Mythbuster: Using international currencies for humanitarian aid transfers

Why transferring international currencies (USD, EUR etc.) into local markets is costing NGOs time and money – and frequently both.

People are using well-known, international currencies, such as USD and EUR, as their sole or co-official currency locally. Or they’re using them informally as a store of value or parallel medium exchange for certain transactions, such as cross-border trade or transfers.

But double-click on this and you quickly realize that this isn’t the real problem – it’s a symptom. It’s a work-around which doesn’t always work and ends up creating further problems. This is especially as global currencies are not always legal tender where they are used, particularly in the key humanitarian aid corridors.

So, back to the root cause. Why are people using currencies other than their own national legal tender? How does this overlap with and impact the work of NGOs? And why might local-currency-to-local-currency transfers be the simple answer to a complex problem?

Capital flies from risk

Consumers, businesses and organizations, including NGOs, may prefer to use international currencies locally for various practical, economic and psychological reasons.

In countries with high inflation, frequent currency devaluations or a history of currency crises, people may look for a safer store of value. For example, when inflation in Nigeria reached a 28-year high of 33% in March 2024, saving or pricing in local currency meant losing purchasing power. International currencies are seen to hold their value better over time.

Stable international currencies are also less likely to lose value between negotiation and payment. That makes them better for bigger purchases or cross-border transfers, such as importing goods, paying foreign suppliers or receiving remittances.

Dollarization

USD accounts for more than 80% of all transactions involving foreign currency. It’s the de facto currency of international trade and investment. It’s how petroleum products are priced and traded. It’s how countries hold reserve currency at central banks. More than 55% of global foreign exchange reserves are held in dollars.

This creates a self-reinforcing cycle. The more people price in dollars, write contracts in dollars or index wages to dollars, the more people do this. The network effect grows. All money is based on trust – and the US dollar is trusted because it’s become associated with stability and international legitimacy.

What’s more, if transactions are conducted in dollars, there’s no need for currency conversion or FX exposures. Consequently, USD is used officially as the sole or primary currency, sometimes alongside a local currency, in various countries outside the US and its territories, including:

• Ecuador – adopted USD in 2000 after a financial crisis
• El Salvador – moved to USD in 2001 for greater economic stability
• Puerto Rico – uses USD as an unincorporated territory of the US
• Panama – uses USD alongside the Panamanian balboa
• Zimbabwe – uses USD alongside various foreign currencies due to the hyperinflation of the Zimbabwean dollar (ZWL)

USD is also used and accepted unofficially or informally, not as legal tender, in the following countries, among others:

• Bahamas
• Barbados
• Cambodia
• Costa Rica
• Honduras
• Nicaragua
• Somalia

International currencies locally: the problems

We know that the most intractable humanitarian crises result from a series of complex, overlapping problems, such as war, economic disruption and an absence of political solutions. With this come humanitarian consequences as well as downstream currency instability, a lack of banking infrastructure and unexpected banking issues.

This is the day-to-day reality for NGOs working in challenging geographies. So, why make it harder? Why move international currencies into local markets, where it’s not legal tender and the transfer is subject to fluctuating FX rates?

What’s more, such payments often take longer and cost more to process due to how international correspondent banking works. Cross-border payments pass through various banks (or ‘hops’), sometimes in long chains, before reaching the recipient.

If intermediary banks are unwilling to transmit payment messages to hard-to-reach or ‘de-risked’ countries, payments must go ‘the long way around’. The more intermediaries and currency conversions involved, and the more ‘exotic’ the currency pairs, the longer the process takes and the more it costs.

Time to rethink the way NGOs move money?

Alternative ways for moving money across national borders do exist. Non-bank payment providers – such as Inpay – are emerging with the right connections to link NGO destination and origin countries. Inpay covers 70% of the top 17 countries receiving humanitarian aid via local bank transfer, and the remainder via international wire.

We’ve effectively built a giant proprietary network, where payments take place between participant members. That makes cross-border payments as simple as domestic bank transfers. It also drives maximum visibility and industry-leading transaction success rates for NGOs.

As Inpay controls the routing of individual payments, we can pick the optimal route to pre-empt problems, resulting in industry-leading transaction success rates. And we can ensure that there are no FX factors, or surprise intermediary bank fees, resulting in cost savings for NGOs.

What’s more, funds never leave the network – they’re simply re-routed to another account internally and sometimes pre-funded. This helps much-needed transfers arrive quickly, as expected and in full without deductions.