Wednesday Dec 11, 2024
Wednesday Dec 11, 2024
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Central Bank Governor Ajith Nivard Cabraal
The Central Bank is determined to crackdown on illegal transfers to restore depleted foreign exchange reserves and has expressed confidence over multiple initiatives rolled out to rebound worker remittances.
“We are using both the carrot and stick approach. The carrot is what we offer additionally to the migrant workers to encourage them to use the formal channels to remit funds, whilst the stick is the prosecution of those indulging in these illegal methods,” Central Bank Governor Ajith Nivard Cabraal told journalists on Saturday.
He said the Central Bank had observed a loss of $ 300 million from official channels in the past month that could be due to transactions of a dubious nature, including from the drug mafia, which has led to workers’ remittances in the first 10 months of 2021 declining by 14% to $ 4.9 billion from the corresponding period last year. Inflows in October halved to $ 317 million (lowest in recent years) from $ 630.7 million a year ago. The forecast for 2021 inflows is to be lower than last year’s $ 7.1 billion. The Central Bank forecast foreign reserves to increase to $ 3.5 billion by year-end, but it dropped by 16% to $ 2.27 billion in October – the lowest since July 2009.
“The $ 300 million is equivalent to Rs. 72 billion. To distribute such a large sum, who can afford it in the grey market? Who’s that person? From where is that money being generated? We are observing all the channels, sectors and accounts that these funds are flowing through the system. We have certain suspicions, and all the banks are cooperating. It can be identified in many ways.”
The Governor eagerly requested migrant workers and their dependents to “only use” organised formal channels for remittances, cautioning both senders and receivers, who might otherwise unnecessarily be prosecuted for supporting the illegal activities of the ‘drug trade’.
He said the Financial Intelligence Unit (FIU) of the Central Bank with the help of the Police were tracking those partaking in illegal practices.
Sri Lanka recorded over $ 500 million per month consecutively from June 2020 till April 2021, but workers’ remittances have moderated in recent months. The large exchange rate anomaly between official and unofficial channels until October, which drove foreign exchange earners to use unofficial channels, and the dwindling number of departures, were cited by Cabraal as major contributing factors for the decline.
In the first 11 months, 96,000 people have left for foreign employment and the Central Bank predicts at least another 20,000-25,000 people will go within this month, making a total l of around 120,000 people migrating for the entirety of 2021.
“This is half of what we have had in a normal year,” Cabraal said, noting that around 230,000 people migrate for employment annually.
With the easing of travel restrictions post-vaccination drive, a higher number were queuing up to take up overseas jobs. He said they have had discussions with the Department of Immigration and Emigration to clear the backlog in issuing passports as well, while allowing banks to setup kiosks to facilitate them to open accounts to remit their earnings.
“This exercise is not only to increase the value of our remittances, but to end money laundering activities. We believe there has been a substantial part which has gone into the grey and illegal money transfer markets, which has been indulging in money laundering. This could be the cause for the low foreign remittances, despite the incentive scheme which was introduced from December 2020.”
To boost inflow of migrant worker remittances via official channels, the Central Bank on 1 December announced a time-bound incentive scheme offering Rs. 10 per dollar remitted and converted. The move was under the prevailing ‘Incentive Scheme on Inward Workers’ Remittances’ launched in December last year. Previously, Rs. 2 per dollar was offered. The offer of an Rs. 8 increase expires on 31 December 2021.
The Central Bank Governor believes the initiative will support to re-channel all foreign inflows to official channels. “The grey market was created to entice foreign remittances with attractive rates, and we have not gone hard enough on those people who indulged in those systems. Hence, we witnessed the dual effect of it at present.”
Despite the fact that prosecution will take time, Cabraal said they had already started to investigate suspicious transactions and to freeze some of the accounts as immediate measures.
“The prosecution will take a little time to hit the news, but we have started the process. We will continue to do it to ensure that it will not happen in future again. People are being tracked down now and they are going to be prosecuted. I can assure you of it,” the Governor said, though refusing to reveal the number of accounts frozen already.
He said the Central Bank was very serious about money laundering and that it was thoroughly investigating all suspicious transactions. “To ensure that those transactions are either disposed of because there is no substance in it or, if there is substance in it, we will go to the extent of prosecution.”
He expressed confidence that these people engaged in illegal practices would be brought before the law, which would be a milestone achievement of the entire initiative rolled out by the Central Bank.
Although when pointed out that people opted for methods such as Hawala and Undial for its attractive rate against the formal channels amidst the backdrop of soaring inflation, Cabraal firmly said: “We don’t want illegal channels to operate.”
He also said that the rupee had already depreciated. “We don’t want the rupee to depreciate any further. We don’t want to get into an auction sale with Hawala people.”
Hawala (sometimes referred to as underground banking) is a way to transmit money without any currency actually moving. Hawala networks have been used since ancient times, and today are widely found among expats sending remittances home. It provides anonymity in its transactions, as official records are not kept and the source of money that is transferred cannot be traced.
Cabraal vehemently refuted media reports that workers were unaware of how to transfer money through formal channels.
“These people who send money via illegal methods, act as if they don’t know. But they opt for the incentive by taking the risk factor involved in those transactions, when there is a formal banking system to do so.”
In November, the Central Bank established a new department named the Foreign Remittances Facilitation Department (FRFD) to facilitate and streamline workers’ remittance inflows to the country, under the provisions of the Monetary Law Act No. 58 of 1949.
Cabraal said workers’ remittances had been a key pillar of Sri Lanka’s foreign currency earnings that had nearly 100% of domestic value addition, providing a substantial cushion for external sector resilience of the country.
Come January 2022, the Government will introduce special incentives for migrant workers to reward those who opt to remit earnings via the banking system.
“We are in discussions with the Labour Department to fast-track the introduction of the pension scheme and an insurance scheme. In addition, we will enhance the duty-free concessions offered to the migrant workers and introduce credit facilities to their dependents in Sri Lanka,” Cabraal added.
The Governor also commended the extensive efforts and initiatives taken by the entire banking system to support this national strategy.
Workers’ remittances have covered around 80% of the annual trade deficit over the past two decades and strengthening remittances inflows to the country brings several socio-economic benefits, including the smooth supply of forex inflows to the formal banking system and the reduction of income and regional disparities.
“There are no issues when incentives are extended to foreign investors and exporters. It is high time we also serve and recognise the significant contribution of our migrant workers.”
