## Public Wage Bills in the Middle East and Central Asia

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### Executive findings and context
- The region faces subdued growth, high unemployment, internal conflicts in some countries, large inflows of refugees, and heightened security risks coinciding with high debt levels and a prolonged decline in oil prices and remittances, reducing fiscal capabilities.
- More than 5 million new workers are expected to join the labor force annually in the Middle East and North Africa alone.
- Many countries have large public wage bills relative to their own revenues and expenditures and compared with global peers; large wage bills reflect high public employment, unusually large compensation, or both.
- Large public wage bills have not produced commensurate improvements in the availability and quality of public services; education, health, and public service delivery indicators are often subpar.
- Public sector compensation often exceeds private sector compensation even at similar skill levels, contributing to labor market distortions and discouraging private employment and productivity growth.
- Countries cited as having begun wage bill adjustments include: Egypt, Georgia, Iraq, the Kyrgyz Republic, Morocco, and Tunisia (common short-run measures: hiring and wage freezes).
- Data limitations: results are largely correlations rather than causal effects; wage bill data cover general government (WEO); employment data often cover the public sector including SOEs.

### Benchmarking and trends
- Regional averages and comparisons:
  - MENAP economies spent on average 6 percent of their GDP a year on general government payroll—equivalent to a fifth of their total expenditure.
  - Public wage bills represented 28 percent of total expenditure in the MENAP region.
  - GCC countries and Algeria: 3.6 percentage points of GDP higher than the emerging market and developing economy average.
  - MENAP oil importers: 2.3 percentage points of GDP higher than in emerging market and developing economies.
  - CCA oil exporters: 16 percent of expenditure (below emerging market and developing economies).
- Public employment:
  - Emerging market and developing economies averages: 9 percent of total employment; nearly 5 percent of the working-age population.
  - Region: every fifth job is in the public sector; public employment as percent of working-age population: 13 percent in the CCA and 9 percent in MENAP.
- Public-private wage gaps:
  - Average public sector wage premium in emerging market and developing economies: nearly 12 percent.
  - Average public wages in the GCC and Morocco: about 2–3 times higher than average private sector wages.
  - Public-private gaps for GCC nationals typically about 30–50 percent; expatriates face the highest gaps.
- Country heterogeneity (selected figures):
  - Saudi Arabia: wage bill about 13 percent of GDP.
  - Iraq: public wage bill exceeds 12 percent of GDP among non-GCC MENA oil exporters.
  - Morocco, Tunisia, West Bank and Gaza: wage bills more than double Jordan and Sudan.
  - Kyrgyz Republic wage bill much higher than the rest of the CCA.
- Growth dynamics:
  - GCC countries and Algeria: real wage bill growth rose to 8 percent a year during 2001–07 from 2 percent during 1992–2000; reached 10 percent during 2008–16.
  - CCA real wage bills grew almost 25 percent a year on average during 2001–07; during 2008–16 averaged 13 percent in oil importers and 8 percent in oil exporters.
  - Since 2011, wage growth rather than employment has been a more prominent driver of wage bill expansion.

### Drivers of high wage bills
- Historical and political economy:
  - Government as “employer of first resort” in parts of the region (particularly MENAP) since the 1960s to provide social support and redistribution of resource wealth.
  - Political pressures, discretionary hiring, political appointments, and generous allowances/bonuses.
  - IMF 2016a estimate: wage bill is 0.53 percentage points higher during an election year than a non-election year.
- Fiscal revenues and resource cycles:
  - An additional percentage point of GDP in the long-term level of revenue is associated with an addition of 0.26 percentage point of GDP to the wage bill in a sample of 160 countries; elasticity for the Middle East and Central Asia is similar.
  - In oil importers: a one percentage point increase in real revenue growth is associated with a 0.24 percentage point increase in real wage bill growth a year later (regional oil-importer elasticity much higher than the emerging market and developing economy average of 0.05 percentage point).
  - In the region’s oil exporters elasticity is 0.08 percentage point, similar to other fuel exporters.
- Demographics and service demand:
  - Over 40 percent of the region’s population is under 20 years old.
  - MENAP will see an annual increase of 5.5 million people in their labor forces in the next five years; average annual labor force growth over the next five years estimated at 2.2 percent in MENAP.
  - Government expenditure on education in Kyrgyz Republic, Morocco, Saudi Arabia, and Tunisia is 1–2 percentage points of GDP higher than the emerging market and developing economy average of 4 percent of GDP.
- Geopolitical tensions and refugee spillovers:
  - Security-related expenses account for nearly 70 and 40 percent, respectively, of the total government wage bill in Afghanistan and Iraq (where such data are available).
  - Refugee impact examples: Lebanon—refugees account for one-quarter of the population; Jordan—one-tenth of the population; Pakistan—close to 2 million refugees (1 percent of the population).

### Outcomes: fiscal, service delivery, and labor markets
- Fiscal implications:
  - Wage bills account for almost a third of total expenditure in the region, crowding out public investment and social transfers.
  - Public investment has a stronger and more lasting impact on growth than current spending; empirical fiscal multiplier ranges cited: current spending 0.2 to 0.7; government investment spending 0.6 to 1.4.
- Service delivery and outcomes:
  - Higher wage bills have on average not produced better service delivery; governance weaknesses, conflicts, and rapid population growth affect outcomes.
  - Education: enrollment and pupil-to-teacher ratios improved but international test scores lag; teacher absenteeism and poor training cited.
  - Health: variable quality providers and absenteeism; citizens’ trust low—about half of MENA respondents in the 2013 Gallup World Poll expressed dissatisfaction with education and health care.
- Labor market effects:
  - High public employment has not reduced overall unemployment; tends to be associated with lower private employment shares.
  - Three crowd-out channels: product market (taxes, interest rates, SOEs), labor market (compensation and job security preferences), education (skill orientation toward public sector).
  - Empirical linkage: A 1 percent increase in the average real government wage is associated with a 0.4 percent increase in private wages within three years (IMF 2016a).
  - High public compensation gaps reduce private sector competitiveness and skill accumulation.

### Policy recommendations and priorities (summary)
- Ensure fiscal sustainability:
  - Identify drivers of wage bills and anchor their growth in medium-term fiscal plans.
  - Use short-term measures (hiring and wage freezes) when necessary but pair with structural reforms.
- Refocus employment and compensation on service delivery:
  - Undertake sectoral expenditure reviews and strengthen mechanisms for public service delivery.
  - Target staffing to functions and performance; protect frontline services (education, health) when appropriate.
- Strengthen institutions and data:
  - Improve human resource management, control over bonuses and allowances, and link compensation to performance.
  - Conduct payroll audits, build comprehensive databases of public employment and compensation, and consolidate statistics across central government and entities.
- Sequence reforms and build synergies:
  - Coordinate wage bill reforms with social protection expansion, economic diversification, private sector development, and job creation.
  - Conduct ex ante social impact analyses and include mitigating measures for vulnerable groups (the poor, women, and youth).
- Communication and stakeholder engagement:
  - Mobilize stakeholders, ensure clear public communications, and embed reforms in transparent technocratic institutions.

### Implementation tools and short-term vs structural measures (Chapter 5 toolbox)
- Compensation measures:
  - Short Term: Wage freezes, ceilings, or cuts; elimination of indexation of allowances; reduction of allowances.
  - Structural: Unifying wage structures; rationalizing allowances; tightening link between pay and performance.
- Employment measures:
  - Short Term: Hiring freezes; employment caps or cuts; attrition; early retirement.
  - Structural: Functional reviews to identify understaffing/overstaffing; payroll census; elimination of ghost workers; position-based employment; public sector restructuring.
- Sequencing and safeguards:
  - Use natural attrition, voluntary separations, or early retirement to reduce staff while avoiding abrupt layoffs.
  - Exemptions for education, health, or strategic sectors to protect service delivery where needed.
  - Pair short-term containment with medium-term structural reforms to secure durable savings.
- Examples of regional measures:
  - Wage freezes/cuts: Egypt, Bahrain, Saudi Arabia.
  - Tightening allowances: Bahrain, Kuwait, Saudi Arabia.
  - Payroll audits and ghost worker identification: Iraq, Mauritania, Saudi Arabia, Yemen.
  - Hiring freezes and attrition: Algeria, Djibouti, Tunisia; attrition programs in Algeria, Bahrain, Egypt, Iraq, Tunisia.

