Investigating the Effect of Currency Devaluation on Contractors: A Case Study on Selected Public Building Projects
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Date
2022-05-01
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Addis Ababa University
Abstract
The National Bank of Ethiopia devalued Birr by 15% against United States Dollar (USD) in October 2017. Since then, the construction industry in Ethiopia has faced price volatility on construction materials. According to prior studies, the construction industry is influenced by currency devaluation, resulting in high inflation, volatile market pricing, and material shortages. This price increase causes contractors to fail in finishing their projects within the acceptable time and quality boundaries, as well as within the anticipated cost boundary. This delays their progress in every way. However, the extent of the impact on construction projects is not well-understood and needs to be studied more closely. Therefore, the main objective of this study is to investigate the effect of currency devaluation on contractors. In particular, this paper aims to determine the effect of currency devaluation on public building projects that were commenced before currency devaluation occurred. It also focuses on contributory trade of works induced by currency devaluation and minimizing the risk of economic loss in construction projects due to currency devaluation for current and future occurrences. Based on a review of literature on the effect of currency devaluation on the Ethiopian construction sector and other countries' currency devaluation issues and measures, a case study research technique was utilized. Secondary data was obtained through document review. Analysis of data demonstrated the impact of the construction project, contributory trade, and strategies that the government should enforce to minimize the risk of devaluation on contractors. The result reviled that the construction cost of four public building projects in Addis Ababa increased by 18.12%, 17.72%, 16.51% and 13.94% because of the price escalation of construction materials tied to the currency devaluation of the Birr. Further, reinforced concrete work, wall and floor finishing work were found contributory to currency devaluation. The study concludes that compensating contractors who work for government projects and were adversely affected by the recent economic legislation adopted by the Government during 2017 to tackle the current crisis and adjusting the value of most contributory trade of works induced by currency devaluation to be increased or decreased based on an index minimizes the risk resulting from currency fluctuation for the future occurrence. On this basis, the government of Ethiopia should pass decisions that allow contracts to be increased or decreased, based on a price index.
Keywords: Currency Devaluation, Construction Materials, Construction Industry