Mini case study: US dollar rate fluctuations and its effects on aid
The dollar has increased its value compared to a number of currencies in 2016, stayed stable against the Euro, and weakened against the Yen. In this mini case study we take a look at how this has potentially affected aid from five top donors (not including the US). These are aggregate calculations — and we would really like to hear how the changes in rates has affected actual projects. So if you have two minutes send an email to Númi! Has your project been affected by changes in other currencies? We are just as interested.
Today we are exploring four mayor donor currencies
UK — large drop in aid value due to weakened Pound The event of the year was Brexit, and the effects can be seen clearly in the diagram below. During 2016, the value of the UK aid budget in USD has thus decreased with 15.5%. This would translate into a reduction of British aid amounting to about USD 2.9 billion (calculated using the 2015 budget). This means substantially less aid to recipients, as calculated in USD. That currency fluctuations has impacted UK aid has happened before. We would be really interested in knowing more about how the situation has been handled this time!
For recipients, the reduced value of the GBP can have substantial impact on the available budget. Every partner with an existing contract could receive up to 15 % less funds than expected, depending on their payment terms.
Do you work in projects funded in British Pound? We are really interested in knowing more about how the decreased value of the GBP has affected actual projects and aid funded activities? Fill in our questionnaire, or reach out to us on twitter or email!
Germany and France — stabilized Euro after initial bargain dollar prices We treat Germany and France together since they both pay for aid in Euro. During 2016, the value (in USD) of the German and French aid budgets has decreased with 1.30 %. If we use the combined value of the countries aid budgets in 2015 (USD 27 billion), that would amount to reduced aid of about USD 350 million. But as seen in the diagram below, most funds disbursed during the year would rather have a positive value when calculated in USD. The Euro has on average had a positive rate compared to the USD, with a drop in the last weeks.
For recipients of aid in Euro, their contracts are at the moment worth 1.3 % less than in the beginning of the year. This is of course true not only for recipients working with Germany or France, but any donor pledging in Euro.
Do you work in projects funded in Euro? We are really interested in knowing more about how the value of the Euro has affected actual projects and aid funded activities? Perhaps you have experiences from different “Euro donors”? Take a minute and fill in our questionnaire, or reach out to us on twitter or email!
Japan — a strong Yen throughout the year The Japanese Yen has gained a lot against the US Dollar during the year, at the moment of writing it almost 11 %. This means the spending power of Japanese aid, formulated in USD, has thus increased substantially. If we use the value of aid reported in 2015, USD 9.3 billion, the increased value of the Yen has resulted in an increase of Japanese aid of about USD 1 billion. Quite an increase!
For recipients having pledged funds in Yen the increase could mean an inflow of additional funds, depending on donor terms. We know that different donors treat the question of additional funds from currency rate changes differently. If you have any experiences of this, or could share how your budget has been affected by the increased value of the Yen, let us know! Take a minute and fill in our questionnaire, or reach out to us on twitter or email!
Sweden — a dropping SEK means reduced value of aid During 2016, the Swedish Krona has lost value against the USD. Just like in 2014 and 2015. Last year the drop was over 17 %, substantially affecting a lot of projects funded by Swedish aid. So far this year the SEK has lost about 7.5 % against the USD. If we look at the aid budget last year the reduced value of the SEK would mean a decrease in Swedish aid, as calculated in USD, of about half a billion USD.
For recipients of Swedish aid the decreased value of the SEK will mean a corresponding reduction in the budget, as Sida always pledge in SEK. As Sida does not cover such losses, we would hope that many have other funds or have managed the risk. In its annual report for last year (2015) Sida described how the currency situation last year had affected many projects. While the reduced value of the SEK against the USD in not as accentuated as last year, 7.5 % (so far) is still a substantial change.
Again, if you have any experiences you could share with us about how this has affected actual projects please consider sharing them with us! We are trying to build a better understanding of how changes in currency rates affects different aid actors. How increases and decreases in budgets are managed — by organisations and donors. So take a minute and fill in our questionnaire, or reach out to us on twitter or email!
About the calculations These calculations are all hampered by a number of assumptions. We for one have no data on how the different donor countries, or recipients, work with currency management. The effects could thus be substantially smaller. It should also be emphasised that the calculations of course also vastly simplifies how aid flows. It is calculated in USD, but large amounts of aid is not exchanged into USD but instead exchanged to another currency, or even stays in the donor country.The calculations were made using rates from 1 January to 15th of November. We show the value of total aid per donor country, based on total (indicative) amount in 2015 (Source: OECD DAC).
Missing the perspective of recipient countries? We are waiting for some additional data, and will get back to the question as soon as we have it (and can take another break in development!). As currencies from developing countries are generally more volatile than those of donor countries, it is a question we surely will not forget!
Please get in touch if you have anything to add or if you want to discuss currency risks, how they affect aid and how they can be managed better. We are almost ready to launch our first version of our currency risk management toolkit and are very eager to test it out on some real cases.
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Originally published at www.aidhedge.org.
