How recession threatens 'complete financial turmoil' in aid sector

The global economy is in the midst of a sclerotic trajectory. Prices are soaring everywhere. Low- and middle-income countries are struggling with debt and the high cost of servicing that debt. “The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” said the International Monetary Fund’s Pierre-Olivier Gourinchas in July. This gloomy economic outlook brings many challenges for development organizations. NGOs are struggling to grapple with the uncertainty and are starting to notice a shift in their fundraising. Budgets are getting stretched because inflation is approaching historic highs, and organizations are also struggling to retain talent as aid workers search for stability and higher pay. Multilateral agencies are similarly facing the possibility of reduced budgets. And the people in low- and middle-income economies who are served by these organizations are facing the prospect of greater hardship. ‘Complete financial turmoil’ In June, Bond, the U.K’s network of NGOs, found in a survey of its members, that there had been a “noticeable decline in individual giving” in the last six months. Meanwhile, as countries like Nigeria, Ghana, and Ethiopia see prices hit historic highs, their currencies are also losing their value — something that chief executives of aid organizations told Bond is a huge worry. “Our members have gone from a state where they were, less than six months ago, developing a fairly stable predictable budget to sort of complete financial turmoil,” Mike Wright, director of membership and communications at Bond, told Devex. “[To] unpredictable costs and unpredictable price rises for everything.” Inflation, in particular, and its accompanying effect on currencies is having a devastating effect on the ability of some organizations to deliver on projects. “What organizations are seeing is almost, within six months, they're seeing a complete erosion of the value of grants and erosion of the value of their spending power,” Wright said. Some members have tried to go back to their donors to communicate a message that they may be unable to deliver on projects based on original budgets and commitments, hoping to renegotiate grants. But unlike at the height of the COVID-19 pandemic, where funders were amenable to working with organizations and adjusting, right now, donors are proving to be unresponsive, Wright said. “For the average person … in a developing country that is … dependent on development aid, life is going to get significantly difficult with or without a recession.” --— W. Gyude Moore, senior policy fellow, Center for Global Development. “Where they can negotiate with donors, they're saying, ‘well, actually, we'll, instead of delivering what we said we will deliver, we'll deliver less,’” Wright said. “So the project outcomes, outputs, are sort of being reduced.” Of even more concern, according to Wright, was that organizations were struggling to replenish the reserves that they had to dip into during the COVID-19 pandemic. In a Bond survey shared with Devex, 60% of members said that the current economic crisis has put pressure on their reserves or prevented organizations from building back reserves, or it's likely to. “They're now dipping into unrestricted reserves yet again. It's affecting their ability to build back that sort of reserves, which ultimately helped create organizational resilience,” Wright said. Meanwhile, some organizations are having to deal with a nervous staff agitating for job security amid the cost of living crisis and economic uncertainty. According to Bond’s survey, about 11% of organizations had imposed a pay freeze. Finance directors are caught between a rock and a hard place trying to balance their commitments to their employees with the demands to deliver on projects at a time when their budgets are of reduced value. “Organizations have staff looking at them and saying, you know, ‘what are you going to do for me now that inflation is 13%?’” Wright said. “It's a very anxious time for lots of organizations and lots of individuals involved.” Peter Sands, executive director at The Global Fund to Fight AIDS, Tuberculosis and Malaria, told Devex that a global economic recession may result in “pressure on domestic financing for health, whether it's because of servicing debt or the incremental costs due to food and energy prices.” He said that if the Global Fund were putting together its investment case now, instead of months ago, they would likely be less ambitious about the amount of domestic financing that they might expect from the countries where they operate. Prior to Russia's invasion of Ukraine, the Global Fund had set an ambitious fundraising target of $18 billion. Such a target, Sands said, was even more crucial during times of economic volatility. Higher food prices will make those afflicted with AIDS, Tuberculosis, and Malaria even more vulnerable, Sands said. “Already something like 20% of active TB is triggered by poor nutrition, so poor nutrition can both contribute to the activation of latent TB into active, and then it can also contribute to a lower treatment success rate,” he said. Similar levels of risk exist for people on antiretroviral treatment or surviving malaria. “Poor nutrition just takes everybody down a level,” he added. “And so when we talk about the food crisis there's one aspect of it, which is obviously the horrific prospect of mass starvation. If you combine that, plus the domestic resourcing, it underscores why we need to raise the money. But it also underscores the scale of the challenge that we collectively face.” ‘Gloomy’ outlook for the global economy After signs of an economic recovery last year following the COVID-19-induced recession the year before, 2022 has been beset by volatility caused by unprecedented high inflation, intractable supply chain issues, and the war in Ukraine. IMF projected that the global economy would grow by 3.2% this year and 2.9% in 2023, a significant dip from last year's 6.1% expansion. “This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook,” IMF said. IMF added that growth could be at the lowest levels since the 1970s. “A plausible alternative scenario in which risks materialize, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, would put growth in the bottom 10 percent of outcomes since 1970,” the Washington, D.C.