Sri Lanka to create special economic zone law, financial court, for Port City
ECONOMYNEXT – Sri Lanka is wrapping up laws to create ring fenced special economic zone in a reclaimed Port City with a cutting edge legal system, a financial court, and where expropriation is prohibited and experts from any part of the global can be hired, a minister said.
The 269 sea reclamation next to Colombo Port will be overseen by a Colombo International Financial City Commission which will be monitored by an advisory council coming under the President of Sri Lanka, State Minister for Economic Affairs Harsha de Silva told a forum organized by Asia Securities, a Colombo-based brokerage.
"There will be no restriction on foreign ownership (of companies), no restriction on the repatriation on repatriate of profits, employment of non-citizens and there is no way property can be expropriated," de Silva said.
Expropriation is a key problem in Sri Lanka which is keeping foreign investors out and also domestic capital in other countries. Monetary instability from a soft-pegged exchange rate regime is also keeping both trade and capital flows restricted, analysts have pointed out.
De Silva, who heads a steering committee on building soft infrastructure, said the reclaimed land itself will be owned by the Sri Lanka and it will be vested in the Urban Development Authority.
Out of the 269 hectares 116 will be developed by the CHEC Port City, the reclamation firm. The government will develop 62 acres and will also own another 91 hectares of common spaces.
There will be licensed and unlicensed activities.
Special Economic Zone
Unlike in some other financial centres the CIFC will not have a single regulator but existing regulators like the central will have authority, which will liaise with the CIFC commission.
Laws of Sri Lanka will apply except as provided otherwise for some activities.
"There will be modification in some areas of contracts and commercial transactions only if there is a lacuna in existing laws," de Silva said.
"It is offer investors a cutting edge legal framework which is up-to-date not second to what is offered at other International Financial Centres in the region."
A modern contract law and that will allow sophisticated financial transactions will apply after being passed by parliament.
There will be a special Colombo Financial Court as a court of first instance which can be appealed to the Supreme Court of Sri Lanka.
There will be commercial dispute resolution centre, an arbitration and mediation centre and there will be a panel of qualified local and foreign arbitrators.
Special tax allowances will also be given in the upcoming budget.
"The special economic zone law will be demarcated and ring fenced by the parliament," de Silva. "It can even be applied to areas like the Trace City."
He said the CIFC will work as a policy lab.
It is not clear what the monetary policy framework will be, or whether the CIFC will be dollarized.
With frequent currency panics it will not be possible to run any financial centre in Sri Lanka with the central bank in is current state, analysts have warned.
Sri Lanka has a central bank with a depreciating currency driven by contradictory policy, generating monetary and political instability and trade controls in the style of the Reserve Bank of India, in sharp contrast to any other financial centre.
De Silva said Sri Lanka had a valuable geo-strategic location, which has a long history dating back from the time of ancient kings and the colonial period.
Share trading in Sri Lanka had started in 1896 with a number of plantations and other firms raising capital.
"Not only shares of local companies, but shares of companies registered in the UK, India and Singapore was traded in Ceylon, in Colombo," de Silva said.
"But that all changed after independence after the abolition of the currency board that we talked about and is being debated even right now.
"Trading in foreign shares ceased and there were further setbacks in the 1950s and 1970s we nationalized oil and insurance companies, quoted companies and plantations companies.
"That resulted in a complete collapse of that model."
Hong Kong has a currency board with inflation and interest rates close to the US with the exchange rate at 7.8 to the US dollar since 1983.
Singapore has a modified currency board where the exchange rate has appreciated from 3.0 to the US dollar at the break-up of the Bretton Woods to about 1.2 to now.
With an appreciating currency Singapore has had generally lower nominal interest rates and inflation thank Hong Kong.
Dubai has a currency board like system with policy rates that track the US. Both Dubai and Sri Lanka started at 4.76 to the US dollar when the Central Bank of Ceylon was created in 1950.
At the time Dubai was dollarized with Indian rupees and Sri Lanka had a currency board, originating from the Indian rupee.
Dubai dumped the Indian rupee as policy at the Reserve Bank of India deteriorated after it was nationalized and the central bank was used to deficit spend.
The Sri Lanka rupee is now close to 172 to the US dollar India’s is over 70. Sri Lanka has slapped trade restrictions and taxes on gold like the Reserve Bank of India and is falling like the Indian rupee.
Mauritius is another financial centre in the region, which is lagging Hong Kong and Singapore. Mauritius had the first currency board in the world in 1848 and had currency completion with Indian rupees and sterling later.
The Mauritius rupee was also at 4.76 to the US dollar at the time Sri Lanka’s central bank was created.
Mauritius weakened after a central bank was set up in 1966 and is lagging behind Hong Kong and Singapore. But for the last 20 years it had an exchange rate of about 40 to the Euro. (Colombo/Oct23/2018)