Falling dollar erodes aid agencies’ spending power

Falling dollar erodes aid agencies’ spending power

London, 13 September For aid agencies with dollar budgets in the developing world, the weakening U.S. currency gives them less to spend and may mean they have to cut back on much-needed projects.

The dollar hit a record low against the euro on Wednesday and has hit a fresh 15-year low against a basket of currencies. For relief planners dependent on dollar donations, long-term planning becomes difficult.

“It has a pretty substantial impact," said Radha Muthiah, assistant country director for CARE International in India. “It may affect the extent of our programmes and the reach we have on the ground."

The US is the worlds biggest aid donor, and multilateral aid from agencies such as the International Monetary Fund and World Bank is often in dollars. So is most funding from growing donor China.

Analysts say the currency could fall further to an all-time low next week on the back of tumult in the financial markets and weak US economic data fuelling fear of recession.

Over 60% of CARE’s India funding is in dollars, mainly from US government agencies and private donors such as the Bill Gates Foundation.

Most of the agency’s budgets assumed an exchange rate of some Rs43 to 45 to the dollar. Now, one dollar only buys some Rs40 and in future proposals CARE is budgeting for that to fall to around 37.

For long-term projects devised in the aftermath of the 2004 tsunami aimed at helping improve peoples’ livelihoods through teaching skills or running workshops for women, Muthiah told Reuters it might simply mean shutting them six months early.

“We are going back to donors and saying that things have changed and asking for more money if we can," she said. “Some are more flexible than others."

It is not just Asia. With the exception of some states such as Zimbabwe in economic crisis themselves, many emerging market currencies are strengthening including those in Africa, the world’s poorest continent and largest recipient of aid.

Stronger Africa

“We are seeing a strengthening trend in a number of African currencies," said chief Africa economist at Standard Chartered bank Razia Khan. “It is arguably a good thing but when it comes to traditional sources of funding such as donor financing then if it is in dollars it will not go as far."

However, she said a general shift from multilateral funding by dollar-based agencies such as the IMF to bilateral donations from countries or groupings such as the European Union -- which donates in euros -- had reduced exposure to dollar falls.

Rising commodity prices -- particularly of food -- and freight rates for shipping may also make it more expensive for aid groups.

But with stronger currencies, states themselves may better be able to buy commodities and fuel, potentially reducing dependence on others. Many African countries are themselves commodity producers and so are seeing their incomes rising.