Salary scale could prompt recession

Central Bank, Ministry of Economy
share concerns over higher spending

The adoption of the salary raise for public sector employees will put more strains on the national economy within the current situation, according to a study issued by the Ministry of Economy and Trade.

The amended salary scale will deeply impact the Treasury, as it will cost between $1.2 billion and $1.7 billion. This additional spending would cause inflation to grow at a higher rate and induce a higher deficit in the trade balance. The additional spending would also increase the budgetary deficit, which will directly enlarge public debt.

Funding the salary scale can be made either through increasing Treasury revenues, or through borrowing. The scale can thus be funded through three schemes. The first is through taxes alone, the second is through taxes and Treasury bills, and the third is through Treasury bills alone. Funding the scale through taxes would impact growth and cut down private sector jobs. This would also result in an immediate surge in tax revenues from 23.4 percent of GDP to 29.7 percent of GDP. On the other hand, funding the raise through borrowing would risk increasing interest rates.

Adopting the wage raise is also expected to negatively affect sovereign ratings in the absence of a comprehensive administrative reform plan.

The Central Bank (BDL) suggested taking more time for additional studies before finalizing the new salary scale. It also proposed, if the salary scale is adopted, to pay the raise in installments over five years.

The BDL said adopting the new salary scale without explaining the government’s vision will have a negative impact on the financing capabilities of the public and the private sectors. The International Monetary Fund and the rating firms disapprove of and censure such policies.

The BDL said the new salary scale would prompt more borrowing by the public sector, which would urge the Treasury to increase the interest rates by at least one percent, depending on the circumstances. Higher interests will increase the costs of debt servicing. A one percent increase in the debt interest rate means more than $560 million.

The witnessed growth in lending to the private sector is in lira, therefore it is important to maintain the current interest rates on the local currency. Raising these rates will lead to a decline in lending, which will negatively impact growth.

Increasing the tax on interests on deposits will potentially have a negative impact on deposits growth. The BDL said it cannot continue to cover the shortage in T-bills underwritings amidst retreating confidence. The BDL's portfolio of Treasury bills has amounted to $12.77 billion.

The salary scale is expected to prompt economic recession during the upcoming year.

Figures issued by the statistics department at the BDL show that inflation in 2013 would be two to three percent higher than the estimated rate. Job opportunities are expected to retreat by some four percent. Growth is expected to be between 1.5 and two percent this year. This rate could go into the negative zone in 2013.

The salary scale is expected to raise the debt-to-GDP ratio, after it had declined and stabilized in the past few years.