Sri Lanka cautioned on money laundering risks at China-backed Colombo Port City
ECONOMYNEXT – Sri Lanka has to be vigilant against unintended consequences of ‘nefarious actors’ who may try to mis-use a China-backed Colombo Port City’s easy business rules as a permissive money laundering haven amid concerns of tax leaks, US Ambassador Alaina Teplitz warned.
Sri Lanka has unveiled draft legislation for a Colombo Port City Commission which allows for sweeping tax breaks, tax free salaries and to be an offshore financial centre.
Teplitz warned that Colombo Port City’s planned easy business rules may be perceived as bein a haven for money laundering.
“Any legislation relating to port city has to be considered very carefully for its economic impact,” Teplitz told reporters in Colombo in an online discussion. “It also has to be considered very, very, carefully for un-intended consequences.
“And of course among those un-intended consequences could be creating a haven for money launderers and other sorts of nefarious actors to take advantage of what was perceived as a permissive business environment for activities that would actually be illegal.”
The Colombo Port City would not be exempt from Sri Lanka’s anti-money laundering and counter-terrorism financing law which was enacted under Western backed UN initiative.
Sri Lanka’s attempts at creating numbered accounts as part of creating Non-resident foreign currency accounts, after re-opening the economy in 1978 was also resisted by Western nations.
Sri Lanka’s economy was progressively closed with an import control law being enacted in 1969 as money printing pressured the rupee, which worsened after the break-up of the Bretton Woods in 1971, as then Federal Reserve Chief Arthur Burns printed money to target an output gap, forcing dollar to be floated.
Sri Lanka is now also under the worst import controls since the 1970s using the 1969 law, though exchange controls are less draconian.
Citizens are also allowed to hold up to 15,000 US dollars as well as unlimited amounts in dollar accounts outside to protect their savings from monetary expropriation, in a relaxation of legal tender laws.
The Port City denizens would be protected from the policy errors of the Monetary Board of the central bank and the resulting wage-earner impoverishment, brain drain, brawn drain and capital destruction that comes from the inevitable currency collapses, through dollarization.
Dollarization is expected to protect the area from balance of payments crises and exchange controls, which the Monetary Board has imposed on the rest of the island after printing money to keep rates down, allowing the Colombo Port City to be an international financial centre and avoid capital flight.
US-built ‘flexible’ central bank
Sri Lanka started having foreign exchange trouble after a central bank with money printing powers was set up by John Exter, a Federal Reserve official in the style of several Latin American central banks inspired by work of Argentina’s central bank creator Raul Prebisch.
US-built central bank brought with it money printing powers for ‘counter cyclical’ or ‘flexible’ policy which is now called ‘stimulus’.
Before that Sri Lanka had a rule-based non-discretionary self-correcting currency board where currency depreciation was illegal and a 1 to 1 hard peg with the Indian rupee (and Sterling later) was held unbroken from 1885 through two World Wars.
Analysts have pointed out that in many countries that the Latin American unit of the Fed under its then chief Robert Triffin was set up Argentina style central banks, currency collapses and macro-economic instability had brought dictators, nationalist or leftist leaders or sometimes military strongmen.
Latin American countries which experienced chronic forex troubles also pioneered ‘import substitution’ and eventually ended up sovereign default.
Such soft-pegged countries, which were originally, close friends of the US.
But they became chronic repeated or ‘recidivist’ clients of the International Monetary Fund where liberal administrations were turfed out by currency instability and leaders hostile to the US interests came to power.
The IMF does not promote currency stability, unlike the practices of East Asian nations which have remained friendly to the US, including Japan, Thailand, Singapore and Taiwan where there was only one currency crisis in many decades.
Hong Kong which was handed over to China also has a currency board with the US dollar.
From 2015 to 2019, the rupee collapsed from 131 to 182 in two currency crisis with negative growth shocks, during an administration which was friendly to the US in a repeat of the experience in Latin America, the Caribbean and Iran.
Flexible IMF program
A collapse of the rupee from 151 to 182 occurred during an IMF program with a highly discretionary un-anchored policy involving a ‘flexible’ exchange rate (non-rule based external anchor) and ‘flexible’ inflation targeting (non-rule based domestic anchor).
Exter the Fed official who set up Sri Lanka’s depreciating Triffin-Prebisch central bank set up the Philippines central bank, which went bankrupt and was re-capitalized.
Similar ones came into being following Fed missions to Iran and Cuba. Triffin had invited Prebisch to participate in some of the missions. Venezuela’s central bank was reformed through a separate mission.
The Bretton Woods agreement of ‘flexible’ of collapsing soft-pegs was itself passed with the help of votes largely from Latin American bloc with which the Fed had links and were friendly to the US before currency collapses and economic hardships pushed them in to the arms of the Soviet Union and now China.
Further reading: The Latin American Origins of the Bretton Woods
Today the US backed Triffin-Prebisch central banks are among top IMF clients, going into sovereign default from time to time.
These include Paraguay (11 IMF deals), Dominican Republic (9 IMF deals), Guatemala (15 IMF programs), The Philippines (23 IMF programs, recapitalized), and Ceylon (16 and counting).
Ecuador, which had 19 IMF programs, has dollarized, like the plan for Colombo Port City.
Korea, where Arthur Bloomfield, another Fed official, set up a central bank in 1953 which issued a currency called Hwan at 60 to the US dollar.
The Hwan fell to 1200 by 1961 and General Park, who remained pro-American. Koreas post-War First Republic was turfed out.
The new central bank set up in 1961 with the current Won also depreciated from time to time but was better. Korea had 17 IMF programs and until the central bank was reformed in the early 1980s including one after reforms during the East Asian crisis.
Unlike Iran, Middle Eastern nations with firm pegs set up by British experts, and do not practice ‘flexible’ policy, including GCC nations have also remained friendly to the US and do not go to the IMF.
GCC central bank follows Fed rate changes, allows short term rates to move and do not print money. Million of Sr Lankans have found employment in the region as the rupee collapsed.
The dollarized Colombo Port City, would not only be free from any policy errors of the US-built central bank, but also the un-anchored, discretionary, free for all, ‘flexible exchange rate’, ‘flexible inflation targeting’ monetary programs of violently conflicting unstable dual anchors.
Meanwhile Teplitz also warned against the Colombo Port City becoming a source of tax leaks.
The agency running the Port City would have extensive powers to exempt businesses from taxes of up to 40 years, though it is not a tax haven in the traditional sense.
Sri Lanka’s tax revenues have plunged in 2020, she said raising concerns over debt and the fiscal path, credit downgrades and the ability to of the government to provide vital public services to the people, while managing loss making state enterprises.
“I do recognize that the government of Sri Lanka wants to take advantage of the investment that has already been made in creating the Port City foundation,” she said.
“But the legislation really needs to be reflected to address these challenges and to be careful of what it might be to open doors to bad practice and unfair competition for the rest of the country.”
Teplitz said a idea by US Treasury Secretary Janet Yellen to have a global single corporate tax was just a proposal with no immediate impact but Sri Lanka should think about tax concessions on its own interests. (Colombo/Apr09/2021)