ISSN: 1391 - 0531
Sunday, October 15, 2006
Vol. 41 - No 20
The Sunday Times Economic Analysis

Challenge of increasing foreign remittances through formal channels

Since migrant workers-remittances are likely to continue in the foreseeable future, they could play a more significant role if all remittances could be mobilised by the banking system

By the Economist

Since writing on the importance and significance of foreign remittances for the balance of payments in this column two weeks ago, two new developments have occurred. The first is whether there are large amounts of remittances coming into the country that are not in the national interest, even though they contribute to easing the country's balance of payments. Current investigations into these remittances, including the investigation and seizure of certain funds by the Central Bank of Sri Lanka, are new developments.

The second is whether there is an adequate effort to mobilise the full quantum of worker remittances, as it appears that a large amount of remittances are sent through informal sources and much of those funds are not accruing to the country's foreign exchange reserves.

Returning Middle-East workers at BIA: A considerable proportion of foreign remittances is brought in the form of goods when workers return.

This second issue has been addressed in a recent study done by the Marga Institute for the International Organisation for Migration (IOM). The main objective of the study was to examine the current policies and systems that are in operation for the remittance of foreign earnings of Sri Lankan migrant workers employed abroad and to make recommendations to increase remittances through official channels and prevent the leakage of foreign exchange that is estimated to be quite high, about one half of total remittances. We wish to focus today on some of the findings of this study that could be important for increasing the mobilisation of remittances through official sources particularly as remittances from other sources may decrease in the light of the current anxiety about the end use of some remittances.

One of the most important issues raised by the Marga study is that of leakages in worker foreign remittances. The study says: " Both government authorities and private banks estimate that nearly 50% of foreign earnings do not enter the official market and that migrant workers obtain the rupee value of their earnings through various illegal transactions. In the interviews conducted, the estimate of such leakage varied from 30% to 60%." The report adds, " However, not all the amount that is estimated as leakage is lost to the economy as foreign exchange. A considerable proportion is brought in the form of goods when the worker returns. The remittances do not come in the form of foreign exchange only when it is “sold” abroad to an agent who gives it in Sri Lankan rupees to the migrant or his dependants in Sri Lanka".

There is a further qualification that one should make. Though the money may not come as foreign exchange immediately, they may be financing trade items that would otherwise be bought through the remittance of official exchange. Nevertheless there is a consensus that remittances could make a more important contribution to the official reserves and assist the balance of payments were these leakages reduced.

On the basis of an analysis of per capita remittances of workers, the Marga study concludes that more than 50 per cent of the foreign earnings do not come into the official foreign exchange account and is leaked away through illegal transactions. It points out that there are about 1.2 million workers employed abroad and their per-capita remittances are about US $ 1570 per annum and that is far below the expected savings that they are likely to remit. The Marga report is however cautious in this conclusion as the estimate of the number of migrant workers employed abroad may have a large margin of error. It is currently estimated at nearly 250,000. It could in fact be more or less.

The Marga Report also points out what we had discussed earlier in this column that remittances are not necessarily from migrant workers alone. The total of US$ 1998 million of remittances in 2005 includes private transfers from countries such as Australia, Canada, US, and the European Union, that are not remittances of workers. Remittances from European Union countries, North America and Australia constitute nearly a third of total remittances. These are for various purposes such as the upkeep of elderly relations, purchase of property and other investments and some of these remittances may be for the LTTE too. Since migrant workers-remittances are likely to continue in the foreseeable future, they could play a more significant role if all remittances could be mobilised by the banking system.

The main recommendations of the Marga Report are that workers should be made familiar with the banking facilities available and of the special benefits that banks provide, that the transactions cost of remitting funds should be reduced and that there should be closer cooperation by government agencies and banks to increases remittances through banking channels. The report is of the view that the banking system should be in a position to offer more attractive service charges and that this has to be combined with a set of banking products and incentives to migrant account holders based on the volume of deposits.

The Marga Report is emphatic: "Migrants have to be convinced of the benefits of opening a bank account, particularly a NRFC account to which they could remit their earnings. They must be persuaded that even with small incomes the banking habit can provide a discipline that can encourage savings. They must be made aware of the full benefits of retaining their earning in dollars even if they need to draw on the account regularly.

They must be shown how the NRFC Account can be a hedge against inflation. In the case of low income migrants who now do not see much value in opening a NRFC account, special features may have to be incorporated that would enable account holders to operate on NRFC accounts freely as in the case of a savings account in the NSB. The NRFC for account holders with small foreign incomes would have to be designed as a special product." The implementation of these and other proposals made in the Marga Report requires a concerted and sustained effort and a special initiative by the Foreign Employment Bureau, the Ministry of Finance, the Central Bank and commercial Banks.

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