DIASPORA BONDS: A CASE FOR ZIMBABWE 2013/14
By Joshua Chigwangwa
[BA Hons Admin: Dip
Public Sector: ZAAT]
INTRODUCTION
Zimbabwe has for the past two decades been experiencing chronic
budgetary constraints due to problems originating primarily from the land
reform program leading to restrictions in accessing multilateral funding
support including development loans invoked
by the Zidera Act of 2001 https://www.govtrack.us/congress/bills/107/s494/text).
These restrictions ignited poverty and political instability precipitating a massive
human capital flight of desperate Zimbabweans into the Diaspora who are now estimated
at plus or minus 4 million people. An
estimated £40 billion in development assistance funding has thus been foregone
resulting in the unprecedented deterioration of public infrastructure and
services including the collapse of key industries and defaults in international
debt repayments.
The global economic crisis has adversely impacted on
confidence in debt markets, many countries including Zimbabwe in particular is as a result also experiencing difficulties in accessing and obtaining private financing which is exacerbated by economic restrictions
imposed on the country by the US and its allies in 2001 to date. These difficulties have pushed governments to be innovative and explore alternative means and options of accessing cheap resources. The Diaspora bond is one such facility that has managed to sustain economies in distress and Israel has successfully manoeuvred this instrument to bridge-finance its economy. Due to the rise in domestic poverty, many
families have been sustained by remittances from family members in the Diaspora. It
is now estimated Zimbabwe received about £1,6bn this year alone according to Finance Minister Patrick Chinamasa, from remittances
making it the second largest contributor to Zimbabwe's Gross Domestic Product (GDP). The standards
of living of the majority of Diasporas particularly in developed countries has
significantly improved over time, which makes it worthwhile to target expatriate
Diaspora communities as potential investors in capital investment projects in
the form of Diaspora bonds (Db). Research has proved that Diaspora bonds and remittances are a vital source of unrestricted funding particularly in difficult times as has been acknowledged in Zimbabwe that remittances did help prop the Zimbabwean economy from collapsing during its worst crisis point in 2008.
BACKGROUND TO
DIASPORA BONDS
In general, a bond is basically a debt security instrument
with an original maturity date of more than 1 year and is also tradeable in the financial markets. A Diaspora bond (Db) is a bond issued by a country to its expatriate
citizens' resident in the Diaspora to tap into their accumulated savings. It is
an alternative to borrowing from the global financial institutions, capital
markets or bilaterally from other governments. The idea of tapping into migrant
wealth is not new. The practise of issuing Diaspora bonds dates back to the
early 1930s with the first issuers being Japan and China followed in the 1950s
by Israel and later by India in the 1990s. The Israeli bonds have been a
success story and are estimated to have mobilised an estimated $25 billion in
the past 30 years. According to statistics, Israel’s Diaspora bonds accounted
for 20-35% of its outstanding external debt between 1983 and 2003.
 |
| Source: Publication by Prof G. Hugo: Adelaide University (2006) |
LESSONS LEARNT FROM
ETHIOPIA
In considering the floatation of Diaspora bonds (Db),
Zimbabwe needs to draw lessons from Ethiopia. Ethiopia is the first African
country to explicitly issue Diaspora Bonds targeted at its nationals living
abroad. Ethiopia’s first Db issue in 2008 which was unsuccessful, dubbed the
“Millennium Corporate Bond,” was intended to finance the Ethiopian Electric
Power Corporation (EEPCO) hydro-electric power project. The bid failed to raise
the expected cash revenue due to a variety of internal and external factors.
Internally, it was mainly due to the lack of trust in the utility to service
the debt, lack of faith and trust in the government’s credit guarantee and the overall
volatile political climate in Ethiopia at the time. Externally, this was due to
competition from bonds in the migrant’s adopted countries particularly the US
and the effects of the liquidity crisis caused by the global economic crisis.
Ethiopia’s second DB issue was in 2011 to finance the 5250W
Grand Renaissance Dam Project which was issued this time by the Finance
Ministry on behalf of a State Utility and incorporated a number of enhancements
such as a more concerted effort to engage with the Diaspora community in target
geographic locations. The issue incorporated key investment incentives and was
less politically driven. It was primarily the emphasis and enforcement of
repayment in convertible currency which made the 2011 bond more appealing to
investors living in developed countries.
The table below
summarises Ethiopia’s Diaspora Bond Issues.
