Why Africa should consider diaspora bonds

DIASPORA bonds have been successfully tapped by many developing countries.

These are long-term financing instruments issued to attract investments from expatriates. Such financing instruments have been used to raise funds for building dams, education, and even war.

Israel, for instance, has used them to raise as much as $32 billion since 1951. India has raised over $11.3bn – mostly for infrastructural projects.

Diaspora bonds have helped both avert a balance of payments crisis. In 1998, expatriate funds helped India buffer the impact of international sanctions imposed after it ran a series of surprise nuclear tests. Now Ukraine is mulling the issue of bonds to its large diaspora to fund its war efforts.

So why should African governments consider issuing diaspora bonds? For one thing, it is a low-cost instrument to raise capital for longterm investments. At a time when the cost of borrowing in the international financial market has significantly increased, the 20 million Africans and people of African descent living outside Africa could be an important source of inward finance.

They can be paid back in local currencies with longer-term maturities. As an expatriate, you are more willing to take risk of currency devaluation because you will probably use it to reinvest back home or for family related expenses. Expatriates often have a home bias. And because they often build a strong network of their own community overseas, bond issuers can find a ready-made marketing network.

Another advantage is that migrants make a more reliable crop of investors. They are less likely to pull out at the first sign of trouble.

But a word of caution here. Finance ministers should not get misled into believing that just because they have a large expatriate population overseas, their bonds will be a runaway success. There are a few factors that need to be considered before issuing such bonds.

First, consider what the fund is going to be used for. If we look at the example of India and Israel, their diaspora bonds have been used largely either in times of financial crisis or to raise funds for infrastructure.

In the case of Nigeria, it has been used to stabilise the naira. Ethiopia has used bonds to finance the Grand Renaissance Dam – a project of national prestige. It could also be used for education.

Expatriates must know that the money they are investing is going to be invested for the purpose it is being raised for. Trust is, therefore, the single most important operating principle.

This calls for a hard look at the operational capacity of the government to manage the fund.

What may also be required is a credible governance framework; water-tight investment guarantees that cannot be changed arbitrarily by any future government; and yes, an attractive rate of return.

Even with a significant diaspora population and a steady flow of remittances from abroad, the issuing country still needs a decent credit rating to entice the diaspora investor. Remember, a high-risk appetite does not mean no risk perception. Therefore, consider issuing a bond only when your fiscal position is relatively stable.

Next, you need to know how to navigate foreign regulatory agencies. Ethiopia was forced to pay $6.5 million for failing to register with the US securities and exchange commission before issuing its Renaissance Dam bonds. Picking the right jurisdiction is, therefore, critical. Disclosure rules in Western financial centres are perceived to be more stringent than those in Asia.

Then comes publicity. What sort of a promotional campaign is carried out before issuing the bonds? That means investing in a marketing campaign. Doing overseas roadshows, hiring a good advertising agency, and slick PR can make all the difference. And finally, the bond application process and its complexity.

These are just some practical considerations that may need to be made by governments in Africa before issuing diaspora bonds.