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How NGO Treasury Functions Manage Currency Risk

  • By John Hintze
  • Published: 8/26/2015

GlobalThe U.S. dollar strengthening to recent highs versus most other currencies has emphasized the importance of a robust foreign exchange strategy for organizations with international operations. Leading the way in the strategic management and mitigation of this financial risk is treasury.  

Non-governmental organizations (NGOs) face an additional layer of complexity. Their operations are in some of the most difficult emerging markets—generally regions or countries that corporations tend to leave due to war, natural disaster or civil unrest.  Although each NGO is unique, revenue is generally acquired through several funding sources, including individual donations, sponsorship of people or programs, foundations, corporations, bi/multilateral government institutions, and gifts/services-in-kind.   

World Vision International (WVI), a global Christian relief, development and advocacy organization with annual revenues of more than $2.8 billion, is all too familiar with these risks. Diverse revenue sources from nearly 20 countries are delivered, via global treasury, to about 75 field offices to provide emergency relief, support long-term community development and engage advocacy work, improve services for vulnerable children, and oppose sex trafficking and child labor.

How does World Vision mitigate FX risk?  

“At the end of the day, good cash forecasting and cash management are the underlying foundations for effective currency risk management,” said Kathryn Powers, WVI’s global treasurer who has worked in the NGO sector as well as corporations, including AT&T and Lucent Technologies.

Powers noted that NGOs can mitigate FX volatility through a strong relationship with global supply chain management (GSCM), particularly robust sourcing decision-making.  

“For most large purchases that GSCM negotiates, our global treasury provides input on several issues, such as the manufacturer’s location, the currency outlook, whether to buy now or later, the decision whether to hedge upfront or build FX risk into the price negotiated with the manufacturer, or pay the difference later,” said Leon Tompkins, WVI’s director of risk management.

GSCM may use risk-sharing clauses in contracts with suppliers of goods such as vehicles, computers, temporary housing supplies, and mosquito nets. In fact, that is one example illustrating treasury’s expertise in financial risk mitigation.

“Unless you have a centralized treasury actively looking to identify risk it can be very hard to detect,” Tompkins said.

Government grants present an additional financial risk for NGOs, according to Stephen Chiu, CTP, director of treasury for WVI. In collaborating with other NGOs, different bi- and multilateral donor institutions introduce foreign exchange stipulations into their RFP opportunities, he said.

For example, one global donor requires using the same FX rate in its first funding installment for all future funding installments, creating currency risk depending on the duration of the grant. Another European donor uses the European Central Bank (ECB) spot rate for all funding to NGOs, creating a risk as NGOs convert euros into USD and, in turn, various local currencies depending on where the project will be implemented.

As many of WVI’s peers are U.S.-based NGOs based on USD, ECB-based funding converted into USD is continuing to generate FX volatility, Chiu said. In many instances, peer NGOs may no longer have adequate funding to fulfill their project activities, due to currency volatility realities, thereby turning to unrestricted donations to cover gaps in government funding.

Somewhat similar to a corporation, FX volatility can occur in NGOs in various stages of the contract process. For the NGO, these depend on the various FX stipulations drafted into the final agreement between the donor and NGO. Volatility can occur:

  • Between the proposal submission and donor award
  • Between donor award and initial funding advance
  • Between initial funding advance and multiple donor funding reimbursements
  • Prior to last donor funding reimbursement.

Certain NGOs have noted that one prime concern around currency volatility is the uncertainty around the timing of grant funding payments. In contrast to child or program sponsorship funds that tend to be stable and allow, when appropriate, the ability to hedge, uncertainty around grant payments may lead to significant FX volatility.

Donors may delay funding during the course and toward the end of a grant. One NGO collaborator noted that at the end of grants for two large multilaterals, the organization typically saw gaps totaling US$1million to US$2 million in the expected funding base on 60-day-plus delays the time expenses were incurred and the grant funds were delivered.

For NGOs whose primary revenue source is grants, these funding gaps, based on already incurred expenditures, can create a severe strain on working capital. This is particularly problematic when considering that in a reimbursement model the NGO is essentially funding the government for a period of time.

WVI develops financial risk mitigation strategies that incorporate multiple components, including: contract management, risk sharing clauses, budget rate management, and when appropriate, foreign exchange hedging.

“A centralized treasury is a valuable strategic partner for any organization with an exposure to global financial risk,” Powers said. “This is particularly important prior to making key operational decisions. Treasury’s unique vantage point should direct the organization toward solutions that avoid risks and, when unavoidable, then utilize practices and tools to mitigate it.”     

A longer version of this article will appear in an upcoming edition of AFP Exchange.

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