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Chapter 6. Conclusion

Author(s):
Natalia Tamirisa, and Christoph Duenwald
Published Date:
January 2018
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Management of public sector wage bills has emerged as an important policy challenge for the region. Reflecting legacies from the past—including the large role of the state—as well as considerable oil wealth and high incidence of conflicts, public sector wage bills in MENAP are higher than in other regions. In the CCA, public employment is still high by international standards, and public wage bills may be underestimated. Wage bill policies in the region have had limited success in achieving their objectives, while exacerbating fiscal pressures and clouding prospects for inclusive growth. Some countries have started reforms, while for others the challenge still looms large.

This paper lays the ground for modifying approaches to public wage bill management in the region. It emphasizes the need to ensure that growth of public wage bills is fiscally sustainable; focus wage bill policies on their core objective of providing public services effectively and equitably; strengthen institutions and data; and complement public wage bill reforms with measures to boost private sector job creation and strengthen social safety nets. The design of public wage bill reforms depends critically on country-specific diagnostics and circumstances, and the paper provides examples of reforms in the region and globally. The IMF stands ready to assist countries in reforming their public wage bill policies with a view to contributing to stronger, more stable, and more inclusive growth.

Box 1.Measurement Issues in Public Wage Bill Data for the Middle East and Central Asia

Issues of comprehensiveness and comparability arise in public wage bill data for the region. There are differences in the coverage of data between wage bills of the public sector and of general and central governments. The public sector wage bill includes compensation for employees from central governments, local governments, state-owned enterprises, and social security funds. The general government wage bill covers central and local governments and social security funds. The central government wage bill covers units in central government, including in many cases security forces. All three definitions include compensation for permanent employees (civil servants) and temporary employees.

Wage bill data coverage across the region is limited. The reported general government wage bill often covers only parts of the general government or just the central government. In some cases, key sectors, such as education and health care, as well as extra-budgetary funds, are excluded. Recording of contractors’ salaries in other budget categories and scarce data on local governments and state-owned enterprises present additional challenges.

Wage bills typically include salaries, allowances, subsidies for the wage bill for central government public entities, and social security contributions as well as security and military salaries. In-kind benefits are usually recorded as goods and services. For some countries (Iran, Jordan, Oman, United Arab Emirates, Uzbekistan), security and military salaries are excluded. For other countries (Armenia, Iraq, Somalia, Tunisia), only some security and defense personnel salaries are included in the wage bill.

Wage bill data are recorded on a cash basis. Exceptions are Mauritania, Tajikistan, United Arab Emirates, and Yemen, where recording is on an accrual basis. Changes in recording practices may lead to exclusion of key factors from the wage bill. For instance, in Tunisia, 2017 wage increases were not fully reflected in the wage bill data but were paid as a tax credit.

Collecting data on the public wage bills of state-owned enterprises, public entities, and local governments would help obtain a more comprehensive picture of public sector wage bills. Such data would allow assessing more comprehensively the fiscal liability of central governments, which remain the last resort for paying public sector salaries. Many countries transfer subsidies to state-owned enterprises and local governments, which helps them achieve financial and cash balances and, primarily, pay salaries. Local governments and state-owned enterprises became instrumental in addressing high unemployment through hiring, for instance in Algeria, Azerbaijan, Iran, Iraq, Kazakhstan, Mauritania, Pakistan, Saudi Arabia, Tunisia, and the United Arab Emirates. That led to an increase in central governments’ subsidies to these entities, while keeping central governments’ wage bills contained. To improve cross-country data consistency, this paper uses, wherever possible, the IMF World Economic Outlook database, excluding state-owned enterprise and local governments data (Annex 1).

Box 2.Oil Prices and Remittances—Key Drivers of Fiscal Revenue and Wage Bills

Oil price is the main economic variable for oil exporters (Figures 2.1.1 and 2.1.2). These countries emerged from the 1980s with mostly double-digit ratios of public wage bills to GDP. In the following decade, low oil prices led to persistent fiscal deficits and rising public debt. At the same time, public wage bills were declining in relation to GDP in the context of a broader fiscal adjustment. With the reversal of the oil price trend around 2000 and improved financial conditions, wage bill growth rose, on average outpacing real GDP growth since 2004. The significant fiscal space created during this period allowed uninterrupted growth of public wage bills during the two episodes of oil price declines—in 2008, after the financial crisis, and since mid-2014, when wage bills increased in real terms and in percent of GDP. Outside the Gulf Cooperation Council (GCC) countries, however, the influence of oil prices on public wage bills has been overshadowed at times by other factors. In the non-GCC Middle Eastern and North African oil exporters, conflicts and geopolitical factors have played an important role. In the Caucasus and Central Asian (CCA) oil exporters, real public wage growth was partly offset by declining public employment during the post-Soviet transition.

Figure 2.1.1.Wage Bill and Oil Price in GCC and Algeria, 1992–2016

(Index 2005 = 100, unless indicated otherwise)

Source: IMF, World Economic Outlook.

Note: GCC = Gulf Cooperation Council.

Figure 2.1.2.Wage Bills and Oil Price in Other MENA Oil Exporters, 1992–2016

(Index 2005 = 100, unless indicated otherwise)

Source: IMF, World Economic Outlook.