### Model-based and GIMF simulations: scenarios and outcomes
- Small DSGE model (search and matching frictions), calibrated to an Egyptian-like representative economy:
  - Scenario 1: Permanent decrease in public vacancies by one-fifth + temporary increase in public investment by 0.5 percentage point of GDP.
    - Outcomes: public employment decreases and unemployment rises initially; private sector production and employment increase by 0.5 percent; most unemployed absorbed by private sector; policy mix effective in creating fiscal space in the longer run (0.8 percent) and providing public investment.
  - Scenario 2: Increase in private sector productivity under different public wage-setting rules.
    - Outcomes: higher private wages reduce public wage premium, incentivize private job search, lower public employment, net increase in private employment and lower unemployment; lower public employment reduces public wage bill and improves fiscal position. If public wages follow private wage developments to protect premiums, risk of wage spirals exists.
- GIMF model calibrated to Saudi Arabia:
  - Scenario 1: Decrease public vacancies and increase public investment by 1 percentage point of GDP (budget-neutral).
    - Short run: higher public investment raises real GDP above baseline by 0.2 percent; reduction in public employment reduces real GDP in the medium term.
    - Long run: real GDP reaches levels above the baseline due to faster accumulation of public capital.
  - Scenario 2: Same as Scenario 1 plus social transfers targeted to liquidity-constrained households (1 percentage point of GDP).
    - Outcomes: negative adjustment in real GDP from lower public employment is less dramatic; higher real GDP accompanied by a permanent deterioration in the overall fiscal balance by 1 percentage point of GDP.
- Cross-cutting simulation lessons:
  - Combining reductions in public employment with increases in public investment can boost private output and employment and create fiscal space over time.
  - Targeted social transfers can mitigate short-run negative effects of lower public employment but may worsen fiscal balances.
  - Attrition and hiring restrictions effective tools but require complementary reforms and political will.

### Country and annex highlights (selected case evidence)
- Iraq (Annex 1):
  - Between 2006 and 2016: wage bill rose almost 2.5 times (Index 2006 = 100); real value of employee compensation increased by 40 percent; real value of average total compensation per public employee grew by 60 percent; number of public employees grew over 50 percent.
  - Payroll increases by jurisdiction: Baghdad-controlled institutions payroll up 64 percent; Kurdistan Regional Government payroll up 22 percent.
  - Security and education/defense/interior major employers (approximately 1.8 million employees, 78 percent of total payroll).
  - Policy recommendations: payroll census and audit; temporary caps on allowances; freezes on promotions and seniority increases; staff reduction via attrition and targeted separations; functional and procedural review; medium-term human resource strategy.
- Kyrgyz Republic (Annex 2):
  - Public wage bill reached almost 10 percent of GDP by 2016.
  - 2011 civil service reform increased base salary share in total compensation (base salary moved from less than 20 percent in some cases to up to 80 percent in sectors) and eliminated the 13th month pay in places.
  - Drivers: compensation increases rather than employment; estimated wage drift (seniority) at 1.7 percent a year.
  - Reform actions: inventory of employees, functional analysis, integration of HRM with financial management systems; progress slow and affected by political cycles (election year 2017).
- Tunisia (Annex 2):
  - Wage bill increased from 10 percent of GDP in 2010 to 14.1 percent in 2016; government intends to reduce to 12 percent of GDP by 2020 via wage restraint, recruitment limits, and voluntary head count reduction.
  - Recruitment surge after 2011: civil service employees rose from 430,000 to about 590,000 by end-2015 (about 35 percent increase).
  - Compensation complexity: allowances make up about 60 percent of average pay; promotions largely seniority-based.
  - Planned measures: hiring freeze in 2018; identify up to 25,000 employees willing to leave (saving about 0.4 percent of GDP); voluntary separation and early retirement programs; functional reviews and a modern HR IT dashboard.
- UAE (Annex 2):
  - Education: spending about 1.6 percent of GDP; expenditure per student above $22,000; PISA performance low (more than 40 percent at or below level 2).
  - Health: public health expenditures estimated at 2.6 percent of GDP; total health expenditures per capita nearly $1,500.
  - Policy directions: quality standards for teachers and schools; school autonomy with stronger monitoring; health system integration, price transparency, episode-based payments, and better use of health information technology.
- International experience (Annex 3):
  - Wage freezes and hiring restrictions have been widely used (examples: Côte d’Ivoire, Honduras, Ireland, Jamaica, Kenya, Moldova, Netherlands, Portugal, Romania).
  - Experience shows wage freezes can be reversed or offset by allowances/bonuses; structural reforms (pay consolidation, payroll management, HR systems) take time and administrative capacity and may incur up-front costs.
  - Case lessons: Ireland—wage reductions lowered wage bill by about 4 percentage points of GDP by 2015; Honduras—census plus freezes led to wage bill decline of about 2.5 percentage points of GDP during 2014–15; Portugal—wage bill reduced by 2 percentage points of GDP in 2010–2014 but legal reversals limited long-run success.
  - Key cross-cutting lessons: combine short-term containment with structural reforms, ensure political will and social dialogue, and embed measures in medium-term fiscal frameworks.

### Data, scope, and methodological notes
- Definitions vary: public sector wage bill (central governments, local governments, SOEs, social security funds); general government wage bill (central and local governments and social security funds); central government wage bill (central units, often including security forces).
- WEO database used for cross-country consistency; WEO aggregates are for the general government. Annex and desk surveys supplement WEO.
- Data limitations and coverage issues:
  - Some countries lack public wage bill data (Libya, Pakistan, Syria, Uzbekistan).
  - West Bank and Gaza excluded from aggregates because PPP GDP data not available.
  - WEO data collected for 1990–2016 but many country series start mid-1990s or 2000s.
  - Employment and population data shorter in coverage; desk survey average response rate roughly 50 percent for detailed wage data; institutional survey response about 70 percent.
- Annex 1 selected survey snapshots (government wage bill, percent of GDP; percent of total spending; government employment percent of working-age population) — selected entries:
  - Algeria: 11.0; 27.0; 20.2
  - Bahrain: 12.0; 33.8; 16.1
  - Kuwait: 18.2; 32.8; 15.8
  - Oman: 12.6; 24.1; 20.4
  - Qatar: 7.2; 20.9; 15.7
  - Saudi Arabia: 13.5; 40.0; 16.3
  - United Arab Emirates: 4.7; 15.7; 16.5
  - Iraq: 18.3; 43.6; 19.8
  - Yemen: 11.4; 46.8; 22.5
  - Afghanistan: 12.8; 48.0; 19.9
  - Egypt: 7.9; 24.1; 19.8
  - Morocco: 11.9; 39.4; 19.3
  - Armenia: 6.0; 22.3; 17.9
  - Kyrgyz Republic: 9.8; 23.9; 21.0
  - Tajikistan: 6.9; 21.5; 22.0
- Fuel-exporter definition: average net fuel exports exceeding 1 percent of GDP during 2007–15 (World Bank WDI source).

*This overlay summarizes material from the IMF departmental paper "Public Wage Bills in the Middle East and Central Asia."*

### references.

### Public Wage Bills in the Middle East and Central Asia (references)

### Executive findings and context
- The Middle East and Central Asia face subdued growth, high unemployment, internal conflicts in some countries, large inflows of refugees, and heightened security risks. These factors coincide with high debt levels and a prolonged decline in oil prices and remittances, reducing fiscal capabilities.
- More than 5 million new workers are expected to join the labor force annually in the Middle East and North Africa alone.
- Many countries in the region have large public wage bills relative to their own revenues and expenditures and compared with global peers. Large wage bills reflect high public employment, unusually large compensation, or both.
- Large public wage bills have not produced commensurate improvements in the availability and quality of public services; indicators of education, health, and public service delivery are often subpar.
- Public sector compensation often exceeds private sector compensation even at similar skill levels, contributing to labor market distortions and discouraging private employment and productivity growth.
- Countries cited as having already begun wage bill adjustments include: Egypt, Georgia, Iraq, the Kyrgyz Republic, Morocco, and Tunisia. Common short-run measures have included hiring and wage freezes.
- Data limitations: results presented are largely correlations rather than causal effects; wage bill data cover general government (WEO); employment data often cover the public sector including SOEs.

