Title: Tonga Faces Challenging Decline in Correspondent Banking Relationships: Pacific Island Leaders Call for International Support

Date: 27 March 2024

Location: Nukualofa, Tonga

The urgent matter of dwindling Correspondent Banking Relationships (CBRs) in the Pacific region was the focus of financial leaders gathered in Tonga for the Coordination Event on Correspondent Banking Relationships Roadmap Implementation. The Pacific Islands Forum Secretariat (PIFS) and various Pacific Island Countries (PICs) representatives, including South Pacific Central Banks Governors, shared their concerns. Notable attendees included Henry Puna (Secretary General of PIFS), Stephen Ndegwa (Country Director of the World Bank Group), and other esteemed guests.

Overview of the Issue

Addressing the group, Secretary General Puna outlined the serious reality of CBRs declining by nearly 50% in the Pacific since 2011, with US dollar CBRs dropping over 60%, double the global average. Tonga, in particular, faces the concentration of remaining relationships in a few banks, increasing the risk of losing all CBRs for some islands.

Impacts on Pacific Island Countries

The decline in CBRs has had negative effects on PICs, exacerbated by international regulatory changes not originating from their region. Compliance with anti-money laundering (AML), counter-terrorist financing (CTF), and countering proliferation financing (CPF) standards in Tonga further adds to the challenges. Profitability concerns are also driving some global banks to halt services in countries with perceived limited AML/CFT/CPF capacities and lower profitability.

Reduced Access and Increased Costs

A lack of CBRs has resulted in multiple currency transfers and conversions, leading to losses and restricted access to transactions in desired currencies for Tonga and other island nations. Two of the country’s banks having lost USD CBRs have brought inconvenience and increased costs for many customers, including those heavily dependant on substantial remittances.

Consequences on Pacific Island Economies

The imminent loss of banking relationships poses severe risks for several Pacific Island countries, including Tonga, which heavily relies on remittances. Tonga, for instance, receives over 39% of its GDP through remittances, mostly from Money Transfer Operators (MTOs). Any restrictions on these transactions can have a significant impact.

Efforts to Overcome the Challenges

Efforts to reduce the cost of remittances have been hindered by the decline in CBRs. Despite a decrease in the average cost of remittances in the Pacific since 2009, they remain significantly higher than the global average in Tonga. The Pacific islands cannot currently meet the G20 cross border payments roadmap’s requirement of a maximum 5% cost for any remittance corridor.

Call for Action from Regional Leaders

Regional leaders appealed for a united effort to address the challenges, involving domestic authorities, regional organizations, international partners, and global banks themselves. Development partners can help PICs strengthen their regulatory frameworks, enhance institutional capacity, and implement best practices in CBR and AML/CFT/CPF compliance.

Collaborative Initiatives

Some collaborative efforts include:

1. Adherence to international regulatory frameworks and the development of a CBR Roadmap through the World Bank and Pacific Islands Forum.
2. Implementation of technology-based solutions to address remittance challenges.
3. Forming partnerships and providing capacity-building support to enable local banks and MTOs.
4. Closer engagements with relevant international banks and regulators.

Conclusion

By fostering a better understanding and working towards viable solutions, Pacific island countries can mitigate the challenges associated with de-risking and safeguard their financial systems.