Dealing with classifications

The World Bank this week changed Sri Lanka’s classification from a lower-middle income country to an upper-middle income country, under its latest country income classifications for the 2020 fiscal year. This should come as good news, but there are concerns that Sri Lanka edging into this category does not present a clear picture of the genuine economic situation on the ground.   

The World Bank classifies the world’s economies into four income groups — high, upper-middle, lower-middle, and low. They base this assignment on Gross National Income (GNI) per capita (current US$) calculated using the Atlas method. The classification is updated each year on 1 July.

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). Argentina was downgraded from a high income country to upper-middle income with a per capita of $12,370. Zimbabwe moved to the lower-middle income category from low income after posting a per capita of $1,790.    

The classification of countries is determined by two factors. A country’s GNI per capita, which can change with economic growth, inflation, exchange rates, and population. Revisions to national accounts methods and data can also influence GNI per capita. Secondly classification thresholds that are adjusted for inflation annually. Yet these do 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 facilities such as GSP+, which could be rolled back earlier than expected due to this categorization. This makes it more imperative for the Government to get its economic policies right.