### Drivers of high public wage bills (stylized)
- Historical model of government as “employer of first resort” in parts of the region (particularly MENAP), used as a mechanism of social support and redistribution of resource wealth.
- Weak institutions and governance, discretionary hiring and compensation practices, and generous bonuses/allowances.
- Demographic pressures: large youth cohorts and rapidly growing labor force entrants.
- External shocks: lower oil prices (for oil exporters) and lower remittances (for oil importers) have reduced fiscal headroom and affected wage bill dynamics.
- Transition legacies: in the Caucasus and Central Asia (CCA), public employment remains high relative to peers following the early-1990s transition.

### Key analytical conclusions
- High and rising wage bills can crowd out pro-growth spending (infrastructure, social protection) and undermine fiscal stability.
- Large public employment shares have not reduced overall unemployment; high public employment may entrench vested interests and dampen private sector job creation.
- Short-term fixes (hiring/wage freezes or cuts) can be useful to manage immediate financing gaps but may impair service delivery and are difficult to sustain. Structural reforms to employment and compensation policies are required for durable improvements.
- Improving public wage bill management can free resources for infrastructure, social protection, and policies that support private sector-led job creation.

### Policy recommendations and priorities (summary of proposed options)
- Ensure fiscal sustainability of wage bill policies:
  - Identify drivers of wage bills and anchor their growth in medium-term fiscal plans.
- Refocus compensation and employment policies on effective and equitable delivery of quality public services:
  - Undertake sectoral expenditure reviews and strengthen mechanisms for public service delivery.
- Strengthen institutions and data:
  - Improve human resource management, control over bonuses and allowances, and link compensation to performance.
- Sequence reforms and build synergies with other policies:
  - Coordinate wage bill reforms with steps to strengthen social protection, diversify the economy, strengthen governance, and improve the business environment and job creation.
- Conduct early social impact analyses and include mitigating measures for vulnerable groups (the poor, women, and youth) during the transition.

### Implementation tools and considerations
- Use hiring freezes, wage freezes, or temporary pay measures when necessary for immediate fiscal stabilization, but pair them with structural reforms to hiring practices, pension and payroll management, and compensation frameworks to avoid long-term service delivery deterioration.
- Strengthen transparency and data collection for general government wage bills and public employment (including SOEs) to enable robust policy design and monitoring.
- Tailor design and sequencing of reforms to country-specific economic and political economy characteristics given high heterogeneity across the region.

### Data, scope, and structure notes (from the source)
- The paper draws on new regional data, country case studies, modeling simulations, and cross-country experiences to provide a framework for managing public wage bills; country-specific policy advice is beyond the paper’s scope.
- Contents include: Acknowledgments; Executive Summary; Chapters 1–6 (Introduction; Benchmarking and Trends; Drivers; Outcomes and Economic Effects; A Way Forward; Conclusion); Annexes 1–4 (data, country experiences, international experience, model-based simulations); References.
- Identifier: ISBN 9781484336731 (paper).

*This overlay summarizes material from the IMF departmental paper "Public Wage Bills in the Middle East and Central Asia" (references section and associated executive-level content).*

### Introduction

### Introduction

### Organization of the paper
- The rest of the paper is organized as follows:
  - Chapters 2 and 3 discuss wage bill dynamics in the region and the underlying factors.
  - Chapter 4 reviews fiscal and socioeconomic outcomes.
  - Chapter 5 outlines possible reforms of wage bill policies.
  - Chapter 6 concludes.
  - Boxes and annexes contain background material:
    - Box 3 summarizes views of civil society organizations (CSOs) and labor unions.
    - Annex 1 describes the regional data set on public wage bills and institutions.
    - Annex 2 presents case studies from the region.
    - Annex 3 summarizes international experience with wage bill reforms (IMF 2016b).
    - Annex 4 presents a specially developed model and policy simulations.

### Comparison with global peers
- Public wage bills in the MENAP region are higher than in other emerging market and developing economies (Figure 2.1).
- During the past decade, these economies spent on average 6 percent of their GDP a year on general government payroll—equivalent to a fifth of their total expenditure.
- In the same period, public wage bills represented 28 percent of total expenditure in the MENAP region.
- Public wage bills in the Gulf Cooperation Council (GCC) countries and Algeria were 3.6 percentage points of GDP higher than the corresponding emerging market and developing economy average and exceeded wage bill averages for fuel exporters from other regions.
- In MENAP oil importers, wage bills were 2.3 percentage points of GDP higher than in emerging market and developing economies.
- By contrast, wage bills in CCA oil exporters (16 percent of expenditure) were below those in emerging market and developing economies and other comparator groups.
- Wage bills in CCA oil importers were broadly comparable to the emerging market and developing economy average.
- Notes and definitions provided in the source:
  - International comparisons provide a common yardstick and serve as a starting point for deeper analysis and assessment.
  - The emerging market and developing economy group follows the WEO classification. Oil exporters comprise countries with average net fuel exports exceeding 1 percent of GDP during 2007–15 (Appendix 1).
  - Public wage bill averages are weighted by countries’ purchasing power parity (PPP)-based GDPs. Simple averages tend to be higher (8 percent of GDP compared with the 6 percent of GDP weighted average for emerging market and developing economies).
  - CCA public wage bills do not cover employment by extrabudgetary funds (IMF 2014a, Box 4). Trends in CCA wage bills in percent of GDP are difficult to interpret because of large swings in output and a sharp scaling up of oil production in the 1990s.

### Benchmarking and trends: public sector employment and wages
- Governments in the region are larger employers than their peers in the rest of the world (Figure 2.2).
- Public sectors in emerging market and developing economies, on average:
  - account for 9 percent of total employment and
  - provide jobs for nearly 5 percent of the working-age population.
- Public employment in most countries in the region is well above these levels:
  - every fifth job is in the public sector, and
  - average public employment in percent of working-age population is nearly double the average in emerging market and developing economies (13 percent in the CCA and 9 percent in MENAP).
- Public employment in the region’s oil exporters, for the most part, exceeds the respective average for oil exporters outside the region.

### Public-private wage gaps
- Several MENAP countries have large gaps between public and private sector compensation (Figure 2.3).
- The average public sector wage premium—the amount by which public sector wages exceed those in the private sector when controlling for skills and education—in emerging market and developing economies is nearly 12 percent (IMF 2016a).
- The few available estimates of true wage premiums (with controls) for the MENAP region are positive, except for Egypt.
- Average public wages in the GCC and Morocco are about 2–3 times higher than average private sector wages.
  - The gap in the GCC countries is highest for expatriates, whereas for nationals it is typically about 30–50 percent.
- These gaps would probably be even higher if substantial nonwage benefits in the public sector, such as various allowances, retirement benefits, and job security were included—information that is generally not available.
- By contrast, public sector workers in the CCA, non-GCC oil exporters, and Mashreq oil importers (Egypt, Jordan) are on average paid less than their private sector counterparts, although the reverse might be true if benefits could be incorporated.

### Diversity within the region
- Differences in public wage bills across the region are significant (Figures 2.4 and 2.5).
  - In the GCC, Saudi Arabia’s wage bill of about 13 percent of GDP is more than double the public wage bills in the United Arab Emirates and Qatar.
  - Among non-GCC MENA oil exporters, Iraq’s public wage bill also exceeds 12 percent of GDP and is significantly higher than that of Iran.
  - Public wage bills in Morocco, Tunisia, and the West Bank and Gaza are more than double what they are in Jordan and Sudan.
  - The Kyrgyz Republic’s wage bill is much higher than in the rest of the CCA.
- Public employment and compensation also vary considerably across countries.

