The Problem of Inflation in Ethiopia

I have spent a bunch of hours over the last two weeks working on preparing a budget proposal for the Children’s Home in Soddo for the 2013 budget.  While the problem of inflation has certainly not been new to me in Ethiopia, over these past two weeks I’ve been painfully reminded of the challenges it presents for average Ethiopians and for small charities and NGOs operating in Ethiopia.  For foreigners, the inflation has certainly been visible, but not necessarily felt.  When converting to USD, items domestically produced in Ethiopia have always been very affordable (imported items are a very different story; automobiles, for example, are about 4 to 5 times the cost that they would be in the U.S, because of import shipping costs and duty, which can be upwards of 200% on top of the value of the vehicle). In addition, a large portion of the inflation over the last 8 years has been absorbed for foreigners by the devaluing of the Ethiopia currency (the Birr, usually represented as ETB) against the US dollar (USD). Ethiopians, however, have experienced the full brunt of the massive inflation of the past 8 years, and, as I was reminded the last couple of weeks, this inflation has created a great challenge for small charities and NGOs trying to operate in Ethiopia.

Just since 2010, the annual budget for the Children’s Home in Soddo has nearly tripled (it is up 278%) when looked at in Ethiopian Birr.  Some of this increase is because the organization has increased in size and scope during those 3 years.  We now have more kids than we did in 2010, and we have increased some of the staff since 2010.  In addition, there have been legal requirements added for alternative childcare institutions and NGOs since 2010, which require extra funding for reporting, documentation, monitoring and evaluation.  With these organizational increases aside, however, most of the budget increase since 2010 has actually been due purely to inflation.  According to inflation measurements by the World Bank, a basket of goods that would have cost 100 ETB in Jan. 2005, would have cost 223 ETB in Jan. 2010 and will cost 450 ETB by Jan. 2013.  That’s inflation of 450% since 2005 and just over 100% just since 2010.

During this same stretch of time, there has also been considerable devaluation of the Ethiopia Birr against the US dollar, so, for an organization that receives funding in US dollars, a good chunk of the inflation has been absorbed by the increased value of the dollar against the birr.  But, this currency devaluation has not come close to covering the full blow of inflation.  For example, in 2005 the exchange rate from ETB – USD was 8 – 1, so that basket of goods that cost 100 ETB would have cost $12.50 in US dollars.  The exchange rate now is 18.2 – 1, so that same basket of goods, which now costs 450 ETB, would be $24.73 in US dollars.  So, even when prices are pegged to the US dollar, inflation since 2005 has been nearly 100%, and just since 2010, it has been 45%.  This is the primary contributor to the increase in the budget for the CCC Home even in dollars. In dollars the budget for the home has increased by 80% since 2010.  As mentioned before, some of this is simply because of organizational growth and some structural changes, but more than half of this increase is because of inflation.

This inflation has made it increasingly challenging to raise the necessary funds to keep the Children’s Home funded properly.  The primary mode of funding the home is through sponsors in the US.  Sponsors are paired with a specific child at the home in Soddo and contribute a certain amount monthly.  It has been impossible, however, to annually increase the amounts expected from sponsors in order to keep up with inflation in Ethiopia.  As a result, every year, a larger percentage of the overall budget must be raised through special fund-raising apart from the sponsorship program.  By budget-year 2013, over 30% of the annual budget will need to be raised by special fund-raising beyond the sponsorship program.

Ethiopia claims that despite the massive inflation over the last 8 years, the growing economy has produced net benefits for the country.  It is true that Ethiopia has had strong economic growth in recent years.  Despite the economic downturn in much of the world, Ethiopia has averaged 10% GDP growth per year since 2004.  The effects are visible everywhere in the country.  There is a mind-blowing amount of construction, for example, happening everywhere; construction of housing, high-rise buildings, hotels, roads, dams, railways, etc.  Though the new wealth generated by the growth has been very unevenly enjoyed, the growth does seem to be helping to lift Ethiopia out of absolute poverty.  Ethiopia is one of the few countries in the world that appears to be on target to meet the Millennium Development Goals of reducing extreme poverty, decreasing child mortality, etc.  Ethiopia claims to have reduced absolute poverty from about 36% of the population in 2005 to below 29% by 2013 and seems to be on track to reduce that further to the goal of 21% by 2015 (these figures depend on from what source one gets his information).

(Based on one study that I was able to find with 2010-11 data, the absolute food poverty line in Ethiopia was determined by the min. amount necessary per adult per year to sustain a 2200 calorie / day diet (this does not account for any other expenses, such as those related to shelter, clothing, transport, etc.).  This number was 1985 ETB / year, which would have been about $140 / year based on the 2010-11 average exchange rate.  This particular study determined that in 2010-11, 29.6% of the population was below this absolute food poverty line.  Though I have not been able to find specific statistics, the Ethiopian government claims that since 2010-11, this below absolute poverty rate has decreased and it claims to be on track to reach its goal of decreasing this percentage to 21% by 2015).

Despite this reduction of absolute poverty, inflation has definitely hurt a large portion of the population.  While government expenditures in improved infrastructure, such as irrigation, clean drinking water, roads and access to markets, has reduced the number of people in Ethiopia who are unable to feed themselves, there is a large segment of the population, that segment just above absolute poverty, that segment who live off of low-wage jobs, whose living standards have decreased as a result of inflation.

