"The focus in the next few years should be on implementing a comprehensive set of economic reforms, spanning several years, that will build on the gains achieved in 1997," the report added.

Sri Lanka's gross domestic product registered a sharp 6.4 per cent growth in 1997 after a 3.8 per cent rise in the previous year.

The government is targeting six per cent GDP growth this year but analysts say the forecast might have to be lowered due to a slowdown in world economies and uncertainty created by the Asian financial crisis.

The World Bank report said Sri Lanka urgently needed to consolidate its fiscal situation and accelerate structural reforms to strengthen the role of the private sector and improvethe performance of the state institutions.

"Budget policies for 1998 have weak points that should be monitored," the report said adding that a one per cent reduction in the budget deficit in this year was insufficient if the target was to reduce it to four per cent of GDP by 2000.

Sri Lanka's budget deficit in 1997 was 6.9 per cent of GDP.

The bank said the government planned to reduce the fiscal deficit by saving on defence expenditure, which may not be possible to achieve in the current security situation.

Sri Lankan troops are fighting a 14-year-old war against Liberation Tigers of Tamil Eelam (LTTE) rebels who demand a separate homeland for minority Tamils in Sri Lanka's north and east.

The government spends 25 per cent of its total current expenditure on defence. The bank said Sri Lanka also had to improve its structure of expenditure for well-rounded growth in coming years.

It said 30 per cent of total current expenditure was spent on interest payments and 10.5 per cent on pensions to formercivil servants.