Question
To ask the Secretary of State for Defence, with reference to the NAO's report of 27 February 2020, The equipment plan 2019 to 2029, HC 111, 2019-20, what the percentages are of (a) USD and (b) EU foreign exchange rate losses of the £1.5 billion losses referenced in that report.
Answer
The assessment of affordability presented in the Ministry of Defence Equipment Plan report of 27 February 2020 includes forecast costs for foreign currency using the most likely exchange rates at the reporting date (April 2019). The NAO calculated that these costs could be £1.5 billion more over 10-years based on less favourable exchange rates in October 2019. All of this was due to US Dollar exchange rate changes. Forecast exchange rates have since improved so these additional costs no longer represent the most likely outcome, though the Department recognises the risk of additional costs as exchange rates fluctuate in response to events.
The Department plans on the basis of most likely costs using foreign exchange rate forecasts from professional forecasting agencies and theoretical economic models. The department limits the risk of additional costs by purchasing a proportion of demand up to three years in advance at fixed prices using services provided by the Bank of England and HM Treasury. The impact of short-term variations in foreign exchange rates are managed as part of the routine financial management of the defence programme.