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Worker remittance inflows lose steam

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Why they are important and how to revive them

By Charith Gamage

In a period of decreasing reserves and foreign exchange shortages, migrant worker remittances had once been a welcome stream of income for Sri Lanka in fulfilling its foreign exchange shortfalls. With the recent sharp fall in remittances, the ongoing situation is causing chaos in the island nation’s mission to increase foreign exchange revenues. The following is an examination of how remittances aided Sri Lanka in the past, the causes of the sudden drop, and most importantly, how to keep remittances flowing as before.

“That’s a nice set of coloured pencils; where did you buy it?” This is not an uncommon question a Sri Lankan student would ask their classmate after noticing that they have a school accessory not commonly available in Sri Lanka. The friend explains that it wasn’t bought from a local shop but that it has instead been sent by a parent working abroad. Although it is a trivial conversation at school, it reveals a unique segment in the Sri Lankan economy.

Nearly 1.5 million of the country’s labour force, ranging from unskilled to skilled and professional, migrate for employment purposes. These workers frequently contact their families and send home part of their earnings and occasional goods. These remittances, that trickle down to the larger economy, have been a vibrant component that balances out the island nation’s foreign exchange position in respect to the rest of the world.

At a time when the external sector is confronted with daunting challenges such as depleting foreign exchange reserves and a stumbling dollar-rupee exchange rate, there has recently been a sharp drop in remittances, making the efforts to get on top of the country’s forex crunch an uphill battle. As of October 2021, Sri Lanka’s remittances receipts have dropped 14 percent compared with the respective period of 2020. This divergence has become increasingly acute in recent months, with inward remittances in September and October 2021 falling sharply to USD 353 and 317 million, respectively, the lowest levels for both months since 2010 and 2009. (Data sources: CBSL historical data and the provisional figures mentioned in the institution’s weekly reports; the November and December 2021 figures were not known at the time of writing this article)

Why are remittances important?

Before explaining the reasons behind the recent shortfall, a simple current account analysis, which summarises what countries spend and take in from abroad, provides a more comprehensive picture of the importance of this vital economic undercurrent.

The current account (CA) of countries like Sri Lanka can be written as CA = (X-M) + NI + NT. Where (X-M) is the trade deficit or the gap between the country’s exports and imports (of goods and services), NI denotes net income, and NT indicates net transfers, of which remittances are a part. Remittances have been a lifesaver for decades, to fill the country’s persistent trade deficit and negative net income due to interest payments on foreign loans. Without this support, the country has to find other means, such as additional foreign borrowings, to fill the gap.

Figure 1, excluding 2021 data, shows that the flow of remittances has reached a tipping point in the mid-2000s and peaked around 2014, growing slowly since the 1990s. After this, it contributed roughly USD 7 billion per year from 2015 to 2020.

Figure 1

The figure also shows (X-M) plus NI and remittances as a percentage of (X-M) plus NI as separate series over the past two decades. One of the notable facts is that with the improved remittances flow, the widening trade deficit plus negative net income has been steadily supported by around 80 percent since 2014. Therefore, the recent remittances drop is a massive blow for the island nation, primarily in balancing its higher imports over exports (financing the deficit in the trade account).

What happened in 2021?

The South Asian region is a good proxy for analysing Sri Lanka’s remittances dynamics in 2021 to determine if this is a regional issue. First and foremost, is the remittances drop a common issue in the region? The answer is not quite so. The World Bank expects the region’s remittances to grow by eight percent in 2021 compared with the previous year, with key players India, Bangladesh and Pakistan earning more than they did in 2020 (https://www.worldbank.org/en/news/press-release/2021/11/17/remittance-flows-register-robust-7-3-percent-growth-in-2021).