Remittances play a key role in oil importers’ economies (Figures 2.1.3 and 2.1.4). Remittances from Russia underpinned a decade of strong wage bill growth in the CCA oil importers. Since 2000, higher oil prices affected the CCA through increased exports and outward migration to Russia, increasing inflows of remittances. The share of remittances in GDP doubled in Georgia and increased tenfold in Tajikistan and the Kyrgyz Republic in the decade beginning in 1998. Fueled by remittances, fiscal revenues rose by 10 percentage points of GDP during this period, triggering double-digit growth in real public wage bills. Even after Russia’s economy slowed in 2008 and 2013–15, and remittances declined, wage bills in the CCA oil importers continued to grow. Similarly, in oil importers in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP), wage bills have fluctuated in correlation with remittances. Although smaller compared with the CCA and less correlated with oil prices, remittances from GCC countries, the United States, and Europe to MENAP oil importers have been significant, between 6 and 10 percent of GDP, affecting fiscal revenues.

Figure 2.1.3.Wage Bills and Fiscal Indicators in CCA Oil Importers, 1992–2016

(Percent of GDP, unless indicated otherwise)

Source: IMF, World Economic Outlook.

Figure 2.1.4.Wage Bills and Fiscal Indicators in MENAP Oil Importers, 1992–2016

(Percent of GDP, unless indicated otherwise)

Source: IMF, World Economic Outlook.

Box 3.Views of Civil Society Organizations and Labor Unions

The IMF staff consulted with representatives of international, regional, and national civil society organizations (CSOs),1 including labor unions. The main points raised by CSOs are summarized in this box, and some of their feedback has been reflected in the paper.

Most CSOs agreed that the level and composition of public wage bills is an issue that governments in the region need to look at in the current economic and fiscal context. They noted however that public wage bill reforms are not necessarily the most appropriate policy to address economic weaknesses or fiscal imbalances in all countries in the region. Any decision to reform wage bills should be made based on an in-depth analysis and understanding of the underlying drivers of these problems. They argued that in some countries in the region, unfair and inefficient taxation systems contribute more to the fiscal deficits and debt than the size of the public wage bills. Looking at improving the tax system may therefore be a better option than reforming the public wage bills.

CSOs also cautioned that exceptional circumstances may hinder wage bill reforms. Even if wage bills pose fiscal sustainability concerns, some countries may be unable to reform wage bills. Security threats and social discontent could create extraordinary demand for public services that only the public sector could meet. In such delicate circumstances, wage bill reforms could increase instability.

In case reforms are needed, CSOs, like IMF staff, did not see wage compression or freezing as enduring solutions, but recommended more structural reforms such as improving transparency and accountability, linking wages to performance, or dealing with the issue of ghost workers.

CSOs stressed the need for governments to identify the social implications of wage bill reforms through an ex ante social impact analysis to design reforms in a socially and politically acceptable way. Looking at the impact on women was seen as especially important because a large proportion of women are employed in the public sector and would be significantly affected by reforms. CSOs also emphasized that sequencing would be crucial to the success of the reforms. Public wage bill reforms need to be preceded by reforms to boost the private sector, create jobs, and provide social protection.

CSOs recommended that the IMF look more closely at the reasons for the recent increases in public wage bills in the region and frame its analysis in this context. The region is facing several challenges (inclusive growth, reaching the United Nations Sustainable Development Goals, youth unemployment, the inflow of refugees) that may justify high public wage bills. For example, in Tunisia the public wage bill increased because a large number of contractual employees or people working in the informal sector were brought into the civil service after the Arab Spring. In Iraq, it was because of a need to increase security.

CSOs asked the IMF to tailor its analysis to country circumstances since regional and international comparisons of public wage bills may mask heterogeneity. Similarly, they advised that the paper analyze sectoral breakdowns of public wage bill data to help explain how much countries spend on the military, education, etc., since this could lead to different conclusions on the size of the public wage bill and whether reforms are needed. For example, a larger public sector wage bills because all health service delivery is through the public sector may be a valid reason. Different sectoral breakdowns of public wage bills may also imply different recommendations. When most of the public wage bill is made up of the military sector and education, asking for cuts may not be wise for security and developmental reasons.

CSOs questioned the finding of a negative relationship between public and private sector employment. They pointed out that the public sector wage bill is not the main reason behind the weakness of the private sector in the region. Other factors may be at play. In many countries, there are just not enough job opportunities in the private sector. The type of private sector that has developed has not generated jobs. In many countries, the military is the main public employer, but it does not compete directly with the private sector since the job requirements are different. On the contrary, limiting hiring in the public sector may exacerbate the problem: it could accelerate brain drain and emigration, ultimately reducing the potential for private-sector-led growth.

CSOs emphasized that wages in the public sector are not always too high compared with the private sector, though they recognized that this can be a problem in some countries. They argued that in many countries public wages are in fact too low. This is one of the reasons for the large number of ghost workers: people are forced to take another job to survive and are absent from their public-sector job. CSOs also suggested granular analysis because the average public sector salary in a country may not a good indicator. There are vast differences within the public sector—wages may be too high in one sector (for example, tax collection) but too low in others (for example, teaching).

Finally, they advised that if governments want to implement reform, they should initiate open and frank dialogue between the public and private sectors, civil society, trade unions, and employer associations and have a strong communication plan to convey all objectives of wage reform and future steps to manage expectations.

1 Arab NGO Network for Development, Bretton Woods Project, ITUC, Transparency International Jordan, Tunisia’s UGTT, Albawsala, Cercle des Economistes Arabes, GJFTU Jordan, and Georgia’s Trade Unions Confederation.

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