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Dwindling worker remittance inflow tightens foreign exchange market

Daily FT, Sri Lanka, 31 August 2021 - Reflecting the global economic setback caused by the COVID-19 pandemic, Sri Lanka’s worker remittances are on a declining trend since the beginning of this year. The domestic economic uncertainties, particularly with regard to foreign exchange market distortions, also seem to have contributed to the fall in inward remittances.

Worker remittances contribute one fourth of the country’s foreign exchange earnings, and they account for nearly 10% of GDP. Hence, the decline in worker remittances will exert immense pressures on the foreign exchange market, which is already hit by export stagnation, breakdown of the tourist industry and heavy foreign debt settlements. The remittance shortfall is likely to further weaken the rupee, given the scarcity of dollars in the market in the backdrop of historically low level of international reserves fallen to $ 2.8 billion by now.

Worker remittances down

Worker remittances recorded a marginal increase of 2.6% in the first half of this year, compared with last year. This was due to the lower base in 2020. The monthly inflow of remittances is down from a peak level of $ 813 million in December 2020 to $ 453 million in last June (Chart 1). 

The downward trend of remittances is rather alarming, since they have served as the lifeline in dealing with the balance of payments difficulties experienced during the past several decades. The average annual inflow of worker remittances amounted to $ 7 billion during the period 2016-2020, and it was sufficient to finance around 35% of the country’s import payments. This implies that the external payments deficit would have been much larger, if not for the inward remittances.



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