A Short Article
Afghanistan’s economy has improved significantly since the fall of the Taliban regime in 2001, yet economic uncertainty prevails in the minds of investors. The government lacks proper infrastructure to develop sophisticated financial instruments and widespread corruption undermines its credibility with investors.
Private companies find it difficult to obtain private financing using banks and traditional financial instruments. While some banks remain highly liquid with billions of dollars in static deposits and hesitance to lend, others face liquidity crunch. This lack of bank lending further means that the economy continues to rely on donor money, which cannot adequately bridge near or long-term financing needs.
Despite these gloomy observations, we believe the private sector can be the catalyst for creating an enabling environment by using innovative financial instruments such as “diaspora bonds.” First, let’s define the term. A diaspora bond is a debt instrument normally issued by a country, but it can also be a bond from private corporations. Sales of diaspora bonds can be restricted to members of a particular nationality or opened to all buyers. Nationals can even be given a preferential rate.
Investors in diaspora bonds or equities in other countries have found such investments attractive; they provide for effective risk management. According to a recent article on McKinsey & Co.’s Voices, India and Israel have raised over US$35 billion by tapping into the wealth of their diaspora communities.
It’s been said that diaspora communities may have a “home bias” and are thus willing to invest as a way of owning something back home that also gains attractive returns. Afghan diaspora communities in the USA, EU and the Middle East hold promise for Afghanistan’s transition from donor economy to a real economy.
Although government-issued diaspora bonds are the most popular vehicles for diaspora investors, we believe there are opportunities for private corporations to attract diaspora investors by issuing bonds or equity shares.
The Voices article notes that Patriotism has famously been “the last refuge of the scoundrel” but nonetheless, it’s a powerful emotion to marshal. To add transparency, accountability, creditability and a sustainable financing alternative, a professionally-managed fund can be created to pool investments from the diaspora communities and invest the capital in high growth sectors such as agriculture, telecommunications, IT, energy, water and commodities export.
Diaspora bonds are not the solution to all problems in the current economy of Afghanistan, but they are good way to start attracting foreign investment. Meanwhile, the Afghan government, with the help of the international community, should lay the groundwork and build its credibility to attract investment into specific projects.