Implications of Pakistan’s public sector pay and pensions crisis
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The federal government has recently faced the ire of employee unions with the latter demanding that promises by the PTI government related to pay rise need to be respected. The start of the new year has seen these unions come out on the streets of Islamabad and promise to continue protests.
The Prime Minister has also come out stating that the federal government structure is bloated, and that this is fast making the burden of pensions fiscally unsustainable. The pension budget at the federal level has seen a growth of over 20 percent annually during the last five years. This expense towards pensions will double every four to five years.
In 2019-20 pensions were almost at 8 percent of the total current budget. With the government’s revenues in inflation-adjusted terms not increasing at a significant pace and COVID-19 expected to impose further demands on the government, it is highly unlikely that the government could comfortably accommodate an increase in pensions or demands for a salary raise.
The thought process towards reform of this area has been haphazard. For reasons best known to the Finance Division, the earlier notified pay and pensions commission was undone, and a new commission has been appointed – comprising of a mix of current and former civil servants.
The provinces have also been late in reckoning. For example, in Punjab, pensions expenditure is almost equal to the entire revenue collected by the province. The Khyber Pakhtunkhwa higher education department directed public universities to abolish pension facility for future recruits owing to recent cash flow crises. The province’s finance minister has proposed that increasing the retirement age by three years could save the province PKR140 billion over the next decade.
The public sector employee emoluments are not harmonized and most provinces have different structures. For example, even in cases where pensions have been delayed, the departments and even state-owned corporations (SoEs) continued processing transport, medical, and entertainment allowances in favour of their regular employees. In the case of SoEs one wonders why their boards of directors haven’t seen this as a potential threat to the solvency of these entities.
Even in cases where pensions have been delayed, the departments and even state-owned corporations (SoEs) continued processing transport, medical, and entertainment allowances in favour of their regular employees. In the case of SoEs one wonders why their boards of directors haven’t seen this as a potential threat to the solvency of these entities.
Dr. Vaqar Ahmed
As federal and provincial governments search for short-term solutions to finance the much demanded increase in salaries and pensions, it is important to address structural reasons which have brought us to these fiscal predicaments.
To start with, clarity in scope of public sector recruitment cannot be established until the time there is a disconnect between planning and budgeting processes at both federal and provincial levels. For example, most provinces are unclear about whether they still require the services of ad hoc employees who were on-boarded during the initial outbreak of the pandemic. The employees await their extension notifications and possible induction in permanent service.
Second, the 206 SoEs collectively contribute PKR 1 trillion loss to the fiscal deficit. One cannot delay the privatization process or any other solution to this financial leakage with the hope that some day these SoEs may be able to stand on their feet and make up for the losses already incurred.
Third, financial management is not the forte of the civil service which continues to be posted on positions requiring relevant and specialized qualifications. Globally, financial management in the public sector is following the innovations in due diligence and risk management seen in the private sector. This is a void which cannot be filled by task-forces or pay and pensions commissions set up by the government.
Fourth, many of the tasks under public finance, including the management of employee benefits can be outsourced to specialized fund management firms with experience of already undertaking such work for the corporate sector.
Fifth, a lot of political will is now required to move employee benefit schemes towards a viable model of a contribution system where employees themselves will contribute towards their post-retirement emoluments including pensions and the access of medical facilities.
The reason this requires urgent political attention is because unless the PTI government explains an economic case for undertaking this gigantic reform, elements from the Pakistan Democratic Movement will be quick to use the ongoing protests to their advantage. This could then put the sincere efforts of the government on the back foot, making it politically difficult to move forward – an outcome already seen in the case of privitization of entities like Pakistan Steel Mill.
The relevant standing committees in the parliament could come to the government’s help. As reforms to pay and pensions structure will require legal changes, opening up a debate well before the federal budget 2021-22 goes in the interests of federal and provincial finance departments.
Given that the government of Sindh also faces a similar fiscal challenge of unsustainable government remunerations, it will be in the interests of the Pakistan Peoples Party to back this reform.
– Dr. Vaqar Ahmed is an economist and former civil servant.
He tweets @vaqarahmed