*Source: PublIC WAgE bIlls In THE MIddlE EAsT And CEnTRAl AsIA (Introduction).*

### 2.6 and 2.7):

### Public Wage Bills in the Middle East and Central Asia

### Benchmarking and trends
- Differences most significant in the GCC and Algeria: public employment levels in Algeria and Saudi Arabia are among the highest in the world, accounting for over a third of total employment.
- Saudi Arabia:
  - Public-private wage gap: over 150 percent.
  - Overall wage bill: above average (relative to peers in the region).
- Kuwait:
  - Public employment: 18 percent of total employment.
  - Public-private wage gap: 245 percent.
- National labor force government employment (GCC nationals): Kuwait 84 percent, Qatar 80 percent, Saudi Arabia 66 percent.
- UAE: public employment moderate (less than 10 percent of total).
- MENAP oil importers:
  - Countries with high public wages relative to private wages employ fewer civil servants but have higher overall wage bills.
  - Morocco and Tunisia: public employment 15 percent and 9 percent, respectively.
  - Egypt and Jordan: public sector jobs account for 25 and 36 percent of total employment, respectively, but typically pay 20–30 percent less than in the private sector.
  - Djibouti: public sector employs 46 percent of the labor force in 2015 with a public wage premium of 21 percent.
- CCA:
  - Oil exporters: public employment at a quarter of total employment, or 16 percent of the working-age population.
  - Oil importers: public employment shares 16 percent of total employment and 9 percent of the working-age population.
- Regional trend: public wage bills in the Middle East and Central Asia have generally grown faster than in global peers in recent years.
  - GCC countries and Algeria:
    - Real wage bill growth rose to 8 percent a year during 2001–07, from an average of 2 percent during 1992–2000.
    - Continued to rise, reaching 10 percent during 2008–16.
    - Expansion driven mainly by expansion of public employment, in part because of development programs.
  - Non-GCC MENA oil exporters:
    - Iran’s wage bill has been shrinking in real terms since the imposition of the UN sanctions in 2006 and a rise in inflation.
    - Iraq’s wage bill growth rose after post–Gulf War restoration of oil production and public administration functions.
  - MENAP oil importers:
    - Real wage bill growth of 8–9 percent during 1992–2007 moderated to below 6 percent during 2008–16.
  - CCA:
    - After moderate expansion in the 1990s, real wage bills grew during 2001–07 almost 25 percent a year on average.
    - During 2008–16, wage bill growth slowed but remained relatively strong, averaging 13 percent in oil importers and 8 percent in oil exporters.
- Since 2011, wage growth rather than employment has been a more prominent driver of wage bill expansion in the region.
- Public employment shares have been stable or slowly declining in most countries, with notable exceptions during the Arab Spring (e.g., Algeria increased public employment; GCC countries and Tunisia reversed earlier declines; public employment rose in Iraq).

### Drivers
- Employment and political factors:
  - In many MENAP countries, the state has been the employer of first resort since the 1960s, providing jobs in exchange for political support, reducing unemployment, and fostering social cohesion.
  - Preference for government employment is incentivized by a privileged civil service and impediments to private sector development.
  - After the Arab Spring, real wage bill growth accelerated in most MENAP oil importers, reflecting wage hikes and/or increased hiring; Tunisia experienced significant increases in annual government hiring during 2011–12.
  - In the CCA, public sectors downsized after the breakup of the Soviet Union, with privatization and civil service reforms; public wage growth has lagged the private sector.
- Oil wealth distribution:
  - GCC countries concentrate the highest oil wealth; countries with higher oil income per capita generally have high public wage bills per capita.
  - Oil income distribution through public wage bills is less apparent in non-GCC MENA and CCA oil exporters, where oil revenues and public wage bills per capita are significantly lower than in the GCC.
  - Public employment remains high in some non-GCC exporters: 25 percent of total employment in the CCA and nearly 40 percent in Algeria and Iraq.
- Fiscal revenues:
  - Availability of fiscal revenues is a key determinant of public wage bills over the long term.
  - An additional percentage point of GDP in the average long-term level of revenue is associated with an addition of 0.26 percentage point of GDP to the wage bill in a sample of 160 countries.
  - The elasticity for the Middle East and Central Asia is similar to the global sample.
  - Temporary relaxation of fiscal constraints triggers increases in wage bills, especially in the region’s oil importers.
  - A one percentage point increase in real revenue growth, on average, is associated with a 0.24 percentage point increase in real wage bill growth a year later in oil importers; this is much higher than the emerging market and developing economy average of 0.05 percentage point.
  - The elasticity in the region’s oil exporters is 0.08 percentage point, similar to other fuel exporters worldwide.
- Demographics and public service demand:
  - Over 40 percent of the region’s population is under 20 years old.
  - Young demographics create high demand for education services; public education accounts for a significantly higher share of spending and employment than in global peers.
  - Government expenditure on education in the Kyrgyz Republic, Morocco, Saudi Arabia, and Tunisia is 1–2 percentage points of GDP higher than the emerging market and developing economy average of 4 percent of GDP.
  - In the Kyrgyz Republic and Tunisia, combined wage payments in health and education account for more than half of the total government payroll.
  - Young demographics imply large numbers of new job market entrants and elevated youth unemployment, especially in MENAP countries.

### Policy objectives and implications
- Employment as a social objective:
  - Public wage bills often reflect the state’s role in job provision for social cohesion and political stability.
  - High public employment has been used to absorb unemployment and support populations, particularly in MENAP.
- Fiscal sustainability considerations:
  - Wage bill growth is sensitive to fiscal revenue cycles and oil-driven fiscal capacity.
  - In oil importers, wage bills respond strongly to temporary revenue relaxations, implying a need for cautious fiscal management to avoid persistent wage bill increases when revenues are cyclical.
- Sectoral priorities:
  - Large young populations justify significant spending on education (and health), which drives composition and size of wage bills.
  - High shares of payroll in education and health in several countries imply limited fiscal space for other priorities if wage bills continue to grow.

*Source: Public Wage Bills in the Middle East and Central Asia (sections 2.6–2.7), IMF PDF.*

### 2000. These challenges have reinforced the demand for public employment

### Public wage bills in the Middle East and Central Asia (content unit)

### Geopolitical tensions
- High incidence of conflicts and terrorism require large security-related payrolls (Rother and others 2016).
- Security-related expenses account for nearly 70 and 40 percent, respectively, of the total government wage bill in Afghanistan and Iraq (countries where such data are available).
- Spillovers from conflicts (refugee and internally displaced inflows) put pressure on public services and wage bills:
  - In Lebanon, refugees from Syria and Iraq account for one-quarter of the population.
  - In Jordan, refugees from Syria and Iraq account for one-tenth of the population.
  - Pakistan hosts many internally displaced people and close to 2 million refugees (1 percent of the population) from Afghanistan.
  - Afghanistan accommodated many returning refugees and internally displaced people fleeing violence.
- These spillovers have augmented pressures on wage bills through increased demand for public infrastructure and basic services.

### Institutions and governance
- Weak institutions and governance have contributed to the swelling of public wage bills and complicated their management and control.
- Political pressures and entrenched corruption have been a challenge in some countries.
- Political factors strongly affect wage hikes and employment; IMF 2016a estimates that the wage bill is 0.53 percentage points higher during an election year than a non-election year.
- Hiring practices that increase political influence include political appointments (examples listed in source) and decentralized hiring; civil service commissions in some economies may not be free from political influence.
- Governments often lack comprehensive employee accounting and tracking systems; public hiring is subject to few controls; “ghost” and informal workers are present.
- Public compensation policies are rarely well defined or linked to performance; discretionary wage setting and elaborate allowance systems—often exceeding base salaries—limit government control over wage bills.

### Public service delivery and outcomes
- Higher wage bills have on average not produced better service delivery; service outcomes are affected by lackluster growth, resource scarcity, conflicts, lack of accountability, and rapid population growth.
- MENAP oil importers on average have much higher multidimensional poverty than the regional average in CCA or Latin America.
- Government effectiveness:
  - MENAP oil importers have lower government effectiveness than peers.
  - MENAP oil exporters exceed EMDE average driven by high-income GCC countries.
  - CCA rankings are close to EMDE average due to inherited Soviet-era service infrastructure.
- Education outcomes:
  - Enrollment and pupil-to-teacher ratios improved, but international test scores lag.
  - Factors: poor infrastructure, curricula focused on public administration careers, absenteeism of students and teachers, and poor teacher training.
- Health outcomes vary and suffer from poor service quality, variable quality providers, and absenteeism.
- Citizens’ trust and satisfaction in public services are low; about half of MENA respondents in the 2013 Gallup World Poll expressed dissatisfaction with educational services and health care.
- Infrastructure services are relatively poor in many MENA countries: electricity blackouts are commonplace; renewable water resources are dwindling at an alarming rate.
- Weak governance, corruption, and lack of accountability are key factors behind inadequate public service delivery, disproportionately affecting the poor.

