Pacific Islands lose up to $US40m a year in costly money transfers

A report in Islands Business says that Pacific Islands remitters and their home economies are losing millions of dollars through the high cost of money transfers, according to an economic research funded by the World Bank.

New Zealand economics professor John Gibson, in studies funded by the World Bank, found that remitters to the Pacific Islands faced very high transfer fees compared to other parts of the world.

Gibson, who focused on New Zealand-Tongan remittances, said the transaction fees were about twice as expensive as transfers from the United States and Britain to a wide range of countries.

Gibson’s study found the most popular remittance methods such as a bank draft or Western Union money transfer incurred the highest cost. A typical transaction of NZ$200 would cost between 15-20%of that amount, he said.

But if remitters used less well-known methods, such as setting up New Zealand bank accounts with Islands ATMs or sending money through NGOs or churches, these would cost less than 5% of the typical sum.

Gibson said that if NZ$500 was sent to Tonga via an ATM account, it would cost between NZ$15 and NZ$20 on exchange rate losses, but it would cost approximately NZ$50 to send the same amount through a money exchange business such as Western Union because of higher fees and a less favourable exchange rate.

Gibson said this ten percentage point spread between the most popular and the cheapest remittance methods meant a potential loss for Tonga of equivalent to four percent of GDP.

Remittances comprise 39% of Tonga’s GDP, and across the Pacific they now total US$400 million a year.

Extrapolating the ten percentage point spread, Gibson said that avoidable transaction costs may total up to US$40 million a year.

Although Gibson focused on New Zealand-Tonga remittances, he noted that other academic research suggested transaction costs for remittances from Australia to Fiji, Samoa, Tonga and Vanuatu are at least as high.

This also appears to be the case for remittances from the United States to the Pacific.

It did not seem that this higher cost could be justified in terms of scale, Gibson said.

He looked at two other non-Pacific countries (Ghana and Mozambique) with scales of remittances similar to New Zealand-Tonga, with both African countries had substantially lower money transfer costs than the Pacific, he said.

Gibson said that finding lower-cost alternatives was very important to Pacific Islands countries because of the high proportion of their population that live overseas.

The importance of remittances can be expected to grow even further as Australia and New Zealand increasingly use Pacific workers to deal with seasonal labour shortages, he said.

Gibson said there were several solutions.

He said ATMs only cost about NZ$15,000 and banks might make greater use of them given the fees they would earn from remittance transactions.

Gibson also looked at a company run by a Tongan church, Meliemei Langi, which is open to people of any denomination. Its fees were very cheap—NZ$5 for amounts under NZ$1000 for example—and despite lacking the financial or technological resources of the large, multinational finance companies, was able to provide a fast, cheap and credible money transfer service.

Gibson said that greater competition in the money transfer sector could drive down the transaction costs to the benefit of remittance recipients and their countries.

But Gibson also suggested that a lack of information about the range of services and costs for sending remittances to the Pacific, meant that remitters and financial institutions were not aware of cheaper options.

That lack of information, along with remitters’ habits, had to change if Pacific nations want to seize up to US$40 million a year currently being lost on money transfer costs, Gibson said.

Report by The Mole and Islands Business