Recommendations
Rapid Inflation
How do we deal with rapid inflation?
Since rapid inflation often results from a mix of high nominal inflation and currency depreciation, make sure that you have also considered the recommendations under these two other sections.
➀ Shift 'invisible' payments into hard currency
With rapid inflation, especially if it lasts, the simple pegging of values into a hard currency (while disbursing in local currency) that is recommended to deal with simple depreciation is not a sufficient risk mitigation measure anymore. You should try instead to actually switch from paying in local currency to paying in hard currency for as many operational payments as possible, as well as where feasible for other payments that can be 'invisible' (such as digital payments to participants). Discuss with each of your suppliers and partners (including FSPs, traders, other types of service providers and local partners) whether they can accept payments in hard currency, whether inside or outside of your country of operation. In some countries, the use of another currency than the local currency can be regulated. If that is the case, you can possibly fall back on more simple 'pegging' practices (See our recommendations for Depreciation).
You should also carefully consider shifting the payment currency for salaries, since this is likely to be your biggest budget line. If you decide to do so, this should be flagged as a temporary and exceptional measure. You can set it for a limited, pre-defined period of time (which can be reconducted as needed) so as to make it easier to switch back to regular procedures. Also consider how this will affect your accrual accounts such as severance pay. Finally, in addition to a change in currency, consider staggering salary payments over the month rather than bulking them at the end of the month. (See also our recommendations about transfer timeframes for Liquidity Constraints)
For programmatic payments, the use of hard currency is only advisable for payments that are somewhat 'invisible' to non-recipients, such that they are no risks of creating tensions.
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➁ Adapt your financial management practices in terms of financial monitoring and reporting
Overall, you want to ensure that your financial management practices already take into account best practices for both high inflation and exchange rate depreciation, such as pegging values in hard currency and forecasting real inflation systematically. In periods of rapid inflation, you can also lose significant amount of value by simply letting money in local currency sit on an account for a few days. You will want for example for your account balances to be as close to zero as possible on the last day of the week to avoid losing money over the weekend. This means increasing the precision of your expenditures forecast, and the frequency of your financial monitoring and reporting practices, up to possible daily posting updates and weekly closure forecast (budget to actual). See also below about having multiple active bank accounts for cashflow management.
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➂ Adjust the depth and breadth of your targeting and favor area-based approaches
Fast inflation spirals will dramatically increase both the levels and severity of needs, which will affect both your geographical and household targeting. You will have to respond to needs that are both significantly more severe and diverse as well as to larger potential caseloads overall. With fast inflation, you should typically favor more area-based targeting strategies, as it will become harder to apply restrictive targeting criteria in locations with high levels of needs overall without creating tensions between participants and non-participants. So it will usually be easier and more appropriate to focus on a smaller number of areas where the severity of needs is high in proportion to the levels of need and apply broader, more transversal household targeting criteria. In other words, you will likely have to reduce the number of areas in which you work in order to better cover the higher level of need within each area.
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➃ Explore opportunities for programming financial inclusion components that support participants with ways to store monetary value
The ability to hold and store money without it loosing it value is critical for affected populations in contexts of fast inflation. You will want to include such financial inclsuion considerations to your regular programming (and especially for resource transfers, whether in cash or in kind), for example by identifying possible liquid assets or refuge values that participants can use to protect the value of their resources. You can look for example into options to mix cash distributions with store assets that are likely better hold value over time (such as phone credit for example). As people are also more likely to keep their money outside of the formal banking system when there is fast inflation, you can also consider program components around informal mechanisms to facilitate and organize savings and loans at community or group level.
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✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for rapid inflation and inflation spirals in the first place!
How do we prepare for rapid inflation?
If you are worried that your context could devolve into rapid inflation or inflation spirals in the future, consider putting in place some of the following actions as preparedness measures.
➊ Start monitoring both the speed of inflation and the depreciation of the exchange rate
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➋ Improve the digital integration of your implementation and delivery systems
Fast inflation means that any delays or loss of time during impelmentation can have a high cost on your overall operation. To increase efficiency and timeliness of implementation, it may be worth investing in digitizing new systems or harmonizing existing systems to make the transition smoother and faster from one step of implementation to another. Ensuring that your internal delivery systems are optimized and inter-operable (including beneficiary data, payment, tracking, reconciliation, etc) by using natural coordination points like digital technologies and similar data formats can save significant costs in times of fast inflation.
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➌ Start identifying emergency funds for top-ups
Identify potential additional sources of flexible funding which could be requested as an addition to existing budgets. Prepare to increase transfer size to cover a broader proportion of HH needs and to scale up the size of the caseload. Here you know already that for your existing programs and areas of intervention, you will actually have more people in need - so you need top ups.
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➍ Consider opening additional bank accounts
If inflation starts spiralling out of control, there are also more risks that banks will start introducing limitations to the nature, volume or frequency of transactions that can be performed. This will be their way to mitigate their own risks of breakdown if people start losing confidence in the economy and run to get their money out of the banks. In turn, it is good a good strategy for you to start diversifying holdings into several places if you expect that rapid inflation is going to take a turn for the worse.
In contexts of rapid inflation in general, the management of your cashflow will be quite crucial. Optimizing the number of your active bank accounts can be a good way to make it manageable.
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