| How Sri Lanka’s Political Transformation Is Reshaping Stock Market

A Follow-up Analysis: September 2024 – September 2025
By Uddeepa Peiris

Introduction: When Predictions Meet Reality

In September 2024, just weeks before Sri Lanka’s presidential election, I wrote that a government committed to clean governance and development could trigger a dramatic transformation in the country’s stock market. One year later, with President Anura Kumara Dissanayake leading the National People’s Power (NPP) government and enjoying an unprecedented two-thirds majority in Parliament, the time has come to ask whether that thesis has materialised. The central claim then was simple: investor confidence, foreign capital, and sustainable market growth would follow if corruption was curbed and reform was prioritised. Today, the Colombo Stock Exchange tells a powerful story, but the broader economy and policy environment present a more nuanced picture.

A Political Mandate for Change

The September 2024 presidential election confirmed what many observers had sensed: an electorate tired of entrenched corruption and short-term politics was ready to place its faith in a new political movement. Dissanayake’s decisive victory, followed two months later by the NPP’s sweeping parliamentary success, provided the country with an unusually strong foundation of political stability. A two-thirds majority gave the new administration a rare opportunity to pass reforms that might otherwise have been blocked or diluted. The government has made transparency and accountability a centrepiece of its policy platform, coupled with a strong emphasis on infrastructure development, technological transformation, and economic diversification. Its first budget was deliberately branded a “people’s budget,” balancing ambitious reform goals with tangible increases in social spending.

This combination of political authority and reformist messaging gave the new government a credibility that markets quickly recognised. For the first time in years, investors believed the state had both the will and the capacity to make sweeping changes.

The Stock Market Responds

Nowhere has this confidence been more visible than in the stock market. By early September 2025, the All Share Price Index (ASPI) had surged to 20,992 points, nearly doubling its level from the same period in 2024. The year-on-year gain of roughly 94 per cent represents one of the strongest rallies in the exchange’s history and far exceeded even optimistic projections from a year earlier. Momentum remained strong in August, with the index climbing by more than six per cent during the month.

Such extraordinary gains were naturally followed by some consolidation. The first week of September saw a fractional decline of 0.03 per cent in the ASPI, while the S&P SL20, a benchmark for blue-chip stocks, fell by just over one per cent. These modest corrections reflected profit-taking after the long rally and indicated that the market was maturing rather than overheating. Importantly, valuations remain grounded, with the ASPI trading close to its three-year average price-to-earnings ratio of 8.2 times.

The rally is not just about numbers. It represents a powerful signal of renewed investor faith in Sri Lanka’s ability to reform, stabilise, and grow.

The 2025 Budget: A Turning Point

The government’s first full budget, presented earlier this year, provided the strongest evidence yet of its reformist and pro-people orientation. The centrepiece was a dramatic increase in the minimum basic salary for public sector employees, raised from Rs.24,250 to Rs.40,000 – a 65 per cent jump that immediately boosted household purchasing power. Alongside this, education and health received substantial increases in allocations, signalling that the administration intends to invest in human capital rather than rely solely on short-term populism.

Infrastructure development was given prominence, with a clear emphasis on Public–Private Partnerships, reflecting an understanding that fiscal constraints require the state to leverage private capital for large-scale projects. Meanwhile, dedicated allocations were made to encourage the growth of the digital economy, positioning Sri Lanka to capture opportunities in IT services, fintech, and innovation. The budget set an official growth target of five per cent for 2025, a goal that is ambitious but not unrealistic given current momentum.

For investors, the budget provided a clear policy framework: welfare and wage increases would strengthen domestic demand, infrastructure expansion would create long-term opportunities, and digital initiatives would underpin new sectors of growth.

Economic Indicators: Recovery with Caveats

Beyond market performance, the broader economy is showing signs of improvement, though challenges remain. According to World Bank forecasts, GDP growth is expected to moderate to around 3.5 per cent in 2025 after a stronger rebound of 4.4 per cent in 2024. Domestic authorities have projected slightly higher figures, but consensus suggests that the economy is on a modest recovery path. Inflation, which fell to extremely low levels in 2024, is projected to return to positive territory by mid-2025, helping normalise consumption and investment behaviour.

Reserves have continued to build, providing a stronger buffer against external shocks, while improved tax collection demonstrates early signs of fiscal discipline under the IMF programme. Nevertheless, poverty remains a persistent challenge, with rates expected to stay above 20 per cent until at least 2026. This reflects the lingering scars of the crisis years and underscores the importance of inclusive growth.

