Why NRBs have little confidence in diaspora bonds

Bangladesh's $1.34 billion non-resident bonds from non-resident nationals does not inspire hope. According to a recent World Bank report, Sri Lanka and Pakistan fare better, with approximately $7.7 billion and $3.7 billion in non-resident stocks, respectively. Meanwhile, India holds approximately $143 in non-resident stocks.   

A look back into the last few years since the pandemic also shows a concerning trend. Non-resident Bangladeshis are moving away from diaspora bonds, especially since the pandemic year. In the context of capital flight and the country's dwindling foreign exchange reserve, experts worry about what a stark decline in diaspora bonds foretells.   

There are three diaspora bonds: US Dollar Investment Bond (DIB), US Dollar Premium Bond (DPB) and Wage Earner Development Bond (WEBD) that can be bought and redeemed from all offices of the Bangladesh Bank, its foreign branches, local authorised dealers, etc.

The money invested in these three bonds and the profits earned are income tax-free. Yet, Bangladesh is seeing a decline. 

According to TBS reports from earlier this year, a myriad of policies put in place deterred non-resident Bangladeshis (NRBs) from investing in diaspora bonds, ranging from reduced interest rates to technical procedural problems.   

A breakdown of 'deliberate' mishaps 

What had been the most damaging policy which contributed to the decline in diaspora bonds? 

"Implementing a limit or cap," said Ahsan H Mansur, Executive Director of the Policy Research Institute of Bangladesh. "Why was it enforced? It did not make sense," he said.  

In December 2020, the government imposed a maximum investment ceiling of Tk1 crore per person in those bonds. 

"The government reserve level was very comfortable at the time when very discouraging policies were adopted. The timing was unfortunate. The dip came at the time when reserves fell too," said Mansur.

While this investment limit was lifted in April 2022, interest was also reduced by nearly half. 

The Wage-Earner Development Bond offers 9% interest while the previous rate was 12%. The US Dollar Premium Bond offers 3.50% while the previous rate was 7.50% and the US Dollar Investment Bond is 3%  while its earlier rate was 6.50%.

Additionally, in April 2022, the finance ministry implemented a tiered interest rate structure for all three bonds, revising the rates downward and introducing investment amount thresholds.

"People were forced to liquefy assets [encash bonds], and much of this outcome – [Bangladesh has a stock of $1.34 billion as deposits from non-resident Bangladeshis, a stark decline of nearly $2 billion from FY22] – is a result of 'deliberate' policy in place," said Ahsan H Mansur.

There's no reason or rhyme for these decisions. "They made a blunder of it," he added.  

Additionally, in December 2020, it became mandatory to have a National Identity Card (NID) to purchase these bonds. 

"Again, why? Many do not have NID. They [NRBs] should be able to use their foreign passports to buy these bonds, to make transactions. Or another official identification document. The point is to make the process easier, to make it accessible through international banking. They have to make it simple," said Ahsan Mansur. 

It was reported earlier this year that the requirement for an NID has since been lifted. However, the National Identity Card (NID) is mandatory for investing in the wage earners' bond, which is a major barrier as many wage earners do not have NIDs.

In a previous TBS report, a Bangladeshi expatriate, who currently lives in Switzerland explained the bureaucratic challenges. 

"I have to visit my bank branch in Dhaka physically to have the account reactivated," said the former official of a UN agency, who invested in US dollar bonds with three-year maturity and withdrew interest in local currency. The account becomes dormant if no transaction is made in one year. 

Moreover, before the ceiling was implemented, diaspora bond data showed a positive trend.

Another major issue NRBs face is withdrawing money from the diaspora bonds in local currency, instead of foreign currency. This works as another nail to the coffin, discouraging investment in bonds and leading to an increase in the use of hundi — an informal, and also illegal, money transfer channel.

Parvez Tamal, the advisor of NRB CIP Association and chairman of the board of directors of NRBC Bank, told TBS earlier that expatriates face significant problems if the principal amount invested in bonds is paid in Bangladeshi taka, as this is also a breach of contract.

A confidence issue?

The yearly sales of expat bonds have seen a downward trend since 2019. Not just the yearly sales of expat bonds, but non-resident deposit stock also took a substantial dip of nearly $2 billion since FY22, according to Bangladesh Bank data reported by TBS last month. 

This means that not only new money is not coming in, but also the existing non-resident Bangladeshis are cashing out their bonds – shrinking the diaspora bond size. 

"This indicates a deeper problem," said Zahid Hussain, former lead economist at the World Bank, Dhaka Office, "the source is a confidence problem, perhaps."

"Things started to crack at the onset of the Ukraine war. I would say it is a matter of confidence. [NRBs] started to lose confidence in assets held by the Bangladesh Bank or any other financial institution. Why? Because of the way we manage the foreign exchange market," he explained, "Many started to think what if my money gets stuck or cannot be withdrawn." 

People make financial decisions based on market mechanisms – if regulated and stable, they will tend to invest in it, according to Hussain.   

Can the diaspora bond reserve help during the dollar crisis? "To an extent, it could have helped," replied Ahsan Mansur, who explained the removal of limits and increasing the interest rates are straightforward solutions to attract expats in the diaspora. 

There are also successful examples in the region. For instance, India which employed savings programmes to boost and attract non-national residents to invest in diaspora bonds.  

Given the track record and pattern of policies in the country, do you think policies will change in the future? "I am not sure. I hope it changes. I urge that they change it," replied Mansur.