Options, investment vehicles for the diaspora

The herald

Dr Gift Mugano—

Diaspora remittances are one of the main sources of funding in developing countries. The diaspora in West African, Latin American and Asian countries play a vital role not only in sending money home for consumption but also for investment. Zimbabwe, in a dollarized environment, diaspora remittances are one of the main sources of cash after exports.However, what is clear is that in recent times diaspora remittances have been on the decline. Once again, it is evident that as a country we have not exhausted the main means of mobilizing remittances from the diaspora. Our remittances were arriving in the country as a support mechanism for families in the diaspora.

In this week’s issues and subsequent articles, I will unbox the options and investment vehicles for the diaspora and of course the political issues.

In order to attract diaspora remittances for home country investment, international experience has shown that countries use a number of investment vehicles such as deposit accounts, remittance securitization of funds, transnational loans, diaspora bonds and tax obligations.

Deposit accounts

The literature has shown that foreign nationals open accounts with commercial banks in their home country to obtain better returns. For example, economists from the German Socio-Economic Panel Christian Dustmann and Joseph Mestres estimate that 48% of German households have savings accounts in their home country. National interest rates are far higher than the London Interbank Rate (LIBOR) of around 1%, hence the motivation to send money home in the form of deposit accounts.

From a political point of view, to enable this in Zimbabwe, we need to eliminate all costs associated with savings accounts and withdrawal fees. Most importantly, savings accounts must carry a higher interest rate than the minimum bank charges that can be incurred as well as inflation. Ultimately, the performance of these accounts should be positive and encouraging.

In my opinion, a good return, based on interest rates, is a better incentive than rewarding the diaspora with bonds that are not real money.

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

Concretely, the balance sheets of our banks must be healthy, the accounts of the State must not be overdrawn, and there must be no constraint to withdraw money or carry out international transfers. If we meet these minimum requirements, we will certainly restore confidence even if we do not say a word to reassure our depositors.

Securitization of

Discount flow

Diasporas can help, albeit inadvertently, to expand the assets held by national banks in their home countries through the securitization of remittances. Securitization is the process of taking an illiquid asset, or group of assets, and converting it into stocks, bonds or property rights. Issuers of securitized debt securities can be public entities, private companies and banks with a proven track record of stability.

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

From a political point of view, the securitization of assets or debts requires the consolidation of the balance sheets of public entities and private entities in particular. At the national level, this requires swift implementation of business reforms and debt clearance. This should then be followed by good corporate governance practices. At the heart of governance, corruption must be fought decisively.

Transnational loans

Cross-border loans are usually small loans from banks or micro-finance that allow immigrants to apply for and manage a loan in their home country while residing abroad.

Cross-border loans allow migrants to extend credit to family members back home while leveraging established credit history 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 spending have been the most successful.

From a political perspective, Zimbabwe’s commercial banks and the government (through the Reserve Bank) should tap into the diaspora as part of a strategy to expand their customer base.

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

The question of prices is a real problem. Our homes are very expensive. Our diaspora siblings continue to lose money to parents who change them in the short term in the house building process.

The government must intervene here. It starts from the earth, doesn’t it? Who owns the land? The answer is government. Who is the government? All Zimbabweans are the government. What is our problem? Our problem is that we don’t have the money.

So if we are the government and we need the money but in order to bring the money we are limited by the cost of housing of which land is the main cost factor, why don’t we donate land free for housing projects for the diaspora and then we bring money to the country. The money that will improve liquidity and move us forward?

Diaspora and tax obligations

Diaspora bonds are long-term sovereign debt agreements that are marketed to diasporas. Diaspora bond issuers have access to fixed-term interest rates. In this regard, diaspora bonds are similar to fixed-term domestic currency deposit accounts, although they have unique features such as the fact that diaspora bonds generally result in a patriotic “cut”, ie. that is, the difference between the market interest on the public debt and the interest rate that the diasporas are ready to accept.

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

Israel has issued bonds to the Jewish diaspora every year since 1951 through the Development Corporation to raise long-term investment capital in infrastructure;

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

The government of Ghana in 2007 issued a $ 50 million Golden Jubilee savings bond to Ghanaians at home and abroad; and

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

Tax obligations, on the other hand, are obligations that are repaid not by the government but through charges for a specific project such as a toll road or a bridge. These bonds are traditionally used to renovate the country’s infrastructure. In Zimbabwe, road rehabilitation by Group Five has this type of arrangement although it falls under a public-private partnership agreement.

Since we have an infrastructure backlog as spelled out in Zimbabwe’s Program for Sustainable Socio-Economic Transformation (ZIM ASSET), the government should consider using diaspora and tax obligations as instruments to attract investment. of the diaspora. Beyond government, universities, for example, can also issue diaspora tax bonds aimed at building university-related infrastructure such as student hostels, lecture halls, laboratories and libraries. These universities can manage these obligations using the income generated from student fees.

In our quest to mobilize diaspora investment, we need to look at our strategies from a business perspective (what’s in it for the diaspora) and not from sympathy.

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

Dr Mugano is an economic advisor, author and expert in trade and finance and competitiveness. He is an associate researcher at Nelson Mandela Metropolitan University. Feedback: [email protected]

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