In December of 2020, amidst the throes of the Covid-19 pandemic, Sri Lanka posted its highest remittance earnings recorded within a month, at $ 812.7 million. This posting was achieved before the Central Bank of Sri Lanka (CBSL) issued an official banning of informal remittance channels such as hawala and undiyal, but nor had the Government introduced a formal remittance software application, such as LankaPay’s LankaRemit.
Even more notably, this posting predates the spike in migration outflows that occurred during the crisis Sri Lanka was to face in less than two years’ time.
By the third quarter of 2021, the Government announced a state of economic emergency with a falling currency exchange rate and rising inflation. With just $ 2.3 billion in foreign reserves, the Central Bank commenced printing currency to suppress the rate, despite the debt Sri Lanka had amassed and its likelihood of defaulting on meeting its debt obligations for the year.
A crackdown on informal channels of remittances was announced by the CBSL, threatening to freeze accounts with unexplained deposits as a means to redirect remittances through formal channels.
Reaching a point of no return in March 2022 with only $ 1.9 billion in its coffers, Sri Lanka declared that it was no longer able to meet its foreign debt obligations of $ 4 billion, nor its International Sovereign Bond (ISB) payment of $ 1 billion for the year.
As the Sri Lankan Rupee depreciated sharply between 2021 and 2022, the exchange rate which was unofficially pegged by the CBSL between Rs. 200 and Rs. 203 to a dollar was pushed to trade between Rs. 255 and Rs. 265 in informal markets, due to currency pressures that were driven by the widening trade deficit, dwindling foreign exchange inflows, and debt repayment concerns.
The disparity meant that migrants were able to remit more rupees for their dollars through informal channels such as hawala and undiyal.
Within two years, remittances would fall by 46.6% – from the $ 7103.9 million posted in 2020 to $ 3,789.5 million. Sri Lanka’s initially pegged (fixed) exchange rate that was meant to stabilise the currency was later abandoned as it could no longer defend the rupee’s value against the US Dollar due to low foreign reserves.
Behind the remittance growth
Remittances from migrant workers have since gained ground in being a key contributor to the economy.
The ‘National Policy and Action Plan on Migration for Employment Sri Lanka 2023-2027’ notes: “Workers’ remittances as a percentage of GDP, which averaged around 5.7% during the 1981-2000 period, increased to around 8% of GDP during the period from 2001-2020, reflecting the increased importance of workers’ remittances in relation to Sri Lanka’s GDP.”
Nonetheless, the poor numbers posted in 2022 were reversed as remittances began climbing in the next two years, growing by 42.3% by the end of 2024 from the numbers posted during the worst year of the crisis.
With promising signs of long-term recovery, Sri Lanka has since been buoyed by optimism over the new remittance numbers rolling in, so much so that the incumbent National People’s Power (NPP) Government has repeatedly claimed the recovery of remittance inflows as a show of confidence by Sri Lankan migrant workers in the new administration that was appointed under the banner of anti-corruption.
But how much of this recovery is truly due to Government confidence and how much is simply a result of more workers leaving the country and a post-crisis return to formal channels?
Popularity of informal channels
A study published by the Institute of Policy Studies (IPS) titled ‘Understanding Informal Remittances During a Crisis: Experience from Sri Lanka,’ authored by Dr. Bilesha Weeraratne, Thilini Bandara, and Thisuri Ekanayake in December 2024 found that remittance channels grew in popularity among migrant workers due to the cost disparity, transaction speed, lack of limitations on number of transactions, convenience, accessibility, and anonymity.
“During the economic downturn, trust in the regulatory framework diminished due to new policies, pushing workers towards informal channels,” the study stated. For ‘irregular migrants’ or those migrating undocumented, the study stated that the added benefit of anonymity in informal channels had shown to be advantageous.
According to labour migration researcher Anoji Ekanayake, hawala and undiyal as parallel exchange systems are typically popular among migrants of other countries and Sri Lankan refugees. “The undiyal system became popular among Sri Lankan migrants because the Government wasn’t using the correct exchange rate,” Ekanayake explained, referring to the artificially fixed exchange rate set by the CBSL.
“Before that, it was popular among migrants in other countries. It had been used by Sri Lankans who had migrated as refugees. I would say that it became popular among Sri Lankan migrants due to the crisis, because the exchange rate did not reflect the actual rate,” she said.
Verité Research Lead Economist Raj Prabu Rajakulendran said that the erosion of trust in formal remittance channels was not a matter of confusion, instead being a reflection of the times.
“People in general prefer to use formal channels to remit, since it is the safest and most legal means of doing it. What happened was that the exchange rate was held artificially. Otherwise, any sensible person would have remitted through formal channels instead of using informal channels,” he said.
Detailing the nature of the persons who had availed themselves of informal channels, Ekanayake too offered a slightly different interpretation from the IPS study of the type of migrants who used the channels.
She explained that most were in fact not undocumented migrants, nor unskilled, though legally unaware of its consequences. “The people who remitted using these methods typically relied on the banking system, were documented, and most were legally permitted to work. They had relied on the banking system during the Covid-19 pandemic, made online transfers, and had experience in connecting with banking institutions,” she said.
Explaining various parallel exchange systems Sri Lankans utilised to remit their currencies to Sri Lanka, she added: “Because of the exchange rate issue, they started asking their friends if they needed to send money to Sri Lanka through WhatsApp groups, alumni, friends, and other social groups back in Sri Lanka, and they would mutually agree upon an exchange rate higher than the one set by the banking system.”
