Aid volatility due to exchange rate fluctuations
The cost of unpredictable aid, or volatility in aid, is suggested to be high, especially in the least developed countries that are also least able to afford it. The predictability of aid has been emphasised in the Paris, Accra and Addis Ababa Agendas. One often overlooked source of aid volatility is exchange rate fluctuations.
The objective of this study is to increase the understanding of the effect of exchange rate volatility on financial aid flows. In particular, the study aims at answering the questions: How does volatility in currency exchange rates impact the predictability and value of Swedish aid? How much of aggregate volatility in aid flows can be attributed to exchange rate fluctuations? How do partner organisations manage their currency risk exposure? How can improved currency risk management decrease aid volatility? How do other donors manage currency risk? Does Sweden differ in comparison to other donors? Are there best practices to learn from?
Author: Númi Östlund
Chair, reference group: Arne Bigsten
Project manager: Richard Sannerholm
Expected delivery of report: 4th quarter 2017