-based multilateral lender explained. Meanwhile, in the United States, officials are battling inflation that, at one point, had hit a 40-year high. Some have warned that aggressive moves by policymakers to bring inflation down to the 2% target of the U.S. central bank could tilt the world’s largest economy into a recession. Senator Elizabeth Warren of the U.S. state of Massachusetts told CNN recently that she was concerned about the Federal Reserve’s policies. “Do you know what’s worse than high prices and a strong economy? It’s high prices and millions of people out of work. I am very worried that the Fed is going to tip this economy into recession,” she said. One question is whether the U.S. and other donors will maintain their development funding as the recession bites. For development watchers, history suggests that during times of economic hardship, some countries roll back their aid budgets. During the global financial crisis that started in 2008, Ireland, for example, cut its aid budget by 24% in 2009. But other countries like the United States worked at ensuring they maintained their aid support, according to researchers. “In times of recession, countries, when they have the ability to do so, tend to be expansionary. So the budgets grow,” said Scott Morris, a senior fellow at the Center for Global Development. “In that context, there can be more scope for foreign assistance.” Morris told Devex that with multiple crises hitting emerging economies — pandemic-induced economic slowdowns, the war in Ukraine, debt challenges — donor countries may be more responsive because of such challenges. “Even if the same economic phenomena are being felt, both in rich countries and poor, it doesn't necessarily mean that the rich countries become stingier,” he said. But Morris also felt that while the U.S. and other European countries aggressively counteracted the economic hits that came with the COVID-19 pandemic in their own backyard, there was insufficient support for low-income countries grappling with similar economic hardships. “The scale of economic support in line with the economic damage done in these countries as a result of the pandemic is just clearly, unambiguously, been inadequate,” he said. “So they really took the hit, fully, from an economic standstill. And that to a significant degree the failure there falls on the donors.” Tough choices Part of that failure, Morris added, was the unwillingness of some high-income countries to push for much more dramatic financing packages from multilateral lenders like the World Bank that could have mitigated the economic crisis that has hit emerging economies hard. The COVID-19-induced economic crisis, coupled with what Morris described as inadequate support, has contributed to a reality where a debt crisis may envelop emerging economies around the world. Meanwhile, as countries struggle with the aftereffects of the 2020 crisis, a slowing global economy in an environment of high interest rates is set to exacerbate their problems, said former Liberian minister W. Gyude Moore — now a senior policy fellow at the Center for Global Development. With policymakers in the U.S. saying that they may continue to hike interest rates, countries that borrow in dollars and have to service their loans in dollars may now see the cost of paying off those debts soar, Moore told Devex. “Without even the recession, COVID, the Russian invasion, high interest rates in the U.S. are having a significant deleterious effect on the economies of most poor countries,” he said. With prices of fuel and food hitting historic levels in many countries, families are forced to make tough choices, he added. “People, families are forced to make a choice between eating and rent, taking care of your child if they are going to be sick or providing for school,” Moore said. “Simply by the increase in the price of food and fuel, it is already making people poor, because the money can not go as far as it did.” The economic challenges are, in turn, sparking social and political crises in some of these countries. “You're beginning to see places like Ghana, places like Nigeria, places like Sierra Leone, where there is a social crisis with people, people dissatisfied with the government's response,” Moore said. At the same time, a persistent drought in the Horn of Africa, coupled with the war in Ukraine, has created a food crisis in the region, putting even more pressure on their already teetering economies. During less challenging economic times, governments may intervene with social protection programs to give communities some relief during a crisis. But emerging economies have already had to stretch their budgets to fend off the effects of COVID-19 and have little left to fight the latest economic downturn. “So governments will turn to their partners. But if there's inflation in Europe, there's inflation in the United States … how many of the development partners would keep their commitments even though they're having these issues at home,” Moore said. “For the average person, the poor person in a developing country that is predominantly dependent, or at least that is dependent on development aid, life is going to get significantly difficult with or without a recession,” he added. Additional reporting by Michael Igoe