Sub-Saharan Africans In The Diaspora Have Over $30 billion In Savings. Why Aren't African Countries Courting Them?

Sub-Saharan Africans In The Diaspora Have Over $30 billion In Savings. Why Aren’t African Countries Courting Them?

The New York Times reports that investors are eager for African sovereign debt despite the risks. Sovereign debt is said to be booming as the narrative for the continent changes despite Ebola and all the other traditional risks previously associated with Africa.

African countries use the money for infrastructure development. According to the NYT, Rwanda used cash from sovereign bonds to complete a convention centre and build a new hydroelectric plant. Senegal has used them for roads and the electric grid, and Kenya is expanding it ports and railway system. But what are Sovereign Bonds?

African countries borrow money to finance their development plans. They do this by a combination of foreign bank loans, foreign aid and by issuing bonds on their domestic market. Sovereign bonds usually designated in dollars can be cheaper than bank loans but are more expensive than direct aid and are not without risk. Read the full NYT story here.

According to Ketkar and Ratha, a diaspora bond is a debt instrument issued by a country – or potentially, a sub-sovereign entity or a private corporation – to raise financing from its overseas diaspora.

African countries are yet to tap into the resources of their diasporas as an additional way of funding development. During the 1950s, Israel issued bonds targeted at their diasporas and raised $32 billion. India followed suit and has been issuing bonds since the 1991 generating $11billion. To be successful, it calls for a different type of relationship between the government of the country and the diaspora who may have originally left the country for economic and opportunity reasons in the first place, and give them a say in how the money will be spent. Kenya have shown some success with this. Ethiopia on the other hand has not.

According to the World Bank, 2009 figures indicate that sub-Saharan Africans in the diaspora have savings of $30.4 billion  equivalent to 3.2 per cent of regional GDP prior to the rebasing of some economies. North Africans in the diaspora have $22.3 billion of savings equivalent to 4.3 per cent of GDP. These bonds could be adapted to fund education for instance.

To work, and for the diaspora to feel comfortable, Ketkar and Ratha suggest that credit enhancements via donor guarantees or securitization, and investor protections through external professional fund management would be needed to facilitate use of diaspora bonds to fund education.

Why aren’t  African countries jumping on this?