70765 Achieving Fiscal Sustainability in Swaziland: Reestablishing Control over the Wage Bill Policy Note December 2010 Poverty Reduction and Economic Management 1 Southern Africa Africa region Document of the World Bank Summary (i) The wage bill (as a percentage of GDP) has become uncommonly large in Swaziland. It is larger when measured against historic levels and against other countries in Africa and the world. (ii) The gaping fiscal deficit of about 15 percent of GDP in 2010/11, and the difficulty in securing the requisite financing have precipitated the need for a rapid intervention in curtailing the wage bill. The irreversible reduction of the SACU revenue base is being addressed by earnest efforts to boost non-SACU revenue that will have an impact in the medium term, thus shifting the emphasis for expenditure restraint on an orderly roll-back of the wage bill. Moreover, a thoughtful resizing of the civil service is likely to facilitate private sector-led growth, since its expansion has most likely come at the expense of the private sector. It is the expansion of the private sector that must be counted on in the long term to sustain the government’s expenditure plans. (iii) Wage bill needs to be addressed urgently for two main reasons. The first is that it cannot be afforded any more, as the public revenue base has experienced a significant collapse that will not be reversed in the near future. The second is that wages are crowding out other type of expenditure that are necessary for quality service delivery. (iv) Swaziland needs to consider two sets of options: one set to put the wage bill on a track that will see it decrease permanently over time as a percentage of GDP, and one that will contract it rapidly to achieve fiscal sustainability. The two sets of options, while conceptually different, need to be considered jointly to keep government effective and efficient. (v) On the structural side, the options include:  splitting the wage increase into a “cost of living adjustment� component (lower than inflation) and a discretionary component based on promotions from notch to notch within an expanded “notch system�;  a reassessment of the government contribution to the pension fund;  a review of allowance schemes; and  a lowering of the pension age for some or all of the civil service. (vi) Immediate measures that need to be considered are centered on the EVERS initiative. These measures include:  an assessment of the demand for the package under the current scheme; 1  an assessment of the fiscal impact of the scheme depending on target reductions in the number of positions and the uptake;  a clear concurrent communication plan on the government’s need for retrenchment regardless of EVERS;  transfers of civil servants to new purposeful agencies without automatic eligibility under EVERS; and  sequencing of benefits under EVERS (to minimize immediate expenditure and curtail later claims of social welfare). (vii) A simple modeling exercise, based on the actual pay scale and positions in the civil service (and estimates for the army) provides insights as to the drivers of the wage bill. It also evidences the need to act decisively and rapidly to make it sustainable. It is only with a mix of immediate one-off reductions in wages and positions, with differentiated and selective increases in wages and positions looking forward, that the wage bill can be brought down to a sustainable level. 2 1. Macroeconomic Background 1. Swaziland is facing an unsustainable fiscal deficit since FY 2009/10. It is slated to be around 15 percent of GDP in FY 2010/11, up from 7.6 percent the previous year. This imbalance is threatening the macroeconomic stability of the economy: reserve levels have fallen by more than half over the past 6 months, to the equivalent of 2.7 months of imports. A further decrease is bound to threaten the sustainability of the main macro policy anchor: the peg of the Lilangeni to the South African Rand. 2. The fiscal deficit is the result of two factors: the collapse of the revenue from the Southern Africa Customs Union (SACU) mainly because of the global economic downturn, and the gradual increase in expenditure. SACU revenue had repeatedly exceeded expectations and reached a high of 25.3 percent of GDP in 2008/09, contributing upward of 60 percent of overall fiscal revenue. They came down by 16 percentage points of GDP, to 9.3 percent of GDP in FY2010/11 and are not forecast to improve significantly over the medium term. Meanwhile, expenditure levels had steadily increased, reaching a high of 45.7 percent of GDP in 2009/10, thanks in large part to continuous pressure from recurrent expenditure, among which wages. While public spending has been brought down to 38.9 percent in 2010/11, further progress is hampered by mandatory expenditure items; the wage bill stands out, at 17.8 percent of GDP. Graph 1: Swaziland - Revenue and Expenditure Trends as a Percentage of GDP 45.0% 40.0% 35.0% 30.0% % of GDP 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2001/2002 2004/2005 2007/2009 2010/2011 Revenue Total Expenditure Source: IMF 3. The total cost of the civil service1 accounts for a substantial portion of overall government spending. As of 2010, the cost of the civil service was 17.8 percent of GDP (up by 1.3 percentage points of GDP over 2008 figures), which is more than half of all recurrent 1 The cost of the civil service comprises gross salaries, personnel allowances of around 5 percent of gross salaries (in cash), travel allowances of around 6 percent of salaries, and a legally mandated transfer to the public pension fund of 15 percent. Salaries therefore make up a little under 80 percent of the cost of the civil service. The figures do not account for the allowances in kind, especially government housing that is available widely across the civil service regardless of duty station. 