COLOMBO, Dec 29: Sri Lanka's Central Bank on Friday cut its 2006 economic growth estimate to 7 per cent from 7.4 per cent, blaming the reduction on poor tea production and falling tourist arrivals.

A decline in the tea harvest, the main export commodity, tourism and other trade-related services contributed to slower than expected growth, the Central Bank of Sri Lanka said.

The previous best performance was in 1978, when the economy grew 8.2 per cent after the government dropped socialist policies for free-market reforms.

The bank said Sri Lanka's economy grew 7.5 per cent in the third quarter alone, up from 6.9 per cent in the same three months a year ago.“This expansion was broad-based, with higher growth in telecommunications, cargo handling, financial services, trade and from the higher usage of hydro-power due to extreme weather,” the bank said.

“The services sector continued to dominate, contributing 63 per cent to the growth, while the industry and agriculture sectors contributed 27 per cent and 10 per cent, respectively.” The third quarter figure boosted nine months total output to 7.8 per cent, against 5.8 per cent reported in the corresponding period of 2005.

However, the island's worsening ethnic conflict could hit growth in 2007, analysts warned.

In its annual review known as the Article IV consultations released last Friday, the International Monetary Fund said Sri Lanka's quest for higher growth hinges on an improved business climate, rationalising trade regimes and financial sector reforms.“However Sri Lanka's near- and medium-term economic prospects depend critically on progress on the peace front and on implementing essential reforms,” the global financial watchdog warned.

Over 3,600 people have died since fighting between government forces and Tamil Tiger rebels intensified last December, leaving the February 2002 Norwegian-brokered truce in shreds.

The central bank made no reference to the security situation in its forecasts. —AFP