You don’t need a headline to know that corruption is a problem in Sri Lanka. You have seen it at the desk of a grinning official who won’t move your file without a little incentive. You have heard it in whispers at the hospital gate. You have felt it when your child’s future hinged not on merit but on a connection. In this country, corruption has been the system.
If corruption were taxed, Sri Lanka might have paid off its debt by now. From inflated tenders to phantom commissions at every turn, we have perfected the art of paying more for less. So normalised is this dysfunction that following the rules can sometimes feel like the riskier option.
Want a permit? Wait months, or pay and have it by Friday. Want a promotion? Hope your uncle knows a minister. Want to do business? Brace yourself.
But behind the jokes, shortcuts, and survival strategies, corruption is draining Sri Lanka’s economy from the inside out. It drives away investment, bloats public spending, undermines services, and corrodes trust in every institution it touches. This week’s ‘Market Mine’ will examine the economic cost of corruption in Sri Lanka.
Abrupt sugar tax revision, bond scandal are also corruption
When most people think about corruption, they picture a bribe slipped under a desk, or a small payment made to speed things up. And while those everyday exchanges are part of the problem, they are only the surface. Corruption in Sri Lanka runs much deeper, as it is very often than not woven into policy decisions, procurement deals, and regulatory loopholes that shift billions behind the scenes.
As Verité Research Lead Economist Raj Prabu Rajakulendran explained to The Sunday Morning, consider the infamous sugar tax scam, where import duties were slashed from Rs. 50 to 25 cents overnight, a decision that remained in effect for three years before being reversed. The result was a staggering Rs. 80 billion in lost State revenue during a period of acute fiscal stress.
Rajakulendran attributed the fallout to the excessive discretionary power held by the Finance Ministry, which enabled the decision to bypass parliamentary scrutiny. “The Finance Minister alone had the authority to reduce the tax and that policy stayed in place from October 2020 until November 2023.”
He placed this incident in the context of structurally enabled scams, such as the infamous bond scandal, which cost the Treasury a further Rs. 20 billion. Together, the two cases represent a Rs. 100 billion loss, equivalent to the Government’s projected personal income tax collection for 2024.
In the case of the bond scam, no queue was jumped. No envelope was exchanged in public view. But the damage was far more devastating than any low-level payoff. It shook investor confidence, dented the credibility of financial institutions, and burdened the country with long-term fiscal consequences.
“Hypothetically, if we had avoided these two incidents, we could have met our income tax target for 2024 without anyone having to pay a cent,” Rajakulendran noted.
Impact on credit rating agencies
The world’s lenders, credit agencies, and multilateral institutions are now drawing a straight line between poor governance and financial risk. And Sri Lanka is learning, sometimes painfully, that corruption drives up the cost of borrowing, weakens credit ratings, and deepens debt.
Speaking to The Sunday Morning, Ernst & Young Sri Lanka Director – Consulting Talal Rafi stated that it was very clear that higher levels of corruption caused credit ratings to go down and borrowing costs to rise.
“If we look at the Corruption Perceptions Index 2024 of Transparency International, all the top 10 countries with the least amount of corruption are developed nations. Sri Lanka is the first country in Asia where the International Monetary Fund (IMF) has required a governance diagnostic assessment, which shows the importance the IMF has given to corruption,” he said.
According to Rajakulendran, governance accounts for as much as 22% of a country’s sovereign credit score under Fitch Ratings’ methodology, which uses the World Bank’s Worldwide Governance Indicators to measure and rank a country’s governance performance
“When we have weak governance, we get poor credit ratings. And when we have poor ratings, we are considered risky,” he said. “As a result, we must borrow at higher interest rates.” This dynamic, he stated, was a key factor behind Sri Lanka’s debt spiral, where the country borrowed not just to finance development, but to service interest on past debt.
“Corruption can distort incentives in markets; it’s a challenge for competitive pricing. For developing economies like Sri Lanka, resources (often public funds) get misallocated, deprioritising efficient investments. In Sri Lanka and across many developing markets, key growth sectors like construction are vulnerable and reduce the positive spillover effects from these sectors into the real economy,” said Frontier Research Deputy Head of Macroeconomic Research Anjali Hewapathage.
Even bilateral allies have raised concerns: TISL
Speaking to The Sunday Morning, Transparency International Sri Lanka (TISL) Advocacy and Research Officer Dhewni Dias stated that Foreign Direct Investment (FDI) had remained weak, as both local and foreign investors faced endemic bribery, cronyism, and arbitrary decision-making that created uncertainty and increased the cost of doing business.
“Even Sri Lanka’s bilateral allies have pointed out the detrimental cost of corruption for Sri Lanka; for example, Japan’s Ambassador recently stated that eliminating corruption is essential to regain global investor confidence and attract foreign capital in Sri Lanka,” she said.
Dias pointed out that for years, tax policies and exemptions had been subject to ad hoc changes and arbitrary decision-making. One reform priority is to restrict the discretion of ministers to alter tax structures without parliamentary approval.
“This would prevent erratic policy shifts and ensure greater scrutiny over decisions that can carry major fiscal costs. In parallel, the Government must publish a full list of all entities receiving tax concessions and provide credible estimates of the resulting revenue loss to the State. At present, this information is scattered or hidden, enabling politically connected businesses to benefit at the public’s expense with no accountability,” she noted.
“These disclosures should be accompanied by the introduction of clear criteria for when and how tax incentives are granted, including cost-benefit analyses and sunset clauses. Tax breaks must serve strategic economic goals, not political favouritism.
