Sri Lanka's trade deficit has narrowed sharply, as the economy continued to shrink after contracting last year for the first time since World War II.

The central bank said the deficit in January narrowed to $131m (�92m) from $228m a year earlier, as imports dropped and export rose slightly.

The government, which presented a growth-oriented budget last week, expects the deficit to expand slightly for the whole of 2002, to $1.25bn from 1.16bn in 2001.

Analysts predict that the mild recovery forecast for this year will raise demand for imports.

Slowing down

Sri Lanka's economy shrank by 1.3% in 2001, its first contraction since the central bank began keeping records shortly after independence in 1948.

In January, imports fell 16% to $474m, while exports rose 2.7% to $343m, the central bank said.

The central bank said the improvement in exports was mostly due to strong sales of garments, Sri Lanka's main export product.

Part of the fall in imports came from a more than one-third decline in investment goods such as machinery and technology, the bank said.