NEW DELHI: Sri Lanka’s economy is expected to shrink by 2% in 2023, its central bank said in an annual report on Thursday, as the country struggled to emerge from its worst financial crisis in decades.

The central bank projected Sri Lanka’s economy would grow by 3.3% in 2024, according to the report.

The economy shrank by 7.8% in 2022, in a year dominated by deep political instability, soaring inflation and steep currency depreciation as Sri Lanka struggled with a financial crisis triggered by record low foreign exchange reserves.

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The central bank’s growth estimate for 2024 is more optimistic than the 3.1% projected by the International Monetary Fund (IMF), which finalised a nearly $3-billion bailout to the crisis-hit country last month. The World Bank estimates Sri Lanka’s economy will contract by 4.3% in 2023.

“Sri Lanka’s economy has been gradually stabilising since mid-2022. The long fuel lines, severe shortages, and high inflation have gradually reversed,” said Udeeshan Jonas chief strategist at CAL Group.

“Recovery from sectors such as tourism could be better than expected and consumer demand is also picking up. That together with the low base could see better performance.”

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Sri Lanka, which defaulted on its foreign debt a year ago, is currently negotiating its debt repayments with bondholders and bilateral creditors. The island expects to complete its debt restructuring process in time for the first IMF review in September.