Sri Lanka is slowly emerging out of its worst economic crisis.  As part of the initiatives to stabilize the economy, the government has commenced many programs to combat corruption and black economy as part of the IMF program. However, some developments in the economy suggest a possible increase in black economy activities and corruption.

In 2025 Sri Lanka improved its score in the Transparent International’s Corruption Perception Index. The 2025 score of 35 is a marginal improvement after reaching the worst ever score of 32 in 2024. Nevertheless recent developments place Sri Lanka at the risk of a lower score for 2026.

Historically High Cash Circulation.

Sharp increase in cash circulation is considered a warning sign in rising black economy and corruption. People hoard cash to hedge against institutional unpredictability, and because of the need to maintain liquid reserves to easily finance illicit payments. Illegitimate transactions rely heavily on the un-traceability of physical cash over formal banking channels.

Sri Lanka’s stock of physical cash (notes) circulation has seen an unusual increase. It was reported that physical cash circulation reached a historic high of Rs 1.7 trillion during the first quarter of 2026. This is a 42 percent increase from cash circulation reported at the end of 2023.

Sri Lanka’s total volume of digital payments have now surpassed the nominal GDP. This is a very good development compared to the global average of 35 percent of GDP, and between 40 to 65 percent of GDP in advanced economies. In such a background, why do the public need large cash stocks is puzzling? Most probable cause of this is the expansion of the underground economy and possible rise in corrupt practices in the country.

Rise in Offshore Money Transfers

Increase in the money flowing out of the country is also a strong sign of corruption as illicit funds, bribes, and embezzled public money are usually moved to safer or secret foreign accounts. At the rate illegal foreign payment schemes are being discovered (by law enforcement agencies), we can argue that illegal money transfer schemes have not only increased, but also entrenched within the formal banking system. Interestingly most of these illegal money transfer schemes have started or expanded during the last few years.    

While billions of dollars are channeled out of the country using methods like phantom imports, there is also an increase Sri Lankan businesses transferring money out of the country as investment.

Central Bank data reveals that USD 200 million (net) has been taken out of the country since 2024 (upto first quarter of 2026) as equity investments alone (USD 22.2 million per quarter). This is a sharp increase compared to USD 115 million equity investment outflow reported for the five years period upto 2023 (USD 5.75 million per quarter).   

Growing High-End Property Market.   

Sharp increase in luxury property sales is another common indicator of rising black economy and corruption. Research shows that corruption directly drives up property demand in developing countries by turning real estate into a primary vehicle for laundering illicit funds. Criminals and politically exposed individuals convert dirty money into high-end real estate investment. Moreover buyers of real estate can use opaque structures like shell companies, trusts, or straw buyers to hide true ownership of real estate.

Recent reports show a sharp rise in luxury condominium property transactions. Despite overall slowdown in condominium sales, demand for “high end” condominiums have increased according to Central Bank Condominium Surveys. Nearly 52 percent of condominiums sold during the first quarter of 2026 were high-end apartments, compared to 33 percent a year ago. 

Also there has been a sharp increase in new ultra high- end property projects, suggesting a growing demand for the same. Increase in high value property sales are also evident from steady increase in government stamp duty revenue which has reached Rs 74 billion in 2025.  

In 2025, Sri Lanka was ranked as the second most expensive housing market in the world based on rentals compared to average income. It is possible that market distortions caused by black economy and corruption have contributed to this. 

Can Inequality Lead to Social Unrest?

A potential outcome of the proliferation in black economy and corruption is social unrest! This is because increase in income inequality and rising poverty are associated with rising black economy and corruption. Corrupt systems distribute wealth to elites while regular people struggle with basic needs, high inflation and joblessness. 

Already Sri Lanka is experiencing rising poverty (over 25 percent), high inflation (over 8 percent) and extreme high unemployment among educated youth (over 43 percent).

(The writer is an Investment, Strategy and Policy Advisory professional. He has a master’s degree in Economics (Colombo), an undergraduate degree in Business (Wisconsin, USA), and also obtained CFA charter (USA). He is contactable on indika.h@jupitercapitalpartners.com    © 2026, Indika Hettiarachchi)