3 expenditure. It is also significantly higher than the sum of all domestic revenue streams (14.6 percent of GDP) – which are the revenue streams that the Government has greater control over. Graph 2: Swaziland - Composition of Expenditure as a Percentage of GDP 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% % of GDP 15.0% 10.0% 5.0% 0.0% 2001/2002 2004/2005 2007/2009 2010/2011 Total Expenditure of which Recurrent Expenditure of which Wages Source: IMF and World Bank staff calculations 4. Overall, the size of Swaziland’s wage bill is exceptionally large. An international comparison of the costs of civil services indicates that Swaziland has one of the highest such ratios in the world (see Graph 1), even when compared to OECD countries in which public expenditure have traditionally been high as a fraction of GDP (i.e. France) Graph 3: Swaziland - Wages as Percent of GDP in Select Countries (2010) 20% 15% 10% % of GDP 5% 0% South Africa France Lesotho Seychelles Swaziland Source: IMF Art IV Consultation Reports 4 2. The Wage Bill: Positions and Wages 5. The underlying factor for this real increase is predominantly the increase in the number of positions, and not so much the yearly salary increases. The nominal value of the wage bill since 2008 has increased by 29.3 percent, almost exactly the combined value of inflation over the same period (29.2 percent) – although the nominal increases were not even across all departments, since the army saw an exceptional salary increase of 20 percent in 2009/10. The real increase in the cost of the civil service is thus mostly due to the expansion of its headcount, which is highest and increasing fastest in the Ministry of Education, as shown in the graph below. Graph 4: Swaziland - Personnel Costs in Ministries and Departments (Current Emalangeni) 2,000,000,000 1,800,000,000 1,600,000,000 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 0 Information… Fire & Emergency… Tinkhundla… Economic Planning &… Justice &… Public Works &… Elections & Boundaries… Labour & Social Security Agriculture Police Defence Civil List NRE Public Service Judiciary Statutory Internal Audit Audit Parliament Geology Finance DPM Home Affairs National Treasury Customs & Excise Private & Cabinet Health Anti Corruption Correctional Services Income Tax Foreign Affairs & Trade Treasury & Stores Housing & Urban Dvpt Commerce & Industry Tourism & Environment Sports, Culture, Youth Education & training 2008 2009 2010 2011 Source: Government of Swaziland and World Bank staff calculations 6. Swaziland’s civil service2 comprises 40,601 positions, the vast majority of which are filled3. The ministries of education and health (together referred to as the “social cluster�) account for 46.3 percent (18,798) of civil servants. The single largest category of civil servants are teachers, of which there are more than 12,000. The ministries of defense, correctional services, the police and the ministry of home affairs (together referred to as the “security cluster�) employs 11,728 staff (28.9 percent of the total). 7. The number of positions in the civil service has expanded significantly in the past 3 years. Between 2008 and 2011, it grew by 2,289 people: from 38,312 people (including the 2 The civil service is defined as the staff in the various administrative frameworks answering to a member of cabinet. These include the civil service strictly defined and the army, but it excludes certain categories of staff who are at least in part financed from the public purse. It also excludes staff who work for autonomous agencies that are financed from lump sum transfers and report to a minister, and staff who report directly to the King. It is estimated that there could be up to 3,000 staff in these categories. 3 There is on average a 5 percent vacancy rate due to normal turnover. 5 armed forces) to 40,601 people, or an increase of 6 percent. The bulk of the increase in personnel occurred at the Ministry of Education, which employs 15,122 staff today, an increase of 827 staff (mostly teachers in classrooms) over 2008 (or 5.8 percent). However, personnel rosters in other ministries have grown faster in relative terms. The Ministry of Defense has increased its personnel by 10.3 percent; the police by 16.3 percent, and Correctional Services by 12.9 percent. Together, these departments increased the combined size of their personnel by 1,303 staff. 8. Wage levels in the civil service appear to be adequate, but not particularly high. While it is difficult to find specific comparator tables for positions across all grades, there are international comparator tables for the most common position in Swaziland’s civil service, that of teacher. Graph 3 shows that Swaziland’s position in Africa does not point to an uncommon situation: a primary school teacher in 2010 earns a yearly gross salary of about E90,000 (or US$1,000 per month), excluding allowances and the public contribution to the pension fund. Graph 5: Primary School Teacher Salaries as Percentage of GDP (2006) 9.0 8.0 7.0 6.0 5.0 4.4 4.0 3.2 (2010) 3.0 2.0 1.0 0.0 Central African… Guinea-Bissau Cameroon Niger Liberia Togo Ethiopia Burundi Seychelles Benin Nigeria Guinea Swaziland (2010) Cote d'Ivoire Malawi Lesotho Zimbabwe Burkina Faso Congo, Dem. Rep. Chad Madagascar Mauritania Sudan Uganda Tanzania Eritrea Mali Sierra Leone Ghana Senegal Angola Rwanda Gambia, The Mozambique Kenya Congo, Rep. Zambia Source: World Bank 9. Other features of the civil service do not point to a particularly problematic situation. The aggregate level of allowances is also relatively limited (at less than 10 percent of the overall cost of the civil service). Allowances overall have increased modestly in absolute terms (from 1.35 percent of GDP in 2008/09 to 1.65 percent in 2010/11), but more significantly in relative terms (by 22 percent over 3 years). This rate of increase is consistent with the increase in the number of civil servants and the wage bill. The most important allowance (travel) accounts consistently for 55 percent of all allowances. 