Figure 2

By comparison, Sri Lanka’s most recent remittances dynamics seem quite different from this regional theme. As Figure 2 shows, since May 2021, there has been an apparent divergence from its remittances flows compared with the corresponding periods of the previous years, indicating that remittances have entered a rocky road. Some explanations suggest that the overvalued formal dollar-rupee exchange rate provides remittances with a lower value than the informal channels; hence, remitters use informal channels such as the ‘Hawala’ or ‘Undiyal’ system, which offers them higher rates. (U. Jayasinghe. Reuters. December 6, 2021. https://www.reuters.com/markets/currencies/why-does-sri-lanka-want-migrant-workers-remit-funds-via-banking-channels-2021-12-06/). Those systems operate so that when workers hand over dollars to a middleman in their host country, the recipient in their home country can withdraw an equal amount of rupees through another agent. Consequently, this causes those remittances to bypass the formal banking system and be unaccounted for, and perhaps may not even be received in Sri Lanka.

Although this might be one of the reasons, the amount lost through the official channels appears to be greater than what studies reveal; for example, some studies show a three percent decrease from formal channels for a 10 percent rise in black market premium. Suggesting that there could be other reasons, such as official channel users restricting transfers in the belief that the rate differential in parallel markets is an implicit tax on them.

Consequently, it seems there are two tasks to fulfil in order to rectify the remittances flow:

(i) shifting informal channel users back to a formal banking channel

(ii) encouraging those who might have used formal channels and limited remittances to remit more.

The country’s ongoing actions, such as offering greater (premium) exchange rates to remitters and cracking down on illegitimate channels, seem to target shifting informal channel users back to a formal banking channel. However, it is important to remember that whenever there is a higher price for dollars outside the formal system, senders are likely to hunt for loopholes, reducing the effectiveness of the efforts.

As a result, these initiatives should be better paired with strategies that motivate workers themselves to use official channels and send more, rather than making them feel they should accept a lower price for their hard-earned money. To better design these policies, it is imperative to find out what motivates them to send money.

Other factors affecting remittances

Although an altruistic motive could be one reason migrant workers remit money, studies show (for example an Indian study by P. Jijin, et al. Macroeconomic determinants of remittances to India. Econ Change Restruct. [2021]) that it is an investment motive that motivates senders to remit money (https://link.springer.com/article/10.1007/s10644-021-09347-3). Investment motive could be more pronounced among seasoned workers willing to shift their savings in bulk for investments or start businesses for the family. These flows are due to their overall confidence in the home country economy and its ease of doing business, including fewer restrictions and regulations imposed on their goals.

Over the past decade, Sri Lanka’s highest percentage increases in remittances, 24 percent and 25 percent occurred respectively in 2010 and 2011, following the boost in confidence in the economy after the end of the country’s 30 year-long civil war in 2009. This shows how these flows are intertwined with better economic outlooks.

This idea is supported by Abbas, Masood, and Sakhawat (2017) in a Pakistani research study spanning from 1972 to 2012, who show that financial and political determinants and variables such as stable macroeconomic conditions influence increased remittance flows (https://www.sciencedirect.com/science/article/abs/pii/S0161893817300248).

How to best manage remittances flow

Restoring remittances to previous levels is a critical challenge for Sri Lanka since it provides a lifeline to the economy in contrast to high-cost international borrowings. Studies show that, in most countries, the black market and the share of remittances flowing through it tend to feed each other; therefore, policies that bring remittances back to the formal channels would automatically shrink the black market as well.

Rather than predetermining the premium, authorities can identify the sender’s switching point between the informal and formal channels. From this, they can identify the level of relaxation on the exchange rate and the exact premium for remitters for a shorter period, for effective absorption of the parallel markets.

Given the disadvantages of the black market, such as lack of or no legal protection, lack of transparency, and the possibility of scams, there is no need to offer a stark contrast between the two markets to entice people to switch back. But, sufficient incentives need to be offered so that they do not feel they are penalised for using the formal channels.

