"Our target is to maintain reasonable interest rates and manageable inflation," Cabraal said.

"Our monetary program is aimed at keeping inflation at 5 to 6 percent in 2010."

He said Sri Lanka has entered a "low inflation, low interest rate" regime and the economic stability achieved should be preserved.

Treasuries yields are now around 10 percent, down from near 20 percent in late 2008.

Sri Lanka, which does not have an explicit inflation targeting framework, targets reserve money supply (the monetary base) in a pegged exchange rate environment.

The central bank is targeting an annual average monetary base of 315.5 billion rupees for 2010.

This is made up of quarterly targets of 306.5 billion rupees (16.6 percent from a year earlier) for March, 314.9 billion for June (16.2 percent), 313.9 billion for September (13.7 percent) and 326.9 billion for December (11.7 percent).

The targets are set assuming real economic growth of 7.0 percent and a gross domestic product deflator, a broad measure of inflation, of 6.0 percent.

In 2009 the actual reserve money growth was 275.6 billion rupees, lower than the 288.1 billion rupee revised target.

In late 2008 Sri Lanka's monetary base contracted as foreign capital flew out of the country, draining net foreign assets of the Central Bank in an environment where sterilization through the acquisition of domestic assets was less than 100 percent.

"We have now entered a low inflation, low interest rate regime," Cabraal said. "That provides prospects for growth in the future.

"We have delivered reserves money targets (in 2009), giving confidence that when we say we will deliver, we will deliver."

In 2009 the main source of reserve money growth would be net foreign assets, and domestic assets are expected to be contract, though provisional advances to the government may increase by 12 billion rupees, Cabraal said.

To maintain a strong peg with the foreign currency and contain inflation around the level of that of the pegged currency, the acquisition of domestic assets has to be avoided.

Cabraal said budget deficits have to be contained to avoid pressure on the private sector borrowing and also to prevent its monetary program from being undermined.

"Any new public spending in hundreds of billions on recurrent expenditure will be disastrous to the economy and will reverse the sound macro-economic fundamentals as prevailing now," Cabraal said.

Sri Lanka's budget deficit was planned to be around 7.0 percent for 2009 but the government has recruited thousands of new people into the public sector despite weak tax revenues, ahead of presidential elections in January 2010.

Meanwhile the common opposition candidate has promised a 10,000 rupee salary hike for state workers, which the finance ministry says will cost 132 billion rupees a year.