Diaspora Bonds

Due to inadequate funding, the government of Nepal (GoN) has not been able to fund large scale development projects that are necessary for overall infrastructure development of the country. The GoN is predominantly dependent on foreign grants and loans to execute large scale infrastructure projects. And because of this dependence and lack of other sources of development financing, existing level of infrastructure in Nepal is very poor. Empirical works in economics have identified infrastructure development as one of the necessary criteria for overall economic development.

In Nepal, however, we lack in overall infrastructure development: road connectivity, hydropower plants, airports and dry ports, and Special Economic Zones (SEZ), among others, are major areas for concerns in terms of infrastructure development. Though natural landscape of Nepal, because of various hilly and mountainous regions, has made carrying out development projects quite a challenging task, they are not the excuse for the current level of infrastructure in Nepal. Political uncertainty coupled with lack of funds has resulted in few large scale development projects over the years and resulted in a situation whereby Nepal ranks one of the lowest in terms of infrastructure development in the world. Because of strong link between infrastructure development and overall economic well being it’s no surprise that Nepal ranks as one of the poorest countries in the world.

Development projects such as hydropower, highways and airports require large scale investment. Because of the size of Nepal’s economy neither the GoN nor private sector commercial banks have the adequate funds to support these infrastructure projects. Analyzing the annual budget of the GoN, one can see that majority of the government revenue is spent on funding recurrent expenditure and GoN is dependent on foreign aid/grants/loans to fund large scale infrastructure project (in 2008/09, approximately 80% of the total capital expenditure of GoN was proposed to be financed by foreign aid). Private sector commercial banks in Nepal are also not in the position to fund big scale infrastructure projects as the average balance sheet position of top commercial banks in Nepal is around NRs. 45 billion. Even if the commercial banks reach a situation whereby they are in a position to fund large scale infrastructure project, the inherent nature of the infrastructure project – long duration – make these projects unattractive to commercial banks because of asset-liability mismatch for the banks. To address this asset-liability mismatch problem, the Indian government recently unveiled a “take-out” financing scheme to facilitate the involvement of commercial banks in large scale development projects. Under this scheme, the banks can opt out of the infrastructure project after a certain period of time by selling the loan to a third party.

While opportunities for development financing seem limited, one area where Nepal has made progress in recent years is remittance inflows. Due to the rise in the number of migrant overseas workers, remittance income has seen exponential increment during last few years. At the end of Fiscal Year (FY) 2008/09, Nepal received Rs. 209.69 billion in remittance income – a whopping 22% of GDP. Anecdotal evidences and research from the World Bank suggest that majority of remittance in Nepal is used for consumption purpose rather than for productive activities.

Under this background, one viable solution is where GoN taps the remittance income for infrastructure development. MOF, in its annual budget for Fiscal Year 2066/67, has proposed an idea of “Infrastructure development Bond” whereby it will raise NRs. 7 billion through Nepal Rastra Bank (NRB) from Nepali workers working abroad in Middle Eastern countries, South Korea and Malaysia. According to the MOF funds raised through issuance of such bonds will be used to finance infrastructure projects. The idea of diaspora bond – raising money by issuing bonds to overseas citizens - is not a new concept. India, Israel, Sri Lanka, South Africa and Lebanon, among others, have time and again tapped their diaspora to raise funds. According to Dilip Ratha of the World Bank, while the motives for the issuance of funds have varied, these diaspora bonds have provided much needed capital for the government of these countries. Israel in particular has been very successful in raising huge amount of money from their Jewish diaspora and utilizing the collected funds for development activities.

Because Nepali diaspora and their income (a share of which will be remitted back home) does provide a source of development financing option for the GoN, a careful analysis is required as to how the GoN can best tap this market. A cross country analysis of how these bonds are issued, interest cost on these bonds, and how the funds from these bonds are utilized for development projects is needed to best channel the remittance income towards development financing through diaspora bonds.

This article was first published in The Kathmandu Post on Sept 25, 2009

Link: http://www.kantipuronline.com/news/news-detail.php?news_id=300752