Sri Lanka is on the verge of receiving $60m in funds from the International Monetary Funds, the country's Finance Ministry has said.

The news came on the same day as government negotiators held their first talks for seven years with leaders from the Tamil Tiger rebels, who want an independent Tamil state in the Jaffna peninsula.

A meeting between IMF Deputy Managing Director Shigemitsu Sugisaki, who is visiting the capital, Colombo, and Finance Minister KN Choksy focused on progress made in ending the 20-year civil war.

Mr Sugisaki made "comprehensive inquiries" about the peace process, a statement from the Finance Ministry said.

Peace dividend

Mr Sugisaki "pointed out that the establishment of peace will gain extra confidence of international donors and potential investors in Sri Lanka," it added.

The $60m loan is seen as vote of confidence in the ceasefire - agreed in April - and economic reforms proposed by the United National Party, analysts said.

A decision by the IMF to release funds for Sri Lanka is likely to act as a positive signal to international donors, who are due to gather in Colombo in early June.

The IMF froze a $235m standby loan last year but has released funds from it again since the election of the UNP in December 2001.

The UNP is targeting 3.5% economic growth this year and an end to last year's recession, when the economy shrank 1.3%.

Recovery hopes

It is pushing through tax, finance and labour reforms.

Cost cuts aim to slash the budget deficit from last year's 10.8% of gross domestic product to 8.5%.

The government has also begun to reform Sri Lanka's indebted state owned banks and its loss making state owned enterprises.