Sri Lanka’s economy is grappling with the need for reforms and increased competitiveness in the wake of the country being catagorised as an upper-middle income country. One of the biggest challenges will be access to concessional programmes and funding, particularly GDP+ post-2023 and continuing growth of exports.
Currently the GSP+ facility benefits as much as 58% of Sri Lanka’s total exports, according to the Commerce Department, with the European Union (EU) being Sri Lanka’s largest export market. With Sri Lanka reaching upper-middle income status it is only eligible for three more years. This opens up the need for stronger economic policy decisions on behalf of the Government.
The World Bank classifies the world’s economies into four income groups — high, upper-middle, lower-middle, and low. Accordingly, Sri Lanka inched into the upper-middle income category thanks to $4,060 per capita income for 2019 along with Kosovo ($4,230 per capita) and Georgia ($4,130 per capita).
While the categorisation points to Sri Lanka’s economic growth and belies the political rhetoric, it nonetheless underscores the harder journey the country must embark on not to become stuck in the infamous middle income trap. The classification also does not reflect many other criteria that define the economic boundaries for an average Sri Lankan. For starters, inequality is high in Sri Lanka.
The Institute of Policy Studies (IPS) has pointed out that although Sri Lanka has managed to reduce income poverty from 26.1% in 1990/91 to 4.1% by 2016, income inequality has remained unchanged for more than four decades. The richest 20% enjoy more than half the total household income of the country, while the poorest 20% get only 5%. The situation of the poorest 10% of the households is worse, with the share of household income being just 1.8% or less. Furthermore, income gaps between different regions is even wider than the income inequality at the national level.
The highest percentage of households falling into the ‘poorest group’, with a monthly household income of less than Rs. 36,500, is in the Mullaitivu district (71.6%) followed by Kilinochchi (66.6%) and Batticaloa (65.2%). On the other hand, only 16% of households in the Colombo district fall into the ‘poorest group’. But in absolute terms, Colombo has more than five times the number of households in the ‘poorest group’ compared to the corresponding number in Mullaitivu. This alone shows how challenging it is to go by per capita data.
Sri Lanka is also a country that is experiencing slowing growth, high debt and with an aging population placing additional challenges, which an average-middle income country may not experience. The economy desperately needs to undergo structural reforms with deep changes needed to mobilise productivity, improve competitiveness, and broaden social safety nets, but these reforms have been limited over the last few years. That together with external debt at about 80% of GDP, provides a complex picture that is difficult to classify.
Even though Sri Lanka may be technically in the high middle income category it is still in need to concessional funding and preferential trade and tariff agreements made economies more competitive. More than anything else it is essential that economic reforms continue to be made and the Government must get its economic policies right.