Options, investment vehicles for the diaspora

24 Nov, 2016 - 00:11 0 Views

The Herald

Dr Gift Mugano—

Diaspora remittances is one of the key sources of finance in developing countries. The diaspora for the West African countries, Latin America and Asia are playing a critical role not only is sending money home for consumption but also for investments. Zimbabwe, under dollarised environment, diaspora remittances is second after exports as one of major source of liquidity.However, what is clear is that of late, diaspora remittances had been falling. Again, it is apparent that, as a country, we didn’t exhausted major avenues for mobilising diaspora remittances. Our remittances had been coming in country as support mechanism for the families of the diaspora.

In this week’s issues and subsequent articles I will be unpacking options and investment vehicles for the diaspora and obviously policy issues.

In order to attract diaspora remittances for investments in the home country, international experience has shown that countries employed a number of investment vehicles like deposit accounts, securitisation of remittances, transnational loans, diaspora bonds and revenue bonds.

Deposit accounts

Literature has shown that foreign nationals open accounts with commercial banks in their home countries to get better returns. For example, German Socio — Economic Panel economists Christian Dustmann and Joseph Mestres estimate that 48 percent of households in German hold savings accounts in their country of origin. Domestic interest rates are by far much higher the London Interbank Rate (LIBOR) of around 1% hence the motivation to send money home as deposit accounts.

From a policy perspective, to enable this in Zimbabwe, we need to eliminate all costs associated with savings accounts and withdrawal charges. Most importantly, the savings accounts should bear interest rate which will be above the minimum bank charges which may be incurred as well as inflation. At the end of the day, the return on such accounts should be positive and encouraging.

In my view, a handsome return, based on interest rates is a better incentive as opposed to say rewarding diaspora with bond notes which is not real money.

In addition, measures aimed at building confidence in the banking sector such as putting measures to ensure bank soundness, liberalisation of the financial market must be put in place and surety that the foreign currency account of the diaspora will remain safe. Words alone are not enough.

To be specific, our banks’ balance sheets must be sound, the Government’s accounts shouldn’t be in overdraft, and there should not be any constraint in withdrawing money nor making international transfers. If we achieve these minimum requirements, we will certainly restore confidence even if we don’t say a word in assuring our depositors.

Securitisation of

Remittance flows

Diasporas can contribute albeit inadvertently — to broadening the assets held by domestic bank in their countries of origin through the securitisation of remittance flows. Securitisation is the process of taking an illiquid asset, or group of assets, and converting it into stocks, bonds or rights to ownership. Issuers of debt securitised can be public entities, private corporations and banks that have proven record of stability.

Evidence has shown that countries like Mexico, Brazil, El Salvador and Peru, for example, successfully securitised their debts using the diasporas.

From a policy perspective, the securitisation of assets or debt requires cleaning of balance sheets of public entities and private entities in particular. At a national level, it requires expeditious implementation of doing business reforms and debt clearance. This must then be followed by good corporate governance practices. At the centre of governance, corruption must be dealt with decisively.

Transnational loans

Transnational loans are generally small loans provided by banks or micro-finance that allow immigrants to apply for and service a loan in their countries of origin while residing abroad.

Transnational loans enable migrants to provide credit to their family members back home while leveraging on credit history established in the country of residence and retaining ultimate control over the loan.

Evidence has shown that transnational loans for business expansion, home improvement, home purchase and education expenses have been most successful.

From a policy perspective,commercial banks in Zimbabwe and Government (through the Reserve Bank) should tap into the diaspora as part of a strategy to broaden their clientele base.

Loans for housing projects which were are under the Home Link project plausible but there is need to reduce the cost of acquiring the house in line with regional benchmarks.

The issue of pricing is a real issue. Our houses are very expensive. Our brothers and sisters in the diaspora continues to lose money to relatives who short change them in the process of building the house.

Government must intervene here. It start from land isn’t? Who owns land? The answer is Government. Who is Government? All the Zimbabweans are the Government. What is our problem? Our problem is that we don’t have money.

So, if we are the Government and we need money but to bring money in we are constrained by the cost of housing of which land is the major cost driver why don’t we give land free for the housing projects meant for the diaspora and then we bring money into the country. Money which will improve liquidity and get us going?

Diaspora bonds and Revenue bonds

Diaspora bonds are long dated sovereign debt arrangements that are marketed to diasporas. Issuers of diaspora bonds gain access to fixed term interest rate. In this respect, diaspora bonds are similar to fixed term domestic currency deposit accounts, although they have some unique features like the fact that diaspora bonds usually earns patriotic ‘‘discount’’ that is, the difference between market interest for Government debt and the interest rate that the diasporas are willing to accept.

A number of countries have successfully used diaspora bonds. Good examples are:

Israel issued bonds to the Jewish diaspora annually since 1951 through the Development Corporation to raise long term infrastructure investment capital;

Egypt issued bonds to Egyptian workers throughout the Middle East in the late 1970s;

The Government of Ghana, in 2007, issued a $50 million “Golden Jubilee” savings bond targeted at the Ghanaian at home and abroad; and

Ethiopia issued the Millennium Corporate Bond in 2008 to raise capital for the state — owned Ethiopian Electric Power Corporation;

Revenue bonds, on the other hand, are bonds which are which are repaid not by Government but through fees from a specific project such as a toll road or bridge. These bonds are traditionally used to revamp the country’s infrastructure. In Zimbabwe, the road rehabilitation by Group Five has this kind of arrangement although it falls under public private partnership arrangement.

Since we have infrastructure backlog as enunciated in the Zimbabwe Agenda for Sustainable Socio Economic Transformation (ZIM ASSET), Government should consider use of diaspora and revenue bonds as instruments for attracting diaspora investments. Beyond Government, universities, for example, can also issue revenue bonds to the diaspora aimed at the construction of university related infrastructure like student hostels, lecture theatres, laboratories and libraries. These universities can service these bonds using the revenue generated from students’ fees.

In our quest to mobilise diaspora investments, we must look at our strategies from a business perspective (what is in it for the diaspora) not sympathy.

Dzioneremhingo (mbereko) yedede (gudo) ukareka kubatira unowa.

Dr Mugano is an Economic Advisor, Author and Expert in Trade& Finance and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: [email protected]

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