10. The highest earner in the civil service framework earns 21 times the salary of the lowest earner. This ratio is not unusual. Moreover, the distribution of personnel between salary levels does not point to an excessively top-heavy administration, as indicated by the four graphs below for some of the largest employers within Swaziland’s administration. The bottom grades 6 account for the most staff for the police, correctional services and education (RSP2, HMC2, and C3 respectively). However, for the Ministry of Health, the intermediate grade of C5 accounts for most technical staff4. Graph 6: Swaziland - Distribution of Staff between Grades in Select Departments police staff distribution correctional services staff distribution RSP1 HMC1 HMC2 RSP2 HMC3 RSP3 HMC4 RSP4 HMC5 HMC6 RSP5 HMC7 RSP6 HMC8 RSP7 HMC9 HMC10 RSP8 HMC11 RSP9 HMC12 0 1000 2000 3000 0 500 1000 1500 education staff distribution health staff distribution A3 A3 A6 A6 B2 B2 B5 B5 CH5 CH5 C3 C3 C6 C6 D1 D1 D4 D4 D7 D7 E3 E3 E6 E6 F3 F3 0 2000 4000 6000 8000 0 200 400 600 800 1000 Source: Ministry of Public Service and World Bank Staff Calculation 4 Grade level A refers to non-technical staff (e.g. maintenance workers), and has a much lower salary range 7 Box 1: Is the public sector crowding out the private sector? The 40,601 civil servants and assimilated (e.g. soldiers) account for about 20 percent of the employed population (of about 198,000, as per the 2007 census); if the vast majority of these 40,601 civil servants are employed in the two urban regions (which employ 120,000), then about one third of the urban population is comprised of civil servants. A simple decomposition of GDP figures indicates that the relative contribution of government to GDP has, over the course of the past 18 years to 2008, steadily increased by more than 4 percentage points. During this period, the services sector overall (of which government is part), has seen its contribution to GDP fall from 48.1 percent to 44.4 percent. Given the increasing size of government, Swaziland has effectively witnessed a relative contraction of its private services sector by almost 8 percentage points of GDP (from 32.8 to 25 percent) since 1990. Another insight into whether the public service compares favorably as an employer comes from comparing the public sector wage bill as a fraction of GDP (17.8 percent) with the portion of the active population employed in the public service (about 20 percent). Figures about the contribution of capital to GDP are not available, if one assumes conservatively that 20 percent of GDP accrues to capital (in the form of interest and dividend payments), it becomes clear that the 20 percent of the active population in public service claims around a quarter of the wage bill. Public service seems like an attractive proposition. Graph 7: Swaziland Composition of GDP by Sector (in percent of GDP) 60.0% 48.1% 50.0% 40.0% 44.4% 30.0% 19.4% 20.0% 15.3% 10.0% = 0.0% 1990 1995 2000 2005 primary secondary tertiary of which gvt Source: CSO, World Bank 8 3. Frameworks and Processes 11. The legal framework for the civil service (and the army) is provided by the Employment Act of 1980 (as amended in 1985 and 1998), and the Wages Act of1964. The civil service is structured in various career streams denoted by letters (A,B, C, etc.) and grades within these streams (1, 2,3, etc.). Within each grade, there are notches (1,2,3, etc.) that have a specific salary level associated with them. There are also ungraded positions, mainly senior ranks of the civil service, ministers, parliamentarians, and other political positions5. The graded positions make up more than 78 percent of the wages, with the army accounting for another 15 percent, and the “politicians� for the rest. Annex1 provides a comprehensive overview of the framework for grades and corresponding wages; Annex 2 documents the number of positions by grade and function (i.e. department) over the past four years. 12. The controlling legislation leaves significant discretion to the Government in the creation or suppression of civil service positions and the manner in which it manages its staff. Under current arrangements, line ministries that would like to create new positions need to secure the approval of the Ministry of Public Service (MoPS). MoPS’ decision can, but need not, be informed by considerations related to the aggregate headcount in the ministry or the civil service as a whole. Once the position has been agreed, its grading (and “notching�) is defined and the process of filling the position begins. For internal candidates at that precise grade level within the line ministry a reassignment suffices; for civil servants in other ministries or at other grades, and for external candidates if the position has been advertised externally, the Civil Service Commission (created by the 2005 Constitution and independent of any other ministry) must review their credentials on the basis of criteria such as “performance�. The creation or suppression of positions in the army appears to be less subject to checks and balances. Defense matters, including the hiring of soldiers, is under the direct control of the head of state. 13. The civil service framework affords significant protections to public sector employees, both formal and informal. Dismissals are rare, in the absence of a standardized performance assessment system to gauge employee performance. While broad terms of reference exist for each position, they are frequently not specific enough to generate accountability. Staff reassignments that are unilaterally decided by management are more difficult without the civil servant’s concurrence. Redeployments that are not jointly agreed are referred to consultations with the unions, and trigger tedious processes that discourage unilateral decisions by management. 14. The wage increase mechanism is triggered annually, and is decided in consultation with the unions. The increase that is decided by cabinet is applied evenly across all grade levels, up to and including ministers. As a result, the ratios between various wage levels and between notches at any one grade level always remain the same. 5 For the purposes of our analysis, we have included the 4,000+ soldiers among the ungraded civil servants, although it is understood that the army has a distinct cadre for its personnel, which we were unable to access. 