COLUMNBy Moremi Marwa
This is the third in a series of articles discussing the concept of bonds, and how their various forms and diversity (treasury bonds, infrastructure bonds, industrial bonds, corporate bonds, municipal bonds, diaspora bonds, sovereign bonds, green bonds, etc) can be used as tools for financing our development. As you may recall, I started writing these series by stating the obvious fact: that in order to succeed, our development visions, policies, plans and strategies must be underpinned by an equivalent transformative change in the financial system, i.e. there must be the financial infrastructure, structures, products and the necessary intermediation agencies that would bring the capital formation idea into fruition.
I further stated that, there can be many financial products that could be developed to facilitate the financing of our development, either in industrialisation or other such development plans — the idea of enhancing and diversifying development of our capital markets via bonds issuances, may seriously need further consideration, given its potential. I said that our bonds market is largely underutilised both by the public and private sector; i.e. to date our bonds market is worth only Sh6.2 trillion ( just 5 per cent of the gross domestic product – GDP, which is far on the lower end), to gravitate this problem 98.5 per cent of our bonds market is made of government bonds, there are only four outstanding listed corporate bonds (worth about Sh100 billion), there are absolutely no municipal bonds or infrastructure bonds, or industrial bonds, or any other form of bonds. And so as a matter of sensitization and probably in efforts to make us think deeper, I have discussed industrial development bonds and infrastructure development bonds, today I will cover diaspora bonds.
As is, upon right conditions and circumstances, diaspora communities are eager to support the fortunes of the people who have remained in homelands. They normally demonstrate this desire via remittances – as a result, remittances have become a vital part of the safety net, cushioning millions of families in developing nations and keeping families from momentous financial difficulties (note, as of 2016 developing countries received remittances of $401 billion which was 3-times larger than official development assistance – ODA and two-third of total global remittances of $601 billion). However, despite high volumes and frequencies of remittances, these funds are largely treated as immediacy expenditure measures, with a bit of developmental aspects, dealt at individual levels hinged on the idea of emotional and personal attachments as well as patriotism. However, for the lack of coordination, this has not been executed in the broader nation building level. And so, while remittances offer evidence that members of the diaspora care about their home countries — even if for a primary intent of keeping their loved ones funded – these funds do not offer a path to financing sustainable development at the national level. In current conditions, governments does little to harness the flow of incoming foreign money from diaspora except by making such transactions cheaper and easier as they make their way to individual families.
Thus, much as communities in developing countries continues to rely heavily on remittances, as source of funding – remittances end up only helping friends and families in times of need and to some extent help the diaspora populations acquire assets back home.
Yet, there is an opportunity for cash-strapped developing nations to gain access to the hard-earned savings of their sons and daughters living abroad – an opportunity that have been tried and tested by some other countries. Israel and India comes to mind easily – over the years these countries have made significant uses of their famously large and industrious diaspora populations to finance local development. Israel and India have had successful issued diaspora bonds, with expatriates from each country investing billions of dollars. From early 1950s, the Development Corporation of Israel has implemented several diaspora bonds issuance program seeking finances from its diaspora with the objective of raising foreign exchange for building the state infrastructure – annual sales of such bonds fluctuating depend on the needs, i.e there were significant increases during the 1973 Yom Kippur War ($150 million), similarly during the 2009/11 terrorist attacks ($500 million). In the other hand, on three separate occasions, India has issued bonds to its expatriates in order to balance their payment deficit and also finance infrastructure projects raising millions of dollars from its diaspora population. What is, and how does diaspora bonds works?
Diaspora bonds are essentially a form of government debt that targets members of the national community living abroad, based on the presumption that their emotional ties to a country make investing in such products worthwhile. It is a fact that, bolstered by advances in transportation and communication and an increasingly mobile workforce, globalisation is contributing to the rise of interconnected societies and communities that needs to be taped. As a result, developing countries in need of financing can consider expatriates working in wealthy countries for development financing support back home. This is the idea behind issuing diaspora bonds, in which diasporas receive discounts on government debt from home countries.
This financing tool has gained its traction in developing countries in recent years – so for developing nations with sizable diaspora populations, diaspora bonds provide an opportunity to tap into a capital market beyond international investors, foreign direct investments, or external loans. After all, some governments (given their geo-political, political and socio-economic challenges) find it difficult raising money on international markets or attracting foreign investments, in such cases, diaspora bonds are thought as attractive alternative source of financing. Much as emotional forces has rarely been applied to finance, but attachments to home and patriotism could yet prove as effective fundraising mechanisms for such economies, that are struggling to raise money on the standard international capital markets or in attracting foreign investments or accessing funds but with prohibitively high interest rates demanded by mainstream investors.
Despite the patriotism aspect, policy makers and governments should not mistaken this financing tool to a quick and easy route to access the stockpile of savings that diaspora population might have built — to succeed in raising capital through this mechanism it requires some painful changes to the way economies manage their finances and how they would like to build trust and develop a sustainable a s well as a responsible relationship with our diaspora populations as considerations for diversifying development finance.
In conclusion, as is, well-planned infrastructure and development projects improve people’s lives and spur economic growth, but with competing financial needs and little to mobilise from, either by way of taxes or borrowing or development assistance – it is difficult to pay for that new road, or a standard railway gauge, or a power generating plant, etc all at once, so government might choose to supplement its domestic bonds issuance program with diaspora bonds. What has been the experience closer to home? – Ethiopia, is one of the countries that have made some tangible success in this aspect, started with the first diaspora bond (“Millennium Corporate bond”) in 2008, targeted raising funds for Ethiopian Electric Power Corporation from the diaspora, however, this issuance did not meet expectations.
Then, despite this first experience, Ethiopia launched the second diaspora bond: “Renaissance Dam Bond” which turned out to be a success. And so, other countries with significant remittances from diaspora such as Nigeria (which receives remittances to the tune of $20 billion per year) issued a diaspora bond of $100 million; Ghana with average remittances of $2 billion a year and Kenya at $1.6 billion, have also considered this idea. I clearly understand that with our average remittance – which is currently less than $0.1 billion per annum – diaspora bonds issuance might not seem as an attractive consideration. However, it may be that with more coordination and existence of products such as diaspora bonds, might unlock the potential.