Hubert Neiss also said in an interview with AFP on the sidelines of the Asian Development Bank's annual meeting here that some crisis-hit Asian economies needed to further reduce interest rates to fuel economic growth.

Neiss cited Indonesia, which received a multi-billion-dollar bailout from the IMF when its economy plunged into turmoil in 1997, as an "obvious" candidate for reducing rates. The benchmark one-month Indonesian SBI interest rates is at around 33.21 per cent.

Neiss described the current Asian stock rallies as a "welcome sign of a recovery in confidence" but stressed that they should be based on efforts made by ailing economies to rehabilitate their turmoil-wracked financial sectors. The stock market buoyancy" should be based on progress in the economies, continued policy implementation, inparticular banking reforms and corporate sector restructuring." "That is important and if that would slow down, there could be a change in (market) sentiment," Neiss said.

Neiss said the bullishness of regional stock markets -- many have risen to pre-crisis levels -- was positive for fuelling economic recovery. Most Asian equity indices have jumped between 25 and 50 per cent in local currency terms from their relative low points in February, according to a recent study by ANZ Investment Bank.

Asked whether rising stock prices across the region was good for economic recovery, he said: "Yes of course." "It reflects increasing confidence and confidence is one essential ingredient for a successful recovery," he said. Foreign and local funds have been fuelling stock-markets in the region in recent weeks.

Meanwhile, India's political stalemate might be hurting Sri Lanka stocks at the moment, but analysts said on Friday it was only a matter of time before the market took off on attractive valuations and aturnaround in earnings.

"The India issue has constrained some South Asia funds, but there is value in the market and it is ready to take off," said Rajiv Casichetty, head of research at CT Smith Stock Brokers.

"At a prospective price earnings (PE) ratio of 5.5 the market is at one of its lowest (levels). The market has no downside on earnings," added Dushyantha Wijesinghe, head of research at Brokerage Asia Securities.

Sri Lanka stocks have stagnated this year due in part to provincial elections, while India's political jostling has driven a wedge into investor confidence in the subcontinent, preventing local stocks from riding the wave of rallies in other Asian markets.

On Wednesday, the Colombo all share index closed 0.39 per cent higher at 548.7 points on a moderate turnover of 20.6 million rupees ($295,000). The market was closed on Thursday in lieu of May Day and on Friday for a Buddhist religious holiday.

Nanda Nair, head of research at John Keells Stock Brokers, said: "Foreign funds will getback into the market because they will realise it has been oversold. This market should be at around 580-600 points."

Casichetty said although company results for the first quarter of calendar 1999 would be sluggish, expectations of a turnaround in second quarter earnings from firmer tea prices and higher tourism receipts should trigger local buying. "The second quarter is going to be better. When improved results start showing it will spark locals off," Casichetty said.

Wijesinghe said hotel sector stocks and conglomerates involved in tourism like Aitken Spence & Co Ltd would be the top picks when liquidity returned to the market. "Automobile stocks like Associated Motorways Ltd and United Motors Lanka Ltd will also be looked at due to the sector's potential for growth this year," Wijesinghe said.

Nair said foreign funds would focus on high-cap blue chip counters, adding that conglomerate John Keells Holdings Ltd was traditionally a favourite. "Foreigners will be keen to move only into counters withhigh liquidity. After burning their hands in the Asian contagion, they need secure exit routes," he added.