Is it "functionally illiterate" if you can read the language aloud and not understand it, if you also wouldn't have understood the same thing spoken to you? That seems like it's about comprehension ability, not literacy.

Although one thing that just occurred to me is that if your reading level is low, you might be using all your cognition on reading so that you don't have spare capacity to understand as well - that's frequently the case for me with e.g. Chinese where I can read an entire passage out and then the teacher asks what the passage was about and I'm just thinking "I dunno, I wasn't thinking about that but I think I understood everything".

And that's definitely a different problem to being able to sound out the words, but just having no idea what those words mean, whether you read them or heard them.

And does it have to be your native language, or in any language? Not trying to nitpick, it just feels like the phrase can be usefully applied to a foreign language too.