The International Monetary Fund says Kenya is among countries that
exhibit large increases in wage bill spending in the run-up to
elections.
By JAMES ANYANZWA
In Summary
- Increase in civil servants' salaries of $1 billion from July breaches official pledge made to the IMF.
- Kenya made the commitment to the Fund when negotiating $1.5 billion contingency loan that it would control the fiscal deficit during the run up to the August 8 election.
- Last year, the IMF, through a report presented to the executive board on May 6, 2016, observed that Kenya is among countries that exhibit large increases in wage bill spending in the run-up to elections.
The International Monetary Fund has said it will hold
discussions with Kenya during a quarterly review in April, about the
country’s eligibility to take up a $1.5 billion contingency loan to
address external shocks.
Kenya made a commitment to the Fund when negotiating the credit
that it would control the fiscal deficit during the run up to the August
8 election.
The commitment has now been put into question after the Cabinet
approved salary increases for civil servants last week that will cost
Ksh100 billion ($1 billion) from July.
“All these things that are happening in an election year and
especially to an economy that is still vulnerable to shocks will be
assessed in our next review in April. We are going to reassess the
impact of new developments such as drought and increases of the wage
bill in the budget,” Armando Morales, the IMF resident representative in
Kenya, told The EastAfrican.
He, however, said the new spending would not be a deal-breaker
as long as the government proves its commitment to reduce the fiscal
deficit.
Last year, the IMF, through a report presented to the executive
board on May 6, 2016, observed that Kenya is among countries that
exhibit large increases in wage bill spending in the run-up to
elections.
Others are Kosovo and Moldova.
Policy trade-offs
According to the report, the wage bill grows on average by 0.53
percentage points during elections in these countries, casting doubt
about the sustainability of such spending in subsequent years.
“The impact of an election appears to be much larger in emerging
markets and low income developing countries (LIDCs) compared with the
advanced economies. The country case studies on Kenya, Kosovo and
Moldova describe large increases in wage bill spending in the run-up to
elections,” said the report.
During election years, the public-to-private wage ratio in LIDCs increases by almost three per cent, according to the Fund.
“If not effectively integrated into budget planning, high or
increasing wage bills can undermine fiscal planning,” the report stated.
“Given Kenya’s fiscal constraints, important policy trade-offs
are required. While a public sector pay hike in July may lead to a
short-term boost to consumption, this will do little to support
longer-term growth. Moreover, by not creating additional fiscal space
for public investment, a lot more potential growth is forgone,” said
Razia Khan, the chief economist at Standard Chartered Bank.
She added that decades of underinvestment also mean that the
Kenyan economy is poorly endowed with infrastructure, despite the
increase in development spending in recent years.
“Against this backdrop — rising debt levels and poor
infrastructure — the decision to increase spending on public sector
wages is naturally a concern. It is the growth that ultimately does not
happen that may reflect the true cost of Kenya’s electoral cycle,” Ms
Khan said.
“Despite the suggested news of revenue outperformance in the
2017/2018 fiscal year released today [last week], with the authorities
raising their expectation of growth of revenues by Ksh200 billion ($1.89
billion) to Ksh1.7 trillion ($16 billion), the general trend of rising
debt that Kenya has seen in recent years means that there is still
pressure on the country to consolidate its fiscal balance, especially
after the August election,” she added.
Public debt
Kenya’s public debt is currently estimated at Ksh3.6 trillion
($34 billion) with debt service to revenue ratio standing at 34.7 per
cent against the threshold of 30 per cent.
The Cabinet, chaired by President Uhuru Kenyatta, also approved
funds for the harmonisation of public sector salaries and allowances,
pension, house and hardship allowances, and recruitment of an additional
10,000 police officers and 5,000 teachers.
However, according to the IMF, raising government wages during
elections or boosting hiring can worsen output fluctuations by
stimulating demand, hindering the stabilising role of fiscal policy and
increasing public debt as compensation increases are often hard to
reverse.
“High compensation spending can also crowd-out priority spending
on public infrastructure and social protection, crucial for economic
growth and poverty reduction,” said the IMF.
The state-owned Salaries and Remuneration Commission (SRC)
recommended an upward review of salaries for all civil servants putting
the lowest paid public employee in job grade B1 on a minimum monthly
wage of Ksh14,442 ($140) per month, with the highest paid employee in
job grade E4 at a monthly salary of Ksh292,765 ($2,900).
Compare this with some of its East African Community
counterparts: The lowest paid public service employee in Rwanda earns
around Rwf216,081 ($255) while the top earning civil servant
(permanent secretary) earns around Rwf16,13,167 ($1,905).
In Uganda, the minimum salary for support staff such as
attendants is set at Ush187,660 ($52) while the highest paid civil
servant (Head of Public Service) earns Ush4,952,059 ($1,366) per month
according to the salary structure for the 2015/2016 financial year.
The annual growth rate in the public sector wage bill has
averaged about 20.9 per cent between 2013 and 2015, surpassing the rate
of growth of the gross domestic product, according to the SRC.
The Public Finance Management Act (2012) introduced a clause to
control wage bill growth by limiting expenditures on wages to a maximum
of 30 per cent of the total budget.
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