Remittances quandary

Tuesday, 19 April 2016 00:01 - - {{hitsCtrl.values.hits}}

SRI LANKA is amongst the most vulnerable countries in the Asia Pacific region to slowing remittances from the Middle East, warns a global ratings company, pointing out the country could have to make a drastic shift in its earnings to bridge the reduction.

Moody’s in a recent report on the impact of slowing remittances pointed out that it could not only exacerbate the country’s fragile external pressures but also would have a bearing on headline growth as the households that depend on remittances temper consumption as inflows fall.

Sri Lanka’s remittance income growth reversed in 2015, edging down by 0.5% to $6.9 billion. This accounted for 9% of GDP and made up close to 100% of reserves based on 2014 data. According to Moody’s, lower current account receipts and therefore lower reserves will have a particularly large effect on the credit quality of those sovereigns that are already operating with a low reserve buffer. Sri Lanka stands out in this regard because it runs higher current account deficits already relative to the other three South Asian countries, namely Pakistan, Bangladesh and India.

Even though remittances have recovered to 8% growth in the first two months of 2016 over the same period last year, Sri Lanka faces vulnerability in keeping sustainable development goals intact because of its dependency on remittances. Different studies over the years have shown that remittances contribute significantly to social development. In Sri Lanka it is usually women who belong to the most financially vulnerable segments of society that seek employment in the Gulf. The money they send back is critical to educating and feeding their children, building houses and even accumulating savings. Without this mainstay, many families will topple into poverty.

This leaves Sri Lanka stuck between a rock and a hard place. Migrant workers to the Middle East send more money than their more educated counterparts who seek employment in professions in developed countries, usually with their families in tow. Moreover, encouraging professionals to migrate is not just long term but will undermine the local economy by feeding into the brain drain. Finding alternative jobs for migrant workers in the Gulf is extremely difficult as most of them possess very low skill levels that cannot be transferred into different industries.

A plausible solution is to attract foreign investment and encourage exports so that Sri Lanka has different options for foreign reserves. To this end the Government has been directing its key focus, working hard to roll back red tape and encourage investors to look at Sri Lanka favourably. Marginal increases in oil prices and speculation the world will continue to rely on oil long term could give Sri Lanka some much needed breathing space.

The remittances quandary is a tough one as it reaches to the most vulnerable of people and is a cornerstone of the economy. Having exported its people for decades, the country now has the challenge of keeping its people and exporting products.