Remittances in the Pacific Islands: Challenges and Solutions

The importance of remittances is widely recognised, and awareness has become even more pronounced as a result of the COVID-19 pandemic. A number of global goals have been developed over the years to address the challenges facing remittances. These include Sustainable Development Goal (SDG) 10.c.¹ which targets a reduction in transaction costs of migrant remittances to less than 3 per cent by 2030 and elimination of remittance corridors with costs higher than 5 per cent (the global average was 6.75% in Q3 2020)².

Many Pacific Island Countries (PICs) are reliant on remittances as a source of income³. They help families cover their day-to-day costs and support investment in education, health and small businesses. They also represent a source of foreign exchange for governments. In 2019, remittances across the Pacific totalled USD 675 million, whereas in 2020 – when the coronavirus pandemic shook the world – remittances represented an even more critical lifeline.

The Pacific region hosts some of the most expensive remittance corridors, particularly for remote islands such as Vanuatu. Although the EU has long-standing relations with the Pacific, action to date has been largely limited between the two regions concerning remittances and associated areas⁴.

Credits: UNCDF

Challenges

A series of key challenges, in terms of utilising remittances for effective development in the region, is holding the Pacific back.

1. High remittance costs

Remittance costs to the Pacific are the second highest in the world, largely driven by cash-to-cash services and the limited uptake of digital options. The main reasons for such costs are high compliance tariffs for Money Transfers Operators (MTOs), poor digital infrastructure, limited financial literacy levels, the presence of exclusivity agreements and the relatively low remittance volumes. 

2. Lack of harmonised data on remittances in the Pacific and related areas

There is no consistent data on financial inclusion numbers, remittances by method or remittance flows for the smaller Pacific Islands. This makes it difficult to estimate the actual levels of financial literacy amongst the populations and the size of the markets. Moreover, reliable data is required in order to make comprehensive and effective changes to the remittance environment, as well as to promote cheaper and more efficient remittances.

3. De-risking is prominent in the region

De-risking is a global challenge, but one that is particularly affecting the Pacific⁵. Banks in New Zealand, Australia and the US have closed or withheld bank accounts from MTOs as they see the business as too risky. The Governor of the Reserve Bank of New Zealand has written to all the banks requesting they undertake a risk-based approach – not a blanket de-risk businesses. Furthermore, de-risking increases compliance costs for MTOs, which is then passed onto the customer in the form of fees.

4. Geographical remoteness – issues with connectivity and infrastructure

A unique challenge to the PIC remittances market is the geographical landscape. Having an efficient remittances environment requires connectivity, including reliable electricity and internet which many PIC outer islands do not have. In many cases, only one bank will be able to provide access to the entire population.

5. Limited financial inclusion

To begin with, there is a lack of financial inclusion across the Pacific communities. The lack of inclusion ranges from not having a bank account to not understanding how to use online services. This has resulted in an increase in informal remittances as Pacific Islanders are fearful of the formal system. Remittance receivers tend to rely on family and friends financially. There are over 15 different islands across the Pacific, all with their own language, which leads to difficulties in developing regional remittance initiatives.

6. Small population and diaspora sizes

PICs have small populations and even smaller diaspora sizes. This makes the region unattractive to many Remittance Service Providers (RSPs), simply because there will not be enough business. Moreover, serving the PICs is an expensive operation for RSPs, so whilst competition is required in the market to bring down costs, too much competition would not be effective due to a lack of payments to sustain MTOs.

Potential solutions

What solutions could be implemented in data collection, financial education and financial inclusion, stakeholder engagement and funding? What activities or roles could be undertaken by the European international cooperation actors – including the European Commission (EC) and the EU Member States (MS) – and what benefits would they bring?

Data collection

The EC and EU MS could support the development of a regional, harmonized approach to data reporting. While each PIC collects its own remittances data, the type and quality varies. In addition, the EC could support in building further capacity in central banks to produce standardized data collection methods.

The above would result in the following benefits:

• Reliable and accurate data on remittance volumes and financial inclusion to inform policies
• Comparable data across the Pacific Islands
• Data for monitoring and evaluation

Financial education and financial inclusion

Among the activities that could be implemented by the EC is the support of the launching of a second Pacific Financial Inclusion Programme (PFIP). The EC was a key funder in the first instalment of the programme from 2008 to 2020. The financial inclusion programme achieved great success in increasing financial literacy among Pacific Islanders. In addition, the programme could be further developed to include more projects specifically focusing on remittances. These two activities would bring:

• An increase in the uptake of digital financial services
• More understanding of savings and investments
• A reduction in informal remittance channels

Stakeholder engagement

The EU can take a supporting role in stakeholder engagement in the Pacific region by providing examples of best practices from work in other regions, particularly in Africa, on areas such as:

• Harmonisation of multiple international bodies/donors in the approach to remittances in the region
• Promotion of the benefits of remittances

Can you think of any other solutions that could be implemented in data collection, financial education and financial inclusion, stakeholder engagement and funding?

Have you been involved in interventions on remittances and want to share the experience with us?⁶

Please leave a message and join the discussion.

Regional Remittance Initiatives: 

1. All PICs have National Financial Inclusion Strategies which include incorporating financial literacy into product design and services provided by RSPs.
2. The Pacific Financial Inclusion Programme (PFIP), 2008-2020, has provided financial education to over two million people in the Pacific Islands through funding 44 projects with financial service providers.
3. The World Bank is developing an Automated Transfer System (ATS) in the Pacific, focusing on Samoa, Fiji, the Solomon Islands and Vanuatu.
4. There has been development of a regional ‘Know Your Customer’ facility by the Asian Development Bank and the Central Bank of Samoa.

1 For more information about the Sustainable Development Goal 10, see here.

2 A Remittance Corridor can be defined as the outflow of funds from one country to another.

3 Remittances account for a significant proportion of GDP for a number of PICs, including: 40% of Tonga’s and at least 10% for all PICs.

4 The EU and PIC relationship is set out in the 2012 joint communication entitled ‘Towards a renewed EU-Pacific Development Partnership’. This builds on the framework of the Cotonou Agreement with the ACP countries.

5 De-risking is a phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the Financial Action Task Force (FATF)’s risk-based approach. The reasons for de-risking include, inter alia, concerns about profitability, prudential requirements, anxiety after the global financial crisis, or reputational risk. For more, read here.

6 If interested in the region of Sub-Saharan Africa, you may also read the discussion Supporting remittance flows to Sub-Saharan Africa in response to COVID-19.