Construction of an overpass near the centre of Nairobi, Kenya Photo: Corbis, Getty & Sarah Elliott

Going long on diaspora bonds

Published:  05 March, 2012

Keen to harness the full potential of migrant communities, African governments are looking for ways to tap their savings as a source of finance. Diaspora bonds are an increasingly popular choice

In 2010, African migrants sent $40bn back to their home countries. For a continent supposedly dependent on official aid, that is more than ODA receipts – and the figure only accounts for formal flows. Undocumented migration and informal channels mean many remittances are hard to trace, and country figures dwarf official estimates. Nigeria’s central bank reports $20bn of inflows every year – double the World Bank’s estimates.

Representing more than 2 percent of Africa’s combined GDP, remittances generate foreign exchange and offer a crucial lifeline for millions. But with cash generally used for consumption, rather than fixed capital expenditure, it adds relatively little on a sustained developmental basis. With Africa facing huge external financing needs, it is the additional $53bn that diaspora members are estimated to save in their destination countries every year that countries are increasingly looking to attract.

“Governments in Africa think they can do better than remittances by tapping into this potential revenue source, but through investment,” argues Zemedeneh Negatu, Ernst & Young’s managing partner in Ethiopia. “Remittances are a good source of hard currency, but not as long-term as equity or bond financing.”

For a number of countries looking to harness migrant savings alongside remittance flows, diaspora bonds have provided a compelling opportunity. Structured like normal bonds, and targeted specifically at migrant communities, these have raised billions for the handful of countries – among them India and Israel – which have utilised them for decades. They work well as a source of alternative financing, advocates say, because risk perception tends to be lower among diaspora communities.

With international perspectives improving, migrant communities are more interested now that ever before, argues Mthuli Ncube, the African Development Bank’s chief economist. The opportunity for African countries to raise debt from the diaspora is huge. “If only a fraction of the African diaspora’s annual savings could be tapped through diaspora bonds, we could realistically estimate somewhere between $5bn and $10bn as the potential size of funds that could be raised,” argues Dilip Ratha, manager of the World Bank’s migration and remittances unit.

Yet among those who have already issued diaspora bonds, success has been limited. Ethiopia’s first – the Millennium Corporate Bond, which was used to raise funds for the country’s Electric Power Corporation – failed to ignite interest. The story was similar in Kenya, where part of an infrastructure bond issued last year was marketed at diaspora communities. Their failure has been pinned on anything from a lack of trust in the countries’ governments and the ability of projects to meet repayments, to political risk and – particularly in Kenya’s case – high inflation. Emotional affiliation does not negate the need to make a financial return.

Learning from its mistakes, Ethiopia’s second diaspora bond – issued last year – seems to be faring better. The so-called Renaissance Diaspora Bond addresses some of the structural failings of its predecessor – smaller denominations, for instance. And raising capital for the construction of the continent’s biggest hydroelectric dam, the Grand Renaissance Dam, it targets a project that resonates with Ethiopians. The government managed to raise over $425m from the domestic market over six months last year.

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