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Diaspora Bonds Gain Momentum

Sponsor: Poverty Reduction and Economic Management Network
  • Diaspora bonds address the untapped potential of diaspora savings and remittances, money that could be applied to development purposes in home countries
  • More developing countries are either issuing diaspora bonds for development projects or are moving in that direction
  • The World Bank stands ready to help governments with project design, financial structuring of bonds, and marketing to the diaspora

WASHINGTON, DC, September 23, 2011 -- Every day, money is earned by the millions who have left their homes to find safer or more prosperous lives in other countries. Some of these earnings are sent home as remittances to family members, resulting in a multibillion-dollar annual flow of money around the globe, contributing significant amounts to some nations' economies.

Before establishing its current trend of robust economic growth and sound fiscal management, "Bangladesh could have gone broke" without remittances, said Dr. Atiur Rahman, governor of the country's central bank. He was one of the participants at the seminar "Diaspora Bonds: Operational and Implementation Challenges," which took place in Washington on the eve of the IMF-World Bank Annual Meetings in late September.

It is estimated that the annual savings of the diasporas from developing countries total as much as $400 billion. It would be a mistake to assume that all of the funds remitted go to consumption by the recipients – Rahman has seen remittance money flowing into small businesses, and there is also ample evidence that expatriates support a wide range of charitable activities.

Both these savings and the remittances represent huge, largely untapped development resources. But how can these scattered funds be attracted by a government that may be thousands of miles away from the money?

Enter the diaspora bond, a retail savings instrument marketed to that segment of the diaspora that has some money socked away but where a capital-organizing power of an entrepreneur is absent.

“Traditional sources of finance, such as official development assistance, have not been sufficient to fund many critical projects,” said World Bank Managing Director Mahmoud Mohieldin. “Developing countries will have to find innovative ways to finance infrastructure, education and health projects.”

In the past five months, the concept has gained momentum. Among the developing nations that stand to benefit from the idea, more are considering bond issues or have made positive moves in their direction.

Kenya's central bank has gone as far as earmarking a portion of its infrastructure bonds for marketing to its diaspora, with auctions set to begin next week. While the bonds are also available to local investors, Kenyan Central Bank Governor Njuguna Ndung'u believes strongly in the concept of engaging the diaspora in development –these bonds enable investing by thousands of people who otherwise would not, by cutting the investment into "slices that they can afford."

For the World Bank's part, it has begun marshaling resources to help these and other governments with the critical tasks that must be accomplished before a bond can be issued, or even seriously considered. It can also act, in the words of Otaviano Canuto, Vice President of the Bank's Poverty Reduction and Economic Management Network, as a "hummingbird" – organizing knowledge, and bringing people from different countries and areas of expertise together in order to maximize the effectiveness of any diaspora bond effort.

“Diaspora bonds represent a significant untapped potential for raising development finance,” said Dilip Ratha, Lead Economist in the Bank’s Migration and Remittances Unit.

Once it has decided to issue a diaspora bond, a government must link it to appropriate projects and be transparent about how the money is used. After all, if the diaspora don't feel that the bonds will truly help the homeland, they won't buy very many.

The Kenyan bond issue is tied to projects in water, sewage and irrigation, energy, and roads – all of which are sectors that potential diaspora investors appear interested in supporting. But the best selling point may be that the government is being up front about how it intends to spend the money, which lends credibility to the whole enterprise, Ndung'u said.

Of course, a government must then be able to effectively communicate the existence of its new financing vehicles to the target audience. As any marketing guru will tell you, selling first requires your audience to listen but then also to trust you. And in order to inspire trust, transparency and good results need to be at the forefront of any diaspora bond effort.

To meet the growing demand for the Bank’s support, Managing Director Mohieldin announced that the World Bank Group is forming a Task Force on the Implementation of Diaspora Bonds aimed at supporting client efforts to harness the energies of the people abroad for the people at home.

Photo credit flickr user baklavabaklava (under a Creative Commons license).

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