Recommendations
Depreciation
How do we deal with depreciation?
➀ Limit liquidities and outstanding balance in local currency
Depending on your contexts, it may be possible to work from local bank accounts in foreign currency. If so, this may be a good option to mitigate the effect of the depreciation of the exchange rate. Overall, the goal is to minimise the amount of money in local currency that you hold at any given time, as well as the duration for which you holds local currency before transferring it to its final recipient. Specifically, it is important to eliminate balances at the end of the month to avoid remaining amounts at unfavourable exchange rates at the beginning of the next month, as this would skew NRC's weighted average system for exchange rates on Agresso.
Note that we are focusing here, and in the recommendations below, mostly on a framing around exchange losses. This is because overall, depreciation is more common than appreciation of the exchange rate. But both exchange losses and gains can have a significant impact on financial management and would require such adaptations and adjustments to your ways of working.
#operations #finance
➁ Start anticipating commitment and disbursement deadlines
With currency depreciation, the main risk for our budgets (which are in foreign currency) is underspending. To avoid ending the budget period with extra money, budget holders should try to disburse funds earlier than usual. This also means that the review of commitments and disbursement levels should happen earlier than usual, allowing time for adjustments if necessary.
In contracts with suppliers, service providers, and other partners, especially long-standing ones, you can typically anticipate payments and / or negotiate a longer lead time between payments and the actual service provision or implementation of activities. Your partners are likely to accept such amendments to existing contracts, as they will themselves also benefit from the earlier cash flow. This may in turn require slight, exceptional adjustments to your monitoring procedures. And for larger payments, you may consider revising payment schedules to smaller, more frequent disbursements as well to further mitigate the risk of non-delivery of services. However, in essence, this practice is not very different from the practice of disbursement in tranches.
This can apply for example to advances to partners and in general to payments related to procurement. To minimize the time between the advance payment date and the final invoice, you can consider, where possible, using an interim invoice for partial acceptance of goods or services, so as to minimize the impact of the depreciation of the exchange rate in your budget.
#operations #finance
➂ Peg all values and calculations in key programmatic and operational documents in a hard currency
In contexts of depreciation of the exchange rate, unless the economy is dollarized, most of your payments are likely to continue to be in local currency. But you should peg all monetary values in key documents into a hard currency, including budgets, contracts, as well as programmatic payments. This also includes defining salary scales in a hard currency such as USD. Pegging is simply the practice of defining the value of a transaction in a hard currency, while the transaction itself is conducted in local currency. For example, your programmatic documents for your cash transfers should stipulate that you will distribute on a monthly basis “the equivalent of 100 USD converted in local currency on the day of distribution”. Pegging allows you to stabilise the value of transfers, which benefits both the accuracy of your budgets and the well-being of your participants.
On the operational angle, the idea is with pegging to be able to do most of your accounting in a hard currency, while not necessarily shifting the currency of your payments. This will facilitate financial management, reporting as well as reconciliation processes. On the programmatic angle, the idea is to continue to distribute in local currency for as long as possible, but to guarantee the stable purchasing power of the transfer by defining it in terms of its counter value in hard currency at market rate. However, ensure that the effective conversion is done as late as possible in the distribution process. Depending on whether local partners and suppliers are able to receive payments in hard currency, you may be able to transfer the conversion risk onto your contracted FSPs as they are likely to have access to better exchange rates than you. You can typically specify in your agreements with them that the conversion should be done based on the value of the market exchange rate and as late as possible, such as on the day of distribution.
Some countries prohibit mentioning prices in specific foreign currencies in contracts, though this is quite rare. If this is the case in your context, there are still ways to peg prices into stable values. For example, you can peg a contractual value into the value of an asset (which itself is implicitely expressed in a hard currency).
