Grey market suspected for recent weakness in remittance inflows

Sri Lanka’s remittance incomes have been growing every month for over a year consecutively from their year earlier levels before showing some cracks starting from June and continuing through July, a trend which is suspected due to the re-emergence of grey market activities, which offer a higher rate for foreign exchange. 

Sri Lankan migrants sent back US$ 453 million in earnings in July 2021, down 35.4 percent from the same month last year narrowing the seven month increase in the cumulative remittance incomes to just 2.6 percent or US$ 3,778 million, fresh data from the Central Bank showed.  

Until June when such incomes declined by 16.4 percent to US$ 478.4 million, Sri Lanka had a thirteen months streak of continuous increase in worker remittances beginning from May last year. 

While the migrants increased their share of earnings repatriation to help their families affected by the pandemic, the widespread use of official banking channels in the absence of informal channels were cited as the main reason behind the continuous ascent in remittance incomes. 

However, the informal channels appear to be again becoming the preferred option by money receivers as they change them at a higher rate than what the banks offer, driving much of the remittance income into the grey market. 

“Last year, there was a very discernible increase in remittance flows. And this year also in the first few months, there was a gradual increase in the remittance volumes. But over the last couple of months there was a distinct decline in the amount of remittances, compared from month-over-month and year-over-year,” said the Central Bank Governor, Prof. W.D. Lakshman. 

“So, we suspect this is not a genuine decline in remittances into Sri Lanka, but think that this may be a change in the form in which the remittances are sent to family members in Sri Lanka,” he added. 

Worker remittances remain the only bright spot in Sri Lanka’s external sector battered harshly by the pandemic as it decimated the tourism industry, which has the capacity to generate over US$ 4.5 billion in foreign exchange. 

However, the lingering pandemic has delayed the returning of the tourism industry in full form, forcing the country to impose self restraints on the amount of foreign currency that can be spent overseas amid honouring large foreign debt settlements, giving rise to foreign exchange rationing and a grey market, both within the banking sector and outside. 

Grey markets and informal money exchanges are a perennial issue in Sri Lanka, which allow foreign inflows, not limited to remittances, to bypass the formal channels.

 
In 2020, remittance income rose by 5.8 percent to reach a four-year high of US$ 7.1 billion and the authorities pin hopes on US$ 7.5 billion in incomes this year.