These questions, often asked of HR practitioners, usually come from left field and catch us out!
Over the last 18 months, economic conditions and inflation in Angola have been problematic, to say the least. However, a sudden interest in Angola has been sparked amongst South African companies because of the newspaper headlines of 18 July 2018 which stated that “Hyperinflation in Angola dragged down Shoprite’s full-year revenue, sending the share down as much as 6.5%...”
Despite the sensationalism headlines, inflation in Angola has been relentlessly reducing over the last 8 months; June 2018’s reading of 19.52% represents the lowest level since December 2017.
The problem associated with the high inflation rates in the recent past, is that employees have received a negative real salary increase in 2016, 2017 and 2018, respectively – the recommended salary increases over the last few years in Angola are enumerated in the table below:
Further, the kwanza has depreciated significantly against the US dollar since January 2018, when the central bank abandoned the dollar peg as part of a plethora of policy amendments introduced by incoming President Joao Lorenco. The result was a depreciation of almost 54% against the US dollar during the first 6 months of 2018.
This drastically increased the cost of foreign workers and/or Expats working in Angola who were remunerated in US dollars.
Angola is currently Africa’s second largest oil exporter and given the recovery in the oil price, we do anticipate that the country will emerge from the recession (GDP was -2.6% and -2.5% in 2016 and 2017 respectively) and record GDP growth of 1.7% in 2018.
Nevertheless, what do these economic factors mean for salary increases or adjustments?
Inflation in African countries is notoriously difficult to predict for the salient reason that it is extremely sensitive to two important drivers of inflation namely, the local currency and food prices. The foreign exchange markets in African countries are illiquid and thus any depreciation in the currency tends to be over exaggerated and a black market develops which exacerbates the fall; the consequence is imported inflation. Food prices are constantly influenced by bad harvests and adverse weather conditions. Resultant from such imperfect market forces, inflation can quickly spiral out of control.
It is still too early to forecast a salary increase for 2019 – this will only be completed in December 2018 when we produce our recommended salary increases across the African continent – however, we would urge compensation practitioners to develop an Inflation Allowance Policy (“IAP”) which should be incorporated into the 2019 salary review process.
Given the vagaries of inflation in most African countries, and the concomitant possibility of a real salary decrease being experienced by the employee, the IAP is an ideal and equitable contingency plan.
The company policy should state that if the inflation rate increases to more than double the salary increase granted or a pre-determined inflation rate for that year (the “trigger”), the IAP would immediately kick in. The IAP would be calculated and paid monthly with the objective to compensate employees for the higher than anticipated inflation.
Obviously, there are several IAP mechanisms and designs however, what is imperative, is that the mechanism is decided upon, entrenched in the company policy and immediately becomes effective once the trigger is breached.
It is also critical to understand that the IAP is temporary in nature and will fall away immediately once inflation conditions return to acceptable levels. The salient advantages of the IAP are that:
- higher salaries do not become entrenched in the company’s salary costs in perpetuity; and
- employees will be prepared to accept a lower annual salary increase because of the “safety net” provided by the IAP.
For more information pertaining to an IAP and/or assistance in designing such a mechanism, please contact Brett Hopkins on Brett.Hopkins@axioconsult.com or on +27 83 325 0437.