Foundations
Depreciation
We focus on problems that affect the local currency of your country of operation. But the same problems may affect your donor currency.
Our analysis & is also applicable to volatility between NOK & USD.
What are we talking about?
Depreciation is a fall in the value of a local currency in terms of its exchange rate versus other currencies.
Typically, the depreciation of an exchange rate is the result of a combination of factors, including:
1. Psychological factors related to domestic confidence, and
2. Fundamental factors related to the demand and supply of local and hard currency on the local market.
The depreciation of the exchange rate is often tied to money creation in local currency (aka. nominal inflation) or to shortages of foreign currency inflows (leading to large external deficits) due to speculative activities and / or psychological factors tied to politico-economic outlook fears.
Why do we care?
Currency depreciation also make imports more expensive and exports cheaper. It thus affects the local economy insofar as it increases local prices for imported products as well as input costs for local production (thus also generating 'real' inflation). Depending on the structure of consumption and which segments of the population consume which types of imported goods, it will thus affect the expenditures of different parts of the population.
In terms of purchasing power in the population and livelihoods, it will affect mostly the value chains that depend upon imports (and typically the agricultural value chains). On the other hand, it will also contribute to increasing inequalities between the part of the population that can access revenues in hard currency and the part that depends upon local currency.
In turn, currency depreciation will have a double inflationary effect on local prices: (1) through a nominal increase of prices for imported goods and (2) through a real increase in price for basic commodities. Since substitution of imports with local production can take time, it tends to also generate shortages and unavailability of some goods and services in the short-term.
Currency depreciation also yields in the medium term a lack of public investments, especially in healthcare, water and sanitation services, basic products subsidies, etc. Hence, highly populated, underserved communities will likely be hit particularly hard.
Currency depreciation typically does not affect negatively humanitarian budgets since those are mostly set in foreign currency.
On the contrary, it could in principle increase our (nominal) purchasing power in local currency which subsequently increases the risk of under-spent. The main financial risk for humanitarians with depreciation is related to accounts held in local currency.
How do we monitor it?
To monitor currency depreciation, we compare the price of the MEB in local currency and in hard currency.
The depreciation of a currency is typically observed by monitoring either the comparison in CPI inflation in foreign currency versus local currency or directly looking at the fluctuation of the (free / black market) exchange rates with a hard currency. By comparing inflation and depreciation, the pass-through rate between the two is calculated.