This has, unfortunately, been the experience for many of the low-wage staff who work at the Children’s Home, despite our best efforts to give annual raises that are in keeping with raises that organizations like ours are giving.  For example, one of the guards that works at the Children’s Home, the most senior of the guards based on his years of experience, was making 498 ETB / month in 2010, which was the equivalent of $38.30 / month based on the 2010 exchange rate.  This was a reasonable wage for a guard.  Guard work is considered unskilled, low-wage labor, often for older men who have had little to no education.  For this guard in 2010, however, this monthly wage, supplemented by his small-plot garden and his few animals, allowed him to live and support his family.  If his wage had kept pace with inflation (45% when using USD), he should be making the ETB equivalent of $55.50 in 2013 (1010 ETB).  In other words, it would require the ETB equivalent of $55.50 / month in 2013 to ensure that our guard had the same purchasing power as he had with his $38.30 / month in 2010.  Instead, despite getting a raise (based on ETB) of 25% in 2011, 10% in 2012 and another 10% in 2013, this guard is now only making the ETB equivalent of $41 / month, which means that his real wages have decreased by $14.50 / month.  In other words, because of inflation, and despite of annual raises, our guard in 2013 is only making 74% of what he was making in 2010.  This same story is true for our other guard and our kitchen staff, who are now making less in real wages than they were in 2010 despite receiving annual raises.  This is the story of millions of low-wage earning Ethiopians across the country.

So the story of Ethiopia’s boom times in the last decade is very mixed.  There is no question that there is an increase of wealth in the country.  There is a new class of people living in Addis who are making lots of money, living in large luxury homes, driving luxury SUVs and enjoying expensive new leisure activities.  There is new business and investment in Ethiopia.  The hotel industry alone in Addis has exploded, with the construction of at least a half dozen high-end hotels in the city just in the last 5 years.  The statistics seem to also show that there is a segment of the population on the very bottom, the absolute poor, who have also benefited to some degree.  This is true at least to the point that the percentage of the population considered in absolute poverty has been decreasing.  But between these two extremes on either end of the spectrum, most Ethiopians will say that their lives have become more difficult and their standards of living have declined in the last 8 years.  This is the part of story that often isn’t reflected by the nation-wide economic statistics and this is the story that I’ve been painfully reminded of during the last couple of weeks.

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Update on the Well Project

It’s been a little more difficult to find time to blog lately.  One of the best things about our life and work in Soddo last year was the flexibility of our time.  We were busy and had lots to do, but we mostly controlled our time and when we worked.  Those days are over now that we’re back at “real jobs” in the city.

Nonetheless, we wanted to give a little blog update on our well drilling project.  For those of you who followed our fund-raising campaign at www.glassofhope.org, you’ll know that we met our goal of $80,000 by the end of September.  We were amazed at all the generous people who gave to the campaign.  It was a real “Obama-style” fund-raising campaign with lots of people giving $100 or so until we reached our goal.  Again, we want to say a huge thank you to all who supported the campaign.

So now that we’ve got the money raised, it’s time to get this well drilled.  We’re working steadily towards that.  As with everything in Ethiopia, projects tend to move a little slower than one would like.  We’ve been delayed recently ensuring that we have the best drilling location selected and the best drilling company for that location.  Our originally selected location for drilling, recommended to us by the hydrogeologist, was in the gorge below our compound, about 20 meters outside of our lower fence.  Before drilling, we wanted to compare costs with a drill location within our compound, which would make it a little closer to pipe the water to our storage tanks and would make it a little easier for the drill rig to access the site.  The problem is that now that we live and work in Addis, many of these arrangements take a little more time to coordinate and they involve long day or weekend trips down to Awassa to meet with Water is Life or down to Soddo to meet with the hydrogeologist.

(And as a side note… These trips aren’t any easier when you have to pay a police bribe in order to make a meeting on time because the officer insists that your right brake light doesn’t work, even though it was working fine that morning and still working fine later that day.  Or when you rent a car that doesn’t have a functioning fuel gage, and you end up out of gas on the side of the road in the middle of rural Oromia, 50 km from the nearest fuel station).

Our exploration of this alternative drill site revealed that drilling within our compound fence would increased our depth estimate considerably (from 180 meters to over 200 meters), which meant we had to reach out to some other drillers with the capacity to drill to greater depths.  The companies that operate these larger drill rigs are considerably more expensive because they are purely for-profit drilling companies, they use more expensive equipment, they use larger drill bits, which drill a larger borehole, and they come from Addis.  So, after 6 weeks of exploring this other option, we have concluded that our original plan was the best plan.

We are now hoping to be drilling within the next month.  We lost our slot in line with Water is Life during our exploration of the other option, so we have to again wait for them to have their drilling equipment available.  We also need to secure a written agreement from the Soddo municipality to drill on the public land outside our compound (we currently have a verbal agreement, but are still awaiting on the formal written agreement).

So despite the delays, we’re still very excited about this project and moving forward with it.  If all goes well from here forward, we still hope to have the project completed by mid-dry season so that the Children’s Home doesn’t have to suffer through months with no water again this year.  Thanks again for all your support.  We’ll continue to keep you updated and once the drilling does begin, you’ll be able to track the progress with pictures on our facebook page (www.facebook.com/hainesgotoethiopia).

We were able to spend the week in Soddo last week.  Spending the week with the kids again reminded me why we’re doing this project to start with.  We’ll close with a couple of pictures from last week.