Remittances, the lifeblood of Sri Lanka’s economy

By the Economist

Remittances from abroad are the lifeblood of the economy. Without remittances the Sri Lankan economy would be in a perilous state. The balance of payments would be in serious difficulties, incurring a massive deficit that would have serious repercussions on the foreign exchange reserves and the exchange rate.

The amount of foreign exchange brought in by remittances is much larger than the earnings from many exports. The remittances last year exceeded the record earnings from tea. It is much higher than the earnings from tourism, foreign aid and other capital inflows. Even last year’s massive borrowings are of lesser magnitude. The importance of remittances to the economy can be measured by the fact that about 70 percent of the trade deficit incurred last year and for several years in the recent past have been offset by these remittances.

It is not foreign aid or foreign capital inflows that have been the significant factors that have transformed the huge deficit in the trade balance to a balance of payments surplus. It is the large inflows of remittances from around the world that has enabled us to import much more than we export. It is also very fortunate that while trade deficits have been increasing in the last several years, foreign remittances have also been increasing.

Last year’s remittances illustrate the huge significance of remittances to the economy. While tea exports reached a record level of US $ 1,025 million last year, the worker remittances were US$2502 million, almost two and a half times higher than the earnings from tea. When one also considers the fact that tea production has an import content of about 25 percent, the significance of remittances assumes a higher level. Total earnings from all agricultural exports were only US $1507 million, merely 60 percent of worker remittances.

Total industrial exports last year of US $5921 million though much higher than the amount of remittances had perhaps a lesser contribution as net earnings of foreign exchange were probably much lower. Considering the fact that most industrial exports have high import content, the net value of remittances is most likely higher than the net value of industrial exports.

For instance, if one assumes a very realistic average import content of over 50 percent the net value of industrial exports would be only slightly higher than the amount of remittances. In the case of the main industrial export, textiles and garments, last year’s value of exports at US$ 3341, though higher than the value of remittances, would have made a lesser contribution when their net foreign exchange value is taken into account.

Earnings from tourism were a mere US$ 385 million that was only 15 percent of the amount of remittances. However, it would be erroneous to consider these other export earnings as unimportant as they make several contributions to the economy through their backward linkages to several other sectors of the economy and contribute to economic growth and development.

Foreign aid to the country is insignificant in comparison with these remittances. Last year foreign grants amounted to only US$ 277 million, a mere 11 percent of the amount of remittances. Also the component of foreign aid is not as meets the eye as these aid commitments have built in clauses that leak out funds to the donor country in the form of consultancies to their nationals, purchase of machinery and equipment from the donor countries at higher prices. The inflow for portfolio investments was only a fraction of the amount of remittances. Other capital inflows in the form of foreign direct investment were only a small amount in comparison to the remittances.

Foreign remittances doubled in the last five years from Rs 136,475 million in 2003 to Rs. 276,728 million. This is somewhat misleading as the increase in rupee terms partly reflects the depreciation of the Rupee during this period as well. In terms of the US dollar, remittances increased from US$ 1414 to US $2502 million an increase of 77 percent. Remittances have been increasing significantly this year as well and are expected to reach a record level.

It is important to understand the significance of these inflows as well as to realise the reasons for the large amount of these remittances that are generally described as worker remittances from Middle Eastern countries.

This appellation is only partly correct and somewhat misleading as well. It is generally thought that these remittances are largely from Middle Eastern countries and from workers in these countries. This is somewhat of an exaggeration that depreciates the large amounts of remittances from other sources. For instance, last year 58 percent of remittances were from the Middle East and most of these would have been from workers, though some are from professionals, academics and even bankers working in these countries.

Also there are worker remittances from such countries as Singapore, Malaysia, the Republic of Korea and Hong Kong. These countries together contribute to about to 8.4 percent of the total remittances. On the other hand, as much as 25 percent of the remittances were from the European Union and other European countries. North America accounted for about 4.2 percent of the remittances and Australia for 1.3 percent. Therefore, while it is true that the majority of the remittances are from workers in the Middle East, workers from other countries and expatriates and professionals too account for a significant amount of remittances.

In fact the contributions from North America, the European Union countries and Eastern Europe are probably largely from Tamil refugees who send money to maintain their relatives. The large number of apartment blocks in the Wellawatte area that has changed the skyline in the area adds credence to this thesis. One may even suggest that some of these funds may also be channelled to terrorists.

Remittances from abroad have assumed a crucial significance in the balance of payments. Without the massive dose of remittances the country would be in serious difficulties.

Even the large amount of foreign borrowing last year of US$ 1290 is only a little more than half (51.5 percent) of the remittances. Other export earnings too are less significant than the inflow of remittances. These remittances are from many countries and regions but the most important source is the Middle Eastern countries. The growth of these remittances leads one to the view that they will continue to be an important source of balance of payments support in the future as well. In fact there is an emerging convention of considering remittances as export earnings.