What Is a Diaspora Bond?
A diaspora bond is a bond issued by a country to its expatriates. These bonds allow developing countries in need of financing to look to expats in wealthy countries for support. Diaspora bonds offer migrants discounts on government debt from their home countries. India and Israel have successfully issued diaspora bonds.
- Diaspora bonds are often used for infrastructure projects or crisis relief in developing countries, where more resources above humanitarian aid are necessary.
- Diaspora bonds have typically been successful with countries such as Israel and India, where expats have strong patriotism and knowledge of their home economy’s prospects.
- However, these bonds typically carry low yields because of the strong patriotic duties felt by expats to their home countries.
- Migrants typically receive a discount on the debt from their home countries.
- Issuance can prove to be challenging at times, especially as migrants have fled oppressive governments in the past.
Understanding Diaspora Bonds
Diaspora bonds are typically offered to expatriates with long-term maturities and low yields. Provided that expatriates hold some patriotism and knowledge of their home economies, they’ll be willing to accept a below-average investment compared to a low-risk U.S. Treasury bond.
Developing countries rely heavily on remittances and foreign direct investment as sources of funding. Increasingly large amounts of remittances help friends and families in times of need as well as helping non-residents acquire assets back home. For these developing countries, access to international markets and foreign debt markets isn’t always a given. Developing countries depend on aid for disaster relief and infrastructure building, among many other reasons.
However, due to little credibility, an inability to back assets, and/or political instability, developing countries can’t always obtain the capital required to proceed with vital projects. A major aspect of diaspora bonds is a country's ability to raise low-cost capital through patriotism. Expatriates can overlook many shortcomings of the financial stability of a country when they’re helping their home country’s economic growth.
Expats in wealthy countries tend to invest in bonds issued by their home countries.
Advantages and Disadvantages of Diaspora Bonds
Diaspora bonds can be very useful in the financing of emerging and developing economies. Looking at the success India had with issuing the India Development Bond, Resurgent India Bond, and the India Millennium Deposits, the patriotic devotion the diaspora has for its country can prove to be very important.
Meanwhile, Israel issued its bonds for development purposes and has reissued them on an annual basis since 1951. Tapping the patriotic nature of expatriates allows countries to efficiently raise capital for necessary projects such as infrastructure or crisis relief to name a few.
However, many factors must be apparent for these bonds to be successful, including financial stability, international support, widely-recognized credit ratings, the structure of the bond itself, and the success of the individual migrants. A combination of these factors plays a large role in investor confidence in one’s home country. At a time when developing economies may find it difficult to secure resources outside of humanitarian aid, diaspora bonds as a debt instrument may prove to be an important introduction to the foreign debt market.
Example of a Diaspora Bond
India and Diaspora Bonds
In the case of India, reaching out to its diaspora in times of need has had significant benefits. India only issues bonds to Non-Residential Indians (NRI). Issuing these bonds exclusively to Indians gives them incentives to invest in an instrument with limited availability. Exclusivity, in particular, can be attributed to the fact that these bonds pay in domestic denominated currency rather than a hard currency such as the U.S. dollar. It is believed that Indians are more inclined to hold local currency as they still hold assets within the country.
This belief is supported by the high level of remittances still pouring into India. The country had $83.3 billion in remittance inflows during 2019. Remittances suggest that expatriates have a lasting connection with individuals in their home country.
Although migrants benefit from patriotic discounts on diaspora bonds, these financial instruments typically offer low yields. Rather than seeking funding through foreign debt markets, India has avoided the restrictions and pressures for societal and structural reform.
Israel and Diaspora Bonds
In 1951, the Development Corporation of Israel implemented a program seeking aid from its diaspora with the objective of raising foreign exchange for the state. The annual issuances of these bonds are seen as a stable source of overseas borrowing while also allowing Israel to maintain ties to its expatriates.
While Israel has sought aid as a means to build infrastructure rather than assistance during the financial crisis, investments have jumped steeply during times of need. For example, annual sales of DCI bonds doubled in the year following the 1973 Yom Kippur War.
Nigeria and Diaspora Bonds
India and Israel’s success with diaspora bonds haven’t proven to be a blueprint for other countries. Attracting investors is difficult without an appropriate foundation. Ethiopia’s Millennium Corporate Bond can in part be attributed to political instability, lack of financial backed assets, local currency-denominated payments, and low-risk premiums. Nigeria will face obstacles similar to Ethiopia in raising investments, but Nigeria has approached its issuance in a more credible manner.
Like Israel, Nigeria registers its bonds with the U.S. Securities and Exchange Commission (SEC), which involves complying with many regulations. Registering debt instruments with the SEC requires covering the costs of registration as well as stringent disclosure and transparency of assets. This gives the Nigerian bonds open access to U.S. retail investors, which the Ethiopian Millennium Bond avoided.