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Worker remittance inflows lose steam


Why they are important and how to revive them

By Charith Gamage

In a period of decreasing reserves and foreign exchange shortages, migrant worker remittances had once been a welcome stream of income for Sri Lanka in fulfilling its foreign exchange shortfalls. With the recent sharp fall in remittances, the ongoing situation is causing chaos in the island nation’s mission to increase foreign exchange revenues. The following is an examination of how remittances aided Sri Lanka in the past, the causes of the sudden drop, and most importantly, how to keep remittances flowing as before.

“That’s a nice set of coloured pencils; where did you buy it?” This is not an uncommon question a Sri Lankan student would ask their classmate after noticing that they have a school accessory not commonly available in Sri Lanka. The friend explains that it wasn’t bought from a local shop but that it has instead been sent by a parent working abroad. Although it is a trivial conversation at school, it reveals a unique segment in the Sri Lankan economy.

Nearly 1.5 million of the country’s labour force, ranging from unskilled to skilled and professional, migrate for employment purposes. These workers frequently contact their families and send home part of their earnings and occasional goods. These remittances, that trickle down to the larger economy, have been a vibrant component that balances out the island nation’s foreign exchange position in respect to the rest of the world.

At a time when the external sector is confronted with daunting challenges such as depleting foreign exchange reserves and a stumbling dollar-rupee exchange rate, there has recently been a sharp drop in remittances, making the efforts to get on top of the country’s forex crunch an uphill battle. As of October 2021, Sri Lanka’s remittances receipts have dropped 14 percent compared with the respective period of 2020. This divergence has become increasingly acute in recent months, with inward remittances in September and October 2021 falling sharply to USD 353 and 317 million, respectively, the lowest levels for both months since 2010 and 2009. (Data sources: CBSL historical data and the provisional figures mentioned in the institution’s weekly reports; the November and December 2021 figures were not known at the time of writing this article)

Why are remittances important?

Before explaining the reasons behind the recent shortfall, a simple current account analysis, which summarises what countries spend and take in from abroad, provides a more comprehensive picture of the importance of this vital economic undercurrent.

The current account (CA) of countries like Sri Lanka can be written as CA = (X-M) + NI + NT. Where (X-M) is the trade deficit or the gap between the country’s exports and imports (of goods and services), NI denotes net income, and NT indicates net transfers, of which remittances are a part. Remittances have been a lifesaver for decades, to fill the country’s persistent trade deficit and negative net income due to interest payments on foreign loans. Without this support, the country has to find other means, such as additional foreign borrowings, to fill the gap.

Figure 1, excluding 2021 data, shows that the flow of remittances has reached a tipping point in the mid-2000s and peaked around 2014, growing slowly since the 1990s. After this, it contributed roughly USD 7 billion per year from 2015 to 2020.

Figure 1

The figure also shows (X-M) plus NI and remittances as a percentage of (X-M) plus NI as separate series over the past two decades. One of the notable facts is that with the improved remittances flow, the widening trade deficit plus negative net income has been steadily supported by around 80 percent since 2014. Therefore, the recent remittances drop is a massive blow for the island nation, primarily in balancing its higher imports over exports (financing the deficit in the trade account).

What happened in 2021?

The South Asian region is a good proxy for analysing Sri Lanka’s remittances dynamics in 2021 to determine if this is a regional issue. First and foremost, is the remittances drop a common issue in the region? The answer is not quite so. The World Bank expects the region’s remittances to grow by eight percent in 2021 compared with the previous year, with key players India, Bangladesh and Pakistan earning more than they did in 2020 (https://www.worldbank.org/en/news/press-release/2021/11/17/remittance-flows-register-robust-7-3-percent-growth-in-2021).

Figure 2

By comparison, Sri Lanka’s most recent remittances dynamics seem quite different from this regional theme. As Figure 2 shows, since May 2021, there has been an apparent divergence from its remittances flows compared with the corresponding periods of the previous years, indicating that remittances have entered a rocky road. Some explanations suggest that the overvalued formal dollar-rupee exchange rate provides remittances with a lower value than the informal channels; hence, remitters use informal channels such as the ‘Hawala’ or ‘Undiyal’ system, which offers them higher rates. (U. Jayasinghe. Reuters. December 6, 2021. https://www.reuters.com/markets/currencies/why-does-sri-lanka-want-migrant-workers-remit-funds-via-banking-channels-2021-12-06/). Those systems operate so that when workers hand over dollars to a middleman in their host country, the recipient in their home country can withdraw an equal amount of rupees through another agent. Consequently, this causes those remittances to bypass the formal banking system and be unaccounted for, and perhaps may not even be received in Sri Lanka.

Although this might be one of the reasons, the amount lost through the official channels appears to be greater than what studies reveal; for example, some studies show a three percent decrease from formal channels for a 10 percent rise in black market premium. Suggesting that there could be other reasons, such as official channel users restricting transfers in the belief that the rate differential in parallel markets is an implicit tax on them.

Consequently, it seems there are two tasks to fulfil in order to rectify the remittances flow:

(i) shifting informal channel users back to a formal banking channel

(ii) encouraging those who might have used formal channels and limited remittances to remit more.

The country’s ongoing actions, such as offering greater (premium) exchange rates to remitters and cracking down on illegitimate channels, seem to target shifting informal channel users back to a formal banking channel. However, it is important to remember that whenever there is a higher price for dollars outside the formal system, senders are likely to hunt for loopholes, reducing the effectiveness of the efforts.

As a result, these initiatives should be better paired with strategies that motivate workers themselves to use official channels and send more, rather than making them feel they should accept a lower…



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