Sri Lanka’s Currency and Remittance Dynamics – The Island

By Bilesha Weeraratne

Written before International Migrants Day on December 18, 2021

Despite the pandemic and the difficulties with remittances, remittances to Sri Lanka had resumed in December 2020 to register an annual growth of 5.8%, contrary to all expectations.

Reasons for such a rapid rebound include catching up on deferred remittances, accrued terminal employment benefits and remittances linked to savings from migrant workers made redundant due to the pandemic, receiving remittances from counter-cyclical funds of less frequent remittances and the shift from informal to formal. canals. In the current context of the currency crisis in Sri Lanka, the latter is the most critical factor to focus on.

From informal to formal channels

The fundamental reason shippers moved from informal to formal channels was the accessibility issue during closures or limited physical operations. Likewise, the increased risk of informal channels may have encouraged the use of formal channels. With adjustments to work under the new standard and a relaxation of lockdown measures, it’s safe to assume that informal transfer channels may have evolved to work during the pandemic as well. As such, the Special Deposit Accounts (SDA) of the Central Bank of Sri Lanka (CBSL), with its higher interest rate of 1-2% and the higher exchange rate of LKR 2 for remittances of funds channeled through Approved Commercial Banks (LCBs), were woefully inadequate. retain these recently converted formal senders.

Black, White and Foreign Gray

Exchange rate

One of the main attractions of informal remittances is their relatively low cost, in part due to the more attractive exchange rate offered through informal channels. Recent movements in the official LKR / USD exchange rate indicated strong pressure towards further depreciation and excess demand amid the deteriorating supply of USD within the Sri Lankan economy resulted in a wide divergence between the exchange rate offered by LCBs – the white market, and non-bank but authorized money exchangers. These can be called “the gray market” because they are allowed to buy currencies, albeit at their own rates. The divergence was even more pronounced compared to those of the black market or the going rate.

Figure 1 below indicates a large spread exceeding 25 LKR in the various foreign exchange markets from July to November 2021. This spread created an opportunity for informal remittances traded on the gray or black Sri Lankan foreign exchange market of ‘be more rewarding for senders. The additional LKR 2 and the subsequent addition to an additional LKR 10 offered by LCBs pales in comparison! Finally, in early December 2021, gray market players were forced to adhere to the LKR / USD 198-202 soft anchor rate.

Sources: Author’s compilation based on CBSL data and rates obtained from licensed money exchangers and newspaper articles.


As the top panel of Figure 2 shows, when the CBSL intervention stabilized the LKR-USD exchange rate, the official remittances to Sri Lanka shown in the bottom panel continued to decline more sharply in October. and November 2021.

Desperate measures

In 2021, various mechanisms have been deployed to access foreign currencies available in the economy. In May 2021, CBSL ordered LCBs to sell 10% of inbound worker remittances converted to CBSL. In October, a previous directive on the mandatory conversion of revenue from the export of goods was extended to cover services. The change also went from a 25% limit to converting the “residual” after use of export products of goods and services.

The attractiveness of informal channels

This latest update caused a lot of confusion. Although the CBSL has indicated that this directive will not affect workers’ remittances, operationally it does not seem very likely. A single Personal Foreign Currency Account (PFCA) can receive foreign currency in the form of remittances from a family member or benefactor and payment for exchange services. The method of distinguishing between the two types of inbound remittances is not yet clear to many. At the same time, many people have already received mail from commercial banks asking them to convert funds from their PFCAs.

Amid the confusion and efforts to protect workers’ foreign exchange earnings, more and more migrant workers seek informal channels to make remittances, while others withhold or delay remittances. Still others divert their remittances to accounts held abroad.

Sources: top panel; CBSL Bottom Panel, Weekly Economic Indicators, Various Dates

Early warning

Remittances are seasonal. Thus, official remittances in December could increase. But it should not be prematurely taken as an indicator of the success of recent efforts to increase remittances or divert informal to formal channels. Departures for labor migration in the first half of 2021 represent only a third of pre-pandemic departures during the same period in 2019. Many returning migrant workers are unable to find jobs abroad and this depleted stock of Sri Lankan migrant workers is a weak base to support formal remittances.

In addition, domestic economic difficulties prompt many migrants and families to wish for a possible further return through informal remittance channels. As such, excessive regulations aimed at cracking down on informal remittances may inadvertently create fertile ground for even larger informal activities and black markets, thus proving to be totally counterproductive to the intended objectives.

Future efforts to increase remittances should not underestimate the resilience of informal transfer channels developed by the age-old Undiyal or Hawala method. So instead of focusing too much on moving from informal to formal remittance channels, policies should primarily aim to ensure a more realistic exchange rate. Likewise, it is important to encourage labor migration and trade in services and their remittances.

Link to the original blog: in-sri -lanka / #

Bilesha Weeraratne is a researcher at IPS and focuses on internal and international migration and urbanization. She is also interested in labor economics, economic development and the economics of sport. Prior to joining IPS in 2014, Bilesha was a postdoctoral research associate at Princeton University, United States. Bilesha holds an MA and PhD in economics from the City University of New York, USA. (Talk to Bilesha – [email protected])