### Fiscal implications
- Public wage bill increases have worsened fiscal balances (IMF 2016a).
- Cross-country panel data analysis shows wage bill increases have been only partially financed by additional revenues; in resource-rich countries increases do not seem associated with current revenues, suggesting use of resource wealth for wage bill financing.
- Wage bills account for almost a third of total expenditure in the region, leaving less room for public investment and social transfers.
- Public investment has a stronger and more lasting impact on growth than current spending (including wages); evidence suggests the impact of capital spending on growth is higher than current spending often by a factor of 2 to 3.
- Fiscal multiplier estimates (Cerisola and others 2015):
  - Current spending: 0.2 to 0.7.
  - Government investment spending: 0.6 to 1.4.
- The role and ability of fiscal policy to promote inclusive growth have been limited by high wage bill spending.

### Labor market effects
- Reliance on government employment has not improved labor market outcomes:
  - High public employment has not been associated with lower overall unemployment.
  - Countries with a higher share of working-age population in public employment tend to have a lower share in private employment.
- Three channels through which public employment can crowd out private employment:
  1. Product market: higher taxes, higher interest rates, and competition from state-owned enterprises can discourage private sector activity.
  2. Labor market: higher compensation, more job security, or higher probability of finding a public sector job can motivate jobseekers to prefer public sector positions over private sector jobs.
  3. Education: people seek qualifications suited to the public sector rather than private-sector productive skills, contributing to “wait” unemployment where university graduates queue for government positions.
- Only some GCC countries have been able to boost overall employment through public hiring, owing to large resources and small populations.
- High public employment has discouraged labor force participation, especially among women and youth:
  - Theoretical link is indeterminate; empirical evidence suggests intrahousehold transfer effects (better-paying, protected public jobs) dominate, discouraging participation.
- High public compensation gaps undermine private sector development and competitiveness:
  - Large wage gaps divert jobseekers away from the private sector, lowering private sector skill level, productivity, and competitiveness.
  - Disconnect between public compensation and productivity fragments labor markets, discourages skill accumulation, and cultivates dependence and resistance to reforms.
- Model-based analysis:
  - Higher public employment lowers the marginal product of labor in the public sector.
  - Reducing the gap between public and private compensation can help ensure efficient labor allocation; if rigidities prevent adjustment, private labor supply declines, lowering overall employment and raising labor cost; private employment and output fall below optimal levels.
- Empirical wage linkage: A 1 percent increase in the average real government wage is associated with a 0.4 percent increase in private wages within three years (IMF 2016a).

### Rising challenges and policy directions
- The pursuit of multiple goals with public payrolls has left several countries with high wage bills amid heightened fiscal pressures; public wage bill policies have not achieved desired socioeconomic objectives.
- High public payrolls have not improved public services and are weighing on fiscal sustainability amid slowing or declining fiscal revenue and economic growth due to lower oil prices and remittances.
- Demographic and technological pressures will intensify tensions if left unaddressed:
  - MENAP countries will see an annual increase of 5.5 million people in their labor forces in the next five years.
  - Average annual growth of the labor force over the next five years is estimated at 2.2 percent in MENAP.
  - The flattening of the age pyramid in the civil service implies rising pension liabilities requiring larger fiscal resources.
- Policy response notes:
  - Countries can step up efforts to raise revenues.
  - Reconsidering the approach to wage bill management is a matter of increasing urgency.
  - Reforming public wage management is already on the policy agenda of several countries in the region (examples noted in source).

*Source: Public wage bills in the Middle East and Central Asia (content unit).*

### 0.8 percent in other emerging market economies, and 0.2 percent in advanced economies.

### A Way Forward — CHAPTER 5

### Modernizing Public Wage Bill Management
- Proposed path forward based on IMF 2016a and regional/international experiences; reflects points from civil society and organizations such as the World Bank and ILO.
- Four key considerations to ensure appropriate level, growth, and composition of public wage bills:
  - Ensure wage bill policies are fiscally sustainable:
    - Evaluate contribution of wage bills to fiscal pressures and crowding out of critical spending.
    - Identify key drivers of wage bills and anchor growth in medium-term fiscal frameworks through policy reforms.
    - Use short-term measures (hiring and compensation freezes) where wage bills are core fiscal problems, but follow with deeper civil service reforms or broader public sector restructuring to achieve medium-term sustainability.
    - Structural measures may include unifying wages, rationalizing allowances, auditing payrolls to remove ghost workers, and replacing career-based employment with position-based employment for some jobs.
  - Focus on providing public services effectively and equitably:
    - Conduct comprehensive reviews and benchmarking of government programs to identify sectoral composition of wage bills and areas of understaffing and overstaffing.
    - Enhance human resource management flexibility, remove legal impediments to reallocating employees, and invest in training.
    - Improve public service delivery mechanisms, including use of digital technologies and e-government.
  - Strengthen institutions and data:
    - Develop transparent technocratic institutions for merit-based employment selection and promotion.
    - Strengthen control over hiring and allowances, link compensation to performance, develop codes of conduct, and improve internal controls and transparency.
    - Conduct payroll audits and build comprehensive databases of public employment and compensation.
  - Sequence reforms and build synergies with other policies:
    - Tailor design and sequencing to country characteristics; complement with measures to improve business climate, diversify economy, promote private sector job creation, and strengthen social safety nets.
    - Conduct social impact analyses up-front with attention to impact on women; mobilize stakeholders and ensure clear public communications.

### Toolbox of Policy Measures (Short Term and Structural)
- Compensation:
  - Short Term: Wage freezes, ceilings, or cuts; Elimination of indexation of allowances; Reduction of allowances.
  - Structural: Unifying wage structures; Rationalizing allowances; Introducing comparisons of public and private sector compensation; Tightening link between pay and performance.
- Employment:
  - Short Term: Hiring freezes; Employment caps or cuts; Attrition; Early Retirement.
  - Structural: Reviewing government programs to identify understaffing and/or overstaffing; Enhancing payroll quality and control (payroll census and elimination of ghost workers); Replacing career-based employment with position-based employment for some jobs; Public sector restructuring.

### Examples of Recent Policy Measures in the Region
- Wage-Related Measures:
  - Wage freezes or reductions in wages (Egypt, Bahrain, Saudi Arabia).
  - Tightening eligibility and reducing number and size of allowances (Bahrain, Kuwait, Saudi Arabia).
  - Structural reforms of compensation structure (Armenia, Georgia).
  - Reforms tightening link between pay and performance (Algeria, Georgia, Saudi Arabia).
  - Expenditure review (Saudi Arabia).
- Employment-Related Measures:
  - Partial or selected hiring freezes (Algeria, Djibouti, Tunisia).
  - Attrition-based employment reduction (Algeria, Bahrain, Egypt, Iraq, Tunisia).
  - Identification and elimination of ghost workers (Iraq, Mauritania, Saudi Arabia, Yemen).
- Fiscal Planning:
  - Medium-term budget incorporating measures to gradually reduce the wage bill as percent of GDP (Algeria).
- Other:
  - Wage subsidies to reduce public-private wage differentials (Bahrain, Kuwait, Saudi Arabia, United Arab Emirates).

