As official development aid declines and foreign direct investment (FDI) struggles to recover from the financial crisis, Africa should look towards “diaspora bonds” to complement the funding of development projects.
This view was once more aired in a paper prepared by the Chief Economist Complex of the African Development Bank Group.
The paper pointed out that dipping into migration wealth could be an effective means of funding development on the African continent. Lessons can be drawn from diaspora bond issuances in Israel, Ethiopia and India.
The paper argued that with an estimated 140 million Africans living outside the continent, saving up to an estimated $53 billion in those destination countries each year, the potential for diaspora bonds is enormous. It noted studies which have indicated that migrant remittances to African countries are second only to FDI and bigger than official development aid.
It said diaspora bonds are typically used to finance large-scale infrastructure development projects in the private sector and are generally used by a country to implement its development strategy. Proceeds of diaspora bonds could be earmarked to projects with appeal to the diaspora, such as infrastructure projects, housing and social amenities.
It also noted that FDI and ODA have declined in recent years. “Traditional donor aid is likely to wane in the future as donor countries focus their resources internally. Remittance flows have also been affected by the economic crisis and consequently developing institutions are seeking new sources of resource mobilization”.
According to earlier Bank research, Africa could potentially raise $17 billion annually by using future flows of exports or remittances as collateral. Securitization of remittances could be used to raise short- to medium-term financing by African banks.
In Africa, Ethiopia is the first country to issue a diaspora bond to date, although several countries are considering following suit, including Cape Verde, Kenya and Ghana. Regular bond issuances in African countries have been available on the international market, such as the Morocco issuance (2010), and Senegalese, Nambian, Nigerian and Zambian issuances in 2011 and 2012. In this case, the shift from international bond to diaspora bond is simply a case of marketing, the paper’s authors argue.
The structure and management of the diaspora bonds are further discussed in the paper, which suggests the African Development Bank’s expertise and its financial instruments, as well as its interest in co-financing projects, could help leverage African migrant resources for development.
Bonds are a debt security instrument with a maturity of more than one year, tradable on the financial markets. Diaspora bonds are issued by the country to its own diaspora to tap into their assets in the destination country, as an alternative to borrowing from the international capital market, multilateral finance institutions or bilaterally from governments. The practice goes back to 1930s China and Japan and was later followed by Israel and India in the 1950s.