How Diaspora Bonds Work

Nigeria’s Finance Minister, Kemi Adeosun recently revealed the Federal Governments (FG) plans to launch a $300 million diaspora bond bid in March 2017. So what is a diaspora bond and how can you invest?

A diaspora bond is basically a government debt that is targeted but not limited to the nationals of the country that are living abroad. The idea is based on a presumption that because of emotional ties to their country of origin, expatriates may find investing in such products worthwhile, especially if they are financing development projects like infrastructure.

According to World Bank Migration and Remittances Factsheet 2016, 247 million people, or 3.4% of the world population live outside their country of birth. In 2015, $581.6 billion was remitted, of that figure, $431.6 billion went to developing countries. In the same year, Nigeria was the highest remittance receiving country in Africa and 6th highest in the world, receiving $20.8 billion. Nigeria’s Senior Special Assistant (SSA) on Foreign Affairs and Diaspora said that in 2016 Nigeria recorded a massive increase receiving a total of $35 billion in remittances.

Most of the remittances are informal, meant for family and friends. Diaspora bonds provide the governments with an opportunity to tap into the wealth of their diaspora community to fund national level development. In other words, governments can tap into capital markets beyond foreign direct investment, foreign investors and conventional loans to finance development. This is particularly important during periods of economic downturns when other lenders may be reluctant. Policy makers should not assume that this is a quick and easy way to raise capital. Many countries have launched bids but with varying levels of success. Israel and India have been the most successful till date, although both set up bonds for different purposes and in different ways.

Israel has issued diaspora bonds by the Development Corporation for Israel (DCI) since 1951 raising a total of $32.4 billion as at 2015. The bond was set up to finance development projects in various industries including energy and transport. On the other hand, India set up its bond to support their balance of payments and it has done this three times Indian Development Bonds in 1991 ($1.6 billion), Resurgent Indian Bonds in 1998 ($4.2 billion) and Indian Millennium Deposits in 2000 ($5.5) raising a total of $11.3 billion.

The bond issued by the DCI was listed with the Securities and Exchange Commission (SEC) and thus, it was open to foreign nationals as well as the Diaspora of Israeli origin. Whereas India’s bonds were issued strictly to the Diaspora of Indian origin and were not listed in the SEC.  Israel-Diaspora Bonds were fixed, floating rate bonds with maturity periods ranging from one to twenty years and bullet repayment, with large financial incentives including making its interest rate slightly higher than US Treasury bills. To make the bonds more accessible, the DCI set up retail agencies in the US and other countries. India, on the other hand, chose fixed rate bonds with five-year maturity and a bullet maturity. As financial incentives, the bonds were two percent higher than US Treasury bills and were exempt from Indian income and wealth tax.

However, African countries like Ethiopia have had limited success. Its first bid the Millennium Corporate bid to finance a hydro-electric dam in 2008 was unsuccessful because take-up was low. Experts have opined that lack of trust of repayment were the key issues that deterred potential buyers.

Against the backdrop of falling oil prices and the loss of value of the naira, the diaspora bond bid may be a good alternative for Nigeria to raise much-needed funds to finance the huge infrastructure deficit. However, foreign investors exited the Nigerian market in 2015 because of unclear economic policies and lack of trust in the government financial management. So the question is how well will the FG communicate with the Nigerian diaspora community to build enough trust so that people can invest in the bond?

To tackle some of these issues, the FG has said the Debt Management Office will manage the bond. As for the returns on the bonds, the SSA on Foreign Affairs and Diaspora Mrs Abike Dabiri noted that the bonds will have at least five to ten-year maturity and annual dividends between five to eight percent, which is higher than bank deposit which is within two percent. As further financial incentives the Director General of the DMO, Dr Abraham Nwankwo said that the bonds are exempt from tax, could be used as collateral from borrowing from banks and discounts on the FG housing scheme. The bonds will be sold on the floor of the Nigerian Stock Exchange and across the 21 Primary Dealers Market Makers licensed by the DMO.

 

 

 

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