### Reform Options and Considerations
- Short-term fiscal measures need to be informed by detailed data and analysis of wage bill drivers (high government compensation relative to private sector, rapid expansion of government employment, or both).
- Limiting hiring:
  - Use natural attrition, voluntary separations, or early retirement to reduce public labor force while avoiding redundancies.
  - Examples: attrition-based programs where governments plan to replace 5 to 6 retiring employees with one new hire (Algeria, Iraq, Tunisia); Egypt and the Kyrgyz Republic are considering similar measures.
  - Some economies have employment caps (Algeria, Armenia, Iraq, Jordan, Tajikistan, West Bank and Gaza).
  - Exemptions for education, health, or strategic sectors used to protect service delivery (Algeria, Jordan).
- Limiting compensation growth:
  - Ceilings on public wages; elimination of indexation of allowances and bonuses (Egypt); streamlining allowances and bonuses (Tunisia); freezing allowances and nonwage compensation (Bahrain); review of allowances (Saudi Arabia).
  - Note risk of reversal via offsetting measures observed elsewhere (Côte d’Ivoire, Jamaica, Moldova, Netherlands, Portugal, Romania, South Africa, Senegal).
- Structural reforms:
  - Comprehensive review of government programs to identify understaffing/overstaffing.
  - Strategic staffing based on objectives, job profiles and competencies; enhance mobility and training.
  - Formalize informal public employment and decide optimal mix of civil servants and contractual employees.
  - Public sector restructuring may include mergers, outsourcing, privatization, and/or downsizing.
  - Structural reforms take time and capacity but generate lasting savings (example: Morocco’s civil service reform reduced civil service by over 7 percent though fiscal savings were later eroded by wage hikes).

### Ensuring Competitive Compensation and Adaptability
- Merit-based employment and promotion systems to recruit and retain skilled, high-performing staff and raise productivity.
- Position-based employment recommended for better payroll adjustability.
- Compensation reforms:
  - Introduce unified wage scale, consolidate allowances and bonuses, link pay to performance, and regular comparisons with private sector wages.
  - Examples: Kyrgyz Republic consolidated allowances so base salary represents up to 80 percent of compensation from an initial 20 percent; Georgia preparing a remuneration law; reforms in Ghana, Portugal, Romania, and Zambia focused on consolidating allowances into base pay.

### Strengthening Institutions and Data
- Embed wage bill policies in medium-term fiscal frameworks:
  - Medium-term forecasting, budgeting, and planning to prevent procyclicality of wage bills.
  - Example: Algeria in 2016 prepared a medium-term budget incorporating measures to gradually reduce the wage bill relative to GDP.
  - Move toward structured wage negotiations and comparisons with private sector wages instead of automatic indexation.
- Improve payroll control through comprehensive databases, payroll census, salary payments through bank accounts, and improved human resource management.
  - Identifying ghost workers and informal employment can eliminate waste and fraud; Mauritania and Iraq pursuing such measures.
  - Consolidate employment and compensation statistics across central government and entities not normally included (including state-owned enterprises).
- Enhance transparency, governance, and accountability to sustain gains and public support:
  - Institutionalize professional human resource policies, channel payments through banking system, and strengthen internal controls to reduce corruption.
  - Empower communities and local leaders to enhance service delivery and accountability.

### Sequencing Reforms and Complementary Policies
- Prioritize diversified private-sector-led growth to absorb labor force; public sector cannot sustainably absorb growing labor supply.
- Complement wage bill reforms with:
  - Improving business climate and access to finance for SMEs.
  - Promoting trade integration and diversification away from oil.
  - Training and education to reduce skill mismatches and labor market frictions.
- Strengthen social protection:
  - Improved unemployment insurance and cash transfers to smooth transitions.
  - Develop alternative instruments for oil income distribution for broader coverage and flexibility.
  - Conduct social impact analysis of wage bill reforms up front to ensure social and political acceptability.
- Use savings from wage bill reforms to increase public investment, which can raise productivity and private sector job creation; public investment can more than offset slower growth in public employment.

### Managing Public Wage Bills in Extraordinary Circumstances
- Countries affected by conflict (Iraq, Libya, Yemen) face urgent spending needs with weakening revenue, financing, and administrative capacity.
- Spillover effects (Jordan, Lebanon, Tunisia) include large refugee flows, increased demand for public services, social tensions, and labor market pressures.
- Containment strategies:
  - Reallocate employment from nonessential areas and eliminate inefficiencies including ghost workers.
  - Increase use of contractual employment for adaptability and cost control.
  - Outsource services to reduce state burden and support private sector.
  - Focus on private sector job creation and improved public service delivery for host and refugee populations to foster social cohesion.

### Conclusions and Policy Priorities
- Public sector wage bills in MENAP and CCA are higher than in other regions; policies have had limited success and sometimes exacerbated fiscal pressures.
- Key priorities:
  - Ensure fiscal sustainability of wage bill growth.
  - Focus wage bill policies on effective and equitable provision of public services.
  - Strengthen institutions and data for public employment and compensation management.
  - Complement wage bill reforms with private sector job creation and strengthened social safety nets.
- Design of reforms must be country-specific; IMF stands ready to assist countries in reforming public wage bill policies to contribute to stronger, more stable, and more inclusive growth.

*Source: A Way Forward — CHAPTER 5*

### Conclusion

### Conclusion

### Comprehensiveness and comparability of public wage bill data
- Definitions vary:
  - Public sector wage bill: compensation for employees from central governments, local governments, state-owned enterprises, and social security funds.
  - General government wage bill: covers central and local governments and social security funds.
  - Central government wage bill: covers units in central government, including in many cases security forces.
  - All three definitions include compensation for permanent employees (civil servants) and temporary employees.
- Coverage issues:
  - Reported general government wage bill often covers only parts of the general government or just the central government.
  - In some cases, key sectors (for example, education and health care) and extra-budgetary funds are excluded.
  - Contractors’ salaries may be recorded in other budget categories.
  - Data on local governments and state-owned enterprises are scarce.

### Components and recording practices
- Typical inclusions in wage bills:
  - Salaries, allowances, subsidies for the wage bill for central government public entities, and social security contributions as well as security and military salaries.
  - In-kind benefits are usually recorded as goods and services.
- Country exceptions on security/military salary coverage:
  - Security and military salaries are excluded for: Iran, Jordan, Oman, United Arab Emirates, Uzbekistan.
  - Only some security and defense personnel salaries are included for: Armenia, Iraq, Somalia, Tunisia.
- Recording basis:
  - Wage bill data are recorded on a cash basis in general.
  - Exceptions recording on an accrual basis: Mauritania, Tajikistan, United Arab Emirates, Yemen.
  - Changes in recording practices can lead to exclusion of key factors (example: in Tunisia, 2017 wage increases were not fully reflected in the wage bill data but were paid as a tax credit).

### Fiscal implications and the role of state-owned enterprises and local governments
- Collecting data on public wage bills of state-owned enterprises, public entities, and local governments would produce a more comprehensive picture of public sector wage bills and better assess central governments’ fiscal liability, because central governments remain the last resort for paying public sector salaries.
- Many countries transfer subsidies to state-owned enterprises and local governments to help them achieve financial and cash balances and, primarily, pay salaries.
- Local governments and state-owned enterprises played a role in addressing high unemployment by hiring in: Algeria, Azerbaijan, Iran, Iraq, Kazakhstan, Mauritania, Pakistan, Saudi Arabia, Tunisia, United Arab Emirates.
  - This led to increases in central governments’ subsidies to these entities while keeping central governments’ wage bills contained.
- Data consistency choice for this paper:
  - To improve cross-country data consistency, the paper uses, wherever possible, the IMF World Economic Outlook database, excluding state-owned enterprise and local governments data (Annex 1).

### Key drivers of wage bill dynamics: oil prices and remittances
- Oil exporters:
  - Oil price is the main economic variable for oil exporters.
  - Historical pattern: double-digit ratios of public wage bills to GDP in the 1980s; subsequent low oil prices led to persistent fiscal deficits and rising public debt with public wage bills declining relative to GDP.
  - After around 2000, reversal of oil prices and improved financial conditions led to wage bill growth that on average outpaced real GDP growth since 2004.
  - Wage bills increased in real terms and in percent of GDP during episodes of oil price declines in 2008 and since mid-2014.
  - In non-GCC oil exporters, conflicts and geopolitical factors also significantly influenced wage bills.
  - In CCA oil exporters, real public wage growth was partly offset by declining public employment during the post-Soviet transition.
- Remittances for oil importers:
  - Remittances play a key role in oil importers’ economies.
  - Remittances from Russia underpinned a decade of strong wage bill growth in the CCA oil importers.
  - Since 2000, higher oil prices increased exports and outward migration to Russia, increasing remittances.
  - The share of remittances in GDP doubled in Georgia and increased tenfold in Tajikistan and the Kyrgyz Republic in the decade beginning in 1998.
  - Fueled by remittances, fiscal revenues rose by 10 percentage points of GDP during this period, triggering double-digit growth in real public wage bills.
  - Even after Russia’s economy slowed in 2008 and 2013–15 and remittances declined, wage bills in the CCA oil importers continued to grow.
  - In MENAP oil importers, wage bills have fluctuated in correlation with remittances.
  - Remittances from GCC countries, the United States, and Europe to MENAP oil importers have been between 6 and 10 percent of GDP.

