Recommendations
Hyperinflation
How do we deal with hyperinflation?
➀ Focus on basic needs and complementary programmatic approaches & service provision that can increase self-reliance
In hyperinflationary contexts, the levels and severity of needs will simply be too high to address at the individual level. Focus on system-level interventions by helping groups or communities as a whole as well as critical institutions through support to community assets for example rather than trying to address individual needs. This will also often mean finding innovative ways to do supply-side support and focusing on interventions that have the potential to have a sustainable positive impact beyond the grant cycle. In other words, you will try to contribute to enabling the population to better meet their needs on their own in the medium term, in a more self-reliant manner, rather than haphazardly try to partially respond to only immediate needs. This will typically be the case of interventions that support local food production whether for collective domestic consumption and natural resource management to improve community subsistence at scale, or for commercial productions that can substitute to imports and has the potential to reduce food insecurity and increase self-reliance at the system-level.
You will also likely adapt not only the nature of your response but also the modalities you will use. Given that not all needs will be addressed, the population is also likely to prioritize the most basic needs. Humanitarians are used to respond to basic needs with resource transfers either in kind or in cash. But in hyperinflation contexts, your capacity to implement resource transfers will also be more limited. Consider mixing modalities and possibly shifting the balance more towards service delivery and information provision rather than resource transfers.
One of the most devastating effects of hyperinflation on affected populations is the uncertainty it creates. Providing a source of stability, even if minimal, can be crucial in enabling individuals to plan for their basic needs and maintain their dignity in such unstable situations. In other words, when working with a limited budget, it is advisable to prioritise partial but longer and more frequent assistance provision over trying to reach larger caseloads or to fully cover individual needs. While the assistance you will be able to provide may not fully meet all the needs, increasing the duration of support (instead of the size of transfers or caseload) can contribute to sustainable and positive outcomes.
#programs
➁ Change your financial management practices in terms of payments, reserves, and transaction schedules
In a hyperinflationary environment, the domestic banking system is likely to experience more widespread failure. Therefore, it is important not only to protect the value of your budget and assets by keeping them outside of the country, but also to conduct as many transactions as possible outside of the country. This entails prioritising partners who have foreign bank accounts and can be paid internationally. Additionally, you can utilise regional proposals and projects to hold money reserves abroad and make payments from overseas.
In contrast to the strategies mentioned above for managing inflation spirals, which involves minimizing the volume of local transactions by making numerous small payments to mitigate risks associated with depreciation and with localized failures in the financial system, in a hyper-inflationary environment, transaction costs are likely to become the most significant problem. The number of financial operations that can be processed within the country on a weekly or monthly basis may be severely limited. Therefore, the recommendation is to consolidate and bundle payments to avoid incurring transaction costs for each individual payment. For instance, this approach can be applied to per diem payments by grouping them over the span of a month or two rather than paying them separately. As much as possible, you also want to try and pay staff and suppliers on foreign accounts outside of the country. While it is not advisable to facilitate the process in itself, consider providing information to staff in advance about their options to open foreign bank accounts.
Finally, you will need also possibly need a larger "stash" of emergency cash in foreign currency in country to face all sorts of financial contingencies. At the same time you need to consider the security risks related to holding a lot of cash in hard currency are going to be higher, so the emergency reserves will likely need to be spread across multiple staff.
#operations #finance
➂ Continuously scope and test new transaction mechanisms and new partners, activate dormant delivery mechanisms, and favour digital exchange mechanisms
In the period leading up to hyperinflation, you should have already started to diversify your partners and available delivery mechanisms. Yet, you will have kept some of them in the pilot stage, or as a potential option in contracts. Hyperinflation serves as the trigger to effectively activate all available mechanisms. Specifically, this applies to all available digital payment methods. They may not have been your preferred option until now because of limitations in reach or scope, or higher costs. But the use of physical local currency will simply not be feasible at all anymore, and the use of other physical hard currencies for transactions in country may pose additional security concerns and legal obstacles.