9 4. Recent Reform Initiatives 15. The Government had undertaken in the past 6 years two different reform efforts: one Voluntary Early Retirement Scheme (VERS) and an Alternative Service Delivery (ASD) reform. Since implementation in 2005 of the VERS began, there have been no takers despite yearly budgeted amounts. An enhanced VERS, known as EVERS has been approved by Government in the past year, with broader eligibility conditions, and more attractive exit packages. However, it targets only 27 percent of staff in specific grades and departments, the package has not been calibrated to account for non-cash benefits (e.g. housing), and its fiscal implications remain to be determined. The ASD has allowed the outsourcing of some services (cleaning and security of some buildings), but the quality of these services is reported to be uneven. Its fiscal impact is reported to be limited. 5. Issues 16. The civil service framework of Swaziland stems from a fundamentally sound design that seems to be broadly implemented as intended. It has especially benefitted from recent efforts by the Ministry of Finance to eliminate ghost workers: 813 were identified and eliminated. However, it faces a few serious issues, and the reforms that they may give rise to will be tested by the need to achieve fiscal sustainability rapidly. 17. Issue 1: Fiscal Sustainability The overall cost of the civil service is exorbitant under Swaziland’s new macroeconomic circumstances. It is a cause of fiscal imbalances that threaten one of the foundations of development: macroeconomic stability. The wage bill is also by itself larger than the Government’s domestic revenue (14.5 percent of GDP), which the Government may see as a security issue. 18. Issue 2: Control The current wage increase mechanism lacks flexibility in various ways: (i) the salary increase cannot reward performance; (ii) nor does it help cabinet in emphasizing the attractiveness of employment conditions in departments that it would like to prioritize; and (iii) it puts government negotiators in a conflict of interest, as they are de facto arguing against their own salary increases. 19. Issue 3: Allocative Efficiency There may be allocative inefficiencies in the distribution of personnel between departments. Recent hires have favored the security cluster over the social cluster. While this is consistent with the explicit government policy of promoting security, it also limits the Government’s ability to increase the pace of its hiring of new teachers to meet its commitment to free primary education (a constitutional mandate). There will 10 inevitably be an important political element in this decision, but there may be scope to reassess these trade-offs in light of changing circumstances. 20. Issue 4: Productive Efficiency Organizational effectiveness is compromised by the high wage bill. The high wage bill throws the composition of expenditure across administrative line items out of balance, as the Government undertakes cost saving measures that are primarily dictated by deficit containment rather than the effective deployment of means to support development policies. 21. Issue 5: Social Stability The civil service is probably the single largest employer in Swaziland, and by all accounts an attractive employer. While it is desirable in the medium term to see a shift in the labor force toward the private sector (to the benefit of both private and public sectors), the transition toward this new allocation of labor will be difficult. There may be short term rises in unemployment, and an increase in social instability. 6. Options 22. Managing the wage bill is a particularly important task, for two main reasons: (i) wages are mandatory expenditure, and are typically not decided upon together with yearly budget decisions; and (ii) wage increases and hiring decisions are rigid: they are difficult to reverse when necessary and thus tend to crowd out other expenditure when resources are unavailable, with adverse consequences for the government’s performance. 23. Options can be organized in three broad categories: (i) structural reforms based on a fundamental review of civil service effectiveness in various departments; (ii) administrative reforms to help control the wage bill over the medium term; and (iii) immediate measures with a direct impact on cash flow. The following options mostly cover the last two categories, for two reasons: (i) there is not adequate analysis to argue for a detailed restructuring of the civil service, and (ii) there is a need for relatively simple and uncontroversial options that could easily be implemented. Options are discussed in more detail the box below. Medium-Term options to reassert greater control over the wage bill (a) Broaden the mechanism by which positions are created to include the army. This will allow for the management of all public servants within a given resource envelope, and interrogate the need for new positions. (b) Disconnect the wage increase mechanism of senior ranks (top tier) of civil service or political appointments from current wage increase mechanism. The top tier wage increases should be decided by a more independent body such as an independent commission (a common feature of Commonwealth countries) to alleviate the conflict 11 of interest of government wage negotiators. The Government may also want to consider top tier wage negotiations on a different schedule from lower tier, so as to limit its simultaneous handling of politically sensitive issues. (c) Split the lower tier salary increase in two distinct parts: (i) a base increase for all across all lower tier grade levels (with a view to limit the overall increase in the nominal wage bill to inflation, at most); this should help address staff concerns about cost-of-living; (ii) an additional salary increase based on passage from one notch to the next within each grade level to reward performance (e.g. passage from one notch to the next should not be automatic). The number of promotions between notches will be constrained by availability of funding for the additional costs of such promotions, and the attrition from the civil service – so as to cap the overall increase in the wage bill to the level the Government will deem appropriate. This recommendation implies that passage from