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.

Sticker Shock

Eighty thousand dollars is a lot of money.  A price tag with $80 thousand on it causes some sticker shock.  This is what we’re trying to raise for the deep borehole well in Wolaita Soddo for the kids at the CCC orphanage.

We’re at nearly $60 thousand.  A lot of people have given generously to help us get to this point.  We have enough to move forward with the drilling and casing of the well, which is scheduled to begin in October.  We’d like to express a big thanks to all of you who have donated to this cause.  We still need $20 thousand more to fully complete the project.

In the process of raising funds for this well, we’ve experience some push back from some people asking why it costs so much to drill this well.  These are very legitimate concerns.  It is a big price tag and with the amount of wastage and corruption that sometimes happens with “aid and development” projects, I fully respect these questions.  If people are going to donate to a cause, they want to be assured that their money is going to be used wisely and effectively.  Below I have set out to provide a little explanation of the costs for the CCC well project.

The price is a combination of factors, mostly connected to the depth to which we have to drill and from which we have to pump in order to have a consistent, reliable water source, given our location.  People who haven’t been to Ethiopia, do not always realize that much of the country is highland terrain.  People often have images of dry, low-lying savanna and desert.  There are certainly parts of Ethiopia that are hot, low and dry, but the majority of the country actually sits on terrain above 6000 feet.  The capital city of Addis Ababa, for example, lies mostly between 7500 and 8000 feet.  The town of Soddo in the Wolaita Zone, where the CCC orphanage is located, lies between 6000 and 7000 feet (the CCC orphanage itself is at 6500 feet).  This elevation, combined with the specific geological and hydrological characteristics of the area, means that in order to hit an aquifer that will supply year-round water, a deep borehole well on our compound will likely be between 500 and 600 feet deep.  That’s a very deep well.

There are very few places in North America where people have to drill to 500 feet to hit a consistent water source.  I grew up with my family home on a well outside of Moncton, NB, Canada.  Our well of 90 feet has served my family home well for over 30 years.  I just did a quick search online of well logs in various regions of the United States.  This is by no means an exhaustive piece of research, but in Ohio I found most wells between 30 – 80 feet deep.  In Oregon, I found wells between 100 – 200 feet deep, with a few over 300.  In Missouri, I found wells everywhere from 50 – 300 feet.  Even in Colorado, where the elevations are similar to Ethiopia, I found most wells between 200 – 400 feet, with very few over 500 feet deep.  In fact, in regions of Colorado where the elevation was similar to Soddo (between 6000 – 7000 feet), most of the wells I found were still less than 200 feet deep.  The same would be true of most of the African continent.  There would be very few places in Africa with terrain at the elevation that it is in Wolaita Soddo.  Every well will be different and very specific to the exact drilling location, but the point is, drilling to over 500 feet to find consistent water is a problem quite unique to our location in Wolaita.  Drilling to this kind of depth is expensive.

The best quote that we received for the drilling and casing of our well is through Water is Life International (www.waterislifeinternational.com) and their drilling partner Hawassa Salem Drillers PLC.  They have quoted us at $80 / meter.  Of course, once a well is drilled, it must be cased to keep the well from collapsing.  Our costs for casing will be at $60 / meter (for PVC casing because steel was just too cost prohibitive).  Obviously, the deeper one has to drill and case, the more costly a well will be.  At these costs, just the per meter costs of drilling and casing a well to 180 meters is over $25,000 and that doesn’t include mobilization costs for the rig and equipment, purification and testing costs for the well, site preparation costs, etc.  It also doesn’t even touch on pump purchase and installation costs, water storage costs, piping costs, labor, taxes (15% VAT here in Ethiopia), etc.

Another unique aspect of the CCC compound is that it sits on a side-hill that slopes at a 60-degree angle, down into a small gorge about 600 feet below the children’s home.  Our hydro-geological survey and report for the site recommends that we drill on the lower end of the compound because that is the cheapest and most probable place to hit water.  What this means, though, is that we have to, not only pump water to the surface of the well, but we have to pump it up our side hill to the top of the compound and then to the top of our storage tanks.  We will, therefore, need a pump with the capacity to pump water a total of 1,100 vertical feet (over 500 feet from water level to the surface of the well, then an additional 500 vertical feet from the surface of the well to the top of our water storage tanks).  These kinds of pumps are expensive, to the tune of $12,000, plus they require 3-phase electrical power, which the orphanage compound does not currently have.  Installing 3-phase electrical power with a 21 KW transformer on our compound costs another $9000.  You can quickly see how these costs are adding up.

