Sri Lanka regains upper-middle-income status after economic recovery

Sri Lanka
By Editor_1
A general view of Sri Lanka's main business city, Colombo. The World Bank Thursday (July 2, 2026) announced the reclassification of Sri Lanka as an upper-middle-income economy effective July 1, 2026, based on its Gross National Income (GNI) per capita calculated using the Atlas method -Dinuka Liyanawatte/ Reuters/File

COLOMBO – The World Bank on Thursday (2) announced the reclassification of Sri Lanka as an upper-middle-income economy effective July 1, 2026, based on its Gross National Income (GNI) per capita calculated using the Atlas method.

Marking a symbolic milestone, the reclassification follows a sharp economic rebound after the country’s 2022 financial crisis and debt default, during which Sri Lanka experienced severe shortages of fuel, food and medicine, soaring inflation and its deepest economic contraction in modern history.

The World Bank’s latest classification places Sri Lanka among countries with a GNI per capita of between US$4,636 and US$14,375. Sri Lanka’s GNI per capita reached US$4,670, narrowly exceeding the lower threshold for the fiscal year 2027 classification.

The upgrade was driven by a combination of stronger economic growth, higher national income and demographic and exchange rate factors.

Sri Lanka’s economy expanded by 5.0% in 2025 as industrial production rebounded and the services sector recorded robust growth, supported by improvements in tourism, financial services and other economic activities. Nominal gross domestic product increased by 8.8%, while a marginal decline in population (0.7%) and relatively stable exchange rate movements also contributed to the increase in per capita income.

The reclassification restores Sri Lanka to a status it briefly held in 2019 before slipping back into the lower-middle-income category a year later, ahead of the economic collapse that culminated in sovereign debt default in 2022.

The latest upgrade also places Sri Lanka among a relatively small group of upper-middle-income economies in South Asia and aligns the country’s income classification more closely with its long-standing achievements in education, healthcare and human development, which have historically ranked above regional averages.

Economists say the new classification also reflects the progress made under Sri Lanka’s economic reform program, including tax increases, subsidy reforms, tighter monetary policy and fiscal consolidation implemented after the country secured a US$2.9 billion bailout program from the International Monetary Fund (IMF).

However, analysts caution that the country’s new status remains fragile.

Sri Lanka’s GNI per capita exceeds the World Bank’s threshold by only US$34, making it vulnerable to relatively small changes in economic growth, inflation, exchange rates or revisions to national income data.

The World Bank reviews country income classifications annually on July 1, and changes in macroeconomic indicators or statistical revisions could result in a country moving between income categories.

Sri Lanka experienced a similar reversal in 2020 when revised income data pushed it just below the upper-middle-income threshold only a year after first entering the category.

The World Bank projects Sri Lanka’s economic growth will moderate to around 3% by 2027 as the initial post-crisis recovery eases, underscoring the need for structural reforms to sustain higher growth.

Economists say maintaining upper-middle-income status will depend on continued fiscal discipline, prudent debt management and reforms to improve productivity and investment.

Although Sri Lanka completed a major external debt restructuring following its 2022 sovereign default, public debt remains high, while many households continue to face elevated living costs and poverty levels remain above pre-crisis levels.

Analysts note that the World Bank’s classification is based on average national income and does not measure income distribution or living standards across the population.

While the reclassification is viewed as an important milestone in Sri Lanka’s economic recovery, economists say it should be seen as a foundation for longer-term reforms rather than evidence that the country’s economic challenges have been fully resolved.

-ENCL

Editor_1
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