Development finance

Untapped potential

African countries find it difficult to sell government bonds to their diaspora. However, initial successes show that diaspora bonds could be a useful instrument for development finance. The German non-governmental institute Südwind has devoted a study to the subject.
Ethiopia needs better infrastructure: rural women often walk kilometres to fetch water. picture-alliance/Yvan Travert/akg-images Ethiopia needs better infrastructure: rural women often walk kilometres to fetch water.

Many people who are unable to find work at home seek their fortune abroad. Those of them who then earn money usually send a share of it to their family back home. As the authors of the Südwind study explain, more than 800 million people worldwide regularly receive such remittances. It is often their main source of income and is used to pay for doctor’s visits, schooling and other things that help raise the family’s standard of living.

In 2018, nearly $ 530 million was transferred in remittances to low and middle-income countries. The Südwind researchers believe that money could be used more efficiently if it not only benefited the remitters’ own families but also financed larger development projects. Diaspora bonds – fixed income securities issued by governments specifically to seek support or investment from expatriates – offer an opportunity to do this.

The current Südwind fact sheet looks at the diaspora bond’s track record. It is found to work well where migrants feel a patriotic duty towards their home country and have confidence in the government. High-income migrants are then happy to invest a portion of their savings in diaspora bonds. This is the target group to which governments should tailor their bond advertising. Südwind notes that India, Bangladesh, Pakistan, Lebanon, Sri Lanka and the Philippines have already managed to finance development projects in this way.

In Africa, however, diaspora bonds have so far been issued by only six countries – with mostly disappointing results. The pioneer was Ethiopia, whose government first issued a bond aimed at expatriates in 2008. The money was intended to help finance the energy company Ethiopia Electric Power. However, few investors came forward because the risks were considered high. Another attempt was made in 2011, this time with a bond to finance the construction of a dam on the Blue Nile, but it also failed because expatriates lacked trust in the government.

Ethiopia’s Prime Minister Abiy Ahmed Ali tried again in 2018. Südwind reports that he appealed to compatriots in the diaspora to support the expansion of health care and water supply at home by donating a dollar a day to the new Ethiopian Diaspora Trust Fund. The fund is also intended to subsidise small and medium-sized enterprises. According to Südwind, however, only $ 4 million had been raised by May 2019.

Kenya issued its first bond in 2009, the study reports, raising the equivalent of € 164 million for transport, energy and water projects. There then followed six more bonds, which were open to all investors, whether from Kenya or not. 2011 saw the issue of a first bond aimed exclusively at the Kenyan diaspora but it generated only a quarter of the targeted investment volume. Bonds for investors from any country have proven more successful.

A positive example of how diaspora bonds could work in Africa was furnished by Nigeria in 2017. Südwind explains that the government spent four years preparing the issue and managed to raise $ 330 million for infrastructure projects. The bond is part of the government’s drive to reduce dependence on oil revenues. Given that Nigeria is by far the most populous country in Africa and also receives the greatest volume of migrant remittances, the conditions for the bond were favourable. In 2018, Nigeria registered total remittances of $ 25 billion– a figure that shows there is still plenty of scope for strengthening diaspora finance.

Südwind Institut, 2019: Fact Sheet: Unentdecktes Potenzial: Remittances und Diaspora Bonds für Afrika (“Fact sheet: Untapped potential: remittances and diaspora bonds for Africa” – available only in German)

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