What are Remittance?


Remittances are financial or in-kind transfers sent by foreign workers to families and friends in the home country. These transfers are considered non-commercial and are crucial for development purposes of the home country, especially for developing countries. The recipient’s foreign exchange and the household income will be enhanced as an economic effect of the increased remittances. The IMF defines remittances as the total of both compensations of employees and personal transfers. However, costs such as transfer fees and the exchange rate margins have discouraged the migrants to use formal channels to direct remittances to the home country.

Trends in Sri Lanka

Image by Indi Samarajiva

Sri Lanka, as all other developing countries greatly rely on remittances and over the years remittances have acted as the highest source of foreign exchange income in Sri Lanka. On average remittances as a share of GDP was 8.3% for the period 2010-2018. Despite the fluctuations subjected to the value of the rupee against the dollar, there has been a continuous upward trend in remittances in recent past years.

From 2010 onwards the male composition of foreign employment has been greater than female participation highlighting the gender shift. It is also a reflection of the policy by Government to discourage migration of female domestic workers. This change in the gender composition of migrant labor affects the remittance income in the long term.

In addition, another trend that has changed is the migration of different types of occupational groups. There is a notable decrease in unskilled workers and housemaids that has a substantial impact in remittance inflow to Sri Lanka. It is also observable that there exists a trend in increasing the number of skilled workforce migration.


What drove Remittance Inflows in 2020?

Migrant workers
© Reuters

The Middle East corridor is the main channel of remittance inflow to Sri Lanka while the European Union corridor serves as the next highest channel. Over 200,000 Sri Lankans migrated for foreign employment in 2019 in which 85% moved to the Middle East. In 2019, workers’ remittances declined sharply by 4.3% to US$ 6.7 billion. It was predicted that 2020 figures will be even below the 2019 figures. The projections were confirmed true for the months of March and April 2020 as remittances had a steep decline due to the lockdowns seen globally. Furthermore, in Q2 of 2020, the remittance inflows were severely affected due to returning of migrant workers, wage cuts and job losses. However, this situation bounced back in May depicting a notable growth in remittances. Remittances accounted for the surge when people were released from restrictions on mobility to visit the banks. Another potential reason for the growth in remittances in 2020 was with the increased number of laid-off migrant workers in the Middle East, there was a transfer of their accumulated savings and terminal employments benefits, unlike other years.

In June and September 2020 remittances were recorded at US$ 702 and US$ 703 million respectively and despite the COVID-19 pandemic, these were two of the top four monthly remittances recorded since 2009. This incline in workers’ remittances contributed to subside the negative impacts of decreased tourist earnings. With the relaxation of the restrictions, the migrants tend to send the backed-up funds in addition to the regular amounts which boosted the remittances inflows in June 2020. Further, informal remittances were directed towards formal channels leading to an increase in official remittance balances. According to a study done by IPS, it was revealed that permanent migrants who had more secure jobs in the Western countries contributed to the increase in remittance balances of Sri Lanka during the pandemic.

However, since September, remittance inflows again showed a decline compared to the previous month but  ended 2020 strong with December recording the highest ever monthly inflow. This enabled the full year figure to reach US$ 7.1 billion in December 2020 which is a year-on-year growth of 5.8% and the highest since 2017. This pickup eased to reduce pressure on the external sector where 53% of the total import bill was covered by remittance by December 2020. On average remittances cover around 80% of the trade deficits over the past decades.

South Asian Region

South Asian Workers
Photo by Shubham Verma on Unsplash

Remittances were more essential during the pandemic for most of the South Asian Countries and income generated from remittances is higher in dollar terms than other sources of financial inflows. The less volatile nature of remittances compared to private flows makes it an ideal reliable financing source for a country. According to the World Bank, in 2019, India received US$ 83 billion remittances becoming the highest recipient in the world.] and Nepal was ranked third in the world in terms of remittance receipt as a share of GDP. 

Afghanistan Government data sources showed growth in remittances in 2020, however, other sources stated a 10% decrease. Bangladesh and Nepal showed the same behavior similar to Sri Lanka where remittances declined in the first half of 2020 and gradually recovered in the latter half. A temporary switch to formal channels, additional transfers and returning overseas workers influenced this recovery in Bangladesh. Whereas the policy changes that were made in September 2019 that were in favor of migrants to open bank accounts facilitated Nepal to grow remittance receipts.

According to the Reserve Bank of India, 3% remittance growth was noted in 2020, but it is lower compared to the records in 2019. Initiatives of the State Bank of Pakistan to encourage the use of formal channels were one of the main reasons for the improvement in remittance balances. Nevertheless, the increase recorded in the month of July was backed by the ‘Haj effect’. Due to the pandemic, the Haj visas were limited resulting in the Pakistan migrants remitting money to their home country that was saved for the pilgrimage to

Mecca. Bhutan also experienced a boost in remittances which was contributed by the savings of the returning migrants.

With the pandemic, many economies shifted their employment policies more in favor of domestic workers over foreign workers. Nonetheless, the economies should understand the vital role of remittances for country development and enhancement. The positive momentum in remittances has continued in 2021 with the first five months recording a 18.2% growth compared to the previous year. 

Author Name

Author Name

Economic Intelligence Unit of The Ceylon Chamber of Commerce