An Article by James Narron Originally published in Apia Financial Review

World Bank 2010Spread about the globe, the Samoan nation lives in diaspora. For a group of people intrepid enough to get to these islands in the first place, the current far-flung dispersion is hardly surprising. Yet the modern day migration is, for the most part, focused on job-hunting and producing remittances. Although remittances are at times a maligned form of revenue, they are nevertheless an important aspect of Samoa’s resources. Samoa currently receives roughly a quarter of its GDP in the form of these overseas funds, which ranks fourth in the world. But there is another opportunity for emigrants and Samoa to benefit from each other; savings bonds.

 

In the simplest terms, a savings bond is just a loan. In this case, the loan is to the government, who promises to pay back the principle plus interest upon maturation of the bond. Savings bonds are nothing new and are a widely used instrument of governments to finance their debt. Connecting a strong remittance culture with a savings bond scheme is not new either.

In a paper by Dilip Ratha and Suhas Ketkar published by the World Bank, the authors explain the concept of the diaspora bond with anecdotal evidence from the Israeli and Indian experience with these bonds. Both India and Israel have issued savings bonds to emigrants living abroad, and both have been able to utilize those funds for either development projects or to support the government’s balance of payments. Either option could be usefully applied in Samoa.

Financially, the bond programs of Israel and India have been impressive successes. Combined, Israel and India have received over 35 billion in investments on diaspora bonds. Additionally, Ketkar and Ratha’s paper point out that over 200 million in development bonds were never redeemed resulting in what amounts to charity for the government. Of course, Israel and India have far more emigrants to many more countries than Samoa, however the point is that the bonds do attract investors.

The goal for the Samoan bonds would be more modest than the numbers from the Israeli or Indian bonds, but there are good reasons to offer these bonds. Diaspora bonds have the ability to earn interest for the investor and develop the home country at the same time. Accordingly, the target audience for these bonds should be long term emigrants residing in rich countries, and especially those who intend to return. The first place to tap the diaspora is Samoa’s principle trading partner and destination for most of its emigrants; New Zealand.

According to New Zealand Statistics, the average length of stay for Samoans living in New Zealand is 18 years

though nearly 40 percent stay over 20. This figure is important for several reasons. First, it identifies that many Samoans do return at some point. Secondly, it suggests that many return either later in their professional careers or nearing retirement. Marketing these bonds as a tool for funding one’s retirement in paradise is a wonderful message and may resonate most clearly with the Samoan population with established careers who have earned some additional income with which to invest.

New Zealand 2005

Estimating how much could be raised from the Samoan population in New Zealand is tricky at best, and could benefit from a state sponsored survey into investment habits of Samoans abroad. What is known however, is the number of Samoans living in New Zealand and general data about their income. Using this data, if only half of the Samoans in New Zealand making more than $25,000 a year invested 1% of their income into diaspora bonds, the government of Samoa could raise $4.16 million ($7.89 million tala) in a single year. Although this represents an amount equal to a mere 2.5% of the money provided by remittances, it represents an investment into delayed gratification; perhaps by investing in bonds now, future Samoan retirees will ease the remittance burden on the next generation.

For the government, it is important to remember that these bonds represent debt and not profit. Obviously, the government of Samoa would be expected to honor these bonds upon maturity. Therefore it is clear that these bonds represent an outflow of money in the long run. However there are several points to consider that could significantly mitigate the overall losses of these bonds. First, is the fact that some savings bonds are never claimed. As mentioned earlier, Israel has some 200 million in savings bonds that were simply never redeemed. Although this is not the point of offering these bonds, it is the reality of the matter. Similarly, bonds redeemed late, at some significant point past maturity also decrease in value as inflation continues to apply to the sum even when interest payments cease. The next to consider is early withdrawal. The ability to withdraw the bond prior to maturity represents another way Samoa may not be liable for the entire amount. However some time minimums should be required to avoid turning this into a cash transfer program. Lastly is the ability to pay out in tala rather than in a foreign currency. Repaying the bond in tala may be easier for the government and may even warrant adding interest incentives to those who opt to redeem in tala rather than a foreign currency. By enticing investors to redeem bonds in tala, the government may also enhance the likelihood that money paid out from the bond would remain in Samoa rather than return to an overseas investor.

Regardless of the mitigating factors, the government must act in a fiscally responsible fashion by setting up a sinking fund to pay back these obligations. This should not prove difficult as the government may set a cap on the number of bonds they will issue and be prepared to operate under the assumption that they will sell them all.

Like many developing countries, Samoa relies on outside support for some of its development. This is not necessarily a bad thing, but investment instruments like diaspora bonds may offer the country an opportunity to become just a little more self reliant, especially as the overseas population continues to grow.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: