How development organizations are planning for a potential recession
The world economy is likely to slow down this year and many countries are worried about a potential recession. How are development organizations getting ready for tougher conditions?
By Natalie Donback // 22 February 2023As costs rise and funding drops due to the global economic slowdown, development organizations are hunting for ways to use their resources better and prepare for a potential recession. The ripple effects of COVID-19 and Russia’s war in Ukraine have together pushed up food and fuel prices and set off a global cost of living crisis, with high inflation and interest rates slowing down the world economy. At the start of the year, the International Monetary Fund predicted that “half the European Union” might enter recession. The United States may or may not follow suit, and it seems likely that the United Kingdom, at least, will see its economy contract this year. In sub-Saharan Africa, a slow pandemic recovery, rising prices, and high levels of public debt have created difficult economic environments and decade-high levels of inflation, which averaged 9% in 2022. This year, the world economy is set to grow at the third weakest pace in nearly three decades, with the worldwide growth rate falling from 3.4% in 2022 to 2.9% this year. Meanwhile, need is rising, but many donors are cutting aid. The U.K. slashed its bilateral aid by 30% last year and Sweden recently dropped its 1% aid target. At the same time, a record 339 million people were in need of humanitarian support even before the recent earthquake in Turkey and Syria. While the organizations Devex spoke to haven’t been forced to cut services — or jobs — yet, several highlighted the increasing needs on the ground as they’re confronted with a fourth “C” — cost of living — in addition to COVID-19, climate, and conflict. The World Food Programme, for example, says costs have risen by 44% since 2019. So how is the development sector bracing itself for a potential recession? Devex spoke to fundraising and finance directors across the sector to find out. Invest in fundraising Fundraising professionals told Devex it was hard to manage the uncertainty. The British Red Cross, for example, is looking back at numbers from the 2008 recession to get a sense of what might lie ahead. “But it's really difficult and to be honest, it's kind of [like] we are monitoring and looking for early warning signs,” said Kerry Blackstock, director of supporter marketing and engagement. For Bill O'Keefe, the executive vice president for mission and mobilization at Catholic Relief Services, the 2008 financial crisis — which forced a temporary hiring freeze — was much tougher than the current slowdown. While COVID-19 affected the most vulnerable and exposed inequalities, those who had resources ended up with more, he explained. In 2008, “people at the top and the bottom got slammed.” The biggest challenge is maintaining internal confidence — and investment — in fundraising despite rising costs for things such as media buying, explained Gemma Sherrington, executive director of fundraising and marketing at Save the Children UK. “Sometimes as fundraisers, we can do ourselves out of business by losing confidence and pulling back on investment, when every piece of evidence says [that] in our sector … when you invest through a recession, that's when you succeed,” she said. Several of the charities Devex spoke to are worried about keeping supporters. “Whilst most people will continue to give to charity, they will choose between their favorite charities,” said Sherrington. Most givers hold a portfolio of different charities, and they will start to cut the tail of that, making it even more important to stand out as their preferred charity of choice, she explained. “The experience they get from being your supporter is really, really important during recessionary times.” Limit costs But how is this investment in services to be paid for? Inflation is leading to rising staff costs and putting pressure on charities’ expenditure, according to a 2022 report from Pro Bono Economics and the Charities Aid Foundation. If the sector’s staffing costs are to keep up with inflation, it will need to find billions more in the next two years. “A recessionary period might mean tough choices,” Sherrington said. “Do you want to give everyone great pay increases to help them with cost of living increases or do you want to protect more jobs? Because you probably can't afford to keep everyone and give everyone great pay increases. So there's tough choices to be made in the fixed cost base to unlock that investment [in fundraising].” Save the Children UK is striving to reduce “the money we spend on ourselves”, she explained, and while it hasn’t implemented any widespread redundancy or hiring freezes in response to the cost of living crisis, there have been some “targeted redundancies aligned to our strategy.” For the British Red Cross, pay increases have been focused on the lower-paid members of staff in order to help them through the current crisis, explained Blackstock. Localization can also help drive down fixed costs, in addition to improving impact, according to Sinéad Magill, U.K. managing partner at the international development implementer Palladium. She said transport costs are far below their pre-pandemic levels. ”Across all of our teams, we’re able to attract and retain really super talented, local team members. And it's not just the right thing to do, it’s more cost-effective,” she said. Use reserves wisely Inflation will also decrease the value of multiyear contracts and grant funding, and put pressure on organizations’ reserves, which might already be running low following the pandemic. Focus your reserves on things that might drive growth during the period and put investments behind things you know work, explained Sherrington. For Sightsavers, an NGO working to prevent avoidable blindness, current reserves would cover operating costs for global operations for approximately six to seven months, wrote Ella Pierce, director of fundraising and marketing, to Devex in an email. “We believe this is prudent to safeguard the sustainability of our work, given the continuing economic and operational risks we face,” she wrote. “We are continually forecasting and budgeting based on best- and worst-case scenarios to make sure we prioritize funds in a sustainable and responsible way.” Look for new sources of cash Many of the organizations Devex spoke to have been in the process of diversifying their funding streams for years — some as a response to aid cuts and policy changes, others in response to the pandemic. But it’s never quick or straight forward to introduce new funding streams successfully, so decisions should be based on longer-term planning, Pierce told Devex. Médecins Sans Frontières was forced to diversify its funding sources in 2016 when the organization stopped accepting funds from the European Union and its member states as a response to the controversial EU-Turkey deal. “At one stage that would have been 30% of our income here in Ireland,” explained Audrey Jones, the head of fundraising at Médecins Sans Frontières UK and Ireland. Now, she said, MSF is only accepting independent and private money, with a “very strict corporate acceptance policy.” Legacies are a growing but unpredictable area — MSF raises more through legacies than any other international NGO. In 2019, they received a €600,000 legacy from one donor, said Jones. “We knew we were going to get a legacy, but we didn't know when we were going to get it, or how much it was going to be worth,” which makes it difficult to plan and forecast. Others such as Catholic Relief Services are looking for more non-American government funding, including new foundations and impact investing such as the socially responsible investment fund they’ve set up to expand water provision and water smart agriculture in Central America, explained O'Keefe. Palladium, on the other hand, has set up a new nature-based business focused on natural capital that’s predominantly funded by the private sector, which has made up for the dips they see across the board in Foreign, Commonwealth & Development Office funding, explained Palladium’s Magill. But shifting the business model toward more commercial capital might be more difficult for NGOs, as it requires a different mentality and skillset around business development, said a U.K.-based institutional funding professional Devex spoke to. The commercial frameworks offered by FCDO can be a lifeline for some organizations, with more NGOs than ever bidding for these commercial contracts and wanting to be part of these frameworks, they explained, adding that proposals are so complex and detailed many organizations are teaming up and creating consortiums to increase the chances of winning a contract.
As costs rise and funding drops due to the global economic slowdown, development organizations are hunting for ways to use their resources better and prepare for a potential recession.
The ripple effects of COVID-19 and Russia’s war in Ukraine have together pushed up food and fuel prices and set off a global cost of living crisis, with high inflation and interest rates slowing down the world economy.
At the start of the year, the International Monetary Fund predicted that “half the European Union” might enter recession. The United States may or may not follow suit, and it seems likely that the United Kingdom, at least, will see its economy contract this year.
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Natalie Donback is a freelance journalist and editor based in Barcelona, where she covers climate change, global health, and the impact of technology on communities. Previously, she was an editor and reporter at Devex, covering aid and the humanitarian sector. She holds a bachelor’s degree in development studies from Lund University and a master’s in journalism from the University of Barcelona and Columbia Journalism School.