Pay increase a stimulus of sorts in a time of crisis

THE recently announced salary increase for civil servants is set to cost the taxpayer N$1 billion a year or more in the midst a global financial crisis, but can be seen as a stimulus of sorts for Namibia’s suffering economy.

Economists and politicians alike have described the pay increase as justifiable and necessary, arguing that civil servants have not received increases in several years, and when they did, increases have been below the inflation rate. They also argue that it is important that civil servants are paid properly, in order not to lose skilled and qualified staff to the private sector.Economist Martin Mwinga, the Chief Executive Officer of RMB Asset Management, says the pay increase is justifiable from an economic and a humanitarian point of view.’The pay increase for Government employees comes at the right time to counteract the negative effect of the [financial] crisis on the Namibian economy. It is basically killing two birds with one stone – firstly, by boosting the morale and motivation of Government workers and therefore improving productivity and helping them focus, and secondly, it boosts the economy by high personal expenditure.’He adds that the increase is also likely to stimulate demand for housing, providing support to the struggling property market.Both Klaus Schade, Acting Director of the Namibian Economic Policy Research Unit (Nepru) and Dr Omu Kakujaha-Matundu, Deputy Dean of Economics and Management at the University of Namibia, agree, saying that the increase is sure to stimulate demand, and will especially benefit the housing, retail, wholesale and financial sectors.’With the global financial crisis, particularly with respect to high food prices, the increase is a good thing because Government is pumping money into the economy to boost aggregate demand, even if at a high price. Demand from outside is decreasing because of the crisis, and this will at least increase demand locally. It’s really not a bad idea,’ Kakujaha-Matundu says.He reasons that even if the pay increase wasn’t intended as a stimulus per se, the increase does come as a stimulus. ‘Part will have to go to taxes, but overall, it will help the economy.’In fact, Mwinga goes as far as to say: ‘What the pay increase means to Namibians is that the resulting stimulus will prevent the Namibian economy falling into a recession’. He believes the increase will ‘boost demand and keep momentum in the economy.’But Schade says that this stimulus comes with a trade-off, ‘especially at a time where revenues are under pressure’ considering the effects of the financial crisis, particularly on Namibia’s mining industry.’There is the concern that quite some money will be spent on remuneration and not on infrastructural progress. These projects, for example the Lüderitz railway, the fuel storage facilities at Keetmanshoop, and so on, are all important for creating a competitive environment for attracting investment, and thereby creating jobs.’Asked what other steps Government should be taking to stimulate the economy, Schade says the pay increase has an impact on other development projects because of the decreased revenue to the State, coupled with increased expenditure, without Government necessarily wanting to increase its budget deficit. ‘Fiscal space to invest is limited at the moment because of the increases in wages and salaries, which means we can’t easily increase spending on infrastructure, which usually creates jobs and benefits the economy.’But Mwinga disagrees on this point, saying that Government has the space to and should indeed further stimulate the economy. ‘This is a time for Government to come up with an expansionary fiscal policy – increase expenditure. Credit goes to the Minister of Finance who during good times used surplus Government revenue to reduce deficits and debts to below Government-set targets. Debt was reduced from more than 40 per cent of GDP years ago to 22 per cent of GDP by 2008. ‘Unlike other governments, the Namibian Government has room to use fiscal policy to stimulate growth. More should be allocated to capital investments, especially in rural areas and areas where mining companies are closing, and Government should also strengthen and widen safety nets. ‘All these expenditures will lead to high budget deficits and debts, but that is the role of fiscal policy to counteract such types of negative shocks to the economy,’ he says.Kakujaha-Matundu is also optimistic about additional steps that could be taken through expansionary spending.’I don’t know what happened to last year’s programmes such as the non-VAT-rated commodities and the school-feeding scheme proposal; but the layoffs, such as those in the mining industry, make things tough. In Namibia, one family doesn’t support only the nuclear family, but also the extended family, and if we can get programmes such as the school-feeding scheme going, while this would increase Government expansionary spending, it would be a great relief in keeping school children healthy and helping poor families.’He adds that this type of relief is particularly important at a time where the combined effect of the ban on labour hire and the slump in wealthy countries directly affects employment.’The Task Force headed by Dr Geingob should try to bring the Namibia Employers’ Federation, unions and Government together to really try to see how the impact of the crisis can be softened. This is not the time for a blame game. If everyone is pulling in their own direction, we won’t find a solution.’Contextualising the global economic crisis, Mwinga says the crisis has exposed the vulnerability of economies, and that once it has passed, active management and stress testing of the economy will form part of new economic management strategies. ‘The current crisis is a wake-up call to both governments and private sector and serves as a reminder of how the world and its risks are highly interconnected. The global crisis will influence decisions and growth over 2009, and also have longer-term effects whose exact shape and reach may not be clear for several years. It is crucial for decision-makers to take a step back and consider a bigger, broader picture of the entire landscape of risks to their economies,’ he says. nangula@namibian.com.na