ranee jayamaha : moving from informal to formal in the provision of remittances speech by dr ranee jayamaha, deputy governor of the central bank of sri lanka, at the global payments week, sydney, 3 - 6 october 2006. * * * let me begin by thanking the world bank, imf and bis officials for giving me this opportunity to speak on the worker remittances in cross border payment flows. most of what has to be said on this topic has already been articulated by the previous speakers. let me therefore be very brief. i intend to make this presentation in three parts. part i deals with an overview of remittances. part ii elaborates the importance of remittances in the sri lankan economy and part iii discusses possible solutions to issues relating to remittances at macro and micro levels. part i – global overview in terms of magnitudes, worker remittance has become a significant component in foreign inflows and balance of payments in developing countries. the statistics presented here are largely estimates. according to the latest reporting, worldwide remittances during 2005 had been approximately us $ 250 bn and it is likely to increase further. in 2005, developing countries appear to have received us $ 167 bn from about 175 migrants. it is also estimated that around 500 mn of the world population is dependent on remittances. formal institutional channels it is important to highlight some key points on the formal institutional mechanism / channels of remittance flows. traditionally, the banks collected and disbursed remittances. now there are many agencies involved in the remittance industry, but banks continue to play a lead role. having realized the increasing volume of cross - border remittance flows and the importance of remittances in the world economy, the institutional channels have increased and they have begun to use technological innovations to speed up the delivery of remittances. remittance transfer services such as western union, eurogiro and moneygram are well - known for cross - border transfers. more recently, smart card companies and telephone companies have also begun remittance transfers with or without links with banks. these new agencies have helped to speed up remittance transfers and provide alternative delivery mechanisms, but remittance transfer prices remain at high levels. it is also noteworthy that governments as well as the formal financial institutions are keen to ensure that remittances are used effectively and prudently by the

framework plans to raise revenue to around 19 %, reduce the budget deficit to 5 % of gdp and national debt below 85 % of gdp by 2009. these measures are intended to provide more resources to the private sector and deepen the capital market. already the government has permitted foreign investments in treasury bonds. national insurance trust fund the budget 2007 also proposes to develop the insurance market in sri lanka by setting up a national insurance trust fund which will help to provide risk insurance to affected properties and developing the re - insurance market. while transferring the funds available under the civil riots and commotion fund, a mandatory cessation of 50 % of all re - insurance businesses to the national insurance trust fund is introduced. this too will help save part of the outflow of funds for re - insurance and enhance liquidity in the insurance market. support for build up of foreign reserves the budget has stipulated a minimum salary of rs 25, 000 or usd 250 for employment abroad requiring all employment agencies to comply with it. this proposal will enhance worker remittances into the country and help to finance the widening trade deficit and maintain a positive balance of payment position. the budget reiterates the need for permitting professionals to earn in foreign currency and retain such funds in foreign currency accounts within the country. the budget also allows expenditure incurred on acquiring international accreditation as a deductible expenditure from taxation. these measures are expected to enhance foreign currency earnings and further facilitate the management of foreign reserves. the down - side risks effective policy coordination is certainly the way forward as set out in the budget 2007 and it is interdependent on action by all policy - making authorities. if one or two policy areas lag behind, then the sustainability of achievements over the long term will become an issue. the monetary policy has to play its part to bring down inflationary expectations, while the investment policy has to attract fdis and other investment flows. the reserve management policy should attempt to enhance foreign reserves through increased worker remittances and other flows. pushing all these policy fronts to work within the open economic policy framework and keeping pace with each other is critical to the success of the medium term development plan. very close coordination is essential for it and it is certainly a challenge. at the same time, the fiscal policy should make all attempts to stick to its revenue and expenditure targets. any deviation would cause problems on the other policy measures, in particular the monetary policy and such a deviation may lead to change the direction and path ahead. if i