Return to upper-middle-income status and the way forward

The reclassification of Sri Lanka as an upper-middle-income country is a symbolic milestone, but it masks many underlying fragilities of the economy. According to the World Bank, the upgrade is a marker of resilience, though the country only narrowly crossed the threshold. The progression is a result of the South Asian state’s Gross National Income (GNI) per person in 2025 reaching $ 4,670, just fractionally above the $ 4,636 threshold required for the upper-middle-income category.

On 1 July of each year, the Development Data Group - the World Bank Group’s development data hub - updates the classifications of economies worldwide according to the GNI per capita estimates from the previous calendar year. Afterwards, the economies assessed are placed into four income groups: low, lower-middle, upper-middle, and high. The GNI per capita is measured in US dollars by using the Atlas methodology, which smooth’s exchange rate fluctuations by using a three-year moving average - the price-adjusted conversion factor. The thresholds that define each income group are adjusted annually to account for inflation. 

It is worth noting that Sri Lanka reached the same milestone in 2019, only to be downgraded as a lower-middle-income country again in 2020. As we are closer to the lower bound of the relevant income category, the chances of falling back to the earlier income group are high. 

The exchange rate stabilisation from 2023 to 2025 would have undoubtedly aided readmission to the upper-middle-income group of economies. However, any unprecedented depreciation of the local currency could risk the country being downgraded back to the previous category. Also, the stagnant/declining population mechanically aids in achieving a higher per capita GNI, and over the last few years, the island’s population growth has been extremely low due to falling births, rising deaths, and increased outward migration/brain drain subsequent to the 2022 economic crisis. It is reported that annual births plummeted from 301,706 in 2020 to 220,761 in 2024, while annual deaths increased from roughly 132,000 to 171,194 during the same period. 

An aspect which has been overlooked is that although the total size of the economy has rebounded from the post-2022 crisis lows, it is still on par with the pre-crisis peak production level recorded in 2018 in real terms. The value of the real GDP in 2025 was measured at Rs. 13.129 trillion ($ 97.4 billion), but it is still slightly below the corresponding pre-crisis peak in 2018 – Rs. 13.235 trillion ($ 98.2 billion).

Despite regaining the upper-middle-income status, a considerable number of families in Sri Lanka remain in poverty. According to the World Bank Estimates, poverty levels in Sri Lanka more than doubled from 2019 to 2022 from 11.3% to 25%. Furthermore, many low-income families remain vulnerable, and any unexpected economic shock or natural calamity could push them into poverty. As the Department of Census and Statistics has not conducted the Household Income and Expenditure Survey (HIES) – which measures poverty among households in the country – after 2019, it is difficult to identify the extent of the impact the post-2019 misfortunes like COVID-19 and the economic crisis had on the standard of living of the population.

True achievement lies in maintaining the upper-middle-income status for years to come and advancing to become a high-income economy. Unfortunately, the country has historically failed to maintain economic stability and commendable economic growth for a long period of time. Now that we have achieved a creditable state of economic stability, policymakers must act decisively to accelerate economic growth by formulating and implementing policies that attract FDIs, reform inefficient and loss-making SOEs, increase productivity and foster a favourable business environment to ensure we do not fall back to the lower-middle-income category again. Otherwise, this upgrade risks remaining a temporary statistical achievement rather than a lasting economic transformation.