World Bank drives Sri Lanka’s Economy backwards

World Bank drives Sri Lanka’s Economy backwards

6 July 2020 09:03 pm

A regrettable news we get to learn in the dawn of June, 2020 is the clumping down of Sri Lanka’s economic status in which the World Bank, in accordance with its latest classification on per capita income of the countries around the world, has downgraded our ‘Upper-Middle Income’ status achieved in 2019 to a ‘Lower-Middle Income’ by category, again. Why has this happened? What are the pros and cons to this change? For a sound clarification, we once again invited our all-time familiar face in economics, a friend to the LNW readers and a reputed economic analyst in the country, Mr. Vincent Mervyn Fernando, who is a former director and a senior economic specialist of the Central Bank of Sri Lanka, a former economics lecturer of the University of Sri Jayawardenapura and an author to 65 books about Economics and Management.  

Let us lay down Mr. Vincent Mervyn Fernando’s answers to the queries we raised on the World Bank’s above decision.

Can you explain first how the World Bank ranks the world in terms of Per Capita Income and how has Sri Lanka moved up to its latest status?

Since 1978, the World Bank divides the countries of the world into four categories in its World Development Report based on the value estimated by dividing the Per Capita Income, or the national income of a state, by the middle-annual population of the relevant country.

1. Low-Income Countries (LICs)

2. Low-Middle Income Countries (LMICs)

3. Upper-Middle Income Countries (UMICs)

4. High-Income Countries (HICs)

Sri Lanka, in compliance with the aforementioned classification, ranked in the first category, among the Low-Income Countries (LICs) until 1997. During that time, countries with a per capita income lower than US$ 905 were considered LICs. That being said, it is revealed that it took a precise period of five decades for Sri Lanka to surge its per capita income up to US$ 905, which in 1948 after independence was US$ 120. Accordingly, Sri Lank, among others, had spent its time as a poor country for fifty years (except a few years in the beginning). Overcoming this struggle in 1997, it had upgraded itself to a Lower-Middle Income Country (LMICs). This suggests us that we had upgraded ourselves into a LMIC after twenty years since the open economic policy was introduced in 1977. This retreat was influenced by ethnic crises and terrorist issues in the country.

Sri Lanka had upgraded from its 1997-incepted LIC status to an Upper-Middle Income Country (UMICs) in accordance with the July, 2019 report of the World Bank. According to that classification, a country was considered a LIC if its per capita income was on or below US$ 1025. Countries with a per capita income of between 1026 and 3995 remained in the LMICs category. Countries with a per capita income of between 3996 and 12375 were ranked among the UMICs. Those that were above US$ 12376 were ranked at the High-Income Countries (HICs) category. Sri Lanka recording a per capita income of US$ 4079 in 2018 was ranked as a UMIC in accordance with the July, 2019 report. That being said, it took Sri Lanka twenty-one years to upgrade itself from its 1997-incepted LMIC status to a UMIC. 

Can you explain to us how were we able to upgrade ourselves to an upper-middle income status in 2018?

Something that we should not forget, is the fact that Sri Lanka had upgraded itself to an upper-middle income status in 2018 amidst many devastations including the 2004 Tsunami disaster, the Civil War until 2009 and the adverse weather conditions and natural disasters. Also, the following statistics reveal that the highest per capita income of the country since 2009 was achieved from 2010 to 2014. But these figures also indicate that the growth was very slow from 2015 to 2018.

Year            Per Capita Income (US$)

2004               1063

2009                2054

2010                2074

2011                3125

2012                3351

2013                3609

2014                3819

2015                3842

2016                3886

2017                4077

2018                4079

2019                3852

Despite the fact that the Good Governance government should be praised for uplifting Sri Lanka’s income status to the upper-middle income category, statistics indicate that the very foundation to this uprising was laid during Mr. Mahinda Rajapaksa’s government. However, Sri Lanka’s upper-middle income status in 2019 was dropped back to the lower-middle income category in July 01, 2020 due to the inability of the Good Governance and with the significant drop of the per capita income for the first time in history, by US$ 227, in 2019, in a matter of a year’s period. The other two countries to accompany Sri Lanka in this downgrading are Algeria and Sudan. But Nepal, a South Asian country, has upgraded from its lower income status to the lower-middle income category.

In terms of the July 01, 2020 classification of the World Bank, Sri Lanka has once again returned to its former ‘lower-middle income’ status. Please tell us what this new classification is about. Why were we dragged backwards through this classification?

On July 01, 2020, the World Bank newly ranked the countries of the world in terms of per capita income of 2019 as follows:

This classification is considered through three criteria (excluding the impact of COVID-19)

1. Gross Domestic Product Income of The Country

2. Conversion of that income into dollars, through the ATLAS System

3. Three-Year Dynamic Average of Adjusted Exchange Rate for the Difference Between Country Inflation and International Inflation

The classification on July 01, 2020 is as follows;

Country Category                    Per Capita (2020.07.01)

1. LICs                                      <1036

2. LMICs                                  1036- 4045

3. UMICs                                  4046-12535

4. HICs                                     >12535

In accordance with the above classification, Sri Lanka’s per capita income in 2019 ought to be US$ 4046 to the least, should it conserve the upper-middle income status.

Although we were able to keep the status intact in 2017 and 2018, the situation changed as the country’s economic growth rate dropped to 2.3% in 2019, the foreign exchange rate, by the end of 2019, marked Rs. 182 (of all which were a result of the Easter Sunday genocide) and the per capita income of 2019 dropped down to US$ 3852, a lower value compared to the previous year, after 18 years.   

Will we have to remain in the ‘lower-middle income’ category next year all well, because of COVID-19?

It is likely that we may have to face the same fate in 2021. Because, by 2021, the per capita income may further drop in the coming of the negative economic growth. 

Do you really believe that us being downgraded from the upper-middle income category to the lower-middle income category is a disadvantage?

As the old saying goes, there is a silver lining in every dark cloud. Us being downgraded to the lower-middle income category, according to what I believe, would be a blessing in disguise for us, given the severe meltdown in the country’s economy at the moment. Because, being an upper-middle income country, it might be difficult for us to obtain reliefs from foreign countries. For example, being an upper-middle income country would be a hindrance to obtain the GSP+ relief. Similarly, being a lower-middle income country may be useful, should we be able to collect the MCC grant by removing its harmful clauses. Therefore, I can say that the situation is as good as it could be given the phase we are passing at the moment.