Colombo, November 15:

Sri Lanka plans to announce a war budget tomorrow in which it will hike defence spending next year by 45 per cent amid a spiralling conflict with separatist Tamil Tiger rebels, officials say.

The budget comes against the backdrop of an International Monetary Fund (IMF) warning yesterday to Sri Lanka that the escalating violence could prompt an economic crisis with surging inflation and dwindling foreign currency reserves.

Despite the upsurge in fighting that has claimed over 3,300 lives since December, the economy was forecast to expand by over seven percent in 2006 and more than eight per cent in the coming year, government officials said.

“We’re going to see an expansion that has not been seen for nearly 30 years,” deputy finance minister Ranjith Siyambalapitiya said.

Preliminary budget estimates placed before parliament projected defence spending would jump to Rs 139.55 billion Sri Lankan Currency (SC) ($1.29 billion) in the 12 months to December 2007 from an estimated Rs 96.21 billion SC in 2006. The documents did not contain a 2007 deficit estimate.