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Tuesday May 17th, 2022
Economy

More Sri Lankans switch to Hawala as money printing drive parallel exchange rates

ECONOMYNEXT – Sri Lankan migrant worker Sampath* is now determined to send his salary from Dubai to his family via hawala, a traditional net settlement system based that had facilitated trade for centuries.

“Last week I found out that my friends get 10 rupees extra for each dirham and I have been losing nearly 15,000 rupees monthly because I have been using the banks,” Sampath, who is now working at a restaurant near Emirates Tower in Dubai, told EconomyNext.

Sampath has been a migrant worker in the UAE since 2010 and he has always sent his salary through the banking system as he was concerned over the hawala intermediaries.

But early last month he found those intermediaries are Sri Lankans and many of his friends have been sending their foreign earnings through these intermediaries for years.

“I got 55 rupees for a dirham from my bank whereas my close friend got a rate of 65 rupees after sending through hawala,” the 38-year old migrant worker said while having his meal at a low cost Indian restaurant near the Emirates Tower metro station.

“I don’t understand this price difference, but I will also send my salary through hawala from next month onwards. I can compensate for the increased prices through the extra 15,000 I will get by sending through Hawala.”

Net Settlements

The higher parallel exchange rate emerged as the central bank limited convertibility to excess rupees printed to keep rates down and tightened exchange controls while trying to maintain a soft-pegged exchange rate of 200/203 to the US dollar.

The gap between official and parallel rates widened as banks rationed dollars to importers on top of exchange controls already in place amid a pick-up in private credit with printed money.

Hawala is a cross-border settlement system said to have started around the 8th century where inflows and outflows are net-settled against the balance of a broker instead of settling every transaction separately as it is done in electronic real time gross-settlement systems.

People who earn foreign currency give the amount of money that should be sent to their family to a hawala broker instead of sending through a foreign bank.

The hawala broker in turn calls the Sri Lankan counterpart and asks to pay the cash money in rupees equal to the foreign currency given by migrant workers.

Migrant workers’ families receive the money in cash in the local currency as quickly as in the formal banking channels.

The Sri Lankan hawala broker now has a ‘foreign reserve’ or a positive ‘net open position’ in his books placed with the Dubai broker, which can be used to import goods to the country, pay university fees, settle a foreign debt, or make any other payment, just as if dollars or dirham were exchanged at a commercial bank, and its treasury placed the funds short term in a Middle Eastern bank.

A person within Sri Lanka who cannot get enough dollars to remit out for imports or other purpose will go the Sri Lanka Hawala broker and give him the premium to pay his foreign counterparty.

Hawala brokers do not create money and transactions are made in existing rupees in the reserve money already in the country and cannot put pressure on the exchange rate, analysts say.

A positive NOP balance of a bank also does not create any pressure on the currency, unless it was re-financed with central bank window money.

Payments out through Hawala reduce the total dollar outflow demand on banks as just as the payments in reduced the inflows.

Premium Effect

As Hawala premiums went up and banks were barred from paying a higher rate to customers coming to cash dollar drafts, worker remittances through official channelsplunged.

In September 2021 official remittances fell by 50 percent to 353 million US dollars compared to the same month in 2020.

Many migrant workers in Dubai said the lower exchange rate given by Sri Lanka banks has forced them to switch to official channels

“I don’t mind losing 2-3 rupees by sending my salary in dirham to support the country,” an Abu Dhabi-based migrant worker told EconomyNext.

“But the gap is 10-11 rupees. If the local banks can give a realistic rate, I will consider sending money via banking channels.”

The central bank has said this week it will give 10 rupees more for dollars converted in December, in a new ‘official’ parallel exchange rate.

In the past, a 2-rupee incentive was given. However since banks only converted at 197.50 the incentive was not felt.

However, at 65 rupees a dirham a migrant’s family will get about 238 rupees for a US dollar via the Hawala system.

