Cash from abroad: How foreign remittances play a part in Sri Lanka’s economic crisis and its recovery

Sri Lanka’s embattled president, Gotabaya Rajapaksa, has fled the country, leaving behind an economy in ruins.

Rajapaksa was due to step down on Wednesday, days after tens of thousands of Sri Lankans occupied his official residence in a stunning act of defiance, having reached their breaking point with fuel, food and medicine shortages in the country. Prime Minister Ranil Wickremesinghe, whose house was set on fire by protesters during the weekend uprising, also promised to resign, but he has yet to do so and remains in hiding.

Demonstrators accused Rajapaksa of corruption and economic mismanagement, as well as leading the island nation to essentially run out of money — specifically the foreign currency reserves it needs to make its debt payments and to import basic resources for its people.

For months, the government has been calling on Sri Lankan expatriates and overseas workers to transfer money from abroad through the country’s banking system.

Foreign bank remittances are a “key pillar” of the country’s foreign exchange reserves, according to the Central Bank of Sri Lanka, but a shift to informal means of sending money and a lack of trust in the government have contributed to a drastic drop in foreign remittances. Without more foreign cash in the nation’s coffers soon, the food, medicine and fuel shortages could go from bad to worse.

Persistent fuel shortages have already left people unable to travel to work or take their children to school, and there are daily power cuts. Food prices have increased an astronomical 80 per cent in June compared with a year earlier, and the United Nations has warned that the majority of Sri Lankans are skipping meals to make ends meet.

The president of the Sri Lankan Medical Association warned people to avoid getting ill or injured because the health-care system is in such a dire state.

“Sri Lanka is very much out of money. We don’t have any dollars,” said Chayu Damsinghe, an economist with Frontier Research based in Colombo, the country’s capital. “We need to fix that soon or things will continue to snowball.”

Damsinghe said an increase in overseas remittances would be a short-term fix to the financial crisis and would help the country manage until there are longer-term solutions for its woes.

“It will mean that fuel is available much more. It will mean that hospitals are able to function. It will mean that the risk of an absolute food shortage goes down massively,” he said.

How do remittances help Sri Lanka’s economy?

Money wired from abroad is often a financial lifeline to the people living in lower-wage countries, providing disposable income for food, housing or even supporting a business. Governments such as Sri Lanka’s benefit both from the additional cash flow and, in particular, the exchange of foreign money for local currency.

But overseas remittances sent to Sri Lankan banks have dropped off since last fall, when the Central Bank pegged the currency, the rupee, to the U.S. dollar at a rate of 200 to 203 rupees per dollar. Damsinghe said there was no rhyme or reason for the move, but it pushed people to turn to informal wire transfer services, where they could get a much better exchange rate.

In the first five months of this year, the Central Bank reported just $1.3 billion US in foreign remittances, compared with $2.8 billion US in the same period a year earlier. Two years ago, personal remittances from Sri Lankans abroad amounted to more than $7 billion US, according to data from the World Bank.

The government has tried clamping down on informal remittance services, offered incentives to use banks and eventually unpegged the rupee’s exchange rate to allow its value to depreciate against the dollar. It’s helped somewhat, but not enough. The amount of remittances recorded by the Central Bank increased in May, but it remains about 34 per cent less than a year earlier.

Answering the call for help in Canada

Sri Lankans living in Canada are answering the call to send money home, using the formal banking system to do so.

“There is a plea from the government to send money through banks, and I’ve been doing that,” said Nishadi Liyanage, who works as a sustainability reporting specialist for a Canadian mining company, noting she doesn’t get as good of an exchange rate and she’s had to increase the amount she sends because of rising inflation.

Liyanage, who’s been watching the turmoil unfold from Vancouver, said she feels like her home country just can’t catch a break and she sees people’s “happiness and optimism” dwindling away.

“We finished going through a war, and then as soon as we were hoping to reconcile and move on in life, this new tragedy is happening,” she said.

Her family, which she describes as middle income, is managing, but it’s getting more difficult. Because there has been very limited cooking fuel available, for example, Liyanage said her parents had to resort to using firewood to prepare food at one point. “It’s, like, way back to the Dark Ages for them.”

But there are also people in the expatriate community who are reluctant to answer the government’s calls for remittances.

Upali Obeyesekere is president of the Canada-Sri Lanka Business Council, which represents nearly 100 members with various businesses in Canada. He said remittances from the diaspora business community are “almost non-existent” because many people feel the government “has pretty much run the country down.”

“They don’t want to help until the present government isn’t in power,” he told CBC News, pointing to the “numerous allegations of bad governance and fraud” that Rajapaksa and his cabinet have faced.

The only way for things to improve, Obeyesekere said, is for the people of Sri Lanka to elect a new one.

Damsinghe, the economist, agreed that the government, under Rajapaksa at least, didn’t “command the trust” needed to carry out the “painful reforms” that may be required to rebuild the economy.

He said some people remitting money may not trust that the government is going to use the reserves wisely.

Sri Lanka’s parliament is due to elect a new president on June 20.

Campaign provides care packages

Sri Lanka had been seeking a bailout from the International Monetary Fund. In a statement on the weekend, the IMF said it hopes “for a resolution to the current situation” so talks can resume.

Harsha Kumara Navaratne, Sri Lanka’s high commissioner of Canada, told CBC News that his office has had “several discussions” with Global Affairs Canada about assistance. In a statement, Global Affairs Canada said it provided $50,000 in humanitarian assistance, through the International Federation of Red Cross and Red Crescent Societies, as an initial response to the crisis in May.

Liyanage, meanwhile, is doing what she can from Vancouver. When she saw the situation in Sri Lanka deteriorating in the spring, she organized a fundraising campaign to help offer some relief to families that are more vulnerable than hers.

Since April, the effort has raised more than $19,000 to provide care packages — including non-perishable food, soap and sanitary products — to more than 700 families. But she says she didn’t expect she would have to keep fundraising for so long.