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  Remittances are a meaningful source of external finance for emerging economies, as it has the potential to increase consumption and investments, as well as contribute to the stability of recipient economies.

Remittances are a meaningful source of external finance for emerging economies, as it has the potential to increase consumption and investments, as well as contribute to the stability of recipient economies. In war-struck Sri Lanka, remittances are a crucial factor in the country’s economic development, where they are usually larger and less volatile than foreign direct investments, portfolio flows and official development assistance. Sri Lanka’s weak financial structure however, has hindered the productive utilization of remittances in the country.  As the global financial crisis impacts foreign employment, the government must not only provide incentives for the inflow of remittances, but also seek to reform its financial institutions, otherwise, it will find itself in a perilous state.


In 2007 remittances sent to Sri Lanka totaled around $2,502 million, a figure much larger than the country’s earnings from exports, foreign aid, tourism and other capital inflows. Last year, remittances accounted for more than double the earnings of tea exports, one of the country’s main industries.  The total earnings from all agricultural exports were less than 60% of the total earnings from remittances, and tourism only amounted to 15% of remittance’s inflows. Foreign aids received by Sri Lanka totaled $277 million, a mere 11% of the amount of remittances, while portfolio investments and FDI were meager compared to the money sent back to the country by foreign workers.


While foreign aid, loans and FDI in the past 25 years have been volatile due to Sri lanka’s ongoing civil war, remittances have remained stable.  In fact, workers’ remittances to Sri Lanka are the highest in South Asia with figures doubling in the past 5 years, an estimated migrant population of 1.6 million and an annual outflow of 200,000 Sri Lankan workers. Remittance’s inflows are expected to reach $3 billion in 2009, addressing 70 % of the country’s trade deficit.


The large inflow of remittances are essential to Sri Lanka’s balancing of debt and are necessary to mitigate macroeconomic shocks caused by the ongoing civil war and natural disasters such as the 2004 tsunami.  Remittances may enhance the country’s creditworthiness and promote access to international capital markets. Remittances also have the potential to improve bilateral relations between Sri Lanka and the countries hosting Sri Lankan migrant workers. Furthermore, in Sri Lanka, remittances provide a lifeline to the poor population and if administered correctly, can result in increased investments and infrastructure development.


Sri Lanka’s dependence on remittances has made the country extremely vulnerable to the instability of the global economy. The impacts of the global financial crisis will be deeply felt in Sri Lanka’s economy, as it slashes jobs in several countries where Sri Lankan migrants are employed. For instance, shrinking oil prices will drastically affect remittance inflows, as it severely affects Middle Eastern countries where 90% of Sri Lanka’s total migrant force is employed. Construction industries and real state businesses in the area have already been affected by the crisis, threating the jobs of tens of thousands of Sri Lankans. In Dubai alone, around 30,000 Sri Lankans working in the construction industry are struggling to maintain their jobs. There has already been a 15-20% demand drop for female domestic workers in the Middle East. Female domestic workers make up for 60% of all Sri Lankan migrant work force in the area.


The decrease in remittances would create serious repercussions in the Sri Lankan economy, as one quarter of the entire population are dependent on this income. It would also pose serious threats to the country’s balance of payments, resulting in a large deficit and severely hurting foreign exchange reserves and the exchange rate. Moreover, with prices of main commodities such as rubber and tea experiencing rapid plunges, remittances are likely to remain the lifeblood of the country’s economy.


The Sri Lankan government, along with many other Asian emerging economies, has acknowledged the importance of remittances in national development and have thus created several incentives to improve the inflow of money sent by migrant workers into the country.  In 2007, the Sri Lankan government created the foreign employment ministry aimed at improving migrant working conditions in foreign countries and dealing with migrant worker affairs. Moreover, the government has introduced incentives to facilitate foreign employment, and has aimed to provide pre-departure loans.


In light of the impacts of the global financial crisis on remittance rates, the Sri Lankan government now seeks to give further incentives to expatriate citizens.  Authorities plan to lower taxes and increase interest rates, as well as offering a “bonus interest”  provided by commercial banks to the those who hold foreign currency accounts in order to increase the interest income.


However, while the government seeks to increase incentives for remittance inflows, the current formal infrastructure of micro-finance institutions, postal system and banking institutions, that provide the network for remittances flows, are not being capitalized. The lack of access availability and technology, combined with high commission rates,  have resulted in a growing number of remittances being channeled through informal dealers, who scarcely keep records of transactions. The growing numbers of informal networks have posed serious challenges to the development growth in Sri Lanka, as they maximize risks, hinder small scale investments and reduce the balance of payments benefits from the government’s foreign exchange reserves.


Structural reform in Sri Lanka’s formal infrastructure through improved technology and outreach is essential for long-term development, specially in a time of crisis. Improved technology such as credit and debit cards, ATM machines and e-banking, will moderate the largely cash dominated economy. It will also improve remittance flows, help migrants manage their savings, and decrease their economic risks,  awhile also increasing the volume of account-to-account transactions. Increased outreach would allow a higher number of people to access formal networks, particularly in rural areas where most remittances are received.


Increased outreach of micro-financing institutions, for instance,  will prove to be crucial in the country’s development growth as these institutions have the capacity to provide investment guidance to remittance recipients. Micro-financing institutions could encourage recipients to invest a portion of their remittance inflow and provide them with enhanced ability to leverage funds. Moreover, micro-financing institutions can utilize remittances to leverage more funds, allowing a greater scope of lending operations.


Evidently,  remittances remain crucial to Sri Lanka’s economic growth and development. Recent government incentives for foreign workers during the global financial crisis will not be sufficient to maximize the potential of remittance flows. A structural reform in the nation’s formal infrastructure through outreach and technology, will increase the levels of remittances transferred through formal networks, which will provide the population with a wider range of financial services. This will result in a decrease of economic risks, enhanced investments, growing lending operations, and increased government benefits; all essential to an overall economic growth that is particularly needed in a time of crisis.


Source: www.AsiaEcon.org

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Source: www.asiaecon.org |

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