Diaspora bonds: An innovative source of financing?
Leveraging the African Diaspora: Exploring the Potential of Diaspora Bonds for Continental Development
A diaspora bond is a debt instrument issued by a country – or potentially, a sub-sovereign entity or a private corporation – to raise financing from its overseas diaspora. Israel and India have raised $35-40 billion using these bonds.
The Government of Israel has offered a flexible menu of diaspora bonds since 1951 to keep the Jewish diaspora engaged. The Indian authorities, in contrast, have used this instrument for balance of payments support, to raise financing during times when they had difficulty in accessing international capital markets. Diaspora bonds are often sold at a premium to the diaspora members, thus fetching a “patriotic” discount in borrowing costs. Besides patriotism or the desire to do good in the investor’s country of origin, such a discount can also be explained by the fact that diaspora investors may be more willing and able to take on sovereign risks of default in hard currency as well as devaluation as they may have local currency liabilities and they may be able to influence the borrower’s decision to service such debt.
The growing influence of the African diaspora in the United States has garnered attention, with the Biden administration signaling targeted support for small- and medium-sized businesses within this community. The diaspora, consisting of approximately 2 million sub-Saharan Africans, has witnessed a fivefold increase since 1980, reflecting a substantial demographic shift. This report delves into the economic and political impact of the African diaspora, particularly in the context of remittances and the potential role of diaspora bonds in driving investments for Africa’s development.
The Financial Clout of the African Diaspora: Sub-Saharan African immigrants, dispersed across the U.S., Europe, and beyond, contribute significantly to remittances sent back to the continent. In 2021, remittances totaled $45 billion, showcasing a resilient trend despite the challenges posed by the COVID-19 pandemic. The financial technology landscape, coupled with an improved regulatory environment, has facilitated remittances, emerging as a vital source of foreign exchange revenue, contributing 2 to 3 percent of sub-Saharan Africa’s GDP.
Diaspora Bonds as Catalysts for Development: Traditionally, diaspora remittances fulfill immediate family needs; however, diaspora bonds present an opportunity for more expansive positive impacts. A diaspora bond is a government debt security involving investors from the country’s nationals living abroad, their descendants, or those connected to the nation. These bonds can diversify funding sources for governments and project sponsors, offering below-market rates and longer tenors, often during times of fiscal crisis. Diaspora bonds hold the potential to finance large-scale projects such as infrastructure and social safety net programs, aligning with Africa’s economic development needs.
African Governments’ Initiatives and Challenges: African governments are increasingly seeking to engage their diaspora for investment, tourism, skills, and networks. However, the success of diaspora bonds faces challenges. Despite attempts by several African countries, only India and Israel have established multiple successful rounds of diaspora bonds. Challenges include the risk of default, market volatility, and a lack of transparency, impacting diaspora interest.
Improving Diaspora Bond Uptake: To enhance the appeal of diaspora bonds, African governments can take proactive measures. Strengthening governance, transparent reporting on fund utilization, linking bonds to a credible country development strategy, and targeting economically valuable projects are essential steps. Conforming to international standards and seeking expertise and funding from Western governments and financial institutions can further boost the credibility and success of diaspora bonds.
Conclusion: Leveraging the financial influence of the African diaspora through diaspora bonds holds great promise for Africa’s development. While challenges exist, strategic measures can enhance the uptake of these bonds, contributing to sustainable economic growth and meeting critical needs. Western governments and financial institutions play a crucial role in supporting African governments in launching diaspora bonds, opening new avenues for investment capital in the face of global challenges such as the COVID-19 pandemic and the Russia-Ukraine conflict.