Record Fall in Remittances After 45 Years

CEYLON TODAY | Published: 2:00 AM Oct 19 2021

Worker remittances, led by Middle-East earnings, Sri Lanka’s single largest foreign exchange (FX) earner, suffered its biggest setback since the exploitation of this sector as an FX earner by the then Premier Sirima Bandaranaike 45 years ago, in 1976, with remittances earnings year on year (YoY) declining by a record 98.93 per cent (US$ 349.5 million) to $ 353.2 million last month (September), Friday’s (15 Oct) Central Bank of Sri Lanka (CBSL) data showed. This YoY fall in remittances last month, both in absolute and percentage terms, is also the largest ever fall recorded to date, even if compared with YoY falls per calendar year as well. 

The largest ever calendar year decline in remittances, YoY, was 2019 over 2018, when remittances earnings declined by 4.25 per cent ( $ 298 million) to $ 6,717 million. Last month was also the fourth consecutive month remittances earnings have declined on a YoY basis. Remittances earnings in the four months to September have sharply declined by 34.46 per cent ($ 910.3 million) to $ 1,731.5 million. Consequently, remittances earnings in the first nine months of this year (2021) steeply declined by 9.3 per cent ($ 471.3 million) YoY to $ 5.048.8 million. 

The build-up to remittances’ sharpest ever fall last month in 45 years, ipso facto began in June, where remittances earnings YoY declined by 16.43 per cent ($ 94.1 million) to $ 478.4 million; in July: by 35.44 per cent ($ 248.8 million) YoY to $ 478.4 million and in August, by 32.79 per cent ($ 217.9 million) to $ 446.6 million. Remittances earnings, after ‘accelerating’ by 38.35 per cent ($ 143.8 million) YoY to $ 518.8 million in April 2021, decelerated to 6.55 per cent ($ 28.3 million) to $ 460.1 million in May 2021, before beginning to shrink since June 2021. 

Prior to this year’s monthly contractions, the last time remittances earnings, at least on a monthly consecutive basis shrank were in the three consecutive months from March 2020 to May 2020, where remittances earnings declined by 23.01 per cent ($ 388.3 million) to $ 1,298.9 million, with the genesis of this fall beginning in March 2020, with remittances earnings declining by 13.88 per cent ($ 79.3 million) YoY to $ 492.1 million; April 2020, by 32.27 per cent ($ 178.7 million) to $ 375 million and in May 2020, by 30.17 per cent ($ 130.3 million) YoY to $ 431.8 million. 

Nonetheless, last year (2020) over 2019 as a whole, remittances earnings grew steeply by 5.76 per cent ($ 387 million) YoY to $ 7,104 million. The genesis of the present contraction in remittances earnings may be traced backed 117 market days ago to 28 April 2021, when the Government of Sri Lanka (GoSL) together with the CBSL began an exchange controlled regime backed by a negligible intervention by CBSL in the FX market due to the country’s Spartan level of FX reserves and with the primary objective of protecting such because of Sri Lanka’s huge FX liabilities led by its annual foreign debt servicing commitments of four billion dollars for at least next year (2022) and in 2023 respectively. 

Meanwhile, the value of Sri Lanka’s official FX reserves as at last month (Sept 2021) end was a miserly $ 2,581.3 million. Consequent to Sri Lanka’s FX controls where the buy-sell quote of the US dollar at present is officially administered at the Rs 202/203 levels in two way quotes, that, however, has spawned a black market where the price of the dollar may fetch a higher price as Rs 240. If the basis of having an exchange controlled regime by the authorities is to rein in the rupee, nonetheless, even at the controlled Exchange Rate (ER) of Rs 203, the ER will have had depreciated by 7.69 per cent (Rs 14.50) in the calendar year to yesterday and YoY by 9.19 per cent (Rs 18.65) to the dollar, thereby causing cost-push inflation as Sri Lanka is an import dependent economy. 

As at 31 December 2020, in the interbank FX market, beginning with ‘cash’ and going up to ‘one week’s forwards’, the ER was trading at a seemingly inflated value of Rs 187.50/188.50 to the dollar in two way quotes due to CBSL controls, while a year ago due to lesser controls, the benchmark ‘spot’ was trading in the market at Rs 184.25/35 to the dollar in two way quotes. 

The danger in having a controlled FX market is, that as said aforesaid, it leads to a black market, shortages, queues, rationing, cronyism, nepotism, bribery and corruption, similar to the conditions that prevailed when Sri Lanka practised a closed economy 44 years ago, i.e. from 1970-77. Also, by having a controlled FX regime encourages illegal money transfer channels such as ‘hawala’ and ‘undiyal,’ to the detriment of the real economy, thereby making it tougher for the GoSL itself to meet its external commitments, as the current sharp fall in remittances earnings only goes to prove.

CEYLON TODAY | Published: 2:00 AM Oct 19 2021

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