IV. Kiribiti’s Remittances: Recent Developments and Policy Options¹

1. The flow of remittances to developing countries has been increasing over the past three decades, and reached around 1½ percent of their GDP (IMF, 2005), which is even higher than official aid (though lower than FDI). The rising trend is expected to persist given population aging in many advanced countries, and remittances are likely to remain important income sources for developing countries.

2. Kiribati, like many Pacific Island countries, depends heavily on remittances as a source of external funds. The ratio of remittances to GDP has been particularly high (7–12 percent over the past 20 years), while the amount of FDI has been negligible. While the ratio of remittances to GDP has not been trending upward, it is still one of the highest among the Pacific Island countries. Large remittances support the economy, but also highlight limited opportunities in the domestic economy. Kiribati’s remittances (mostly) come from seamen who work outside the country, and go to their spouses and parents, indicating that remittances are generally sent for altruistic motives rather than for the portfolio management of the senders.

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Remittances to Kiribati

Citation: IMF Staff Country Reports 2009, 196; 10.5089/9781451821901.002.A004

Source: Kiribati’s authorities.

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Net Remittances, 2003-07 ^1/

(In percent of GDP, average)

Citation: IMF Staff Country Reports 2009, 196; 10.5089/9781451821901.002.A004

Sources: Country authorities; Fund staff estimates; and World Bank, World Development Indicators.^1/ 2003-05 average data for Samoa, Micronesia, and Marshall Is.

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3. Remittances are generally believed to have favorable implications for the economy through the following channels:

• Remittances have positive impacts on economic welfare including through reducing poverty and volatility of aggregate income. Empirical evidence indicates that remittances are resilient in the face of economic downturns and crises in recipient countries. In Kiribati, remittances seem to be playing an important role in reducing poverty. According to previous research (for example, Cornell and Brown, 2005), remittances to Kiribati are used for meeting basic needs including food.

• Remittances to Kiribati also appear have contributed to stabilizing national income. The correlation between real growth in GDP and remittances is moderately negative (-0.2), suggesting that remittances work as a buffer in domestic economic downturns. However, remittances to Kiribati are more volatile than GDP; the standard deviation of real growth in remittances is 20.4 percent and higher than that of GDP growth (5.2 percent). This volatility may be due to the fact that Kiribati’s remittances are mostly sent by seamen, a large part of which depends on volatile fish catches.

• Theoretically, remittances also help accelerate economic growth by providing funds for development, although the positive impacts on growth are not empirically well-established (IMF, 2005; Browne and Mineshima, 2007).²

• Remittances could be exploited for financial development, by bringing a larger share of the population into the formal financial sector (IMF, 2005). In particular, those who receive remittances can be persuaded to put the remittances into bank deposits. Financial development may itself have a positive impact on economic growth through better utilization of remittances.

4. Going forward, remittances will likely remain a major source of external funds, since it may take some time for the private sector in Kiribati to create greater domestic employment opportunities. Given specific features of remittances to Kiribati, the following policy options could be considered:

• Securing a stable inflow of remittances:

  • Continue to produce high-skilled seamen (the main source of remittances to Kiribati). This will be achieved through training, as has been done by the Kiribati Marine Training Center. However, too much reliance on remittances from seamen poses risks given they are highly volatile and may be subject to exogenous medium-term risks such as climate change.

  • Diversify sources of remittances. Since Kiribati’s remittances come mostly from seamen, diversification would be desirable. In this respect, the authorities’ objectives of increasing other types of migrant labor could help to diversify sources of remittances and increase national income at least in the short-run. Indeed, there are some opportunities such as in Australia and New Zealand, which have introduced seasonal work schemes.³ Furthermore, there has been some progress in developing specific skills. For example, under Kiribati Australia Nursing Initiative young Kiribati nationals are currently being trained as nurses in Australia (for future work there). Promoting regional cooperation in the context of the Pacific Island Countries Trade Agreement (PICTA) would also help to expand labor mobility by integrating labor markets in the region (one of the PICTA’s objectives). However, since migration may also involve side effects (such as a “brain drain” problem), it should be planned and implemented carefully.

  • Reduce costs of remittances. The cost of remittences to Pacific Island countries can be relatively large. Source countries will play a more important role in determining the cost of sending remittances, but financial sector development and competition in Kiribati would also supports lower remittance costs. A World Bank initiative has targetted reducing remittance costs, including by the creation of a “Remittance Price Database”. The Australian and New Zealand aid agencies have also launched a joint web-based initiative that aims to reduce the cost of remittances to Pacific Islands.