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SOUTH AFRICAN SALARY INCREASE FORECAST FOR 2025

Understanding the "Real Increase": Forecasting Salary Hikes Beyond Inflation.

“Sharon, please could you give Finance the forecast salary increase percentage for 2025 and the projected increase in our salary cost.”

This request normally sparks a sense of foreboding as it is a clear indication that the annual salary increase process is imminent- with all the associated angst, issues, problems, heated negotiations and hard work that is required.

The forecast is not difficult, and we have long advocated that clients adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original forecast. Finally, to incorporate other factors into the decision and to then formulate an equitable final salary increase for 2025.

INFLATION

Our departure point in the forecast process is to determine the expected inflation rate for 2025. Salary increases are implicitly linked to inflation; where inflation is one of the most important determinants when deciding on the quantum of the salary increase. Employees want to retain the same purchasing power with their remuneration from one year to the next.

Consistent with the Axiomatic methodology, a “forward looking” approach must be adopted where inflation is forecasted for 2025, and the proposed salary increase is based on this result. We remain firm advocates of this methodology as it calculates the amount of the salary increase which will be “forfeited” to inflation. The alternative approach, namely the “backward looking” methodology, uses the previous year’s inflation rate which is “sunk” and thus does not exert an influence on the additional purchasing power given to the employee by granting him or her an increase.

Axiomatic’s inflation forecast for the remainder of 2024 and 2025 is detailed in the table below:

Our forecast for 2025 is closely aligned with the MPC Committee’s forecast of 4.4% which they predicted at the 18 July 2024 meeting. Importantly, 4.5% represents the mid-point of the MPC’s 3.0% to 6.0% target range and the target percentage they want to anchor in terms of market expectations.

SA Reserve Bank Governor Lesetja Kganyago recently said, “What matters for the future is what the outlook for inflation is. Our forecast is that we will be 4.5% in this coming quarter. Some of the months we might even be below 4.5%. But what matters is the next three quarters in the New Year. And at the moment it looks like we will be 2025 averaging the 4.5% that we are targeting.”

Normally we state that the risks to the forecast are to the upside- where the risk is greater that inflation could be higher than our forecast. This year, barring any exogenous shocks, we think the risk is to the downside because of the strengthening of the rand and lower fuel and food prices.

REAL SALARY INCREASE

The next step in the scientific process is to establish the possible quantum of the “real increase”. A real increase is defined as the increase after inflation has been considered. As an example, if the salary increase is 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted.

The historic methodology adopted in South Africa, when determining an equitable salary increase in the past, was to add a 2.0% real increase to the forecasted inflation figure. However, there has been a discernible trend over the last few years of lower real salary increases being granted. This assertion is corroborated by the 5-year moving average in the graph above, which has been steadily declining in recent years. One must recognise that 2022 and 2023 were an anomaly, as inflation increased to higher levels than those envisioned when increases were determined at the beginning of the year, reducing the 5-year average.

The conclusion of the analysis is that a 1.0% real salary increase is the “new normal”.

FORECAST OF 2025 SALARY INCREASE

The scientific and qualitative approach would conclude that an equitable salary increase would therefore be:

The current forecast salary increase for 2025 is thus 5.50%.

The above forecast obviously ignores quantitative factors such as economic growth, union demands, trends in compensation and benefits and of course, the unique financial position of the company. These however should be considered closer to salary increase time.

Over the coming months Axiomatic will continue to update our 2025 recommended salary increase in response to new data, include some quantitative considerations and discuss some emerging trends we are observing in the market.

Stay ahead of the salary increase curve with our strategic guide, contact us to access our latest insights and ensure your business stays on top!

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BIRR DEVALUATION AND THE IMPLICATIONS FOR 2025 ANNUAL SALARY INCREASES

Ethiopia's Birr Float Fails to Buoy Currency: IMF and World Bank Funding Secured, but at What Cost?

In mid-July we posted an article “If Ethiopia devalues the Birr, what is the impact on employees”. In that article we stated that we were of the opinion that a devaluation of the birr was imminent, a currency adjustment of 40% was expected and that this would have inflationary consequences. Importantly, this would further erode the purchasing power of employees given that a negative salary increase was granted for 2024.

On 29 July 2024, Ethiopia floated its currency to ease foreign currency shortages, attract foreign investment and most importantly, to secure over $10 billion in IMF and World Bank funding.

On its website, the National Bank of Ethiopia announced that banks can now buy and sell foreign currency at freely negotiated rates and that, “The central bank will make “only limited interventions to support the market in its early days and if justified by disorderly market conditions.”

The birr immediately depreciated from 58 to the US dollar to 80- the 40% depreciation we forecast in the July article. However, since then, the birr has depreciated further to 108; a whopping 86% depreciation. Interestingly, 110 was the black market rate prior to the devaluation- the market always knows best!!!

There is little doubt that because of Ethiopia’s heavy reliance on imports, this will push inflation higher in the next few months. The inflation rate of 18.6% recorded in July 2024 was the lowest level since December 2020 but we can assume that future increases must be expected.

