Quick analysis: Swedish aid budget predictability and currency volatility
We took a brief break in the development to try to give an answer to to a question we got:
How much does currency fluctuations affect the overall value of the Swedish aid budget?
While we will be able to give quite a more detailed answer when the tool is up and running, we still wanted to get some figures out there already!
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Update: Since this blog was written The Expert Group for Aid Studies, EBA, has commissioned an in-depth study of how currency fluctuations affects the predictability of Swedish aid. The study is authored by Númi, and should be published in early 2018. ___________________________________________________________________
There will be a lot of ifs and buts about the results of this analysis, but we still think it is interesting enough and gives a strong picture of the possible effect of currency fluctuations on the value of aid.
The analysis is a quick back-of-the-napkin thing:
1. We took data about Swedish aid for the last 25 years. We cleaned out in-country refugee costs, as they are in SEK and thus will not be affected by currency fluctuations. This by itself is really interesting data, as it show the development of the Swedish aid budget (about SEK 13,5 billion in 1993 to a proposed budget of almost SEK 35 billion in 2017). But this is of course more complex than it looks, and since it is analysed in many other places, we leave that for now.
2. The next step is to make quite a few important assumptions…
(a) A first assumption is that not all Swedish aid is actually flowing out of Sweden, and thereby not the entire budget is exposed to currency fluctuations. The Expert Group for Aid Studies, EBA, did a review in 2015 that concluded that about 19 per cent of Swedish aid was used in Sweden. But about 65 per cent of that was in-country refugee costs, which we already excluded. About 7 per cent remains, and should thus be subtracted.
(b) A second assumption is that a majority of Swedish aid ends up in USD. This is an important and rater crude assumption. A lot of aid surely flows to multilaterals and large NGOs who budget in USD. When the Swedish National Audit Office audited currency management at Sida and the MFA in 2014 about 70 % of payments were directly exchanged into USD. We can conclude that there are a lot of uncertainty in this assumption.
(c ) A final assumption is that no part of the aid budget has been hedged by Sida.
3. We then go on and decide a time frame for our analysis. We are trying to understand how currency fluctuations can affect predictability. Rates fluctuate every minute and every second. So the value of Swedish aid compared to the USD will change all the time. We have chosen a quite long perspective here. What is the change in value of Swedish aid due to fluctuations in the relationship between SEK and USD from the start of one budget year to the next. So what you end up with is an estimation of the budget value in planning aid for next year.
4. We calculate the difference in value of the aid budget at the start of each year, compared to the value of the same amount of aid one year ago. The difference being the rate in USD/SEK.
5. Finally a note on the resulting value. What we get is a rough estimate of the value of the Swedish aid budget in terms of international “purchasing power”. If the SEK is depreciated in relation to the USD, Swedish ability to fund aid is decreased. The opposite is true should the SEK increase in relation to the USD.
The results are quite interesting!
We see substantial value fluctuations between years in our data. The median difference in between years is about 9 per cent, with a range from +21 per cent to -17 per cent. Since the budget has increased steadily, the impact in absolute numbers has also increased. Compared to 2014, the value of Swedish aid was decreased with about SEK 4.6 billion in 2015.
This analysis gives, as noted, just a first understanding of how currency fluctuations can affect the value of aid flows. We will certainly return to this a lot, and hope to improve on this analysis a lot when we get more data about flows and currency management (note: see the Update above!).
One thing that is not at all included here is the effect on projects, programmes and partner organisations! This is the main target in the tool that we are currently developing — so we will return to that question a lot in the near future!
Thoughts on this quick analysis? Things that we should add? Reach out to us on @aidhedge
Resources:
EBA report on use of development funds
Swedish National Audit Office report on currency managemen in Swedish aid
Originally published at www.aidhedge.org.