It is crucial to continue continuously exploring new options and mechanisms. Economies tends to adapt and innovate in response to complex situations. Innovative solutions for resource transfers in kind and in cash are likely to emerge with hyperinflation. You may not be the best positioned to learn about these options or pilot them. Your strategy should be to continually inquire and listen to what other stakeholders are doing and the ways they are finding to overcome the situation.
This includes discussing and learning from similar organisations. However, they are likely to face the same constraints as you, so their solutions may only provide marginal new ideas. It is important to set up new processes to regularly exchange ideas with a broader set of local actors, including existing partners, but also participants themselves, local CSOs and CBOs, the local private sector, and even the diaspora. Look at the mechanisms they have developed to cope and see if there are aspects that you can adapt to your operations."
#operations #programs #procurement
➃ Start implementation as early as possible in the grant cycle and adjust the way workplans are made
In hyper-inflationary environments, you never know which process in your implementation will delay your activities. Starting implementation as early as possible can help mitigate potential delays and provide buffers in case operations are halted. Making expenses early on is also a cost-effective strategy compared to engaging them later in the timeline. Prioritise all the payments that can be reasonably made in advance of output delivery or activity implementation. These payments should take priority in workplans at the beginning of the grant cycle, even over actions focused on activity design. This is particularly relevant for procurement plans. However, paying for items in advance does not necessarily mean that you want to receive them early as well. In such cases, you may need to balance the advantages of anticipated procurements in terms of activity delays with the fixed costs associated with longer warehousing if other blocking points delay implementation.
#programs
➄ Look for contingency funds and use crisis modifiers to mitigate risks related to real inflation
Another specificity of hyperinflation contexts is that the nature of inflation can be quite unpredictable: you will have to deal with both nominal and real sources of inflation. If a specific donor’s rules allow it, you can try to more systematically make provision in your budgets for crisis modifiers in order to mitigate the risks related to real inflation. The part of the grant that is set as a crisis modifier can be held either with the donor or with NRC. The trigger for the crisis modifier portion of the budget to be released can be defined as a combined change in inflation rate & exchange rate (in other words, if the exchange rate depreciates in line with inflation, then there is no need to use the crisis modifier since inflation will be mostly nominal and your budget in foreign currency will not be affected in its purchasing power).
#programs #grants
✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for hyperinflation contexts in the first place!
How do we prepare for hyperinflation?
If you are worried that your context could devolve into hyperinflation in the future, consider putting in place some of the following actions as preparedness measures.
➊ Review program criticality and prioritize interventions that you can conduct in an autonomous manner
Leading up to hyperinflation, you may have already adopted an area-based approach and favoured integrated program activities. However, hyperinflation will require an even more narrow focus on a limited number of activities. You should identify the most critical sectors where your intervention can address the urgent needs of affected populations while at the same time also supporting your operations. This typically includes food production, food transformation, and food consumption systems, as food security becomes a paramount concern for the population. Additionally, by focusing on these sectors, you can also help ensure basic livelihood opportunities. It is also important to explore opportunities for multiplier effects by supporting and strengthening critical support functions and infrastructures that impact multiple critical markets. This can improve the availability of key goods and services as well as options for the delivery of humanitarian assistance. Some examples of such support functions and infrastructures include transport and delivery services, as well as communication or digital services.
In a hyperinflationary context, the capacity of your partners and of local actors in general may also be severely hindered. Therefore, it is important to also prioritise activities that can be implemented independently, without relying on outputs from external sources. This is especially relevant for services and information provision, which can be directly carried out by staff, rather than resource transfers that may heavily depend on service providers' capacities and procurement processes.
Additionally, you can design activities that rely on closed financial loops or minimize the number of transactions involved. For example, voucher-based components or supply-side support for critical public services can be utilized in this manner.
#programs
➋ Carefully consider what you commit to in proposals and explore alternative & more flexible financing mechanisms
"Implementing projects in the context of hyperinflation is complex and requires significant adjustments in your approach. It is important to communicate these adjustments to donors, explaining how they will impact the nature of your activities and the timelines within which you can reasonably expect to complete them. While you may be able to implement meaningful activities in practice, it will be difficult to plan in advance which activities precisely, and when and where they will be effectively carried out.
