The World Bank Group has officially bumped Sri Lanka up to the upper-middle-income tier with effect from 1 July, an upgrade which reflects 5% real economic growth recorded over 2025, lifting the country out of the lower-middle-income bracket. 

The reclassification follows the country’s Gross National Income (GNI) per capita rising above the threshold of $ 4,636. Since its announcement, there have been varying views, both positive and negative, expressed regarding its implications for the country’s economy and development prospects. 

What does this reclassification actually mean for Sri Lanka’s economy? This is not the first time Sri Lanka achieved this classification. In 2019, the World Bank officially classified Sri Lanka as an upper-middle-income country, with a GNI per capita of $ 4,060. However, this status was short-lived, as the country was subsequently downgraded back to a lower-middle-income classification in July 2020 after revised income data fell slightly below the threshold.

Commenting on the implications of Sri Lanka’s reclassification, Deputy Minister of Economic Development U.D. Nishantha Jayaweera said the World Bank’s decision indicated that the country’s economic performance had reached a higher level.

Speaking to The Sunday Morning Business, the Deputy Minister said that the reclassification was a positive development for the country, as it reflected improvements in key economic indicators.

However, Jayaweera noted that moving into a higher income category could also have certain implications when it came to opportunities that were specifically targeted at lower-income countries.

“Sometimes, when institutions grant external scholarships or similar forms of assistance, they consider whether a country falls into a poorer income category and may allocate a higher quota accordingly. But we cannot remain in that position forever simply because of those benefits.”

Referring to Sri Lanka’s recent economic performance, he noted that, according to the Central Bank, the country’s per capita income had reached $ 5,003 and that GDP had increased, which had contributed to the World Bank’s decision. Jayaweera also expressed confidence that current economic trends would support the country’s position going forward.

“According to the Ministry of Finance’s first-quarter financial statements, and even if the first four months of the year are considered, there is actually a budget surplus. That itself is a positive sign,” he said.

Meanwhile, Deputy Minister of Trade R.M. Jayawardana said that Sri Lanka’s reclassification as an upper-middle-income country could potentially encourage greater investment due to improved investor confidence by signalling that the country’s economic conditions were improving. He said that the upgrade reflected improvements in the country’s economic indicators and presented a more favourable picture of Sri Lanka to the international community.

Given that investors generally look for signs of economic stability before making investment decisions, he added that the latest developments could contribute positively in that regard.

“Investors gain confidence when they see that a country’s economy is stable, or at least becoming stable. It is under those conditions that they begin to show interest in investing. During the period of economic instability, there was understandable hesitation. Most of the economic indicators have progressed as planned. We believe this can create a greater inclination among investors to consider Sri Lanka. It will not happen overnight, but there is now a belief that it can encourage investment,” he added.

Long-term impact

Commenting on discussions surrounding implications of the reclassification on Sri Lanka’s ability to receive lending facilities, Arutha Executive Director Yolani Fernando stated that the World Bank’s income classification should not be confused with its lending classification, noting that Sri Lanka’s reclassification as an upper-middle-income country did not automatically mean that the country would lose access to concessional financing.

She further explained that the end result of the reclassification remained uncertain at present. “There is potential that Sri Lanka will end up only receiving higher interest rates and short-term maturity loans from the bond market as we may not have as much access to concessionary loans again,” she noted.

Sri Lanka officially transitioned from the low-income to the lower-middle-income economy category in 1997.

Fernando noted that when this happened, most access to concessional borrowing gradually declined over the following years. She explained that concessional borrowing had accounted for more than 97% of Sri Lanka’s external borrowing at that time, but this had changed gradually, and by 2007 the country had begun issuing International Sovereign Bonds (ISBs). By the time Sri Lanka defaulted on its external debt in 2022, concessional loans accounted for less than half of the country’s external debt.

Moreover, this reclassification is not evidence that Sri Lanka had fully recovered economically. 

