On Thursday, the World Bank’s board approved a substantial $68 million initiative aimed at preventing Pacific Island nations from losing their crucial ties to the global financial system. This program, as announced by World Bank President Ajay Banga, seeks to ensure that these small island economies remain integrated into the international financial framework essential for tourism, trade, and aid.
Significance of Sustaining Global Financial Access
For many small island economies, maintaining access to international financial services is critical. The potential withdrawal of Western banks from the region poses a threat to these countries’ ability to handle transactions in U.S. dollars and euros. Banga, who previously served as CEO of Mastercard, recently met with leaders from Tonga, Fiji, Nauru, Marshall Islands, and the Federated States of Micronesia in Suva. He is notably the first World Bank president to visit Fiji in half a century.
“The initial phase of this program will focus on maintaining correspondent banking by subsidizing related costs. However, the goal is to transition from mere subsidies to establishing a sustainable business model,” Banga explained during the meeting. He emphasized the necessity of scale for success: “Together you have scale, separately it will be a problem.”
Program Details and Immediate Needs
The initiative allocates $9 million each to eight Pacific Island nations to set up a service designed to ensure that cross-border transactions continue smoothly if a country loses its last international banking relationship. Both Nauru and the Marshall Islands are currently facing the potential exit of their remaining international banks.
Many Pacific Island economies heavily rely on remittances from overseas workers in countries like Australia, the United States, and New Zealand, which contribute significantly to their gross domestic product. Additionally, these nations depend on trade, tourism, and disaster relief funds that would be jeopardized if cross-border transactions were disrupted.
Addressing Challenges
Pacific Islands Forum Secretary-General Baron Waqa highlighted that “de-banking” has become a pressing issue, with the region losing 60% of its correspondent banking relationships between 2011 and 2022. These relationships involve Western banks holding deposits on behalf of local banks to facilitate international payments.
Tonga’s Prime Minister Siaosi Sovaleni noted, “We have banks leaving some of our smaller Pacific countries because we are too small and unprofitable.”
Under the World Bank’s new agreement, participating countries will also receive support to meet international financial standards, including money laundering regulations, which have contributed to the withdrawal of cautious Western banks.
Looking Forward
The World Bank views this funding program as a crucial step toward developing a long-term market solution for Pacific Island states. This solution aims to aggregate payments across these small nations, ensuring continued financial connectivity. Banga plans to leverage his financial services expertise to aid the initiative and encourages Pacific Island nations to collaborate. The Pacific Islands Forum will oversee the program, with commercial banks invited to bid for the management of the emergency facility.
(Includes inputs from online sources.)
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