#programs #operations
➃ Use tokens in distributions and favor delivery mechanisms with late conversion points
In contexts of currency depreciation, information and clarity about the value of assistance is valuable to participants. The use of tokens during distributions can both contribute to that clarity as well as facilitate financial tracking and reconciliation processes. To put it simply, the participants receive their entitlement as a token (which can be in physical or digital format) that states the equivalent value of their transfer in a hard currency (for example, “you will receive the equivalent of 100 USD in exchange for this token”). In cash distributions for example, the token is exchanged for local currency at the daily applicable rate at the time of encashment. If using a distribution site, the entitlement and encashment processes and token exchanges can also simply happen on two different tables within the same room. The use of tokens will also considerably facilitate the processes of financial tracking as well as financial and programmatic reconciliation, as used tokens can be used as proof of delivery.
#programs #operations
➄ Use the situation as an opportunity to negotiate better contracts with local suppliers and partners
"When dealing with contracts in local currency, you can use the fact that your own budgets are set in a foreign currency as leverage to negotiate better terms for NRC such as duration, lead times, fees, etc. This strategy is particularly beneficial for longer-term contracts or contracts with repeated payments, such as rental contracts. Usually, local actors are less keen to make contracts in contexts of significant depreciation. This is essentially because depreciation also drives high nominal inflation, such that any price points that they can give at the time of the tendering will likely be inaccurate by the time of implementation when they have to incur the actual costs, and even more by the time of financial reconciliation when they receive payments. But because your budgets are in a foreign currency, you can actually absorb the nominal part of inflation on behalf of your potential partners. One simple mechanism to do so is described above as pegging values in a hard currency. Another one would be simply to explicitly state in the contract that prices will be adjusted for nominal inflation at the time of payment.
It is important to note that these adjustments should only apply to the nominal part of inflation (aka the part that is equal to the depreciation of the exchange rate). This is the part of inflation that does not affect your budget. Real inflation on the other hand should still be forecasted, using the aforementioned best practices. Restricting contract renegotiation to nominal inflation also helps prevent additional increases in real prices. Alternatively, when dealing with suppliers or service providers that can receive payments in USD, which can often be the case of FSPs, you can leverage in your negotiation the possibility of paying them in USD, such they take on the exchange risk.
You should also consider offering longer contracts to your local partners as a way to negotiate better terms. Currency depreciation can lead to increased volatility and uncertainty in the local economy, making it challenging for local organisations to accurately forecast and manage their budgets which are set in SDG. By entering into longer contracts, you can provide stability to your partners and help them mitigate the risks associated with currency fluctuations. Longer contracts allow for better planning and budgeting, as they provide a fixed exchange rate and reduce the need for frequent renegotiations due to currency depreciation. This approach helps ensure the continuity of projects and partnerships.
Another bargaining position that you can use when negotiating contracts with local organisations, without incurring any additional costs to your budget, is frontloaded payments. This means providing your local partners, suppliers, and service providers with money early on in the implementation cycle. By doing so, they can better plan their expenses and make investments before the value of the money decreases. You can leverage this to secure better contractual conditions for NRC. For example, you can offer to make some payments early or in advance of the delivery, or provide a higher downpayment at the contract signing in exchange for lower fees or other preferential treatment. With FSPs for example, it may also be possible to renegotiate the transaction costs that are charged, such these are charged only once, in bulk, at a given time of the month, rather than per transaction."
#operations #procurement
✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for depreciation contexts in the first place!
How do we prepare for depreciation?
If you are worried that the local currency could significantly depreciate in the future in your context, consider putting in place some of the following actions as preparedness measures.
➊ Identify potential additional caseloads at the beginning of your grant cycles
If you find yourself with extra money at the end of your grant cycle due to currency depreciation, it is crucial to have already identified additional participants in advance. There is usually limited time remaining to spend the money, and conducting new needs assessments, verification, and registration may not be feasible. Instead of providing additional funds to participants who have already received their entitlement, it is better to prioritise targeting additional participants. This is particularly important considering the high level and severity of needs, as it is likely that not all needs have been adequately addressed.
In practice, during the early stages of implementation, such as needs assessments and verification processes, you may already identify an additional group of participants that you could have potentially served if there were no budget constraints. In other words, if your budget had been larger and you could have targeted more people, who would they have been? This list, known as the "waitlist", should be kept as a backup document by the program team and should not be communicated to the affected communities during the enrolment process.