ISSN: 1391 - 0531
Sunday, October 01, 2006
Vol. 41 - No 18
Front Page Columns
Columns - The Sunday Times Economic Analysis

Crisis in balance of payments averted by foreign remittances

By the Economist

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 this year.

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 remittances.

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 sources.

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 crisis.

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Copyright 2006 Wijeya Newspapers Ltd.Colombo. Sri Lanka.