“In the absence of formal accountability tools, non-State actors, from organisations to individuals, can wield mechanisms like the Right to Information to track progress, access information they are entitled to, and hold the Government accountable to meaningful reform.
“Civil society, journalists, and activists play a vital role not only in advocating for these changes but in tracking implementation, exposing backsliding, and keeping both political and institutional actors accountable,” Dias added.
Meaningful reform still possible
With international partners like the IMF tying financial assistance to structural improvements, meaningful reform is now directly linked to the country’s economic recovery.
Rajakulendran believes that meaningful reform is still possible. He pointed to the IMF’s governance diagnostic, developed in consultation with civil society, as a credible blueprint for structural change. Among the IMF’s 16 priority recommendations for Sri Lanka are measures to reduce ministerial discretion, enact a proceeds of crime law, and require parliamentary oversight for tax policy changes.
“These recommendations have been tailored from international experience but made relevant to Sri Lanka,” he explained. “The Government has actually produced a strong plan in response, but we now need to see it implemented.”
Rajakulendran also touched upon Sri Lanka’s Governance-Linked Bond as a groundbreaking example of how governance reforms could yield direct fiscal benefits. He explained that in Sri Lanka’s case, simply meeting defined benchmarks, such as publishing requirements and revenue targets, translated into savings of approximately $ 70 million.
He also stressed the importance of smaller, often overlooked policy decisions. One example is the failure to index cigarette taxes to inflation. While the Government has raised nominal taxes, tobacco companies have increased prices more aggressively, shrinking the Government’s share of revenue as a percentage of retail price.
“International benchmarks suggest tobacco taxes should account for 75% of the retail price, but we are currently at around 68% for the most sold brand,” he said.
Hewapathage noted that in Sri Lanka’s post-crisis context, the track record for implementing reforms had been noticeably positive.
“The Central Bank of Sri Lanka Act coming into effect has been a cornerstone of success that established strong institutional credibility and accountability, which has certainly helped to sustain the financial support from the IMF, Asian Development Bank (ADB), and World Bank, alongside credit ratings upgrades,” she said.
On the side of public finance management, she added that the Public Financial Management Act set the ceiling on non-interest expenditure of the Government at 13% of Gross Domestic Product (GDP), which installed a legal framework for prudent spending.
“Administrative improvements to the tax policy – i.e. mandating the possession of a Taxpayer Identification Number (TIN) – reduce the space for tax evasion. Beyond this, the IMF structural benchmarks on anti-corruption are particularly helpful for Sri Lanka. Governance measures like the 21st Amendment also add an additional firewall,” she noted.
Government stance
Both the Minister of Justice and Auditor General were unavailable for comment, despite attempts by The Sunday Morning to reach out to them over consecutive days. When contacted, a Commissioner of the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) directed the request to CIABOC Director General Ranga Dissanayake, who noted down the request for comment but failed to return the calls.
Meanwhile, Sri Lanka has taken a formal step towards institutional reform with the launch of the National Anti-Corruption Action Plan (NACAP) 2025-2029. Developed by the CIABOC, the plan outlines a structured approach to improving governance, increasing transparency, and reinforcing the rule of law.
Yet, even the most comprehensive reform plans cannot stand alone. Tackling corruption in a lasting, systematic manner requires improving the quality of public service delivery, investing in digital governance to reduce discretion and inefficiency, and strengthening accountability at every level of government.
Equally important is the creation of the right incentives: a well-resourced, professional public sector, competitive salaries that reduce reliance on informal income streams, and recognition for integrity and performance.
The success of Sri Lanka’s anti-corruption drive will have to become a national priority. Without this, plans and policies may come and go and anti-corruption drives and launches will simply be an annual event.
Some notorious corruption scams in SL
- Central Bank bond scam (2015-2016)
- Possibly the most high-profile financial scandal in recent history
- Alleged insider trading during bond auctions caused losses estimated at Rs. 20 billion to the Treasury
- Involved the Central Bank Governor at the time, Arjuna Mahendran, and Perpetual Treasuries Ltd.
2. Sugar tax scam (2020-2023)
- Import tax on sugar reduced from Rs. 50 to just 25 cents per kg overnight
- Policy remained unchanged for nearly three years
- Resulted in over Rs. 80 billion in lost revenue and massive profits to a few politically connected importers
3.‘Sil redi’ scandal (2014)
- Government funds (Rs. 600 million) were allegedly used to distribute ‘sil redi’ (religious cloth) to temples just before the 2015 Presidential Election
- Seen as an attempt to buy voter influence
- Found to be a misuse of public funds; officials were convicted
4.Lanka Marine Services privatisation (2002)
- The Supreme Court later ruled the privatisation as corrupt and illegal
- Involved manipulation of tender procedures and undervaluing of State assets
5.‘Helping Hambantota’ scandal (2005)
- Allegations arose that tsunami relief funds of about Rs. 83 million, meant for all affected areas, were diverted to a private fund associated with then Prime Minister Mahinda Rajapaksa
- Although cleared later, the controversy raised major ethical concerns
6.Sathosa corruption cases
- Lanka Sathosa has been the subject of multiple procurement and fraud investigations over the years, often involving overpriced purchases or misuse of funds
7. Coal tender scandal (2016)
- Accusations of irregularities in awarding tenders for coal imports, including bypassing competitive bidding
- Auditor General’s reports highlighted serious lapses