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IMF raises red flag on Kenya’s rising wage bill

Monday February 13 2017
debt

The International Monetary Fund says 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.

READ: Kenya civil servants set for pay rise in 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.

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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.

READ: IMF, World Bank cautious about Kenya’s economic growth

“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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