|Kathmandu, Nepal. Photo: © Simone D. McCourtie / World Bank|
You might recall that the finance minister of Nepal announced in the annual budget in July 2009 that the government would issue a diaspora bond to raise funds for infrastructure development. Indeed Nepal Rastra Bank followed through in June 2010 by floating a “Foreign Employment Bond”. Although the initial goal was to issue Rs. 7 billion (about $100 million), Rs. 1 billion was floated in the first round. Nepali workers in Qatar, Saudi Arabia, UAE, and Malaysia could buy the bond from one of seven licensed money transfer operators in denominations of Rs. 5,000 (about $65).
Data are hard to come by, but the funds raised have been minuscule, nowhere near target. Apparently, the name of the bond had nothing to do with its unsuccessful launch!
Perhaps the primary reason for the failure may have to do with a lack of publicity and a short period of sale. Little marketing was done before the issuance and it seemed rushed, with the government conducting it for a short period from June 30 to July 12. This might have been related to the Nepali fiscal year, which ended on July 16. Given that bonds were issued for the first time and only for two weeks, there wasn't enough time to generate wide interest.
A second reason was limited targeting. Migrants in India (the largest destination of Nepali migrants) were not allowed to buy these bonds. Also excluded were Nepali migrants in the OECD countries that generally have higher incomes than migrants in the Gulf countries and Malaysia.
A third reason was financial, notwithstanding patriotism and home bias. The interest rate offered on the bond was not attractive to potential buyers. This local currency diaspora bond had an interest rate of 9.75% and a maturity of 5 years. Commercial banks in Nepal offer up to 13% on 5-year fixed deposits.
Finally, money transfer agencies that sold the bonds received a 0.25% commission on the sale but had to forgo money transfer fees. It is possible that they did not have the right incentives to promote the bonds over remittance transfers.
The Nepali finance minister reiterated the government’s commitment in November 2010 to continue issuing the bond. Nepal Rastra Bank plans on floating Rs. 5 billion in Foreign Employment Bonds in early 2011. Nepal appears to have learnt valuable lessons and from its foray into diaspora bonds. If marketed in a wider list of countries, with better publicity, higher interest rates and a longer window of sale, the bond issuance should do much better the next time around.
How much perhaps could Nepal hope to raise from a diaspora bond? Perhaps the size of remittance flows to Nepal can give us an order of magnitude. Remittance flows to Nepal have increased rapidly in recent years, reaching $3.5 billion (close to a quarter of the GDP) in 2010. And that's not including remittances from India (which in rupee terms is larger than the bilateral trade deficit between Nepal and India, enough to sustain the linked exchange rate of the Nepali rupee to the Indian rupee). A retail bond can raise a lot of money from the large number of migrants that Nepal has!