### Civil society organizations (CSOs) and labor unions—views and recommendations
- General views:
  - Most CSOs agreed the level and composition of public wage bills is an issue governments need to examine in the current economic and fiscal context.
  - However, public wage bill reforms are not necessarily the most appropriate policy to address economic weaknesses or fiscal imbalances in all countries.
  - Governments should base decisions on in-depth analysis of underlying drivers; in some cases, unfair and inefficient taxation systems contribute more to fiscal deficits and debt than public wage bills.
- Constraints on reforms:
  - Exceptional circumstances (security threats, social discontent) may hinder wage bill reforms and could make reforms counterproductive.
- Recommended reform approaches:
  - Avoid wage compression or freezing as enduring solutions.
  - Favor structural reforms: improving transparency and accountability, linking wages to performance, addressing ghost workers.
  - Conduct ex ante social impact analysis to design reforms that are socially and politically acceptable, with special attention to impacts on women.
  - Sequence reforms: precede public wage bill reforms with measures to boost the private sector, create jobs, and provide social protection.
  - Tailor IMF analysis to country circumstances; analyze sectoral breakdowns (military, education, health) to inform policy recommendations.
  - Promote open dialogue among public and private sectors, civil society, trade unions, and employer associations and implement a strong communication plan.
- CSO critiques of empirical findings:
  - CSOs questioned the negative relationship found between public and private sector employment and argued the public wage bill is not the main reason behind private sector weakness in many countries.
  - Public-sector wages are not always too high; in many countries public wages may be too low, contributing to ghost workers and absenteeism.
  - Granular, sectoral analysis is necessary because average public sector salary may mask large within-sector differences.

### Data sources, limitations, and desk survey
- Main data sources:
  - IMF’s World Economic Outlook (WEO) database for government wage bills and key economic variables (GDP nominal, real, PPP; government expenditure; compensation of employees; government revenue; exports; gross government debt; demographic data; commodity prices).
  - Cross-checked against the IMF’s 2016 paper database and World Bank databases.
  - WEO aggregates are for the general government.
- Supplementary sources:
  - National statistics websites, a survey of IMF desk economists, International Labour Organization (ILO), World Bank database, World Bank World Development Indicators (WDI), Global Competitiveness Index (GCI), World Bank World Governance Indicators (WGI).
- Data limitations and coverage:
  - Some countries do not provide public wage bill data (Libya, Pakistan, Syria, Uzbekistan), requiring their exclusion from the sample.
  - The West Bank and Gaza excluded from aggregates because PPP GDP data are not available.
  - WEO data collected for 1990 to 2016, but for most countries data start in the mid-1990s; for some (CCA oil exporters and conflict economies) data start in the early to mid-2000s.
  - Employment and population data from national websites or authorities cover a shorter period than WEO data.
- Desk survey:
  - A survey was sent to IMF country desks to gather more detailed public wage bill data (civil service wages and employment; wage bills for education, health care, security sectors; basic salary, allowances, social contributions).
  - IMF desk economists filled the survey using country authorities’ sources and external country-specific sources.
  - The survey had limited success; detailed public wage bill data for many countries were not obtained (Annex Table 1.2).
  - Average response rate was roughly 50 percent.
  - No apparent geographic bias in response rate; response rates by group:
    - Oil importers: 57 percent average response rate.
    - Oil exporters: 32 percent average response rate.
- Institutional arrangements questions posed to IMF desks included:
  - How are wages determined?
  - How strong are public sector unions at the national level?
  - Is the percentage of public sector workers covered by collective wage agreements high, moderate, low, or are there no collective wage agreements?
  - Are base wages indexed?
  - Does the government have a ceiling on the total wage bill?

*Conclusion. Chapter 6, Public Wage Bills in the Middle East and Central Asia.*

### Annex 1. Data on Public Wage Bills and Related Institutional Arrangements

### Annex 1. Data on Public Wage Bills and Related Institutional Arrangements

### Survey Responses and Data Coverage
- Latest observations; data reflects 2000–16 averages.
- Response rate for institutional questions averaged close to 70 percent across all questions.
- No apparent bias in response rate based on geographic or oil-exporter/importer status.
- Commonalities across countries:
  - Lack of wage indexation.
  - Highly centralized decision making on wage increases.
  - Hiring of contractual labor.
- Systematic differences between regions:
  - CCA countries tend to have ceilings on government employment and wage bills; permit laying off public employees; creation of new positions approved centrally (president/prime minister or legislature).
  - MENAP countries (particularly GCC) often have broader decision-making bodies for creation of new positions (departmental level or commission); few or no established ceilings on employment and overall public wage bill.

### Selected Tabulated Findings (survey snapshots)
- Government Wage Bill (percent of GDP), Government Wage Bill (percent of total spending), Government employment (percent of working-age population) — examples from Annex Table 1.2:
  - Algeria: 11.0; 27.0; 20.2
  - Bahrain: 12.0; 33.8; 16.1
  - Kuwait: 18.2; 32.8; 15.8
  - Oman: 12.6; 24.1; 20.4
  - Qatar: 7.2; 20.9; 15.7
  - Saudi Arabia: 13.5; 40.0; 16.3
  - United Arab Emirates: 4.7; 15.7; 16.5
  - Iraq: 18.3; 43.6; 19.8
  - Yemen: 11.4; 46.8; 22.5
  - Afghanistan: 12.8; 48.0; 19.9
  - Egypt: 7.9; 24.1; 19.8
  - Morocco: 11.9; 39.4; 19.3
  - Uzbekistan: (no data shown)
  - Armenia: 6.0; 22.3; 17.9
  - Kyrgyz Republic: 9.8; 23.9; 21.0
  - Tajikistan: 6.9; 21.5; 22.0
- Legend used in institutional survey (Annex Table 1.3): Yes; No; No response; Legislature; Ministry/Department; Civil Service Commission; President/Prime Minister.

### Country Groupings, Weights, and Fuel-Exporter Definition
- Groupings based on purchasing-power-parity GDP; zero weights indicate missing data.
- Annex Table 1.4: Weights for 2000–16 (percent, period average) — selected entries:
  - GCC and Algeria: Algeria 16.4; Bahrain 1.7; Kuwait 8.2; Oman 4.8; Qatar 6.1; Saudi Arabia 45.2; United Arab Emirates 17.6.
  - Other MENA Oil Exporters: Iraq 77.6; Libya 0.0; Yemen 22.4.
  - MENAP Oil Importers: Afghanistan 2.4; Djibouti 0.2; Egypt 53.6; Jordan 4.1; Lebanon 4.2; Mauritania 0.8; Morocco 13.5; Pakistan 0.0; Sudan 9.0; Syria 5.5; Tunisia 7.0; West Bank and Gaza 0.0.
  - CCA Oil Exporters: Azerbaijan 22.7; Kazakhstan 67.5; Turkmenistan 9.9; Uzbekistan 0.0.
  - CCA Oil Importers: Armenia 24.9; Georgia 34.1; Kyrgyz Republic 20.7; Tajikistan 20.3.
- Fuel exporters defined as countries with average net oil and gas exports exceeding 1 percent of GDP during 2007–15 (World Bank WDI source).
- Annex Table 1.5: Net Fuel Exports, 2007–15 (percent of GDP) — selected countries:
  - Brunei Darussalam 56.0
  - Angola 52.4
  - Gabon 43.7
  - Trinidad and Tobago 28.1
  - Venezuela 21.4
  - Norway 19.5
  - Russia 16.7
  - Bolivia 13.9
  - Ecuador 10.1
  - Colombia 7.5
  - Ghana 4.7
  - Canada 4.0
  - Australia 2.4
  - Cameroon 2.2
  - Indonesia 1.9
  - Belize 1.2

### Iraq: Institutional Background
- Public spending is high in international comparison, driven by the public wage bill.
- Central government has limited control over the actual size of the public sector: no central authority exercising hiring, promotion, redundancy and retirement rights; no central registry of public sector employees; discrepancy between reported payrolls financed by the budget and the actual number of workers.
- Defense and security sector size is not fully known due to changing relations with non-governmental militias and weaker reporting standards; potential for large numbers of fictitious employees and rank inflation.
- Incomplete information flow between central government and Kurdistan Regional Government complicates countrywide public employment accounting.
- Allowances range between 35 percent and 150 percent of the base salary; relative weight of allowances grows with grades.
- Wage premium compared with the private sector is approximately 11 percent across all grades (constant along the public sector wage distribution).