one notch to the next is not an automatic yearly occurrence, but is a deliberate management decision. In this connection, the design and roll-out of a comprehensive and systematic performance management framework for promotions between notches is critical to provide legitimacy to managers’ decisions. Such a systematic performance management framework would also require the training of managers to ensure that it is implemented widely and evenly. (d) Expand the notch system within any grade level (C1, C2, A4) to cover as many years as a civil servant may contemplate within his or her career, and provide a greater frequency in salary increases from selective promotions between notches. This implies the need to determine the equivalent “notching� for all staff in the new expanded notch range; (e) Reconsider the contribution of 15 percent of gross salary that the Government makes to the public pension fund. The findings of the 2007 census confounded expectations of populations growth, and may allow for the conclusion that the pension fund is overcapitalized in light of its reassessed commitments. An in-depth assessment of the financial health of the public pension fund would need to be undertaken; (f) Reconsider the various (20+) allowances policies selectively on a needs basis – especially, but not only, the ones that give rise to current expenditures; to facilitate a transition to a new allowance regime, consider a reform that may allow for the grandfathering of certain allowances to current beneficiaries; 12 (g) Consider lowering the pension age for various categories of civil servants. Some categories of civil servants for which physical ability is part of the job requirements could have a mandatory pensionable age well below the current age of 60. It will be easier to implement such a differentiated retirement age for categories that fall in different cadres, like the army. Short- term options for scaling back the size of the civil service (a) Assess the demand for the EVERS package as currently defined, and ensure that packages compensate for actual loss of cash and non-cash benefits; to be able to do so, the Government will need to compile a register of government housing (currently inexistent), a register of civil servants who benefit from such housing; and a register of civil servants who receive housing allowances; (b) Establish the fiscal impact of various scenarios under EVERS; (c) Deploy the EVERS program in tandem with an involuntary departure program; clear communication by the authorities of their willingness to enforce a level of involuntary retrenchment (based on criteria that include individual performance, but also the suppression of obsolete positions) may trigger greater interest in the EVERS; (d) Facilitate the transfer of civil servants to new autonomous agencies (such as the Revenue Authority) by providing the EVERS package as an unconditional guarantee for a limited period of up to 2 or 3 years, but not an automatic right upon exiting the civil service; this recommendation could also be applied to outsourcing through the ASD program; (e) Eliminate lump sum pension payments under EVERS; they cause large cash outlays and may not prevent beneficiaries from tapping public welfare funds in their old age. 7. Scenarios 24. The need for far-reaching reforms with a rapid impact has been discussed with the Government, the IMF and the World Bank in the context of missions during the past 2 years. The path to macroeconomic stability under the existing peg arrangement requires a dramatic decrease of the public deficit: from close to 15 percent of GDP in 2010/11 to just a third of that (5 percentage points of GDP) by 2013/14. The Government has already taken many of the structural reforms that will improve revenue generation, such as the introduction of the VAT. 13 However, they are slated to take some time to have an impact, which in turn is difficult to quantify with confidence. Therefore discussions with the Government and the IMF have also pointed to the need to roll back public expenditure by 3.8 points of GDP: from 37.9 percent of GDP in FY 2010/11 to 34.1 percent of GDP in FY2013/14. 25. The composition of the expenditure roll-back matters. Emergency measures to contain expenditure this year have disproportionately affected discretionary expenditure (i.e. goods and services, and transfers and subsidies), and that public debt service will likely increase from 0.8 percent of GDP to 2.4 percent of GDP, resulting in an overall expenditure mix that is unbalanced. Discussions therefore also concluded that the most important reduction in expenditure over the medium term would need to come from the wage bill: by FY2013/14, the wage bill would need to fall by 3.5 percentage points of GDP. The endeavor will be challenging, but is necessary to reestablish balance between expenditure items. 26. Even if successful, this reduction in the wage bill would still leave Swaziland with a public service absorbing 14 percent of GDP in 2013/14. This is still high relative to the wage bill in South Africa, which is projected somewhat in excess of 10 percent of its GDP. It is also high in that it remains close to the level of non-SACU revenue (i.e. the revenue that Swaziland has greater control over), which is projected to be 15.8 percent in 2013/14. Graph 8: Swaziland – Projected Public Expenditure for Sustainable Fiscal Deficits by Administrative Line Item 50 45 0.8 40 6.8 Public Expenditure in % of GDP 0.8 35 4.7 1 9.2 1.5 2.4 3.8 30 3.6 3.5 6.4 5.2 4.9 25 4.9 20 17.3 17.5 15.6 14.6 14 15 10 5 10.4 8.6 9.1 9.3 9.3 0 2009/10 2010/11 2011/12 2012/13 2013/14 Fiscal Year Interest Subsidies & Transfers Goods & Services Wages Capital Expenditure Source: IMF, World Bank staff 14 27. To help devise measures with the necessary effect on the wage bill, various policy reform options has been modeled based on a detailed recording of the full civil service framework6 – with few limitative assumptions with which to qualify the projections. The decision variables are the increases in the number of staff in the Education Sector (ES), the Health Sector (HS), the “Security Cluster� Sector (SCS), and the remaining Other Sectors (OS) of the civil service, and the increases in the various elements of the overall compensation packages for the same civil servant categories. The real economic growth rate can also be adjusted, but is otherwise assumed to be 2.5 percent p.a.. The inflation rate is projected at a constant 6 percent p.a.. 28. We have created five scenarios to illustrate the impact of the measures we propose, with a view to bring the wage bill back to a level consistent with ongoing macroeconomic policy discussion figures. Each of the scenarios draws on the previous one, and thus models an increasing number of policy options we present above. The progression between scenarios is as follows: (i) no notable reform – current situation; (ii) no new hires, nominal wage increases of half the inflation rate across the board, and no further pension fund contribution; (iii) differentiated nominal wage increases across departments, with higher wage increases and new hires for the education sector, and a shrinking of security cluster positions in line with natural attrition; (iv) same parameters as previous scenario, plus a one-off nominal wage reduction across the board next year; (v) same parameters as previous scenario, with an additional exceptional departure of civil servants in 2013 (and commensurate shrinkage of the number of positions). 7.1. Scenario 1: No Notable Reform to Current Expenditure Plans 29. Under the first scenario, hiring of teachers to support the roll-out of education continues apace (with 400 new hires each year until 2017), with salary increases of 6 percent p.a. that compensate in full for increases in the cost of living. In this case, by 2017 the education sector wage bill remains broadly steady at 6.7 percent of GDP, and the overall wage bill will have decreased by more than 1 percentage point of GDP by 2017. The situation is an improvement, but the high overall wage bill remains unsustainable: the wage bill would still be higher than that of most other countries, and far larger than current domestic revenue. 6 The Bank team reconstructed the wage bill in Excel spreadsheets from the bottom up, on the basis of the civil service establishment rolls and the wages associated with various positions, plus additional information from pension statutes and the budget. The only department for which the number and grading of positions remained unavailable was the army. On the basis of this bottom-up approach, the wage bill came to 17.9 percent of GDP, or within 0.1 percentage points of the incremental approach adopted by the IMF. 15 Graph 9: Scenario 1 - Composition of the Wage Bill with no Notable Reform 20.0% 18.0% 16.7% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 6.7% 4.0% 4.7% 3.7% 2.0% 1.6% 0.0% 2011 2012 2013 2014 2015 2016 2017 TOTAL WAGE Bill as % of GDP of which ES wage bill of which SCS wage bill of which HS wage bill of which OS wage bill 7.2. Scenario 2: Broad Undifferentiated Reforms 30. Under a second scenario illustrating a certain appetite for reform, all new net hires are frozen, nominal wage increases are kept to half the prevailing inflation rate of 6 percent, and the public pension fund contributions of 15 percent of gross salary are suspended indefinitely7. This scenario (not illustrated) points to a sharp decrease in the size of the wage bill, to 12.9 percent of GDP in 2017. Thus, with genuine reform efforts and austerity, the gap between the improving real economic growth rate of 2.5 percent and the negative real increase in the overall wage bill achieves a significant reduction in the wage bill. But it may be politically challenging, and does not address the issue of allocative efficiency. Moreover, it may undermine the financial health of the public pension system. 7.3. Scenario 3: Targeted Wage Bill Reduction over Time (by Department) 31. Under a third scenario, the reform options we have suggested are put in place, allowing for a differentiation between departments. A base wage increase of half the inflation rate is provided to all personnel for all future years. An additional allocation equivalent to 4 percent per annum for the average wage is provided to the Ministry of Education to facilitate promotions between notches, raising its average wage increase to 7 percent per annum (higher than the inflation rate). Moreover, 150 new teachers (net) are hired each year. Ministry of Health staff get an additional average 3 percent wage increase to be administered through promotions between notches, keeping their average purchasing power equal to the previous year’s. Other civil servants get an additional wage increase of 2 percent p.a., except for personnel from the security cluster, who get no additional wage increase. In addition, we have assumed that 1 7 This decision may cause the pension fund’s obligations to become unsustainable in the long run under current pension benefits arrangements 16 percent of security cluster staff leave their positions each year without being replaced. Under these assumptions, while the education sector wage bill remains steady at 6.5 percent of GDP, the security cluster wage bill falls by 1.7 percent of GDP by 2017, while other departments’ modestly decreasing wage bills contribute to a combined impact on the overall wage bill of a little under 3 percentage points of GDP over 6 years. The improvement is real and meaningful, and priority sectors are protected. There are no mass layoffs, thus addressing the issue of social stability. But the wage bill remains high by any standard. Graph 10: Scenario 3 - Composition of the Wage Bill with Differentiation between Departments 20.0% 18.0% 16.0% 15.1% 14.0% 12.0% 10.0% 8.0% 6.0% 6.5% 4.0% 3.7% 2.0% 3.3% 1.6% 0.0% 2011 2012 2013 2014 2015 2016 2017 TOTAL WAGE Bill as % of GDP of which ES wage bill of which SCS wage bill of which HS wage bill of which OS wage bill 7.4. Scenario 4: Scenario 3 Plus a One-Off Immediate Wage Cut 32. Under a fourth scenario, all decision variables are identical to the previous scenario, except for a one-off 5 percent wage reduction in 2012 across the board: an order of magnitude comparable to what the Greek civil service experienced in 2010 (an less than 7 percent average wage cut that the Irish civil service experienced in 2009). Such an option precipitates the reduction in the overall wage bill over time without compromising a selective differentiation between ministries over time. Moreover, the overall wage bill comes down to a more manageable 14.2 percent in 2017 (a level comparable to current domestic revenue levels), although that may not be fast enough. 