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

- In 2021, Sri Lanka’s economy experienced a growth of 3.5%, but it contracted by 7.8% in 2022, marking the deepest economic contraction since the country’s independence. This was primarily due to the ripple effects of an unprecedented economic crisis amidst domestic and global headwinds that reversed the post-pandemic recovery. The GDP at current market prices increased from LKR 17,600 billion in 2021 to LKR 24,148 billion in 2022. However, when converted to US dollars, the overall size of the economy contracted to $77.1 billion in 2022 from $88.5 billion in 2021 due to the large depreciation of the exchange rate. The per capita GDP (at current market prices) also declined from $3,997 in 2021 to $3,474 in 2022. This represents a decrease of approximately 13.1% in dollar terms. 2

To ascertain the CAGR required for Sri Lanka to achieve ‘Developed Country’ status, we use both CBSL and IMF economic growth projections. We analyze the growth rates needed beyond these projections to meet the future income thresholds established by the World Bank.

The CBSL forecasts a range of growth rates up to 2027. Using these figures, we calculate the CAGRs necessary from 2028 to elevate Sri Lanka’s GDP per capita to the projected high-income thresholds for 2035, 2040, 2045, and 2048.

According to the CBSL projections 3 the real GDP growth rates are as follows: -2% (2023), 3.3% (2024), 4% (2025), 4.5% (2026), 5% (2027).

Based on Table 2 projections to reach a high-income status by 2035 the GDP per capita should be $16,433.62, for 2040 it is $17,418.04, for 2045 it is $18,402.47 and for 2048 it would be $18,993.13, starting from $3,474 in 2022.

Considering the specific GDP growth projections for Sri Lanka for the years 2023 to 2027, the required Compound Annual Growth Rates (CAGR) from 2028 onwards would be:

The GDP per capita at the end of 2027, considering the provided growth rates, is estimated to be approximately $4,013.24. Based on this, the required Compound Annual Growth Rates (CAGR) from 2028 onwards to reach the high-income status targets in the specified years are as follows:

- For 2035: The required CAGR is approximately 19.27%.
- For 2040: The required CAGR is approximately 11.95%.
- For 2045: The required CAGR is approximately 8.83%
- For 2048: The required CAGR is approximately 7.68%.

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.

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Similarly, the IMF’s projections provide a framework for estimating future GDP per capita.

According to the IMF projections *4* the real GDP growth rates are as follows: -3% (2023), 1.5% (2024), 2.6% (2025), 3% (2026).

Based on Table 2 projections to reach a high-income status by 2035 the GDP per capita should be $16,433.62, for 2040 it is $17,418.04, for 2045 it is $18,402.47 and for 2048 it would be $18,993.13, starting from $3,474 in 2022.

Considering the specific GDP growth projections for Sri Lanka for the years 2023 to 2026, the required Compound Annual Growth Rates (CAGR) from 2027 onwards would be:

Based on the updated IMF projections for Sri Lanka’s real GDP growth rates from 2023 to 2026, the GDP per capita at the end of 2026 is estimated to be approximately $3,614.53. Using this as the starting point, the required Compound Annual Growth Rates (CAGR) from 2027 onwards to reach the high-income status targets in the specified years are as follows:

- For 2035: The required CAGR is approximately 18.32%.
- For 2040: The required CAGR is approximately 11.89%.
- For 2045: The required CAGR is approximately 8.94%.
- For 2048: The required CAGR is approximately 7.83%.

These figures represent the average annual growth rate in GDP per capita that Sri Lanka needs to maintain from 2027 onwards to achieve the specified GDP per capita targets in each of the future years. The required growth rates are notably high, especially for the earlier target years, indicating a significant economic acceleration will be necessary to reach these ambitious goals.

Reaching high-income status is an ambitious target requiring substantial economic growth and development. For Sri Lanka, the calculated CAGRs necessary to achieve this status by the given years are significantly higher than current projections, indicating a need for profound economic reform and acceleration. The reliance on a linear regression model for these projections does pose limitations; employing more sophisticated models could yield more accurate forecasts. Ultimately, achieving these growth rates would necessitate a combination of strategic economic planning, robust policy implementation, and favorable global economic conditions.

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:

where:

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

Economist

The Ceylon Chamber of Commerce

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