Homeward Bond
To help Africa, sell diaspora bonds, say Ngozi Okonjo-Iweala and Dilip Ratha

March 15, 2011 - This op-ed by Ngozi Okonjo-Iweala, managing director and Dilip Ratha, manager of the DEC-PREM Migration and Remittances unit, first appeared in the New York Times on March 12.

Here is a statistic you may not be aware of: about 50 percent of the worlds uncultivated, arable land is in Africa. This abundance of potential farmland offers Africa the opportunity to feed itself and to help feed the rest of the globe. But consider another statistic: because of poor roads and a lack of storage, African farmers can lose up to 50 percent of their crop just trying to get it to market.

In other words, Africa needs not only greater investment in agriculture, but also in roads, ports and other facilities that are vital to moving the lands products to consumers. Fortunately, part of the solution could lie with the almost 23 million African migrants around the globe, who together have an annual savings of more than $30 billion. Tapping into this money with so-called diaspora bonds could help provide Africa with the equipment and services it needs for long-term growth and poverty reduction.

These diaspora bonds would be in essence structured like any bonds on the market, but would be sold by governments, private companies and public-private partnerships to Africans living abroad. The bonds would be sold in small denominations, from $100 to $10,000, to individual investors or, in larger denominations, to institutional and foreign investors.

Preliminary estimates suggest that sub-Saharan African countries (excluding South Africa, which doesn't have significant emigration) could raise $5 billion to $10 billion a year through diaspora bonds. Countries like Ghana, Kenya and Zambia, which have fairly large numbers of migrants living abroad in high-income countries, would particularly profit from issuing diaspora bonds.

There are precedents for such moves. Greece announced this week that it was preparing to issue $3 billion worth of diaspora bonds in the United States. India and Israel have issued diaspora bonds in the past, raising over $35 billion, often in times of financial crises.

Why would diaspora bonds work so well? For one thing, the idea taps into emigrants continuing patriotism and desire to give back to their home countries. And because diaspora populations often build strong webs of churches, community groups and newspapers, bond issuers would be able to tap into a ready-made marketing network.

Another advantage of diaspora bonds for African countries is that migrants make more stable investors in their home countries than people without local knowledge. Theyre less likely to pull out at the first sign of trouble. And they wouldnt demand the same high rate of interest as a foreign investor, who wants to compensate for the risk of investing in what would seem to them like a relatively unknown developing country.

Diaspora bonds could also be issued in the local currency, as migrants are likely to be less averse to the risk of currency devaluation. Thats because members of the diaspora have more use for local currency than foreign investors; migrants can always use it when they go back home or for family-related expenses.

Take, for example, an African living in the United States who now earns an annual interest rate of less than 1 percent on small deposits; a diaspora bond with an interest rate of about 5 percent certainly might seem attractive. To make the bond even more appealing, the countries the migrants reside in could provide tax breaks on interest income. Donor or multilateral aid agencies could also offer credit enhancements in the form of partial guarantees, to mitigate default risks.

Even more money could flow into Africa if countries tapped into the billions of dollars that members of the diaspora send home each year by using those remittances as collateral to raise financing from international markets. This approach has allowed banks in several developing countries including Brazil, Egypt, El Salvador, Guatemala, Kazakhstan, Mexico and Turkey to raise more than $15 billion since 2000.

Heres how this works: When a migrant transfers foreign currency to a relatives creditworthy bank in his home country, the bank pays out the remittance from its holding of local currency. That transaction creates a foreign currency asset equivalent to the size of the remittance, which can be used as collateral for borrowing cheaply and over the long term in overseas capital markets.

Such borrowing has no effect on the flow of money from migrants to their beneficiaries. Yet development banks, national banks in developing countries and donor agencies can partner to harness enough remittances and create enough collateral to raise significant sums of money to invest in agriculture, roads, housing and other vital projects.

The people of Africa are scattered around the globe, but many still feel a powerful sense of belonging to the continent. Through diaspora bonds and remittances, they could create a better future for their homeland.