:-
EEPCO
Millennium Corporate Bonds
|
Grand Renaissance Dam Project
|
|
Purpose
|
Raising funds for the Ethiopian
Electric Power
Corporation
|
Financing the Grand Renaissance Dam
|
Currency
|
USD, Euro and Pound Sterling and other
convertible currency, and Birr
|
USD, Euro and Pound Sterling or Birr
|
Minimum Denomination
|
USD 100 denominations but minimum
purchase
USD 500
|
USD, Euro and Pound Sterling, in
denominations
of 50
|
Maturity
|
5, 7 and 10 years
|
5 or between 5-10 years
|
Interest
|
4%, 4.5% and 5%
|
Non-interest bearing Option with
interest:
5yr: Libor+1.25%
6-7yr = Libor+1.5%
8-10yr = Libor +2%
|
Payment of the Bond
|
At maturity, the bold holder can:
i) receive the face
value of the bond in foreign currency;
ii) purchase
another bond with the same face value;
iii) deposit in a foreign currency or birr
account;
iv) pay for import commitments
|
At maturity
|
Payment of the Interest
|
Annually
|
Every six months
|
Repayment of the Interest
|
i) in birr in person; ii) deposit in a
foreign currency or birr account; iii) transfer abroad; iv) repurchase
additional bonds; v) pay for import commitments
|
Paid in the currency in which the bond
was originally purchased
|
Transferability
|
Transferable to a second party
|
Transferable to up to three people
|
Taxes
|
Interest income from the bond free from
any income tax
|
Revenue accrued will be free from any
tax
|
In the context of Zimbabwe, there is need for a massive
investment on the modernisation of communication tools and technology upgrade
that is critical to inducing the Diaspora community to participate in such Capital
finance initiatives. There is need for investment in and promotion of increased
use of electronic money transfer and payment systems that incorporate
international systems such as Pay Pal and BACs to enhance capacity in handling large financial transactions and reduce red-tape. This measure will help alleviate current
liquidity problems being encountered and promote wire-transfer payment
arrangements thus reducing the need for physical currency circulation of large amounts
unnecessarily. This also facilitates the
effective monitoring of the flow of remittances including facilitating the securitisation
of foreign remittances using established Money Transfer Operators (MTOs). This
will go a long way as well to eliminate current problems being experienced by established MTOs such as
Mukuru.com which is impacting on public confidence in this system.
Zimbabweans have a high literacy rate and most of its nationals in the Diaspora command high skills
mobility potential due to their strong educational background, a legacy of post
independence Zimbabwe. A majority of Zimbabweans believe in their culture of
investing back home and this is an area where government support is needed to
help ensure that these resources are applied in capital projects that have an
overall benefit to the aspirations of the nation’s development agenda. This
lack of synergy is evident in the thousands of low cost imported vehicles that have ended up making Zimbabwe a dumping ground for vehicles that are beyond their useful life
flooding the streets and resulting in a drain of more scarce resources. It is
estimated that there are over 500 000 un-roadworthy vehicles in Zimbabwe leading
to serious road carnage and a loss to vital human lives. (http://www.herald.co.zw/500-000-vehicles-unroadworthy-mpofu/).
 |
Nyaradzayi Gumbodzvanda rehabilitates Magaya School in Murewa from the Diaspora
|
Nyaradzayi Gumbodzvanda rehabilitates Magaya School in Murewa
from the Diaspora
A lot of Zimbabweans show a high degree of patriotism to
their country and will engage in Diaspora bonds if the right investment climate
is created and promoted. There already are a number of Zimbabweans and
organisations engaged in micro-financing of small infrastructure projects such
as school building projects and financing the education of children from poor
backgrounds in communities they originated from, which is a clear signal that
there is potential for this facility to prosper if government initiates efforts
to tap the Diaspora market using instruments such as the Diaspora bonds are properly introduced into the market. . (http://www.globalgiving.org/projects/rehabilitating-magaya-school-after-a-storm/
) The following link showcases a UK based Zimbabwean paying school fees and
upkeep for more than 200 children from her home area in Honde Valley from her
personal savings which is quiet remarkable. http://jmchigwangwa.blogspot.co.uk/2013/03/linda-satimburwa-amazed-at-zaa.html
 |
| Linda Satimburwa brings hope to disadvantaged children in Honde Valley from the Diaspora |
CHALLENGES FACING
ZIMBABWE’S ECONOMY
Due to the nature of political polarisation and manner in which human capital flight occurred, there is very little or no data available that has a complete mapping of Zimbabweans in the Diaspora making it even more difficult to plan how to effectively target and engage this community due to the spatial distribution and lack of accurate information but the areas of concentration including income data. A lot of the Diasporas suffered from lack of proper documentation in the early years leading to a concentration of low level jobs being taken up, but the situation has changed significantly with more Zimbabweans graduating in various post graduate studies and landing into highly skilled and rewarding jobs of late. There is scant information on how much the Diasporas earn, save and invest, key information that can facilitate effective planning and engagement. The ZIMSTATS Office carried a country profile published in 2009 which is not quiet convincing as detailed on the table below based on the sources of data.
