As countries across Africa grapple with the challenge of mobilising resources for critical development initiatives, an increasingly popular financial instrument has emerged as a promising solution – diaspora bonds. Designed to tap into the substantial savings and investment potential of citizens living abroad, these bonds offer governments, project sponsors and corporations an opportunity to diversify funding sources through what’s known as a ‘diasporic discount’, enabling domestic entities to borrow at below-market rates with extended maturities.
While traditional diaspora remittances have primarily supported family members, diaspora bonds can facilitate far-reaching positive impacts for entire communities. According to this year’s Absa African Financial Markets Index, countries are increasingly diversifying their financing products, with diaspora bonds gaining particular traction.
A growing appetite for alternative financing
The timing couldn’t be better. According to World Bank data, annual remittance inflows to Africa in 2023 amounted to $90.3bn, or approximately 259% of the continent’s gross domestic product. And this figure is expected to rise further in 2024. It is the second highest after Asia, where remittance inflows as a share of GDP come to 278%. Channelling these flows through purpose-specific bonds serves a dual purpose: it deepens often underdeveloped financial markets while broadening the retail investor base.
Nigeria’s 2017 diaspora bond stands as a testament to the potential of these instruments in Africa – the country successfully raised $330m for infrastructure projects. Building on this success, Olayemi Cardoso, Central Bank of Nigeria governor, announced plans to launch another diaspora bond in the US, targeting monthly remittance inflows of $1bn. The aim, according to the Ministry of Finance, would be to increase the supply of foreign exchange in the economy. This instrument could ease the foreign exchange shortages the country is facing in the aftermath of the central bank’s move to unify multiple exchange rate windows in June 2023.
Elsewhere, Cabo Verde is making significant strides in this direction. The country is developing regulations for diaspora bonds, expected to be published in 2024. According to a stakeholder from the country, recent blue and green bond listings in the country saw 25% to 35% of subscriptions coming from diasporic communities, suggesting a ready market for dedicated diaspora instruments.
Kenya, too, is positioning itself to tap into this market. With remittances growing to $2.8bn in the first seven months of this year (up from $2.4bn in the previous year), the country is working with the Multilateral Investment Guarantee Agency to structure a new diaspora bond. This comes at a crucial time as Kenya seeks alternative funding sources following domestic challenges that affected its revenue collection plans.
Learning from historical precedents
The concept of diaspora bonds isn’t new. Israel pioneered these instruments in 1951 and continues to issue them successfully. India has also demonstrated their viability, particularly with its 1991 issuance that capitalised on its large global diaspora.
However, not all attempts have been successful. Ethiopia’s experiences in 2008 and 2011 serve as cautionary tales, where limited trust in the government and high perceived risks deterred potential investors. There are also examples of failed attempts in Asia and Europe. These cases highlight a crucial lesson: successful diaspora bonds require more than just a large overseas population.
For diaspora bonds to succeed, several key factors must align. Countries need to establish strong policy and regulatory frameworks, coupled with robust financial market infrastructure to instil confidence in investors. And there needs to be careful consideration on the use of the funds raised through the bonds.
There’s also the delicate balance of timing. While the Israeli and Indian cases demonstrate their effectiveness during times of crisis, issuing these bonds during periods of fiscal distress could potentially damage sovereign credibility and market perception
Yet the potential benefits are compelling. Beyond providing an alternative funding source, diaspora bonds can help deepen domestic financial markets and create new investment opportunities for citizens and diasporic communities abroad who wish to contribute to their home country’s development.
Arunima Sharan is Senior Economist, Economic and Monetary Policy Institute, OMFIF.
