Public sector pay award complicates economy management - Yadav by Gitanjali Singh Stabroek News December 19, 1999 The public sector pay award has not served the country well and has complicated the management of the macro economic situation, IMF Chief of Mission to Guyana, Gopal Yadav, said. Yadav, in an interview with Stabroek News, said no country in the world could sustain such high increases in salaries and the high increases will send the wrong signals to investors. He alluded to the pressures now building on the private sector to pay higher wages as a result of the awards in the public sector and said that this will result in less investments because profit margins will have to be sacrificed as export companies could not increase their prices or they would lose their markets. "If [there is the expectation of lowered profits as a result] why would investors want to invest here. They would go to rest of the world where economies are booming. In that sense, the civil service pay award has been very counterproductive," said Yadav. He also noted that the government had to find resources to pay the 36.01 per cent this year and the 26.6 per cent next year but could not increase taxes as the tax to GDP ratio was already too high at 30 per cent. The world standard of tax to GDP ratio is moving to 15 per cent to create the environment for growth. Yadav said for Guyana to create such conditions for growth, (15 per cent of tax to GDP ratio) then public expenditure had to be lowered. Central government expenditure currently stands at around 45 per cent of GDP and Yadav said this left very little room for the private sector to grow. He agreed that if the government allowed the private sector to get heavily involved in infrastructure projects such as the funding and construction of roads, bridges, deep water harbour and other schemes, its expenditure level would drop significantly. "Growth has to come from the private sector. Governments do not create jobs. Their objectives are different: to provide a stable macro economic framework as well as social services," Yadav said. The IMF official said it was because of the heavy fiscal burden of the wage increase that something had to be done to counteract it and this was where the public sector modernisation programme came in. Yadav noted that inflation was rising and there was not much room for tight monetary policy by the Bank of Guyana as this would reflect itself in the form of higher interest rates, also counterproductive to the private sector, and would limit economic growth. "People have to realise when we make a bad decision in one area, there are consequences in other areas... there are no free lunches. The modernisation of the civil service is very much needed," Yadav said, adding that this was accepted by many in society. He said that what Guyana needed was a much smaller, more efficient and well-paid civil service, not a large number of public servants who are poorly paid and not well motivated. It is in this context that the IMF/World Bank and the Inter-American Development Bank (IDB) are working with the government on the modernisation project for the public sector. Noting that 2000 would be an election year, Yadav said this could take a lot of energy out of everyone and be a constraint to the reform process. But he highlighted the need to get the unions, civil society and the government to work together on this project. He said that while everyone seemed to be acknowledging the need for the reform the question was how to go about it, but the sooner the reform was started, the better for all concerned. Yadav denied that the IMF/World Bank has put pressure on the government to move ahead with this programme without adequate studies in place to determine the size the public sector should be and the quality of staff that should be retained. He said the government had approached the fund for help on the issue and noted that in Guyana ten per cent of GDP was spent on civil service wages which would go up by one percentage point next year. However, in other countries, developed and underdeveloped, Yadav said, three per cent of GDP was spent on public sector wages. "It is easy for me without looking at figures [number of persons in the public sector] to say you are somehow out of line. How can you justify this high wage bill?" asked Yadav. And Yadav said the fund had looked at an audit of the jobs and knew who was employed at what grade and their qualifications. He said the government had approached the World Bank for a US$10 million loan at 0.5 per cent interest and this had to be justified to the World Bank Board. A similar proposal by the IDB for a US$30 million loan for the civil service reform is at the board level. The IMF senior official noted that in the past ten years the size of the public service had been slashed in half and salaries had doubled in the last 18 months. He said this was one form of modernisation, but productivity needed to be looked at. He said a case had been made that people at the lower end of the scale being offered the voluntary severance package may want to go and do something else with their lives. The second stage of the reform, Yadav said, would be in line with the study done two years ago which informed the structure of the public sector. Yadav noted that public sector modernisation was a problem which faced many underdeveloped countries. He acknowledged the effects the voluntary separation package would have on unemployment, adding that this was always a concern for all involved. But he said this fear would always be there and that was why the government had to make sure that the private sector was there to create jobs by developing a conducive environment which meant no increase in taxes to fund government spending. Yadav sees the severance package as giving those employees at the lower end of the scale an opportunity to improve their lot rather than keep them in the government in the false hope that their standard of living will rise. A © page from: Guyana: Land of Six Peoples