The case for a currency policy in aid organisations

We talk currency with aid and development organisations all day, every day. Very few of the organisations we engage with have a currency policy in place, or a financial policy that covers currency management. A very common argument is that as aid organisations they should not have a policy on currency, as it is not their role to “speculate”.

I would instead argue that almost all aid and development organisations should absolutely have a policy that covers currency management, and not having one exposes the organisation to both financial and reputational risks.

In this post, I’ll try and to make the case for having a currency policy. We’ll first quickly cover what a policy is, and then look at why they are relevant and what they should cover. Finally a few words on how you can establish a policy, and what the next steps are.

1. What is a currency policy?

A currency policy (they are often referred to as “FX-policies”) is simply a set of guiding principles that describes how the organisation should handle the fact that it exposed to more than one currency.

The objective is to ensure that there are no ill-effects to its financials, to the intended results or to the reputation or standing of the organisation.

This might sound serious indeed! And it is! But still, very few aid and development organisations have a policy that covers currency questions. With larger organisations, the most common arguments we get is that they are not affected by currency, or as mentioned above, that they cant engage in speculation. Let’s unpack that a bit…

Many organisations are exposed to significant financial risks but lack the policy to manage this!

2. Why would an aid organisation need an FX-policy?

If an organisation, or it’s implementing partners, are working in more than one currency they are exposed to currency risks and costs. Simple as that. These risks and costs can take different shapes, but ultimately there are financial risks and costs involved. Exchanging currencies comes with a cost, and fluctuating exchange rates will affect the values of disbursed funds.

If you don’t have guiding principles for how your organisations should handle risks, or costs, they will eventually hit your reputation, result or financial standing.

Let's look at some basic examples of how this can affect an aid or development organisation. I’ll take four common ones, that will likely be relevant for 95 % of all organisations. They are really simplified, and there are definitely more of them!

a) You have funding in another currency. An international donor, working in another currency, is supporting your work. This means that there is an exchange rate risk towards your budget, in that you can’t be sure how much the funding will be when it is finally exchanged into your working currency.

b) You are funding implementing partners in other countries. You contract in your own currency, so have no financial risk. But you risk not getting the results you are paying for!

c) You have costs in other currencies. It can be that you have local offices or operations, or perhaps local staff. Depending on contracts, you might have a financial risk of your own, a risk towards your results or even staff that risk not getting the salaries they expected.

d) You are buying currencies. If you are sending funds to other countries you are buying currencies. Just like with any other purchases: if you don’t question the price — you will be overcharged!

To sum up: Most organisations risk not getting what they paid for, or perhaps worse, not getting funding for what they are contracted to do. Not having a policy that covers that is equal to a severe risk exposure.

Funding losses due to transaction costs, exchange rate spreads or currency volatility is common is aid — currency policies are not!

3. What should the policy cover?

While an important matter, a currency policy for an aid or development organisation does actually not have to be that complicated. It really only needs to highlight to the organisation how currency risks should be treated, and who in the organisation is responsible for the task.

Having a policy means staff and management can be confident of how to manage potential risks, and removes any risk that individual employees have to make important decisions that can affect financial standing or results on their own.

For example, one of the organisations we work with have simple principles that cover the funding of external implementing partners. The policy, decided by the board, states that:

a) The organisation cannot take any financial risk upon itself. Contracts thus have to be signed in their own working currency.

b) If partners work in another currency, a currency risk analysis has to be carried out before deciding on the budget and at every annual budget revision. identified risks should be analysed and mitigated with a plan. It states that this is the responsibility of the programme officer, with support from the finance department.

4. How do we get a policy, and then what?

When we work to support organisations with policies, we usually follow a three-step process:

1. Establish how the organisation is exposed to currency risks and costs. Together with colleagues from the organisation, we analyse their operating model, funding situation and transaction set-up to highlight the risks and costs.
2. Guide the strategic decisions. The most important step in developing a policy is supporting the management in their work to establish the guiding principles. Given the identified risks, how should the organisation act? This decision must come from the organisations itself. If possible we try and organise a scenario-workshop with both management and key staff, to ensure that decisions are based on a real understanding of the issues at hand.
3. Drafting and decision. We work with the responsible staff to produce the policy draft, and support the organisation in the decision process. This often involves participation in a presentation at the board meeting where the policy is to be approved.

As you might realise, having a policy is the foundation for good currency management at an aid or development organisation. Depending on the risks covered by the policy, the next steps for an organisation is often to but working guidelines in place for staff, covering the responsibilities set out in the policy.

What is your experience of working with currency polices in aid and development? Have any best practices you would like to share? Get in touch!