The pursuit of economic growth and development is a central goal for many countries, with the classification of ‘Developed Country’ status being a particularly coveted milestone. This article provides an analysis of the Compound Annual Growth Rate (CAGR) necessary for Sri Lanka to achieve high-income status by the years 2035, 2040, 2045, and 2048, in light of the World Bank’s income categories. It utilises historical data, current economic trends, and projections by the Central Bank of Sri Lanka (CBSL) and the International Monetary Fund (IMF) to calculate these CAGRs.
Table 1: Most recent World Bank classification
The World Bank classifies economies into four income categories: low income, lower-middle income, upper-middle income, and high income. These classifications are based on GDP per capita, calculated using the World Bank Atlas method .
o Low-income countries (LICs): These are countries with a GDP per capita of $1,085 or less in 2020.
o Lower middle-income countries (LMICs): These are countries with a GDP per capita between $1,086 and $4,255.
o Upper middle-income countries (UMICs): These are countries with a GDP per capita between $4,256 and $13,205.
o High-income countries (HICs): These are countries with a GDP per capita of $13,206 or more.
A historical overview indicates shifts in these thresholds, hence understanding the trajectory of these changes is crucial.
The classification thresholds have historically been fluid, reflecting changes in global economic conditions. Using linear regression analysis on historical World Bank data, we can project future thresholds for each income category, as delineated in Table 2. These projections form the basis for determining the growth rates necessary for a country like Sri Lanka to transition to a high-income economy.
Table 2: Projected classification
*Note: These projections are based on a linear regression. Accuracy may improve according to the model used
It’s important to note that these rates are significantly higher than the growth rates projected for 2023-2027, indicating a need for substantial economic acceleration to reach these ambitious targets.
The CAGR is a useful measure to understand the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. The formula for calculating CAGR is:
FV is the future value (target GDP per capita).
PV is the present value (GDP per capita at the end of the base year).
n is the number of years from the base year to the target year.
This analysis is a stepping stone towards understanding the economic trajectory required for Sri Lanka to achieve its goals, serving as a guide for policymakers in their strategic planning.
By Sanjaya Ariyawansa
The Ceylon Chamber of Commerce
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