Breaking Sri Lanka’s capital market ‘Chicken-and-Egg’ cycle: Why the time has come to act
Having spent decades participating in Sri Lanka’s capital market, I believe we are at an important inflection point. The All Share Price Index has climbed above 21,000, while market capitalisation stands at around Rs.7.6 trillion. On paper, the market has recovered strongly. And yet, through much of this recovery, foreign investors have been walking out the door, with cumulative net foreign outflows reaching approximately Rs.57 billion during the first nine months of 2026. Foreign participation in market turnover, which was around 40% before the crisis, has fallen to approximately 9%.
This is the paradox we need to confront: a market rising in value while a significant part of the international investment community remains on the sidelines. In my view, this is not simply a cyclical problem. It is a structural chicken-and-egg cycle that has constrained the Colombo Stock Exchange for more than two decades.
Foreign investors wait for a bigger, more liquid market before they commit. The great domestic funds, including the EPF, ETF and SLIC, wait for greater depth before shifting more of their money into shares. Large private companies hold off listing while valuations and liquidity remain uncertain. Ordinary Sri Lankans stay away because financial literacy and confidence remain low.
Everyone is waiting for someone else to move first. I believe Sri Lanka now needs to break that cycle deliberately.
A market that has grown, but not deepened enough
Look closely and the weakness is structural. The listed universe has barely moved in 25 years, from around 240 companies to a peak near 300 between 2016 and 2021, and approximately 289 today. New arrivals have largely replaced companies that left, rather than adding materially to the breadth of the market.
Market capitalisation, meanwhile, has risen from roughly Rs.2–3 trillion to more than Rs.7.5 trillion. Much of that increase has come from the higher earnings and valuations of companies already listed, rather than from a sustained expansion in the number and scale of listed businesses. Measured in US dollars, the increase is also more modest because periods of rupee depreciation have eroded part of the gain.
The participation problem
Foreign participation in market turnover: approximately 40% before the crisis → approximately 9% today.
Net foreign selling in 2026: approximately Rs.57.1 billion by late September
Listed companies: peak near 300 → approximately 289 today
Adults who actively invest: only around 2–3%
Recent weekly average daily turnover: approximately Rs.1.2 billion
This will not correct itself through market movements alone. But the moment to act has arrived. Real GDP grew 5.1% in the first quarter of 2026 and a further 4.2% in the second quarter, extending the recovery. Government debt as a share of GDP had fallen to approximately 88.8% by June 2026, from around 95% at end-2025. Gross official reserves reached approximately $ 6.9 billion by end-August 2026.
The rupee has depreciated during 2026, but the extreme currency instability of 2022 has not returned. The fears that drove investors out in 2022—a collapsing currency and a shortage of Dollars—have eased materially. Sri Lanka has rebuilt a significant degree of macroeconomic stability.
The question now is: how do we turn that stability into investment, liquidity and broad-based wealth?
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Breaking Sri Lanka’s capital market ‘Chicken-and-Egg’ cycle: Why the time has come to act | Daily FT