Poor, little upper-middle income country

“Sri Lanka has been ranked among the least happy countries in the latest World Happiness Report 2026…standing alongside Ethiopia”- The Sunday Island March 2026 Sri Lanka was officially declared an Upper-Middle Income country by the World Bank in July 2026, regaining the classification it had in 2019. On the 30th of June, the IMF delegation meeting the President at the Presidential Secretariat praised the government: “…IMF praised the government’s economic programme and noted that Sri Lanka has made greater progress than many other countries implementing IMF-supported programmes. The delegation commended the government for maintaining macroeconomic stability despite a series of external shocks and for remaining firmly committed to its reform agenda…” (Presidential Media Division, 30 June 2026) Meanwhile, a UN-backed World Happiness Report 2026 compiled by the Wellbeing Research Centre at the University of Oxford, ranked Sri Lanka 134th out of 147 nations. A daily newspaper which ran the story on the 19th of March 2026, added that the report showed that “Sri Lanka has slipped one place from its 133rd ranking in 2025, now standing alongside Ethiopia. The country also trails behind its South Asian neighbours, with India ranked 116th, Pakistan and Bangladesh positioned significantly higher.” Good News, Bad News The Upper-Middle Income classification was declared by the World Bank during the Yahapalana government in July 2019. 6 months later, the Yahapalana government was swept out at elections. Only 2 years later, in April 2022, the country was declared bankrupt, and by July that year the newly elected President was toppled by a people’s uprising for the first time in the country’s history. To fill the vacuum, an unlikely combination of an unelected MP from the Opposition who was made President by the Parliament and an unpopular government that had barely survived the uprising, governed the country together. It was massively defeated by the people only 2 years later in 2024, despite ‘stabilising’ the economy. An Upper-Middle Income status may give the impression of a prosperous people, but prosperous people are not an unhappy people. The World Bank report 2026 (World Bank, Sri Lanka Development Update) notes the anomaly: “the recovery is unfinished and has not translated into widespread improvements in welfare.” The report adds: * Real output remains below 2018 levels. * Although poverty is projected to decline in 2025, it remains double the 2019 levels. * Vulnerability remains high with an additional 10 percent of the population living just above the poverty line. * Malnutrition continues to be elevated. * The labour market recovery is slow with real wages and labor force participation well below 2019 levels. The World Bank’s Poverty and Equity Brief (October 2025) sheds further light: * Poverty is projected at 22.3-22.4 percent in 2025 and around 20 percent until 2027 without stronger inclusive growth. * Real earnings remain below pre-crisis levels. So, are Top of the Class in the IMF index and almost Bottom of the Class in the Happiness Index related? As a friend who is a highly-placed economist explained to me, if people are poorer, undernourished, indebted, and insecure after stabilisation, then reserves, inflation, and primary balances alone cannot be relied on to judge the next IMF programme. Sri Lanka needs a national programme whose success metric is household recovery, jobs, nutrition, and productive capacity. From the praise heaped on the President and this government’s strong leadership by the IMF for their performance thus far, sticking closely to the IMF conditionalities, we can only infer that things for the unhappy citizens will hardly get better as they negotiate the 18th IMF programme. The AKD administration doesn’t haggle on behalf of the people. They see the rewards of that approach in fiscal consolidation and macroeconomic stability. This however, is not the only kind of stability they have to bear in mind, given recent history. By the People, But Not for the People? The new or renewed (from July 2019) ‘Upper-Middle Income’ classification has served to remind people where the government has failed, been weak, as much as where it has been strong and succeeded. The economy in the abstract is better off, but the majority of the people who gave the government a two thirds majority, are much worse off in material reality. To return to my top economist friend, she explained that Sri Lanka should not reject fiscal discipline, but it must own the design of fiscal adjustment. The country needs a fairer tax mix, better tax administration, public investment discipline, and protection of health, education, nutrition, and climate-resilient infrastructure. Otherwise, fiscal discipline becomes socially brittle and growth-reducing. The direction she recommended is hardly where the government is heading. The World Bank warns that the on-going reliance on regressive indirect taxes could worsen the poverty outlook, while the primary expenditure ceiling of 13 percent of GDP can constrain public investment and service delivery. A leading financial daily (6 July) reported that at the CA Sri Lanka’s 5th Annual Economic and Tax Symposium, both the Government’s tax policies and the Inland Revenue Department (IRD) “came under sustained criticism from leading private sector tax professionals”. Gajma & Co. Senior Partner N.R. Gajendran argued that “…higher revenues had come largely from imposing a heavier burden on existing taxpayers rather than widening the tax base.” He said that “When taxes become excessive and unbearable, and it is not coming from the widening of the base, it is coming from the same taxpayer, it erodes expenditure capabilities, it erodes saving capabilities, and it erodes investment