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.