The government appears to recognise this danger, and the central bank governor Mamo Mihretu emphasized that Ethiopia’s restrictive monetary policies differentiate it from other African nations that have faced challenges following similar reforms and that as an immediate measure, they will temporarily subsidise essential imports like fuel and medicine.

The danger of inflation increasing over the next 6 months obviously makes formulating an equitable 2025 annual salary increase difficult to forecast at this stage. At this juncture, it is impossible to forecast the inflationary impact of the devaluation. The initial departure point is that inflation will not continue to recede below 19.0% and this should be factored into the increase decision.

We will continue to monitor inflation in Ethiopia over the coming months and when we are confident that we can model the future trajectory of inflation, we will communicate our recommended 2025 annual salary increase.

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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If Ethiopia Devalues The Birr What Is The Impact On Employees

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.

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.

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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Nigeria’s inflation rate continued its inexorable upward trajectory in June 2024

Nigeria’s inflation rate continued its inexorable upward trajectory in June 2024

Nigeria Inflation Hits 28-Year High, Denting Purchasing Power

At 34.19%, the inflation rate in June 2024 represented the highest rate since March 1996- the highest for 28 years. Food inflation, which constitutes the bulk of the inflation basket, increased by 40.87% because of price increases in staple foods like bread, cereal, potatoes and fish.

The chart clearly illustrates that the Niara has been the worst-performing Sub-Saharan currency since the beginning of the calendar year. This will ensure that inflation remains high given the high cost of imported goods and the usual consequences of imported inflation.

The hope is that the Dangote refinery will commence supplying the local market with petrol from this month, thus alleviating the local currency’s pressure.

We stand by our original forecast that the average inflation rate for 2024 will be 29.5%.

The continued high inflation, the weakening Niaria and the removal of the fuel subsidies in May 2023 have significantly impacted on employees’ purchasing power. Further, given the forecasts of many economists in the beginning of the calendar year, there is little doubt that most employers would have granted negative salary increases. The impact of a negative salary increase was spelt out in our June 2024 article – “Are your employees in some African countries moaning about salaries?”

One possible remedy could be the introduction of an Inflation Allowance which floats with the prevailing official inflation rate. This concession should be communicated to employees, which will demonstrate that the company is aware of their declining purchasing power and the fact that a negative salary increase was granted but where:

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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Impact of Negative Real Salary Increases on Employees in Africa

Impact of Negative Real Salary Increases on Employees in Africa

Are your employees in some African countries moaning about salaries?

During the annual salary increase cycle, clients often question why inflation is such an important input when determining an equitable salary increase for employees. Inflation plays a crucial role due to its direct impact on the purchasing power of employees. And this is especially important in Africa where a sudden, and often dramatic, increase in inflation is experienced and/or where there is a high prevailing inflation rate.

Granting a negative real salary increase can have dire consequences for employees.

A real salary increase refers to an increase in the employee’s salary that exceeds the rate of inflation, resulting in a higher purchasing power for the individual. In other words, a real salary increase means that after accounting for inflation, the employee has more money to spend on goods and services than they did before the increase.

For example, let’s say you granted an employee a 5% salary increase. If the inflation rate is 2%, then the employee’s real salary increase is 3% (5% – 2% = 3%). This means that their purchasing power has effectively increased by 3% because their salary has grown faster than the prices of goods and services.

Concomitantly, if you grant a negative real salary increase, this results in negative purchasing power which can have several adverse consequences for employees. It can lead to a decrease in their standard of living, as the employee finds it increasingly difficult to afford the same level of goods and services as before. It may also result in financial stress, as employees struggle to make ends meet due to their diminished purchasing power.

Having defined the problem and the consequences of granting a negative salary increase, it is worthwhile considering some African countries with high inflation rates.

What is now patently obvious, is that if you granted employees in the above countries a salary increases this year of less than the “Expected 2024 inflation” shown in the table above, they have received a negative real salary increase and concomitantly, they will experience a decline in their purchasing power.

Of course, other factors must also be considered which could mitigate the erosion of an employee’s purchasing power. However, these factors may also exacerbate the hardship.

For example, in Malawi, the tax tables were amended with effect from 1 April 2024 as detailed in the table below. In a high inflation environment, where we are projecting an average inflation rate of 25.5% for 2024, one would expect the tax bands increases to be correlated with inflation. Without adjusting income tax bands/ brackets and thresholds for inflation, taxpayers may find themselves pushed into higher tax brackets even though their real income hasn’t increased. This results in taxpayers paying a higher proportion of their income in taxes, effectively increasing their tax burden.

For employees earning above MWK 1,800,000, the higher limits will decrease the tax payable monthly and increase their net pay, but it will not compensate them for the erosion in their purchasing power which they will experience because of the high inflation rate and the possible negative salary increase.

While we are not saying that an employer should simply align a salary increase to the expected inflation rate, one must be cognisant of the erosion of employee’s purchasing power in some African countries. And perhaps most importantly, understand why they are moaning.

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