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How Exchange Rates Affect your Income

Economy

How Exchange Rates Affect your Income

Exchange rates don’t move in tandem with your income, and your income doesn’t move with it either. In many economies, exchange rates fluctuate but your income is fixed, at least for several months. For example, the Ghana cedi lost about 30% of its value against the US dollar within the first 9months of 2015, but I doubt your income saw a corresponding increase within the same period.

Changes in exchange rates

Ghana’s cedi, for example, fluctuates often against its major trading currencies, the dollar, pounds sterling and the euro. While your income is fixed for about a year or two, the dollar-cedi rate doesn’t wait for your income to move before it moves. And I doubt your cedi income is adjusted on weekly or even monthly basis with the corresponding changes in the exchange rate. Movements in exchange rates are usually influenced by capital flows, not your income. However, it directly affects the value of your income.

Global village

The world is getting smaller and smaller due to the minimization and gradual disappearance of economic and social boundaries, which are largely influenced by the power of technology and technological innovations, but also as a result of a drive towards global trade and economic cooperation. As goods move from one country to another, prices change in the process to reflect the cost of importation, which is impacted by the exchange rate. In simple terms, one commodity may vary in price from one country to another. The difference in prices reflects so many factors one of which is the exchange rate.

Businesses don’t bear it all alone

Importing businesses do not bear all the impact of a depreciating local currency alone. They mostly shift a larger portion to consumers through higher prices. So a product you’re buying at GHc3,300 when the dollar to cedi rate was at 3.3 would be sold at GHc3,900 when the exchange rate is at 3.9. The difference of GHc600 is what your income may not be able to accommodate because your employer did not increase your income accordingly.

Your Income Shrinks or Grows

When exchange rates fluctuate, it impacts the real value of your income. For import dependent economies like Ghana and other African countries, the impact is bigger when your local currency depreciates. Your income cannot buy the same basket of products it used to buy. On the other hand, when your local currency appreciates, your income grows bigger in the global market. You are able to buy more than you could buy previously.

Online Transactions

The growth of online transactions means that you are able to eliminate physical middlemen in the importation process and hence eliminate their profit margins which make commodities expensive. But it also means that we are all competing to buy the same products in the world. Manufacturers price their products based on several factors such as cost and the standard of living of the people around us (which partly determines their purchasing power as well). And we buy at same prices as Europeans and Americans.

Any Pardon for weak Currencies?

The average American earns more than their counterparts in many African countries. Some American products may be priced accordingly, probably forgetting many bankers take home just about $18,000 annually in Ghana and elsewhere in Africa. You are not given a lower price when buying online simply because you’re from Ghana, Nigeria or Kenya and definitely not because you have a weaker currency. You pay the same price as American consumers, or even higher if you add shipping cost. The problem is made worse when your local currency keeps depreciating against the US dollar.

Those who have their incomes pegged to foreign currencies are a bit safe because by the end of the year, it is these foreign currencies that outperform the Ghana cedi, Nigerian naira and the Kenyan shilling. This makes these local workers earning incomes in foreign currency or pegged to foreign currencies, have a stronger purchasing power than those earning local currencies, not pegged to any foreign currency.

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  1. Pingback: Exchange Rate Volatility Concerns Everyone, Not only Importers

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