Muttukrishna Sarvananthan is the founder and principal researcher of the Point Pedro Institute of Development and a senior lecturer in economics at the University of Jaffna in Sri Lanka. He is the author of “Anatomy of the Sovereign Insolvency of Sri Lanka.”
Last month, the World Bank reclassified Sri Lanka as an upper-middle-income economy, alongside Jordan, Micronesia, the Philippines and Vietnam. The classification is based on Gross National Income, or GNI, per person, calculated using the World Bank’s Atlas method.
As of July 2026, the World Bank defines an upper-middle-income economy as one with a per-capita GNI between US$4,636 and US$14,375. Sri Lanka’s per-capita GNI reached US$4,670 in 2025 — just enough to cross the threshold.
On paper, that looks like an economic achievement. But does it reflect the financial condition of the country and its citizens?
I would argue that it does not.
Looking Beyond Income
The World Bank’s income classification is widely used by governments, investors and international organizations. It also has practical consequences. As countries move into higher income categories, they can gradually lose access to some forms of concessional development finance and become increasingly reliant on borrowing from international capital markets.
For Sri Lanka, that distinction matters.
The classification measures income. It does not measure the burden of public debt. A country can therefore cross an income threshold while carrying a debt burden that continues to constrain its economy, its government and ultimately its citizens.
Income alone is not enough to describe prosperity.
A Different Measure of Prosperity
Per-capita income should be considered alongside per-capita public debt. This is not a proposal to replace the World Bank’s income classification, but to put that classification in a broader financial context.
Sri Lanka’s total public debt stood at approximately US$99 billion in early 2026. With a population of about 21.8 million, that amounts to roughly US$4,547 of public debt for every citizen.
Compare that with the country’s per-capita GNI of US$4,670.
The difference is only about US$123 per person.
These figures are not directly comparable economic measures: GNI represents income generated by an economy, while public debt represents obligations accumulated by the state. But the comparison illustrates something important. Sri Lanka’s apparent improvement in income has occurred alongside an enormous public debt burden.
Viewed in that context, the country’s graduation to upper-middle-income status appears far less impressive than the headline figure suggests.
Why It Matters
Sri Lanka defaulted on its external debt in April 2022 and remains under an IMF-supported reform program. One objective of that program is to restore the country’s access to international capital markets.
But restoring access to borrowing should not be confused with solving the problem of excessive dependence on borrowing.
Sri Lanka’s experience illustrates the risks of financing development through an ever-growing accumulation of public debt. Advocates of global debt justice sometimes describe sovereign borrowing that does not genuinely benefit citizens as “odious debt.” Whether or not one accepts that definition, the broader question remains: How much borrowing can a country sustain before access to new credit becomes a substitute for genuine economic reform?
For Sri Lanka, that question is particularly urgent.
Breaking the Debt Cycle
If countries want lasting economic resilience, they must reduce their dependence on debt rather than simply improve their access to new loans.
In Sri Lanka, that requires structural reform.
The state dominates much of the financial sector through ownership of major banks, including the Bank of Ceylon, National Savings Bank and People’s Bank; the largest insurance company, Sri Lanka Insurance Corporation; and the country’s largest pension funds, the Employees’ Provident Fund and Employees’ Trust Fund.
This concentration of financial power has enabled successive governments to draw heavily on domestic savings to finance persistent fiscal deficits.
The danger is that an economy can become increasingly dependent on borrowing without creating a corresponding expansion in productive wealth.
That is the deeper problem behind the income classification. Moving above an international threshold does not necessarily mean that the underlying economic model has become sustainable.
A Broader Lesson
The issue extends beyond Sri Lanka. Many countries, including developed economies with relatively high per-capita incomes, also carry enormous public debt burdens.
Income alone does not tell the whole story.
A more meaningful assessment of national prosperity should consider both what a country earns and what it owes. Looking only at income creates an incomplete, and sometimes misleading, picture of economic well-being.
This matters because international classifications can shape how countries are perceived — by investors, lenders, governments and even their own citizens. A higher income designation can create the impression that a country has entered a new stage of economic security when its underlying vulnerabilities may remain.
For Sri Lanka, the distinction between appearing richer and becoming financially stronger is especially important.
Conclusion
Sri Lanka’s graduation to upper-middle-income status should not, by itself, be mistaken for genuine economic prosperity.
The country has crossed an income threshold. It has not necessarily escaped the financial constraints that have defined its recent economic history.
A country’s financial health depends not only on the income it generates but also on the debt it owes, the cost of servicing that debt and the productive capacity it builds in return.
The goal, therefore, should not simply be to regain access to international capital markets or to move into a higher income category. It should be to build an economy that can finance its future without repeatedly relying on borrowing to compensate for weaknesses in its economic foundations.
Sri Lanka’s new status as an upper-middle-income economy may be a statistical milestone. But the more important question is whether ordinary Sri Lankans are becoming more economically secure.
Until that happens, the country’s higher headline income will tell only part of the story.
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