June 1, 2017 Jwala Rambarran 1Comment

Jamaica prides itself on its cultural and sporting prowess, boasting reggae superstar – Bob Marley – and the fastest man in the world – Usain Bolt. Jamaica is also the exotic island paradise that inspired and defined the world’s most famous secret agent, James Bond. But the Caribbean island may soon have another remarkable achievement apart from Bob, Bolt and Bond.

Earlier this year, Jamaican Prime Minister Andrew Holness accompanied by the Chairman of Jamaica’s Economic Growth Council, Michael Lee Chin, embarked on a trade mission to Israel. This trade mission may, once the ground-breaking spirit under which it was undertaken continues, turn out to be a historic one for Jamaica and the rest of the Caribbean.

What made this trade mission different from those of some other Caribbean leaders meeting executives of energy companies without any technocrats or secretly playing golf in Houston, Texas is that Lee Chin strategically used it to advocate the introduction of an innovative financing instrument for Jamaica, known as the diaspora bond.

The trade mission highlighted the success Israel has enjoyed with diaspora bonds, which though considered new in our part of the world, has been highly effective in generating financing for Israel since 1951.

This type of economic ingenuity and leadership displayed by Jamaica is what the entire Caribbean region desperately needs right now in these tough economic times. Strengthening economic growth, reducing poverty and meeting the Sustainable Development Goals for the benefit of millions of people in the Caribbean requires large amounts of funds. But the Caribbean’s traditional sources of development finance are drying up and there are not that many new sources of funding that governments can tap.

Migrants from the Caribbean offer a unique pool of resources that can be harnessed. According to estimates from the World Bank, there are more than 4 million first-generation migrants from the Caribbean living mainly in the US, Canada and the United Kingdom. The size of the Caribbean diaspora is even larger if we add second- and third-generation migrants.

The money these migrants send home in the form of remittances is substantial. Migrants from the Caribbean sent more than US$5.5 billion in remittances last year to relatives back home. These remittance inflows were three and half times that of foreign aid and one and half times that of foreign direct investment.

For all their attraction, however, remittances remain a survival mechanism. While they help hundreds of families across the Caribbean to meet household expenses and repay debts, remittances are based on private bonds of attachment, rather than national interests. There’s little Caribbean governments can do to harness the flow of incoming remittances except make transactions at Western Union and Money Gram cheaper and easier.

What’s less well known is the enormous savings Caribbean migrant sons and daughters have amassed. Preliminary estimates put the savings of the Caribbean diaspora at over US$12.5 billion a year. Diaspora savings are sizable for countries such as Haiti, Jamaica and Trinidad and Tobago that have more migrants in the advanced economies. These savings are mostly held in low-yielding bank accounts in the US, Canada and the UK.

Imagine if some of those diaspora savings were channelled into building schools, hospitals and houses across the Caribbean. If just one in every 10 diaspora members were persuaded to invest US$1,000 in his or her country of origin, the Caribbean could potentially raise close to US$500 million in fresh financing each year.

The concept of the diaspora bond is not new. It has been tried and tested by two countries with famously large and hardworking diaspora populations, Israel and India. Both nations have successfully issued diaspora bonds, Israel since the 1950s and India in the 1990s.

The Israeli government has raised nearly US$40 billion since 1951 when it first started tapping into its Jewish diaspora community for funding in the aftermath of the War of Independence which devastated the fledgling Israeli economy.

India raised more than US$11 billion from its Non Resident Indian community, which helped it to recover from a balance of payments crisis in 1991, and again in 1998 and 2000 when India was cut off from the global capital markets following the imposition of international sanctions in the wake of its testing of nuclear weapons.

Since then a few countries with large first-generation diaspora populations in middle to high-income countries have either issued diaspora bonds (Sri Lanka, Ethiopia and Nepal) or announced plans to do so (Greece and Nigeria). But not all these efforts have been successful. Jamaica would do well to learn from the experiences of these countries if it wants to successfully mobilize funds from its diaspora.

 

Jamaica Diaspora Bond

About fourteen years ago Jamaica contemplated issuing a diaspora bond, but did not move ahead with this pioneering initiative. Timing, as they say, is everything. Today, of all the countries in the Caribbean, Jamaica is the best suited to successfully tap into the wealth of its diaspora.

