In May 2022, Sri Lanka's foreign exchange reserves were a mere $50 million, not enough to cover even one month's imports. However, by June this year, the country's forex reserves surged to an impressive $3.72 billion.
In contrast, Bangladesh's forex reserves plummeted from over $34 billion in May 2022 to less than $25 billion this June, dipping further below $23 billion in August.
Bangladesh struggled to halt the decline in remittance inflows, which hit a 41-month low in September of the same year, according to the latest central bank data released yesterday.
The situation in Sri Lanka has seen a remarkable turnaround, to the extent that the country fully repaid the $250 million loan it had taken from Bangladesh under a currency swap deal in 2020. These disparate figures highlight how Sri Lanka effectively managed its dwindling forex reserves, preventing the country from defaulting on international payments, while Bangladesh's external finance conditions deteriorated.
What led to these contrasting outcomes?
From Sri Lanka's perspective, several factors contributed to its recovery. The country took various initiatives, including securing a swap facility from the People's Bank of China equivalent to approximately $1.4 billion. Additionally, Sri Lanka encouraged its expatriates to remit their funds through formal channels, actively promoting this practice, apart from encouraging tourism, another key source of the island nation's forex income, which slid during Covid years.
Authorities in Sri Lanka also encouraged migration and implemented measures over the past six months to boost both the outflow of people and the inflow of remittances. Data from the Immigration Department reveals that in the first half of 2022, the government issued around 396,600 passports, surpassing the total issued in the entire 2021. Also, Sri Lanka reduced the minimum age for women to work overseas to 21 and eliminated the requirement for female migrant domestic workers to submit a family background report.
At one point, there was even a proposal to offer an incentive of an additional 2 rupees per dollar for remittances that were converted, which further encouraged remittance inflows. These concerted efforts led to Sri Lanka's remarkable economic turnaround from the brink of collapse in 2022.
Its official remittances rose 98% to cross $407 million in February 2023. The high growth continued, reaching monthly earnings close to $500 million and the first six months' earnings were up by 75% from a year-ago period.
But the authorities are still not happy; they want a further $150 million monthly remittances to reach pre-crisis level before 2020. The foreign employment ministry has continued its efforts to make Sri Lanka a high-skill export hub. The number of people leaving home for overseas jobs almost doubled last year than the previous year, mostly to the Middle East.
Nearly 5 lakh Sri Lankans are already in Saudi Arabia, where the country wants to send more skilled people. Sri Lanka also invited more travellers from the Arabian kingdom, offering them family holiday hospitality.
The initiatives gave dividends, with host countries tapping skills of the crisis-ridden country and asking for higher migrant intakes. Saudi Arabia announced to raise its skill worker intake ceiling to 4 lakh from earlier 1.8 lakh, while Malaysia welcomed more Sri Lankan migrants and universities in Japan and South Korea offered incentives for youth talents.
The pandemic-induced crisis drove many high-skilled professionals out of the country as well, with government medical officers' association reporting roughly 500 doctors leaving the country alone in 2022 for high-paid overseas jobs, many without even notifying the authorities. The eroding local currency helped their families get more money at home, which was another reason that encouraged high-skilled professionals to race for overseas jobs.
These moves, on top of the government's steps to facilitate overseas migration for both low-skilled and high-skilled people, resulted in more inflow of foreign workers' remittance which lifted the country's economy from a near-collapsed state.
Remittance through informal channels has long been a major woe for Sri Lanka, and the authorities were more serious about it during the pandemic when the island nation's economy plunged to its historic low from falling exports and tourists.
In 2021, Sri Lankan authorities enhanced its crackdown on informal remittance inflow through hawla (also known as hundi) to double its reserve to over $4.5 billion in 2022 to meet foreign repayment obligation.
To shore up its shrinking reserves, Sri Lanka took a range of measures including bilateral swaps, government-to-government loans and the securitisation of remittances—an initiative suggested by Asian Development Bank back in 2016 to encourage remittance through banks.
Meanwhile, the central bank governor resigned in Sri Lanka and the incumbent governor took office with more vigorous initiatives to bring more remittance and build reserves. Authorities took drastic efforts to boost tourism and halt sliding value of local currency.
What we did and didn't do
A 2.5% cash incentive is one of the steps Bangladesh took to encourage remittance inflow, which is not reflecting the huge growth in the number of people going abroad for work.
Analysts attributed this decline primarily to the intervention in controlling exchange rates, rather than allowing market forces to determine them.
A record 11.37 lakh Bangladeshi workers went abroad in the last fiscal year ending in June, 15% more than those who left the country a year before. But the remittance inflow grew by a modest 2.75%.
Migration experts and bankers have identified unabated hundi operations, unfavourable exchange rate and higher percentage of unskilled workers for slow growth in inward remittance.
Hundi operators offer higher rates for dollar than official rates, surpassing the cash incentives. While Sri Lanka authorities allow their overseas exchange houses to offer competitive rates for remittance, our banks and exchange houses are asked not to exceed the official ceiling. So hundi operations continued to attract more remittance, leading to declines in inward remittance through official channels.
Though the exchange rate for remittance has been marginally raised, it is still lower than what is offered in the informal market. Some bankers suggest that the central bank should allow commercial banks to purchase dollars at higher rates to bridge the gap, at least Tk6 or more per dollar.
Overseas recruiting agents also feel the urgency of raising job and language skills to help migrants earn more from abroad. Bangladeshi migrants earn much less compared to those from the Philippines, India, Pakistan, and Sri Lanka. According to International Organization of Migration statistics, for every $100 earned by a Bangladeshi, $200 is earned by an Indian worker and $300 by a Sri Lankan. Lack of skills makes the difference and Bangladesh needs to upskill its workforce, offer them a higher rate for dollar and make their overseas trips and transactions easier to see growth in overseas jobs is truly reflected in the amount they send home.