Essay on Development Policy

Learning from Nepals First Diaspora Bond

Issuances

Thomas Probst

NADEL MAS-Cycle 2010-2012

March 2012

Abstract
So far, only a few countries have launched diaspora bonds Israel and India being
the most prominent examples. In 2010 and 2011, Nepals central bank issued the
countrys first diaspora bonds. Even though Nepals diaspora is large and provides a
steady flow of remittances, the Government of Nepal could only raise a fraction of the
amount initially expected. The weak market response was caused by several factors
that need to be addressed in order to improve the results of similar bond issuances in
the future. This paper identifies challenges and makes recommendations in a number
of areas such as the narrow buyers universe, limitations in the distribution channels,
regulatory challenges, technical issues, lack of a functioning secondary market,
unattractive interest rates from an investors point of view, and a missing
understanding among the market participants regarding the intended use of the raised
funds.

Key words: Diaspora, Bonds, Nepal, Remittance, Development Finance

Table of Content
Abstract ............................................................................................................................. 2
Table of Content ................................................................................................................ 3
1. Introduction ................................................................................................................ 4
2. Rationale for the Government of Nepal to issue diaspora bonds ................................. 5
3. Size of Nepals diaspora, its savings and remittances .................................................. 6
4. Characteristics of Nepals first two diaspora bonds ..................................................... 7
5. Challenges faced by Nepal during bond issuance ....................................................... 11
6. Lessons learnt ........................................................................................................... 14
Acronyms ........................................................................................................................ 17
References ....................................................................................................................... 18

1. Introduction
Diaspora bonds are debt instruments that are targeted at the diaspora of a specific country and
allow tapping into the wealth and income of a countrys emigrants. Countries, sub-sovereign
entities, as well as private companies can issue such bonds. Unlike foreign currency deposits
(FCDs)1, diaspora bonds are typically long-dated securities to be redeemed only upon
maturity". The purpose of issuing diaspora bonds is usually to finance long-term investment
projects.
In practice, the examples of the Government of Israel and the Government of India are
probably the best-studied cases of successful diaspora bond issues. Ketkar and Ratha have
analysed these two cases in detail.2 Since 1951, Israel has raised funds with the help of its
diaspora on a regular basis and India has done so three times since 1991. So far, Israel and
India have raised US$ 32 billion3 and US$ 11 billion from their diasporas, respectively.
Another country that successfully launched diaspora bonds is Sri Lanka, which raised a total
of US$ 580 million between 2001 and 2007 through the Sri Lanka Development Bond
programme. The programme also targeted Sri Lankans living outside of their home country.
According to Ketkar and Ratha4, also South Africa has a project to raise funds from its
diaspora and Lebanon seems to have approached its emigrants for funding in the past, too.
Recently, Nepal tried to join the ranks of the countries that can successfully raise funds
through their diaspora, though without much success.
The reasons behind Nepals attempt to issue diaspora bonds for the first time are laid out in
section 2. Section 3 provides an overview of the size of Nepals diaspora, its savings and
remittances. In section 4, a closer look is taken at the characteristics of Nepals diaspora
bonds before section 5, which provides an analysis of some of the reasons that caused the low
take up of bonds in the markets. Finally, section 6 concludes this essay with a number of
recommendations and an outlook.

Ketkar and Ratha (2007: 4) define foreign currency deposits (FCDs) as follows: Diaspora bonds are
different from foreign currency deposits (FCDs) that are used by many developing countries to attract
foreign currency inflows. Diaspora Bonds are typically long-dated securities to be redeemed only
upon maturity. FCDs, in contrast, can be withdrawn at any time. [] Therefore, FCDs are likely to be
much more volatile, requiring banks to hold much larger reserves against their FCD liabilities, thereby
reducing their ability to fund investments. Diaspora bonds, in contrast, are a source of foreign
financing that is long-term in nature.
2
Ketkar and Ratha (2010: 252).
3
DCI (2012).
4
Ketkar and Ratha (2007: 3).

