Colombo: Sri Lanka was better known for its tea until Tamil Tiger rebels grabbed the headlines with spectacular suicide bombings, but nearly two decades later empty war chests have driven the government to a Thai tea party.

After spending over a third of state revenue to finance a seemingly unending war against Tamil Tiger rebels, the government went broke last year recording the island's first ever recession since Independence from Britain.

"Sri Lanka is currently in a state of economic paralysis," Finance Minister K N Choksy announced in Parliament six months ago. Since then, it turned out the economic performance in 2001 was worse than expected.

The gross domestic product (GDP) growth rate turned out to be a negative 1.4 per cent and for the first time the country debt servicing burden has become greater than the total state revenue sending the island into a debt crisis.

"For the first time in our history, Sri Lanka suffered the shock and shame of negative economic growth," Choksy said.

Financial analysts and diplomats believe the empty war chest encouraged the government of Prime Minister Ranil Wickremesinghe, which came to power in December, to use a carrot where the stick had failed with the Tigers.

With the revival of a Norwegian-backed peace bid, the government secured a ceasefire deal with the Liberation Tigers of Tamil Eelam (LTTE) on February 23 and since then the guns have remained largely silent.

Despite allegations of truce violations by both sides, Scandinavian ceasefire monitors have said the breaches were not serious enough to jeopardise the entire peace process.

Wickremesinghe is banking on a "peace dividend" to revive the war-battered economy and attract much needed foreign investment to create jobs in a country where unemployment fuels militancy. But he admits this will not be instant.

"Even if we end the war with the Tamil Tigers immediately, we are stuck with a huge debt till 2008 to repay the loans taken to buy arms and ammunition," he said.

Wickremesinghe said the country's total debt burden had risen from Rs 549 billion eight years ago to Rs 1,451 billion ($ 16 billion) last year.

The debt servicing was a staggering Rs 327 billion ($ 3.4 billion), up from Rs 179 billion in 2001. It was more than the government's total revenue, he said.

The only saving grace for the economy has been the steady income from the exports of the island's legendary "Ceylon Tea" and the remittances from Sri Lankans employed abroad. Virtually all other sectors have suffered a slump.

Even as his top negotiators discuss ways to resolve the decades-old ethnic conflict which has claimed over 60,000 lives, Wickremesinghe will be in Washington and New York trying to drum up investment.

For the Tamil Tiger rebels too, the pinch in the pocket appears to have nudged them to the table.

With the United States banning the group in October 1997 and Britain, Australia and Canada following suit last year, the funding from large Tamil communities abroad has reduced to a trickle.

"The Tigers are finding it difficult to move vast amounts of money from abroad after the crackdown," a Western diplomat said. "The Tigers too have a financial reason to talk because money is getting tight for them too."

One of the first issues to be taken up at peace talks in Thailand on September 16 will be the reconstruction of the island's war-battered northern peninsula of Jaffna.

The Japanese government, Sri Lanka's main aid donor, has promised extensive funds for reconstruction, but has sought guarantees of a durable peace before any money is spent.