Q&A: Harnessing Diaspora Funds for Development Financing

Posted on 11 October 2011 by admin

Thalif Deen interviews DILIP RATHA of the World Bank

Dilip Ratha

Credit: Courtesy of Dilip Ratha

UNITED NATIONS, Oct 11, 2011 (IPS) – When the final aid figures for 2010 were tallied early this year, industrial nations claimed a record-high 129 billion dollars in official development assistance (ODA) to the world’s poorer nations.

 

Still, it fell far short of the average 325 billion dollars in remittances migrants send annually to their home countries in Asia, Africa and Latin America and the Caribbean.

“That figure,” U.N. Secretary-General Ban Ki-moon points out, “dwarfs international aid flows.”

Nearly two-thirds of the world’s 214 million migrants live in wealthy countries of the north and the global south. And if current trends continue, the figure will rise to 405 million by 2050, according to the Geneva-based International Organization for Migration (IOM).

But how much of the remittances from migrants are invested in savings and channeled into development?

Dilip Ratha, lead economist and manager of the Migration and Remittances Unit at the World Bank, is one of the strongest advocates of “diaspora bonds”.

In an interview with IPS U.N. Bureau Chief Thalif Deen, he said that diaspora savings are estimated to be in the range of 400 billion dollars annually – far more than the 325-billion-dollar figure.

He said significant amounts of development financing can be raised via diaspora bonds by developing countries.

“And most of this is currently invested in low-yield deposits or held as cash under the mattress,” said Ratha, a former assistant professor of economics at the Indian Institute of Management at Ahmedabad.

If a diaspora bond offers four percent interest, that could be of significant interest to the diaspora investors.

A distinguishing feature of a diaspora bond, he pointed out, is that it is a retail bond. That also increases the cost of retailing the bonds.

However, the “patriotic discount” or discount on account of home bias can outweigh the higher retailing cost of diaspora bonds. Since migration is expected to increase in the coming years – due to falling travel and information costs, demographic trends and income disparities among countries – and since migrant incomes are likely to rise over the long-term, the potential for diaspora bonds will also increase correspondingly, Ratha said.

Excerpts from the interview follow.

Q: Besides Israel (which established State of Israel Bonds back in 1951), are there any other countries that have successfully set up diaspora bonds?

A: India is perhaps the only other example of successful launching of diaspora bonds. Between India and Israel, nearly 40 billion dollars have been raised since 1951 via diaspora bonds. Many countries – e.g., the Philippines, Lebanon, Sri Lanka – have raised diaspora savings via foreign currency deposits, but these are not the same as bonds.

Q: How different are diaspora bonds?

A: Diaspora bonds are similar to fixed-term deposits, and offer a degree of predictability on debt service and amortisation and thus, helpful to the borrower. Other countries – e.g., Ethiopia and Nepal – have issued diaspora bonds, but the past issuances have not been successful. The Philippines also issued an Overseas Filipino Workers’ Bond last year, but a large part of these bonds were purchased by local banks and only a small part was sold to diaspora members.

Q: Doesn’t the investment in such bonds depend on several factors, including the extent of savings by migrants – pretty poor in the Middle East, for example; the security of the bonds itself; and the economic and political stability of the home country, for example, Haiti, Somalia, Yemen or Egypt?

A: You are right. It is key for the issuing government to understand where the diaspora members are; how many; how much do they earn, save, invest; how do they feel about the government and about investing back home; and what particular types of projects would they like so that diaspora bond proceeds could be targeted accordingly.

Political risk perception by the diaspora members is an important factor that would affect investments in diaspora bonds. Yet, given the amount of political risk, it is often the case that the diaspora members have less of a risk perception and more risk tolerance than unattached foreign investors. On top, diaspora members often have a desire to give back that the diaspora bond could exploit, to raise a lower interest rate and longer maturity debt.

Q: What role does the World Bank play in diaspora bonds? Advising countries? If so, what are the countries you are working with?

A: The World Bank is currently working with Kenya, Nigeria, and the Philippines on diaspora bonds. The main role of the World Bank is that of an honest broker: between investment bankers and the government, between the government and the diasporas, between the government of the issuing country and the government regulators in the destination country for migrants.

The World Bank also hopes to offer technical assistance in the financial structuring of these bonds, such as pricing, currency denomination, risk assessment and rating, timing of issuance.

(END)

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