The success of these financial instruments in India and Nigeria shows that patriotic ties can be a powerful incentive for diaspora members to invest in their home countries.
More than 250 million people, or 3% of the world population, live and work outside of their country of origin. Corresponding to this large stock of migrants, the total remittance flow in the world is estimated to have exceeded $600 billion in 2015, and this number will rise in coming years. In Asia and the Pacific, remittances amounted to $223 billion in 2014, almost 10 times the $25 billion spent that year on official development assistance in the region.
Despite this high volume, however, countries have not yet fully tapped their remittances’ potential for development finance. This is a missed opportunity, since tapping diaspora resources would enable countries to efficiently raise capital for development projects such as infrastructure or crisis relief, as well as reduce their reliance on official development assistance.
Most of the remittances to the Asia-Pacific region are cash-to-cash, which means they are not held as savings or other financial instruments but rather withdrawn as cash at receiving points. Although a growing number of banks and financial institutions have started offering remittance-linked investment products, most remittances are used for consumption and little stays in the national financial system. To address this problem and encourage remittance flows to contribute more to national economies, governments could further develop the financial sector and make remittance transactions cheaper and faster, but governments have limited means to harness remittances and channel them into productive investments.
Governments can gain access to migrant resources—in potentially substantial amounts—by issuing ‘diaspora bonds,' a type of government debt that targets members of their national communities abroad, and an important source of funding for governments that have a large number of overseas nationals.
Diaspora bonds have particular advantages over borrowing from international investors or finding foreign direct investment. Due to social, cultural, and nationalistic attachments, diaspora communities find products like diaspora bonds more attractive compared to other investment products such as US Treasury bonds. Diasporas tend to have in-depth knowledge about their country’s economic conditions, and can make better investment decisions even in the absence of country credit ratings. Many living overseas feel obliged to help their home countries, in particular at times of crisis, and may even accept a lower yield – a so-called ‘patriotic discount.’
The Government of India has successfully issued diaspora bonds and raised a total of $32 billion in three issues. India sold 5-year maturity rupee-denominated bonds in 1991, 1998, and 2000 exclusively to non-resident Indians. The exclusivity was particularly effective in India because it is believed that the Indian diaspora prefer to invest in instruments exclusive to them and hold assets in Indian rupees.
Nigeria is another recent successful example. Nigeria issued $100 million in diaspora bonds in 2013 in a private placement. Given the success of that first issue, the government has decided to raise 300 million euros from a second diaspora bond issue under its 2016-2018 borrowing plan. This time, Nigeria will register its bonds with the US Securities and Exchange Commission. This involves complying with many regulations but provides transparency, and will give the Nigerian bonds open access to US retail investors.
The success in India and Nigeria shows that patriotic ties can be a powerful incentive for diaspora members to invest in their home countries. However, to issue diaspora bonds successfully governments must get some fundamentals right. Governments have to maintain financial sector stability and, if possible, well recognized credit ratings. They also have to maintain close ties with diaspora communities and conduct persistent networking and marketing when issuing bonds.