High wage bill could erode gains from falling oil prices, lower lending rates

Wage bill pressure could undermine the gains that the Kenyan government and businesses are hoping to make from falling oil prices and the reduction in lending rates.

It is projected that the compensation for public servants will jump by an extra Ksh19.7 billion ($218.8 million) in the next financial year before taking into account the demands by teachers and other civil servants.

Treasury Cabinet Secretary Henry Rotich said the increase provided for was largely to accommodate harmonised allowances paid to public servants.

“As a result, the wage bill will increase by Ksh19.7 billion, which will be factored into the next financial year,” said Mr Rotich.

The allowances were considered too distorted and have now been harmonised with the help of the Salaries and Remuneration Commission (SRC).

“Consequently, there are no disparities and duplication for this cadre of officers. This completes the cycle of harmonisation started in 2009,” SRC chairperson Sarah Serem said.

Moreover, last Wednesday, President Uhuru Kenyatta launched an enhanced medical insurance scheme for civil servants including the disciplined forces that also covers emergency evacuation by road or air. The services will be offered by the Kenya Red Cross and Amref, but it is not clear whether this has been factored into the wage bill increase.

Currently, the wage bill stands at Ksh568 billion ($6.24 billion), consuming over 52 per cent of the country’s domestic revenue, which is already too high for a low middle-income economy, analysts said. Unlike Kenya, in some developed and emerging economies, the public wage bill consumes only five per cent of total revenues.

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The SRC itself has repeatedly echoed analysts’ views that the ballooning wage bill is not sustainable for an agricultural economy like Kenya’s. Ms Serem said the commission is now undertaking a job evaluation exercise to determine the worth of each job and award equal pay for work of equal value.

The Constitution stipulates fairness, equity and productivity as the guiding principles for the country’s labour sector. Since the new Constitution was enacted, Kenya has witnessed increased cases of labour unrest as workers’ unions demand better pay for their members.

Recently, the Kenya National Union of Teachers (Knut) and Kenya Union of Post-Primary Education Teachers (Kuppet) went on strike demanding at least a 200 per cent pay rise. The two unions, however, called off the strike after the industrial court ordered teachers to return to work, enabling the 2015 school first term to begin last Monday.

The industrial court also ordered the Teachers Service Commission and the two unions to argue their case in court. As a result, there is a chance the wage bill could increase further if the court decides in favour of the teachers.

If the demands for salary increase by teachers were to be effected, an additional Ksh255 billion ($2.8 billion) would be required, bringing the total wage bill to Ksh823 billion ($9.04 billion) or about 90 per cent of the country’s revenue.

Moreover, since salaries have now been harmonised, all civil servants of the same grade would also have to receive an equivalent pay increase.

“If we give in to the demands of all public officers, the economy will definitely crash because it will push the wage bill higher, taking up to 90 per cent of our revenues,” said Mr Rotich.

Late last year, the Kenya National Union of Nurses (KNUN) also threatened to call a nationwide strike if the government did not provide clear guidelines on devolution of health services. The professionals also threatened to down their tools if the government reneged on the collective bargain agreement it signed with the union. 

Joseph Kieyah, a principal policy analyst at the Kenya Institute for Public Policy Research and Analysis, said it was time Kenyans started thinking about how to bake a bigger national cake rather than concentrating only on its redistribution.

“Though equally important, the equity issue has taken over since we became a low middle-income country; my biggest concern is that we are worrying more about subdivision of the cake rather than baking it,” said Prof Kieyah.

The economist said the country risked experiencing high inflation if the recurrent expenditure increases sharply in future.

“The money that the government uses comes from taxpayers. Unless we get this economy to grow, raising taxes will be the only option and we risk high inflation if we go that way,” Prof Kieyah added.

Kenya’s inflation rate has been declining since September last year, impelled by falling energy costs and adequate supply of food. Last month, it dropped to 6.02 per cent from 6.09 per cent in November, the only upward risk being a looming drought that could push up food prices. The drop was expected to be sustained with the record drop in crude oil prices to less than $50 per barrel, which saw pump prices in Kenya reviewed to a four-year low.

Further respite for the economy was expected from the decision by the Monetary Policy Committee on Wednesday to drop the base lending rate for bank loans — the Kenya Bank Reference Rate (KBRR) — from 9.13 per cent to 8.54 per cent.

The introduction of KBRR in July last year helped push down the effective average lending rate by a percentage point to 15.9 per cent. The measure is expected to reduce the spread from the base rate, already down from 7.8 per cent to 5.8 per cent, further by the time KBRR is reviewed in July.  

READ: Will Kenya’s reference bank rate lower interest on loans?

These expectations risk being derailed by the wage bill, which would necessitate more domestic borrowing despite the cushion provided by the reopening of the sovereign bond last month, putting pressure on interest rates.

The director-general of Vision 2030, Wainainah Gituro, said the country should focus on development projects rather than increasing spending for consumption.

“There should be a correlation between productivity and the wage bill, particularly in the public sector otherwise Kenya will not be able to sustain higher wages,” said Prof Gituro.

Kenneth Kaniu, chief investment officer at Stanlib, said higher wages would also mean the government paying more for pension.

“Payment of pensions has been a problem for the government and that is partly the reason why it raised the retirement age to ease the pressure,” said Mr Kaniu.