The IPS study however states that informal systems like hawala flourished due to better rates, anonymity, and accessibility, particularly for low-skilled and irregular migrants. It notes that those with digital access or legal awareness continued using formal banking, while others, including high-skilled workers, explored alternatives like cryptocurrencies.
Further, it states that on top of the lack of legal awareness on the consequences of using informal channels, trust and confidence in unregulated systems minimised the ability for persons to perceive risks.
Impact of State efforts
In 2021, with the intention of facilitating workers’ remittances through the banking sector, the Central Bank established a new department named the Foreign Remittances Facilitation Department while also introducing a number of incentive schemes for workers remitting money through the banking sector.
To incorporate digital convenience into its efforts, LankaRemit was launched by LankaPay, a mobile application meant to facilitate the convenient transfer of remittances, with the involvement of Licensed Commercial Banks (LCBs).
Further, a temporary monetary incentive above the official exchange rate was provided for remittances converted into rupees while several other incentive schemes are in the pipeline to be introduced to promote workers’ remittances focusing on improved welfare of migrant workers and their families.
Adding to its incentives of using formal channels, Sri Lanka began offering higher exchange rates, providing additional duty-free allowances, permits to import electrical vehicles, and bank loans at concessionary interest rates.
Since its highest remittance earnings posted in December 2020, Sri Lanka has since recorded its second-highest monthly remittance inflows in March this year, with $ 693.3 million received through official channels.
The recent rebound in official remittance figures comes on the back of the CBSL’s efforts to dismantle parallel exchange rate systems and encourage formal transfers, which is finally gaining ground. However, according to experts, this ‘recovery’ may not be entirely driven by regulation.
“It took some time for things to settle down and for people to use the system; after things settled down they preferred this,” Ekanayake said, referring to the broader stability gained through the country treading its path through economic recovery.
“Some time ago there was a discussion on how we should help Sri Lanka, encouraging migrant workers to be cooperative,” she added, pointing to initiatives made by the Government to make awareness of the importance of remittances flowing through formal channels. “However, there is a likelihood that there are people who still use the undiyal system,” she stated.
“The lucrative nature of using informal channels is no longer valid, since the artificially held rate has been reversed and there is a very low cap,” Rajakulendran said, noting that it was no longer worth the risk of remitting through such channels.
“Even if formal channels now offer a less lucrative rate, it is likely that migrants will not use informal channels,” he added. The country has now reached a state of stability, posting a 5% growth.
In its ‘National Policy and Action Plan on Migration for Employment Sri Lanka 2023-2027,’ the previous Government detailed that migration was a key factor in Sri Lanka’s economic development, contributing to foreign remittances and addressing unemployment.
“The need for exploring new labour markets and entering into bilateral agreements with other advanced economies are imperative to reduce the exposure of Sri Lankan foreign remittances being sourced largely from one single region,” the plan stated.
The Government pursued a campaign of promoting labour migration since 2022, with migration reaching record highs of 311,056 persons leaving the country within the year, beating its previous peak recorded in 2014 with 300,703 recorded departures. More recently, Sri Lanka topped its highest departures again in 2024 with 312,836 departures, culminating in a record exodus of workers within the span of two years, which is unprecedented.
As monthly remittances still stagnate below pre-crisis averages, informal flows are likely to still be significant, though less visible. The CBSL’s crackdown on informal channels and exchange rate stabilisation have undoubtedly helped, but the IPS study highlights deeper challenges
Migrants prefer informal systems for legitimate reasons: cost, speed, and distrust in past policies. Unless formal channels address these gaps, reliance on hawala could persist. Enforcement alone isn’t enough. The study recommends reducing transfer costs, aligning exchange rates with markets, and simplifying KYC rules – measures only partially implemented so far.
“Banning informal channels did not result in much change. If the Government was using the correct exchange rate, there would have been an insignificant number of people using the system,” Ekanayake said, referring to the fact that due to the crisis, most informal remitters were likely to have had the convenience to deal with institutions, yet chose not to.
She also added that the banning of the systems too had been done informally, as there was likely no way of tracing a change or dip in use of these systems. “My personal opinion is that it was not very effective,” she said.
Govt. stance
To understand the Government’s view of what factors may have caused the revival of remittances, The Sunday Morning Business spoke to Deputy Minister of Labour Mahinda Jayasinghe, who stated that the increase in remittances was due to the confidence the NPP Government had instilled in the people.
“They have trust in the Government and we built that trust. Previously, they were reluctant to send money because they lacked confidence in the Government. They were forced to migrate due to the economic crisis caused by the previous Government, but within six months of our appointment, we have been gradually building this trust with them,” he stated, adding that the previous Government’s mishandling of funds was why migrants preferred to use informal channels to remit their earnings.
“Earlier they were reluctant to use formal channels due to the abuse of money by the previous Government and its culture of being irresponsible. People have now understood that we are carefully handling the economy and their money. Earlier, people used all sorts of ways to send money, but we are trying to gradually get them to send money through the legal channel,” he said.
Jayasinghe further stated that although remittances were on the rise, the Government’s ability to facilitate new jobs abroad would however take time. “We are looking to send skilled labourers instead of unskilled labourers, because skilled labourers remit higher sums. To do this will take time,” he said.