It could be a well-orchestrated statement or a Freudian slip. One never knows. We could only see that Mr Sunil Handunnetti, an aspirant for the position of Finance Minister, upon the National People’s Party’s (NPP) success in the forthcoming elections – expressed considerable confidence, when making this statement. He was addressing a regional audience from the Banking and Finance sector of Polonnaruwa district. The video is available on YouTube.
“Black Money” was the key term used. With that, Mr Handunnetti articulated a vision to integrate them into the formal state economy. According to him the methods by which this funding is generated are of no consequence. The state, he said further, has no time to investigate these methods. Instead, the state should think about the benefits such an integration would provide to it and its citizens. The citizens should have the opportunity to actively contribute to the State Projects Fund, which will be established following the transition of power. Additionally, there will be avenues for the diaspora to invest in local projects through rural banks.
This statement carries significant weight, considering NPP’s current prominence in local politics. It was surprising that there was little to no response from the opposite camps. Harsha De Silva, another contender for the leading finance position, let it pass. Mainstream economists remained notably silent, suggesting that the situation was perceived as a routine occurrence.
To be fair to Mr Handunnetti, this is not the first instance in which a similar statement has been made. It is reported that Junius Jayawardene, the country’s first executive President, famously remarked, “Let robber barons come!” during the beginning of the economic liberalization process in the late seventies. That statement too could be viewed as a Freudian slip. However, the anticipated influx of such figures did not materialize to the extent that would have likely satisfied Jayawardene.
Then came President Premadasa, another fan of the idea. Similar to his predecessor Jayawardene, Premadasa recognized the critical role of capital in achieving the rapid development he envisioned. The legitimate avenues to attract foreign investment have then nearly reached their limits. President Premadasa’s strategy involved leveraging the resources of the rapidly developing Southeast Asian region, often with little regard for the origins of the capital.
This approach led to accusations of crony capitalism, a term used to describe an economic system where businesses benefit from close relationships with government officials, by his political rival Lalith Athulathmudali. Crony capitalism can manifest through anti-competitive regulations, direct government favouritism, or corruption. Examples include securing permits, receiving tax breaks, or exerting undue influence over the allocation of public resources, such as public works contracts.
Despite all the negative points, that could have brought some positive outcomes. Still, the process was thwarted when Premadasa was assassinated mid-term. In the post-1994 era, whatever the other weaknesses of the governments, the concept of leveraging black money was seldom advocated.
This does not mean that the Sri Lankan economy has been entirely free from black money. Any economy that does not operate on digital transactions allowing for the traceability of fund origins, inherently has its share of black money. This situation arises from several factors. Firstly, cash transactions remain prevalent, enabling individuals to engage in unreported or illicit activities using physical currency. Secondly, the informal economy — comprising street vendors, small businesses, and unregistered labour — functions outside formal financial channels, facilitating the generation and circulation of black money.
Additionally, corruption within government institutions, tax evasion, and bribery contribute significantly to the creation of black money. Weak enforcement and a lack of transparency permit individuals and businesses to evade taxes and conceal their income. Moreover, systems like hawala and undiyal allow for cross-border money transfers without formal banking channels. Barter transactions and investments in real estate and gold provide further avenues for parking black money. Collectively, these factors have been prevalent within our economy and continue to persist.
Fast forward to 2024. The country is grappling with one of the most significant economic challenges in the post-independence era. While foreign debts have been restructured and we find ourselves in a relatively more stable position, there remains a pressing need for financial resources. In light of this situation, the proposal has emerged: why not leverage black money? Isn’t this approach the best as a pragmatic solution in our current circumstances?
In the international scene, many countries have developed their economies by exploiting black money. The most notable example is Switzerland, the “respectable” nation in Western Europe well known for its watches and cleanliness. Over the past century, Switzerland has built a significant portion of its economy on funds of dubious origin from abroad, particularly from developing countries. The country’s tradition of banking secrecy, enshrined in law in 1934, made it a haven for tax-dodging wealthy clients and politically exposed persons (PEPs) seeking to hide their money.
This secrecy helped Switzerland become a magnet for illegally acquired wealth, as Swiss banks actively courted foreign elites, distributing brochures and deploying bankers across countries like France in the early 1900s to attract new business, especially as inheritance taxes were introduced.
During the 20th century, Switzerland’s political neutrality and banking secrecy further solidified its status as a haven for Nazi officials and their looted assets after World War II. In recent decades, numerous Swiss bank accounts have been implicated in major corruption scandals and money laundering networks involving countries in the Global South, such as the 1MDB scandal in Malaysia, the Lava Jato scandal in Brazil, and revelations from the Panama Papers.
