Self-made crisis of remittances

According to official Central Bank figures, workers’ remittances, a major source of foreign exchange in Sri Lanka, dropped to a 10-year low at $ 5.49 billion in 2021. In January this year, it fell to a 13-year low of $ 259 million which is even more concerning.

As Sri Lanka is in the grips of an unprecedented financial crisis, the Government has bet on its recovery mainly on increased remittances from workers abroad, increase in exports with possible narrowing of the trade deficit and income generated through tourism. At least the first two of these three prongs depend on the foreign exchange rate and the bad policies of the past have in fact seen these earnings drop in the last two years.

The artificial exchange rate maintained by the Central Bank since at least September 2021 is directly responsible for the rapid decline in workers’ remittances. The exchange for the US Dollar is set by the Central Bank in the range of Rs. 203 while the buying rate of the greenback outside the official banking system is at least Rs. 60 more. 

At the same time there are numerous restrictions on importers and the general public cannot purchase foreign currency except under very strict conditions at designated bank rates. Obviously, this created an informal market, where speculation by informal currency traders would determine the ‘true’ exchange rate. Sri Lanka’s migrant workforce is either saving currency earned overseas, without remitting to the island’s banking system, or more likely using informal channels that offer more attractive exchange rates to send hard-earned money back home. The increasing economic hardships in Sri Lanka would further encourage migrant workers to seek an extra return on their foreign exchange through informal remittance channels. 

The Central Bank’s efforts to limit such informal channels and threats of legal consequences have been dismissed for the bluff that it is and as the data shows such excessive regulations have not been able to prevent the use of informal remittance channels.

The incentives of offering Rs. 10 extra on the exchange rate for official remittances have also not allured the migrant workers to the banking system when the informal channels can provide up to Rs. 60 more than the official exchange rate. It is further learnt that some banks have informed their Sri Lankan customers remitting through online transactions that the extra Rs. 10 incentive promised by the Central Bank will only be granted when currency is physically deposited. Such fine print technicalities will nullify the attempts by the CB to encourage remittances through the formal channels and drive migrant workers to continue to use informal means of money transfer.

Sri Lanka’s dropping workers’ remittances are in fact an aberration from the trend. Other Asian economies with high levels of migrant labour such as Pakistan, Bangladesh, Philippines, Vietnam, etc., have shown steady growth in inward remittances during the period 2019-2021. This suggests that the drop in remittances in Sri Lanka is by no means related to the global pandemic but a direct result of poor policymaking.

In addition to workers’ remittances, it is now becoming apparent that exporters are also not remitting their foreign currencies back into the country. Some have opted to set up their banking offshore in more secure destinations such as Singapore and Dubai. 

The overall drop in remittances from migrant workers and exporters will have a catastrophic impact on the Sri Lankan economy which has hedged its recovery on these inflows. The results of ill-advised, bad policies are now apparent. If there is to be any chance of avoiding a sovereign default and outright bankruptcy, the policy on maintaining an artificial exchange rate should be immediately withdrawn.