What is the economic and moral justification?

Every employee deserves a decent living wage and every worker has legitimate expectations of a periodic pay hike—probably at least once a year.

And, yes, every employer—including government—has a responsibility of ensuring that it appropriately responds to demands of upward salary adjustments within reason.

At the same time, workers should also understand that salary adjustments have financial and economic implications.

It does not make sense for a company, for example, to bow down to pay hike demands that it cannot afford or which could force the company to go under—something that  would be unfortunate to both employees and shareholders.

The same applies to Government Incorporated. It cannot please civil servants with ambitious pay packages that eat up a huge chunk of the recurrent budget at the expense of other areas within this category such as drug procurement or other social services in the sectors of education, agriculture and water for instance.

There are also macroeconomic considerations that can be affected by salary hikes.

For example, ill-advised increments could be inflationary, worsen deficits and even lead to high interest rates, among other negative effects, although the upside is higher demand for goods and services within the economy—assuming there is enough production capacity locally to satisfy the wants of a well-paid public service.

But I suspect that any increased appetite for goods and services would largely be for imports, which create jobs elsewhere other than Malawi.

Anyway, I digress.

I should add that overly ambitious pay hikes can also distort labour markets and bring fiscal imbalances in the budget framework that may have implications on budget execution.

The current social and macroeconomic challenges the country is experiencing make it even harder for government to implement a radical pay hike, certainly not at a time the country’s economy is in such a delicate situation.

As we speak, the 2014/2015 National Budget is gasping under a budget deficit of K107 billion, which roughly translates to 14.4 percent of the planned total expenditure (K743 billion).

This gap will be filled by foreign loans of K92 billion and domestic borrowing worth K15 billion.

Should we really borrow billions of kwacha—most of which could be in foreign currency and repaid in the same hard cash—just to spend on wages and salaries?

Is that a prudent way of borrowing? Where does such borrowing fit in the country’s debt sustainability policy and strategy?

Already, wages and salaries are eating a huge chunk of the recurrent budget. Of the K531.1 billion recurrent expenditures in the current fiscal year, K163.3 billion are wages and salaries, representing over 30 percent of recurrent expenditures.

Indeed, the wages and salaries budget has jumped by 24.65 percent or K32.3 billion from K131 billion in the last fiscal calendar on account of salary and leave grant adjustments. Over the past three fiscal years, the wages and salaries budget has almost doubled from nearly K87 billion in 2012/13 to the K163.3 billion planned for 2014/15. The sustainability of such increases remains open to debate.

But if government bows down to pressure and accepts the 50 percent hike civil servants are demanding in the current budget, it means that the Ministry of Finance, Economic Planning and Development must raise an extra K30 billion or so to accommodate this salary increase.

Where will government get such money? It will borrow from the domestic market where it already is deep in debt.

In the aftermath of Cashgate, government borrowed heavily, which saw the domestic debt accumulating to K340 billion by the end of May 2014.

This domestic debt—largely contracted from the financial market—is very expensive in terms of interest payments.

In the current financial year alone, interest payments have more than doubled to K80 billion, up from approved estimates of K35.6 billion in the 2013/14 financial year. Borrowing more to boost civil servants’ salaries will end up further ballooning the debt service costs—something that is not sustainable at all.

On top of this, government has accumulated unpaid bills (arrears) of K158 billion at the end of the 2013/14 financial year, which government is struggling to pay, only allocating a small fraction for this year and is currently negotiating with the private sector to securitise these arrears.

With such a huge burden, does it make economic and moral sense to push government—which has already increased salaries by over 24 percent, which is within the ruling inflation rate—to double the raise rate to 50 percent?