2. Rationale for the Government of Nepal to issue diaspora

bonds
In July 2009, Nepals finance minister, Surendra Pandey, announced in his budget speech that
the Government of Nepal (GoN) planed to issue its first ever diaspora bond in order to raise
funds for not-further-specified infrastructure projects.5 The announcement of the proposal
was generally welcomed in Nepals English-speaking press. 6 The financial industry in
particular, was initially upbeat and had high expectations.
Raising funds through diaspora bonds is seen as a way to bolster the governments finances
and to channel part of the significant remittance inflows of Nepal into more productive
investments. Even though a number of scholars hold the view that remittances have a positive
impact on economic development and poverty reduction, some pundits think that from an
economic and social perspective, the disadvantages of remittances outweigh their advantages.
They argue that the inflows are not used in a very productive manner. Instead of being used
for goods with an investment character, they are spent on consumer goods. Another point is
that many of the consumer goods purchased in Nepal with remittance income need to be
imported. That contributes to a further increase in the already significant trade deficit of
Nepal and does little to support domestic production and job creation. If invested in real
estate, remittances can distort asset prices and actually exacerbate poverty by pricing many
poor families out of the real estate market.7 In some cases, remittances also lead to an
exchange rate appreciation, thus hampering growth (this consequence is also known as
Dutch Disease). Due to the short-term poverty reducing effect of remittances, Chami and
Fullenkamp8 see a vicious circle at work and argue that large amounts of remittances can
negatively influence the quality of governance and undermine long-term economic
development:
A remittance-receiving household no longer has to care as much about the quality of
the government and its ability to provide infrastructure and institutions that facilitate
growth. If conditions are bad at home, families send more members abroad and use
remittance income to compensate for the lack of government services. They lose

Pandey (2009: 31).

See Ghimire (2011), Pokharel (2010) and also Pokharel (2011).
7
Chami and Fullenkamp (2009).
8
Ibid.
6

interest in pressuring the government to deliver better services. The government, for
its part, does not feel compelled to provide these services because it realizes that these
households can fend for themselves, and the quality of government declines even
further.
In that sense, capturing at least a small fraction of the remittance for development purposes
would help to counteract some of the negative side effects that are associated with large
remittance inflows.
Moreover, Nepals weak infrastructure is clearly insufficient for a country with a population
of approximately 30 million9 and needs to be upgraded. Large investments in hydropower
plants, highways and airports are required to support the economic growth desperately
needed for poverty reduction. Currently, the country mainly depends on foreign aid to finance
its infrastructure projects. As such, diaspora bonds can also be seen as a potential means to
regain some independence from official development assistance. Having said that, it should
not be forgotten that using the proceeds for investments in infrastructure projects might
contribute to a further increase in the trade deficit, due to the fact that such projects normally
require large amounts of imported inputs.

3. Size of Nepals diaspora, its savings and remittances

Nepal has a large diaspora that provides the population of its country of origin with
significant liquidity and remittance flows. Ratha and Mohapatra estimated that roughly one
million Nepali in the working age live abroad, which is more than three per cent of the
countrys population.10 In terms of savings by its migrant workers, Nepal is ranked 13th
among low-income countries. In 2009, the estimated diaspora savings for Nepal was US$ 1
billion, which is approximately eight per cent of Nepals GDP and is equal to the amount that
is saved domestically. Emigrants seem to be better educated than the average person in
Nepal: While approximately three per cent of the population emigrate, about 5.3 per cent of
people with a tertiary level education opt to work abroad.11 Thus, the share of well-educated
people among Nepals diaspora is higher than the average of the total population at home.

According to the latest estimate of the CIA World Factbook from July 2011, Nepal has a population
of 29,391,883.
10
Ratha and Mohapatra (2011:4).
11
World Bank (2011: 31, 138, 144).

