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BusinessMOENCO loses $36.8 million due to Ethiopia's "hyperinflationary economy"

MOENCO loses $36.8 million due to Ethiopia’s “hyperinflationary economy”

“Hyperinflation” in Ethiopia forces the country’s largest vehicle supplier, the Motor & Engineering Company of Ethiopia Limited S.C., to declare a net monetary loss of GBP 29.6 million (USD 36.8 million) in 2022, according to its audit report.

MOENCO, a subsidiary of Inchcape, has imported and distributed cars for over 60 years and is one of Ethiopia’s top 10 taxpayers, with its Toyota brand cars holding the largest market share in the automobile market.

MOENCO is among the companies that have been greatly hit by the inflation that has tormented the nation for the last three years, as it has become unable to repatriate profit for years, despite having a solid track record of generating positive profits in Ethiopia’s market.

The largest vehicle supplier was forced to make an adjustment to its consolidated statement due to Ethiopia’s designation as a hyperinflationary economy throughout the course of the year as the nation’s three-year cumulative inflation rate surpassed 100 percent.

Inchcape Group’s consolidated financial statements reflect the results and financial position of its Ethiopian operations restated to the purchasing power or inflationary measuring unit current at the end of the year, which “results in a hyperinflationary loss in respect of monetary items being reported in finance costs and treated as an adjusting item.”

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“The results and financial position of Ethiopia have therefore been restated to include the effect of indexation, and the resulting £29.6 million net monetary loss on hyperinflation has been recognized within net finance costs and reported as an adjusting item,” the financial statement of the Group reads.

Inchcape has utilized the official price indices released by the Ethiopian Statistics Service (ESS), previously known as the Central Statistical Agency, during the adjustment process. Inflation has surged over the past year, with the price index reaching 328.9 at the end of December 2022, up from 245.8 during the same period in the previous year, the Group said. As a result, hyperinflationary adjustments have been made based on this calculation, according to the company.

Ernst & Young, one of the world’s leading accounting firms, has designated Ethiopia as hyperinflationary due to the three-year cumulative rate of inflation. Such a conclusion has been reached using data from the International Monetary Fund (IMF) and the ESS. In contrast to ESS, which reported 107 percent as of August 2022, the former estimated a three-year cumulative rate of inflation of 111 percent as of December 2022.

Under such conditions, according to Abdulmeman Mohammed (PhD), a financial analyst with over two decades of experience, it is feasible to incur a net monetary loss. He highlighted International Accounting Standard 29, which requires a firm’s financial statements to be restated if cumulative inflation in a country over three years is about 100 percent or higher.

“Such a loss arises if the company has monetary assets (such as receivables) more than monetary liabilities (payable to creditors) and vice versa. In a period of inflation, an entity holding an excess of monetary assets over monetary liabilities loses purchasing power,” said the financial analyst.

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