Mozambique is considered one of the rapidly flourishing economies in the African region, thanks to foreign direct investment (FDI) in the energy and mining sectors. However, the stability of the Mozambican economy is challenged by the weakening of the metical (MZN).
Since 2015, devaluation of the MZN against the US dollar (USD) has been significant. As the graph below illustrates, the MZN lost almost half its value in 2015, and has continued to depreciate in 2016. As of the end of May, 2016, the rate is around 56.20 MZN per USD.
Tighter monetary policies to contain rapid depreciation of the MZN are causing confusion among employers as to how to respond to these kinds of situations.
How Should Employers Respond? Is Dollarization a Good Solution?
In a word, no! Dollarization is in fact, a bad solution. In times of economic uncertainty, many employers think that converting compensation schemes to dollars or other hard currencies will keep employees happy and ensure a competitive market position is maintained. It might accomplish those things initially. But it will also ensure that your costs are uncontrollable, and in all likelihood, you will pay far more than you need to in order to be competitive.
In Mozambique, as you can see in the chart below, market movement of salaries since October, 2013, based on a cost-of-labor approach, show only modest growth over the same period. Annual increases topped out around 13%, and the cumulative increase is just 26%, far less than the 115% devaluation that occurred during the same period.
In other words, if you dollarized your local staff pay in Mozambique in October, 2013, you would be paying about 115% more in local currency terms today. In the meantime, the local market has moved up just 26% cumulatively. You are overpaying!
So What Should You Do?
Living in a market suffering high devaluation is challenging and your employees will look to you, their employer, to help them through the difficult period. They will expect that somehow, you can keep them “whole” but as we’ve shown above, that will be too costly an approach, and is not aligned to a market-based compensation policy.
Instead, Birches Group recommends that employers base compensation adjustments on the cost of labor. Our survey data, which is updated three times a year, shows the trends in the market on which you can base your decisions. An extra increase during the year goes a long way to satisfy the demands for an adjustment, as long as it’s modest, no more than 25% of the devaluation. This way, as the market catches up, you will still be competitive.
Our clients understand that paying attention to salary movement more than the cost of living or currency devaluation will not only prevent them from paying employees ahead of the market, but also reap long-term benefits for the organization due to better cost controls.
With the recent discoveries of natural gas offshore in northern Rovuma, it will not be long before Mozambican economy stabilizes once again. This, together with the positive economic outlook of other sectors, will start moving salaries up more rapidly, as growth returns to the country.
About Birches Group
Specializing in developing markets, Birches Group can help you manage compensation packages in times of economic uncertainty. Our salary surveys conducted three times a year, and our comprehensive survey approach can provide you with all of the information you need to manage your organization’s compensation in developing markets. Contact us for information about joining our survey in Mozambique, or any of the other 147 markets we cover.