capabilities,” warning that “sustained over-taxation ultimately weakens consumption, investment, and long-term economic growth.” Sri Lanka has already lost a large number of skilled professionals who migrated in droves in the last two years. Factum reports (April 2026) that the annual departures for foreign employment have hovered above the 310,000 mark. This includes Healthcare Professionals (Doctors, nurses), Academics and Researchers (including 80-90% of State University graduates), Technologists and Engineers. Will the Lawyers be next? The Island editorial of 6 July 2026 strongly supports the stand that the BASL has taken, (endorsed by the Colombo Law Society, Colombo High Court Lawyers Association, LAWASIA and the Commonwealth Lawyers Association) opposing the government’s effort to move a constitutional amendment to extend the retirement age of judges of the Supreme Court and the Court of Appeal, denouncing political interference in the judiciary and urging the government to avoid a Zimbabwean crisis. None of this makes for a happy citizen, stability notwithstanding. By the People, for the Creditors So, what of all those promises made with such passion to do better than all previous governments since Independence in 1948? The World Food Programme has this to report: * Households unable to meet essential food needs increased from 14 percent in 2024 to 20 percent in 2026. * If price trends continue, another 1.3 million people could be unable to afford essential food needs, including nearly 300,000 urban poor. * Child nutrition remains worrying: stunting 10.1 percent, wasting 8.6 percent, and underweight 16.1 percent. (WFP, Food Security Under Pressure) Economists warn that a programme that ‘stabilises’ the economy while households sell assets, cut food, reduce education and health spending, and slide into coping strategies, i.e., de-stabilises the household economy and lives, will not be socially, politically or developmentally sustainable. Those who care for the people recommend that Sri Lanka’s own programme must place adaptive social protection, nutrition, and livelihoods at the very centre. The promised re-negotiation of the 17th IMF package to make the necessary economic recovery less taxing (pun intended) for the people, less painful, and more sustainable overall, never happened. The government acted as if it was elected by the People for the Creditors. We have been warned that Sri Lanka’s shift toward commercial borrowing and ISBs changed the debt-risk profile, with ISBs carrying high interest rates and short maturities. The government’s promised negotiations didn’t resemble anything like what was expected by the people, and went the way of the ISB holders who celebrated the victory in Canary Wharf toasting our President in absentia. IMF Country Report No 26/111 indicates that even after restructuring, debt sustainability risks remain high. Public debt is projected at around 100.1 percent of GDP in 2026, with central government gross financing needs at 19.8 percent of GDP. Economists remind us that Sri Lanka’s recent graduation to the Upper Middle-Income classification means that we will have to pay more in debt repayments as per the macro-linked bond of the debt restructuring settlement with the creditors. IMF 18, going on 19? Who’d have thought it? In the last 77 years, the most pro-people, pro-poor administration has certainly not been the AKD government. There were much better ones, even during the 30 year war, when policies were more enlightened and served the people; were undertaken with confidence and determination, and some still continue to provide the foreign exchange to pay for subsequent errors of judgment. And with the courage of their convictions and confidence in their capacity to deliver, those leaders didn’t feel the need to postpone any elections. Stabilisation was an immediate necessity. But my economist friend spoke for us all when she told me “Sri Lanka cannot stabilise its way to prosperity. It should not risk turning emergency discipline into a permanent development model”. With the current state of play, is that what we are looking at? There is little evidence that this administration has the capacity to design an independent programme, not subject to the whims and fancies of IFIs, but as my friend put it, “our own programme: fiscally responsible, socially protective, production-oriented, climate-resilient, and politically owned. The IMF can support that programme, but it cannot be the programme.” An unhappy people is surely as much of an indicator of the real health of the economy, as the Gross National Income per capita calculated in US dollars by the World Bank. A Sunday newspaper quoted a young economist, Rehana Thowfeek, co-founder/director at Arutha Research, who says: “There is no point in celebrating becoming an upper-middle-income country while 1 in 4 of our people is in poverty, two out of every 5 Sri Lankans cannot afford a healthy diet and 1 out of 3 of our children under 5 years is malnourished.” This is not a situation that should be allowed to prevail by an allegedly pro-people government, or indeed any government that has been granted the privilege to govern, through the people’s vote. The planning, the policy choices are all in the hands of the government. Will they choose a better path? People are not unhappy because they are too mean to acknowledge what a wonderful job this government is doing, and give praise to this administration like the IMF at the Presidential Secretariat. It is because they are in pain, they are suffering, they are hungry, they cannot pay the bills, and they are looking at a future where none of these things are going away, but is set to get much worse, as the government slouches towards its next IMF programme and the next debt repayment.

by Sanja de Silva Jayatilleka