Global Fund at eye of perfect storm in financial markets in 2014
The Global Fund is confident it will weather a perfect storm of currency fluctuations, a straitened environment in international banking and additional financial requirements caused by shortened grants to face no interruption in services through the end of the 2014-2017 allocations period.
Stark downward trends in global currencies meant that the Fund has experienced some $300 million in losses from contributions in other currencies against the US dollar, which has so far remained strong. The Fund is "very exposed" to these fluctuations because without its own commercial bank accounts it is technically not yet able to hedge against foreign exchange shifts and declining interest rates, the Board's constituencies heard on 31 March at their 33rd meeting.
Exposure to foreign exchange risk is at two levels for the Global Fund: one, at the Secretariat level, where pledges are converted to contributions in a number of different currencies and then disbursed to countries; and two, at the country level itself, once a global currency -- like the US dollar -- is converted into the local denomination.
Table 1 shows the distribution of currencies coming in and going out.
"It comes in at a different rate and goes out differently, resulting in a structural imbalance," Chief Financial Officer Daniel Camus explained. "We are in a race to beat the fluctuation in currencies."
With the World Bank as its trustee, the Global Fund does not have the maneuverability to respond on its own in as timely a manner as it would wish to the global financial markets. "We are not in a vacuum," Camus explained to the Board. "We are affected by global markets."
So, while the Fund is being "reactive and responsive", its year-long search for a banking institution willing to accept it as a client continues. Part of the problem is that the Fund works in many countries that are not only financially risky but also on a list of prohibited countries for deposits or transactions. This has eliminated a number of banking institutions with a US presence, as have tighter regulations on banks for whom they can do business with.
In the meantime, within the Fund's own financial structures, a new rigor and financial discipline have been emplaced so that the institution as a whole is as sound as it can be in order to weather the external shocks.
Seventy percent of pledges under the 4th replenishment have been converted, guaranteeing that there will be money available to resource the $10.3 billion in concept notes reviewed by the Technical Review Panel in Windows 1-5. This represents 150 concept notes: roughly three-quarters of the expected 226 that should be submitted under the new funding model. Of those concept notes reviewed, $2.5 billion in grants has been signed, slightly off the pace envisaged in 2014. At the end of 2014, the Fund had $4.4 billion in cash on hand, derived from $3.3 billion in receipts: the same as a year earlier.
Here, too, were challenges born from past practices in financial management within the institution: the high volume of in-country cash balances, particularly in High Impact countries, means that there is less flexibility in the portfolio to move money around where it is needed. Of the cash reserves consolidated outside of the Secretariat, 60% of it was in a few high impact/high risk countries. This is risky for two reasons: one, because in-country cash balances are vulnerable to currency fluctuation, theft and fraud; and two, because it means that money is essentially locked in to use in a single country, rather than being flexible funds that can be disbursed where needed.
Going forward the Fund will have to "normalize how we disburse cash in countries," to avoid scenarios as at the end of 2013 where $1 billion was disbursed to various countries in a period of two weeks.
The impact of shortened grant duration and the current $1.1 billion gap to ensure no interruption in services in those countries with shortened grants was downplayed by Camus as by others in the Secretariat during their various presentations to the Board.
The peak of $1.8 billion forecast in November 2014 was a 'worst case scenario' that has been mitigated by a closer look at grants that could have been shortened, with a "stricter gap assessment" being undertaken as part of the review by both the Technical Review Panel and the Grant Approvals Committee as concept notes are submitted.
"We have climbed the mountain so are able to provide a better forecast of the impact of shortened grants," Camus said. "Now that the bulk of the concept notes are in, we will be able to improve our forecasting."
There is confidence that this gap will shrink further; still, it is not readily apparent where money will come from to fill the gap, whatever the size, beyond the modest cost-savings, efficiencies and reliance on traditionally slow absorption rates in other countries.