Diaspora bond: State burns midnight oil as economists urge caution

President William Ruto and Prime Cabinet Secretary Musalia Mudavadi during a church service at Ekambuli Church of God, Khwisero, in Kakamega County on November 10, 2024. [PCS, Standard]

In a bid to diversify government revenue, the President William Ruto administration seeks to tap into the vast financial resources of the global diaspora with a groundbreaking Diaspora Bond aimed at raising half a trillion shillings in the first quarter of 2025.

Traditionally, the government has relied on increasing taxes and borrowing from development partners, including banks, non-governmental organizations, and foreign governments.

However, with Prime Cabinet Secretary Musalia Mudavadi leading the charge, the initiative promises to fund major infrastructure projects, including a new airport at Jomo Kenyatta International Airport (JKIA) and other key developments.

Yet, doubts persist among many Kenyans abroad, haunted by previous instances of unaccounted funds in similar initiatives, such as the Eurobonds.

“We can even raise up to a trillion if we open it up beyond the diaspora. If we go that route, we will have a new, modern, state-of-the-art airport fully owned by Kenyans,” said Mudavadi, sparking both interest and concern.

The proposed plan has attracted attention for its ambitious goal of financing critical infrastructure projects, as it allows Kenyans abroad to invest in development back home.

However, critics worry that the government may not avoid the pitfalls of the past, when funds raised through similar bonds during former President Uhuru Kenyatta’s administration went unaccounted for, leaving many wondering whether this latest initiative will suffer the same fate.

Economist Patrick Muinde yesterday told The Standard, “There is nothing better than the government issuing its securities to people working abroad because it provides them a chance to participate in development back in Kenya.

However, the government has to offer competitive rates to the diaspora. They might target dollars and foreign exchange to attract investors, but this might affect our exchange rate and general debt.”

Muinde said the bond should be tied to specific projects to attract investments and win the trust of potential investors.

“The good thing is that a foreign currency that can be protected will attract investors. However, some people in the diaspora have better opportunities where they live, and they might consider those instead of investing in Kenya’s government,” he said.

Mudavadi believes that with over four million Kenyans living abroad, the bond could easily raise more than Sh500 billion. He highlights the potential benefits, especially in strengthening Kenya’s currency with the influx of foreign exchange.

"With Sh500 billion, we could build a new international airport at approximately Sh300 billion, with the remaining funds directed towards other infrastructural projects," he added.

Experts, however, remain cautious about the government's ability to manage the bond effectively. Dennis Kabara, an economist, said while a diaspora bond offers a secure investment opportunity for Kenyans abroad, the key challenge is trust.

"Kenyans are the main beneficiaries since they can own assets, but the biggest challenge Kenya Kwanza will face is trust," Kabaara noted.

Mudavadi, optimistic about the bond’s potential, pointed to the successes of other countries that have issued similar bonds to fund national projects. "The Indian Diaspora bond was oversubscribed by five billion dollars, and Israel raised up to 50 billion dollars over time to build their economy," he said.

The bond, he explained, will not only raise money for infrastructure but will also help the government diversify its sources of financing, reducing reliance on costly foreign loans.

Deputy High Commissioner Joe Warui (centre), Governor Bernard Kavyu (right) and other diaspora leaders at the Kenya High Commission in London. [Courtesy]

Treasury officials, who spoke to The Standard yesterday and asked not to be named since they are not authorised to speak to the press, said Kenya could raise up to a trillion shillings from the Diaspora Bond, funding projects like the expansion of JKIA or other infrastructure projects like the Standard Gauge Railway (SGR) or the dual road connecting Uganda.

The government’s push to engage the diaspora is also motivated by their growing contribution to the country’s economy, especially through remittances. Mudavadi cited a record-breaking $4 billion (over Sh520 billion) in remittances in the first 10 months of 2024, marking a 17.8% increase over the previous year.

However, not all experts share Mudavadi’s optimism. Patrick Muinde cautioned;

"The diaspora might be hesitant to invest if they feel they could get better returns elsewhere or if they are concerned about accountability," Muinde warned. He also emphasized the importance of linking the funds to specific, tangible projects and ensuring transparency to avoid repeating past mistakes.

As the government prepares to float the bond in the first quarter of 2024, Treasury, with technical support from the World Bank’s Multilateral Investment Guarantee Agency (MIGA), hopes to offer a secure investment to Kenyans abroad while contributing to Kenya’s infrastructure development.

While the bond promises to be a potential game-changer, the success of the initiative will depend largely on the government's ability to rebuild  trust with the diaspora and ensure that the funds raised are properly accounted for and directed towards projects that will benefit the country.

It is worth exploring, notes Kabaara, the potential of relying on high remittances, assuming Kenyans abroad will be patriotic. “For instance, the Indian Diaspora bond pays in local currency, offering guarantees for safety and return on investments. Ethiopia tried a similar approach and failed,” he said.

Kabara said the bond will rely on political stability and economic prospects, which play a significant role in the success of such initiatives. "Trust remains a key factor. The diaspora will be particularly concerned with the safety guarantees and assurances of receiving returns," he stated.

Regarding the Diaspora bond, Kabaara said, it is essential to ensure the bond is tied to specific projects to avoid repeating the mistakes of past bonds that were not properly accounted for, such as those floated during former President Uhuru Kenyatta’s administration.

Without clear accountability, funds could disappear just like previous bonds. He said the Kenya Kwanza's government will face challenges in building trust in the diaspora. The bond should be seen as a secure investment that directly benefits Kenyans, especially if it is linked to tangible, specific projects.

Mudavadi believes that with a cash injection from the diaspora, especially in foreign exchange, Kenya could strengthen its shilling. From the Sh500 billion raised through the bond, Mudavadi suggests that Kenya could build a new international airport, costing around Sh300 billion, with an additional Sh200 billion allocated to other large-scale infrastructure projects.

Additionally, the government is focusing on the diaspora’s growing role in Kenya’s socio-economic development through remittances, investments, and knowledge transfer.

Mudavadi has pointed out that in the first 10 months of 2024, remittances hit a record $4 billion (over Sh520 billion), marking a 17.8 percent increase over the same period in 2023.

This growth has made remittances Kenya’s largest foreign exchange earner, surpassing earnings from coffee, tea, horticulture, and tourism. The government aims to increase this figure to Sh1 trillion by 2027.

“Kenya does not live in isolation, we must always engage with the rest of the world. By 2027, we are even projecting a rise to Sh1 trillion in Diaspora remittances. This is money that has and will help us take up the value of shillings. The remittances, alongside government interventions, had brought down a dollar from Sh169 to now Sh129,” said Mudavadi.