17 Graph 11: Scenario 4 - Composition of the Wage Bill with Differentiation between Departments and a One-off Nominal Wage Cut 20.0% 18.0% 16.0% 14.0% 14.2% 12.0% 10.0% 8.0% 6.0% 5.5% 4.0% 4.0% 2.0% 3.3% 1.4% 0.0% 2011 2012 2013 2014 2015 2016 2017 TOTAL WAGE Bill as % of GDP of which ES wage bill of which SCS wage bill of which HS wage bill of which OS wage bill 7.5. Scenario 5: Scenario 4 Plus Personnel Attrition in Select Departments 33. Under a fifth scenario, all decision variables remain the same as for the previous scenario (including the wage cut), but an additional five percent of civil servants leave their positions in 2013 from within all departments other than the ministries of health and education. The overall impact effectively brings the wage bill down further by one percentage point of GDP in 2017, while preserving the number of positions and wage levels in the social sectors. Sustainability is further promoted by the initial rapid decrease in the wage bill. However, the wage bill in this scenario does not reflect the one-off retrenchment costs that may be present. Graph 12: Scenario 5 - Composition of the Wage Bill with Differentiation between Departments, a One-off Nominal Wage Cut, and a One-off Retrenchment 20.0% 18.0% 16.0% 14.0% 13.2% 12.0% 10.0% 8.0% 6.0% 5.5% 4.0% 3.8% 2.0% 2.6% 1.4% 0.0% 2011 2012 2013 2014 2015 2016 2017 TOTAL WAGE Bill as % of GDP of which ES wage bill of which SCS wage bill of which HS wage bill of which OS wage bill 34. Finally, it is worth stressing that in a situation identical in all assumptions to the previous one in its decision variables, an increase in the growth rate by 1 percent p.a. (to 3.5 percent) has a 18 significant effect on the wage bill as a percentage of GDP. The impact is favorable and significant (with an overall wage bill falling by an extra 0.7 percentage points of GDP). The implicit assumption under the model is that the additional growth comes from the private sector, which over time grows comparatively larger. Graph 13: Scenario 5 in a Higher Growth Context 20.0% 18.0% 16.0% 14.0% 12.0% 12.5% 10.0% 8.0% 6.0% 5.2% 4.0% 3.6% 2.0% 2.4% 0.0% 1.3% 2011 2012 2013 2014 2015 2016 2017 TOTAL WAGE Bill as % of GDP of which ES wage bill of which SCS wage bill of which HS wage bill of which OS wage bill 7.6. Conclusion 35. The compounding of the reforms under the above scenarios indicates that Swaziland will only be able to achieve a sustainable fiscal path under the more ambitious reform agenda, encompassing one-off immediate reductions in wages and positions, and selective and differentiated increases looking forward. This agenda will need to include structural measures that modify the wage framework (i.e. number of notches, dual wage increase mechanism) and one-off measures such as the nominal wage reduction and the proposed retrenchment under EVERS. The upside from implementing this approach is that the efficiency gains are possible without compromising the effectiveness of the civil service, and the pursuit of the most important policy objectives of the government: universal and free primary education and a high level of security. 19 20 Annex 1 Wages by grade level and notch, in Emalangeni, for the four previous years. Grade Notch 2008 2009 2010 2011 A 1 1 15,712 17,362 19,445 20,320 2 16,183 17,882 20,028 20,929 3 16,668 18,418 20,628 21,557 4 17,172 18,975 21,252 22,208 5 17,682 19,539 21,883 22,868 6 18,213 20,125 22,540 23,555 A 2 1 18,921 20,908 23,417 24,470 2 21,077 23,290 26,085 27,259 3 23,606 26,085 29,215 30,529 4 26,439 29,215 32,721 34,193 5 29,610 32,719 36,645 38,294 A 3 1 31,683 35,010 39,211 40,975 2 32,634 36,061 40,388 42,205 3 33,612 37,141 41,598 43,470 4 34,621 38,256 42,847 44,775 5 35,660 39,404 44,133 46,119 A 4 1 38,155 42,161 47,221 49,346 2 39,301 43,428 48,639 50,828 3 40,479 44,729 50,097 52,351 4 41,694 46,072 51,600 53,923 5 42,945 47,454 53,149 55,540 A 5 1 45,951 50,776 56,869 59,428 2 47,330 52,300 58,576 61,212 3 48,749 53,868 60,332 63,047 4 50,212 55,484 62,142 64,939 5 51,718 57,148 64,006 66,886 A 6 1 54,303 60,005 67,205 70,230 2 55,933 61,806 69,223 72,338 3 57,611 63,660 71,299 74,508 4 59,339 65,570 73,438 76,743 5 61,120 67,538 75,642 79,046 A 7 1 64,176 70,914 79,424 82,998 2 66,100 73,041 81,805 85,487 3 68,084 75,233 84,261 88,052 4 70,127 77,490 86,789 90,695 5 72,230 79,814 89,392 93,414 21 Grade Notch 2008 2009 2010 2011 B 1 1 28,451 31,438 35,211 36,795 2 29,304 32,381 36,267 37,899 3 30,183 33,352 37,354 39,035 4 31,089 34,353 38,476 40,207 5 32,022 35,384 39,630 41,414 B 2 1 33,623 37,153 41,612 43,484 2 34,631 38,267 42,859 44,788 3 35,670 39,415 44,145 46,132 4 36,740 40,598 45,469 47,516 5 37,843 41,817 46,834 48,942 B 3 1 40,492 44,744 50,113 52,368 2 41,707 46,086 51,617 53,939 3 42,958 47,469 53,165 55,557 4 44,246 48,892 54,759 57,223 5 45,575 50,360 56,404 58,942 B 4 1 48,765 53,885 60,352 63,067 2 50,228 55,502 62,162 64,959 3 51,735 57,167 64,027 66,908 4 53,287 58,882 65,948 68,916 5 54,884 60,647 67,924 70,981 B 5 1 58,727 64,893 72,681 75,951 2 60,489 66,840 74,861 78,230 3 62,303 68,845 77,106 80,576 4 64,171 70,909 79,418 82,992 5 66,098 73,038 81,803 85,484 B 6 1 70,725 78,151 87,529 91,468 2 72,847 80,496 90,155 94,212 3 75,032 82,910 92,860 97,038 4 77,283 85,398 95,645 99,949 5 79,601 87,959 98,514 102,947 B 7 1 85,173 94,116 105,410 110,154 2 87,729 96,941 108,573 113,459 3 90,359 99,847 111,828 116,861 4 93,071 102,843 115,185 120,368 5 95,863 105,929 118,640 123,979 22 Grade Notch 2008 2009 2010 2011 C 1 1 42,970 47,482 53,180 55,573 2 44,260 48,907 54,776 57,241 3 45,587 50,374 56,418 58,957 4 46,955 51,885 58,112 60,727 5 48,364 53,442 59,855 62,549 C 2 1 53,199 58,785 65,839 68,802 