A Bond for the Homeland

Reducing poverty, creating employment, and building schools and roads for the benefit of billions of people in developing countries requires large amounts of funds. But there are not that many new sources of funding that can be tapped for such noble purposes. The migrants of developing countries offer a rare pool of resources that can be tapped via diaspora bonds.

According to estimates from the United Nations, there are more than 200 million migrants worldwide. The size of the global diaspora is even larger if one considers adding second- and third-generation migrants to the mix.

The money these migrants send home — in the form of remittances, usually through money-transfer services like Western Union — each year is considerable. Migrants from developing countries sent more than $325 billion in remittances last year.

All this is well documented and exhaustively studied by academics and development experts. What’s less well known, perhaps, is the enormous savings these migrants have amassed. Preliminary estimates by the World Bank suggest that annual savings of the diasporas from developing countries could be in the range of $400 billion. For those from Africa, the figure is estimated at $52 billion.

These savings are mostly held as cash under the mattress or in low-yielding bank accounts in the countries of destination. Imagine if some of those savings were channeled into development efforts in poor countries. If one in every 10 diaspora members, whether rich or poor, could be persuaded to invest $1,000 in his or her country of origin, developing countries could potentially raise $20 billion a year for development financing.

Enter the diaspora bond — a retail saving instrument marketed only to migrants. Through retailing diaspora bonds at small denominations ranging from $100 to $1,000, a developing country government or a reputable private corporation in a developing country can tap into the wealth of relatively poor migrants. Wealthier migrants could, of course, invest larger amounts and the bonds would also be sold in large denominations to institutional and foreign investors.

The money could then be used to finance projects that interest overseas migrants — such as housing, schooling, hospitals, and infrastructure projects with a concrete benefit to their families, or the community back home.

Diaspora bonds can tap into the same kind of emotion migrants feel when cheering on their national team in a football match, a long way from their homeland. Patriotism could in effect become the effective tool for helping a developing country fulfill its development dreams.

There is also a readymade marketing avenue to target the diaspora. These bonds can be sold globally to diaspora groups through national and international banks and money transfer companies. They can be marketed through churches, community groups, ethnic newspapers, stores, and business associations in places where migrants live in large numbers. Investment bankers may be needed to structure these bonds and ensure compliance with securities regulations in the United States and other jurisdictions.

A diaspora investor may even be willing to buy diaspora bonds at a lower interest rate than that demanded by foreign investors. For example, a migrant in the United States who currently earns an annual interest rate of less than 1 percent on small deposits would find it attractive to buy a diaspora bond offering an annual interest rate of, say, 5 percent. The cost of retailing diaspora bonds can be high, but can be justified if the interest rate offered is lower than the rate typically paid to pension funds and other institutional investors. The bond can be made even more attractive by offering tax breaks and credit enhancements to purchasers.

A clear advantage is that migrants are expected to be more loyal than the average investor in times of distress. Migrants are likely to have better knowledge of their home country and legal recourse in the event of a default. They’re also less likely to worry about the risk of currency devaluation or being paid in local currency rather than dollars, since they can find ways to spend local currency if the bonds were repaid in those terms.

The concept of diaspora bonds is not new. Greece is currently preparing to issue a diaspora bond in Australia, Europe, and the United States, places with large numbers of Greek migrants. Ireland is likely to follow soon. In the past, the governments of India and Israel have issued diaspora bonds to raise about $40 billion dollars in total, often in times of political or financial crisis. Israel has sold diaspora bonds regularly since 1951, to fund development projects in the early years but to continue to maintain ties with the diaspora in more recent years.  India has turned to its diaspora only recently as a source of funding in times of economic difficulty. In both cases, a remarkable feature of these bonds was that diaspora investors tended to roll over their capital to newer diaspora bonds or local bank deposits after their diaspora bonds matured. The result is that these bonds have provided a more stable source of funding than foreign investments in equity and bond markets, which tend to decline or even reverse in an economic downturn.

None of which is to say that these instruments are always a slam dunk. In the past two years, Ethiopia and Nepal issued diaspora bonds, but were unsuccessful in mobilizing funds. Both were likely affected by limited marketing and publicity. Nepal issued what it called "foreign employment bonds" in Arab Gulf countries where migrants are mostly low skilled, rather than targeting the OECD countries where there are more skilled and financially literate Nepali workers. Another shortcoming was that these bonds were denominated in local currency and had low interest rates compared to the inflation rate in Nepal. The state-owned Ethiopian Electric Power Corporation’s (EEPCo) Millennium Bond seems to have suffered owing to the diaspora’s perception of high political risk and economic uncertainty in Ethiopia.

Diaspora bonds need not just be the province of governments alone. Governments can also team up with reputable private companies, and infrastructure corporations to form public-private partnerships to issue the bonds.

Countries in which governments, or public and private companies, could potentially consider diaspora bonds  include Ghana, Kenya, Liberia, Nigeria, Senegal, Uganda and Zambia in Sub-Saharan Africa; Bangladesh, India, Nepal, Pakistan, and Sri Lanka in South Asia; and Armenia, Colombia, Egypt, El Salvador, Jordan, Haiti, Jamaica, Lebanon, Mexico, Morocco, Philippines, Romania, Serbia, Tunisia, and Tajikistan in the other regions. These countries have a large diaspora abroad, especially in high-income countries

Consider the case of Haiti, a country facing high needs for reconstruction after the earthquake.  According to official statistics, about one million Haitians live overseas; about half of them are in the United States. Haiti receives $1.5 to 1.8 billion in remittances each year; some estimates are even larger — amounting to more than half the country’s national income. Preliminary estimates of Haitian diaspora saving are even larger, exceeding $3.5 billion per year.

If 200,000 Haitians in the United States, Canada, and France invested $1,000 each in diaspora bonds, it would add up to $200 million. Much larger sums could be raised if these bonds were opened to friends of Haiti, including private charitable organizations. And if the bond rating were enhanced to investment grade rating via guarantees from multilateral and bilateral donors, such bonds could even attract institutional investors such as pension funds and mutual funds.

There’s also the case of Pakistan. The Pakistani diaspora exceeds 5 million, with a large number residing in high-income countries. Their estimated savings exceed $9 billion per year, more than half the total domestic savings of Pakistan. It is easy to see the potential for a diaspora bond for Pakistan.

Given a real or perceived high degree of political risk in Haiti and Pakistan, however, guarantees from donors or even international oversight may be necessary.

There are, of course, risks for any developing country wanting to embark on this move. Potential issuers of diaspora bonds need to be reminded of the dangers associated with foreign currency debt. Large foreign currency inflows after a bond issuance (and potential outflows when the bond matures) require careful macroeconomic management, especially of the exchange rate. Developing countries also need to do their homework beforehand and consult diaspora groups on their particular areas of interest, while learning more about the size, income, and wealth characteristics of migrant groups in key destination countries. That sort of information is not easily available now.

Diaspora bonds offer a unique way to tap the wealth, and goodwill, of the diasporas from developing countries. It is certainly an idea worth pursuing in these tough economic times when simply maintaining, let alone increasing, aid flows to developing countries is a challenge for the global community.