Wage bill trap

Jo-Maré Duddy – Government choosing to remain in a “mental lockdown” and ignoring expert warnings and pleas to reform the bloated civil service for decades has saddled it with one of its toughest challenges at a time when Namibia can least afford it.

Analysts are cautioning that the country is heading for a debt trap, a predicament largely fuelled by the state’s total remuneration package slurping up around 60% of its revenue. With the ongoing recession and already high unemployment likely soaring due to the impact of Covid-19, a major scaling-down of the civil service will have devastating socio-economic consequences. And the drained fiscus can ill afford demands for salary increases.

The spotlight has once again fallen on the wage bill conundrum after most employees at the Namibian Broadcasting Corporation (NBC) started a nationwide strike on 22 April. Among others, they demand a back-dated salary increase of 8%.

‘NO ROOM’

Experts agree there is no room in the 2021/22 budget to give in to the workers’ demands as government struggles to contain expenditure and debt to steer the country back to macro-economic stability.

According to Dr Omu Kakujaha-Matundu, a senior lecturer in economics at the University of Namibia (Unam), government has three options.

Identify wasteful or non-essential spending and move it to NBC. “But the question is will that be sustainable? What happens in the 2022/23 budget?”

Move money from other votes to social or agricultural sectors “with all the intended and unintended consequences. The question is what are the short to medium-term implications on the economy, i.e. on people's livelihoods, employment and economic growth.”

The third option: “Borrow, consume today with very little economic spill-over in terms of the additional aggregate demand brought about by the NBC consumption activities. Is it sustainable? Are you going to borrow again for the 2022/23 NBC wage bill?”

‘AVALANCHE’

Labour expert Herbert Jauch, a former director of the Labour Resource and Research Institute (LARRI), says the signs are already there for increased tensions in the civil service and state-owned enterprises (SOEs).

“A few years ago, the then minister of finance (Calle Schlettwein) announced that government would only grant inflation-related salary adjustments, but now government is not even willing to do that,” he says.

Prof Henning Melber from the Nordic Africa Institute and lecturer at various academic institutions, says even if the NBC employees’ demand would be justified, “it would trigger an avalanche of related demands by others in public employment”.

In the current fiscal situation this is simply unaffordable, he adds.

Kakujaha-Matundu believes increasing salaries at the NBC “could open floodgates with devastating consequences - civil servants and their unions are on the sidelines waiting to demand for raises”.

Klaus Schade, director of the Economic Association of Namibia (EAN), says an increase “could act as a precedent for demands at other public institutions and will increase budget deficit and public debt levels and/or result in even lower allocations to capital expenditure”.

Heiko Prior, head of securities at Simonis Storm (SS), agrees. “What is good for the goose is good for the gander.”

POLITICAL HOT POTATO

Kakujaha-Matundu believes there is a “strong temptation” for government to give in to the NBC employees’ demands.

Melber agrees. “Government is desperate in restoring support and offering higher salaries might be an incentive for voters to remain politically loyal.”

However: “This would require either further debts (totally unsustainable and reckless) or cutting of expenditure elsewhere (health, social services, education) - which then in return would also risk that voters turn their loyalty towards other parties if only out of sheer frustration, not because they have more convincing programmes.”

In a research announcement in March 2021, Moody’s identified Namibia’s “huge public wage bill” as one of the factors weakening the country’s credit profile.

Namibia’s sovereign credit rating at both Moody’s and Fitch Ratings has been junk since 2017. In December 2020, Moody’s downgraded Namibia to three notches below investment grade, with a negative outlook, citing the wage bill as one of the reasons.

In March, Moody’s said Namibia’s negative outlook reflects risks being slanted to the downside. “Implementation of the government's fiscal consolidation plans will prove difficult in a low growth environment, particularly as the government tries to cut the large, but politically challenging, public sector wage bill.”

THE COLD FACTS

Government’s total personnel expenses in 2021/20 is estimated at nearly N$28.5 billion – about five times more than the total development budget for the current fiscal year.

The Institute of Public Policy Research (IPPR) points out that the 2021/22 budget took place in the aftermath of the liquidation of Air Namibia and the loss of over 600 jobs – “perhaps the single most painful economic decision government has had to make since Independence”.

Including the contribution to government’s medical aid scheme (PSEMAS), personnel expenditure accounts for 46% of total expenditure in 2021/22.

In a 2019 working paper, the International Monetary Fund (IMF) said spending on the wage bill absorbs around 20% of total spending on average in advanced economies and nearly 30% in emerging markets and low-income and developing countries.

THE GDP MIRROR

Comparing the size of the public wage bill to gross domestic product (GDP), however, is more important. An article published by the Institute of Economic Affairs (IEA) in 2014 stated: “Comparing the GDP against the wage bill is essential, since economic growth cannot be realised with huge debts, but with growth in real terms and not nominally.”

