Discouraging the use of formal channels

Dr Satish Chand





 
Have you ever tried cashing in your foreign currency, say Australian dollars, at home? If so, then do you know the charges you incurred?
  I was shocked while doing the sums on two separate transactions that involved telegraphic transfers between Australia and Papua New Guinea.
  It is only now that I realised the hundreds of dollars I have lost on every occasion that I have sent money to colleagues, friends and family within the islands. And Fiji fares the best in these transmissions while PNG comes out last. Why this anomaly?
  Last Christmas I had to pay for research assistance to a dozen university students from PNG. They drew my attention to the penalties involved in cashing a bank draft sent in Australian dollars in Port Moresby. And I was equally shocked to discover that it had cost me a thousand Kina to transfer 10,000 Kina from Port Moresby to Canberra. The exchange rate margin charged is amongst the highest on the planet.
  The high fees charged for money-transfers to the Pacific Islands discourage the use of formal channels.
  Remittances now comprise an increasing share of household income in many islands-communities, thus this is an issue of public interest.
  High encashment fees
  On the first incident, I organised payment to my researchers via the University of New South Wales’ (UNSW) finance guidelines.
  Our finance office sent bank drafts to the dozen individuals who in turn took these, in excitement, for encashment to their banks. The excitement changed into disappointment soon afterwards.
  One bank simply refused to cash any bank draft less that AU$150. The remaining two quoted encashment fee of between 50 and 60 Kina per bank draft. These charges were punitive to the extent that we abandoned using the drafts.
  I have recalled the bank drafts and am now in the process of making alternate arrangements for payments. Fortunately for us, the National Research Institute, our partner institution in this research programme, is assisting us in facilitating payments. An ordinary household would not have such luxury. But this is not all.
  Large exchange
  rate margins
  The high encashment fee is made known to the recipients but not the exchange rate margins being applied. I had to calculate them myself. The table below gives the buy and sell rate for three currencies as advertised by a bank. These rates are similar across banks.
  The rates provided are for sell and buy rate from the local currency to Australian dollars. As an example, the second row and second column shows that one US dollar would fetch one dollar and six cents Australian at the ANZ Bank in Canberra, while you would need one dollar and eleven cents Australian if you bought the same US dollar from this same bank on the same day. This margin is not a surprise. Banks are not charities and they incur costs in facilitating this exchange.
  What is a reasonable margin? The trade in US dollars involves a margin of 3.8 cents for every US dollar traded. This figure is comparable to what is incurred on a similar transaction involving the New Zealand dollar and a percentage points less that the margin on the Fijian dollar.
  The margins on the remaining currencies are abnormally high. A Kina would fetch 38 Australian cents but you would need 43 cents Australian to buy the Kina back—a margin of five cents per Kina traded!
  Margins are calculated as the difference between buy and sell rate divided by the average of the two. The far left hand side column of Table 1 shows exchange rate margins for four Pacific islands currencies.
  The exchange rate margins for the PNG Kina, the Solomon Islands Dollar, the Samoan Tala and the Vanuatu Vatu at 12, 10, 11, and 9 percent, respectively. They are approximately double the margin charged on the Fiji dollar. Why should these margins be so high? And there is little escape from these same margins as they apply when one uses the ATMs around the region!
  My researchers from PNG would be paying twice when cashing their bank drafts in Port Moresby; first, in the fixed fee for the transaction, and second, in the high exchange rate margins.
  Why both of the above should be amongst the highest on the planet for PNG, Solomon Islands, Samoa and Vanuatu, and not for Fiji, remains a real puzzle to me. Banks (and regulators), please explain!