The government has forecast growth of six per cent this year, after 5.6 per cent in 2003, riding a wave fuelled by a ceasefire with the separatist Tamil Tiger rebels which has held for two years.

But that target may be more hard to reach if a political fight between President Chandrika Kumaratunga and Prime Minister Ranil Wickremesinghe -- rivals who are elected separately -- is not resolved soon.

"The political crisis that arose in November certainly makes it more difficult for us to reach the economic targets for the current year," Choksy told Reuters in an interview.

"It is essential for the development of an economy that those who participate in it should have confidence both in its viability and most importantly in the continuation of policies," he said.

Kumaratunga and Wickremesinghe have been openly at odds since the president seized control of three ministries in November, including defence, accusing the prime minister of risking the country's security to win peace with the Tigers.

Wickremesinghe has denied that and stepped back from his leading role in the peace process.

Efforts so far to bridge the gap have failed, also stopping plans to restart stalled direct peace talks to put a permanent end to the two-decade civil war that has killed 64,000 people.

Choksy also said plans to seek a sovereign credit rating for Sri Lanka would be hampered by the political crisis.

"We thought 2004 would provide a beneficial springboard (to get a rating), but now I think the brakes have to be applied for sometime," he said.

Slower economic growth would also make it harder for the government to meet its target of cutting the budget deficit.

Analysts have said that if the power struggle is not resolved, a snap general election maybe called, but Choksy said his comments were not directed at the voting public.

"It is economic reality that is shown on the ground, he said, pointing to falls in the value of the rupee, the stock market and foreign exchange reserves since November.

Colombo stock prices are down 15 per cent since before the crisis, the rupee has fallen 2.8 per cent and two-year bond yields have risen to about 7.8 per cent from 6.75 per cent.

He said the falling trend in interest rates had been "somewhat reversed by the recent political uncertainty."

Choksy also said a drought in Sri Lanka was a worry because it would mean a switch from hydropower to more costly thermal power, and higher vegetable prices.