World Bank Looking to Bolster Financial Links for Pacific Islands

Australia and the United States are supporting a World Bank move to offer a financial lifeline to Pacific Island nations.

Some of the 18 small countries and territories in the Pacific have been hit by an exodus of Western banks because the market is viewed as a risky and unprofitable because of its low level of development.

However, there has been concern that these small nations in the Pacific Islands Forum – spread over 30 million square km (10 million square miles) of ocean – could face being cut off from global finance, and, that China could fill the vacuum in the strategic region.

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The $77-million proposal will initially enable emergency access to dollars or other major currencies that the far-flung island nations would need for trade and remittances if Western banks cut ties, the World Bank said in an email.

The region, which Washington has long considered its maritime neighbourhood, is caught in a superpower battle for influence as China makes steady advances.

Nauru, Solomon Islands and Kiribati switched diplomatic recognition from Taiwan to Beijing in recent years, and the Solomon Islands has struck security and policing pacts with China that sparked alarm in the US and Australia.

Banking curbs after the 2008 financial crisis have made Western lenders cautious about ties to the Pacific, where banks and regulators often lack the resources to find and prosecute financial crimes, raising the risk that banks get embroiled in embarrassing and expensive scandals.

There is also little prospect of profit from the region’s tiny, remote populations to entice banks to bear the cost of helping raise compliance standards.

The World Bank has cut its forecast for China’s growth next year and warned that east Asia’s developing economies are set to expand at one of the lowest rates in five decades.

Foreign banks needed for tourists, trade, remittances

“The proposed World Bank project is a creative way of addressing the challenge of de-risking and small scale in Pacific Island countries,” Lalita Moorty, the World Bank’s East Asia and Pacific director for prosperity, said.

Without access to overseas banks, Pacific countries would struggle to receive remittances – a key component of their economies – welcome holidaymakers, or trade with the wider world.

Already as competition wanes, the cost of remittances has increased to some of the highest globally.

“It can create instability for the financial system,” Denton Rarawa, senior economics adviser at the Pacific Islands Forum, said.

Between 2011 and 2022, the region lost 60% of its correspondent banking relationships, where Western banks partner with local ones to enable transactions in international currencies.

ANZ Bank has sold assets in Papua New Guinea, while Westpac tried to sell its Pacific business and Nauru’s only lender, Australia’s Bendigo Bank, announced plans to leave in 2025.

China moving into the region

China may be seeking to fill that gap. The Bank of China has opened an office in Papua New Guinea and signed a memorandum of understanding with Nauru to look at how they could step in if Bendigo Bank leaves.

And Vanuatu last week asked Bank of China to set up a branch. Bank of China did not respond to a request for comment.

Chinese banks have in recent years expressed interest in the Solomon Islands, Tonga and Samoa, the central bankers of those countries said, although nothing has eventuated.

“We’re well aware of the geostrategic interest of our region between US, China and Australia,” Cook Islands Prime Minister Mark Brown, the current chair of the Pacific Islands Forum, said.

“What we’re saying is that if you’re not going to address concerns and issues we have, Pacific countries will start looking elsewhere for support.”

The US and Australia were spurred to act against the festering problem from recent years caused by planned exits like Bendigo’s and concern that China could step in, according to three officials who asked not to be identified because they were not authorised to speak to media.

A delegation of more than 20 US Treasury and Federal Reserve officials flew in for a conference in Brisbane last week with Australian and Pacific Islands officials, opened by a video message from Treasury Secretary Janet Yellen.

Under the plan, the World Bank will also study ways to make the Pacific Islands more attractive to global banks, including a mechanism to aggregate payments from various countries to help achieve economies of scale, the World Bank said in a statement.

The Washington-based global lender’s board is expected to approve the plan within a few months. Commercial banks will bid to run the facility, which can be used in an emergency to process transactions in dollars and other currencies.

Countries will be charged to use the facility so it does not undercut private providers. They will also need to meet standards on financial crimes regulation.

The US and Australian effort convinced at least some conference attendees that after more than a decade of talk, a solution is close.

“We can see the light at the end of the tunnel,” Reserve Bank of Fiji Governor Ariff Ali said. “I’m confident we’ll find a solution and I’m confident we’re making progress.”