“This is not a permanent category. More importantly, it is an average based on GNI per capita. While the methodology is sophisticated, it does not account for poverty levels or the cost of living. It is simply an income classification. It is not a reflection of affordability, equitable development, or sustainable economic progress. Sri Lanka has stabilised, and I think most people would agree with that, but it is a leap to say that we have recovered,” she added.

Responding to questions about whether the reclassification could help attract Foreign Direct Investment (FDI), Fernando said that she did not believe Sri Lanka’s income classification had been the main obstacle to attracting investors.

“Our problem has always been that we have not been able to provide investors with stable investment offers and a business environment. We lack a stable tax policy and we have a great deal of bureaucratic red tape, as well as uncertainty surrounding it. It is one thing to have bureaucracy because every country has bureaucracy. It is another thing when nobody really knows the rules, and no one can clearly tell investors what they need to do to invest in Sri Lanka.”

Thus, she added that between uncertainty and policy instability, a much larger barrier to investment had been created than income classification.

Context matters

Speaking to The Sunday Morning Business, Frontier Research Research Analyst Theeksha Gunasinghe said that while there were mixed views surrounding Sri Lanka’s reclassification as an upper-middle-income economy by the World Bank, it was important to step back and look at the broader context rather than focusing on the classification alone.

He pointed out that Sri Lanka had previously reached upper-middle-income status a few years back, but noted that the circumstances surrounding the latest upgrade were very different.

“What everyone should understand is that this is a classification done by the World Bank every year considering only some indicators of the economy for analytical purposes. However, the context in which this upgrade has happened – three years after defaulting on our external debt and falling to the depths of a severe economic crisis – is what makes it special.”

Gunasinghe explained that one of the biggest misconceptions surrounding the reclassification was how it was being interpreted. He said that the World Bank grouped countries using its own methodology to make country comparisons easier, adding that the classification should not be viewed as a direct measure of individual income or living standards.

“It is simply a statistical average. According to World Bank classifications that consider GNI per capita, this is an upgrade that Sri Lanka received.”

He added that the significance of the reclassification was in the broader economic changes taking place alongside it. According to Gunasinghe, Sri Lanka is not only progressing through another International Monetary Fund (IMF) programme, but is also outperforming expectations across several areas.

“Looking at the last two quarters specifically, we saw the economy growing at 5% even amidst severe shocks like Cyclone Ditwah and the Iran war, which indicates some level of economic resiliency. And the fiscal transformation has been among the strongest in the world. When these facts are considered  together, they are not easy to comprehend, given Sri Lanka’s history of running a deficit-driven economy. This upgrade does not come alone. It comes alongside several macroeconomic changes taking place within the economy.”

Commenting on the nature of fluctuation regarding this position, Gunasinghe acknowledged that the classification could change depending on the country’s economic performance as well as revisions to the World Bank’s methodology. However, he highlighted that maintaining the country’s current economic direction would be the most important factor.

“Frontier Research believes Sri Lanka is undergoing a structural transition from a deficit-based economy to one built on surpluses, fundamentally changing how the economy operates. Especially since the crisis in 2022, despite a number of shocks in between, the economy has recorded consistent surpluses on both the primary and current accounts. Alongside this, we saw reserves build up as well. Because of fundamental shifts like this, we think the economy has new opportunities and costs attached to it now that could be different to how it looked before,” he noted.

Gunasinghe also said that the reclassification, together with wider macroeconomic improvements, could support Sri Lanka’s longer-term development prospects by improving international confidence.

“The classification upgrade and the macroeconomic shifts happening alongside communicates to the world that Sri Lanka is fundamentally different from where it was before. This could possibly help Sri Lanka in getting a credit rating upgrade over the course of its broader economic trajectory, helping the country to regain access to global capital markets sometime down the line as well. Looking at it from a macro perspective, this is one piece of a much bigger puzzle.”