Officially, remittances amount to 23 per cent of Nepals GDP.12 However, estimates by the
financial industry are much higher: according to people familiar with the situation, the flow
of remittances could be as high as 30 per cent of the GDP due to the large amounts of money
that are transferred informally through the traditional hundi system.13

4. Characteristics of Nepals first two diaspora bonds

As we have seen in the previous section, it seems that there certainly is potential for the
Government of Nepal to issue diaspora bonds given the countrys large diaspora, the latters
wealth and the resulting remittance flows. Nepals then finance minister, Surendra Pandey,
announced in his budget speech to the Legislative-Parliament of Constituent Assembly in
July 2009 the first-ever diaspora bond of Nepal, named Infrastructure Development Bond
[sic]:14
An arrangement has been made to issue Infrastructure Development Bond of an
amount of Rs. 7 billions by Nepal Rastra Bank fixing pegged exchange rates targeting
the Nepalese working abroad through Nepalese Embassies in South Korea, Malaysia,
United Arab Emirates, Saudi Arabia and Qatar, as a part of domestic borrowing for
the coming fiscal year. Such Bonds can be purchased only from workers working
abroad. From this arrangement, the remittance can be used for infrastructure
development and the remittance itself remains free of additional charges while
transmitting to Nepal. In addition to it, I am confident that such workers employed
abroad will receive interest from the day of bond purchase and be benefitted.
The second diaspora bond of Nepal, named Foreign Employment Bond was announced in
November 2010 in Surendra Pandeys budget speech:15
Issuance of Foreign Employment Bond targeted at Nepalese residing abroad will be
continued.

12

World Bank (2011: 14).

Endo and Afram (2011: 12) define the hundi system as follows: A typical hawala/hundi
transaction involves the remitter, the recipient, and two intermediaries (hawaladars). The remitter
makes payment in local currency in a sending country to the service provider. The service provider
contacts a partner service provider in a receiving country, who arranges payment in local currency to
the recipient in exchange for reference code that was given to the remitter by the provider in the
sending country.
14
Pandey (2009: 31).
15
Pandey (2010: 16).
13

According to people familiar with the situation, the project was driven mainly by the Ministry
of Finance (MoF) and executed by Nepals central bank, the Nepal Rastra Bank (NRB).
Apparently, there was no involvement of international donors and the Government of Nepal
had the full ownership of the project during the first two rounds of bond issues. Only at a
later stage, the Asian Development Bank helped to analyse the first bond programme and
supported further research on this topic.16
However, both diaspora bonds did not meet the high expectations of the Government of
Nepal. The government expected to raise Nepalese Rupees (NPR) 7.0 billion (approximately
US$ 93.8 million17) with the first diaspora bond that was issued in 2010. Fearing undersubscription, it later revised the target to NPR 1.0 billion (US$ 13.4 million). The actual take
up in the markets was even lower than feared: only bonds worth NPR 4.5 million (US$
60,000) were subscribed18, which is a meagre 4.5 of the revised target. Given the poor
result of the first year but believing in having made the necessary improvements in the
process the Government of Nepal set the target for the second round of diaspora bonds at
NPR 5.0 billion (US$ 69.5 million19). In December 2010, NRB spokesperson Gopal Kafle
was quoted saying: The experience gained last year is also a plus point for our planning this
year. [] Further, we have recognised the hurdles; we can avoid them this year. 20
Nevertheless, this time the migrant workers response was even weaker, and only bonds
worth NPR 3.38 million (US$ 47,000) were subscribed.21 This is 0.68 of the target, despite
having extended the sales period by an additional 15 days, halfway through the process.22 The
reasons for this result will be analysed in the next section, but first we will focus on the
distribution and sales mechanism chosen by NRB and we will look at the terms and
conditions of the first two diaspora bonds.

Distribution and sales

On 26 May 2010, Nepal Rastra Bank issued a call for agencies interested in distributing the
upcoming Infrastructure Development Bond. 23 As Table 1 below shows, it granted

16

See Economic Policy Network II (2010).

