Recommendations
Dollarization
How do we deal with dollarization?
➀ Reassess FSPs capacity
In a context of dollarization of the economy, every aid organization will need to reassess the possibility to use different FSPs and operate in a foreign currency. As such, they will all need similar information about available delivery mechanisms and the service providers that enable them. While obtaining private information by having a privileged relationship with a given partner could potentially offer small benefits, the collective gain from everybody sharing all the information about their discussions with FSPs is much greater. By sharing information, the aid community will be able to negotiate better rates and coordinate distribution schedules with specific FSPs to avoid liquidity constraints.
FSP Mappings is often coordinated through the CWG in many contexts. Make sure that the efforts focus on producing a comprehensive picture of “what could be used in the near future”, rather than simply focusing on “what can be used today”. In contexts of dollarization, the mapping of potential partners for conducting transactions can also include service providers that are not specifically financial actors themselves, such as emerging fintech companies. They may provide adjacent, viable solutions.
Since many if not all aid agencies are likely to decide more or less at the same time to switch to programmatic payments in hard currency, you can explore the option of a homogenized framework agreement with FSPs on dollarized disbursement of aid.
If humanitarian agencies (in particular international organizations) cannot legally access and distribute hard currency, you should also consider collective advocacy towards the government on this issue.
#programs #operations #finance
➁ Check exchange conditions & access to hard currency for local actors (including participants)
If you consider switching to programmatic payments in USD following the dollarization of the economy, you need to strengthen various monitoring mechanisms including protection monitoring (since dollarization de facto provides valuable windfalls to otherwise vulnerable individuals), crowd control monitoring at points of cash distribution (since USD will be more desirable to all and thus more susceptible to diversion), market monitoring and monitoring rent payments/eviction rates (since there could be potential price hikes where beneficiaries are known to be receiving assistance in hard currency (and/or for services, e.g., rental), which could also impact non beneficiaries).
Since programmatic payments in USD would effectively transfers the risk related to exchange onto program participants, there is a need to ensure that they actually have safe options to exchange their USD windfalls for local currency as needed and at good exchange conditions. Can the target population safely access and spend money in hard currency, either physically or electronically? Does this vary by population group? In some contexts, dollarization may require beneficiaries to exchange money illegally (but at better rates than humanitarian agencies would be allowed to). There are also potential risks that money exchangers seek exploitative margins.
#programs #operations #finance
➂ Carefully consider the decision to distribute assistance in a different currency
You should only start considering transitioning to USD-only programmatic payments after your participants are already effectively using it in their daily lives. However, the decision to shift currencies requires careful thinking and preparation, both internally within NRC and collectively with the rest of the aid community.
An intermediate step, as the circulation of USD or another hard currency in the population increases, would be to consider a currency mix. For example, with cash transfers, you could distribute part of the windfall value in USD and part in local currency. This would be appropriate to mitigate liquidity constraints in either currency and help participants store value and protect against the depreciation of the local currency. However, this requires a careful analysis of the terms of access to foreign exchange for different participant profiles, as well as an analysis of the legal framework and regulations applicable to foreign currency distributions. In theory, if parts of the economy are dollarized before others, a hybrid approach could also be considered, whereby some transfer are made in hard currency for some core competencies or objectives (where expenditure are more likely to be in hard currency) but not for others.
Another argument that often arises in discussions within the international community about dollarization of assistance is related to the spillover effects that such a decision could have on inflation and depreciation dynamics within the economy as a whole. However, as long as the decision comes after the effective dollarization of the economy, this should not be a major concern, considering that international aid flows are very marginal compared to the overall volume of exchanges in the economy.
#programs #operations #finance
✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for contexts in which the economy is dollarized in the first place!
How do we prepare for dollarization?
If you are worried that the dollarization of the economy will happen in your context in the future, consider putting in place some of the following actions as preparedness measures.
➊ Expect a bump in real inflation
When a change in the currency-in-use happens in a country, especially when it happens rapidly, there is often at the same time an opportunistic adjustment of most prices upwards. All traders and vendors will have a tendency to round 'upwards' their prices when converting them into a new currency.
#programs #operations
➋ Check the legislation about making direct payments (including distributions) in hard currency
You should only start considering transitioning to USD-only programmatic payments after your participants are already effectively using it in their daily lives. However, the decision to shift currencies requires careful thinking and preparation, both internally within NRC and collectively with the rest of the aid community.
An intermediate step, as the circulation of USD or another hard currency increases, would be to consider a currency mix. For example, you could make part of your payments in USD and part in local currency. This would be appropriate to mitigate liquidity constraints in either currency. In programmatic payements, it can also help participants store value and protect against the depreciation of the local currency. However, this requires a careful analysis of the terms of access to foreign exchange for different population profiles, as well as an analysis of the legal framework and regulations applicable to foreign currency distributions. In theory, if parts of the economy are dollarized before others, a hybrid approach by CCs or objectives could also be considered, whereby some transactions are made in hard currency (where exchanges are more likely to be in hard currency) but not for others.
An argument that commonly arises in discussions within the international community about the decision to dollarize assistance is related to the spillover effects that such a decision could have on inflation and depreciation dynamics within the economy as a whole. However, as long as the decision comes after the effective dollarization of the economy, this should not be a major concern, considering that international aid flows are always very marginal, even at the local level, compared to the overall volume of exchanges in an economy.
#programs #operations