Fiscal discipline 

Wednesday, 16 January 2019 00:00 -     - {{hitsCtrl.values.hits}}

When an election year arrives it is usually accompanied by high expectations, especially regarding public sector salaries. Already there are reports on the possibility of salaries being increased, albeit by small amounts, but the Government has to protect against unreasonable demands that could derail the Budget deficit target. To this end, it would be timely for the Government to pay attention to, discuss and adapt recommendations that were made by the Salaries Commission. 

The Salaries Commission was appointed in August 2018 to conduct an in-depth study on the provisions of the existing circulars dealing with the payment of salaries and other allowances paid to public sector employees, and handed over its report to President Maithripala Sirisena in November. At the time the country was engulfed in a constitutional crisis that left little space for any other matters, but it now makes sense to continue efforts to reform public sector salaries before a serious strike returns public attention to this issue.  

In August it was announced that the Government, based on the recommendation of the Salaries Commission, would introduce a new salary structure to increase the salaries of all public servants and to remove the reported salary anomalies that exist at certain Government institutions such as the Railways Department. 

The Commission came after a standoff between the Government and railway trade unions that went on strike demanding a salary increase. Finance Minister Mangala Samaraweera rejected trade union demands as a salary hike for the Railway Department would have resulted in a pay increase for 24 other grades within the public sector, including for teachers, doctors, and police. After a days-long standoff, President Maithripala Sirisena met with the railway trade unions and promised to find solutions to their demands. This is a common cycle in Sri Lanka, where when unions make demands governments promise solutions, but reports are only partially implemented or ignored all together. 

The challenge of salary demands is that the public sector is overcrowded, and salary payments are made irrespective of the financial performance of the institution. When State assets become loss-making, they have to be funded by taxpayers, forcing governments to increase taxes and divert revenue that could be spent on healthcare, education, and housing into maintaining corporations that provide little or no benefit to the people. In extreme cases, more loans have to be taken to repay old loans, entrapping countries in colossal debt, and causing massive macroeconomic headaches to governments. These hidden costs are rarely seen by the masses, but governments are stepping up to tackle them. 

In mid-2017, Moody’s Investors Service put Sri Lanka’s public enterprise debt at a whopping 14% of GDP and warned the Government of additional risks to its finances should such debt require any State support, which is likely to become the case as most cannot support repaying their debt. This translates into a massive debt pile of little under $ 12 billion, or Rs. 1,848 billion, that has accumulated due to the continuous annual losses. According to Moody’s, the total liabilities include Government guarantees, outstanding SOE debt to the banking system and outstanding SOE foreign borrowings. 

As difficult as it is, an emotionally-driven political discourse on loss-making State assets should not be allowed to take precedence over the economic facts. Paying salaries, perks and pensions of an overloaded public sector is a colossal task, which will become increasingly difficult given Sri Lanka’s limited growth and socio-economic dynamics such as a rapidly aging population. It is hoped the Salaries Commission would also have taken into account these peripheral factors in making its recommendations. Now it is up to the Government to take them and link them to larger public sector reforms for the process to be successful.