In addition, since remittances are linked to investment intent, another front should encourage them to send more money home and through formal channels. It is important to build a network and boost their confidence by relaxing restrictions on them, providing investment opportunities and business guides for entrepreneurship, including credit and facilities to import machinery at concessional rates. Providing a robust safety net for their loved ones to help them out during the turbulent times of global economies is also essential. Overall, to help the country smooth out these flows, more diplomacy and a win-win situation for workers abroad seem to be key in harnessing effective outcomes.

Finally, given the procyclicality (tendency to move alongside the economy’s cyclical condition) of remittances, the issue should not be isolated from the rest of the economy. Higher remittances are tied to better home-country economic conditions, so they are linked with policies that promote higher investment and export-led growth with subdued inflation that does not erode home-country investments. In particular, one important requirement is allowing the formal rate to reflect the real situation in the external sector by improving the overall macroeconomic situation with a business-friendly environment and consistent policies. That is the key to perfecting this mission.

(The writer is a PhD candidate attached to Monash University, Australia. The views and opinions expressed in this article are those of the writer, and he could be reached at charith.gamage@monash.edu)



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Features

‘Popular will’ and the democratic process in the US and outside

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Kamala Harris and Donald Trump

The just concluded presidential election in the US could very well have been the tightest ever such contest in the world’s ‘mightiest democracy’ in recent decades. With some reservations it could be said that the democratic system of government triumphed once again in the US and that the ‘popular will’ asserted itself.

It would have been preferable if the President of the US was elected only by the ‘popular vote’ or the majority of votes she or he directly polls countrywide but unfortunately this is not the case. The Electoral College (EC) system gets in the way of this happening effectively and it is gladdening to note that this issue is being addressed by the more reflective sections in the US. It is time for this question to receive the complete attention of the US’ voting public.

Hopefully, the ‘pluses’ and ‘minuses’ of the EC system would be fully examined by the US public in the days ahead. Right now, critics of the system could not be faulted for seeing it as distorting somewhat the ‘popular will’ or the overall preference of the US voting public in its choice of President.

The close contests between the contenders in what are termed the ‘Swing States’ helped highlight some notable limitations in the EC system. It ought to be plain to see that the requirement that the ‘winner takes all’ of the EC votes in these states needs urgent questioning and rectification.

However, the US and the world’s thriving democracies could take heart from the fact that there has been a legitimate transition of power in the US in the most democratic of ways possible at present for the US. Considering this it could be said that the US is continuing as a frontline, vibrant democratic state.

Not to be forgotten too is the fact that the elections to the US House of Representatives and the Senate have also been simultaneously completed on the basis of laid down legal procedures. That is, elections to all tiers of government have been concluded, testifying to the fact that the ‘democratic health’ of the US is unquestionable.

‘Democracies’ come in numerous forms and it is open to question whether a rigorous definition of the term could be given. Even some of the most authoritarian, autocratic and theocratic states prefer to call themselves ‘democracies’. At first glance, these considerations could lead to some bafflement but it could be stated that, generally, it is only those governing systems that lead to the total empowerment of people that could be considered democratic.

Defenders of and apologists for authoritarian and dictatorial regimes could shoot back on hearing the above observations that since their regimes satisfy the material needs of their populations, their states fully qualify for democratic status.

But the defenders of democracy, correctly understood, may beg to defer. The total empowerment of individuals and publics is realized only when the latter enjoy fundamental rights and freedoms, as enshrined in the UN Declaration of Human Rights, for example.

Accordingly, a regime that does not permit its people total Freedom of Speech and Thought, for instance, could in no way be seen as empowering its people. A regime that does not allow its citizenry the latter rights is repressive and undemocratic and is out of step with democratic development. In fact it is the latter process that even facilitates the material empowerment of publics.

Assessed on the basis of the above yardsticks, the US and other Western states, where fundamental freedoms are generally ‘alive and well’ could be considered democratic although absolute or perfect democracies could nowhere be found. Democracy is a process and it needs to be enriched and given greater depth, going forward. The process is long term and one which progressively evolves.

