ABC of becoming an upper middle-income country: Risks outweigh benefits

Make growth sustainable. Five percent growth in 2025 is good. But it must continue year after year, at a higher level, if the country wants to become a rich country within a generation. This requires more reforms

In its latest classification of countries, the World Bank has elevated Sri Lanka from a lower middle-income country to an upper middle-income country. What does this mean? Let us find out. But first, the basic facts.

World Bank’s classification of countries

The World Bank classifies countries every year based on their level of development.

This year, Sri Lanka moved up one step, from lower middle-income to upper middle-income. Why did the World Bank do this? It pointed to Sri Lanka’s recovery story.

Three years ago, in 2022, the country was in a severe economic crisis. Now, it has turned around. In 2025, the World Bank noted, based on official statistics, that Sri Lanka recorded real economic growth of 5%. Real economic growth means the economy has produced 5% more goods and services than in the previous year. For instance, if coconuts were the only commodity produced, and Sri Lanka produced 100 coconuts in 2024, production would have increased to 105 in 2025. Thus, in measuring real production, the effect of price changes on value has been removed, and only the actual quantity of goods and the volume of services have been taken into account.

The World Bank, again based on official data, says this growth was driven by a rebound across industries. Financial services and tourism also grew strongly. The World Bank complimented Sri Lanka, saying the current upgrade was a “marker of (economic) resilience” for the country. That means the country has shown it can bounce back from hardship.

But the World Bank also added a note of caution. Sri Lanka crossed the threshold only narrowly. The required Gross National Income per person was $ 4,636. Sri Lanka’s level was just $ 4,670, a very small margin of only $ 34 above the threshold. In other words, it just managed to qualify. The new classification is valid from 1 July 2026 to the end of June 2027. After that, the World Bank will review it again.

Five other countries also attained the same status this year. They are Vietnam, the Philippines, Micronesia, Jordan, and Togo. Sri Lanka had been there before. In 2019, it also became an upper middle-income country, based on its performance in 2018. But that status was short-lived. The very next year, it was downgraded. Why? Because it could not sustain that higher income level. So, this is the second time Sri Lanka is entering this club. The question is: can it stay this time?

Manage debt carefully. Even with the upgrade, Sri Lanka must live within its means. Excessive borrowing must be avoided

Method of classification

Every year, the World Bank places all countries into four groups. These are low-income countries, lower middle-income countries, upper middle-income countries, and high-income countries. How does it decide which country goes where? It uses a simple measure called Gross National Income per person, calculated according to a method it has adopted, known as the World Bank Atlas method.

Atlas refers to a graphical method used by the World Bank to present countries on a world map. For this purpose, the Bank does not use the raw growth data published by individual countries. That is because such data are not internationally comparable due to the use of inappropriate exchange rates, which may have been deliberately manipulated by governments to present a more favourable set of economic data.

Therefore, the Bank uses a calculated exchange rate based on domestic inflation, measured by the GDP deflator used in compiling national income data, and global inflation, measured by the deflator for the Special Drawing Rights (SDR), which is considered a relatively stable currency. Even then, instead of using the calculated exchange rate for the current year, it uses the average for the previous three years. This average exchange rate is then used to convert the GNI calculated by individual countries in their own currencies into US dollars.

This GNI is then divided by the country’s mid-year population to assess its income status. That is why GNI per person, according to the Government’s statistical bureau, amounted to $ 4,910, while the figure used by the World Bank for 2025 was only $ 4,670. Gross National Income, or GNI, is the total income earned by a country’s people and businesses located both within Sri Lanka and abroad. Thus, the income generated by foreigners producing goods and services within Sri Lanka is not counted. This total is then divided by the mid-year population. The result is GNI per person.

Think of it as the average annual income per person in that country if the total income were distributed equally among everyone. The World Bank updates the income thresholds every year. For the 2026-2027 classification, the thresholds are: $ 1,175 or less for low-income countries; $ 1,176 to $ 4,635 for lower middle-income countries; $ 4,636 to $ 14,375 for upper middle-income countries; and above $ 14,375 for high-income countries.

