Analysis of motives and the impact of foreign remittance on financial development, poverty and income inequality: empirical evidence from Sri Lanka

Parahara Withanalage, Niroshani Anuruddika Kumari (2019) Analysis of motives and the impact of foreign remittance on financial development, poverty and income inequality: empirical evidence from Sri Lanka. PhD thesis, Victoria University.


Foreign remittance is the main external source of finance for Sri Lanka. It contributes immensely towards the country’s economy and makes up around 8 per cent of the GDP. However, there is a lack of study on foreign remittance in the Sri Lankan context, which hinders the potential of creating a comprehensive policy on remittance. Hence, this thesis has analysed the motives for foreign remittance and its determinants, the impact of foreign remittance on financial development, alongside its influence on poverty and income inequality in Sri Lanka. The objective of this research was to provide relevant information to the policy makers to guide them in enhancing the benefits to Sri Lanka from foreign remittance. The study used the autoregressive distributed lag (ARDL) and autoregressive (AR) models, Granger causality, impulse response analysis, variance decomposition and recursive estimation for analysing research data. At first, the motive for foreign remittance and its nature (static or dynamic) was examined to investigate the relevance of the prevalent notion that remittance motive is static in nature. Based on recursive estimation, the study found that remittance to Sri Lanka was dominated by altruistic motive until 1992 and by self-interest motive thereafter. Therefore, the findings disproved that the motive for remittance is static and confirmed its dynamic nature. This highlighted the need to assess the motive for foreign remittance at an individual country level and adjust migration and remittance policies accordingly since the motives keep changing over time and require continuous monitoring. The next stage in this study involved determining the key factors of foreign remittance to Sri Lanka by using factor analysis and ARDL model. Through the analysis, it was found that the per capita GDP and government stability are long-run determinants of remittance and have a positive impact on it. In addition, accountability and socio-economic status were identified as short-run determinants. The findings showed the importance and implications of push factors over pull factors to determine the inflow of remittance. It demonstrated that the Sri Lankan migrants, unlike altruistically driven migrants, are highly attentive to economic and political stability, and send more money when the economic and political conditions of the home country are favourable for investment. The undertaken research also examined the impact of foreign remittance on financial development in Sri Lanka using ARDL model. It used four proxies to represent financial development: money, deposits, credit and assets. The analysis revealed a significant impact of remittance on money and credit in Sri Lanka. Furthermore, it showed that the nexus between remittance and financial development supports a complementary hypothesis. This highlighted the likelihood of remittance to enhance the credit availability, promote investment and thereby enhance the economic growth of the country. Finally, the study examined the causal relationships between foreign remittance and poverty, and foreign remittance and income inequality in Sri Lanka with autoregressive model. The analysis showed that foreign remittance has a significant impact on moderate poverty reduction. Apart from the AR model, the Granger causality analysis verified the above-mentioned relationships between foreign remittance and poverty in Sri Lanka. However, the results of the study found no evidence to prove a significant impact or a causal relationship between foreign remittance and income inequality in Sri Lanka, unlike in some developing countries. All the findings from this research contribute to both the theoretical and the empirical literature. They provide relevant information that are invaluable for migration and remittance policy development, which can enable Sri Lanka to create an investment- friendly environment to attract more remittance by reducing the country’s financial risk and by enhancing its economic stability. In addition, since Sri Lankan employment migrants are motivated by self-interest the findings would help the financial institutions to customise their services to migrants, to further enhance their investment motive.

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Item type Thesis (PhD thesis)
Subjects Historical > FOR Classification > 1402 Applied Economics
Current > Division/Research > Institute for Sustainable Industries and Liveable Cities
Keywords foreign remittance; Sri Lanka; financial development; poverty; income inequality; autoregressive distributed lag model; autoregressive model; Granger causality; impulse response analysis; variance decomposition; recursive estimation
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