A little more than two weeks after the United Kingdom voted to leave the European Union, the economic and development impacts of the referendum are beginning to take shape.
The instability caused by the referendum sent the British pound plummeting in the greatest one-day loss since the beginning of the Bretton Woods system. The currency now hovers at a 12 percent loss against the dollar, with knock-on effects for the U.K. aid budget. Currently valued at about $19 billion, British aid has lost $1.9 billion in value since the pound dropped.
The aid budget, experts warned, is now under even greater threat. Spending is tied by law to 0.7 percent of gross national income, but growth of gross domestic product will drop by an estimated 3 percent for 2016. The accompanying decline in GNI will cause a net reduction in aid.
Aid-recipient countries will also be hit with an estimated $1.4 billion loss in value of U.K.-sourced remittances. Those most dependent on U.K. remittances include Uganda, Kenya and South Africa, among others. Authors of a briefing paper compiled by the Overseas Development Institute estimate the total net loss to developing countries as a result of the pound’s devaluation at around $3.8 billion.
“By our calculations this means about 700 million more people in the developing world will be going to bed hungry,” Dr. Unni Krishna, director of the Emergency Health Unit for Asia and the Pacific at Save the Children told Devex.
At the same time, U.K. Secretary of State for International Development Justine Greening told reporters on Thursday that some shifting in the market was to be expected.
"You always have exchange rates changes,” she said. That's part and parcel of any development program,"
Greening told reporters the Department for International Development did not have specific plans to account for the the effect of the currency devaluation on aid, but would continue spending 0.7 percent of GNI on development assistance.
‘And that’s before the UK even leaves the EU’
A barrage of U.K. political leaders have resigned, and those who follow may be less inclined to support aid, analysts warned.
“We’re likely to have a government that’s more right-wing than the one we just had, so I wouldn’t have high hopes [for aid],” Vicky Pryce, economist and former joint head of the U.K. Government Economics Service said during a panel discussion at ODI on Thursday.
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“Given that we made such a huge fuss about [ring-fencing] 0.7, it means it will be looked at, and that puts it under serious threat,” she said.
Kevin Watkins, head of ODI and soon-to-be chief executive of Save the Children U.K., told the audience of mostly aid professionals that he also believes “it’s an absolute certainty knives are being sharpened on the aid budget,” given the likelihood of an economic recession.
One question mark is over what would happen to the U.K.’s current contribution to the EU’s aid and development finance cooperation — which accounts for about 10 percent of total British aid spending. The U.K. government has yet to trigger Article 50 of the Lisbon Treaty, which would set in motion the two-year adjustment period preceding Britain’s exit from the EU. Until negotiations are underway, development practitioners won’t know how or where aid channeled through the EU will be reallocated.
Brexit will likely hit EU humanitarian aid hardest if funding channels aren’t preserved in negotiations. The briefing paper also pointed out that the European Investment Bank, of which the U.K. is the biggest investor, holding 17 percent of EIB capital, will likely see major cuts. Without its stake in the EIB, the U.K. would become the only country in the Group of 20 without an investment bank in its development toolbox.
Still, the terms of Brexit remain uncertain, and development practitioners are unsure whether to plan for the long or short term.
What’s better for aid, a fast or slow Brexit?
While EU officials urged a speedy Brexit last week, Prime Minister David Cameron’s resignation means the two-year negotiations won’t begin until the next prime minister is nominated by the Conservative Party and takes office. Even then, leaders may decide to hold a snap election, delaying the Brexit process even further.
Although a longer negotiation and reflection period might mean the U.K. retains more of its cooperation with the EU, a prolonged Brexit could spell more uncertainty for the pound and global markets. Still, development experts favored a protracted negotiation, in hopes the lengthier timeframe could allow developing countries and aid organizations to prepare, and potentially increase the likelihood of a conditional, less-drastic Brexit.
A longer Brexit period would be “much more preferable,” David Luke, coordinator of the African Trade Policy Center at the U.N. Economic Commission for Africa told Devex. It would “give us all a chance to catch our breath to see what kinds of policies and strategies we should put in place.”
Still, drawing out the economic uncertainty could deepen the already-likely recession, with serious consequences for global markets, especially in developing countries, said Phyllis Papadavid, team leader for the international macroeconomics team at ODI’s Centre for Aid and Public Expenditure.
“If this continues, you’ll see not only currency weakness but currency volatility,” Papadavid said. “It throws any long-term plans off course in the development world.”
Regardless, Papadavid agreed that the ambiguity of a delayed exit would be worthwhile, if an alternative Brexit arrangement could be agreed.
Pryce added that prolonging Brexit “would be better, even if if it causes uncertainty, because a lot of the other commitments would remain and remain for longer,” she said.
Free movement and recruitment
A longer negotiation, however, could add to the growing number of headaches for British development organizations looking to increase staffing, both in the U.K. and in country offices. Because terms remain unclear, and the EU’s “freedom of movement” for workers will potentially no longer apply to the U.K., recruiters are being forced to restrict employment to certain nationals or suspend job searches altogether.
“We chose to be [in the UK] because it was the best place for a variety of reasons, but the loss of freedom of movement may change that math,” Brad van Leeuwen, chief technology officer of Dopay, an independent startup that launched through Barclays fintech accelerator that offers payroll systems to underserved populations in the developing world, told Devex.
“We've not changed our hiring plan as a result, but if it becomes clear that Europeans will not have the right to work here in two years, then we will have to take a decision,” he said.
Leeuwen explained that in the short term, Dopay will continue hiring people regardless of their country of origin, but “we may put them somewhere other than London.” He added that “We're more likely to hire more Europeans and less British, rather than the other way around,” to provide more flexibility between global offices.
Others are confronted with hesitation among promising candidates due to Brexit fears.
"I'm saddened to have had a candidate withdraw from an offer they accepted with us last week, due to the Brexit decision,” Stuart Marsh, head of recruitment at Save the Children International wrote on his LinkedIn page.
“The candidate said that due to the change in atmosphere in the country, including the increase in racial abuse cases, they have decided to leave the U.K. and return home,” he said.
Bracing for uncertainty
For organizations hoping to brace themselves from the Brexit turmoil, experts suggested remaining as flexible and forward-looking as possible, particularly for groups unable to supplement financial shortfall with emergency funds.
Papadavid suggested organizations take a page from financial institutions’ playbooks by “gaming out” potential outcomes of the Brexit process. “Banks do this all the time,” she told Devex. “It’s worthwhile to look at medium- and long-term strategies based on what could happen, just to anticipate the shocks and have a plan,” she said.
Aid advocates, meanwhile, could help mitigate Brexit fallout by advocating reform for alternative sources of development finance, like remittances, according to Watkins. Reducing remittance transfer costs to under 3 percent — one of the Sustainable Development Goal targets — “could counter the effect” of Brexit on remittances, he said. Watkins added that aid organizations could play a huge role in “making the case for Western Union to do what they should’ve done years ago, and African governments as well.”
Faced with growing concern at home and abroad for the U.K.’s place in the global aid landscape, Watkins encouraged aid practitioners to come together. It’s time to “create a narrative that explains aid to the world and to Britain.”
“Coming into ODI the day after the vote was a bit like walking through the morgue,” he said. “But I think we have to start getting into the mindset, we’re not helpless, these things are not set in stone.”