Exchange rate of 0.0134 US$ per NPR on 30 June 2010 (source: www.oanda.com).
18
Economic Policy Network II (2010: 12).
19
Exchange rate of 0.0139 US$ per NPR on 30 June 2011 (source: www.oanda.com).
20
Kathmandu Post (2010).
21
Kathmandu Post (2011).
22
NRB (2011b).
23
NRB (2010a).
17

permission to sell bonds in the primary markets to seven distribution partners who were
mandated with the sale of the bonds in the foreign markets, two banks and five providers of
remittance services. The permission for an eighth sales agent, Delta International Money
Express Pvt. Ltd., was revoked on 23 June 2010 for unknown reasons.24 The original plan to
also involve embassies in the sale of bonds was never implemented. The same seven
providers were involved in the sale of the Foreign Employment Bonds 2011.25
Organization

Type of Organization

Countries of bonds sales

Himalayan Bank Limited

Commercial bank26

Malaysia
United Arab Emirates
Saudi Arabia
Qatar

Prabhu

Finance

Company Commercial bank

Qatar

Limited
Incentive Money Transfer Remittance service

Malaysia

Pvt. Ltd.
International Money Express Remittance service
(IME) Pvt Ltd
Prabhu Money Transfer Pvt. Remittance service
Ltd.
Sewa Money Transfer Pvt. Remittance service

Malaysia
United Arab Emirates
Saudi Arabia
Qatar
Malaysia
United Arab Emirates
Saudi Arabia
Qatar
Qatar

Ltd.
Shramik

Remit

Company Remittance service

Qatar

Pvt. Ltd.
Table 1 List of sales agents for diaspora bonds27

Sales agents are compensated for their time and effort with a 50 base points commission of
the total amount sold to primary markets. Agencies paying the coupon of the bond receive a

24

NRB (2010b).
NRB (2011a).
26
Sale of bonds was carried out through Himalayan Banks own remittance arm, HimalRemit.
27
NRB (2010d).
25

commission of 25 base points of the interest payment, and agencies paying the principal at
maturity receive a 15 base points share of the payment made to the bond holder.28 When
comparing these commissions with the transaction fees, which the above-mentioned financial
institutions normally charge in their core business, we see that the commissions provided by
Nepals central bank, are very small. Remittance companies can earn significantly more with
regular remittance transfers as shown in the example of costs for transfer from Qatar to
Nepal.
The Qatar-Nepal remittance corridor is particularly relevant because Qatar is the top
emigration country for Nepali outside of India. Furthermore, the Nepali diaspora is the third
largest group of immigrants in Qatar, after Pakistani and Indian nationals. 29 Increasing
competition in the Qatar-Nepal corridor has led to very favourable fee structures (from the
clients perspective) in comparison to global average prices. In 2009 for instance, remittance
companies earned on average 5.78 per cent in direct transfer fees and foreign exchange
margins on transfers of US$ 100. Transfers of US$ 200 and US$ 500 were priced at 3.41 per
cent and 1.99 per cent, respectively.30 Hence, despite operating in an environment with very
competitive rates for remittance transfers31, these agencies can earn much more in their core
business than through the sale of diaspora bonds on behalf of the Government of Nepal.
Another relevant factor is the choice of countries in which Nepal's diaspora bonds were
available to investors: South Korea, Malaysia, United Arab Emirates, Saudi Arabia and Qatar
were selected by the Government of Nepal. This includes only two of the top ten destination
countries for Nepali emigrants, which are India, Qatar, the United States, Thailand, the
United Kingdom, Saudi Arabia, Japan, Brunei Darussalam, Australia and Canada.32 As a
consequence, a very large fraction of Nepals migrant workers was excluded from the
universe of potential buyers from the very beginning.

Terms of diaspora bonds

Nepals first and second diaspora bonds with maturities of five years were offered with the
following terms and conditions: The denomination of the bonds was NPR 5,000 and

28

NRB (2010c).
World Bank (2011: 188, 209).
30
Endo and Afram (2011: 25).
31
According to Endo and Afram (2011: 24), in the first quarter of 2010 the global average price of a
US$ 200 remittance transfer was 8.83 per cent.
32
World Bank (2011: 188).
29

10

multiples thereof, which is approximately US$ 70. The annual interest rate was set at 9.75 per
cent in 201033 and at 10.5 per cent in 201134, with tax-free coupon payments on a semiannual basis.
In 2010, the bonds were available for sale in the first week of July. Learning from the
experience made in 2010, the Government of Nepal offered the bonds over a longer period of
time in 2011. They were available for subscription during a period of 73 days from 10 April
through 21 June.35 As we have seen above, this did not help much in attracting more investors
than in the year before.

