Expat bonds lose charm, investment falls by $2b

Investment in dollar bonds by Bangladeshi expatriates declined by nearly $2 billion in the last fiscal year due to a drastic cut in interest rate and cumbersome procedures at a time when the country is grappling with a severe dollar crisis and depleting foreign exchange reserves.

The total outstanding investment in all three government-issued bonds for non-resident Bangladeshis including wage earners bond, US dollar premium bond, and US dollar investment bond stood at less than $1 billion at the end of FY23 which was nearly $3 billion in FY22, according to Bangladesh Bank data.

Currently, non-resident Bangladeshis with investments exceeding $5 lakh in US dollar premium bonds and investment bonds receive an interest rate between 2% and 3.5% when the yield rate on US treasury bills surpasses 5%. The interest rate was 5.5% to 7.5% before 2022 when the US bond rate was less than 1%.

Lower yields prompted non-resident Bangladeshis to encash more bonds than they bought, putting significant strain on the country's financial account and resulting in a historic deficit of nearly $4 billion in the first quarter of the current fiscal year.

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.

The wage earners bond yield rate was a maximum of 12% before rescheduling the interest rate but now the interest rate varies on investment ceilings. Expatriates with an investment of only Tk1.50 lakh will enjoy the maximum 12% rate after a five-year maturity period. On the other hand, remitters with investments above Tk50 lakh will get a maximum of 9% rate on the wage earners bond.

Bangladesh Bank officials told TBS that the government decided to offer lower rates to reduce pressure on the reserve as the interest payment is made in USD.

The central bank has recently proposed to the finance ministry that the interest rate on all three bonds be increased by 2%.

Md Mezbaul Haque, executive director and spokesperson of the Bangladesh Bank, said the central bank proposed raising interest rates on diaspora bonds in line with the international market.

Speaking with The Business Standard, an expatriate investor said when interest rates rose globally, Bangladesh bucked the trend by offering lower rates, which contributed to widening the financial account deficit further.

Before 2022, interest rates for dollar bonds were more favourable than global rates. Even then, investments did not reach the anticipated level due to a lack of public awareness, the Bangladeshi expatriate said, attributing this shortfall to the government's inadequate marketing efforts which have left wage earners uninformed about these lucrative investment opportunities.

The country's three diaspora bonds could have played a crucial role in alleviating the dollar crisis by incentivising remittances through official channels. However, the government's failure to adequately promote these saving instruments to wage earners hindered their effectiveness, the expatriate investor added.

Another Bangladeshi expatriate, who now lives in Switzerland, referred to the problem he faces every time to revive his foreign currency account, which becomes dormant if no transaction is made in one year. "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.

What are the barriers?

Md Zahurul Islam, deputy general manager of the wage earners corporate branch of Sonali Bank, told The Business Standard that fresh investment through his branch is low. However, expatriates are reinvesting after the maturity of their previous investment which is being considered as new investments.

He said 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.

There is a ceiling of Tk1 crore for investing in two instruments together including wage earners bond and national saving certificate. There was no ceiling for investing in wage earners bonds before 2021, Zahurul Islam said.

Furthermore, expatriates investing in diaspora bonds are not getting government incentives. For instance, while investors in US dollar investment bonds receive a 5% profit rate after maturity, remitters can obtain a 5% cash incentive immediately, he said.

The banker also highlighted the challenges of profit repatriation as a deterrent for expatriates investing in bonds. While investors in dollar bonds can only repatriate their profits after three years, prior to 2021, they could repatriate their profits at any time.

Zahurul said the cumbersome process for opening foreign currency accounts is a significant barrier to investment. Clients need to collect, prepare and present a host of documentation to open the accounts. Additionally, the lack of online investment options for non-resident Bangladeshis further discourages them from investing in the country's financial instruments.

Marketing remains another major challenge as embassies are not effectively promoting these investment opportunities to wage earners, he said.

Citing an example, he said that Sonali Bank has offices inside the Bangladesh embassies in Saudi Arabia and Kuwait where a banker is posted who can provide information to wage earners about such investment instruments.

Zahurul Islam, who has extensive experience working with non-residents at various overseas branches of Sonali Bank, proposed deploying dedicated bankers at other embassies to increase awareness about these investment opportunities, which could encourage more remittances through official channels.