Diaspora Bonds: A viable option for Nepal?

Remittances have become a substantial source of GDP for many developing countries including Nepal. However, there are growing concerns regarding the use of remittances – most of it is used for household consumption, almost 90% in Nepal, and the rest for education and paying back previous loans. The question is how do we channel remittances towards productive use so that we can increase our savings and investment rates instead of simply consuming it? This question goes beyond just concerns from Nepalese central bankers to those in other developing countries as well. In most countries, remittances are used for consumption. In response to this concern, several experts on migration issues have suggested “diaspora bonds”, a debt instrument issued by a country or a private corporation to raise financing from its diaspora.

There are several advantages to harnessing the diaspora through issuance of bonds: members of the diaspora are often patriotic and want to contribute to developing their homelands; they are less impatient and less nervous about investing since they have long-term ties to their home country; and they like seeing their investments go into something concrete rather than simply being consumed. “Because the diaspora savings are held mostly as cash under the mattress or in low-yielding bank accounts in the countries of destination, offering an annual interest rate of 4 or 5 percent on diaspora bonds could be attractive”, Dilip Ratha of the World Bank writes.

Nepal also issued diaspora bonds, under the name “Foreign Employment Bond” in 2010, to raise funds for infrastructure development but only for a very short period of time of about 2 weeks. Ratha points out that the bond failed to bring about any significant changes for multiple reasons: 1) it was initiated for too short a period, only about 2-weeks from June 30 to July 12, 2010, 2) it was not advertised broadly, and migrants in India and OECD countries were not allowed to buy diaspora bonds (only those in the Gulf countries and Malaysia were allowed to purchase these bonds), 3) the interest provided on the bond, 9.75%, barely met even the inflation rate, making other commercial assets more attractive, etc.

The size of remittance to Nepal has been rapidly increasing in the past few years, with the number being $3.5 billion in 2010, not including remittances from India, Ratha writes. This is almost a quarter of the GDP. Given that remittances are bound to increase over the years and increasingly will play an important role in the country’s economy, the government of Nepal should consider ways of harnessing the diaspora. However, how likely this would be through diaspora bonds is uncertain, given that most people living in or abroad have hardly any faith in the government.

And the distrust towards government is for a good reason: corruption is extremely high in Nepal. There is mistrust amongst the diaspora and those living in the country regarding how the government manages its funds and whether any investments made in government projects would even be completed during their own lifetime. Given such mistrust, it’s hard to imagine that Nepal would be successful in selling diaspora bonds. Unless the Nepalese government can show that it is ready to tackle corruption, diaspora bonds may only look good in paper.

Image source: http://www.parakhi.com/news/2012/02/21/150000-nepali-migrant-workers-in-uae