The percentage of Sri Lankans living in poverty doubled between 2021 and 2022, leaving a quarter of the population living on less than $3.65 per day. This followed an economic crisis allowed to manifest due to a depletion of foreign currency reserves. A string of misinformed economic decisions characterized the crisis, one of which led to a collapse in remittances to Sri Lanka. In July 2022, public disapproval culminated in riotous political protests leading to a change of leadership.

Sri Lanka is now rebuilding. The re-emergence of its vital tourism sector since the pandemic and an International Monetary Fund (IMF) bailout have each played a role. Moreover, remittance payments — money sent to the country by Sri Lankans living abroad — have increased by 46% in 2023, helping relieve poverty on the ground and providing much-needed foreign currency. 

The recovery of remittance payments has helped negate the worst impacts of the crisis on poverty levels in Sri Lanka. The money sent helps people make vital repairs on homes, pay off outstanding debts or buy some type of income source, like a vehicle. In addition, foreign currencies coming into the banking system have allowed the country to import basic necessities and meet IMF criteria for debt restructuring. 

The Sri Lankan Diaspora

Remittances have historically been a large source of income for Sri Lanka. Sri Lanka’s diaspora totals more than 2 million people and up to 3 million when you count their descendants. This is a large proportion of a country with a population of only 22 million.

Much of the diaspora are Sri Lankan Tamils, who fled to places like Canada, Europe and Australia to escape persecution during and after the 30-year civil war. Sri Lankans of all backgrounds, however, spend extended periods as guest workers in the Middle East, often with the sole intention of earning money to send home. More than 500,000 Sri Lankans currently live and work in Saudi Arabia, with another 250,000 in the UAE, according to UN statistics. With this steady flow of outward migration throughout the 21st century, total remittances to Sri Lanka rocketed from around $1 billion in 2000 to more than $7 billion in 2016.

Remittance Collapse in Early 2022

A sharp fall in remittances to Sri Lanka through official channels was partly responsible for the economic collapse in 2021. Persistent attempts by the government to peg its exchange rate to the U.S. dollar while pursuing expansionary fiscal policies elsewhere effectively devalued the Sri Lankan rupee. This prompted unofficial exchanges to offer around 20% more in exchange for foreign currency than the market rate. In short, workers sending remittances could get much better value for money via unofficial channels. 

The situation was so desperate that the Central Bank, at one point, threatened to freeze the bank accounts of the diaspora sending back funds via unofficial means. While remittances were finding a way through, they were not contributing to Sri Lanka’s foreign exchange reserves. This contributed to the fuel crisis, preventing Sri Lanka from importing crude oil. The problem also impacted the market for food and medicine, with inflation rates of more than 50%. 

Remittances Rebound Throughout 2023

Attempting to reverse Sri Lanka’s economic woes, several drastic actions were taken by governments in 2022. One of these was a sharp devaluation of the rupee in an attempt to attract remittance payments, which by this point had reached a 10-year low. In February 2022, the dollar had been worth around 200 rupees, but by February 2023, $1 bought 360 rupees. 

The devaluation served to close the gap that opened up between official and unofficial exchange rates. It also meant that remittances from abroad went further in Sri Lanka. The policy was effective, with the most recent figures showing that remittances to Sri Lanka coming through official channels went up to $517.4 million in October 2023, up 46% from $355.4 million a year earlier.

Recovery Through Remittances

To the relief of those battling poverty across Sri Lanka, all indicators show that the country is well on the way to recovery. Remittances to Sri Lanka have been key to stabilizing foreign currency reserves and providing a source of household income in the country. Going forward, they can even play a role in educating and upskilling younger generations amid a national brain drain. 

On this note, the government hopes to create economic conditions that will reduce the number of people seeking opportunities abroad, with 200,000 reported to be leaving each year. With outward migration of such magnitude, however, remittance payments are likely to continue to play a vital role in the economy. 

– Alex Finch
Photo: Wikimedia Commons