Wage bill impotence

Jo-Maré Duddy – Cutting Namibia’s civil service wage bill – one of the highest in Africa and among middle-income countries globally – is a political challenge for government, Moody’s Investor Service has said.

Issuing its annual credit analysis on Monday, Moody’s said government has historically had trouble implementing politically sensitive fiscal policies such as reduction of the wage bill.

Government’s long-term foreign debt, excluding the rand, was first slated as junk by Moody’s in August 2017. In December 2020, the credit rating agency to downgraded Namibia to Ba3, three rungs below investment status, with a negative outlook.

“The government has had a mixed track record addressing fiscal challenges, with pre-pandemic results showing effective policies addressing excessive subsidies and transfers, but a general inability to reduce the wage bill,” Moody’s said on Monday.

Government managed to reduce the fiscal deficit to around 6% of gross domestic product (GDP) from 2015 to 2019, “but was unable to achieve further fiscal consolidation”, Moody’s said.

According to the agency: “In the last three fiscal years, Namibia has posted deficits above the government's original targets. Moreover, while spending cuts were introduced late in the cycle, Namibia has had trouble controlling its expenditure, which has dented its policy credibility.”

‘STRONGER MEASURES NEEDED’

The agency pointed out that some structural changes have been made on both the revenue and expenditure sides.

These include establishing adequate control systems, gradually reducing personnel and related expenses, encouraging a reduction in subsistence travel allowances and expenses, reducing telephone expenses, reducing transport expenses, limiting the allocation of expenditure to noncore activities and administration of priority programmes, as well as reducing the public-sector wage bill through a combination of natural attrition, lower-than-inflation indexing and capping personnel growth to below 6% in the medium term.

Government salaries have been frozen since a 9% increase in 2017, which helped stabilise the government wage bill, Moody’s said.

“However, the wage bill remains relatively constant as a percentage of current revenue, making the task of achieving further fiscal consolidation more difficult as stronger measures will be required to reduce wage costs.”

Moody’s added: “Policies to control the wage bill were put on hold in the wake of the coronavirus pandemic in 2020, with fiscal consolidation not expected until economic conditions strengthen in late 2021 or the beginning of 2022.”

‘FISCAL RIGIDITIES’

Moody’s said long-term structural fiscal rigidities and a sizeable increase in the public sector wage bill in recent years constrained Namibia's room for policy manoeuvre.

“The scope for additional non-wage bill expenditure rationalisation and reductions in transfers to SOEs [state-owned enterprises] and capital spending has been largely exhausted.”

Government’s intention to tackle the wage bill through a combination of attrition and phased retrenchments will be “challenging from both a human resources and financial perspective”, Moody’s said.

“Given high unemployment levels in Namibia (20% overall, with youth unemployment at 40% in 2019), the government tends to be the first resort for employment. On the financial side, it will require a large outlay to fund retrenchments before benefits are seen in current expenditure,” it said.