The IMF have called for the government to raise fuel prices

It urged Sri Lanka to cut subsidies, especially on fuel, to help restore economic stability.

The report said that higher spending, combined with lower than expected tax revenues, had led to high inflation.

But, it also acknowledged that financial aid and a freeze on debt repayment after last December's tsunami had provided some economic relief.

"On the expenditure side, subsidies for fuel have been considerably higher than budget provisions and 20 billion rupees ($200m) has already been spent on tsunami relief," the report issued on Tuesday said.

'Politically difficult'

The IMF said that the government should be prepared to increase prices, even though "it may prove politically difficult".

It also called on the government to increase interest rates in order to combat inflation, which was forecast to rise to 14% this year from 7.9% last year.

The body wants the government to continue a policy of economic liberalisation.

But, with presidential elections pending the future of Sri Lanka's economic policy is uncertain.

Ruling party candidate - and current prime minister - Mahinda Rajapakse has signed a pre-election deal with left-wing Sinhalese nationalist party, the JVP, in which he has pledged to halt privatisation if elected.