The Pacific Islands may not feel the full brunt of the global financial crisis until perhaps the end of the first quarter of this year. The world over, Christmas and year-end parties—which are far more simple affairs than they have been in recent years—are already being held in a somber mood among fears that many colleagues may not be back in the office when business reopens in the new year after the holiday period.
In fact, many companies are using these parties ahead of the holiday season to convey the grim news to their employees that they will either not be required to come back until things improve or that their jobs are going to be different with less pay when they return to work.
This scenario is bound to hit Pacific Islands economies in two of their biggest revenue earning streams—tourism and remittances. In any case, the first quarter of any new year tends to be slow for the tourism industry as people go back to their jobs after the holiday with fewer tourists coming in. This year is likely to be worse with even fewer tourists turning up in the first quarter.
But as redundancies climb in the countries from where the Pacific Islands derive most of their remittance incomes—namely Australia, New Zealand, the United States and a few other western nations—the regular flow of remittances from those countries are sure to be affected progressively as the early months of this new year wear out. Some economists have surmised even a worse case scenario where there will be a growing number of islanders working on temporary work visas overseas who may lose their jobs, forcing them to head back to their countries, thereby putting greater pressure on their economies.
While this may sound like an extreme scenario, there is little doubt that it is a distinct possibility, given the bleak prognostications for the global economy in the near to medium terms.
In this backdrop, perhaps the best news to have hit the islands as 2008 came to a close is that at last there has been a significant cut in the fees that remittances—one of the biggest revenue channels for many Pacific Islands—have attracted over the past several years.
For most Pacific Islands, like many small developing countries around the world, remittances form a vital part of their economies. Over 40 percent of Tonga’s GDP, a quarter of Samoa’s and nearly seven percent of Fiji’s come from this single channel. For some smaller countries, it is the biggest single source of income.
Growing numbers of migrant workers and rising incomes have seen remittance volumes triple to the equivalent of US$425 million in the past 10 years.
But against widely accepted international best practice for fee levels of between one and five percent of the amount transferred, money transfer companies and financial institutions engaged in the business charge anything between 15 and 50 percent in the Pacific region, including New Zealand and Australia.
So even at an estimate at the lower end of the commission scale of 25 percent, the Pacific Islands were losing more than a whopping US$100 million a year to money transfer agencies and banking channels.
If one considers a higher average, that works out to more than a quarter of the income earned. Compared to what people from other western countries transferring to high remittance destinations (such as between the United States and Mexico) pay, this is believed to be almost US$40 million higher.
That is too high a fee for any service anywhere in the world and it would not be an exaggeration if one were to term it as daylight robbery.
Following a study of work-related migration in the Pacific Islands region over the past few years, the World Bank published a report in 2006 titled “At Home and Away: Expanding Job Opportunities for Pacific Islanders Through Labour Mobility” in which it had expressed concern at the high transfer fees that were putting undue financial strain on the small economies of the islands.
The World Bank worked proactively, coordinating the interaction between governments, banks and money transfer agencies and held a series of meetings across the region over the past two years. The tasks were far from simple.
There were several issues to be addressed before money transfer from New Zealand and Australia to the Pacific Islands could be made easier and cheaper: the financial sector needed to consider a range of alternative products that have proved to work well in similar environments in other parts of the world.
The islands’ apex banks needed to strengthen reporting and disclosure requirements in the interests of better transparency to both customers and other stakeholders.
Last month’s announcements that a new mechanism had been put in place to cut costs of money transfers must be welcomed from all quarters. The new transfer system would be based on the ATM technology and is believed to be aimed at slashing the costs of transfers to an average of around five percent of the amount transferred.
One bank that serves the Pacific Islands widely has already introduced the service and others are expected to follow suit. The costs have already come down significantly.
There have been reports that top money transfer agencies have also slashed their flat fees for money transfers between countries in the region by up to 20 percent already in response to this development. But for the scheme to succeed, Pacific Islands governments need to adequately educate their people on the details of the scheme and how it is best used. Perhaps, one slight deterrent is that ATMs have to be used in this system and the proliferation of ATMs is fairly low in the islands—particularly on smaller outer islands of some of the countries. The banks on their part will have to roll out more of these machines and local banks could well participate in scaling up the presence of ATMs in concert with the international banks already having a big presence there.
The World Bank needs to be commended for its efforts to coordinate this vast exercise and finally making it happen though it took a few years. Indeed, it has come at a time that couldn’t have been more opportune.