Just seven months into the ceasefire between the Sri Lankan government and the Tamil Tigers, the economy, which shrunk by an alarming 3.7 per cent in the final quarter of last year, is showing signs of recovery.

Now, as both sides meet in Bangkok for Norwegian-brokered peace talks, hopes are high that the 19-year civil war, which has cost 75,000 lives and displaced more than a million Sri Lankans, can end. Similar initiatives have broken down before, but the signs this time are encouraging, with both parties seemingly prepared to "walk the extra mile".

The government of Ranil Wickramasinghe is desperate to carry out its December election pledge and end a conflict that costs the country an estimated £540m a year in defence spending - to say nothing of lost revenues from investment and tourism. The Tamil Tigers, for their part, seem willing to sacrifice their dream of an independent Tamil state in return for a level of autonomy.

The economic benefits of a settlement to the island's 17.5 million inhabitants would be enormous. Before hostilities began, Sri Lanka's defence spending was less than 0.5 per cent of total GDP. By 2001, the year of the Tamil Tiger attack on Bandaranaike airport, the Sri Lankan government spent a total of $350m on new weaponry, pushing defence spending to 34 per cent of the national budget. Peace would free up funds for health, sanitation and poverty-reduction programmes. Most important, it could free Sri Lanka from the tentacles of the IMF.

The crippling civil war has increased Sri Lankan economic dependence on foreign donors. Last year, Sri Lanka had to apply for a $64m "standby" arrangement from the IMF, tying the country to the usual structural reforms, including widespread privatisation and reduction in subsidies. Already, the government has abolished the flour subsidy and allowed electricity prices to rise by 35 per cent. At the same time, it has held down wages.

In 1948, Ceylon was called the future "Switzerland of Asia". Today, Sri Lanka looks light years away from fulfilling that lofty prediction. But 54 years ago, the country saw off one colonial power. The "peace dividend" may enable Sri Lanka to throw off the shackles of another.