Besides the above considerations, advanced democracies are also characterized by multiple political parties that contest for power within the parameters of democratic principles. States that lack these essential attributes could not be considered democratic.

Going forward, states East and West need to be guided by the above principles because minus the multi-faceted empowerment of people, democratic development would not be possible. Seen from this viewpoint, it would be self-defeating for government leaders of the South in particular to consider opposition parties as inessential.

They need to also consider that there is no question of turning back the hands of time and reverting to strait-jacketed, one-party states of the Soviet era. These formations were thrown out by the relevant peoples themselves as incapable of ‘delivering the goods’ most needed by them.

The recent US presidential election campaign speeches were, for the most part, bereft of any substantive content. As a result, it’s difficult to predict as to the specific directions in which US foreign policy would evolve in the days ahead.

However, while a less pluralistic and ethnically accommodative US could be expected under Trump, a more inward looking foreign policy could very well be on the cards as well. A future Trump administration could see a lesser need to be committed to the Ukraine, for instance, and is likely to pursue more of an isolationist foreign policy which could see a gradual friction build-up between the US and its Western allies. Consequently, the cause of democratic development worldwide could suffer.

However, during one of her closing election addresses Presidential contender Kamala Harris left the world with a nugget of wisdom or two which would need to be treasured by policy planners and governments worldwide. She said, among other things, that one’s opponent should not necessarily be seen as one’s enemy. The latter should be spoken to in a most constructive fashion at the same table and be seen as having something essential to contribute towards nation-building.

The above is a stateswoman like pronouncement. If the international community is desirous of ushering a more peaceful world, Harris’ words would need to be dwelt on and consistently acted on. They come at a time when inhumanity internationally is more the norm rather than the exception.

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Amazing scene in Mexico…

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All the contestants, vying for the title of Miss Universe 2024, are having an awesome time in the city of Mexico. Sri Lanka is represented by Melloney Dassanayaka and she is doing great in the scene over there, according to reports coming my way. Says Melloney: “I’m having an amazing time in Mexico City, and meeting up with these beautiful ladies is incredible.”

She went on to say that she is super grateful for her incredible roommate, Miss Universe Canada! “She’s kind, funny, caring, and a true sweetheart who made this long pageant month, away from family, so much brighter.

“With her talent as a TV host, and her amazing spirit, I couldn’t have asked for a better companion on this journey. “Huge thanks to Miss Universe @missuniverse for connecting me with all these beautiful souls!”

Plenty of smiles for the cameraman

Melloney has also come in for a lot of praise on social media, with many wishing her ‘good luck’, as well as describing her as…

* Sooo beautiful

* Awww she is cute

* So pretty. Good luck

* Wow! She deserves the crown

The beautiful ladies, in the city of Mexico, are now busy rehearsing and getting themselves fine-tuned for the grand finale, scheduled for next Saturday, 16th November.

By the way, the four top beauty pageants in the world, for women, are (1) Miss Universe, (2) Miss World, (3) Miss Earth, and (4) Miss International.

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Importance of monitoring and follow-up action

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by Chandrasena Maliyadde

I have worked with all the Executive Presidents, except President Gotabaya Rajapaksa, in different capacities during my tenure in the public service and even afterwards. The way they managed or rather mis-managed the economy was different from one to the other. The late President Ranasinghe Premadasa’s management style was unique, flawless and foolproof. He monitored and followed up each and every decision he made.

We used to keep notepads and pens beside our land phones. Mobile phones were not freely available at the time. The phone could ring any time after 4.00 am. The President would direct us to attend to a particular matter. By 10.00 am a second call would come from him, inquiring about progress.

With this system of monitoring and follow up he was able to establish 200 garment factories in the rural countryside, implement the first-ever government sponsored poverty alleviation programme, Janasaviya, one million Housing Programme, Gam Udawa Programme and the Rural Road Rehabilitation Programme within a period as short as four years.

The aforesaid anecdote will serve to show the importance of monitoring and follow-up.

