Sri Lanka’s inflation will hit zero by the middle of the year, a senior central banker said, with 12-month price inflation in the capital Colombo already down to 5.3 percent in March 2009.

"Inflation will come down even further," said Nandalal Weerasinghe, chief economist Central Bank of Sri Lanka.

"By the end of June we expect inflation to hit zero."

The March inflation was the lowest since 2004, when the country abandoned fiscal and monetary prudence and went on a spending spree mostly financed by money printing, under what was called a ‘home grown’ policy framework.

When inflation hit 29.9 percent in mid-2008 authorities promptly changed the weights of the widely watched Colombo Consumer Price Index (CCPI) and dropped the highly taxed tobacco and alcohol in a transparent attempt to understate inflation.

An island-wide price index was completely suppressed.

Since 2007 however monetary policy has been tightened - with some hiccups - though fiscal policy continued to deteriorate, resulting in very high interest rates.

In September 2008, monetary policy again went awry with an unsustainable defence of a dollar peg, which has since driven the island into an International Monetary Fund bailout with the country losing more than two-thirds of its reserves.

Sri Lanka has also benefited from deflationary collapse of the global economy, with deflation being imported through a dollar peg in the form of falling prices of traded goods, including petroleum.

However, analysts expect the rupee to weaken from May onwards adjusting to previous loose monetary policy under an IMF program. The rupee has fallen to 116.00 levels against the greenback in April from 108.00 when peg defence began in September.