Apr 21 - 2:30 Minutes
Several developing countries are encountering great difficulty in obtaining private financing using traditional financial instruments. It has led to a severe crisis of confidence in debt markets in the current environment. The scarcity of capital threatens to jeopardize long-term growth and employment generation in developing countries. So official aid alone will not be adequate to bridge short-term or long-term financing gaps. Hence, adopting innovative mechanism like diaspora bonds will help to target untapped investors.
A diaspora bond is a bond issued to expatriates whereby developing countries can borrow from their expatriate communities. In simple words, the diaspora bonds fund the developing countries in need of financial emergency from expats living in developed countries during the crisis. Consequently, these bonds support housing, health, education projects, and balance of payments needs and finance infrastructure. Therefore in return, the government gives discounts to diasporas in their home countries for financial support. However, India and Israel have used diaspora bonds to raise over $35 billions of development financing.
Potential for diaspora bond
Only high skilled migrants residing in rich nations are eligible and principal purchasers for diaspora bonds. Organization for Economic Co-operation and Development (OECD) ranks twenty-five developing countries by the presence of their diaspora. The presence of diaspora is also significant in other parts of the world, e.g., Korean and Chinese diaspora in Japan.
Bonds include some factors that contribute to the emerging of finance in developing economies. These factors include financial stability, international support, credit ratings, the structure of the bond itself, and the success of the individual migrants. A combination of these factors play a massive role in investor's confidence in one's home country. During crucial times in developing countries, like securing resources outside of humanitarian aid. The diaspora bond act as a crisis relief.
Issuance can prove to be challenging at times
Several factors contribute to the outcome of the actual issuance of diaspora bond.
There is limited awareness about this financing vehicle. This bond often deters government and other entities due to its complexities of bond instruments. Simultaneously the focus is shifted on national banks to generate local and foreign currency deposits(LCDs and FCDs) from diaspora investors.
Many countries have little concrete appreciation of the abilities and resources of their respective diaspora. Diaspora's data are available based on their registration with embassies. As a result, the government does not possess any information about the expatriates.
In many cases, diasporas abandon their plans for using new financing mechanisms after the financing gap dissolves. Hence the same scenario was witnessed in Sri Lanka and the Philippines.
Diaspora investors must have confidence in the government of their native nation while purchasing bonds. Now countries have initiated tracking their diaspora due to the increase in remittance. Countries are currently moving towards giving their dual diaspora citizenship.
Government plays a vital role in the purchase of diaspora bond. Purchasing hard currency bonds without governability can lead to civil strife. So, in the Far East, Eastern European and countries such as Cuba, Haiti, and Nigeria possess diasporas abroad but have low governance levels. Unlike India and Israel have to undergo some legal process. This legal process states that diaspora bonds should be registered with the US Securities and Exchange Commission (SEC) to tap the retail US market.
Israel and India have experienced diaspora bonds' success, where expats have intense patriotism and knowledge of their home economy's prospects. Diaspora bonds are a stable and cheap source of external finance for countries, especially in times of financial stress. Looking at India's success with issuing the India Development Bond, Resurgent India Bond, and the India Millennium Deposits. The diaspora contains patriotic devotion for their country, which proves to be very important. Besides being motivated by patriotism, diaspora members are usually more interested than foreign investors in investing in their home country. Hence for diaspora investors, these bonds offer opportunities for home country and investment opportunity. Other countries like El Salvador, Ethiopia, Nepal, the Philippines, Rwanda and Sri Lanka are commencing diaspora bonds to bridge financing gaps.
Reading time 2:30 Minutes
Prerana has completed her graduation in Media Science from NSHM Knowledge Campus, Kolkata. She has more than two years of experience in content writing. Alongside, she has a passion for research in the marketing industry.
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