Treasury puts civil servants on three-year wage freeze

The Treasury has promised the International Monetary Fund (IMF) a three-year public sector wage freeze, setting up government employees for a tough sail in an economy expected to come under increasing inflationary pressure.

The deal is part of the conditions for disbursement of the Sh40 billion that the IMF and bilateral donors have promised Kenya to help shield the economy from forex rate fluctuation.

“Expenditure measures agreed under this programme include no increase in real wages for public servants and the CBK’s promise to maintain a prudent policy stance focusing on its medium-term inflation target of 5 per cent,” said an IMF report signed by Deputy Prime Minister and Finance minister Uhuru Kenyatta and the Central Bank of Kenya governor, Prof Njuguna Ndung’u.

In the three-year period of IMF support, government employees should expect only marginal adjustments to their pay in line with prevailing inflation rates.

The Treasury’s agreement with the IMF to keep wage increments in tune with inflation means that civil servants should not expect wage adjustments of more than the five per cent inflation target that CBK promised the lenders.

Civil servants have rejected the move, setting the Treasury up for battle with the workers’ union that is already fighting the government in court for non-payment of salary increments agreed in 2008.

Kenya Civil Servants Union said it would not accept the terms of the agreement but would instead be asking the government to triple the wages of the lowest paid state employees in line with the rising cost of living.

“We reject the agreement in so far as the salaries of civil servants are concerned,” said Mr Tom Odege, the secretary general of the union.

“Let the government expect problems if they are going to insist on meeting the IMF’s conditions”.

Inflation appears to have been a key concern for the framers of Treasury’s agreement with IMF – causing the Bretton Woods institution to demand that the CBK files an explanatory report with the Treasury should it deviate from the target by two percentage points or more.

Independent analysts expect the economy to come under intense inflationary pressure in view of the rising commodity prices in local as well as global markets.

Citigroup head of research David Cowan said in a newly released report that inflation was likely to rise above the target five per cent to about 10 per cent by November.

“Ongoing surge in crude oil price in recent weeks, and high food prices coupled with the structural challenges that the economy is facing as growth picks up could well generate reasonably strong inflationary pressures,” Dr Cowan said.

And Mr John Kamunya, head of research at Dyer and Blair Investment Bank, said: “We might have even more than six per cent in inflation if you look at the fact that it has been on a steady rise in the past four months.

“Global oil prices are on the rise translating to higher pump prices that will certainly have a negative impact on the economy.”

London-based Standard Chartered Plc analysts expect inflation to stand at 7.8 per cent in 2011 and 6.9 per cent in 2012, with the possibility of an upward revision in view of rising oil prices as political unrest spreads through the Arab world.

A freeze in wages against the backdrop of high inflationary pressure exposes thousands of low cadre government workers to the risk of purchasing power erosion -- a recipe for frequent labour unrest.

The wage freeze is one of the major conditions for a new loan to cushion Kenya from forex rate fluctuations and is also key to unlocking more than $1.6 billion (Sh128 billion) for bilateral donors.

The IMF, which operates like a credit rating agency for other donors, is financing the deal to the tune of $509 million.

Public sector wage bill stands at Sh197.7 billion this financial year or 20 per cent of total government expenditure.

That figure does not include pension and related payments that will consume additional Sh28.6 billion this fiscal year pushing the total wage bill to 23 per cent of the national budget.

It remains to be seen how Treasury will meet the stringent lending conditions even as it meets the demands for expanded bureaucracy under the new system of devolved government.

Public sector wages and emoluments are expected to rise to Sh218.4 billion in the next financial year that begins in July while the pension bill will touch the Sh40.5 billion mark.

This means that total expenditure in salaries, pension and related payments will rise 10 per cent and 42 per cent, respectively -- higher than the rate of economic growth of about six per cent.

The financing deal, however, carries good news for some civil servants who stand to double their pay as the government moves to deal the huge differences that currently exist among those in the same jobs groups.

The review targets workers in job group P and above including permanent secretaries, directors, senior parliamentary staff, the Judiciary, and employees of the Kenya Anti Corruption Commission (Kacc).

The reviews will target huge salary disparities among top civil servants that has seen a select group of employees take home more than double their peers in the same job group.

Wage bill rising

Kenya’s public sector wage bill has been rising steadily in the past eight years squeezing out spending on infrastructure that the IMF says is likely to impact negatively on growth.

To shield priority spending on health and education from the agreed caps, the IMF further wants Kenya to cut its debt levels, including government guaranteed debts and state pension.

The IMF says Kenya’s debt levels are currently grossly understated citing the omission of parastatal debt and unfunded obligations of the National Social Security Fund.

Together, the two should add an extra 11 percentage points to the officially declared debt to GDP ratio – pushing it past the 50 per cent mark.

To deal with these risks, the IMF wants the NSSF to fully comply with the provisions of the Retirement Benefits Act outlining the levels of prudent investments that will ensure the retirees get decent returns from their contributions.

The fund has consistently resisted being subjected to RBA regulations citing legacy problems that require time to be rationalised.