Currency risk is the development tax on institutions that earn in local currency and account in foreign currency. It is real, large, and almost always underestimated.
What Currency Risk Is in Development Contexts
Currency risk in development contexts is the exposure that organisations face when their operational costs are denominated in one currency and their funding or revenue is denominated in another. The NGO funded in US dollars and operating in a country whose currency has depreciated significantly against the dollar has received a real resource reduction without any change in its nominal budget — its dollar budget buys fewer local services, employs fewer local staff at competitive wages, and funds fewer local activities than it did before the depreciation. The enterprise that borrowed in foreign currency to finance local operations faces an increased debt burden in local currency terms if the local currency depreciates after the debt is incurred.
Currency risk is particularly consequential for development operations in countries with volatile currencies, which tend to be the countries with the weakest institutions and the highest development need. The organisations operating in these environments face a systematic resource uncertainty that undermines their ability to plan, commit, and deliver on multi-year development objectives.
Managing Currency Risk
Managing currency risk in development contexts requires explicit acknowledgment that it exists and systematic incorporation of it into operational planning. Scenario planning for currency movements, financial structures that match the currency denomination of costs and revenues, and operational flexibility to adjust the scale of activities when currency movements reduce real resources — each of these is a component of currency risk management that most development organisations implement inadequately relative to the scale of the risk they face.
Currency risk is the silent budget cut that no one voted for. The organisation that does not manage it is operating with a budget that is more uncertain than the nominal numbers suggest — and will discover the uncertainty at the worst possible time, when currency moves make already-constrained resources even more constrained.
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