Due to the nature of political polarisation and manner in which human capital flight occurred, there is very little or no data available that has a complete mapping of Zimbabweans in the Diaspora making it even more difficult to plan how to effectively target and engage this community due to the spatial distribution and lack of accurate information but the areas of concentration including income data. A lot of the Diasporas suffered from lack of proper documentation in the early years leading to a concentration of low level jobs being taken up, but the situation has changed significantly with more Zimbabweans graduating in various post graduate studies and landing into highly skilled and rewarding jobs of late. There is scant information on how much the Diasporas earn, save and invest, key information that can facilitate effective planning and engagement. The ZIMSTATS Office carried a country profile published in 2009 which is not quiet convincing as detailed on the table below based on the sources of data.
 |
A National Migration Strategy was carried out by the International Organisation for Migration (IOM) which published a report in 2009. The detailed report attempted to provided comprehensive migration data although it appears the report concentrated its findings in South Africa and included inconclusive secondary data representative of data from other parts of the world. The report is authoritative and identified a number of key issues for the Diaspora community but lacked weighted data and statistics mainly from parts outside the SADC region. The target population that is anticipated to contribute to the Diaspora bond issue is domiciled in the developed countries such as Australia, UK, USA and of Europe and Asia (http://www.iomzimbabwe.org.zw/index.php?option=com_docman&task=doc_details&gid=10&Itemid=3)
The report attempted to show data about the Diasporas spatial distribution based on isolated reports quoted from a number of authoritative sources but to not provide a comprehensive global perspective as it obtains today. The table below shows the summary data:
Zimbabwe therefore needs to map out detailed information first about its Citizens Living Abroad with a high degree of precision particularly those living in developed countries where there is inconclusive data due to the nature migration patterns, emulating a similar exercise carried out by Australia in 2003 contained in a report published by Professor Graeme Hugo from Adelaide University. See ( http://www.immi.gov.au/media/publications/pdf/aust_diaspora.pdf)
The thorny issue of weak institutional capacity in Parastatals, rampant corruption and lack of accountability needs to be tackled
to restore public confidence. Lack of effective oversight on the prudent
operations of state enterprises which has seen some CEOs earning more than 15%
of a Parastatals revenue in-flows, at a time when such institutions are failing to pay
wages to more than 80% of its workforce including the lack of transparency in the accountability of
Diamond revenues are some of the current issues of public concern that to be tackled as well. (http://www.financialgazette.co.zw/clean-up-psmas-now/)
These become key issues of concern for public
interest in being responsive to the calls to subscribe to Diaspora bond floatation and entrusting these resources to these institutions. There is need to heal the rifts that have polarised relationships due
to the volatile political climate that has prevailed over the past decade. A
lot of Diasporas still harbour bitter sentiments emanating from
previous political outbursts that have resulted in loss of mutual
confidence between the State and the Diasporas. There is need to research on the clarity and suitability
of regulations in the respective host countries to gather and ascertain conformity of conditions of the bonds with local enforcement laws across the globe for smooth operation of these bonds. .
The government is currently facing challenges of
political insecurity due to the disputed July 31 polls that are yet to be
endorsed by most countries in the developed world and a major stumbling block
to mending relations with multilateral institutions. There is need to
provide guarantees to policy consistence to reassure the Diasporas that previous decisions
that undermined the credibility of the banking sector following the unilateral
decisions to collapse Foreign Currency Denominated Accounts (FCA) by the
Central Bank will not be repeated. (http://www.theindependent.co.zw/2006/07/21/pay-homelink-proceeds-in-forex-rbz-told/).
The other policy issues that are of Diaspora
concern regards challenges emanating from the current liquidity crisis and how it
is being managed. A number of indigenous owned banks are struggling to meet
depositors’ demands and this casts a shadow of doubt on issues of credibility.
(http://www.bloomberg.com/news/2013-12-18/zimbabwe-bank-manager-assaulted-as-clients-fail-to-draw-cash-1-.html).
Other key macro-economic management
issues include measures being taken to resolve the £11 billion debt crisis
including the protracted illegal economic sanctions that are crowding out
government efforts to turn around the economy.
