Colombo, November 14:

The International Monetary Fund (IMF) today warned Sri Lanka that escalating violence in a bitter ethnic conflict could prompt an economic crisis through higher prices and dwindling foreign currency reserves.

The IMF statement followed a round of talks with Sri Lanka over an economic stabilisation programme, which includes loans to prop up the budget and currency. The island nation imports all of its oil and gas needs and is heavily dependent on textile exports and tourism, both of which have been hit by an upsurge in violence between Tamil rebels and the military since December.

The strain of extra spending as the military battle Tamil separatists has shown-up in the budget deficit, forecast to hit 9.1 per cent of gross domestic product (GDP) in 2006, compared to 8.7 per cent last year, the IMF said.

“In this context, the rising debt service burden adds to the economy’s vulnerability to external sho-cks,” the IMF said. The fighting along with rising global oil prices has also spurred inflation to double digit rates, with a forecast of an average 12 per cent now for 2006 from 3.6 per cent last year, the IMF said. In October alone prices rose by 17.2 per cent compared to the same month last year.