The Opportunities of Diaspora Bonds

Irwin Allotey, London, UK
Frebruray 26, 2023

O n June 30, 2017, the minister of finance Ken Ofori-Atta, hinted that the country would consider a diaspora bond as a funding mechanism to boost public finance revenues and fund critical growth-oriented development projects in the country¹. The government reiterated this ambition via the Ministry of External Relations and Regional Integration, in a 2019 concept paper entitled ‟Diaspora engagement initiative”. In this paper, the Ministry discussed how Ghanaians resident abroad could participate in national development. The document specifically mentioned diaspora bonds as a mechanism to attract diaspora direct investments. Until now, the country has opted for other fundraising mechanisms while seemingly keeping the option for a diaspora bond open in the future.

Overview

A diaspora bond is a form of fixed-income instrument issued by a country to its own diaspora to tap into their disposable incomes and savings straight from their adopted countries. Through this instrument, a Ghanaian living abroad can lend the government money for investment into development projects. In return, the investor (a Ghanaian living abroad) will receive coupon payments at a fixed interest rate over the duration of the bond and then the principal at maturity.

Diaspora bonds have the structure of classic fixed-income bonds, for example, in terms of risk vs return to attract investors. In addition, diaspora bonds have a unique feature commonly referred to as a “patriotic discount”. Essentially, for the same risk, the investor is expected to accept a lower return in the form of bond coupons that are lower than the benchmark (e.g. 10-year US Treasury bond or other bonds on the global market issued by the same or comparable issuer).

Some diaspora bonds may add other items, such as repayment in local currency or in dollars, to their structure to make them appealing. International development finance institutions such as the World Bank and the African Development Bank (AfDB)² identify diaspora bonds as important fundraising vehicles. Examples of nations sourcing from the diaspora can be traced back to the early 1930s, with Japan as the first issuer, followed by China in the 1950s, then Israel and India. The ‟State of Israel Bond” stands out as the most successful example of a diaspora bond issuance. It mobilized close to US$25 billion over the course of 30 years. Other examples include Lebanon and Sri Lanka. On the African continent, Ethiopia and Nigeria have issued diaspora bonds.

Investment potential of the Ghanaian diaspora

One of the prerequisites for a successful diaspora bond is a study of the demographics, which can give a solid understanding of the diaspora's individual and collective expectations.

A direct engagement with the diaspora community is vital. In this field, the government of Ghana continues to deploy policies to attract the diaspora to Ghana. The ‟Year of Return” program, launched in September 2018 by President Nana Akufo-Addo in Washington-D.C., was a year-long initiative that ran through 2019. On December 27, 2019, in Accra, the President of Ghana launched an extension program called ‟Beyond Year of Return”. The President said that this extension program builds on feedback received from the diaspora and host communities in Ghana. He explained that as the year-long ‟Year of Return” drew to a close, it was time to ‟engage Africans in the diaspora and all persons of African descent, more positively in areas such as trade and investment co-operation, and skills and knowledge development”. The ultimate goal is to broaden the demographic base of the Ghanaian diaspora.

Recent demographic surveys tend to confirm the readiness of the Ghanaian dispora for investments back in Ghana. A study by the London-based Commonwealth Secretariat found that members of the Ghanaian diaspora maintain financial connections with their country, with 92 percent reporting that they send money to friends and family. Savings, deposit accounts, and real estate properties are the most common form of assets they have in Ghana. The study also indicates that 43 percent say that they currently hold one. Specifically, the study revealed that 39 percent of members of the diaspora in the study expressed an interest in investing in government bonds, with 12 percent saying they have invested in the past³. In addition to these positive dispositions to invest in the country, figures from remittances are showing sustained growth despite recent external economic shocks.

Learning from others

Ghana has experience in bond issues that target a diverse pool of international investors including the diaspora. In recent years, the country has issued US-Dollar denominated bonds which partly targetted the diaspora. A concrete example for Ghana is the the African Export-Import Bank, which in 1996, co-arranged the first ‟future flow securitization” by a sub-Saharan African country. This was a US$40 million medium-term loan in favor of a development bank in Ghana, backed by its Western Union remittance receivables. Prior to this issue, Ghana issued the ‟Golden Jubilee Savings Bond” in 2007, targeted to both Ghanaians living in Ghana and those living abroad, to attract infrastructure finance, with funds allocated to specific development projects across the country. This proved unsuccessful, with the bond 60 percent undersubscribed ⁴

However, today Ghana can count on multilateral partners. They can provide credit enhancements to developing country-borrowers facing severe financing gaps. In their tool kit, multilateral institutions offer technical assistance on legal matters, bond structuring, pricing and risk management expertise. Ghana can also learn from other African countries.

Ethiopia

1. The example from Ethiopia provides instructive and insightful lessons. In 2008, the first diaspora bond from Ethiopia, called the ‟Millennium Corporate Bond”sourced funds for a hydroelectric power project (The Gilgel Gibe III, sponsored by the Ethiopian Electric Power Corporation or EEPCO). This bond issue did not meet revenue expectations. According to the World Bank⁵, sales were slow during the first months of offering despite the efforts of the Commercial Bank of Ethiopia and of embassies and consulates abroad. According to the African Development Bank (AfDB)⁶, at the time, the diaspora perceived the ability or (inability) of the issuer (EEPCO, the national utility company) to service the debt as a risk. A lack of trust in the government (guarantor) and the political climate prevailing in Ethiopia during the issue also dented the confidence of many investors. In addition, the lack of secondary markets and the low yield on the bond (5 percent) compared to instruments in their country of residence, for example, certificate of deposits (i.e. US) discouraged many potential investors in the diaspora.

   Armed with these harsh lessons, the government embellished its second diaspora bond in 2011⁷. The state, instead of a utility company, issued the bond to finance the construction of a 5,250MW hydroelectric project called the Grand Renaissance Dam. The bond contained several enhancements, such as an improvement in the marketing campaign to the Ethiopian diaspora, minimum denominations of US$50, and the possibility to transfer the bond to up to three people. The State also allowed Ethiopians to use the bond as collateral inside Ethiopia. The Commercial Bank of Ethiopia also covered remittance fees associated with the purchase of the bonds⁸.

Nigeria

1. In 2017, Nigeria adopted another approach in its first Diaspora Bond⁹, which raised $300 million. It listed the bond in the United States and in the United Kingdom. This strategy had two objectives. The first was to reassure the Nigerian diaspora about the legal framework of the bond. During a public press conference held in Abuja on June 17, 2017, Mrs. Kemi Adeosun, Minister of finance during the issuance, said that ‟to have received the approval of the U.S. SEC was indicative that the highest level of transparency and accountability in the economic process has been attained”.

   The second objective was to appeal to a wider international Nigerian diaspora and international investors. Minister Adeosun indicated that ‟there was considerable interest from investors from all over the world, with the issuance attracting initial orders of about 190 per cent of the offered amount”.

   She subsequently disclosed that ‟final subscriptions were about 130 per cent of offer at the final price for the transaction”. The Federal Government redeemed the US$300 million bond at maturity on June 27, 2022 Bond¹⁰.

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