by Frances Harrison BBC Colombo correspondent

The Sri Lankan Prime Minister, Ranil Wickremesinghe, has said he hopes economic growth will reach 3.7% by the end of the year, after the country experienced negative growth for the first time in its history in 2001.

Wickremesinghe says recovery will take time

In a special address to the nation on the state of the economy, Mr Wickremesinghe outlined the reasons why neither the government nor the people had any money.

But he tried to reassure the Sri Lankan public that things would eventually get better.

Since Mr Wickremesinghe took office more than six months ago, the cost of living has steadily risen, disappointing those who had hoped the cease-fire with Tamil Tiger rebels would shore up the economy.

Costly war

Mr Wickremesinghe explained that spending on defence would remain high until the year 2008 because of unpaid bills for previous arms purchases.

Sri Lanka has been spending up to $1bn a year on the war, and the government said last year's rebel attack on the country's main airport inflicted another billion dollars worth of damage.

The Prime Minister also listed many other reasons why the Sri Lankan economy was hurting.

He said the rupee has been depreciating against the dollar while government borrowing has risen sharply in the last decade.

The government has also been forced to spend money to rectify the country's electricity crisis.

No short-term solutions

Mr Wickremesinghe said his government had taken steps to revive the economy and asked for the public's continued support.

He said the finance minister would make a public statement about the privatisation of state-run organisations in a few days, and added that they had discussed the possibility of getting banks to lower interest rates.

Mr Wickremesinghe's speech will give little cheer to those who had hoped for early signs of a peace dividend.

Fuel prices have already risen 8% this year, with huge knock on effects on transportation charges and food prices.

A kilo of rice that cost 30 rupees at the start of the year is now nearer 40 rupees.

Donors and foreign investors are waiting for more stable progress towards peace before they make commitments.