FC 97/4



Ninety-seventh Session

Rome, 17 - 22 September 2001

Protection of the Programme of Work against Exchange Rate Fluctuations


Table of Contents


1. The Finance Committee at its last session further considered the issue of how best to protect the Programme of Work against variations in exchange rates. It recalled that the subject of protection of the Organization's Programme of Work against exchange rate fluctuations had been raised at the secretariat's initiative at its ninety-fifth session in September 2000.

2. The Committee was informed that under current market conditions, the present methodology as applied to budget rates and forward purchase would entail minor cost and, therefore, that the search for an alternative method was no longer as urgent as had previously been the case.

3. The Committee was further informed that, given the complexity of the matter, the secretariat planned to seek expert advice via one of the major international accounting firms. Such advice would include examination of the possible methods for protecting the budget, consideration of a change in the functional currency and the implications of such action for the extra-budgetary programmes of FAO.

4. The Committee agreed that it would be preferable to defer the matter, so as to benefit from the expert opinions before reaching its final decision. It agreed to re-visit the matter at its September session.

5. This paper is for information and brings the Committee up-to-date on actions taken since its last session.

Forward Purchase

6. Following the 120th Session of the Council, the Director-General reviewed the situation taking into account his concern about the effect that wide variations in exchange rates would have on the amount required for cost increases. This concern was heightened by the current relatively strong US dollar juxtaposed with virtually all of the professional advice on the subject which suggested that the US dollar is probably over-valued and that some weakening could be expected over the forthcoming months.

7. Given that such a weakening would reduce the purchasing power of whatever amount is eventually approved for the budget, the Director-General concluded that it would be in the interest of the Organization that it take advantage of the unprecedented strength of the US dollar by entering into a forward purchase contract to cover its Euro requirements at current expenditure rates for the entire biennium 2002-03. This was also in accord with the advice of the immediately available Members of the Investment Committee.

8. The Organization contracted with two of its regular banks to purchase forward its Euro needs for 2002-03 based upon the scale of requirements as authorized in the currently approved budget. The total amount involved was for each bank to buy forward the equivalent in Euro of US$ 150 million split into twenty four equal monthly installments.

9. The Committee is informed that the banks carried out the transaction in several tranches with a blended rate of €1=US$ 0.8800 (US$ 1=Lire 2200) in one case and €1=US$ 0.8805 (US$ 1=Lire 2200) in the other. The premium over the spot rate was, in both cases € 0.0005, which implies that a forward contract cost of € 150 000 has effectively been incurred - in other words, the larger part of the Programme of Work has been protected for the entire biennium at minimal cost.

10. The Director-General proposes that the average rate of €1=US$ 0.880 be used as the budget rate of exchange, given that the contract guarantees this rate for the two year period covered by the proposed budget. To set the budget rate at any other level would generate an imbalance between the budget and the real purchasing power of the US dollar amount approved.

11. It follows that cost increases should be calculated and applied at this rate of exchange which is what has been done in the PWB 2002-03 (C 2001/3). The Committee may wish to note that that cost increases are now estimated to be only US$ 3.7 million with the consequence that they have a limited effect on the assessed contribution of Members. The details of the calculation are provided in the PWB document.

Future Means of Protecting the Programme of Work

12. While the situation for 2002-03 has been resolved through the above action, it should be noted that this only proved feasible because of two fortuitous factors: the strength of the US dollar and the relative interest rate spread between the Euro and the dollar. Hence, the method of protecting the Programme of Work in the long term continues to need to be addressed.

13. As regards the proposals of the Secretariat to seek expert advice on this and related issues, the Committee is informed that Terms of Reference have been drawn up and proposals are being sought from the major accounting firms considered to be competent in this area of work.

14. The Committee may also wish to be informed that the Cour des Comptes has provided extensive information regarding the practice in other UN Organizations to protect the budget against fluctuations in exchange rates. This data will also be made available to the selected firm so that the experiences of others in this area can be taken into account.

15. As soon as the report of the selected firm is available, the Committee will again be consulted on this issue.


16. No decision is sought from the Committee at the present time. However, it may wish to endorse the action taken by the Director-General to protect the Programme of Work for 2002-03 and to recommend that the budget rate of exchange be set at €1=US$ 0.880 (US$ 1=Lire 2200).