Sri Lanka’s central bank has allowed people to open up bank accounts in dollars in a move to encourage people to save in dollars so that they also can hedge against rupee depreciation (deposit dollarization).

However, the banks only return rupees to customers. And as money printing ratcheted up last year payments out were severely restricted and can only be paid to immediate family members of the account holders (such as children studying abroad) or if the holder travels abroad.

The Central Bank has already set up a new Foreign Remittance Facilitation Department.

Credibility of the peg

Exporters also do not want to convert dollars early expecting depreciation ahead.

The central bank has also tightened rules on exporters holding dollars, after printing money to keep rates down.

However the market is also adapting.

Ashan* is a small time exporter of food* products and he exports them to a Middle Eastern country where he visits frequently.

In October, he earned nearly 5,500 US dollars for his exports.

Instead of asking his buyer to remit the money to his Sri Lankan local account, he requested his foreign counterparty to keep the money with the buyer until he visits the foreign country.

“If I get the money to my bank account, I get a lesser amount. So when I go on foreign trip, I get the money in the foreign currency,” Ashan told EconomyNext.

“I am ready to use the formal banking channel if there is only a 2-3-rupee difference between the central bank rate and black market rate. But the difference is around 20 percent. Why should I lose the money?”

Ashan was unwilling to convert because he fears depreciation ahead, which is called a loss credibility of the peg.

With the money blocked in Dubai in a private foreign reserve, Ashan now has to use his savings or borrow from a local bank to buy goods for his next export shipment.

This should raise domestic interest rates, crowd out other private credit – perhaps to a house builder – and reduce imports.

However if money is printed to keep rates down, there will be no reduction in credit or imports to offset the money kept out of the country.

Exporters are incentivized to borrow domestically because rupee rates are low and the carrying cost of not converting is low.

Other are also coming up with innovations.

Another small importer said he is now unable to get any dollars because his local bank had told him they do not have enough to give.

“So I asked some of my friends in foreign countries to pay my import bill from outside the country and I pay in rupees to my friend’s family or whoever my friend asks to pay,” the importer told EconomyNext, asking not to be named fearing repercussions from the authorities.

“The rate is cheaper than the black market.

“I do this because there is no sizable quantity of dollars to buy legally. At the same time, I will have to close my business if I buy dollars from black market and use them for imports. The central bank’s dollar rate is 200 rupees. But a dollar is sold at around 240 rupees now in the unofficial market.”

Central Bank Governor NivardCabraal last week warned against Hawala and off market transactions.

“There are some clearing houses as well which indulge in this kind of clearing of foreign exchange receipts which occur in one part of the world and there is a mirror image of the transaction taking place here (Sri Lanka) as well,” he said on November 25.

“We are using laws as well as persuasive powers the central bank has with the banks to deal with that.”

This week in a twitter.com message this week he said bank accounts involved in settling unofficial remittances are being frozen.

Christmas Parallel

Also this week an official parallel exchange rate for expat workers was set up.

With foreign reserves depleting further, the central bank on Wednesday (01) decided to increase its incentive paid on inflow of each US dollar to 10 rupees from the existing 2.00 rupees in the month of December.

“The additional incentive provided by the CBSL (central bank of Sri Lanka) is expected to attract more workers’ remittances to the country through the formal banking channels, thereby improving the foreign currency liquidity in the domestic foreign exchange market,” the central bank said in a statement.

“At the same time, several measures are being taken by the CBSL and the law enforcement authorities to curtail informal fund transfer channels, which would, in turn, further encourage migrant workers to use formal channels to remit their hard-earned foreign exchange to the benefit of their dependents.”

The move will see migrant workers getting around 210 rupees compared to 240 rupees in the black market.

The latest incentive may also not be enough to convince those who receive around 240 rupees for dollars in the parallel market.

Analysts say the central bank will either have to raise rates, float the currency (fully deny convertibility) or do both to close the gap to re-start free conversion of exporter and remittances. (Dubai-Colombo/Dec03/2021)

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