18 July, 2019

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Sri Lanka’s Elevation To Upper Middle Income Status: Attainment Is Welcome But Challenges Are More

By W. A Wijewardena

Dr. W.A Wijewardena

Sri Lanka is now an upper middle income country

The World Bank, in its 2019 country classification release, has elevated Sri Lanka from a lower middle income country to an upper middle income country. This has been based on the average income of a Sri Lankan, known in economic parlance as the gross national income or GNI per capita, passing the threshold of $ 3,996 set for upper middle income countries. As at 1 July 2019, a Sri Lankan on average has earned an income of $ 4,060, a little above this threshold, thereby making Sri Lanka eligible to join the upper middle income country club.

Use of GNI in place of GDP to measure economic advancement

The World Bank uses GNI per capita and not the more popularly known Gross Domestic Product or GDP per capita for classifying countries into different stages of economic advancement. That is because GNI includes all the incomes earned by peoples of a country irrespective of whether they are resident in that particular country or not. In contrast, GDP measures the incomes earned by all within the territory of a country irrespective of whether they are citizens or not. Hence, GNI pertains to the people of a country and therefore is a better indicator of the wellbeing of such people. For international comparison, the World Bank converts GNI per capita measured in the local currency into US dollars by using an average exchange rate.

Atlas method

That rate is the average exchange rate of the currency of the country against the US dollar for the last three year period adjusted for local inflation. This conversion method is technically called ‘The Atlas Method’ because it is the method used by the Bank to present data in its World Development Atlas. This precludes the distortion of the exchange rate at least to some extent due to manipulation by governments or spikes in the rate due to temporary market developments. While this measure has its own limitations, it is considered a better measure than alternatives available. The details of the measurement can be found here. In the case of Sri Lanka, because of the high interest payments and profit transfers made to foreigners, GNI is lower than GDP by about 3%.

The present elevation in the status is encouraging 

Despite these limitations, this attainment by Sri Lanka is certainly encouraging. But it also exposes the country to a few challenges.

It is encouraging because Sri Lanka, after 22 long years since it was promoted from a poor country to a lower middle income country by the World Bank in 1997, has now been able to pass one of the two hurdles in its way to become a rich country. Since independence in 1948, Sri Lanka had remained a poor country for 50 years because of its low economic performance at slightly more than 4% per annum. This was a derogatory tag attached to Sri Lanka, but in 1997, it was able to shed that tag when it earned an average income of $ 786 per person. But because of a little higher economic performance after 1997, it did not take 50 years for the country to pass the next hurdle. In fact, that hurdle was passed after 22 years. Hence, the present attainment is encouraging.

Such an attainment in which a country has become richer than before should make its people happier. However, in this case, there are two qualifications which diminish the real value of this attainment.

Need for removing price increases

One is the price increases that have contributed to increase the money income of people during this period. That would have been corrected had the rupee been allowed to fall correspondingly against the US dollar, the currency used to convert the income measured in rupees to a globally comparable yardstick, to the extent Sri Lanka’s average inflation was higher than the average inflation of its major trading partners. The second is the income disparity among Sri Lankans as well as across provinces in Sri Lanka which makes some people or provinces richer, while the others remain laggards.

An element of overvaluation in the exchange rate

During 1997-2018, Sri Lanka’s economy had grown on average at about 5% per annum in real terms. This growth rate is not sufficient to push the income levels of people to the minimum needed to cross the threshold of the upper middle income category within 22 years. However, there have been increases in price levels at about 13% per annum on average boosting people’s rupee incomes. To consider such increases in money incomes as a real improvement of people’s wellbeing is an illusion. Hence, the illusive effect of price increases should be corrected by allowing the exchange rate against the US dollar to fall in the market.

If it had not been allowed to happen, the result is the overvaluation of the rupee against the US dollar, the currency which is used to convert the income in rupee terms to an internationally comparable measurement. During 1997-2018, the rupee has fallen in value against the US dollar by about 3.4% annually. It appears that this depreciation has not been sufficient to push the rupee value down to reflect the true value of the incomes converted to dollar terms. To correct this, the World Bank has used the average rupee-dollar rate for the previous three year period, but there is still an element of overvaluation of the rupee built into that formula. Hence, the overvalued rupee would make such incomes higher than what they should have been. As such, Sri Lanka may have attained the upper middle income country status faster than the period it would have normally taken.

The World Bank also recognises the deficiency of using per capita income to gauge the wellbeing of people due to income disparities. This is particularly relevant in the case of Sri Lanka due to two reasons.

