SYDNEY: The World Bank (WB) is preparing a financial lifeline for Pacific Island nations, backed by the United States and Australia, as a departure of Western banks from the unprofitable market prompts concern that China could fill the vacuum in the strategic region.

Without a backstop, many of the 18 small countries and territories of the Pacific Islands Forum, spanning 30 million square km of ocean, risk being cut off from global finance as Western banks leave the less-developed region, a situation an Australian official involved in the plan called “Armageddon”.

The US$77mil proposal would 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.

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

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

Without access to overseas banks, Pacific countries would struggle to receive remittances - a key component of their economies - to 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,” said Denton Rarawa, senior economics adviser at the Pacific Islands Forum.

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, Westpac tried to sell its Pacific business and Nauru’s only lender, Australia’s Bendigo Bank, announced plans to leave in 2025.

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.

Vanuatu last week asked the Bank of China to set up a branch. The 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 aware of the geostrategic interests of our region between the United States, China and Australia,” said Cook Islands Prime Minister Mark Brown, the current chairman of the Pacific Islands Forum.

“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 United States and Australia were spurred to act against the festering problem in the past two years by planned exits like Bendigo’s and concern that China could step in, said three officials who asked not to be identified because they were not authorised to speak to the 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 US 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 for financial crime regulation.

The American and Australian efforts convinced at least some conference attendees that, after more than a decade of talk, a solution was 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.”

 - Reuters