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inflation rates and currency devaluation

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John Molineux

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Hey, I work with an INGO dedicated to fighting human trafficking and helping orphan and abandoned children in the developing world. Currently, one problem we're facing is that the cost we collect from sponsors to sponsor children in our children's homes ($60 / month / child) is less than our real cost / child (around $108).  We're trying to make a plan to our program to change this.  However, we feel that whatever change we make, the program should remain that way for a long time. 

 

However, the inflation rate in Nepal (where most of our work is) has been around 10% over the last 5 years.  At this rate, our real cost / child / month would be over $200 in 10 years!  But we raise money in US Dollars, and spend the money in Nepali Ruppees, and I was thinking that the inflation rate would also cause the devaluation of the currency, so that our cost (in dollars) would not actually increase that much.  So my question is this: how can I determine (as best I can) at what rate the cost should be expected to grow (in dollars)?  The US inflation rate?  The world rate?  The Nepal rate? 

 

Thanks!

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However, the inflation rate in Nepal (where most of our work is) has been around 10% over the last 5 years.  At this rate, our real cost / child / month would be over $200 in 10 years!  But we raise money in US Dollars, and spend the money in Nepali Ruppees, and I was thinking that the inflation rate would also cause the devaluation of the currency, so that our cost (in dollars) would not actually increase that much.  So my question is this: how can I determine (as best I can) at what rate the cost should be expected to grow (in dollars)?  The US inflation rate?  The world rate?  The Nepal rate?

A good starting point is to look at the past few years and see how things would have worked on that basis. You say your real cost per child is $108/month. At Rs. 101/USD, that means your current cost in local currency is Rs.10,900/month. Roll back to 2010 and if you assume 10% inflation applies to your costs, you ought to have been spending about Rs. 7,500/month. Was your NGO around at that time, and if so does Rs. 7,500 sound like a good ballpark estimate for 2010? If not, it is possible that the type of costs you incur are rising faster or slower than 10%.

Assuming 10% is the appropriate rate, Rs. 7,500 would have been your cost in 2010. The exchange rate was about Rs. 74/USD. So, your expenses in 2010 would have been about $100. So, you've gone from $100 to $108 in those 4 years. That works out to a 2% annual increase (compounded).

For the future, you have to project a Nepali rate of inflation that is specific to your basket of expenses. Then, you have to project an exchange rate. If the above assumptions are true, and if the future rates are like the past rates, then a 2% per year increase in US dollar terms should work out.

Of course, Nepali inflation could go this way or that. I understand that they are pegged to the Indian rupee, so the Indian rupee exchange rate could go this way or that. You could build in a buffer for negative surprises. Or, you could build in optimism, assuming that India strengthens its relative position. (In theory, you could even hedge some of the currency-risk.)

Edited by softwareNerd
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