ECONOMYNEXT – The World Bank Group has reclassified Sri Lanka from lower-middle-income to upper-middle-income, effective July 1. However it cautioned that several risks remain to maintaining that status amid elevated debt and slowing growth.
Sri Lanka has been here before in 2019, lost the status within a year, and then experienced an economic crisis.
“The 2027 reclassification comes after a genuine crisis and a hard-fought recovery. That makes it more meaningful. However, as experienced in 2019, it does not make it permanent,” the World Bank Group said in a statement.
The reclassification now was precipitated by the country’s GDP growth as it continued its recovery.
“Real GDP grew by 5.0% in 2025, supported by a broad-based industrial rebound and steady growth in the services sector (54.6%) especially financial and tourism-related services. GDP in current prices increased by 8.8%. The combined effect of a shrinking population (0.7%) and exchange rate depreciation (0.4%), while small, nudged the country just over the threshold into the upper-middle income category in 2025.”
The reclassification is formal recognition that the country’s average income per person has crossed a global threshold, signalling economic recovery after the crisis.
The World Bank Group uses its income classifications for analytical purposes, including in reports and statistics.
“A country’s income level is not the sole determinant for allocation of World Bank resources for operational lending purposes. In determining eligibility, resources and their associated terms and conditions, the World Bank Group also considers many additional criteria.”
However, other institutions use the World Bank Group’s income classifications to inform eligibility criteria, operational frameworks, and administrative decisions. Examples include eligibility for official development assistance reported by the OECD and access to certain preferential programs administered by other organizations.
“The reclassification reflects real and hard-won progress. Sri Lanka’s recovery from the 2022 crisis has required painful fiscal adjustments, including tax increases and subsidy reforms that affected ordinary citizens. Crossing the upper-middle-income threshold is a recognition that those efforts have contributed to measurable economic
improvement.
However, the WB cautioned, several risks remain:
• It can be reversed. The World Bank reviews classifications every July 1. Exchange rates, growth slowdowns, or data revisions can push a country back across the line within a single year. Sri Lanka has lived this exact
experience.
• Debt remains elevated. Sri Lanka completed a painful debt restructuring after its 2022 default. Public debt levels are still high. The fiscal discipline that enabled this recovery must continue.
• GNI per capita is an average. It does not reflect how income is distributed across the population, or whether the recovery has reached the most vulnerable. Many Sri Lankan households are still managing cost-of-living pressures from the crisis years. Poverty indicators have not fully recovered to pre-2022 levels.
• Growth is slowing. The World Bank projects Sri Lanka’s growth at around 3% in 2027, down from the stronger rebound years. Staying in the upper-middle-income band will require structural reforms, not just recovery momentum.
Upper-middle-income status is rare in South Asia — this sets Sri Lanka apart, the WB said.
“Sri Lanka has long outperformed regional averages on health, education, and human development indicators. If this classification holds, it would bring the country’s formal income status into closer alignment with those longer-standing achievements, a meaningful alignment that has been missing since the 2022 crisis.”
In July 2019, the World Bank classified Sri Lanka as upper-middle-income for the first time, with a GNI per capita of $4,060, just $64 above the threshold.
In July 2020, the country was downgraded back to lower-middle-income when revised data placed it fractionally below the line.
In 2022 the country faced an economic crisis; Foreign exchange reserves ran dry. Sri Lanka defaulted on its external debt, and inflation surged.
The World Bank Group classifies economies into four categories on the basis of gross national income (GNI) per capita: high income, upper-middle income, lower-middle income, and low income.
At the start of a new fiscal year on July 1, the classifications are updated based on GNI per capita estimates for the previous calendar year, along with changes to the thresholds defining the income categories, adjusted annually for inflation.
GNI measures are expressed in nominal US dollars using conversion factors derived according to the Atlas method, which is designed to provide an internationally comparable measure of GNI per capita by reducing the impact of short-term, country-specific fluctuations.
The Atlas methodology is not intended to evaluate macroeconomic stability, economic resilience, external vulnerabilities, or other aspects of economic performance, the WB specifies, but as an annual snapshot of groups of countries with similar levels of economic capacity.
Changes in Atlas GNI per capita reflect real income growth, domestic price developments, and exchange-rate movements.
The Atlas GNI per capita approach offers a transparent and consistent framework for classifying economies, but it does not capture all dimensions of a country’s economic circumstances.
Results can be skewed by periods of elevated inflation in which higher prices are not fully offset by exchange-rate movements, because the indicator is measured in nominal US dollar terms.
This is true for economies whose Atlas GNI per capita is very close to the thresholds separating the income categories, in which case, very small differences in combinations of real growth, inflation, population, or exchange rates can result in countries with nearly similar economic profiles falling on different sides of the threshold line, the WB says.
Small changes in any of these factors can result in a country moving in and out of categories from year to year.
“Accordingly, income group classifications should be interpreted as measures of income level rather than comprehensive assessments of economic conditions of individual economies,” the WB said in a statement.(Colombo/Jul2/2026)
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