Sri Lanka needs to slash state spending and contain the budget deficit, the International Monetary Fund said last Sunday, warning that the island's debt exceeds gross national production.
It also rapped the Colombo government for not collecting enough revenue to meet day-to-day expenses and noted that investments were too low to sustain growth.
"Sri Lanka's gross capital formation is the lowest in the region and current government spending is high," the global financial lender said in a report.
"...increasing public sector investment spending while reducing the size of fiscal deficits -- thereby reducing fiscal dominance in economic activity -- can positively contribute to economic growth in Sri Lanka."
It said that Sri Lanka had recorded high and sustained deficits of around 8.0 to 9.5 percent of GDP (gross domestic product) for more than 10 years, while government spending accounted for 35 percent of GDP in the past decade.
"High growth economies tend to have a much higher ratio of gross public sector investment to GDP," IMF's Nombulelo Duma said.
"Sri Lanka's gross capital formation is the lowest in the region and current government spending is high," the report said.
Government debt averaging 101 percent of GDP over the past five years far exceeded that of other economies in the region, it said. In Nepal it was 63 percent, in Bangladesh 49 percent and 85 percent in India.
Sri Lanka, however, has reported economic growth of 7.4 percent in 2006 boosted by an influx of aid to rebuild areas affected by the 2004 tsunami. Growth has since slowed to 6.2 percent for the first half of 2007.
Central bank governor Nivard Cabraal last week lowered full-year 2007 economic growth figures from 7.5 percent to "slightly lower than seven percent" due to "constraints," but said the economy "remained resilient."
However, the Asian Development Bank forecast that Sri Lanka's 27 billion dollar economy will expand by 6.1 percent this year and 6.0 percent in 2008.
"The ethnic conflict that has dominated economics and politics in Sri Lanka over the last quarter century has constrained the economy's growth potential," the IMF said.