Thus, according to Gunasinghe, the World Bank’s decision should not be viewed in isolation but alongside the broader economic changes taking place. He highlighted that together with the broader economic developments, it sent a positive message to the world about the direction of the economy. This could encourage more foreign investment and capital inflows, which would also help Sri Lanka progress further in its development pathway.

Factors behind the upgrade

Meanwhile, speaking to The Sunday Morning Business, Economist Umesh Moramudali said that Sri Lanka’s return to upper-middle-income status should not be viewed as permanent, adding that the country could slip back into the lower-middle-income category if economic conditions weakened. He said that there was a possibility of Sri Lanka being downgraded again within the next year or two if the country experienced significant exchange rate depreciation.

“What we have to understand is that this upgrade was largely driven by two factors. One is that Sri Lanka recorded moderate economic growth after the default, with around 5% growth over three consecutive years. The second is the performance of the exchange rate. Following the default, the exchange rate first appreciated and has remained fairly stable since then. 

“Because the indicator used for this income classification is GDP per capita in US Dollar terms, the appreciation of the exchange rate and its stability over the past two years had a positive impact.”

Moramudali explained that Sri Lanka had experienced a similar situation before. He pointed out that the country had been classified as an upper-middle-income economy in 2018 before being downgraded the following year, largely due to exchange rate movements and weaker growth. He said that Sri Lanka’s current position was only slightly above the threshold, making it vulnerable to future fluctuations.

“In the long term, it really depends on the kind of economic growth we have and whether we are able to maintain exchange rate stability,” he stated.

He added that retaining the country’s status would ultimately depend on addressing long-standing structural weaknesses. Moramudali also noted that Sri Lanka needed sustained tax revenue, better external sector performance through higher exports and investment, and improvements in State capacity, which he described as an area that had deteriorated over time.

“Becoming an upper-middle-income country also means gradually losing some of the support available to developing countries, while having to deal much more with global financial markets and a more sophisticated economy. To manage that, Sri Lanka needs substantially better State capacity, which we do not have at present. The core issue is to address that weakness.”

The path ahead 

Commenting on whether the reclassification would affect access to concessional financing, Moramudali said that the World Bank’s income classification and lending classification were separate systems. He noted that Sri Lanka continued to remain eligible for concessional lending through the International Development Association (IDA).

“Sri Lanka still falls under the IDA category, which provides access to concessional financing. That classification has not changed. The country will continue to have access to low-cost lending facilities for the foreseeable future. Even after moving into the blend category, Sri Lanka will still have access to IDA financing together with International Bank for Reconstruction and Development (IBRD) financing. It will likely take another 5–10 years before the country completely loses access to IDA lending.”

He added that while it remained to be seen how the Asian Development Bank would apply the new income classification, he did not expect any immediate impact on concessional financing, noting that any changes were more likely to emerge over the medium term.

Discussing potential advantages of the reclassification, Moramudali said that it could improve Sri Lanka’s standing among international investors and support future access to international capital markets.

“This is generally viewed as a positive signal. Sri Lanka could be seen as being in a better position than countries that have recently defaulted, such as Ghana or Zambia. It could improve the country’s standing among international investors and have a positive impact on perceptions if Sri Lanka returns to issuing international dollar bonds.”

However, he also pointed to the drawbacks of moving into a higher income category, noting that countries at that level gradually received less support from development partners.

“As countries move up the income ladder, the expectation is that they require less development assistance. That means access to certain concessions and support available to lower-income countries becomes more limited. We have already seen examples where Sri Lanka does not receive some of the concessions available to countries such as Bangladesh because our GDP per capita is higher. That can create challenges for sectors such as exports and development,” he noted.

Moramudali further highlighted that the World Bank’s classification should not be interpreted as a complete measure of the country’s economic health.

“This classification simply indicates that Sri Lanka’s GDP per capita in US Dollar terms has increased. It is an indicator of overall economic performance. It does not capture the country’s economic vulnerabilities, State capacity, inequality, poverty, or differences in income distribution across provinces. Those are not reflected in this indicator, and that is important to remember.”