Sectoral Shifts in the Market

The rally has not been evenly distributed across all sectors. Infrastructure and construction companies have experienced a revival on the back of government commitments to PPP-led development. Banks and financial institutions, buoyed by increased confidence and macroeconomic stability, have also performed strongly. Tourism has emerged as another winner, with arrivals rebounding as the foreign ministry prioritises the industry alongside diplomatic engagement. The technology sector, encouraged by digital economy incentives in the budget, has captured investor imagination, while consumer goods companies have benefited directly from the surge in public sector salaries and the resulting boost in disposable incomes.

These sectoral trends reinforce the narrative that the rally is not purely speculative; it reflects genuine shifts in economic fundamentals and policy direction.

Foreign Investment: Ambition Meets Reality

The government has set a target of attracting five billion US dollars in foreign direct investment by the end of 2025, an ambitious goal by any standard. While early signs of renewed interest are visible, progress has been mixed. International investors continue to highlight concerns about policy consistency and regulatory clarity, issues that have historically undermined Sri Lanka’s investment climate. Global headwinds, including trade uncertainty and oil price volatility, further complicate the picture.

Achieving the FDI target will require more than promises. It will demand consistent implementation of reforms, a credible commitment to long-term stability, and improvements in the ease of doing business.

IMF Discipline and Its Double Edge

The IMF Extended Fund Facility remains the backbone of Sri Lanka’s economic recovery programme. Its conditionalities restrict excessive fiscal expansion, limiting the government’s room to manoeuvre. Yet those same conditions also provide credibility to international lenders and investors, ensuring access to financing and supporting the stability of the currency and reserves.

The government has managed to increase social spending while remaining broadly within IMF constraints, but balancing these competing pressures will continue to be delicate. Too much deviation risks jeopardising disbursements, while excessive compliance risks political backlash at home.

Market Fundamentals: Justified or Stretched?

Corporate earnings and revenues provide some support for the market’s gains. Over the past three years, listed companies have delivered average annual earnings growth of nearly six per cent and revenue growth close to seven per cent. These figures are steady but not extraordinary, raising the question of whether market valuations can continue to rise without stronger fundamental performance. Investors will be watching carefully to see if reforms translate into higher productivity, export competitiveness, and profitability across industries.

Risks That Cannot Be Ignored

The year’s successes do not erase the risks that lie ahead. Global headwinds remain a significant concern, particularly given Sri Lanka’s reliance on imported fuel and its vulnerability to fluctuations in oil prices. Any deterioration in the trade environment could quickly affect exports and the current account. Domestically, the danger of policy reversals or implementation delays cannot be dismissed, given the country’s history of abrupt shifts. Even in the markets, the sheer scale of the rally raises the possibility of further corrections, which, while healthy in moderation, could unsettle investors if too sharp.

Outlook for 2025–2026

Looking ahead, the remainder of 2025 is likely to see the market consolidate in the 20,000 to 22,000 point range. Investors may rotate into consumer-focused companies that stand to benefit from the surge in disposable incomes. The real test will be whether foreign direct investment begins to flow in meaningful volumes, moving beyond pledges into concrete commitments.

In the medium term, through 2026 and beyond, sustaining growth will require more than fiscal discipline and welfare spending. Exports must expand significantly to reduce external vulnerability, and poverty reduction will be a critical measure of whether growth is truly inclusive. Patience will be necessary, as structural change is rarely immediate

Investment Implications

For now, certain themes are clear. Consumer goods companies are likely to benefit most directly from increased public sector purchasing power. Financial services appear positioned to sustain steady growth as credit demand recovers. Infrastructure and construction firms should continue to gain from PPP-driven projects, while technology companies enjoy the long-term tailwinds of digital economy initiatives.

Nevertheless, investors must remain mindful of risks. Policy unpredictability has not disappeared, global volatility remains a threat, and IMF-driven fiscal constraints will limit the scope for expansionary measures.

Conclusion: A Thesis Partly Vindicated

One year on, the evidence largely supports the original thesis. Political stability and a reform mandate have coincided with one of the strongest rallies in the Colombo Stock Exchange’s history. The ASPI’s near-doubling, the government’s decisive parliamentary majority, the adoption of a pro-people budget, and the restoration of macroeconomic stability all underscore the potential of this new political-economic order.

At the same time, challenges are real. Foreign investment remains below target, implementation speed is uneven, and global headwinds are beyond the government’s control. The recent corrections in the market are reminders that growth is rarely linear.

Sri Lanka now stands at a rare juncture where political will, IMF discipline, and market confidence converge. Whether this moment translates into long-term prosperity will depend on sustained delivery rather than rhetoric. For investors and policymakers alike, the lesson of the past year is that confidence can be won -but must be carefully preserved.

Uddeepa Peiris is a seasoned Asset Management Professional with over twelve years of experience in investment management, portfolio management, and risk analysis. Now based in France, he remains actively involved in the financial sector, specializing in strategic planning and trade finance