More Sri Lankans switch to hawala as money printing drives 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 that has facilitated trade for centuries.

“Last week I found out that my friends were getting an extra 10 rupees for every dirham and I lost almost 15,000 rupees a month because I used the banks,” said Sampath, who now works in a restaurant near the Emirates Tower in Dubai. EconomyNext.

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

But early last month, he found out that these middlemen were Sri Lankans and that many of his friends had been sending their income overseas through these middlemen for years.

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

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

Net settlements

The higher parallel exchange rate came as the central bank limited convertibility to excess printed rupees to keep rates low and tightened exchange controls while trying to keep the exchange rate fixed at 200/203 to the US dollar. .

The gap between official and parallel rates widened as banks rationed dollars to importers on top of the exchange controls already in place as part of a resumption of private lending with printed money.

Hawala is a cross-border settlement system that is said to have started around the 8th century, where entries and exits are settled net against a broker’s balance instead of settling each transaction separately as is the case in electronic systems. real-time gross settlement.

People who earn foreign exchange donate the amount of money that should be sent to their family to a Hawala broker instead of going through a foreign bank.

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

Families of migrant workers receive cash in local currency as quickly as through formal banking channels.

The Sri Lankan Hawala broker now has a positive ‘foreign reserve’ or ‘net open position’ on their books placed with the Dubai broker, which can be used to import goods into the country, pay college fees, settle a charge. foreign debt or make any other payment, as if dollars or dirhams were exchanged in a commercial bank, and its treasury placed the short-term funds in a bank in the Middle East.

A person in Sri Lanka who cannot get enough dollars to send for imports or other purposes will go to the Sri Lanka hawala broker and give them the premium to pay their foreign counterpart.

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

Payments made through Hawala reduce the total demand for dollar outflow on banks just as payments made reduce inflows.

Premium effect

As Hawala’s premiums rose and banks were not allowed to pay a higher rate to customers who collected dollar drafts, workers’ remittances through official channels plummeted.

In September 2021, official remittances fell 50% to US $ 353 million from the same month in 2020.

Many migrant workers in Dubai said the lower exchange rate granted by Sri Lankan banks forced them to switch to official channels

“I don’t mind losing 2-3 rupees by sending my salary in dirhams 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 through the banking channels. “

The central bank said this week it would give 10 rupees more for dollars converted in December, in a new “official” parallel exchange rate.

In the past, an incentive of 2 rupees was offered. However, as the banks only converted at 197.50, the incentive was not felt.

However, at 65 rupees per dirham, a migrant family will receive approximately 238 rupees per US dollar through the Hawala system.

Sri Lanka’s central bank has allowed people to open dollar bank accounts in order to encourage people to save in dollars so that they can also hedge against the depreciation of the rupee (dollarization of deposits).

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

The Central Bank has already established a new department to facilitate foreign remittances.

Ankle credibility

Exporters also don’t want to convert dollars in anticipation of an anticipated depreciation.

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

However, the market is also adjusting.

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

In October, he earned almost US $ 5,500 for his exports.

Instead of asking his buyer to put the money into his local Sri Lankan account, he asked his foreign counterpart to keep the money with the buyer until he travels to the foreign country.

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

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

Ashan was unwilling to convert because he fears a downgrade ahead, which is called a loss of anchor credibility.

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

This is expected to raise domestic interest rates, crowd out other private credit – perhaps to a homebuilder – and cut imports.

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

Exporters have an incentive to borrow domestically because rupee rates are low and the cost of owning non-conversion is low.

Others also offer innovations.

Another small importer said he was now unable to get dollars because his local bank told him they didn’t have enough to give.

“So I have 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 asks my friend 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 am doing this because there is not a significant amount of dollars to buy legally. At the same time, I will have to shut down my business if I buy dollars on the black market and use them for imports. The central bank dollar rate is 200 rupees. But a dollar currently sells for around 240 rupees on the unofficial market. ”

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

“There are also clearing houses that engage in this type of foreign exchange earnings clearing that occurs in one part of the world and there is also a mirror image of the transaction taking place here (Sri Lanka),” he said. he said on November 25.

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

This week, in a twitter.com post this week, he said bank accounts involved in settling unofficial remittances were frozen.

Christmas parallel

Also this week, an official parallel exchange rate for expatriate workers was implemented.

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

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

“At the same time, several measures are being taken by CBSL and law enforcement authorities to restrict informal channels of remittance, which in turn would further encourage migrant workers to use formal channels. to return their hard-earned currency to the country. benefit of their beneficiaries.

The move will see migrant workers earning around 210 rupees against 240 rupees on the black market.

The latter incentive also might not be enough to convince those receiving around 240 rupees for dollars in the parallel market.

Analysts say the central bank will need to either hike rates, float the currency (deny convertibility altogether) or do both to close the gap in order to jump-start free exporters and remittances conversion. (Dubai-Colombo / Dec03 / 2021)