Diaspora bonds are known as fixed income securities issued by countries that want to borrow money from nationals living abroad. They function like any other bonds and are open to all investors but have historically specifically targeted members of the diaspora. Researchers have found that diaspora bonds work better when they are long-dated, fixed interest rate securities that can be redeemed only at maturity.

According to the Asian Development Bank (ADB), more than 250 million people, or around 3 percent of the world population, live and work outside of their country of origin. The total remittance flows from migrants around the world is estimated to have exceeded US$600 billion in 2015. In Asia and the Pacific, remittances amounted to $223 billion in 2014, almost 10 times the $25 billion spent that year on official development assistance in the region.

With this huge volume of remittances, countries could be more open to the idea of maximizing remittances’ potential to support development. In many countries, including Indonesia, remittances are traditionally spent on consumption, basic family needs and help with emergency expenses. If the government provides a productive investment like diaspora bonds, more money will stay in the national financial system.

India and Nigeria have shared similar success stories in issuing diaspora bonds. According to ADB, India has successfully issued diaspora bonds and raised a total of $32 billion in three issues.

India sold five-year maturity rupee-denominated bonds in 1991, 1998 and 2000 exclusively to non-resident Indians. Diaspora bonds helped the Indian government control large trade deficits, high inflation, devaluation of currency and generally a large-scale deficit.

Nigeria first issued $100 million in diaspora bonds in 2013. The government then decided to issue second diaspora bonds under its 2016-2018 borrowing plan. At their second issuance, Nigeria registered its bonds with the United States Securities and Exchange Commission.

However, not all countries have experienced success in issuing diaspora bonds. Ethiopia in 2008 and 2011 failed to attract sufficient diaspora investment. In 2007, Ghana issued a Golden Jubilee Savings Bond to fund its infrastructure projects across the country. Yet, again, this proved unsuccessful, with the bond 60 percent undersubscribed.

Cyrus Rustomjee in 2008 argued that there were three key reasons for the limited uptake of the instrument. They are challenges in implementing know-your-customer regulatory requirements; restrictions in marketing the diaspora bond in foreign jurisdictions; and perceived currency and foreign exchange risk among diaspora investors.

So what about Indonesia? Sule Akkonyulu in 2018 projected that Indonesia could be a promising candidate in issuing diaspora bonds. According to the Indonesia Diaspora Network, the number of Indonesia’s diaspora members is currently around 8 million people. With this large number, the government can further maximize the role of the diaspora in development through diaspora bonds.

Based on data from the Finance Ministry per April 2019, 61.56 percent of state debt ownership is domestic and 38.44 percent is foreign. The issuance of diaspora bonds can also help Indonesia reduce its foreign debt.

The success of the 2016 tax amnesty also indicates the potential in delivering a successful diaspora bonds issuance. The tax amnesty success also shows that patriotic ties can be a powerful incentive for diaspora members to invest in their home countries.

Furthermore, it shows that Indonesia has not yet fully tapped their remittances’ potential for development finance.

According to Bank Indonesia (BI), Indonesia’s remittance from time to time shows an upsurge trend. In 2012, the inflow of money from Indonesian workers was $7,018 each and in 2018 BI recorded a remittance of $10,974. The uprising rend shows a great potential in issuing diaspora bonds. Thus, the government should create an environment that is conducive to supporting remittance inflow.

Another way is to ensure that the rate is profitable enough, though sometimes profit is not always the most important thing for the diaspora as the opportunity to help their home country is more essential. Economist Dilip Ratha mentioned that the diaspora’s emotional bond with its country of origin could be seen as an opportunity to create mechanisms and avenues to facilitate diaspora investments.

Indonesian diasporas might feel obliged to help their home country and may even accept a lower yield, a so-called patriotic discount. Having said that, what’s more important here is that the government could facilitate the diaspora and provide clear information and guidance so that it can buy diaspora bonds in the easiest way possible.

All in all, diaspora bonds can provide living-abroad Indonesians with a way to significantly contribute to the development of the country. Diaspora bonds can also help the government reduce its portion of foreign debt. Seeing its potentials, such as the large number of diasporas, remittances and Indonesia’s well-known credit ratings, coupled with easy technicalities and a profitable rate, Indonesia might see success in its first diaspora bonds issuance.

Moreover, the government must also maintain and improve financial sector stability and, if possible, well-recognized credit ratings. The government also needs to maintain close ties with diaspora communities and conduct persistent networking and marketing when issuing bonds.

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Dwinanda A. Swasono works at the Finance Ministry’s communication and information services bureau. Nopriyanto H. Suhada works at the ministry’s Center for Regional and Bilateral Policy, Fiscal Policy Agency.

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