Diaspora Bonds: Migration Meets Investment

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A diaspora bond is a debt instrument that a country sells specifically to its own emigrants and their descendants, rather than to the general international bond market. The idea is straightforward. People who left a country often retain an attachment to it, hold savings in a hard currency, and are willing to accept a lower return, or to lend at a moment when nobody else will, because their motives are not purely financial. For a government facing a shortage of foreign exchange, that combination is valuable: it offers a source of hard currency that is less sensitive to credit ratings and market panic than ordinary borrowing.

India is one of only two countries with a substantial track record in this instrument, the other being Israel. Israel has issued bonds to Jewish communities abroad more or less continuously since 1951 through what is now called Israel Bonds, and has raised very large cumulative sums that way. India's approach has been episodic rather than continuous, and its three main issues were each a response to a specific crisis or a specific external shock.

Three Indian issues and why they happened

The first came in 1991, in the depth of India's balance of payments crisis. Foreign exchange reserves had fallen to the point where they covered only a few weeks of imports, the government physically shipped gold to the Bank of England as collateral, and India entered an International Monetary Fund programme. In that context the State Bank of India issued India Development Bonds, denominated in United States dollars and sterling, sold to non resident Indians. The instrument raised roughly one and a half billion United States dollars at a time when conventional market access was effectively closed.

The second came in 1998, after India conducted nuclear tests at Pokhran in May of that year and faced sanctions from the United States, Japan and others, along with downgrades from the credit rating agencies. The State Bank of India issued Resurgent India Bonds, again targeted at non resident Indians and people of Indian origin, and raised in the region of four billion United States dollars. The third followed in 2000 with India Millennium Deposits, raised in a calmer environment and reported to have brought in a comparable or somewhat larger amount. In each case the money came in at a moment when the alternative sources were expensive or unavailable, which is exactly the counter cyclical property that makes the instrument attractive to finance ministries.

The mechanics matter for understanding both the appeal and the criticism. These were not bonds sold on an exchange to anybody. Eligibility was restricted by ethnicity or origin, the bonds were typically not freely tradable, and they carried tax advantages and exchange rate features designed to make them attractive to holders of foreign currency savings. Critically, they were issued by the State Bank of India rather than directly by the sovereign, and the government provided support behind that. This structure has been questioned. Because eligibility was defined by origin, the bonds were not registered for sale to the general public in the United States, which raised regulatory issues under American securities law that have been discussed in the academic literature ever since.

Why other countries have found it hard to copy

The apparent simplicity of the idea has attracted many governments. Ethiopia issued a diaspora bond to finance the Grand Ethiopian Renaissance Dam, Nigeria issued one in 2017, Kenya, Nepal, Ghana, Pakistan, Sri Lanka and the Philippines have all attempted versions, and Greece and Jamaica have discussed them at various points. Most have raised far less than hoped. The reasons are instructive.

The first is trust. A diaspora bond is a bet on the issuing government's willingness to repay, and emigrants often left precisely because they did not trust the state they left. Ethiopia's earlier issue for an electric power project reportedly performed poorly, and later efforts have been complicated by political conflict at home. The second is the profile of the diaspora. The instrument works best where emigrants are numerous, wealthy, concentrated in high income countries with convertible currencies, and connected to institutions that can market to them. India's professional migration to North America, Britain and the Gulf, and Israel's relationship with communities in the United States, both fit that description. Many countries whose emigrants are mostly low wage workers sending small remittances do not.

The third is that remittances already do much of the job. India receives more remittances than any other country, running above one hundred billion United States dollars a year in recent World Bank estimates, and non resident Indian deposits held in Indian banks represent another very large stock of diaspora money that arrives without any bond issue at all. Several economists have argued that the marginal value of a diaspora bond, over and above deposit schemes that already attract the same money, is smaller than advocates claim, and that governments would do better to reduce the cost of remitting money and improve the returns on ordinary deposits.

There is also a design question that has not been settled. Development economists, notably Dilip Ratha at the World Bank, have argued that diaspora bonds could be structured to finance identifiable projects such as schools, hospitals or transport links in the emigrant's own region of origin, which would convert a vague patriotic appeal into something a lender can see. That has intuitive appeal and matches the way many diaspora communities already fund village institutions directly. It also creates hard problems of governance and reporting, because the whole premise depends on the lender believing the money actually built the school.

India has not returned to the instrument since 2000, and its reserves position has been comfortable enough that it has not needed to. The idea resurfaces in Indian policy discussion whenever the rupee comes under pressure or the current account deficit widens, and it is periodically raised as a way to fund infrastructure. Whether it would work a fourth time is uncertain: the diaspora is now larger and wealthier than it was in 1998, but it is also more integrated into the financial systems of its host countries, has ordinary access to Indian markets through regulated channels, and is a generation further removed from the emotional register that made an emergency appeal effective.

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