The Ethiopian economy has been grappling with a balance of payments crisis for several months, leading to a series of setbacks. The lack of flexibility in the Ethiopian Birr’s exchange rate and the concomitant currency shortage has resulted in the currency experiencing an annual depreciation of more than 20% since mid-2018. The currency shortage has resulted in a black market (parallel market) developing, where the exchange rate is approximately 110- 120 to the US dollar compared to the official rate of 57.
If Ethiopia Devalues The Birr What Is The Impact On Employees
Ethiopia on the Brink: The Looming Threat of Currency Devaluation
Ethiopia has faced significant economic challenges in recent years, including foreign exchange shortages, a high debt burden, and inflationary pressures. One policy measure under consideration to address these issues is the devaluation of the Ethiopian birr.
Ethiopia has not received any IMF funds since 2020 and its last lending arrangement with the fund went off track in 2021. The IMF has not said that currency reform is a prerequisite to continued funding, but it is widely expected that the government will devalue the birr in the immediate future to appease the IMF and gain access to much-needed funds.
If one considers that Egypt devalued the pound by 38% in March to secure a large IMF loan and Nigeria devalued the naira by 37% in January, one could safely assume that a 40% devaluation of the birr is a rational forecast.
While devaluation can offer some economic benefits, it also poses significant risks, particularly with regard to employers, employees and inflation:
- Imported Inflation: Ethiopia is heavily reliant on imports for various goods, including fuel, machinery, and food. Devaluation would make these imports more expensive, directly increasing the cost of goods and services in the domestic market. This imported inflation can lead to a general rise in prices.
- Cost-Push Inflation: As the costs of imported raw materials and intermediate goods rise, domestic producers may increase their prices to maintain profit margins, contributing to cost-push inflation.
- Wage-Price Spiral: Higher inflation can lead to demands for higher wages as workers seek to maintain their purchasing power.
Inflation in Ethiopia is already high and the impact of negative salary increases on employees in the country was dealt with in our article, “Are your employees in some African countries moaning about salaries”
Ethiopian inflation has come down over the last few months thus providing employees with some relief. However, the danger exists that if the currency is devalued, that inflation increases significantly in the ensuing months. This will further erode the purchasing power of employees.
The possible devaluation of the Ethiopian birr presents a complex policy decision with potential benefits and significant risks. While it could help address foreign exchange shortages and improve export competitiveness, the risk of exacerbating inflation and the purchasing power of employees is substantial. Employers must be aware of this development and formulate an action plan if inflation increases significantly.
Concerned about the impact of inflation on your business or employees? Axiomatic can help. Contact us to discuss tailored solutions for your organization.
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