5. Challenges faced by Nepal during bond issuance

Discussions with a senior employee of a financial institution involved in the sale of the
bonds, with a representative of a multilateral agency speaking on his own behalf (off-therecord), and with the patron of the Non Resident Nepali Association (NRNA), Mr Bhim
Udas, have shown that there were a number of reasons why the first two diaspora bonds of
Nepal could not attract as much interest from investors as initially hoped for.
A major limiting factor for a successful issuance of Nepals first two diaspora bonds surely
was the small buyers universe. As we have seen in the previous section, the bonds were only
sold in two of the ten most important emigration destinations of Nepali migrant workers. This
means that bonds were not available in very important markets like India, the United States
and other OECD countries. It is understandable that Nepal did not begin with its diaspora
bonds programme in the United States because of high transaction costs due to a significant
regulatory burden and legal risks arising from the United States plaintiff-friendly legal
system. 36 Not including India, however, means losing a significant number of potential
buyers. Neglecting OECD countries also means excluding migrant workers that tend to be
wealthier than those in the defined target markets. It is also questionable, whether the
Government of Nepal was really able to reach all the potential investors in markets it actually
targeted, given the limited networks of the selected sales agents and their focus on formal
remittance transfers. As we have seen before, the traditional remittances business is

33

NRB (2010c).
NRB (2011a).
35
NRB (2011b).
36
Ketkar and Ratha (2007: 13).
34

11

financially much more attractive for the sales agents than selling diaspora bonds for low
commissions, which reduces their motivation to market such bonds. In any case, migrant
workers who make money transfers with informal systems (e.g. hundi) will be difficult to
reach with a system purely relying on formal money transfers.
A further challenge are the regulatory requirements for the sale of bonds to retail investors in
the target countries. The remittance companies normally have a license for the transfer of
cash from their host country to Nepal, but they might not fulfil all requirements of the
regulators that are necessary to sell investment products, including Know-Your Customer
(KYC) procedures. Not being allowed to sell bonds or not knowing whether doing so is
legally allowed surely prevented remittance companies from promoting such products to their
clients more aggressively. Obtaining the necessary licenses, or even seeking legal advice to
better understand the regulatory situation, was not a realistic option given the relatively low
business potential. Thus, ramping up the marketing efforts beyond printing some flyers and
mentioning the investment opportunity during client discussions was not feasible. To mitigate
this, the Government of Nepal could have sought an agreement with the governments of the
target markets, or the Nepal Rastra Bank could have tried to find an agreement on the central
bank level. 37 In discussions with people familiar with the situation, it has also been
mentioned, that for unknown reasons, neither of this happened, and that Nepals Ministry of
Foreign Affairs (and its embassies) was not involved as initially expected by market
participants.
Another reason for the challenges faced by NRB and GoN was probably that the technical
details were not sorted out in the best possible way. The process from the purchase of the
bond until the redemption at maturity should be reengineered with more attention to detail,
simplicity, and with a focus on reducing exchange rate risks for the parties involved. To
illustrate this, let us look at the transactions required to transfer the proceeds from the country
of domicile to Nepal:
(1) The investor purchases the NPR denominated bond and makes a payment in the
currency of the country of residence. The investing migrant therefore incurs an

37

In contrast to India and Nepal, the Development Corporation of Israel maintains its own network of
sales offices across the United States of America and furthermore offers the possibility of purchasing
bonds through its website (www.israelbonds.com). According to Ketkar and Ratha (2007: 9, 11), DCI
registered its Diaspora Bonds with the United States Securities and Exchange Commission (SEC) in
order to have full access to US-based investors.

