Kenya's Diaspora Bond: Economists Warn While Government Pushes Forward

President William Ruto's administration plans to issue a Diaspora Bond with a target of raising 500 billion Kenyan shillings in the first quarter of 2025.

This initiative, which is being led by Prime Cabinet Secretary Musalia Mudavadi, looks to leverage the financial resources of Kenyans living abroad to fund significant infrastructure projects, including the construction of a new airport at Jomo Kenyatta International Airport (JKIA). Historically, the Kenyan government has depended on increasing tax rates and borrowing from development partners. The proposed Diaspora Bond represents a shift in strategy, as it invites the diaspora to contribute to national development while providing an investment opportunity in the growth of their homeland.

Mudavadi is optimistic, suggesting that if the bond allows for investments beyond the diaspora, it could potentially raise up to one trillion shillings. This funding would not only help in establishing a modern airport but also support other critical infrastructure initiatives. However, the initiative faces scepticism among Kenyans abroad, who remain concerned about past instances of mismanaged funds linked to similar projects, notably the Eurobonds. Economist Patrick Muinde affirms the need for the government to provide competitive interest rates and to associate the bond with specific projects to foster investor confidence.

He cautions that targeting foreign currency could influence Kenya’s exchange rate and overall national debt situation. Mudavadi asserts that the bond has the potential to mobilize substantial financial resources, thanks to the over four million Kenyans living outside the country. He anticipates that the influx of foreign exchange could bolster the Kenyan currency. Nonetheless, experts caution that the government's capability to administer the bond remains a critical concern. According to economist Dennis Kabara, building trust is paramount; the diaspora is likely to seek safety guarantees and assurance of returns on their investment.

Mudavadi draws comparisons with successful diaspora bond initiatives in other countries, such as India and Israel, which have utilized these financial instruments to fund national projects. He contends that implementing the bond could not only generate the necessary funding for infrastructure but also facilitate diversification of financing sources, decreasing reliance on expensive foreign loans. The government's initiative is further motivated by the increasing economic contributions of the diaspora, particularly through remittances.

In the first ten months of 2024, remittances reached a record $4 billion, reflecting a 17.8% rise from the previous year. This trend has positioned remittances as Kenya’s primary foreign exchange earner, surpassing traditional sectors like coffee, tea, horticulture, and tourism. As preparations for the bond issuance are underway, Treasury officials, with technical guidance from the World Bank’s Multilateral Investment Guarantee Agency (MIGA), aim to provide a reliable investment option for Kenyans abroad while contributing to national infrastructure development.

The initiative's success hinges on the government's ability to restore trust with the diaspora and ensure that the funds raised are transparently and effectively allocated to beneficial projects. Kabara emphasizes that the bond's success will also depend on factors such as political stability and economic outlook. He highlights the importance of linking the funds to specific, measurable projects and maintaining transparency to prevent a recurrence of previous failures. Without established accountability, there is a risk that funds may not be utilized effectively, echoing the challenges faced with earlier bonds.

Mudavadi remains hopeful, suggesting that if the bond manages to raise 500 billion shillings, Kenya could build a new international airport, projected to cost approximately 300 billion shillings, with an additional 200 billion shillings allocated to various large-scale infrastructure endeavours.