As we explored this project and costs of it, we researched all the cheaper options available.  Unfortunately, each of these options failed to meet the specific needs of our orphanage compound.

First, we looked at hand-dug wells with hand-pumps.  These types of wells are very popular around Africa because they’re cheap.  You can dig a well with local, unskilled labor and install an pretty low-tech pumping system like the India Mark II or the Afridev or even a rope and washer system and have a well completed that can serve the needs a 100 or so people in a village for probably between $500 – $1000.  The cost-to-impact ratio of these types of wells is fabulous.  Let’s say a $1000 well with India Mark II pump serves a community of 100 people.  That’s $10 / person.  That’s really ensuring that donated funds have maximum impact.  The problem is that the CCC compound has a hand-dug well that’s 18 meters deep and is completely dry and useless for almost half the year because shallow groundwater simply isn’t sufficient in Wolaita to supply year-round water.

Second, we looked at new hand-drilling technology like what is being used by groups like iDE in the Rift Valley of Ethiopia.  This technology involves a human-powered bit apparatus that can drill through soft geological formations down to 200 feet using only local manpower.  These drill teams are charging about $6 / meter (as compared to the $80 / meter that we’ve been quoted).  This type of technology is having a huge impact on communities in the Rift Valley because it’s bringing a consistent water source to farming communities for drinking and irrigation at affordable costs.  A 200-foot well, installed with a small diesel pump, can provide water to a community of a 100+ families.  With drilling, casing and pumping, this kind of deep well could be done for well under $10,000, which could easily provide water for 500+ people with a cost-to-impact ratio of less than $20 / person. The problem is, this technology cannot handle the medium-to-hard geological formations of Wolaita, nor the 500+ feet of depth required for a year-round well in Wolaita.

Third, a lot of people have suggested to us water filtration systems.  Biosand filters have become a popular tool for purifying water in developing countries.  These filters can be developed for about $100 and can serve about 100 people.  That’s a great cost-to-impact ratio; that’s $1 / person to provide clean drinking water.  Obviously, though, the catch is that one needs to have a water source in order to purify water through a filter.  In Wolaita during the dry season, its not only an issue of unclean water, it’s an issue of water period.  If we don’t receive water from the town (we commonly only receive a few hours / week of town water from Dec. – Mar.), we have to rely on “donkey water,” which is water carried in jerry cans on the backs of donkeys from a spring 30 min. away.  As we learned last year, it’s very difficult to run a healthy children’s home of 60 kids when our only source of water many days is by the jerry can.  It would take 1 donkey water carrier with two donkeys all day to make the 6 trips to and from the spring necessary to supply enough water for us to barely function at the home.  Barely functioning meant that drinking water was rationed, toilets weren’t flushed, and cleaning and bathing was limited.  Our issue at the CCC orphanage is less about water quality and more about water access.

So it is very true that the cost-to-impact ratio of our well project for the orphanage is poor in comparison to other possible water projects one could donate to.  You could donate $1000 to an organization installing Biosand filters and impact 1000 people.  You cold donate a $1000 to an organization digging hand-dug wells and impact at least a 100 people.  You could donate a $1000 to an organization involved in hand-drilling technology, and together with 10 other like-donors, you could impact 500 – 1000 people.  Or you could donate a $1000 to our glassofhope project for a well for the CCC orphanage, and only after we raise another $79,000, could you help to impact 60 kids.  If you base it on the cost-to-impact of your donated money, our project does not make sense.

But here’s the thing.  Donating to all those other great water projects doesn’t help get water to the 60 kids living at the CCC orphanage in Wolaita Soddo, because those projects don’t work for the CCC compound.  There is sticker shock with this project, but it is the only way to provide consistent, year-round water for the CCC orphanage.  We only have $20 thousand more to go; please help us keep the momentum going.  Please share, email, facebook, tweet, blog, etc.

 

P.S.

Just to put it slightly in perspective…  the two presidential candidate campaigns for U.S. president during the month of July alone received a total of $175 million in donated funds.  I’ll leave it up to the reader to do the cost-to-impact analysis of those funds…