Middle-income misnomer | Sunday Observer

Middle-income misnomer

22 May, 2022

Sri Lanka was promoted to upper-middle-income status soon after the end of the battle against terrorisn. Now the country has been downgraded — as of 2019 — to lower-middle-income status.

It is the best admission yet that the 2014 upgrading was misguided. A country recovering from a searing crisis — a debilitating battle against terrorism that sapped it of its resources for over three decades — was not suddenly fit to face the vagaries a middle-income nation peddling its own canoe in an often turbulent global economy.

Our growth and our experiences as a newly emergent economy should have been closely monitored. Moreover, our debt to GDP ratio and how we manage our debt as a newly emerging nation should have been a concern for those who do these upgrades and send nations off on journeys that they are ill equipped to handle.

But, no, the world insisted that we are an upper-middle-income country. To say the very least, it did not end well. In the intervening years, after upper-middle income status was conferred upon us, we have had trouble managing our debt and the balance of payments.

The country particularly had a problem managing its debt that was incurred in the commercial market. Hitherto, we had been borrowing from countries at low to moderate interest rates, but suddenly we became a bit uppity and incurred substantial debt at commercial lending rates.


This debt was owed to Chinese banks and various other commercial lenders. To say the very least, countries that are not used to paddling their own canoe after long periods of economic stress facing battles and so on should not have to face the vagaries of commercial lending and so on in this way.

Of course this could be seen by some as a ludicrous assertion. A country, newly emergent or otherwise, has to manage its own finances, it is granted. Some may do well in that task, and if the world monitored these nations and had some form of check on how well they manage their debt and so on that would be labeled gross interference.

But on the other hand when a nation is in trouble, international agencies have to step in. This is the current fate of our nation. Isn’t it far better that countries that are hardly able to manage their new found financial freedoms, if you will, are more closely watched in the best way it’s possible so that the unfortunate fate that befell Sri Lanka would not befall those countries?

As an upper-middle income nation, all forms of aid to Sri Lanka were essentially terminated. This wasn’t bad and was not necessarily a negative development.

It may have done something for national pride as well.

But, the fact that the country was suddenly left to its own devices to chart a new course when there were so many income disparities within the various demographics, was not a happy outcome of the middle-income promotion that we were granted.

Today, that is more than clear. The new Government would have a mammoth task on its hands to ensure that the country gets back on track, after the sovereign debt crisis that we faced, which is the primary reason for the current economic meltdown we are facing.

A newly emergent nation such as ours, coming out of a period of a terrorist battle was ill equipped negotiating international commercial borrowing, but we were especially susceptible to the vagaries of the world economy.

All this could have been easily foreseen. There was no need to wait until the Covid induced slump hit, to realise that countries such as ours were extremely vulnerable.


Our income status, be it upper-middle, lower-middle income and so on has some bearing on the way the country’s ratings are decided by agencies such as Moodys for example. It seems that suddenly we were given a cross that was too heavy to bear.

Our political culture should have been taken into account before any of these promotions such as the ‘upper-middle income’ status promotion was made. The way we were incurring debt was certainly not a good sign of things to come. But this did not deter the ratings and gradings people.

It’s as if we imprudently maxed out our ‘national credit card.’ Why do some people max out their credit cards? A lot of them are not aware of the consequences of paying the minimum monthly payment.

Others are ill equipped to handle the new found financial freedoms they have got. The fact that we as a country were left to our own devices to negotiate loans on the commercial market soon after a terrorist battle was also unfortunate.

Our coffers had depleted over time, but there was a sudden spurt of growth mostly because our growth had been suppressed due to obvious reasons during the battle against terrorism.

But this sudden growth spurt was taken to be a good enough indication that we had ‘arrived.’ No such thing had happened. It is just that we were catching up for time that we had lost due to a battle against terrorism.

Some may say that economic hit-men induced us to incur debt that we could not afford. That sort of thing has been described by John Perkins in his books.

But of course our policymakers should have known. They walked into a situation of more debt and riskier and still more riskier loans with their eyes open.

Now that we are in this situation wouldn’t some of the industrialised nations consider giving this country the kind of aid that was given in the good/bad old days when we were a poor nation?

Apparently now that we have had a sojourn in upper-middle-income territory, we are not qualified under any circumstances for the type of aid that we used to receive during the battle against terrorism and the pre-battle period.


We have outgrown grants it is said, but we are totally hoist by our substantial debt component and are a supplicant nation. So while there has been much talk about debt traps and so on it seems we were also in an upper-middle income trap.

The moment we were promoted to that status, it seems a trap was set for us. It may have been inadvertent or otherwise, but that is largely irrelevant.

In the future perhaps when such upgrades such as middle-income status are bestowed on us, we should perhaps refuse these baubles! It is recalled that Sajith Premadasa, the current leader of the Opposition said at the time we were promoted to upper-middle income status that it was a shame we were losing out on the aid.

He probably said what he did due to politically motivated envy, but no matter; it appears there was more than a modicum of truth to what he said despite the fact that he didn’t really mean well, despite having said what he did.

This time around, we could tread more gingerly. Since 2019 we have been downgraded to lower-middle income status. We shouldn’t cherish the next step on the ladder.

The slope becomes very slippery there as we have now found out. Besides, those who promoted us to upper-middle income status are not exactly feeling bad for us when we come down a notch. It’s as if they too agree that these guys ‘got up there before they were ready.”

We may not want to go back to the status of an aid recipient nation but we should want to consider how sustainable short term ‘growth’ is. If we don’t produce anything that has demand despite world market vagaries, that growth may signify that we are in a bubble.

The bubble burst badly in 2022. The people had no time to say ‘upper-middle.’ Before they could so much as say bingo they were staring at the mud with an economy that had gone too pear shaped far too sooner that anyone could have imagined.