As noted earlier, Sri Lanka’s GNI per person has now crossed the $ 4,636 threshold by a very narrow margin of $ 34. Imagine a student who scores exactly the pass mark. Yes, the student has passed. But there is no room to relax. That is Sri Lanka’s situation.

The upgrade is good news. It shows that the painful reforms are working. But it is not the end of the road. It is just a milestone. What must Sri Lanka do to stay in this category? And, more importantly, how can it make sure ordinary people feel the benefits? 

Upper middle income, an average

Now, there is something important to understand. GNI per person is an average. And averages can be misleading. Let’s consider an example. 

Suppose there are ten people in a room. One person earns Rs. 1 million. The other nine earn Rs. 10,000 each. The average income is over Rs. 100,000. But does that average reflect the reality of the nine people? No. They are still earning only Rs. 10,000. The same thing happens with countries. A country can have a high average income. But if the wealth is concentrated in a few hands, as in the case of Sri Lanka, many citizens may still be poor. So, when we say Sri Lanka is now an upper middle-income country, we are talking about the average. It does not mean every Sri Lankan has become better off. We must keep this in mind when accepting the upper middle-income country status.

 

The dark era of economic crisis

To understand today’s news, we must go back a few years. 

The year 2022 was a dark time for Sri Lanka. The country faced its worst economic crisis since independence. What happened? Sri Lanka ran out of foreign currency. It could not pay for essential imports. Remember the queues? People waited for hours, even days, to get fuel. Cooking gas was scarce. Electricity was cut for many hours every day. Prices of food and medicine shot up. Inflation reached levels never seen before. Many families fell into poverty. There were protests. The political leadership changed. The World Bank thinks that Sri Lanka has recovered from this dark era. 

Benefits of elevation

You may ask: does this classification really matter? Is it just a label? No. It has real consequences. Some are good. Some are not so good. Let us look at both sides.

On the positive side, first, the upgrade improves Sri Lanka’s image. International investors look at these classifications. They see an upper middle-income country and think: this country is moving forward. This can bring in foreign investment. Companies may set up factories, hotels, and service centres.

More investment means more jobs. More jobs mean more income for families. Second, it can boost national pride. After the shame of the crisis, this is a moment of recognition. The world is saying: Sri Lanka is not a failed State. It is rebuilding. That lifts the spirits of the nation. Third, tourism may benefit. Travellers from rich countries feel more comfortable visiting places that are seen as stable. Sri Lanka is already a beautiful destination. The new label makes it even more attractive.

A significant plus point for Sri Lanka is that it is still classified under the World Bank’s low-income country financing window, the International Development Association (IDA), for receiving World Bank and ADB loans. This was done at the request of the Government in 2023, and these loans are highly concessional, with low interest rates, longer grace periods, and longer maturities.

So, the current elevation is just a number on paper. For practical purposes, Sri Lanka remains a low-income country for receiving concessional loans. It is like a person who has done well at the GCE O/L but poorly at the degree level asking that only his O/L qualifications be considered when applying for a job.

Prepare for future shocks. The world is becoming more uncertain. Climate change is bringing more floods, droughts, and storms. Global economic conditions can change quickly. Sri Lanka must build buffers: foreign currency reserves, savings, and diversified export markets

Risks of elevation

Now, the other side of the coin. Upper middle-income countries are expected to borrow on commercial terms from international markets. This means higher interest rates and shorter repayment periods. For Sri Lanka, which already has a heavy debt burden, this is a concern. If borrowing becomes more expensive, there is less money for schools, hospitals, and roads. The Government may have to raise more taxes. That burden could fall on ordinary citizens. Also, some international aid is meant only for lower-income countries. Those doors may now start to close. Sri Lanka will have to stand more on its own feet. That is the price of progress. But it must be managed carefully.

Impact on common people

Now, let us be very clear about a few things. This upgrade is good. But we must not misunderstand it. It does not mean everyone has become richer. As I explained earlier, the classification is based on an average. Many Sri Lankans are still struggling. Many families still find it hard to make ends meet. It does not mean poverty has disappeared. Even before the crisis, there were pockets of poverty. The crisis pushed more people below the poverty line.

