in balance of payments averted by foreign remittances
Remittances of foreign exchange into
the country are significant and increasing. Everyone
is aware that remittances from abroad have become an
important source of foreign exchange earnings. They
are an important source of capital inflows and have
become especially significant in recent years owing
to the widening trade deficit, largely due to escalating
oil prices. Nonetheless, there isn't adequate realisation
of the extent and magnitude of their contribution to
the balance of payments. There is also a lack of awareness
of where the money comes from.
The general notion is that maids and
other workers from the Middle East remit money. This
is only a partial picture. Remittances are sent from
a wide range of countries and by persons of diverse
occupations. The aggregate of their remittances are
more than some of our export earnings, foreign loans
and grants and the volume of foreign direct investment.
This is a broad generalisation. The more precise situation
is what we attempt to get across here.
The significance of remittances was
discussed in some detail in last year's Central Bank
Annual Report. The Central Bank account portrayed the
significance of these remittances, possibilities of
increasing them through increased foreign employment
and more effective mobilisation of funds, the negative
aspects of emigration of workers on the economy and
some social costs of worker exodus. It also sounded
a word of caution that the country should not be excessively
dependent on them.
In 2005 remittances accounted for
as much as 76.2 percent of the total trade balance.
They were about twice the amount of loans and grants
received by the country and about seven times the amount
of Foreign Direct Investment. Remittances were 8 per
cent of GDP, about one half the value of all our agricultural
output and more than the total earnings from agriculture.
In 2005 the inflow of remittances increased by about
23 percent. This trend is continuing and in the first
seven months of this year (till end July) there has
been a further increase of about 24 per cent. This implies
that remittances would increase in relative importance
The importance of remittances vis-à-vis
our export earnings is underestimated when one takes
into consideration the fact that our exports, especially
most industrial exports, have high import content.
Remittances to Sri Lanka are from
a wide range of countries. It is the remittances from
migrant workers from the Middle East that have been
highlighted, and rightly so as these constituted 56.5
per cent of the total remittances in 2005. However worker
remittances also come from Italy, South Korea, Malaysia
and Singapore. The remittances from Asian countries
constitute 4.5 percent of the total. Besides this there
has been an increasing inflow of remittances from European
Union countries that accounted for 18.5 percent of the
total. Another 6.5 percent was from other European countries.
Inflows from North America contribute a significant
6.5 percent to the total last year. Some of these remittances
are for the upkeep of family members, purchase of land
and apartments and other investments.
Remittances from workers are expected
to continue increasing as unskilled workers continue
to migrate to the Middle East. These expatriate remittances
have an importance far beyond the support to the balance
of payments and support at the macro economic level.
They improve living standards of the
poor by enhancing their incomes, improving basic consumption,
and improving their housing, education and other amenities.
These funds have also enabled the start up of small
business enterprises. Some families are able to break
out of their vicious cycle of poverty because of these
Despite the importance of remittances
that have been sketched above, there is potential for
them to play an even more significant role if the amount
of remittances mobilised by the banking system is enhanced
and the use of funds by the worker families and the
returnees is better utilised. To the extent that remittances
are transferred through formal financial institutions,
the government balance of payments benefits from the
increase in the foreign exchange reserve. However there
is evidence that informal remittance mechanisms mobilise
a high proportion of remittances. A World Bank study
put forward the estimate of the share of private remittances
channelled through informal dealers were about 45 per
cent in the mid 1990s. This is of course a guesstimate
and no one knows the exact extent of such informal transfers.
That they are significant is agreed by most informed
A dominant view is that informal systems
of remittances are unreliable and susceptible to abuse
and fraud. This is an exaggeration as the sustainability
of an informal system depends on its reliability. Information
on their reliability is vital for their continued operations.
Persons resort to informal methods
of transmission of funds owing to their convenience,
low transactions costs and ease. It is also revealed
that workers are reluctant to use formal systems, as
they are unaware of the facilities, intimidated by the
procedures, language difficulties and inability to provide
documentation. Besides this some workers, especially
in Italy, are illegal migrants and are unable to expose
themselves in bank transactions. The Hawalah system
of money exchanging is a reliable one that handles huge
amounts of money. Remittances through such informal
conduits deny benefits to the balance of payments but
are useful to recipients in improving their livelihoods.
The Sri Lankan government is interested
in having as much of the remittance to flow through
formal conduits. However the task is difficult owing
to the educational level of migrant workers, the strengths
of informal money brokers and the weaknesses of banks
to compete with an aggressive and advantageous informal
remittance network. Banks cannot supplant the informal
money exchangers, but there is some scope to increase
their share of remittance mobilisation.
An important strategy would be to
increase the awareness of migrants about banking services
so that they would have a preference to remit funds
through banks. On the other hand, banks would require
making the formalities for remittances simple and expedient,
transfer funds to recipients speedily and reducing transactions
costs of remitting funds.
It is fortunate that in the face of
the oil price shock the country has been protected to
a significant extent by increased remittances. Without
these the balance of payments would no doubt be in serious