12

exchange rate risk, as the salary and cost of daily life are in foreign currency whereas
the bonds and interest payments are denominated in NPR.
(2) The bank or remittance agency settles the transaction in US$ and therefore has to
convert the foreign currency to US$ before it can transfer the money to the Rastra
Bank in Nepal.
(3) Finally, in Nepal the US$ amount needs to be converted to NPR, as the
Government of Nepal expenses NPR for its local development projects.
Nepal does not have a functioning secondary market for such bonds, even though the Bond
Procedure 2067 issued by the central bank does explicitly mention the right of debt owners
to sell their bonds in the secondary market.38 The inexistent secondary market for diaspora
bonds essentially locks investors up for a five years period. Given the uncertainties a lot of
migrant workers and their families in the home country face, an investment horizon of five
years could be too long and they may seek more liquid assets to invest in. As opposed to
Nepal, India has had a working secondary market for diaspora bonds with investment funds
providing liquidity to the market.
Another reason for the weak demand from investors side is the 9.75 / 10.5 per cent interest
rate of the bond, which was not as attractive as other saving options for migrant workers.
Banks do offer NPR savings accounts with interest rates of ten per cent and 1-year deposits
pay interest rates of up to twelve per cent. The patriotic discount39 that has played an
important role in the case of Israel and to a lesser degree also in India40 somehow seems
to be irrelevant in the case of Nepal. This could have been caused by a lack of trust in the
institutions of Nepal.
Still, Nepals migrant workers are emotionally very attached to their country of origin, and
anecdotal evidence shows that they are also interested in investing at least part of their assets
in the home country. What was missing, however, was a clearly defined use of funds raised.
Even though from an economic perspective, funds are fungible and proceeds from diaspora
bonds could substitute other forms of government funding, the idea of linking the bonds to
specific investment projects matters from a marketing perspective. It can be speculated that

38

NRB (2010c).
Patriotic discount describes the fact that in some cases, members of the diaspora tend to accept
lower returns on their investment than the regular capital market would.
40
Ketkar and Ratha (2007: 14-15).
39

13

the targeted investors were not convinced the government was able to put the proceeds to
productive use. From the distributors point of view, knowing what the funds will be used for
could have provided additional arguments to convince potential buyers to invest despite the
relatively low interest rate. Since working migrants mostly left their home because of
expected better livelihoods and income opportunities abroad, showing that their savings
would be spent in a wise way could surely have been an additional sales proposition.
Another factor could have been the length of the sales window. While the short availability
of the bonds might indeed have been a limiting factor for the success of Nepals
Infrastructure Development Bond 2010, in reality it seems that the length of the sales window
did not affect the amount of sold bonds. In 2011, the bonds were available for subscription
during a period of 73 days, which was more than in 2010. Still, the amount raised in 2011
was smaller than in 2010.
Whether the denomination size of the bonds played any role in the low market response
could not be confirmed in the discussions with people familiar with the situation. It seems
that a size of NPR 5,000, and multiples thereof, is reasonable.

6. Lessons learnt
Although the finance minister of Nepal, Mr Bharat Mohan Adhikari, did not explicitly
announce another round of Foreign Employment Bonds in his budget speech for the fiscal
year 2011-2012 held in July 201141, the government intends to do so according to a media
report.42 The Ministry of Finance has lowered its expectations to NPR 1 billion, which is still
far above the achievements of the previous two years. In addition to reducing the gap
between expectations and realistic targets, the MoF and NRB should also look into the
following ideas to improve the future success of its diaspora bond programme:
-

Increase the number of potential buyers by offering the bonds in more markets with
large numbers of Nepali workers (e.g. India) and markets with wealthier Nepali
workers (e.g. OECD countries like the United Kingdom, Japan, Australia and
Canada). At the same time exit markets where the potential take up is too small to
justify the efforts (e.g. South Korea).

41
42

Adhikari (2011).
Himalayan Times (2011).

14

Increase the number of potential buyers by offering the bonds to anyone who is keen
to invest in Nepal. A successful sale of bonds to additional groups of investors (e.g.
foreigners, Nepali residing in Nepal) can furthermore be a sign of trust and attract
more investors.

Improve the coordination between the Ministry of Finance, Ministry of Foreign

Affairs, Nepal Rastra Bank and the sales agents in order to reduce legal risks and to
achieve an agreement with the financial regulators of the foreign markets.

Sort out all technical details jointly with the organizations involved, including a
simplification of the processes to reduce foreign exchange risks for all participants,
and assessing the option of issuing bonds in foreign currency (e.g. US$).