Growth takes time to reach the poor. It does not happen automatically. Good policies are needed. Nor does it mean the crisis is fully behind us. The country’s debts are still high. Large repayments are due in the coming years. The economy is still fragile. A global recession, a natural disaster, or a sudden loss of investor confidence could cause problems. Since the margin by which Sri Lanka crossed the threshold was narrow, slipping back is possible.

It also does not measure everything that matters. GNI does not measure the quality of education, clean air, and safe drinking water, how long people live in good health, or how fairly they are treated. A country can move up the income ladder and still have serious problems in all these areas. Development is about more than income.

Finally, this status is not permanent. It is valid for only one year. The World Bank will review the 2026 data next year. If growth slows or the currency weakens, the country could be downgraded again. We have seen this happen before. This classification is a snapshot, not a permanent medal.

Make sure growth reaches the poor. Every child, rich or poor, must have a chance. It must invest in healthcare. It must build roads, electricity, and internet infrastructure in rural areas. Businesses must be able to grow outside Colombo. Social safety nets must be strengthened. Families hit by shocks must not fall into poverty

Way forward, and strategies

The upgrade is good news. It shows that the painful reforms are working. But it is not the end of the road. It is just a milestone. What must Sri Lanka do to stay in this category? And, more importantly, how can it make sure ordinary people feel the benefits? Here are five priorities.

First, make growth sustainable. Five percent growth in 2025 is good. But it must continue year after year, at a higher level, if the country wants to become a rich country within a generation.

This requires more reforms. It needs a better business environment. It needs more investment. It needs higher productivity. We cannot rely on borrowing to fuel growth, as we did in the past. Growth must come from producing goods and selling them to the world, providing services the world values, and using our resources wisely.

Second, manage debt carefully. The Government is talking to foreign creditors. It is trying to restructure its debts. That means stretching repayments over a longer period and reducing interest rates. These talks are slow and difficult. But they are essential. Without debt relief, the recovery will remain weak. Even with the upgrade, Sri Lanka must live within its means. Excessive borrowing must be avoided.

Third, make sure growth reaches the poor. Growth that benefits only the already rich is not real development. The Government must invest in education. Every child, rich or poor, must have a chance. It must invest in healthcare. It must build roads, electricity, and internet infrastructure in rural areas. Businesses must be able to grow outside Colombo. Social safety nets must be strengthened. Families hit by shocks must not fall into poverty.

Fourth, prepare for future shocks. The world is becoming more uncertain. Climate change is bringing more floods, droughts, and storms. Global economic conditions can change quickly. Sri Lanka must build buffers: foreign currency reserves, savings, and diversified export markets, so that it can withstand shocks without collapsing again.

Fifth, rebuild trust. The 2022 crisis was not just an economic failure. It was a failure of governance, transparency, and accountability. Citizens lost trust in institutions. Rebuilding that trust is essential. This means committing to good governance, fighting corruption, and ensuring that the rules apply equally to all. Without trust, people will resist reforms. With trust, the country can move forward together.

So, where does this leave us? Sri Lanka has achieved something.

Three years after the darkest days, the country is recovering. The queues for fuel are a memory. The lights are back on. Tourists have returned. The economy is growing. The World Bank has recognised this. The people of Sri Lanka, who suffered so much, can take a moment to feel proud. But we must also be realistic. The threshold was crossed narrowly. Many families still struggle. Many young people still cannot find good jobs. The debt burden remains. Cheap loans will become harder to obtain. And we have lost this status once before.

The 2022 crisis was not just an economic failure. It was a failure of governance, transparency, and accountability. Citizens lost trust in institutions. Rebuilding that trust is essential. This means committing to good governance, fighting corruption, and ensuring that the rules apply equally to all. Without trust, people will resist reforms

True test

Therefore, the true test is not what the World Bank calls us. The true test is whether ordinary people feel their lives improving, whether their children have opportunities they did not have, and whether the future looks brighter than the past. 

The upper middle-income label is a guidepost. It is not the destination. The destination is a country where every citizen can live with dignity, where growth is shared by all, and where prosperity is built on solid foundations. This upgrade is a step in that direction. There are many more steps to take, and that should not be forgotten.

(The author, a former Central Bank of Sri Lanka Deputy Governor, can be reached at [email protected] )