2018 Organisation and Management of Aid Evaluation

How Predictable is Swedish Aid? A Study of Exchange Rate Volatility

Númi Östlund

Sweden generally disburses development aid in SEK, while most partner countries, implementation organisations and recipients work in other currencies. This EBA report examines the effects of disbursing Swedish bilateral aid in Swedish kronor (SEK) without hedging.

The study is based on the analysis of over 30 000 bilateral activities funded by Swedish aid from 2006–2016, as reported to the International Aid Transparency Initiative (IATI). Two case studies
have also been conducted with visits to Rwanda and Zambia.

The report was presented during the seminar The (Fluctuating) Value of Aid.

Findings

  • The overall conclusion of the study is that exchange rate fluctuations have a substantial impact on the predictability of Swedish aid.
  • Predictability is not about amounts paid, but amounts received.
  • The two case studies illustrates how part of the uncertainty due to exchange rate fluctuations was offset by either over-contracting or underperformance, or a combination of both.
  • The study has found almost no examples of best practices for currency risk mitigation among other donors but several practical options are available based on best practices from other sectors.

Recommendations

  • Provide predictable funding in major currencies.
  • Explore innovative financial solutions for smaller currencies.
  • Work with transparent and efficient contracting rates.
  • Ensure that partner organisations have positive incentives to ensure a high implementation rate in line with plans and budgets.
  • Increase transparency about financial transactions in the reporting to the IATI.

Author
Númi Östlund, Programme Manager, EBA

 

The diagram shows the change over time of the Swedish exchange rate against three currencies used in development aid. For example, a three-year aid initiative of the same size calculated in SEK will have a completely different value in the Zambian kwacha depending on whether it was launched in January 2012 or January 2013.