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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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Payroll Integration

Payroll Integration

Different ways payroll integration can be achieved

In today’s fast-paced business environment, efficiency is paramount. For companies to stay competitive, integrating various systems into their payroll software can streamline operations, reduce errors, and save valuable time and resources.

Here’s a closer look at the different ways and systems that can seamlessly integrate with payroll software to create a more efficient, effective, and user-friendly experience.

1. Human Resource Management Systems (HRMS)

Why Integrate?

HRMS integration with payroll software automates the flow of employee data, reducing redundancy and errors. This integration ensures that any changes in employee status, benefits, remuneration awards, workforce planning, or recruitment are instantly reflected in payroll processing.

Key Benefits:

- Real-time Data Synchronization: Automatically updates payroll with new hires, terminations, and changes in employee information.
- Enhanced Accuracy: Minimizes manual data entry which reduce the risk of errors.
- Streamlined Onboarding: Simplifies the onboarding process by automatically enrolling new employees in payroll.

2. Time and Attendance Systems

Why Integrate?

Integrating time and attendance systems with payroll software ensures that employee hours are accurately tracked and paid, avoiding discrepancies, and ensuring compliance with labour laws.

Key Benefits:

- Automated Time Tracking: Automatically transfers clock-in and clock-out data to payroll.
- Compliance Assurance: Helps maintain accurate records for labour law compliance.
- Improved Productivity: Reduces administrative burden by allowing HR and payroll staff to focus on more strategic tasks.

3. Accounting Software

Why Integrate?

Linking payroll software with accounting systems ensures that payroll expenses are accurately recorded, and financial statements are up-to-date ad accurate facilitating a comprehensive view of the company’s financial health.

Key Benefits:

- Seamless Financial Reporting: Automatically updates accounting records with payroll data.
- Improved Financial Accuracy: Reduces the risk of errors in financial statements.
- Simplified Reconciliation: Streamlines the process of reconciling payroll expenses with bank statements.

4. Employee Benefits Management Systems

Why Integrate?

Integration with benefits management systems ensures that payroll deductions for benefits are accurate and up to date, facilitating smoother administration of employee benefits.

Key Benefits:

- Accurate Deductions: Ensures correct deductions for health insurance, retirement plans, and other benefits and that the correct monthly payments are made to the administrator.
- Enhanced Employee Satisfaction: Provides employees with clear, accurate information about their benefits.
- Streamlined Administration: Simplifies the process of managing employee benefits.

5. Customer Relationship Management (CRM) Systems

Why Integrate?

For companies where payroll impacts customer billing, integrating CRM systems with payroll software can ensure that client billing is accurate and timely.

Key Benefits:

- Accurate Billing: Ensures client invoices reflect actual labour costs.
- Enhanced Client Trust: Builds trust with clients through accurate and transparent billing.
- Operational Efficiency: Reduces the time spent on manual data entry and reconciliation.

6. Project Management Software

Why Integrate?

Integrating project management software with payroll systems can help track labour costs by project or cost centre therefore improving project budgeting and profitability analysis.

Key Benefits:

- Precise Cost Tracking: Links labour costs directly to specific projects.
- Improved Budgeting: Enhances project cost forecasting and control.
- Profitability Analysis: Helps determine the profitability of projects by providing accurate labour cost data.

7. Statutory Filing Systems

Why Integrate?

Integrating tax filing systems with payroll software automates the preparation and submission of payroll taxes, ensuring compliance with local tax regulations. We can manage the most complex integration to the simplest communication with revenue authorities throughout the African continent.

Key Benefits:

- Automated Statutory Filing: Automatically calculates and submits payroll statutory obligations.
- Regulatory Compliance: Ensures adherence to tax laws and deadlines.
- Reduced Penalties: Minimizes the risk of fines or penalties due to errors or late filings.

8. Payroll Advance payments to employees

Why Integrate?

Integrating payroll with financial banking platforms will allow your employees to receive an advance of their net pay.

Key Benefits:

- Reducing payroll administration
- Reduced risk to lending third party.
- Eliminating funding requirements for the employer on payroll advances
- Improved Employee Value Proposition.

Axiomatic has significant experience integrating with other systems using API’s including the development and set-up of appropriate middleware. Previous interface projects have ranged from rather simple interfaces to custom-built solutions with a complete staging area with two bridges between various systems to ensure the data was “cleansed” and coupled with update logging, data quality validation, and consistency.

Why Integrate?

- A tailored solution is precisely aligned with the client’s specific business needs, ensuring that the solution fits perfectly into their existing workflows and processes.
- Customization allows for the optimization of the API to handle the unique demands of the client’s operations, leading to more efficient and streamlined processes. This reduces the time and effort required for integration and ongoing operations.
- Custom APIs can be designed to scale with the client’s business. As the client grows or their needs change, the API can be adjusted accordingly, ensuring that it continues to meet their requirements without requiring significant overhauls.
- Scalability can enhance performance by ensuring that the API is neither over-engineered nor underpowered, leading to faster response times and more reliable data exchange.
- By delivering precisely what the client needs without unnecessary features or complexity, customized APIs can be more cost-effective, reducing both initial implementation costs and ongoing maintenance expenses.

Conclusion

Integrating various systems with payroll software is not just a trend but a necessity for modern businesses aiming for operational efficiency and accuracy. By creating a seamless flow of information between payroll and other essential business functions, companies can reduce administrative burdens, enhance accuracy, and ultimately, improve employee and client satisfaction. Investing in these integrations can lead to significant time and cost savings, positioning your business for sustained growth and success.

With our extensive expertise in both African payrolls and powerful technology and tools, we truly believe we can deliver a single scalable solution for your integration environment in Africa.

If you would like to discuss integrations with us, please:

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GPA Announcement

GPA Announcement

Axiomatic is proud to announce

We have been shortlisted for the prestigious Global Payroll Association’s Regional Payroll Supplier of the Year Award 2024.

Our entry was bolstered by our ability to run payrolls in 44 African countries using a cloud-based ISO 27001 accredited system. Further, our capabilities and track record of completing integrations with SuccessFactors, Workday, and other related systems, using API’s, certainly contributed to the shortlisting.

THE GLOBAL PAYROLL AWARDS 2024

27th June 2024 - Athens, Greece

The Global Payroll Association is an international organisation for global and in-country payroll professionals. Our competition for the nomination was therefore other international payroll providers covering several regions.

We would take this opportunity to thank our clients. We are fortunate to have awe-inspiring and progressive forward-thinking clients, and it is easy to aspire to our mantra of providing a WOW and world-class service for our clients. The reason that we “stood out from the crowd” is the result of you pushing us to deliver constant innovations, improvements, and world-class solutions.

We would also like to thank our Axiomatic colleagues. Their hard work, dedication, and constant commitment to going above and beyond for our clients resulted in marvellous client testimonials that played a large part in our shortlisting.

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