During the past six weeks or so, President Anura Kumara Dissanayake (AKD) has held meetings with all key Ministries and several other organizations and outlined his government’s plans and expectations. He gave directives related to Agriculture, Education, Power and Energy, Rural Development, Public Service, Exports, Tourism, Industry, Business and Enterprises. the President has underscored the urgency of accelerating and swift implementation of development projects. My intention is to examine how much these decisions have been followed up and translated into action. Considering the limitation of space, I decided to select one area to illustrate this i.e. the devastating flood and the havoc it brought a few days back.

On 14 Oct., the President held a meeting with officials to discuss the flood situation and the measures to be taken. The meeting was attended by the Secretaries to the President and Ministries of Finance, Defence and Disaster Management, Director General of Disaster Management Division, Disaster Management Centre National Building Research Organization and Meteorological Department and Senior Assistant Secretary of the National Disaster Relief Service Centre.

The President has emphasized, at this meeting, the need for a specific and sustainable programme to address the recurring flood situation in the country. He noted that frequent flooding requires long-term solutions for effective control.

Since then three weeks have elapsed; Rain has ceased; Flood victims are returning to their homes; No news on the emphasis on specific and sustainable programmes. Maybe it has to be reemphasized when the next disaster strikes. Until then there is no urgency.

Why is a Specific Sustainable Programme important?

Sri Lanka is a blessed island surrounded by Indian Ocean water but, is punished by water – lack of it, as well as abundance of it. “Water is a gift of nature and its management is man’s (of course woman’s as well) responsibility”.

The recent floods, landslides and the inclement weather brought havoc. Occurrence of heavy rainfall, floods and long droughts increased significantly over the recent years. Sri Lanka is being positioned among the top 10 countries at risk of extreme weather events by the Global Climate Risk Index. Floods are common and widespread among the most frequent weather-related disasters in Sri Lanka. Popular and common belief that disasters are natural is misleading.  Change of the weather is natural. But the disaster occurs when the weather changes intersects with human activities.

The United Nations Office for Disaster Risk Reduction (UNDRR) emphasizes that human actions, such as deforestation, urbanization and inadequate infrastructure, worsen the impacts of events like floods, earthquakes and storms. Building in flood-prone areas and settling communities close to rivers and on mountain slopes increases the vulnerability to floods, transforming into a devastating disaster. Inadequate building norms, marginalisation of people and poor choices on land-use planning make natural disasters worse. Change of weather is a given but the disaster that follows can be avoided.

‘Climate Change’ has come to the top of the Agenda on international platforms. Human Activity is the Cause of Increased Greenhouse Gas Concentrations. Over the last century, burning of fossil fuels, like coal and oil (Sri Lanka is notorious for this), has increased the concentration of atmospheric carbon dioxide (CO2). Taken together, these miserable and sometimes deadly effects are what have come to be known as climate change. Human activity is the primary driver.

World Bank 2018, South Asia’s Hotspots: The Impact of Temperature and Precipitation Changes on Living Standards. South Asia Development Matters has estimated that 87 % of Sri Lanka’s population lives in moderate or severe hotspots for disasters. Nearly half of Sri Lanka’s population lacks disaster preparedness, a key vulnerability factor aggravated by accelerating climate risks.

All the above findings point to the fact that disasters are not free from human intervention. Then disaster management arguably requires human intervention, too. We human beings, that include the agencies responsible for disaster handling, need to prepare a specific and sustainable programme to address the recurring disasters and to minimize the damage caused by them.

It was not reported that any of the agencies present at the meeting with the President held on the 14th has commented or qualified the President’s emphasis for a specific sustainable programme. This does not mean that nothing has happened in the past or no institutional and regulatory arrangements are in place. Sri Lanka is abundant in the solutions and technologies and legal and institutional network required addressing disaster management.