As of 2020, nearly half of the 7.9 trillion Swiss francs in assets under management in Switzerland belong to foreign clients, with the country accounting for approximately USD 21 billion in lost tax revenue for other nations each year. While Switzerland has taken some steps to curb money laundering in recent years, it continues to host illegally acquired wealth from abroad, particularly from developing countries. This situation places a moral burden on the nation, which profits from funds that have drained resources from poorer nations
So why cannot Sri Lanka be the Switzerland of South Asia? Indian gangster bosses and corrupted politicians would be happy to save their money somewhere closer to home, than taking it to Europe. Easily Sri Lanka could be the driving force of the illicit Indian economy. Currently, most related activities are illegal, but then it is a matter of changing laws. Yes, at least theoretically it is a possibility. Comrade Handunnetti should be congratulated for the bright idea.
There are other avenues too. In a series of previous articles for the same journal, I have examined Sri Lanka’s strategically significant position in the international drug trade. The consistent seizure of narcotics within Sri Lanka suggests that these substances are destined for the global market rather than solely for the local Sri Lankan market. Our country lies along a major drug trafficking route that originates in nearby Tamil Nadu and extends towards Malaysia, and possibly even Australia. This situation too presents an opportunity for financial gain, if we completely ignore the ethical concerns.
Perhaps Myanmar is one country that might interest Mr Handunnetti. Interestingly, Myanmar’s illicit economy plays a significant role in sustaining conflict and shaping the country’s transition to democracy. For decades, it has been a major hub for opiate and methamphetamine production. This coincided with complex civil war and counterinsurgency policies. Ceasefires negotiated in the 1990s allowed insurgent groups to engage in trade, including drugs, gems, and timber.
However, since the mid-2000s, ceasefires have broken down, leading to increased violent conflict. Currently, tackling wildlife trafficking is a priority. The nexus between ceasefires and the underground economy has implications for peace and democratization. Balancing political power while addressing illicit economies is crucial. Besides drugs, Myanmar’s informal economy involves illegal logging, mining, and human trafficking. The Tatmadaw (Myanmar’s military) often facilitates these activities.
The problem is, no matter how attractive, black money is black. It never becomes white, no matter how much washing powder we use. The proliferation of black money can have severe repercussions on a nation’s economy, undermining economic stability, fostering corruption, and creating disparities.
One of the most significant impacts of black money is the erosion of the tax base. Reduced tax collections due to unreported transactions hamper the government’s ability to fund public services and infrastructure projects. To compensate for the shortfall, the government may increase taxes on compliant taxpayers, leading to economic distortion and potential disincentives for businesses and individuals. Further, black money exacerbates economic inequality by concentrating wealth among those engaged in illicit activities, widening the gap between the rich and the poor, and exacerbating social disparities, potentially leading to social unrest.
Black money also distorts economic data, resulting in inaccurate economic indicators. Transactions involving black money are not reflected in official statistics, leading to misleading GDP figures and other economic metrics. Policymakers, relying on inaccurate data, may implement ineffective or misdirected economic policies, further harming the economy.
Moreover, black money undermines public institutions by encouraging bribery and corruption, eroding trust in governance, and reducing the effectiveness of government functions. The presence of a parallel economy operating outside the legal framework weakens the rule of law and judicial systems.
Some argue that using black money has minimal consequences, especially when related crimes have already occurred. This argument often arises in the context of money laundering. However, this perspective lacks validity because utilizing black money perpetuates criminal activities.
An economy that relies on black money indirectly endorses criminal behaviour for its survival. For instance, countries like Afghanistan, Colombia, Bolivia and Peru struggle to completely eradicate their drug trade due to the large number of people involved in illicit activities. Discontinuing these practices would immediately lead to unemployment, so they continue. This is not the future we look for Sri Lanka, even as a way out of its current economic crisis.
Sri Lanka, given its current economic challenges, cannot afford to engage in experimental economic policies. The country has already grappled with a dual crisis involving debt and foreign exchange. Our urgent priority is to emerge from this situation by strategically restructuring our debts and strengthening the economy with IMF assistance. This is largely done.
Any negative incident could significantly impact Sri Lanka’s international standing and creditworthiness, potentially hindering our ability to attract investment capital. Therefore, we must avoid any association with illicit funds, even at a distance. Instead of depending on black money, Sri Lanka should immediately make the best efforts to eliminate the same from its financial system by developing a vibrant digital system that automates the entire financial sector. I hope Mr Handunnetti and his economic advisors take note.