In December 2021, the Sri Lankan government announced that they would contain informal remittance channels as the country struggles financially. Instead, they are promoting that money sent in the country should be transferred through formal banking channels.
Due to the pandemic, Sri Lanka went down further in debt as its economy shrank by 3.6 percent in 2020. By 2022, the country must make about USD 4.5 billion to pay for their debt and interest payments, including USD 500 million for international bond maturity in January 2022.
While facing debt, Sri Lanka’s sources of income and foreign exchange, such as tourism and remittances, have accelerated decline since 2020. For example, tourism slumped from USD 4.3 billion in 2018 to USD 92.5 million in September 2021. The same is true in remittances, from USD 5.1 billion to USD 4.5 billion since September 30, 2020, a 9.3 percent decrease.
These decreases have contributed to the downgrade sovereign ratings of Sri Lanka, making their reserves go down to only USD 2.3 billion as of October 31, 2021.
Due to the continuous trade deficit, debt, and limited foreign exchange, in early September 2021, the Sri Lankan rupee has weakened sharply as the central bank unofficially set the exchange rate 157 to 160 LKR to 1 CAD.
This unofficial exchange rate has made it more alluring and seemed practical for migrant workers to remit money via the informal “hawala”( system (refers to transferring money without actually moving it to the country you want to send it to), which offers 180 to 190 rupees for 1 CAD. This scheme allows the families of migrant workers to earn 20 to 30 more rupees compared to remittances sent through formal channels. Because the Sri Lankan government wants a crackdown on informal remittance channels, using the hawala system in sending more than LKR 200,000 worth of money could lead the government to monitor your account, or worse, freeze it. To avoid this inconvenience, it is best to follow the direction of the government and the Central Bank of Sri Lanka (CBSL) by sending money through their authorized remittance options.
The government announced uplift the country’s economy and restore the robustness of its remittances while they still wait for its tourism to regain its momentum. Early this December, they will offer an incentive for inward workers remittances if these are paid through Licensed banks and other internationally accepted formal channels converted into Sri Lankan rupees from December 1 to 31 of 2021.
Under the “Incentive Scheme on Inward Worker’s Remittances,” the CBSL already pays a 2 rupees incentive. But now, 8 more rupees (10 in total for 1 USD sent) will be added to that incentive. Thus, for every 1 CAD you send via a formal channel to Sri Lanka that converts your money to LKR, your receiver will receive up to 7 rupees (0.062 CAD) more.
When the country’s remittances go high, it earns more, and the power of LKR against CAD becomes more robust, making LKR have more purchasing power than it is right now. Sri Lanka is experiencing shortages in food and non-food products, including sugar, wheat flour, milk powder, cooking gas, and cement. Once the economy regains power, the country can import these and other products to improve its economy and export products further.
Data shows that Sri Lanka’s import partners are its neighbouring countries of India, Iran, Singapore and China. Products such as petroleum, food, textile, machinery, and transportation equipment are major products they import from their partners.
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