COLOMBO (Reuters) -Sri Lanka will enter into an agreement with the World Bank for $500 million in budgetary support after the cabinet approved it on Tuesday, the biggest funding tranche for the crisis-hit nation since an International Monetary Fund deal in March.

The island nation of 22 million is emerging out of its worst economic crisis in seven decades and its economy is expected to shrink 2% this year before returning to growth next year, following last year's record contraction of 7.8%.

Reuters reported last week that the World Bank is likely to approve $700 million in budgetary and welfare support for Sri Lanka at its board meeting on June 28, out of which $200 million will be for welfare programmes.

The government said on Tuesday that funding from the lender will come in two tranches.

(Reporting by Uditha Jayasinghe; Writing by Shivam Patel; Editing by Edmund Klamann)