The government introduced the Sri Lanka Disaster Management Act in 2005. The Act provides the legal foundation and strategic directions and proposes an institutional structure and coordination mechanism from national to local levels. A National Council for Disaster Management (NCDM), a high-level inter-ministerial body chaired by the President and a Disaster Management Centre (DMC), was established. Subsequently a separate Ministry for Disaster Management was established.

The National Disaster Management Policy 2013, National Disaster Management Plan (NDMC) 2013- 2017, and National Emergency Operation Plan (NEOP) 2017 have been developed in accordance with the SLDM Act. Several other policies and plans, such as National Climate Change Adaptation Policy and the Plan, Water Conservation policy, Local Government Policy, Flood Protection Ordinance, National Land Use Policy, National Physical Plan and Policy and several sector-specific policies also contribute to Disaster Risk Management (DRM) in the country.

Integrated Water Resources Development: The Way Forward for Sri Lanka to tackle the Climate Crisis-UNDP  04 October 2023 suggests “In moving forward, Sri Lanka requires a two-track approach. First is to invest in our infrastructure. As this requires more funding and time, in parallel, integrated water resource management should be promoted, tapping into Sri Lanka’s 4,000-year-old cascade systems.”

The question is how, when and who would prepare the programme envisaged by the President, follow it up and monitor the progress?

There is already a National Disaster Management Plan (NDMP) for 2022-2030 prepared in 2022 running into over 200 pages with 8 Chapters, 17 Annexures and 13 Figures. This plan guides all Ministries, Departments, Statutory bodies, officials of sub-national administrations (provincial Ministries and district divisional and local government); relevant officers and personnel from Governmental and UN Agencies, INGOs Non-Governmental organizations; civil-society organizations, private sector, and professional organizations in Sri Lanka.

NDMP would throw a lot of lights in preparation of the programme envisaged by the President. Only drawback is “The NDMP aims to set the 2030 strategic direction for Disaster Risk Management in the country, in line with the national development vision of the Government, “Vistas of Prosperity and Splendor”.

A senior officer once told me “Chandre, when you prepare a report don’t worry too much about the content. But, make sure you have the picture of the President or the Minister on the front cover”. Following that saner advice one can replace “Vistas of Prosperity and Splendor” with “A Rich Country-A Beautiful Life”.

There are two other plans (perhaps more) already prepared. One is the ‘National Drought Plan for Sri Lanka’ by the Ministry of Environment in September 2020; the other is the National Emergency Operation Plan (NEOP) formulated by the Disaster Management Centre in 2017.

The President has made decisions; issued directives; plans, policies, agencies, legal and administrative arrangements are in place. I believe that someone with command, clout and the will to organize an inter/multi-disciplinary/agency committee a). To peruse all relevant documents, reports and plans already in place; b). To set a time target and c). To assign the responsibilities to identified agencies/personnel. The Committee would meet from time to time and monitor the progress and provide assistance and instructions to resolve issues that arise during the implementation stage and follow up.

Sri Lanka has rich experience in such arrangements. I remember Secretaries such as Mr. Paskaralingam, Dr. Wickarma Weerasooria, who were known as super secretaries, have revived “Secretaries Committee’ to monitor the progress of directives and decisions made and follow up by resolving issues that arose in implementation. Dr. Lloyd Fernando, as the DG National Planning, facilitated and serviced the Committee. Mr. Dharmasiri Peiris a luminary in the public service, as the Secretary Ministry of Agriculture established a Committee consisting of players at both the centre and the Provincial level to ensure the Agriculture value chain is working smoothly. H. M. G. S. Palihakkara, the most illustrious Foreign Affairs Secretary, established an inter-ministerial Committee to follow up the developments in all the Ministries for the benefit of Sri Lankan Missions abroad as well as the respective Ministries.

This kind of hands-on experience and the experiments would be useful in establishing a mechanism for monitoring and follow up of directives and decisions made by the President.

Monitoring and follow-ups provide concrete evidence of outcomes.

(The writer is former Secretary to the Ministry of Plan Implementation. He can be reached on chandra.maliyadde@gmail.com)

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