The comparatively slower growth in Sri Lanka’s consistently largest foreign exchange earner, worker remittances in 2015 till to-date is a major concern given the fact that other predominant revenue streams, such as exports, tourism and Foreign Direct Investments (FDI) have also not performed to expectations, analysts cautioned last week. They say that if the current trend continued, Sri Lanka would be under severe fiscal pressure owing to the lack of proper revenue mechanisms to match the gap between current expenditure and revenue.
According to latest statistics, remittances for the first seven months of the year grew by a mere 1.6% to US$4.032 billion from US$ 3.966 billion remitted last year whilst export earnings for the first six months witnessed a marginal decline of 0.6% to US$ 5.4 billion. On the other hand, earnings from tourism during the first seven months have however recorded a healthy growth of 16.8% growth to US$ 1.37 billion.
“A key reason for the reduction in remittances could be due to the slump in oil prices which affected many of the Middle Eastern countries where the majority of Sri Lankan workers are employed. If you look at UAE, which is our third largest market in terms of departures, you will see a contraction in their recruitment market,” Senior Analyst, Frontier Research, Shiran Fernando told The Nation Gain.
According to the Central Bank statistics, around 55% (US$ 3.8 billion) of the total US$ 7 billion of workers remittances remitted last year came from the Middle East.
Meanwhile, the Indian media last week reported the remittances to India by Non Resident Indians (NRI) had increased by 25% recently due to the devaluation of the Chinese Yuan, which weakened the rupee, leading to attractive exchange rates in the UAE.
Explaining the situation, Deputy Governor, Central Bank, Dr. P. N. Weerasinghe told The Nation Gain that in the case of India, its currency weakened along with the Yuan depreciation, resulting in higher remittances to that country.
“Sri Lanka also depreciated the rupee from Rs. 130 to Rs. 134. Therefore, we also would see a slight increase of about four to five percent increase in remittances,” he said.
In the wake of the current fiscal pressure, the new Government is expected to soon present its tax bills announced in January to Parliament so that they would help cushion the revenue deficit and finance the populist measures introduced. Among the proposals is the much-debated Super Gain tax of 25% to be imposed on corporates which had earned profits of over Rs. 2 billion during 2013-14. In addition, a Rs. 1 million Mansion Tax will be imposed on houses valued at Rs. 150 million and over or 10,000 square feet area, and which have been built after April 1, 2000.
“If they are not implemented, then the Government would have to borrow more. You’ve had all these current expenditure increase this year which is not matched by additional revenue. So that shortfall has to be financed and could add more borrowing pressure domestically,” Fernando added.
The Central Bank last week said that gross official reserves, which stood at US$ 7.5 billion at end June 2015, are estimated to have decreased to US $6.8 billion by end July 2015 whilst the Sri Lankan rupee has depreciated by 2.3% to Rs. 134.30 against the US dollar so far during the year.