In July 2026, the World Bank re-classified Sri Lanka as an upper-middle income country with a per capita income of Rs. 1.6 million.
Again, according to the World Bank, Sri Lanka had a poverty rate of 22.1% in 2025. Its poverty line was set at Rs. 16,690 in March 2026. This means over one-fifth of Lankans earn just Rs. 205,000 per year.
In a country with an annual per capita income of Rs. 1.6 million, one-fifth of the population earn just Rs. 205,000 a year. This is not one country but two countries, with diametrically opposite interests and aspirations.
The Government understandably celebrated Sri Lanka’s elevation to upper-middle income status, yet had no concrete measures to offer the 22% of Lankans earning just Rs. 205,000 per year – other than more growth of the same unequal and un-equalising nature plus some handouts.
Sri Lanka reached the upper-middle income level for the first time in 2019. The country’s per capita income then was Rs. 688,719. Poverty rate was 14.3% and poverty line set at Rs. 6,966.
Compare middle-income Sri Lanka of 2019 with middle-income Sri Lanka of 2026 and the conclusion is inescapable. The recovery from the Rajapaksa-induced economic collapse of 2022 is real – and highly unequal. The recovery had made poor and the not-so-poor poorer and the rich richer.
The findings of the latest survey by the Centre for Policy Analysis (CPA) confirm this: 51% of respondents say that their household economic situation has worsened compared to a year ago; only 18% say it has improved while 30% say it remains unchanged. This is despite an increase in Aswesuma grants. Without that vital support, poverty and inequality are likely to break through the ceiling.
According to the World Bank, ‘The economic recovery has been unable to reverse crisis-induced welfare losses’ (https://documents1.worldbank.org/curated/en/099213205052641407/pdf/IDU-df6d36cb-59f0-4e01-af7b-4893b4d08e24.pdf). This inability is no accident but an inevitable outcome of the very nature of the recovery and the policy choices that shaped it.
In trying to fix the country’s broken finances, the Ranil Wickremesinghe administration decided not to reduce military expenditure significantly or to get rid of money-guzzlers like the SriLankan airline. Since new borrowing was impossible, this meant a near-exclusive reliance on taxes. And in late 2023, the Wickremesinghe administration made the fateful decision of placing a disproportionate share of the tax burden on indirect taxes.
On 1 January 2024, the Government increased VAT from 15% to 18% and removed VAT exemptions from 97 items including books and other educational materials. The impact on living costs was immediate and devastating. The VAT burden went up by 50% due to the removal of exemptions. And the poorest 40% of households experienced a massive increase of around 60% in VAT payments (https://www.ips.lk/talkingeconomics/2024/10/14/vat-hike-in-sri-lanka-who-really-pays-the-price/).
Today the poorest 10% of the population spend 10% of their income on VAT.
Sri Lanka’s economic recovery is real. But its sustainability is in question not least because it is built on the shifting sands of widening socio-economic disparities.