Thus the task has primarily involved controlling the way that developments unfold, and in the Central Bank’s view the worst path would have been if the real exchange rate had been driven up by domestic inflation. We are familiar with such cycles from historical experience and neither businesses nor households benefited from them. The Central Bank’s approach was therefore to raise its policy interest rate, causing a corresponding increase in the nominal exchange rate, in an attempt to prevent the real exchange rate from rising in step with inflation. An easier monetary stance may lead to a lower nominal exchange rate in the short run, but not to a lower real exchange rate in the long run. Lower interest rates would eventually lead to more inflation and wage rises, which in the final analysis would probably move the real exchange rate to broadly the same level as if monetary policy had been kept tight from the outset. The chief difference would simply be a much higher rate of inflation when the inevitable exchange rate adjustment arrived as the aluminium-related investments came to an end. There is no question that the high real exchange rate has squeezed the export and traded goods sectors, but it was known that such difficulties would emerge when the investments peak, so it should not have come as a surprise.
Banks and financial institutions should be more innovative and make arrangements to collect/capture remittances from legal/illegal migrants at the field level and coordinate with the host country’s banking/financial institutions to transfer monies to remitter's home country speedily and at a reduced cost. Informal transfers largely take the form of cash. The absence of an efficient financial infrastructure at the remitter's end as well as receiver's end is also found to be a discouraging factor that contribute to the use of informal channels. In some destinations, there is no access to sophisticated infrastructure in the host countries for cross-border transfers. Migrant workers, therefore, depend heavily on informal systems. In this context, a global attempt should be made to facilitate cross-border remittance transfers as such transfers have a significant impact on the development of many nations. 2  BIS Review 3/2007  Part II - Importance of remittances in Sri Lanka's economy I now proceed to illustrate how dependent Sri Lanka is on worker remittances. Over the last couple of years, worker remittance has been the single largest inflow of foreign exchange after exports in Sri Lanka. Remittances have played a significant role in financing the widening trade deficit and maintaining balance of payment surpluses. During 2005, over 75% of the trade deficit was financed by worker remittances.