The dismal effort set a new low for South Africa in Sri Lanka, worse than their 169 at the SSC in 2006.
Sri Lankan spinners have bowled 36 out of 37 overs of the innings.
Fast bowler Kagiso Rabada claimed four wickets to reduce Sri Lanka to 176-8 but Karunaratne gave the total respect with his 222-ball knock after the hosts elected to bat first.
"Following this South Africa series, there is another three months until the England series. For now, this is what I've planned for. There comes a time for every cricketer, when they have to stop playing. I think that time has come for me," Herath said.
Sri Lanka have also named the injured Kusal Perera and Rangana Herath in the squad, though they will be picked only if they pass the relevant fitness tests.
West Indies openers Kraigg Brathwaite and Devon Smith negotiated two overs before the close of play safely.
Despite losing three wickets, Bangladesh scored 93 runs in the session.
Pakistan faced a set back as Afghanistan thrashed them in the first match by 5 wickets in the first match of U-19 World Cup 2018.
Sri Lanka lost 7 Tests in 2017, 4 by an innings and 2 others by 282 and 304 runs. Their ODI performance was their worst in 26 years. And this three-year phase is their worst in T20I history.
Rashid Khan, from the militant nation, emerged second in the shorter formats. Goodness knows how satanic he would have been had Afghanistan played Test cricket this year. Kaustubh S. Mayekar relives the spellbinding performances in short tell-a-tales.