Sri Lanka's economy grew 5.3% year-on-year in the first three months of 2024, official data showed on Friday, as the island nation made further progress in emerging from its worst financial crisis in decades.

Sri Lanka's agriculture sector grew 1.1% from a year earlier, industrial output expanded by 11.8%, and services grew by 2.6%, Sri Lanka's Census and Statistics Department said in a statement.

A lower base effect, increased foreign currency liquidity, reduced import restrictions and improved tourism contributed to a strong rebound, it added.

Struck by a severe dollar shortfall Sri Lanka's economy went into freefall in 2022, contracting 7.3% as it grappled with soaring inflation, a steeply weaker currency and a historic foreign debt default.

It fared better last year after securing a $2.9 billion bailout from the International Monetary Fund but still shrank 2.3%.

The fragile economy made tentative steps to recovery in 2023 after six quarters of contraction, posting 4.5% growth in the fourth quarter and setting the stage for a further improvement this year.

Sri Lanka is projected to grow around 3% in 2024 and is likely to continue posting strong performances from the second quarter onwards helped by lower energy and fuel prices, analysts said.

"We are expecting about 3% growth in 2Q, increasing to 4%-5% in the last two quarters, so averaging about 3% for the full year," said Dimantha Mathew, head of research at First Capital.

Lower inflation, which reached 0.9% in May, coupled with falling interest rates would also boost growth, analysts said.

The Central Bank of Sri Lanka has slashed rates by 700bps since last June as it shifts focus towards improving economic stability and growth. The monetary authority expects inflation to remain within its 5% target for 2024.

The IMF approved the second review of Sri Lanka's programme on Wednesday, taking total funding to $1 billion but the global lender warned the economy remains vulnerable despite signs of recovery and urged Colombo to do more to restructure a hefty debt burden. (Reporting by Uditha Jayasinghe Editing by Tomasz Janowski and Toby Chopra)