Uneven income distribution

First, historically Sri Lanka has had an uneven income distribution among its citizens. According to the Household Income and Expenditure Survey conducted by the Department of Census and Statistics in 2016, 51% of the country’s income has been earned by the richest 20% of citizens. In contrast, the poorest 20% has earned only 5% of the total income. Incomes in Sri Lanka have normally been concentrated at high income earners. This is shown by the fact that the top 30% has bagged 62% of the total income in 2016, while the poorest 30% has got only 9% of the total income. The middle income earners have got only 29% of the total income. With this uneven income distribution, it is questionable whether the elevation of the country to upper middle income status would really mean an improvement of the welfare levels of people in general.

Uneven provincial income distribution

Second, the disparity of incomes earned by different provinces in Sri Lanka is more prominent than the overall uneven income distribution. The provincial GDP numbers are calculated by the Central Bank after the Department of Census and Statistics compiles the national GDP numbers. Hence, there is a time lag in getting provincial GDP numbers and the latest available has been in respect of 2017. These numbers were converted to GNI numbers by this author by using the national level disparity of 3% between GDP and GNI.

The results are presented in figure 1 along with the threshold limit of $ 3,996 applicable to upper middle income countries. According to these data, only the Western Province and the Uva Province have qualified to join the upper middle income country club, while all other provinces have to further grow in order to earn that status. If Sri Lanka grows at a rate of 5% per annum in the coming years, it would take at least another eight years for the whole country to earn the status of an upper middle income country.

The exploitation of people’s dissatisfaction by crafty leaders

Sri Lanka’s present challenge is therefore to eliminate the provincial disparity in income levels in order to reap the full benefit of being an upper middle income country from the wellbeing point of its citizens. For that purpose, it is necessary to adopt a policy strategy to generate even economic growth across all the provinces. As long as only an exclusive few would benefit from economic growth, nationally or provincially, all others are denied of enjoying its fruits. It leads to the creation of economic, social and political tensions among citizens. These tensions become a fertile ground for crafty leaders to exploit people’s dissatisfaction for their personal benefits.

Creation of an unseen enemy 

There is a set modus operandi used by these leaders to attain their goal. A fictional enemy who is both illusive and elusive is created and shown to dissatisfied people as the cause of their suffering. With a promise to end the suffering, they are mobilised against this enemy.

In most cases, the enemies are ethnic or religious minorities who are projected as a group enjoying a better life at the expense of the majority people.

In Nazi Germany in mid 1930s, the enemy was the Jews. In Myanmar today, it is Rohingya, a minority Muslim group living at the margin of the economic system. In Bangladesh, it is minority Buddhists. Among the majority Buddhists in Sri Lanka, it is Muslim or Tamil minorities. In Burkina Faso, it is the Christian minority among the majority Muslims. If there are no potential minorities, then, the enemy is invariably the rich people in the country.

Political leaders throughout history have survived and prospered by creating conflicts among their own citizens. When doing so, they usually misrepresent nationalism as equivalent to patriotism. A patriot will fight for his ethnic, caste or religious group. In contrast, a nationalist will fight for the wellbeing of all humans. Hence, while patriotism impedes economic prosperity, nationalism will be a beneficial causal factor for same. Accordingly, a country which is divided on ethnic or religious lines fails to mobilise the efforts of all citizens for generating prosperity. One important causal factor for the low economic growth in Sri Lanka in the post-independence history has been the division of people on ethnic or religious grounds.

Have megapolis scheme in all provinces

The present resource allocation strategy in Sri Lanka has overwhelmingly favoured the Western Province. A Megapolis scheme aiming at diverting resources to the tune of $ 45 billion over the next five years for the development of the Western Province has been launched.

The underlying economic logic has been that the fast development in the Western Province will generate similar development in other parts of the island due to economic linkages and interdependence. For instance, those in Ampara District will stand to benefit from the high incomes earned by those in the Western Province by creating a safe market for their food, dairy and fish products.

However, this will not happen automatically unless there are conscious policies to link these two markets via access roads, logistical facilities and technological improvements. If these are not present, those high income earners will seek to satisfy their demand from markets in Kerala or Tamil Nadu which are closer by air to Colombo than to Ampara or Batticaloa. What this means is that similar Megapolis schemes have to be initiated in other parts of the island as well.

Goal should be to generate shared prosperity

The goal of economic development efforts by world nations today is to generate ‘shared prosperity’ among its citizens. At a global level, this is further expanded to include all the nations in the world. As such, economic development in India or China should generate similar prosperity in other nations as well. It would ensure that the fruits of economic development will not be enjoyed by an exclusive group of people or countries. It should invariably be an inclusive development in which all the citizens irrespective of location, ethnicity, religious faith or caste can participate in growth efforts and enjoy its fruits without any discrimination.

Thus, to make Sri Lanka’s elevation to upper middle income country status meaningful, it is necessary to ensure that growth generates shared prosperity to all.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 0
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    American Rating agencies are also doing a similar thing. world Bank an IMF do not have a good reputation. Those are two organizations created internationalize the america, dollar. How ever in this case, a bankrupt country has to pay more INTEREST because they says Srilanka’s income increase by $ 61 per head.
    besides, it is election time, So, The RANIL And HIS UNP needs some promotion. They BRICS which is countering the world Bank. They destroyed Brazil and south Africa is not there and now is working on India.

