By Uditha Jayasinghe

COLOMBO (Reuters) -Sri Lanka's economy is set to perform better than expected but still see a significant contraction in 2023 before growing next year, World Bank projections for the crisis-hit nation showed on Tuesday.

"Sri Lanka is showing signs of recovery after a severe recession and the economy is expected to grow by 1.7 percent in 2024, after contracting by 3.8 percent in 2023," the World Bank said in a statement.

It had previously forecast a contraction of 4.2% this year and growth of 1% in 2024.

The island nation's economy shrank 3.1% in the April-June quarter.

In the last six months, Sri Lanka has seen runaway inflation drop to 1.3% in September, its currency appreciate by about 12% and foreign exchange reserves improve.

Sri Lanka struck an agreement for a $2.9 billion bailout package from the International Monetary Fund in March but a potential shortfall in government revenue has meant that a second tranche of funds from the package may be delayed.

In contrast to the World Bank, Sri Lanka's central bank has predicted a milder 2% contraction this year after the economy shrunk 7.8% in 2022.

(Reporting by Uditha Jayasinghe; writing by Swati Bhat; editing by Sudipto Ganguly and Edwina Gibbs)