Let me start of by admitting that thinking about the impact of a Trump president is a bit more interesting (and frightening) than the issue of foreign exchange and aid disbursements. But as so often, those seemingly boring things can actually be quite important for the lives and well-being of those who are most marginalised and have the least power.
The genesis for this post was back in late 2015, on a trip to the Republic of Georgia for a research project. Talking to some staff in the national office of an international NGO, I was told that the national office was having to substantially cut back on its programming due to a significant shortfall in funding from its Canadian funding partner. During 2015, the value of the Canadian dollar fell. When funds from that partner were exchanged into the Georgian Lari, the effect was to immediately wipe the equivalent of Can$400,000 from the value of the grant. The Canadian funding organisation was still giving the amount it had agreed, but from the perspective of the recipient, not only was significantly less actually being received, but programmes designed to support child and community development were being cancelled as a result.
Flash forward six months to the outcome of the Brexit referendum, and the sudden and dramatic collapse of sterling. What, I wondered, was the impact of Brexit on UK aid flows – not the headline figures as published by DFID and that appear in official aid statistics, but the more meaningful impact on what was received by its recipients, and on programming as a result?
I have been asking a few organisations how they cope with the issue of fluctuating exchange rates, and, in particular, whether they revisit their initial grants when shortfalls emerge as a result; and whether the unusually large fall after the 23rd June referendum had had an impact. The answer, universally, was no: the grant is the grant, and recipients must operate within those budgetary parameters, however they may fall.
One NGO explained that because currency fluctuation is to be expected over the course of a project, it undertook regular (re)forecasting exercises to try and calculate potential losses and gains in the grants it received, and ensure effective financial management. But whereas gains might lead to it being able to re-investment in the programme (subject to donor approval), losses would lead to scaling back in funded activities. As a recipient of large-donor funding, losses would be expected to be absorbed by the NGO, and it would not receive extra funds.
This same NGO followed similar principles when making grants to its own partner organisations: reforecasting at least twice a year, and an expecting country programmes to stay in budget. However, when exceptional losses were made, a business case could be made to access flexible funds to cover losses.
The Financial Controller of another British NGO outlined their strategy for coping with movement in forex rates. As well as the emphasis on effective forecasting and re-forcasting models common to all organisations, they identified a number of other coping strategies:
- Trying to build in flexibility in agreements with donors: either allowing for amendment of the grant budget when fluctuations are especially severe (as has been the post-June situation for sterling); or including a contingency budget for unforeseen costs, including forex movements.
- Seeking to ‘achieve a natural hedge’ by matching currency assets and liabilities on a currency basis, where possible.
- Making use of foreign exchange hedging contracts (i.e. locking into a particular rate over a period of time) if cost-effective.
In answer to a parliamentary question by Labour MP Paula Sherriff on the impact of the fall in the value of sterling since June 23rd 2016, Aid Minister Rory Stewart did not directly answer the question but stated in his written response that (a) fluctuations are not new, (b) payments are made in sterling so additional costs would be imposed upon DFID; and (c) recipients are ‘carefully selected’ to ensure they have sufficiently strong financial mechanisms to cope with such shocks.
I also sent in an FOI to DFID, asking specifically about the impact on recipients (not the impact on UK department finances), and whether there was a policy to make up shortfalls in disbursements when fluctuations were especially severe. The response acknowledged that when aid paid in sterling was converted to other currencies post-June 2016, its value would fall. However, managing risk of fluctuations was the responsibility of the recipient, and they assumed all the currency risk. DFID’s Strategic Risk Register is responsible for monitoring and forecasting the potential impact of strong fluctuations, but shortfall grants were not an option.
Although fluctuations are indeed a normal occurrence, and can be mitigated to an extent by forecasting and hedging, the 15% fall after the referendum was far in excess of the normal range of ups and downs, and will inevitably have had a major impact on programming. It is still far from clear to me that this impact has been acknowledged (from the perspective of programming, rather than impact on UK finances), never mind addressed.
This bring us to problems of how aid is seen and officially defined, and misleading assumptions about how much is actually spend on aid programming – you know, the stuff that the money is supposed to be used for. Official aid is defined from the perspective of the donor, not the recipient. So when you look at OECD data, what you will see is what donor governments gave to a particular country or organisation. That is not what was necessarily received. As an example, back in 2003 gross official aid to Africa (the headline figure for how much aid was made available) totalled $25.9 billion (of which $20.8b. was in grants, the rest in new loans). However, when we look at it from the perspective of the recipient, the total amount of aid received by African governments was $10.7b (and taking out support for debt repayments, the total falls again to $7.2b).
Whilst that ‘missing’ $10 billion or so was spent on ‘development’ activity, much of it was spent in donor countries and regions: on consultants, administration, services and equipment, grants to multi-lateral organisations and NGOs and so on. So, assuming it was spent wisely and had a positive impact (a big assumption, but let’s go with it), there should have been a positive impact on the African region. But nonetheless, if the headline figure for, say, DFID aid to Tanzania is one amount, and what arrives in banks in Dar es Salaam is another, there is an issue here.
When thinking about aid flows, should we really be looking from the perspective of the donor? We know that some European aid spending is being directed to manage the migration crisis within Europe – is that really international aid? Does the donor-focus make it easier for aid Ministers like Priti Patel to re-orientate aid spending to support UK post-Brexit trade-deals? A recipient-focused definition may lead to some surprising findings about what donors think is aid, and what the impact of that thinking has on the programmes they support. As the experience of the NGO in Georgia shows us, this is not just about semantics and dry definitions: the shift in perspective can uncover some very real consequences, not only for the local NGO, nor aid-recipient governments, but for the poor, marginalised and vulnerable.