    • 6
      1

      After the Easter sunday attack on the Sri lankan economy by US Special Operations Forces (SOF) , and having debt trapped and crashed the rupee through currency manipulation, in order to asset strip, land grab and ocean grab Lanka, which is a geo-strategic GOLD MINE with vast ocean resources, the Washington Consensus (WB-IMF and ADB) are putting out fake ‘good news’ economic data based on cheery picked indicators — to keep US puppet Bondscam Ranil in power.

      Does this Dr Wije have have a brain to accept this WB tosh that Lanka is an upper Middle Income Cournty?! Where is the calculous of DEBT and its crippling burden on the national economy?!!!
      The World Bank uses GNI per capita and not the more popularly known Gross Domestic Product or GDP per capita for classifying countries into different stages of economic advancement. That is because GNI includes all the incomes earned by peoples of a country irrespective of whether they are resident in that particular country or not. In contrast, GDP measures the incomes earned by all within the territory of a country irrespective of whether they are citizens or not.
      What a joke. Only morons will swallow the Washington Consensus AWB sop that SL is an Upper Middle Income country when it is upto its eyeballs in debt due to US-Euro soverign Bond currency manipulations. Nomura Rating, Tokyo must be sued by CBSL for currency manipulation just as Qatar is suing EU and Saudi banks!

      • 4
        2

        The financially illiterate finance minister of Banana Republic who was happily crashing the Lankan currency on the behest of his Washington Handlers, rather than defending the rupee, has now swallowed the World Bank fib!

        How to can your compute regional inequality when the GNI is based on earnings of these overseas as well? what kind of imbecile would accept this canard that Sri Lanka is an upper mid income country on this metric also when the Former Auditor General Gamini Wijesinghe said that the debt burden on every citizen in the country amounts to Rs. 530,000 ??!
        US puppets Bondscam Ranil and his (neo) liberal butterfly mafia must be impeached for beggering Sri Lanka which is a Geo-strategic Gold mine – to be asset stripped, land and ocean grabbed by their Washington backers.

    • 1
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      I think even Ethiopia s situation has been subjected to drastic changes in terms of their Economy since Chinese banks invested lot more in that once-the poorest -country of this planet.
      In Europe, rose to other flowers and some veg and so many goods you find in supermarkets are either from Ethiopia or Kenya. They should be very flexible with the foreign investments in that country. Lots of jobs are being generated. Etiopions I got to know during my Uni education in Germany and Swiss have all returned to their home country for better job positions.
      But the problem we have in our HELL-SIRLANKA is the name of so called investments through the chinese, a bunch thugs packed the commissions in to their pockets. Not yet not 5% income is reported from neither Mattala Airport nor Hambantota harbour.
      For some reasons, all these facts are kept under the carpet may well be to cover Rajaakshe real ground realities.
      Not many new jobs were generated by so called Rajaakshe develop ment projects. The current govt only even TOURISM was promoted so that Tourists could flow into the country as no times inthe past.
      All in all, just because his term found the stop to THE REALY race of CIVIL war, Rajakshe thought it to be taken as a licence in order to FOOL THE nation for a building of HITLAR style hedgemony. Even today, not a single man ina village would open his mouth wider against Rajakshes…. they become stand still as they are permamently blind.
      No different to that of North korean KIM style politcs. No nothing is done towards the murder case of Thadjudeen, becuase former DRAKULA pRESIDENT s wife was too complicit of that murder.
      Nothing seems to work for the people, since their COVER man MOST uneducated Sirisena s nosal rope is being controleld by Rajaakshe thakadiyas today.

  • 1
    2

    UNP govt must be uprooted and eliminated for the good of the country. They are destroying the country. In reality Mangala and some others should be tried for HIGH TREASON.

  • 1
    2

    There are no third world countries in the world that became developed because of IMF or World bank involvement.

  • 1
    1

    Is this real Dr Wijewardana?..

    I just checked the Currency Converter..
    Lankans must have LKR 59333 Rupiahs income per Month if Dr Wije is right…

    Do the estate Tamils earn that sort of dosh , although their Political Bosses drive Bullet Proof Mercs while singing Hosannas to Dr Ranil and his UNP?..

    Do our ex LTTE Thamil brothers and Sisters including their AAVA Home Gurads get 59.333 a Month ?.-

    How many in my Neighborhood in Wella Gardens who live in those Shanties earn that sort of Dosh per month?..

