In The Press

Colombo Port City - Sri Lanka’s portal to the global financial economy

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Despite gradual economic liberalisation over the past few decades, Sri Lanka’s banking and financial system has remained relatively closed, unsophisticated, and conservative. While this may have been a sound platform for financial stability post-Independence and as we emerged as a republic in the 1950s and 1970s, it now works more to impede growth than to ensure stability.

Thus, with the emergence of the Colombo Port City Special Economic Zone and the proposed world-class mechanisms for its governance, Sri Lanka is standing at the threshold of a new economic era. All we need to do now is step forward.

Some historical background

To understand exactly how and why a special economic zone, such as the Port City, can act as a portal for Sri Lanka to operate freely in the global financial system, it is necessary to understand how the global economy has arrived at where it is presently.

In August 1971, American President Richard Nixon moved to decouple the US dollar from the Gold Standard. This effectively ended the Bretton Woods System and created the modern international monetary system of currency exchange rates driven by international supply and demand, thus fundamentally changing the nature of the global financial system.

It became possible to freely create and trade in complex financial instruments and services across borders, resulting in the emergence of truly sophisticated, liberal financial economies. In turn, this promoted free trade and spurred on global economic activity. Therefore, it is reasonable, and perhaps even necessary, to argue that the economic growth enjoyed by the major world economies in the last 50 years has been supported, and even been driven, by the growing sophistication of their financial systems.

This relationship between a sophisticated, liberal financial system and real growth and prosperity can be seen across history. An excellent historical case study is how the innovation and sophistication of the Dutch financial system propelled the Netherlands to the position of an imperial power in the 16th Century, despite being a small player in Europe.

The Sri Lankan limitation

Being an economy that continued to remain relatively closed subsequent to the emergence of the modern international monetary system, the development of Sri Lanka’s financial system and economy has lagged behind that of some of its peers. Despite some economic liberalisation occurring gradually since the 1980s, Sri Lanka’s financial system has remained relatively closed, making international transactions complicated and reducing attractiveness to foreign investors.

Sri Lanka is also a relatively small economy and thus prone to shocks in the face of instability and large capital flows. Therefore, in the present context it is simply not possible to suddenly open up Sri Lanka’s financial system to the world. Doing so would likely result in violent shifts and shocks that could cause unnecessary pain for Sri Lankans, even if it would be beneficial over the long term.

It is for this reason that a separate financial system that is open to the global financial system, but at the same time part of Sri Lanka’s economy, acting to allow Sri Lanka to transact freely while concurrently insulating Sri Lanka’s mainstream economy, is vital. This is the quantum leap advantage the Colombo Port City Special Economic Zone will provide to Sri Lanka.

Not new or revolutionary

Special economic zones are not a new or radical idea, globally or at home. In Sri Lanka, many special economic zones already exist, but we know them as Free Trade Zones. None of the existing ones however, push the envelope as far as the Port City, in terms of creating a mixed-purpose special economic zone amidst a world-class legal and governance framework.Across the world, countries that are today very economically and financially successful have adopted similar measures. Excellent examples include the Dubai International Financial Centre, Labuan IBFC in Malaysia, and the Red Sea Project in Saudi Arabia.

From a financial markets perspective

The Port City will attract investors and capital from all over the world. But, why will they come here? Sri Lanka’s geographical location is perfect, between the Middle East and South East Asia, on one of the world’s busiest trade routes. Sri Lanka is easily accessible, possesses sufficient infrastructure, and the risk of major natural disasters is low. We have a talented workforce, along with a relatively stable political and economic environment and now, with the Port City, we will also have a portion of our economy that is truly open to the world in a way that Sri Lanka’s mainstream economy simply cannot be, at least for now.

This will create an ideal environment and venue for companies looking to raise capital and for companies looking at alternate venues for listing their securities for trading, whether equity, debt, futures, or derivatives. Apart from this, the flow of capital, combined with the concentration of financial services providers and their ancillary service providers, will create a ripe environment for a vibrant, open, deep, and liquid financial market. In turn, this will create plenty of high-paying skilled and unskilled jobs, resulting in an environment where Sri Lankans can gain global exposure without ever having to leave Sri Lanka.

A portal only we can open

Ultimately, the Port City will provide a portal through which Sri Lanka and the world can interact, transact, share knowledge, and collaborate to grow and win together. As far as Sri Lanka’s financial markets and financial system are concerned, the Port City is potentially the biggest positive development in our history, paving the way for Sri Lanka to take its place as a significant player in global financial markets and a leader in South Asia.

(The writer is the President of the Colombo Stock Brokers Association)

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