2 54,796 60,550 67,816 70,867 3 56,439 62,365 69,849 72,992 4 58,132 64,236 71,944 75,182 5 59,876 66,163 74,103 77,437 C 3 1 64,068 70,795 79,291 82,859 2 65,990 72,919 81,669 85,344 3 67,970 75,107 84,120 87,905 4 70,009 77,360 86,643 90,542 5 72,109 79,680 89,242 93,258 C 4 1 77,157 85,258 95,490 99,787 2 79,471 87,815 98,353 102,779 3 81,855 90,450 101,304 105,862 4 84,312 93,165 104,345 109,040 5 86,841 95,959 107,474 112,311 C 5 1 92,919 102,675 114,997 120,171 2 95,707 105,756 118,447 123,777 3 98,579 108,930 122,001 127,491 4 101,536 112,197 125,661 131,316 5 104,582 115,563 129,431 135,255 C 6 1 115,211 127,308 142,585 149,001 2 118,667 131,127 146,862 153,471 3 122,228 135,062 151,269 158,076 4 125,895 139,114 155,808 162,819 5 129,672 143,288 160,482 167,704 23 Grade Notch 2008 2009 2010 2011 D 1 1 79,097 87,402 97,890 102,296 2 81,469 90,023 100,826 105,363 3 83,914 92,725 103,852 108,525 4 86,431 95,506 106,967 111,781 5 89,024 98,372 110,176 115,134 D 2 1 90,961 100,512 112,573 117,639 2 93,691 103,529 115,952 121,170 3 96,501 106,634 119,430 124,804 4 99,396 109,833 123,012 128,548 5 102,378 113,128 126,703 132,405 D 3 1 104,606 115,590 129,460 135,286 2 107,744 119,057 133,344 139,344 3 110,976 122,628 137,344 143,524 4 114,305 126,307 141,464 147,830 5 117,734 130,096 145,708 152,264 D 4 1 120,296 132,927 148,878 155,578 2 123,905 136,915 153,345 160,245 3 127,623 141,023 157,946 165,054 4 131,451 145,253 162,684 170,005 5 135,394 149,610 167,564 175,104 D 5 1 138,340 152,866 171,210 178,914 2 142,491 157,453 176,347 184,282 3 146,766 162,176 181,638 189,811 4 151,169 167,042 187,087 195,506 5 155,704 172,053 192,699 201,371 D 6 1 159,917 176,708 197,913 206,819 2 164,715 182,010 203,851 213,025 3 169,657 187,471 209,968 219,416 4 174,747 193,095 216,267 225,999 5 179,989 198,888 222,754 232,778 D 7 1 193,127 213,405 239,014 249,770 2 198,922 219,809 246,186 257,264 3 204,890 226,403 253,572 264,983 4 211,037 233,196 261,179 272,932 5 217,367 240,191 269,013 281,119 24 Grade Notch 2008 2009 2010 2011 E 1 1 127,357 140,729 157,617 164,710 2 129,409 142,997 160,157 167,364 3 133,515 147,534 165,238 172,674 4 137,755 152,219 170,486 178,157 5 142,140 157,065 175,912 183,829 E 2 1 152,065 168,032 188,196 196,664 2 152,864 168,915 189,184 197,698 3 156,844 173,313 194,110 202,845 4 160,929 177,827 199,166 208,128 5 165,129 182,468 204,364 213,560 E 3 1 173,443 191,655 214,653 224,312 2 177,978 196,666 220,266 230,178 3 182,637 201,814 226,032 236,203 4 187,421 207,100 231,952 242,390 5 192,339 212,535 238,039 248,750 E 4 1 225,036 248,665 278,505 291,037 2 231,786 256,124 286,858 299,767 3 238,740 263,808 295,465 308,761 4 245,901 271,721 304,327 318,022 5 253,279 279,873 313,458 327,564 E 5 1 258,217 285,330 319,569 333,950 2 265,964 293,890 329,157 343,969 3 273,945 302,709 339,034 354,291 E 6 1 290,451 320,948 359,462 375,638 25 Grade Notch 2008 2009 2010 2011 F 1 1 218,608 241,562 270,549 282,724 2 225,165 248,807 278,664 291,204 3 231,920 256,272 287,024 299,940 F 2 1 255,113 281,900 315,728 329,936 2 262,765 290,355 325,198 339,832 3 270,649 299,067 334,955 350,028 F 3 1 297,713 328,973 368,450 385,030 F 4 1 327,483 361,869 405,293 423,531 26 Grade Notch 2008 2009 2010 2011 HMCS 1 1 35,410 39,128 43,823 45,795 HMCS 2 1 58,551 64,699 72,463 75,724 2 60,313 66,646 74,643 78,002 3 61,117 67,534 75,638 79,042 4 63,980 70,698 79,182 82,745 5 65,901 72,821 81,559 85,229 6 67,878 75,005 84,006 87,786 7 69,913 77,254 86,524 90,418 8 72,011 79,572 89,121 93,131 9 74,172 81,960 91,795 95,926 10 76,397 84,419 94,549 98,804 HMCS 11 1 67,334 74,404 83,333 87,083 2 69,354 76,636 85,833 89,695 3 71,435 78,936 88,408 92,386 4 73,578 81,304 91,060 95,158 5 75,786 83,744 93,793 98,013 HMCS 3 1 78,690 86,952 97,387 101,769 2 81,050 89,560 100,307 104,821 3 83,481 92,247 103,316 107,965 4 85,986 95,015 106,416 111,205 5 88,564 97,863 109,607 114,539 6 91,220 100,798 112,894 117,974 HMCS 12 1 90,492 99,994 111,993 117,033 2 93,206 102,993 115,352 120,543 3 96,003 106,083 118,813 124,160 4 98,883 109,266 122,378 127,885 5 101,850 112,544 126,050 131,722 HMCS 4 1 109,303 120,780 135,273 141,361 2 111,821 123,562 138,390 144,617 3 115,876 128,043 143,408 149,862 4 118,630 131,086 146,816 153,423 HMCS 5 1 137,354 151,776 169,989 177,639 2 141,474 156,329 175,088 182,967 3 145,718 161,018 180,341 188,456 4 150,089 165,848 185,750 194,109 27 HMCS 6 1 172,604 190,727 213,615 223,227 2 177,782 196,449 220,023 229,924 3 183,115 202,342 226,623 236,821 4 188,609 208,413 233,422 243,927 HMCS 7 1 210,490 232,591 260,502 272,225 2 216,805 239,570 268,318 280,392 3 223,309 246,756 276,367 288,804 4 230,009 254,160 284,659 297,469 HMCS 8 1 257,891 284,970 319,166 333,528 HMCS 9 1 281,101 310,617 347,891 363,546 HMCS 10 1 297,713 328,973 368,450 385,030 28 Grade Notch 2008 2009 2010 2011 RSP 1 1 35,410 39,128 43,823 45,795 RSP 2 1 58,551 64,699 72,463 75,724 2 60,313 66,646 74,643 78,002 3 61,117 67,534 75,638 79,042 4 63,980 70,698 79,182 82,745 5 65,901 72,821 81,559 85,229 6 67,878 75,005 84,006 87,786 7 69,913 77,254 86,524 90,418 8 72,011 79,572 89,121 93,131 9 74,172 81,960 91,795 95,926 10 76,397 84,419 94,549 98,804 RSP 3 1 78,690 86,952 97,387 101,769 2 81,050 89,560 100,307 104,821 3 83,481 92,247 103,316 107,965 4 85,986 95,015 106,416 111,205 5 88,564 97,863 109,607 114,539 6 91,220 100,798 112,894 117,974 RSP 4 1 109,303 120,780 135,273 141,361 2 111,821 123,562 138,390 144,617 3 115,176 127,269 142,542 148,956 4 118,630 131,086 146,816 153,423 RSP 5 1 137,354 151,776 169,989 177,639 2 141,474 156,329 175,088 182,967 3 145,718 161,018 180,341 188,456 4 150,089 165,848 185,750 194,109 RSP 6 1 172,604 190,727 213,615 223,227 2 177,782 196,449 220,023 229,924 3 183,115 202,342 226,623 236,821 4 188,609 208,413 233,422 243,927 RSP 7 1 210,490 232,591 260,502 272,225 2 216,815 239,581 268,330 280,405 3 223,309 246,756 276,367 288,804 4 230,009 254,160 284,659 297,469 RSP 8 1 257,891 284,970 319,166 333,528 RSP 9 1 281,101 310,617 347,891 363,546 RSP 10 1 297,713 328,973 368,450 385,030 29 Annex 2 Positions by grade level and department, for the four previous years. 30 31 32 33