2025: Will remittances decrease? Will it be the year of diaspora bonds?

In observance of the International Migrants Day, December 18

It has been an eventful few months since summer. I traveled to Bhutan, India, Kenya, Mexico, and the UAE, and participated in several interesting and impactful events.* The purpose of my travels was to explore how MIGA could support remittances, cross-border payments, and diaspora bonds by offering political risk insurance (for some ideas see here).

Two questions kept coming up:

1.      Will remittances decline in 2025?

2.      Will diaspora bonds pick up in 2025?

1. Will remittances decline in 2025? Especially to Latin America and the Caribbean region?

This question is linked to worries about large scale involuntary return of existing migrants in the United States. My answer would be no, remittances are unlikely to decline in 2025. This is because remittances are sent by new migrants as well as existing migrants. New migration flows to the United States may decline in 2025, but people considering voluntary return are likely to reconsider their decision and stay on. The net impact on the stock of migrants would therefore be smaller than the combination of decrease in new migration and increase in forced return. And those returning home are likely to bring in their savings either with them or, likely, remit their savings home in anticipation of their return.   

There are some examples of such unexpected increases in remittances accompanying large scale return migration. During the global financial crisis in 2009 remittance flows to the develop countries declined by less than 5 percent. And by 2010, they had bounced back to precrisis levels. During the gulf war in 1991, a large number of workers had to return home to India and Jordan. Remittance flows did not decline in India as many returnees came back with savings, skills and entrepreneurial energy. The latter (skills and entrepreneurial activities) was believed to be a significant contributor to the surge in growth rate (>18%) registered by Jordan in 1992 (see Migration and Development Brief 11, p11).

Those migrants who stay on during episodes of large-scale return are likely to send more money home, in part, because they’d be working harder, trying to save and send more remittances. We saw that during the global financial crisis in 2009 and more recently, also during the COVID-19 crisis in 2020-21.

During the pandemic crisis, migrants did not really return on a large scale. On the contrary, most of the host communities increased their reliance on migrant workers. The demand for migrant workers increased at both ends of the skill spectrum - for doctors and nurses and IT workers at the high end and for lower skilled workers in hospitals and stores and delivery services. And since the pandemic, there has been a rapid increase in the employment level of foreign-born workers in the United States, sharper increase than in the employment level of native-born workers. It is likely that native born workers are less willing to return to work and more willing to work from the safer environment of home. Dirty and dangerous jobs, once again, are left to be done by migrant workers.

Another related recurring question is, if a country starts taxing outward remittances, will these flows decline? The answer is not obvious. A tax on remittances can be difficult to administer because people would choose channels where there are no taxes. Remittances may go underground. And the cost of tax administration could exceed the revenue collections. There is also an argument for not taxing remittances on the ground that the incomes of legal migrants as well as most of the undocumented migrants are already taxed. As such, taxing remittances again would amount to taxing a migrant’s income twice. We have dealt with this question in the past in this note.

A final recurring question is: How can a government make remittances more productive? Since remittances are private money, governments can’t decree their use for public or productive purposes. An obvious recommendation would be to create incentives for investment by improving the business climate, but that’s not so easy. Remittances, however, can be leveraged for bond issuances for financing development projects: via diaspora bonds and future-remittances-backed bonds (or securitization of diversified payment rights securitization). A less desirable but more common practice in many countries is to try to attract diaspora savings into nonresident bank deposits. These tools are discussed at length in Migration and Development Brief 39.

2.   Will 2025 be the year of diaspora bonds?

Yes, judging by interests from many countries such as Bhutan, Guatemala, Kenya, Mexico (Jalisco), Nepal, Nigeria, Senegal, and Zimbabwe. Israel last year raised nearly $3 billion via diaspora bonds. While Israel may be judged as “special” from the viewpoint of having an unusually large and affluent and supportive diaspora, many developing countries share similar characteristics at a significant scale, sufficient condition for potential success in issuing diaspora bonds. Diaspora bonds are to be sold as retail bonds, in small denominations to tap diaspora savings kept in bank deposits that do not pay higher interest rates. Such bonds should be registered with the securities and exchange authorities in appropriate jurisdictions. And such bonds should be structured after appropriate consultations with the relevant diaspora groups. It is highly likely that a diaspora bond would carry a lower interest rate than a plain sovereign bond. And of course, a diaspora bond could be used for impact – to make it a green bond, a blue bond, a masala bond, a Simba bond, a Tequila bond, or whatever seems palatable. The latest on this asset class is briefly discussed in this flagship report of MIGA.

Season’s Greetings, and wishing you a Happy and Prosperous 2025!
 

*Notably, the IAMTN summit in Dubai, the CrossTech World in Miami, Aspen Mexico session at Feria Internacional del Libro in Guadalajara, and Aspen-McKinsey Event in New York.