A rising public wage bill acerbated by recent N$1.2 billion salary increments has forced government to seek containment measures and announce a recruitment freeze for the remainder of this financial year.
In his midterm budget presentation last week, Finance Minister Iipumbu Shiimi highlighted that in light of the wage bill which stood at N$29.6 billion by the end of FY2021/22 and accounted for 43% of total public expenditure, a Wage Bill Committee which was set up by government has produced a comprehensive draft report on findings and recommendations regarding the containment of the public sector wage bill.
“The report is being scrutinised and analysed by the Office of the Prime Minister before submission for clearance and approval by the Cabinet Committee on Public Service. At the same time, to manage expenditure and realise savings in the short-term, a temporary public service recruitment freeze has been imposed for the remainder of FY2022/23,” Shiimi said.
Business Express understands that for the previous financial year that ended in March 2022 operational expenditure amounted to N$56.9 billion reflecting an overspending of 1.1 percent. In essence, notable overspending was recorded on personnel expenditure on the votes of education, arts and culture as well as health and social services.
Government approved a 5% salary increase for public workers in July 2022, which is estimated to increase the public wage bill by N$1.2 billion. The initial demand from trade unions would have implied an additional cost to the annual public wage bill of N$3.1 billion. In addition to basic salary increases, government also approved an increase in benefits to the value of N$334.9 million and consisted of a 7% increase in the Homeowners Scheme for Staff Members (HOSSM), 14.5% increase in housing allowances for members below management and a 12% housing allowance increase for management.
According to the Namibia Statistics Agency’s (NSA’s) Public Wage Index report, central government had 108,875 employees with 61.8% being in public administration, 28.0% in education and 10.2% in health.
WAGES AS UNPRODUCTIVE SPENDING
Simonis Storm economist, Theo Klein who commented on the wage bill realities last noted that assuming all public workers get the same salary, his firm estimates that each worker receives an average monthly salary of N$22,656 which is far above the national average monthly salary of N$8,712, yet at the same time, Namibia’s ease of doing business keeps deteriorating further, implying that there is a low return on public salaries as inefficiencies in public administration services still remain.
“We calculate a marginal propensity to consume of 0.69 for Namibia. This implies that for every N$1 earned, Namibians typically spend 69 cents and only save 31 cents. Using this, we then estimate a money multiplier of 3.23, which means that every N$1 of income generated or spent leads to N$3.23 of additional spending throughout the economy/country. Using the above, one could argue that high public wages support economic activity through consumption spending (which accounts for 75% of GDP on average).
“The total public wages of N$29.6 billion could lead to consumption spending of N$66.0 billion (which is about 47.6% of total private consumption in Namibia). However, this is not the kind of economic support that public finances should be focusing on, especially given the low return on public wages. Ultimately, we need to become an industrial nation which needs more investment – and not consumption – spend,” Klein said.
RISING DEBT
While the public wage bill continues to be a major problem, the public debt stock is expected to increase to N$138.4 billion, equivalent to 69.6 percent of GDP in FY2022/23. Over the MTEF, the pace of debt accumulation is projected to peak in the next financial year resulting in a stabilization of the debt ratios over the remainder of the MTEF, as nominal GDP growth outpace debt growth.
“The high public debt levels continue to be central in the fiscal policy considerations over the medium term. As affirmed in the previous budget, government maintain the commitment to redirect much of the revenue increases in the coming years, as the economy recovers, towards debt redemption and reducing the borrowing requirement as much as possible. As such, we will focus on maintaining a positive primary budget balance over the medium term. At the same time, we will continue working in close collaboration with the private sector to diversify the economy and create new engines of growth.
“Going forward, the FY2023/24 fiscal strategy will centre on maintaining prudent expenditure management and promoting economic recovery. Accordingly, government will focus on entrenching fiscal sustainability and stabilizing the pace of debt accumulation. At the same time, government will continue to address the binding constraints to creating a conducive operating environment for the private sector to drive sustainable growth,” Shiimi said last week.
Commenting on public debt, Klein however expressed optimism saying that Inflation is expected to fall over 4Q2022 and 2023, lessening the upward pressure on interest rates and bond yields.
“Falling inflation will also lower the deflationary effect on government debt and debt ratios in the next financial year. South African bond yields have risen materially on the global stagflationary environment (i.e. rising inflation and unemployment, with declining economic growth) and rising interest rates. Locally, Namibian bond yields have risen due to benchmark movements from South Africa and local investors pricing in higher risk (e.g. rising local TED spread). Across the yield curve, local bond yields have increased by 32bps since the Budget Speech on 23 February 2022. This should increase the debt servicing costs as a percentage of total revenue for the current financial year. However, MoF has revised their debt servicing costs lower as a result of improved revenue collection potentially outweighing the rise in bond yields,” he said adding that they remain confident on government’s debt repayment abilities in the medium-term.
Only 24.1% of government’s total debt will be maturing by 2025 which ranks quite low compared to other African countries and Fitch BB- peers.
“Once again, we argue that our debt levels are not too concerning, but rather how the debt is being targeted and spent in our economy. We continuously see debt growing faster than our economy (i.e. GDP growth rates), which implies that debt is being used mainly for consumption purposes and not investments in enhancing the country’s productive capacities. This has serious negative effects on long run economic development and growth,” he said.