Nivad Cabraal, who takes over as governor of the Central Bank of Sri Lanka on Saturday, said strong 8.1 percent growth in the first quarter made the bank optimistic about achieving eight percent in 2006.

"It's a tough call but we can see growth rates increasing in all sectors," Cabraal said. "In the first quarter we've seen very encouraging indicators and I'm confident eight percent growth can be achieved this year."

Sri Lanka's economic growth last topped 8.0 percent in 1978 when it rose 8.2 percent, a year after becoming the first nation in South Asia to liberalise its economy from socialist prescriptions.

High oil prices and a worsening security situation were the two biggest challenges faced by the tropical island nation as it seeks to achieve eight percent growth, Cabraal said.

"The oil price increase is by far the biggest challenge," Cabraal said. "The negative impact felt in the economy because of the security situation is the other but our development must take place whatever challenges we face."

Fighting between government forces and Tamil Tiger rebels has escalated since December and official figures show at least 820 people have been killed in the past seven months despite a truce that is now virtually confined to paper.

International ratings agencies Fitch and Standard and Poor's downgraded the island's credit outlook to negative from stable in April, citing fears of a slide back to full-scale civil war.