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Diaspora bonds for development financing during a crisis

Dilip Ratha's picture

On September 16 Greece announced that it plans to issue a diaspora bond. In the past the governments of India and Israel have raised over $35 billion dollars, often in times of liquidity crisis. Preliminary estimates suggest that Sub-Saharan African countries can potentially raise $5-10 billion per year by issuing diaspora bonds. Countries that can potentially consider diaspora bonds are Bangladesh, Colombia, El Salvador, Ghana, India, Jamaica, Kenya, Mexico, Morocco, Nepal, Nigeria, Pakistan, Philippines, Romania, Senegal, South Africa, Sri Lanka, Uganda, Zambia, and Zimbabwe (and also Greece, Ireland, Italy, South Korea and Spain). 

Diaspora bonds have several advantages, both for the issuer and for the emigrant who buys the bond:

  • Through retailing at small denominations, ranging from $100-$10,000, issuers can tap into the wealth of relatively poor migrants, although diaspora bonds are not necessarily limited to migrants.
  • Diaspora bonds open new marketing channels such as churches, community groups, ethnic newspapers, stores, and home town associations in countries and cities where diaspora members reside in large numbers.
  • A confident issuer could issue in local currency terms as migrants may have local currency liabilities in the issuing country and hence less aversion to devaluation risk. Migrants likely have better knowledge of their origin country’s creditworthiness and likely have more legal recourse in the event of a default.
  • Migrants are expected to be more loyal than the average investors in times of distress. And they might be especially interested in financing infrastructure, housing, health and education projects.
  • A diaspora bond would offer a higher interest rate than the rate a diaspora saver earns from bank deposits in her country of residence, even as the diaspora investor demands a lower yield for these bonds compared to an international investor. Tax breaks and credit enhancement (first-loss guarantee, relatively senior creditor status) can enhance the attractiveness of these instruments for diaspora members.

 

Investment bankers may be needed to structure these bonds and ensure compliance with SEC regulations in the US and other jurisdictions. However, nothing can prevent an issuer from marketing these bonds under its national regulations and these bonds can be marketed (for a commission) through commercial banks with a global presence.

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