    I don’t think even a majority of the UNP Supporters are in that 59.333 Rupiah Bracket,

    Otherwise the UNP Deputy Leader wouldn’t boast that he is going to put as many as his followers on Samurdhi before the Election , because 29 % percent of our Inhabitants qualify for the Samurdhi. according to Keselwatta Kid’s own Maths…

    To top it all, the beloved UN’s World Poverty Report says 60 % of our Students are malnourished along with their parents.

    If one takes all those above out of the equation , wonder how much would be the GDP Average Income of our UNP Brothers and Sisters in Colombo such as Aloysious, Galleon Ravi, Pakiosothy, Kabir Hashim, Mallika , Poodle Club Baby , their families and their supporters and followers..

    Dear Native .. Can you help with the Maths , because you seems to be one of those ” Educated” ones whom Galleon Ravi wants promote as our Rulers..

    BTW , I thought the UNP Minister Bathudeen and his Missus who paid reportedly paid LKR 240 Million in 2016 for 3000 acres of coastal land in Mannar would have boosted the per Capita Income of the Wahabis in the East to be well over the Average which which Dr Wije is on about.

    But Looking at his Chart it is not…

    • 1
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      It is reported that the original Tamil owners of these 3000 acres of coastal lands in Mannar that was illegally acquired, had fled to India. Powerful Muslim politicians in the north and east are illegally changing the title of these lands , as they know most of the Tamil owners of these lands , who have fled to India will never return and are acquiring them. The TNA is just sleeping. These coastal Tamil lands in the Mannar district is facing South India and have been acquired for the sole purpose Islamising the Tamil Mannar district , this will also be a threat to India. How did this former beggar from Mannar become a multi millionaire and pay 240 Million , where are all these funds coming for these Muslim politicians to illegally acquire Tamil lands for Islamisation and why is the TNA keeping quiet. We all know the government in complicit in these matters.

  • 2
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    “Sri Lanka’s Elevation To Upper Middle Income Status: Attainment Is Welcome But Challenges Are More”

    How does the world bank measure this?
    is this based on how rich the politicians has become ?
    as ordinary people dont feel upper middle income at all

  • 3
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    Upper Middle Income Country has a section of the country under army occupation and rule since the end of war 10yrs ago – that section is much less than lower middle income.

    • 4
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      yes….and all these ministers crowing here …blocked the Rs 1000 a day for the tea pluckers….they are lower lower lower income….

      …which analyst in the World Bank came out with this theory ….ask him/her to face up to the tea estate workers

  • 2
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    The most meaningful part of the article was in the last sentence. Some people are doing very well, but too many are just scraping by. The events at Easter has been a major set back both to many incomes in the lower bracket, and to the general feel good well-being of all. If the gap between those in the top 30% and the lowest 30% increases much further, the ground will be fertile for all sorts of trouble makers to use the widening gap to further their own divisive agendas. Is anyone listening? Is anyone worried? The chances are that given the current state of our politics, this festering sore will be lowest in the minds of our self-serving politicians.

  • 1
    1

    How about the accusation that Ranil is giving permanent land deeds to poor because next year MCC will buy all for extra paid.

  • 2
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    There are three types of Lies:

    1. Lies
    2. Damn Lies
    3. Statistics

    So according to the third type of lie, Sri Lanka is a “Upper Middle-Income” country..!!

    What Hogwash!

    The Finance Minister and a former Deputy Governor of the Central Bank of Sri Lanka are swallowing the bait – hook, line and sinker!!

    The World Bank, IMF and similarly placed so-called International Agencies are master manipulators of data and facts and distort to present a ‘rosy’ or ‘dismal’ picture as it suits their final objective!

    As Abraham Lincoln said:

    You can fool all the people some of the time,
    and some of the people all the time,
    but you cannot fool all the people all the time.

  • 1
    0

    Dr W A W

    I read your article again this morning, and the comments that follow it.

    I cannot but help thinking that someone deep in the bowels of the World Bank building has dreamt up the GNI yardstick – something to do?

    As I go around our currently hot and sticky paradise, I just reach one conclusion: that we should judge ourselves not by how the few rich live, but by the quality of life of the poorest. We have some way to go yet before popping the champagne corks.

  • 1
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    Dr W A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, {“As at 1 July 2019, a Sri Lankan on average has earned an income of $ 4,060, a little above this threshold, thereby making Sri Lanka eligible to join the upper middle income country club”}.
    You have stated that your are inspired by the wisdom of your hair-dresser, you trishaw drivers. Do they earn this kind of income?
    .
    ‘The Daily Mirror’ of 07 July 2019 has the following {“Former Auditor General Gamini Wijesinghe said that the debt burden on every citizen in the country amounts to Rs. 530,000.
    Addressing a conference of professionals and scholars at the Ramada Hotel in Polonnaruwa he said that majority of the people have not realized this situation and think that the government was responsible for debt servicing and it was not a burden on them”}.
    Left to the readers of CT and ‘The DM’ to judge. Dr W A W cannot.

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