World Bank cautions Sri Lanka’s income upgrade remains fragile

*Sri Lanka's GNI per capita rose to US$4,670

*This is the second time Sri Lanka has reached this status

*Real GDP expanded by 5 per cent in 2025

*Sri Lanka's economy projected to expand by around 3 per cent in 2027

Colombo, July 06 (Daily Mirror) - Sri Lanka's return to upper-middle-income status has revived memories of an earlier promotion that proved short-lived, with the World Bank cautioning that the latest achievement remains vulnerable unless the country sustains reforms, strengthens growth and avoids the vulnerabilities that culminated in the 2022 economic crisis.

The World Bank reclassified Sri Lanka from lower-middle-income to upper-middle-income status with effect from 1 July after the country's Gross National Income (GNI) per capita rose to US$4,670 in 2025, marginally above the new threshold of US$4,636.

It is the second time Sri Lanka has crossed the threshold.

The first promotion came in July 2019 under the administration of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe, when the country's GNI per capita reached US$4,060, just US$64 above the threshold at the time. The elevation was widely celebrated as a milestone in Sri Lanka's development journey.

However, the status lasted only a year. In July 2020, under the newly elected Gotabaya Rajapaksa administration, Sri Lanka was downgraded to lower-middle-income status after revised data placed the country marginally below the threshold.

The downgrade came as economic vulnerabilities were mounting. Weak growth, deteriorating public finances, pressure on foreign reserves and the economic fallout from the Easter Sunday attacks had already exposed structural weaknesses. Those pressures intensified in the years that followed, culminating in the 2022 sovereign debt default, soaring inflation, severe shortages of essential goods and the political upheaval that forced Rajapaksa from office.

Ranil Wickremesinghe subsequently assumed the presidency and oversaw a difficult debt restructuring programme and an IMF-backed reform agenda that restored a degree of macroeconomic stability. The latest upgrade has now taken effect under President Anura Kumara Dissanayake, whose administration has pledged to continue economic reforms while pursuing more inclusive growth.

According to the World Bank, the latest reclassification reflects a genuine economic recovery rather than a statistical anomaly. Real GDP expanded by 5 per cent in 2025, supported by a broad-based industrial rebound and growth in services, particularly tourism and financial services. GDP at current prices rose 8.8 per cent, while a 0.7 per cent decline in population and limited exchange-rate depreciation also helped lift per-capita income above the threshold.

Yet the World Bank stressed that income classifications should not be viewed as a measure of overall economic health.

The institution noted that the Atlas methodology used to calculate GNI per capita is designed to compare income levels across countries and does not assess macroeconomic stability, debt sustainability, poverty levels, external vulnerabilities or the quality of growth. Countries whose income levels remain close to classification thresholds can move between categories due to relatively small changes in growth, inflation, exchange rates or population trends.

That warning carries particular significance for Sri Lanka, which crossed the upper-middle-income threshold by a relatively narrow margin and has already experienced how quickly such gains can be reversed.

The reclassification also carries implications beyond prestige and international recognition.

Although the World Bank's income categories do not directly determine access to its lending programmes, the classifications are widely used by development agencies, bilateral donors and international institutions when determining eligibility for concessional financing, grants and preferential assistance programmes.

As countries move up the income ladder, access to highly concessional funding often becomes more limited over time, while expectations increase for governments to rely more on commercial financing, domestic resource mobilisation and private-sector investment to support development. Development partners increasingly expect upper-middle-income economies to demonstrate stronger fiscal capacity and greater ability to attract investment-led growth.

For Sri Lanka, which is emerging from a debt crisis and remains dependent on external financing to support its development ambitions, the transition affirms the importance of attracting foreign direct investment, boosting exports and improving productivity rather than relying solely on aid or concessional funding.

The World Bank also highlighted several risks that continue to cloud the outlook.

Public debt remains elevated despite the completion of debt restructuring; many households continue to face cost-of-living pressures, and poverty indicators have yet to return to pre-crisis levels. Moreover, income-per-capita measures do not capture how gains are distributed across society or whether the benefits of recovery are reaching the most vulnerable segments of the population.

Growth is also expected to moderate. The World Bank projects Sri Lanka's economy to expand by around 3 per cent in 2027, down from the stronger rebound recorded in recent years, suggesting that maintaining upper-middle-income status will require deeper structural reforms and sustained investment rather than recovery momentum alone.

Sri Lanka was among five economies upgraded in the World Bank's latest annual income classification review, alongside Jordan, Micronesia, the Philippines and Vietnam.

Sri Lanka has already shown that crossing the upper-middle-income threshold is easier than staying there.