July 06, Colombo (LNW): Sri Lanka has once again been classified as an upper-middle-income economy by the World Bank, marking a significant milestone in the country’s economic recovery. However, the international lender has cautioned that the achievement will only be meaningful if it is supported by sustained reforms, stronger economic fundamentals and policies that prevent a repeat of the conditions that led to the country’s financial collapse in 2022.
The revised classification came into effect on July 01 after Sri Lanka’s Gross National Income (GNI) per capita increased to US$4,670 in 2025, exceeding the World Bank’s latest upper-middle-income threshold of US$4,636.
This is the second occasion on which Sri Lanka has entered the upper-middle-income category. The country first secured the status in 2019 during the administration of President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe, when per-capita income narrowly surpassed the qualifying benchmark. That recognition, however, lasted only a year before Sri Lanka slipped back into the lower-middle-income group after revised economic data placed its income level below the required threshold.
The reversal foreshadowed the severe economic difficulties that followed. Long-standing structural weaknesses, declining foreign exchange reserves, mounting public debt, sluggish economic growth and the aftermath of the Easter Sunday terrorist attacks steadily eroded the country’s economic resilience. These pressures ultimately culminated in Sri Lanka’s unprecedented sovereign debt default in 2022, accompanied by soaring inflation, shortages of fuel, food and medicines, and a political crisis that brought an end to the Gotabaya Rajapaksa administration.
The country’s subsequent recovery gathered pace under former President Ranil Wickremesinghe, whose government implemented a comprehensive debt restructuring programme and introduced wide-ranging reforms under an International Monetary Fund (IMF) assistance package. The latest World Bank upgrade has taken effect during the administration of President Anura Kumara Dissanayake, whose government has pledged to maintain fiscal discipline while pursuing economic policies aimed at delivering broader and more inclusive growth.
According to the World Bank, Sri Lanka’s renewed elevation reflects genuine improvements in economic performance rather than temporary statistical movements. The economy recorded real GDP growth of 5 per cent in 2025, driven by a recovery across manufacturing, industry and services, with tourism and financial services making notable contributions. Current-price GDP also increased by 8.8 per cent, while modest exchange-rate depreciation and a slight decline in population further lifted average income above the qualifying threshold.
Even so, the World Bank stressed that income classification should not be interpreted as a comprehensive assessment of a country’s economic health. The institution explained that its Atlas methodology is designed solely to compare national income levels across economies and does not account for factors such as fiscal sustainability, debt burdens, macroeconomic stability, poverty, inequality or external vulnerabilities.
It also noted that countries positioned close to the classification thresholds remain susceptible to moving between income categories due to relatively modest shifts in economic growth, inflation, exchange rates or demographic trends. Given Sri Lanka’s narrow margin above the qualifying benchmark, the country remains vulnerable to another downgrade should economic conditions deteriorate.
Beyond its symbolic value, upper-middle-income status could also influence Sri Lanka’s relationship with international development partners. While the World Bank’s classifications do not automatically determine eligibility for its lending facilities, they are frequently used by bilateral donors, multilateral institutions and development agencies when assessing access to concessional loans, grants and other forms of financial assistance.
As countries progress into higher income categories, they are generally expected to rely less on concessionary funding and increasingly finance development through stronger domestic revenue, foreign direct investment, export growth and private-sector participation. The transition therefore places greater emphasis on improving productivity, enhancing competitiveness and creating an environment capable of attracting long-term investment.
Despite signs of recovery, significant challenges remain. Public debt continues to be high even after restructuring efforts, many families are still grappling with elevated living costs, and poverty levels have yet to fully recover to where they stood before the economic crisis. The World Bank also observed that national income figures do not necessarily reflect how the benefits of economic growth are shared among the population, particularly among lower-income households.
Looking ahead, the institution expects Sri Lanka’s economic expansion to moderate to around 3 per cent by 2027, suggesting that maintaining upper-middle-income status will depend less on post-crisis recovery and more on consistent structural reforms, sound fiscal management and sustained investment.
Sri Lanka was one of five economies upgraded in the World Bank’s latest annual income classification review, alongside Jordan, Micronesia, the Philippines and Vietnam. While the latest recognition signals renewed economic progress, the country’s previous experience serves as a reminder that preserving upper-middle-income status may prove far more challenging than achieving it.