Data from the Organisation for Economic Co-operation and Development (OECD) shows government’s wage bill in 1998 equalled 18.4% of GDP. By 2008 it was 13.9%.

The African Development Bank (AfDB) in its Country Strategy Paper in 2020 said the wage bill averaged 16% of GDP in 2014/15 and 2016/17, among the highest in Sub-Saharan Africa.

The bank pointed out that the high wage bill was among the issues which “continue to pose significant fiscal risks”.

Estimates in the 2021/22 budget indicate that the wage bill in the current fiscal year will be about 16.9% of GDP.

According to the IMF, a one percentage point of GDP increase in a government’s wage bill is on average financed by revenue increases of 0.5 percentage points and deficit increases of almost equal magnitude.

“In other words, increases in the wage bill are associated with a deterioration of the overall balance in the medium term as these spending increases are only partially compensated with additional revenues,” the IMF said in its 2019 working paper.

IMF COMMITMENTS

Government met with the IMF in February 2021 as part of their annual discussion. This year, however, Namibia’s application for a loan of around N$4 billion under the IMF’s Rapid Facility Instrument (RFI) to mitigate the impact of the Covid-19 pandemic was also on the agenda. The IMF approved the loan on 31 March.

The IMF recently released its annual Staff Report on Namibia. As in several previous report, the IMF referred to the high public wage bill.

The latest report contains a letter from finance minister Iipumbu Shiimi and the governor of the Bank of Namibia (BoN), Johannes !Gawaxab, written in February to the managing director of the IMF, Kristalina Georgieva.

In it, Shiimi and !Gawaxab said government “will contain the wage bill through a wage freeze in 2021/22, allowing for natural attrition, except in priority social sectors, and implementing a targeted and phased early retirement scheme”.

In the report, the IMF, among others, said “the [Namibian] authorities are committed to containing the wage bill by freezing nominal wage increases and that there will be no inflation adjustment in 2021/22. A targeted early retirement scheme will be implemented during 2022/23-2023/24.

“[IMF] Staff noted that front-loading the planned public sector early retirement scheme may serve as contingency measure, in case of lower-than-anticipated SACU [Southern African Customs Union] tax revenues.”

‘NOW IS NOT THE TIME’

“Namibia’s solution in cutting the wage bill is not as easy as it may sound,” says Prior.

“Legacy issues, brought about by the previous regime plays a big role in our current situation (over-investing in one area as supposed to another) – needless to say, the lack of management since Independence did not help either.”

Prior adds: “Allowing for early retrenchment packages and cutting or freezing salaries, commendable as they are, may also lead to further reduce public service levels, and strengthen unemployment and inequality.”

Kakujaha-Matundu agrees: “Any drastic or any level of cut/reduction of the civil service will have a serious negative implication on the economy in the short term. And no one will know for how long that effect will last. Secondly, reducing the civil service will be costly/unaffordable at this moment when government/economy is struggling.”

Given the already huge levels of unemployment and the dependency of most Namibian households on one major income earner, cutting the civil service would push many households into poverty, Jauch says.

According to Schade, it will be “extremely difficult” to reduce public service employment to sustainable levels in the current economic climate since the private sector won't be in a position to absorb the employees.

“A good opportunity to streamline the public sector was during the boom years 2012 to 2015, when particularly the construction and retail trade sectors performed very well”, he adds.

DEAF EARS

Experts agree government has failed to deliver on its promises to reduce the civil service.

“I think the government has remained in a ‘mental lockdown’ when it comes to the necessary public sector reform since the mid-1990s,” says Melber. Melber headed the former Namibian Economic Policy Research Unit (Nepru) from 1992 to 2000.

The Wage and Salary Commission (WASCOM) in the 1990s “had in no uncertain terms recommended a leaner civil service with a lid on salary increases”, he says.

“This was a time when governance could have shifted employment emphasis to opportunities in the then thriving private sector. Instead, it continued to cultivate the civil service as the expansion of state administration as the most convenient option accessing easy and relatively high paid jobs without being necessarily based on competence and performance (but rather of political and ethnic affinities),” Melber said.

He continues: “Nepru in a study in 1999 warned that the oversized public sector crowded out public sector growth and government clearly shown itself unable to grasp the urgent need of serious public sector reform. Since then the problem increased instead of being addressed.”

Melber says government is now confronted with the accumulated bill of closing its eyes for 25 years and pretending the problem will be solved by being ignored.

“Instead, the problem was on a constant rise. Now government sits on a bloated (and partly overpaid) civil service which was considered a basis for good election results, while parts of it turn increasingly frustrated because their relatively comfortable niche is getting less cosy.”