DIRECT LESSONS FROM THE DIASPORA HOMELINK SCHEME
The Reserve Bank of Zimbabwe (RBZ) set up a subsidiary company Homelink (Pvt) Ltd in 2004 to mobilise foreign currency remittances and facilitate property acquisitions and development for Zimbabweans in the diaspora, a package significantly mirrors the Diaspora bonds. It is believed the conditions of this scheme were not properly thought out and based more on limited assumptions that were more of a replication of the sub-prime mortgage deals that triggered the collapse of Fraddie Mae in the US and triggered the financial housing cash crisis that ignited the global economic crisis in September 2007. As toxic effects of this scheme sank poisonous fangs midway into its implementation, its venom shocked the product which was also exacerbated by severe foreign currency shortages which hit the domestic market.
The RBZ compromised the credibility of the deal following a unilateral instruction to its associate MTOs to pay recipients under this deal in local Zimbabwe currency when the Diasporas were compelled to only pay-off the loans in hard currency which in turn accrued to the Central bank. The decision fuelled the parallel black market causing even more problems for the economy as the Diasporas opted to deal with the more flexible and even more competitive black market. According to experts analysis, the foreign currency exchange rate offered then by the RBZ was far too low to attract the diaspora market and given that it was also a fixed rate which was not responsive to volatile environment that unfolded as the ripple effects of the global economic crisis were setting.
The scheme was dealt with a nail in the head in 2008 when the then Acting Minister of Finance Patrick Chinamasa announced the government decision to discard use of the Zimbabwe dollar in preference of the US dollar as official tender. The turn of events made the scheme unattractive leading to the decision in 2011 for the RBZ to ditch non-core quasi fiscal activities. Although financial products under Homelink had been re-engineered to adapt to the volatile environment, a lot of damage had been done to its reputation. A lot of properties under the scheme were repossessed from the Diaspora participants who felt trapped in the devil's dungeon and unrealistic clauses which were part of the packages. It therefore goes without elaboration, that there already exists painful experiences that have scarred both sides giving rise for the need to put more effort in gathering intelligence data and engaging with the Diaspora to remove predatory tendencies and scheming the Diaspora community.
DIRECT LESSONS FROM THE DIASPORA HOMELINK SCHEME
The Reserve Bank of Zimbabwe (RBZ) set up a subsidiary company Homelink (Pvt) Ltd in 2004 to mobilise foreign currency remittances and facilitate property acquisitions and development for Zimbabweans in the diaspora, a package significantly mirrors the Diaspora bonds. It is believed the conditions of this scheme were not properly thought out and based more on limited assumptions that were more of a replication of the sub-prime mortgage deals that triggered the collapse of Fraddie Mae in the US and triggered the financial housing cash crisis that ignited the global economic crisis in September 2007. As toxic effects of this scheme sank poisonous fangs midway into its implementation, its venom shocked the product which was also exacerbated by severe foreign currency shortages which hit the domestic market.
The RBZ compromised the credibility of the deal following a unilateral instruction to its associate MTOs to pay recipients under this deal in local Zimbabwe currency when the Diasporas were compelled to only pay-off the loans in hard currency which in turn accrued to the Central bank. The decision fuelled the parallel black market causing even more problems for the economy as the Diasporas opted to deal with the more flexible and even more competitive black market. According to experts analysis, the foreign currency exchange rate offered then by the RBZ was far too low to attract the diaspora market and given that it was also a fixed rate which was not responsive to volatile environment that unfolded as the ripple effects of the global economic crisis were setting.
The scheme was dealt with a nail in the head in 2008 when the then Acting Minister of Finance Patrick Chinamasa announced the government decision to discard use of the Zimbabwe dollar in preference of the US dollar as official tender. The turn of events made the scheme unattractive leading to the decision in 2011 for the RBZ to ditch non-core quasi fiscal activities. Although financial products under Homelink had been re-engineered to adapt to the volatile environment, a lot of damage had been done to its reputation. A lot of properties under the scheme were repossessed from the Diaspora participants who felt trapped in the devil's dungeon and unrealistic clauses which were part of the packages. It therefore goes without elaboration, that there already exists painful experiences that have scarred both sides giving rise for the need to put more effort in gathering intelligence data and engaging with the Diaspora to remove predatory tendencies and scheming the Diaspora community.
