I assume you are considering buying a late 90's petrol S40. I have used two 2.0ltr petrol S40s abroad (both manual). I used to get about 14Km/ltr city and long distance combined (but that's with very clean fuel and ideal road conditions). So in SL I assume a 2.0ltr petrol S40 should give you at least 10km/ltr (combined milage). The 1.8 might do a little bit better. There is a 1.6 variant as well but it's under powered. There is a 1.9D (Diesel - Turbo) version that does about 20Km/lrt even in local conditions. So if you can extend your budget to about 2.3M, it's a good buy.
As 'The Don' mentioned earlier, there are some S40s that have mitsubishi engines. Those are based on the Mitsubishi Charisma. However the engine cover says VOLVO in big letters, so it's not possible to spot one by popping the bonnet. The best way to differentiate a Volvo engine and gear box is that the reverse gear engages forwards (very close to the 1st gear, by pulling up a ring around the gear leaver). However there are S40s with Renault engines as well that have the reverse gear backwards just like the Mistubishi. If it's an automatic it's very difficult to spot the difference. Most (if not all) Volvos in SL are from the UK market because the EU is left hand drive.
Note: The Volvo petrol engines can properly burn only 95 Octain fuel. If you buy a car that has been running on 90 Octain, chances of the engine being under powered etc is high. These cars are mechanically quite hardy so most of the problems are suspension and steering etc (road condition related issues). Parts are a lot more expensive than Jap cars and sometimes the only option might be to buy it from the agents. If you are buying a manual, make sure it's got a new clutch, but automatic is highly recommended. The local Volvo agnets are Sweedish Trading Co. Their customer service is not the best. However, if you do end up buying a Volvo I can give you a contact at their service and repair centre (in Colombo) who can make a difference.