Perhaps the most important condition for a diaspora bond to be issued is the existence of political will. Both Prime Minister Holness and Lee Chin, as Chairman of Jamaica’s Economic Growth Council, have publicly demonstrated their resolve to see Jamaica successfully issue a diaspora bond.

Another important condition is to have an economic plan in place. Since 2013, Jamaica has made considerable progress under IMF-supported programs in restoring economic stability, reducing its onerous public debt, and addressing a range of structural issues.

These achievements were possible, despite a change in government after general elections in February 2016. But economic growth remains low, job creation has been slower than anticipated, and high crime continues to impose significant costs to Jamaican business and society.

So the Holness administration has entered into a new precautionary IMF program to support growth, create jobs, and provide policy continuity.

Perhaps in what is considered a first for the IMF is that Jamaica’s  program incorporates all the recommendations made by Lee Chin’s Economic Growth Council to reboot Jamaica’s growth, including harnessing the power of the diaspora. The recommendations reflect public consensus on a priority set of initiatives to help stimulate Jamaica’s growth.

Incidentally, Trinidad and Tobago’s Economic Advisory Board should study its Jamaican counterpart in terms of making its recommendations become part of the country’s economic policy framework in a timely manner, especially since Trinidad and Tobago’s economic board was established some six months before that of Jamaica’s but is yet to make any meaningful national impact.

A third important condition for a diaspora bond is the need to have access to more stable and less costly external resources. Tapping into the patriotism and wealth of its one million plus diaspora should provide the Jamaican government with financing not only in good times but especially in bad times.

The savings of the Jamaican diaspora are estimated at around US$3.5 billion a year. That’s more than twice the entire amount the Jamaica government could borrow from the IMF under its current program.

A diaspora investor may be willing to buy Jamaican diaspora bonds at a lower interest rate than that demanded by foreign investors. This is called a “patriotic” discount and it lowers the cost of borrowing for the Jamaican government.

A Jamaican migrant in the United States, for example, who presently earns close to zero on his bank deposits would find it attractive to buy a Jamaican diaspora bond offering an annual interest rate of say, 5%. The interest rate on this diaspora bond would be far below the 7.625% interest rate demanded by foreign investors who hold Jamaica’s latest 2025 Eurobond.

Jamaican diaspora bonds can be sold in small denominations ranging from US$100 to US$1,000 to diaspora communities through national and international banks and money transfer companies. The bonds could be sold in larger denominations to wealthier migrants, diaspora groups, and institutional investors.

They can be marketed through churches, community groups, newspapers, stores and business associations in places where Jamaican migrants live in large numbers.

There is no reason, however, for Jamaica to restrict its diaspora bonds to persons of Jamaican descent. “Brand Jamaica” is very strong and the government should leverage this to include many friends of Jamaica who may wish to contribute directly to the country’s economic development.

Since Jamaica has a speculative grade credit rating, its diaspora bond can be made even more attractive to institutional investors such as pension funds and mutual funds by offering credit enhancements.

The Jamaican government can obtain a partial risk guarantee for its diaspora bond from the International Finance Corporation (IFC), the private sector arm of the World Bank. Such a guarantee could even raise the rating on a Jamaican diaspora bond to investment grade.

Jamaica’s diaspora bonds offer the diaspora community an investment opportunity to express their desire to do “good” in their homeland, especially if the bonds will finance projects such as housing, schools and hospitals with a concrete benefit to their families, or the community back home.

While patriotism will motivate the Jamaican diaspora to provide cheaper funding, the Jamaican government must also be prepared to give its diaspora a greater say in how any funds raised will be used in order to alleviate concerns about graft and mismanagement.

The desire to maintain an attachment to the homeland is a powerful emotion rarely applied to finance, but is certainly an idea worth pursuing for cash-strapped, debt-ridden Caribbean economies.

Diaspora bonds cannot solve all the problems of Caribbean countries. But they can be part of the solution.

This time, Jamaica is leading the way for the rest of the Caribbean.

And it might soon add a new Bond to its list of impressive achievements.

 

 

One thought on “Harnessing the Diaspora…A New Bond for the Jamaican Homeland

  1. I read you article with great interest. However, what guantees Jamaicans living overseas will have to ensure governance conditionality. You there cannot ask the diaspora to contribute to a bond with giving them the rights to vote in order to protect their interest.

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