Consider measures to improve the liquidity in the secondary markets.

Reduce the patriotic discount and thus increase the interest rates of the bonds.

Clarify the purpose of the proceeds to the investors and consider earmarking the
bonds to specific investment projects.

Ramp up marketing efforts to improve the understanding of the product in the migrant
worker community and to increase the awareness of this savings product. This could
include road shows, higher commissions for the sales agents as well as broadening the
spectrum of organizations involved in the sales and distribution process, e.g. to
include NRNA or Nepalese embassies as well as local banks.

Keeping the sales window open for a reasonable amount of time.

Increase the creditworthiness and credibility of the Government of Nepal as debtor

and maintain a level of public debt that is acceptable for investors. Building up a track
record of reasonable fiscal policy and political stability will strengthen the confidence
of investors in the Government of Nepal and the quality of its debt. Currently, Nepal
has a high default risk and its implied credit rating, as calculated by the World Bank,
is CCC+ / Caa1.43

Seek technical assistance from external advisers, for instance from development
banks such as the World Bank or the Asian Development Bank.

We have learnt that Nepal has a very sizeable diaspora with large savings and that the
government would like to channel a part of the remittance flow to productive projects in

43

Canuto et al. (2011: 5) calculated so-called shadow ratings for countries that are not currently
rated by the big three rating agencies Standard & Poors, Fitch and Moodys.

15

order to mitigate some of the adverse effects associated with large remittance transfers.
However, it remains questionable, whether diaspora bonds are actually a necessary and
appropriate funding source for the Government of Nepal. Some interview partners argued
that the government already has more financial resources than it can absorb. Large amounts
of official development assistance are made available to Nepal every year and the
government is able to issue bonds in the domestic market. The government is still in the
process of developing its capacities to timely and properly implement all the funded projects.
Thus, raising more cash may not even be necessary and is possibly not the best allocation of
the governments scarce human resources. Moreover, just doing something about
remittances might not be enough and it could be sensible to put a stronger emphasis on
execution excellence in the future.
Additionally, it should be analysed, whether the private sector could not play a more
important role in putting the wealth and income of Nepals diaspora to productive use. One of
those ideas is for instance, to earmark the proceeds of diaspora bonds for specific privatesector projects. Another idea is going to be tested in 2012 by the Non Resident Nepali
Association. NRNA plans to set up a mutual fund that can make equity-based investments in
Nepals private sector. The goal is to set up separate vehicles for different sectors under a
single umbrella brand. Instead of a fixed interest rate, investors would receive a dividend
based on the success of the investments. The collective investment fund will be targeted at
non-resident Nepali anywhere in the world. NRNA which is present in 60 countries44 will
use its extensive network in the Nepali expatriate communities to market the investment
opportunity. So far, NRNA has obtained the support of the Securities Board of Nepal,
Nepals Bankers Association, the Federation of Nepalese Chambers of Commerce and
Industry, Nepal Rastra Bank, and the Ministry of Finance. It will be very interesting to follow
the success of this private initiative and it remains to be seen, whether investors are prepared
to accept the high risk that is inherent to investments in equity.

44

NRNA (2012).

16

Acronyms
CIA

Central Intelligence Agency

DCI

Development Corporation for Israel

FCDs

Foreign Currency Deposits

GoN

Government of Nepal

IME

International Money Express

KYC

Know Your Customer

Ltd.

Limited

MoF

Ministry of Finance

NPR

Nepalese Rupees

NRB

Nepal Rastra Bank

NRIs

Non-resident Indians

NRNA

Non Resident Nepali Association

OECD

Organisation for Economic Co-operation and Development

Pvt.

Private

Rs

Rupees

SEC

Securities and Exchange Commission

US$

United States Dollar

17

References
Adhikari, Bharat Mohan (2011). Budget Speech of Fiscal Year 2011-12. Delivered to
Legislature-Parliament of the Constituent Assembly by Honorable Deputy Prime Minister
and Finance Minister Bharat Mohan Adhikari on Friday 15 July 2011. Kathmandu:
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