Safaricom’s Net Income Decline: What Ethiopia’s Currency Depreciation Means for Safaricom’s Financial Future

Safaricom, Kenya’s telecommunications giant, recently reported a dip in net income due to the depreciation of the Ethiopian birr, alongside mounting challenges in Ethiopia’s economy and regulatory environment. Despite these setbacks, Safaricom remains optimistic about its future in Ethiopia, a country of over 120 million people and Africa’s second-most populous nation.

Safaricom’s Ethiopian operations, launched in 2022 after winning the country’s first private telecom licence, are part of the company’s broader strategy to expand its regional footprint. However, the economic climate in Ethiopia has created significant hurdles. Currency depreciation alone has had a marked impact: the Ethiopian birr’s value has dropped sharply since the government floated the currency to meet International Monetary Fund (IMF) requirements, leading to inflationary pressures and a 17.7% decrease in Safaricom’s net income on a year-over-year basis.

Group Chief Executive Officer Peter Ndegwa noted the challenges this currency fluctuation poses to the business. “Due to the uncertainty of what [exchange] rate we will have at the end of the year, we are guiding that any 10 percentage points change in terms of currency depreciation would result in about eight billion shillings in terms of balance sheet impact,” he said. This instability directly impacts Safaricom’s ability to project and manage earnings from Ethiopia, where half-year earnings before interest and taxes (EBIT) grew by 31.9%, despite wider economic headwinds.

Safaricom’s entry into the Ethiopian market came with high hopes but also significant costs. Initial investment benefits included duty-free capital goods imports and income tax exemptions, though recent regulatory shifts have tempered some of the early excitement. Ethiopian regulators have postponed issuing a third telecom licence due to global and local economic challenges. Additionally, France’s Orange, a potential major investor, cited an inability to align with Ethiopia’s evolving conditions and suspended its bid to acquire a significant stake in state-owned Ethio Telecom.

On the operational front, Safaricom’s Ethiopian business is growing steadily. It signed up 7 million users since its October 2022 network launch, and its mobile money platform, M-Pesa, launched in 2023, now has 1.2 million customers. Nevertheless, the Ethiopian arm has yet to turn a profit and is not expected to break even until at least 2026. Ndegwa remains optimistic, stating that while challenges persist, there is “an enthusiastic uptake” of Safaricom’s services in Ethiopia.

Safaricom’s challenges are compounded by the pressure to uphold its financial standing in Kenya. In its latest half-year report, the company projected a decline in full-year earnings to between 94 billion and 100 billion Kenyan shillings, down from 103 billion to 109 billion last year. The company’s shares on the Nairobi Securities Exchange, where it holds the title of largest listed entity, have fallen by 2.75%.

Despite these obstacles, Safaricom continues to push forward with its Ethiopian expansion, viewing the market as a long-term investment. According to Ndegwa, “Despite the short-term challenges, we remain confident in the long-term commercial success of our Ethiopian business.” While Ethiopian currency depreciation and regulatory hurdles have presented steep challenges, Safaricom’s leadership remains committed to navigating these complexities and solidifying its presence in East Africa’s largest new telecom market.