Efficient remittance services for development in the Pacific

Abstract

Capital inflows to the Pacific islands from aid, foreign investment and remittances are an important source of development finance. Remittances are the fastest growing; they now total US$ 400 million per year and can be expected to grow even further as labour mobility is used to deal with seasonal labour shortages in Australia and New Zealand and limited job opportunities in the Pacific. The transaction costs of sending remittances to the Pacific islands are very high for the most widely used methods. This paper examines the New Zealand- Tonga remittance corridor, where typical transactions involve costs in the order of 15 to 20 per cent for bank drafts and transfers through money transfer companies such as Western Union. Cheaper transfer methods using automated teller machines (ATMs) are feasible and have transaction costs of less than 5 per cent but are not widely used. This spread of 10 percentage points between the most popular and the cheapest remittance methods means a potential loss for Tonga of the equivalent of 4 per cent of GDP. Extrapolating from this remittance corridor to the rest of the Pacific, avoidable transaction costs may total US$ 40 million per year. Hypotheses about the continued reliance on high transaction cost methods are examined and implications for development policy are discussed.