The Potential of Diaspora Bonds in Africa

https://blogs.lse.ac.uk/africaatlse/2017/04/12/the-potential-of-diaspora-bonds-in-africa/
Michael Famoroti takes a look at how the diaspora can work in tandem with African governments.

“No money is better spent than what is laid out for domestic satisfaction.” – Samuel Johnson

This equivocal statement may ring true for over 30 million Africans in the diaspora. According to the World Bank, this group remitted over $40 billion to Africa in 2015, with Nigeria and Egypt particularly popular destinations. As it stands, diaspora flows are usually to family and friends, or, occasionally, for investments back home. Many consider this a missed opportunity: African countries are still developing and require substantial funds to accelerate growth. The diaspora – through diaspora bonds – can lend a helping hand, and in doing so, play their role in economic development.

At least, so the argument goes. But for diaspora bonds to work effectively, we must first understand how and why they work to benefit their home countries.

Michael Famoroti takes a look at how the diaspora can work in tandem with African governments.

“No money is better spent than what is laid out for domestic satisfaction.” – Samuel Johnson

This equivocal statement may ring true for over 30 million Africans in the diaspora. According to the World Bank, this group remitted over $40 billion to Africa in 2015, with Nigeria and Egypt particularly popular destinations. As it stands, diaspora flows are usually to family and friends, or, occasionally, for investments back home. Many consider this a missed opportunity: African countries are still developing and require substantial funds to accelerate growth. The diaspora – through diaspora bonds – can lend a helping hand, and in doing so, play their role in economic development.

At least, so the argument goes. But for diaspora bonds to work effectively, we must first understand how and why they work to benefit their home countries.

Nigeria is the most recent country to push for a diaspora bond sale
Photo Credit: Jeff Attaway via Flickr (http://bit.ly/2nTLbAt) CC BY 2.0
How do diaspora bonds work?

The logic of a diaspora bond is simple. Most times, they are tied to a specific purpose and targeted exclusively at nationals of a country residing abroad. The premise is that home-bias would encourage citizens to view these bonds as a special opportunity to contribute their quota to the development of their home countries. A recent example is the Greek debt crisis which compelled the Greek authorities to issue diaspora bonds, banking on the fact that the ideal group of external creditors would be Greeks living abroad.

That being said, patriotism is not the sole motivation. Diaspora bonds can be very attractive for those seeking high-return investments. Rather than entrust monies with relatives at home – who sometimes make rather liberal use of them, these bonds serve as an opportunity for local investment. In addition, the diaspora is usually shielded from harsh economic environments at home. For example, they are less sensitive to currency risk as depreciation makes them relatively wealthier (i.e. if the domestic currency depreciates, you can afford to send a bigger gift back to your parents at home).

Why bother?

For the country issuing these bonds, one appeal is the patriotic discount. Diaspora are often more willing to purchase their home government’s debt, making debt-raising cheaper. It also offers a more stable source of foreign exchange for African countries as diaspora funds are consistent across business cycles, unlike foreign direct investment or portfolio flows. The diaspora is also less likely to flee with their capital at the slightest hint of trouble, if only because they usually have ears on the ground. Finally, as they are a form of external finance, domestic investment crowding out is minimised, similar to Eurobonds.

Nigeria looks to be the latest African country to push for a diaspora bond sale. The Minister of Finance recently suggested that a $300 million diaspora bond offering will follow the freshly completed, and heavily oversubscribed $1bn Eurobond sale. Interestingly, those numbers hint at a problem with Nigeria’s plan for the bonds. The subscription for Nigeria’s 2032 Eurobond was $7.8 billion. Another Eurobond sale of $500 billion has just been swiftly completed. A $300 million diaspora bond is a drop in the ocean compared to the investor appetite in the market. And though it could be seen as a step forward, is it a cost-effective one? For a country like Nigeria with diaspora scattered around the globe, the logistics of galvanising this market may prove unnecessarily costly, especially when complex regulations are likely to be involved. Yet, it seems countries like Nigeria are willing to take this risk.

Patriotism in Practice

So can diaspora bonds work? Infamously, they failed in Ethiopia at the turn of the decade. East Africa’s most populous country issued a diaspora bond for the Ethiopian Electric Power Corporation called the ‘Millennium Corporate Bond’. Unfortunately, the outcome was disappointing. In hindsight, take-up was low partly because of doubts about the viability of the project and perceived political risk in the country – a situation not so unfamiliar in Nigeria. As diaspora bonds tend to be linked to infrastructure projects – potentially “white elephant projects” – this is a significant hurdle to cross.

At the same time, the most impactful infrastructure projects (e.g. power infrastructure in Nigeria) may be too large and costly even in the long term to be attractive for diaspora bonds. Nevertheless, identifying and marketing viable projects is necessary in a continent with such a large infrastructure gap.

The most successful diaspora bonds can be found out of Africa: Israel and India. Israel’s case is remarkable. They have been selling development-linked diaspora bonds since 1951 and in doing so, have established a strong economic and social connection between the nation and its diaspora. As for India, opportunism rather than community was the main driver. The country with the largest emmigrant population sold diaspora bonds through the 90s as part of efforts to resolve its balance of payments crisis. Like Greece, these were “desperation bonds”.

For diaspora bonds to work, the economics must be right. But, as shown by Israel, the relationship between a country and its citizens is also critical. African countries must come to understand the peculiar demographics of their diaspora and their attitude towards home countries. Some will find a large class of citizens in political or economic exile that is unwilling to engage with the government. Others will find a sizeable base of second-generation diaspora keen to partake in the economy of their home nation in any way possible.

The African Narrative

When marketing the bonds, framing will be important. Frame diaspora bonds purely as an investment opportunity and you may erode the patriotic discount. At the same time, frame them as a purely ‘social good’ and you may fail to convince people to substitute sending remittances back home to family. Worse still, if the diaspora bond is too uneconomic for potential investors, they are likely to turn away, fueled by their distrust of many African governments. What you want to do is tap into the diaspora’s desire to stay connected to their home country, while presenting a viable project they can back. As it is sometimes said, diaspora participation exists in the space between investing and charity.

Will the moral and economic incentives complement or contradict each other? It may come down to the design of the bond and how it is sold. To determine the balance, African nations must engage more with the diaspora. This is perhaps the most compelling argument for pursuing diaspora bond sales: for many African countries, it would be the start of a belated relationship with their diaspora. There are many ways to engage the diaspora. A start would be permitting Nigerians living abroad to vote in the 2019 Presidential elections. Building the future of this continent is a herculean task; every helping hand is appreciated. The diaspora should not merely be seen as a source of funds but as genuine stakeholders in the development of the economy and society.

Nigeria’s proposed diaspora bond sale may still turn out successful considering the strong global investor interest in the country’s dollar-denominated bonds. We may baulk at the fact that governments are not using diaspora funds to develop infrastructure. The bigger sin is that governments aren’t leveraging the people in the diaspora.

The Potential of Diaspora Bonds in Africa