Explanation: Why does Sri Lanka want migrant workers to send remittances through banking channels?

Sri Lanka Central Bank Governor Ajith Nivard Cabraal speaks at the launch of the “Roadmap: Monetary and Financial Sector Policies for 2014 and Beyond” in Colombo on January 2, 2014. REUTERS / Dinuka Liyanawatte

COLOMBO, Dec. 6 (Reuters) – Sri Lankan authorities to begin cracking down on informal remittances as the country seeks to build up its reserves to meet more than $ 4.5 billion in debt repayments owed on it. ‘next year.

Central bank governor Ajith Nivard Cabraal said he saw a $ 300 million drop in remittances over the past month and pledged to use anti-money laundering laws to prevent informal channels from hijacking millions of dollars in the banking system’s vital foreign exchange reserves. . Read more

Here are the details of Sri Lanka’s precarious foreign exchange position and the reasons it seeks to stop flows through informal channels:

WHY IS SRI LANKA WANT TO STRENGTHEN PAYMENTS THROUGH FORMAL CHANNELS?

Remittances and tourism, traditionally among the main sources of foreign exchange income, have been hit hard by the pandemic. Tourism revenue fell to $ 92.5 million in the first nine months of 2021, from $ 4.3 billion in 2018.

Remittances, which were robust in 2020, fell 9.3% as of September 30 to $ 4.5 billion, from $ 5.1 billion over the same period in 2020, and declines have grown. accelerated since October.

Sri Lanka’s sovereign ratings have been downgraded several times in recent months by major rating agencies due to weak government revenues, sluggish growth and reserves which fell to $ 2.3 billion as of 31 December. October.

The country is due to repay around $ 4.5 billion in debt and interest in 2022, including servicing a $ 500 million international sovereign bond in January. Meanwhile, its trade deficit in the first nine months of the year climbed to $ 6 billion, from $ 4.3 billion in the same period last year.

WHY HAVE THE ENVIRONMENTAL FLOWS TO SRI LANKA VIA THE FORMAL CHANNELS BEEN DELETED?

In early September, as the Sri Lankan rupee weakened sharply, the central bank ordered banks to unofficially fix the exchange rate between 200 and 203 Sri Lankan rupees to the dollar.

However, monetary pressure caused by a growing trade deficit, limited foreign exchange earnings, and concerns over debt repayment caused the rupee to change hands between 255 and 265 rupees to the dollar through informal channels. Migrant workers sent money through the informal “hawala” system, and remittances through official channels fell to $ 353 million in September, from $ 703 million in the same month last year.

The central bank is now offering migrant workers an additional 10 rupees for every dollar they send through formal channels, but there are doubts this will work given the more attractive exchange rate in unofficial channels. Read more

HOW DO INFORMAL CHANNELS WORK?

The “hawala” or “undiyal” transfer system allows migrant workers to remit funds, usually in cash in the currency in which they earn, which is handed over to an intermediary who in turn ensures that the family of the person in the household. Sri Lanka receives the equivalent amount in rupees.

The central bank is now threatening to freeze accounts that receive unexplained money transfers or deposits.

WHY SRI LANKA DOESN’T WANT TO LET RUPIA DEPRECISE AGAIN?

Sri Lanka’s retail price inflation accelerated to an almost ten-year high of 9.9% in November, well above the central bank’s 4-6% target range.

Allowing the rupee to float freely could sharply accelerate inflation for the island economy that is largely dependent on imports.

HOW THE CENTRAL BANK HOPES TO CORRECT ITS WEAK FINANCES?

The central bank wants to increase reserves by capturing more inflows and is counting on a recovery in tourism.

Having a larger share of the remittance flow is vital as it plans to securitize a portion of the remittances and use it as collateral to borrow additional funds. The country is also exploring swap agreements with other central banks and lines of credit to support imports of essential goods such as food, medicine and fuel. Read more

Editing by Euan Rocha and Jacqueline Wong

Our Standards: Thomson Reuters Trust Principles.