DIASPORA BOND
PROPOSALS AND CONSIDERATIONS
The government through the Budget presented by
Finance Minister Chinamasa, earlier this month expressed its interest in
engaging the Diaspora to fund some small scale hydro-electric schemes through
issuance of Diaspora bonds in return for tax and import duties concessions and
participation in the indigenisation programme. In the spirit of transparency
and democracy as expounded in Zimbabwe’s new Constitution, it is perhaps
advisable that meticulous efforts be made to consult and engage the Diaspora to
make an informed input into the complexity of what of form and shape the first Diaspora bond issue should appear like. A one size fits all approach may not attract Diaspora interest
taking into account a number prevailing factors as discussed earlier. The offer on the table is only focused on hydro-electric schemes but needs to a have a broader outlook in my view.
It is advisable and prudent to come up with a basket
of unique projects covering different sectors that could be optional such as
housing, power generation, health facilities, upgrading of infrastructure,
tourism development and transportation, etc. This gives flexibility given
access to opportunities differs across the globe as some areas may be ideal to use these instruments with flexibility. It is also vital that
a frame work be formulated that guarantees accountability, transparency and
effective governance necessary to enforce these contracts given the weak
institutional capacity that currently exists.
The government needs to take this opportune
moment to offer incentives that can guarantee long term engagement mechanisms
with the Diaspora. In mind, it should create conditions that encourage the
Diasporas to register with and engage with their respective embassies. This
should also come with decentralisation of key services like a quick turnaround
in the processing and provision of key documents such as birth certificates and
passports among others. The embassies need to be also equipped to help
Zimbabweans stranded in the Diaspora for whatever reason to provide a protector
of last resort status in times of difficulties to reduce cases of people dying
either due to destitution and neglect. The government needs to foist and demonstrate a
culture of caring and genuine concern for its abroad to make this engagement worthwhile
and not be construed merely as a desperate measure to callously milk savings
and resources from the Diaspora community in difficult times.
CONCLUSION
This paper discussed the rationale and potential
of issuing Diaspora bonds as instruments of raising external development
finance drawing on experiences from Ethiopia. Ethiopia has so far issued two
Diaspora bonds, the first one was unsuccessful and the second one generated
substantial interest in the Diaspora after suitable adjustments and
consultations had been taken into account. There is need to deal with challenges
affecting Zimbabwe’s economy which discourage participation of the Diaspora
community to engage government in infrastructure development. There is need to
engage the Diaspora and carry out an exercise to determine their geographic
location across the globe, as well as key data such as skills, occupations,
earnings, savings and investments and to promote engagement with embassies
regularly for data consistency. Australia has carried out such an exercise which can be a learning curve.
The government needs to deal with governance challenges such as rampant corruption, weak institutional capacity and governance polarisation to foster cordial relations with the Diaspora community. There is need to consult the Diasporas on optional projects that they may be interested in investing in and to formulate a framework that guarantees accountability, transparency and capacity to manage the investments. Lessons from the Home link schemes should be a seriously considered given that this is product that failed dismally, taking into account that there are no immediate signs of the economy stabilising in the short to medium term.
The government needs to deal with governance challenges such as rampant corruption, weak institutional capacity and governance polarisation to foster cordial relations with the Diaspora community. There is need to consult the Diasporas on optional projects that they may be interested in investing in and to formulate a framework that guarantees accountability, transparency and capacity to manage the investments. Lessons from the Home link schemes should be a seriously considered given that this is product that failed dismally, taking into account that there are no immediate signs of the economy stabilising in the short to medium term.
REFERENCES
Zimbabwe Bank Manager Assaulted as Clients Fail to Draw Cash (Dec, 2013)
http://www.bloomberg.com/news/2013-12-18/zimbabwe-bank-manager-assaulted-as-clients-fail-to-draw-cash-1-.html
Mapping Issues for Diaspora Participation and Engaging in Zimbabwe’s Reconstruction by Peter Mudungwe (2009)
http://www.iomzimbabwe.org.zw/index.php?option=com_docman&task=doc_details&gid=10&Itemid=3
Migration in Zimbabwe: A Country Profile (2009) by Dr L. Zanamwe and A. Devillard
http://www.iomzimbabwe.org.zw/index.php? option=com_docman&task=doc_details&gid=10&Itemid=3
http://rickymarima.wordpress.com/2013/05/02/zimbabwes-diaspora-question-and-its-economic-colonisation/
http://www.financialgazette.co.zw/clean-up-psmas-now/
http://www.immi.gov.au/media/publications/pdf/aust_diaspora.pdf
http://www.slideshare.net/Ausmerica/the-australian-diaspora-its-size-nature-and-significance
http://www.immi.gov.au/media/publications/pdf/aust_diaspora.pdf
http://www.slideshare.net/Ausmerica/the-australian-diaspora-its-size-nature-and-significance
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