To help Africa, sell diaspora bonds, say Ngozi Okonjo-Iweala and
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
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
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
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.