This means that you will need more flexible funding in general, and traditional humanitarian donors may not always be the most suitable source of funding. Humanitarian donors often have specific and restrictive rules on how their funds can be used and provide limited flexibility for reallocation of costs. They typically require detailed budget line specifications in advance, rather than general envelopes by budget categories or global allocations per activity. Additionally, they have strict audit procedures to ensure compliance with budget commitments. However, in a hyperinflation context, it may not be possible to make such precise commitments well in advance.
Unless you can negotiate more flexible funding arrangements with your traditional donors, it is crucial to carefully consider what you can commit to in proposals. You should also be selective in the donors you choose and the grants you apply for, to avoid the risk of significant cost disallowances later on.
Alternatively, you can start looking for more flexible sources of funding with alternative financing mechanisms or through non-traditional donors. Look in particular for donors in the private sector who are usually more flexible in terms of cost allocation, or development donors that could provide multi-year funding so that you have some measure of pre-visibility in your operations.
#programs #grants
➌ Review your cost structure to look for efficiency gains
"Hyperinflation is a severe situation that can have a significant impact on your ability to operate in a country, and it may even cause you to reconsider maintaining a presence there altogether. You will need to review your cost structure to rationalise repeated, fixed costs and identify strategies that allow you to be more nimble in your implementation
In hyper-inflationary environments, transaction costs can be significantly high due to the rapid and unpredictable changes in prices. You should expect overall high delays in implementation, with alternating periods where all activities are suspended pending the success of a procurement or payment processes and periods where a lot of activities need to be implemented within a short timeframe in order to keep meeting deadlines related to the grant cycle. This means that you need to be highly adaptable and flexible in your operations in order to effectively navigate these challenging circumstances.
One important aspect of adapting to hyperinflation is to constantly assess and adjust implementation based on what becomes feasible or not at a given time and in a specific area. In practice, for example, it becomes difficult to anticipate when a procurement process will go through and when specific goods or services will become available. This involves closely monitoring the market conditions and being ready to make changes to your strategies and processes as needed.
A key step in adapting to high transaction costs is to take proactive measures to rationalise your cost structure. The part of your budget that is going to weigh the more heavily and be the more complex to manage are repeated fixed costs such as offices and salaries. Consider adapting your operational model as a way to minimise such costs and find more flexible alternatives. For example, instead of having a large number of fixed offices, consider reducing the number and size of offices and utilising roving staff who can cover multiple areas of operation. This not only helps in reducing costs but also allows for greater flexibility in cost allocation.
By constantly reassessing and adjusting your operations, rationalising your cost structure, and finding more flexible alternatives, you can ensure long-term business continuity."
#operations
➍ Review your SOPs to look for time gains
"In a hyper-inflationary environment, any delays in processes can result in significant financial losses. So it is also crucial to streamline your SOPs to minimise such delays and save valuable time. This is especially important for processes involving handovers between teams, whether it is within NRC or between NRC and its partners. Examples of these processes include Purchase Requests (PR) and Purchase Orders (PO), which heavily rely on information provided by program teams, as well as partner payments, which are essential for the delivery of services.
One effective way to achieve time savings is by improving communication between program and support teams, as well as between NRC and its partners. By ensuring that teams have a clear understanding of the processes and the information required by other teams, significant time can be saved. For instance, during needs assessments, providing advance notice of future distributions to the support team and agreeing in advance that they can initiate processes with rough estimates can be beneficial. Final numbers and detailed information can be confirmed later after verification.
#programs #operations
➍ Check for possible technical limitations in systems and tools
This is a simple point, but it can become challenging in contexts affected by hyperinflation. In these situations, annual inflation rates can reach three, four, or even five digits. As a result, prices can increase by a hundred or a thousand times, and may be expressed in billions or trillions. Unfortunately, some technical systems are unable to handle such large numbers. It's important to identify this issue in advance and find solutions, whether by switching to different systems or adapting the way numbers are reported (e.g., adopting a convention where 5 represents 5 million instead of entering 5,000,000).
#operations #IT