June 14, 2022

Pacific Island Countries - How much can remittances help?

Melissa Erisen

The Pacific region is known for its paradisiac islands, ranging from Solomon Islands located West, to  Fiji, Vanuatu, Samoa, Tuvalu... Most of these Pacific island countries are in a phase of development, as they undergo deep economic and social changes, such as population growth, migration, and urbanisation (Source).

In these environments, remittances play an important role in supporting long-run development. For many inhabitants of the region, emigration is a necessity. For instance, emigrants from Fiji were estimated to exceed 222,000 in mid-2019, and were almost all located in Australia, New-Zealand, Canada and the US (Source). A large majority of migrants from the region relocate in New Zealand and Australia, the two large developed economies of the region.

Remittances to the Pacific islands, especially Fiji, Samoa and Tonga, have boomed since the 1990s, reaching respectively US$340 million, US$155 million and US $190 million in 2020. These flows are continuously supporting local economies, becoming a source of foreign exchange together with tourism, and improving development outcomes such as schooling.

In the last year, it became clear that climate change is a pressing issue, and the Pacific countries, surrounded by the ocean, are the first in line. Ocean temperatures are rising. On land, storms and floods routinely trigger death, destruction and displacement (Source). While advanced solutions will have to be implemented by governments globally to slow down the progression of climate change, remittances can at least help rebuild infrastructures and economies after natural disasters. It is now clear that not enough is being done to counter the ongoing changes in climate, which means that remittances will be essential to support the small Pacific economies. For instance, last January, Tongans working abroad sent more money to support their loved ones after the eruption of a volcano, just 50 kilometres from Tonga’s capital Nuku’alofa (Source).

Unfortunately, remittance corridors to Pacific islands remain very expensive. Cash remittances, which are known to be more expensive than digital ones, are preferred by most people in the region. Surveys show that 72% of Fijians and 92% of Samoans receive money from abroad through conventional money transfer operators. In Tonga, approximately 83% of the individuals who receive international remittances use only Western Union’s services (Source), which is among the most expensive. It is estimated that, if a Tongan family received remittances through a fintech instead, they could save up to $960 per year (Source). The region remains heavily dependent on cash remittances, as limited accessibility, awareness and financial literacy hinder users from using digital remittance channels. Many challenges remain to be overcome to make remittances cheaper in the Pacific Island Countries.

In Australia, the largest remittance sender in the region, the newly elected government has shown its commitment to keeping tight relations with the Pacific countries. Plans for example include the introduction of family-related migration pathways to Australia from the Pacific (Source), which implies that remittances to Pacific island countries will keep increasing in the years to come.

It is in the hands of the Australian government to improve the remittance landscape in a way to reduce fees, for example by banning the practice of exclusivity contracts, which limit competition between transfer operators, and reduce incentives to keep prices transparent. Another widespread issue in Australia is bank de-risking: many remittance service providers are losing their bank accounts, which creates additional operational difficulties and major costs.

While major challenges persist, there are reasons to believe in a brighter future for remittances in the Pacific region: the Australian authorities’ commitment to act upon the issues of bank de-risking and exclusivity contracts can substantially improve the market. Moreover, digital channels are growing in popularity among remitters, suggesting that more people are accessing cheaper remittance services. At the same time, mobile money is becoming widely available in the region, which will also contribute to driving prices down.

To conclude, the Pacific remittance landscape remains full of frictions that are to be solved by governments, remittance businesses, and consumers themselves throughout the years. Allowing remittances to flow smoothly into Pacific Island Countries should be taken as a policy priority, as it will matter to a great extent when it comes to supporting these countries to develop in times where natural disasters are continuously striking the region.