BIRR DEVALUATION AND THE IMPLICATIONS FOR 2025 ANNUAL SALARY INCREASES

ETHIOPIA UPDATE

In mid- July we posted an article “If Ethiopia devalues the Birr, what is the impact on employees”. In that article (Click here), 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.