Africa: World Bank Advocates Diaspora Consultation for Successful Bond Issuance

The World Bank has underscored the importance of consulting with citizens living in the diaspora before issuing diaspora bonds to enhance their success rate. This recommendation was outlined in the latest Migration and Development Brief released by the Bretton Woods Institution in December. The report emphasized that remittances from the diaspora, which have been consistently growing, represent a more reliable source of funding compared to diminishing Foreign Direct Investment.

The report stated, “Chances for the success of an issuance can be improved by consulting with the diaspora ahead of time. Such consultations can provide valuable information on the potential market, the most suitable denominations, and the appropriate financial structure and interest rate. Consultations also can help dispel any distrust about the use of bond proceeds, which can be a barrier to diaspora participation.”

It further suggested the use of multilateral guarantees, such as those against breach of contract, to support bond issuance. In cases where risk mitigation is necessary or to meet eligibility criteria for guarantee support, the report proposed the establishment of a special purpose entity offshore for issuing the bond and remitting the proceeds to the government.

This recommendation comes amid a mixed trend in the success of diaspora bond issuance. While Nigeria successfully raised $300 million in 2017, other countries like Ethiopia, Nepal, and Kenya faced challenges in achieving the expected fundraising amounts through diaspora bonds.

Diaspora bonds are retail bonds sold in small denominations to a large number of people. Despite potential higher distribution costs compared to sovereign bonds sold to institutional investors, the use of mobile phones and digital platforms for bond distribution can significantly reduce these costs.

A report by the Brookings Institution highlighted factors impacting diaspora bond success, including the risk of default, volatility in African financial markets, and a lack of transparency and confidence in domestic financial markets.

The World Bank’s call for diaspora consultation reflects the growing significance of remittances as a major source of external financing for developing countries, particularly those without access to international capital markets. In Nigeria, for instance, Foreign Direct Investment (FDI) has declined, making remittances a critical financial lifeline.

Dr. Akinwumi Adesina, President of the African Development Bank (AfDB), emphasized the pivotal role of remittances from Africans overseas, characterizing them as the largest financiers of the continent through gifts or grants, contributing to livelihood security for millions of Africans.