### Iraq: Trends and Key Statistics
- Over the past 10 years, Iraq’s public wage bill grew very large due to abundant hiring and generous remuneration policies.
- Any reductions in salaries, pensions, or social welfare transfers stemmed mostly from the government’s inability to pay.
- By 2016, Iraq’s spending on public sector compensation (wages and pensions) had grown above geographic comparators (MENA), oil-exporting emerging economies, and transition economies.
- Between 2006 and 2016:
  - The wage bill rose almost 2.5 times (index reference: Annex Figure 2.3, Index 2006 = 100).
  - The real value of employee compensation increased by 40 percent.
  - The real value of the average total compensation per public employee grew by 60 percent.
  - The number of public employees grew over 50 percent.
- Payroll increases by jurisdiction:
  - Institutions under Baghdad’s control: payroll went up by 64 percent.
  - Institutions controlled by the Kurdistan Regional Government: payroll increased by 22 percent.
- Largest employers (approximately 1.8 million employees, or 78 percent of the total payroll): education sector (includes Ministry of Education and Ministry of Higher Education and Scientific Research), defense, and interior ministries.
- Security-related employment expansion occurred mostly before 2011; payroll expansion since then concentrated in non-security-related ministries.
- Iraq is an outlier internationally in terms of the size of its wage bill (see Annex Figure 2.4).

### Reform Challenges and Policy Recommendations
- Primary focus: address the size of the payroll (main driver of wage bill growth); secondary focus: level of compensation.
- Restructuring and recalibrating public sector wages and supplements can curb further wage growth despite a low-inflation environment.
- Allowances can be gradually decreased (given the public sector wage premium of approximately 10–11 percent) with focus on strengthening performance-compensation links.
- Possible short-term emergency measures:
  - Temporary cap on allowances.
  - Freezes on promotions.
  - Freezes on seniority wage increases.
- Sector-specific approaches recommended:
  - Health care is critically understaffed.
  - Employment levels in secondary and higher education should be linked to enrollment improvements.
  - Demobilization is expected to exert supply pressure on the labor market; avoid fiscally irresponsible expansion of public sector and state-owned enterprises.
  - Require a functional and procedural review and a medium-term human resource strategy; improve business environment to absorb labor displaced from public sector.
- Risks in separation programs:
  - Voluntary departures risk adverse selection, improperly priced severance packages, and rehiring if programs are poorly targeted or implemented without analysis.
- Short-term employment measure recommended:
  - Staff reduction through natural attrition (partial hiring freeze preventing automatic filling of vacancies), linked to clear staffing indicators where feasible.
- Urgent actions:
  - Complete a payroll census; under the current Stand-By Arrangement, conduct a payroll audit.
  - Establish a risk-based audit timetable with sampling to inform the Board of Supreme Audit on sectors with most frequent fraud, then focus early audits on these areas.
  - Implement a standardized action plan for identified fraud, with legal and financial consequences affecting both implicated workers and officials reasonably expected to be aware of the fraud.
- One-off measures if necessary:
  - Outright staff reductions coupled with voluntary early retirement in sectors where service outcomes are unrelated to population growth, economic activity, or the security situation, or where service has been reduced or contracted out to the private sector.
  - Voluntary retirement programs require a credible threat of layoff to be effective.

*Source: National authorities; IMF staff calculations; prepared material within Annex 1 and Annex 2 of the provided document.*

### Annex 2. Experience with Public Wage Bill Reforms in the Middle East and Central Asia

### Annex 2. Experience with Public Wage Bill Reforms in the Middle East and Central Asia

### Hiring, authorization, and institutional arrangements
- Hiring decisions should be subject to fiscal authorization; simplification can take the form of joint authorization by the hiring department and the Ministry of Finance.
- Over the medium term, uniform hiring, promotion, and termination rules should be handled by a central human resource management unit or a civil service and public employee commission.
- Regulations establishing legal and financial liability for unauthorized and unlawful hiring decisions—potentially retroactively with a short grace period—are needed; these would penalize decision makers and all officials who could reasonably be expected to be aware of such decisions.
- To better reflect performance and make the wage scale more transparent, total remuneration needs to rely less on allowances; allowances should be merged with wages, restricting nonwage remuneration to performance-based, occasional bonuses.

### Kyrgyz Republic — Institutional background
- Public wage bill rising, reaching almost 10 percent of GDP by 2016.
- A 2011 civil service reform strategy was only partially implemented; main objectives included increasing low-end wages to nationally identified subsistence levels and moving toward a performance-based compensation framework.
- Outcomes of the 2011 reform included:
  - increase in the share of base salaries in total compensation and a decrease in allowances;
  - separation of pay scales in health and education;
  - elimination of the 13th month of pay;
  - some progress in introducing incentive-based pay by linking bonuses to performance reviews.
- The government wage bill is set by the legislature as part of the overall budget process; it excludes wages paid by the social funds, particularly the Mandatory Health Insurance Fund (MHIF), which represents close to 20 percent of the public wage bill.
- Structure of compensation varies dramatically among sectors:
  - Prior to 2011, base salary represented less than 20 percent of wages.
  - Since 2011, base salary share increased and allowance system streamlined.
  - In 2015, base salary represented more than 80 percent of total compensation in some sectors (recreation, culture, and religion) but only about 55 percent in social security.
- Allowances reward seniority, education, or the difficulty of working conditions.

### Kyrgyz Republic — Trends and issues
- Overall public spending on wages has been high and rising since 2011; increases in compensation, not employment, have been the main driver.
- Average public wages have grown much faster than inflation.
- Sectoral wage growth:
  - wages in education grew the fastest (catching up from a low base), followed by health; in other sectors wage growth close to inflation.
- A wage drift, such as seniority-related increases, is estimated at 1.7 percent a year and has contributed significantly to public wage growth.
- Key systemic gaps:
  - Absence of a clear policy framework for setting public wages and employment.
  - No comprehensive registry of public employees and no human resource management information system.
  - Weak control over overall public payroll because each service delivery unit manages its own payroll.
- Given high debt level, need to create fiscal space to avoid crowding out expenditure, promote inclusive growth, and build buffers for future shocks.
- Education outcomes remain poor despite large spending (PISA scores below peers); increasing access to postsecondary education and vocational training recommended to reduce skills mismatches and boost medium-term growth prospects.

### Kyrgyz Republic — Reform challenges and lessons
- Authorities decided to act in 2016; measures included program conditionality under the Extended Credit Facility arrangement (started in 2014).
- IMF-recommended short- and medium-term measures to reduce the wage bill without layoffs or wage cuts:
  - only partially replacing departing workers;
  - limiting growth of allowances and bonuses as well as of base salaries to inflation;
  - suspending seniority-based allowance and promotion increases.
- Authorities’ action plan for 2016–19 envisaged:
  - create an inventory of all employees with wages and allowances to identify and eliminate inconsistencies;
  - conduct functional analysis of sectors to streamline employee numbers and identify outsourcing options;
  - develop an automated system integrated with the financial management information system to control and manage the wage bill.
- Progress has been slow; reforms lacked traction in 2017 (an election year). Successful implementation requires political will at the highest level, comprehensiveness, proper sequencing, coordination, and a communication strategy.

### Tunisia — Institutional background
- Since 2011 Tunisia made political strides but economic progress lagged with slow job creation, high unemployment, and security threats.
- Public wage bill expanded rapidly and stands at 14.1 percent of GDP.
- Government intends to comprehensively reform the civil service to reduce the wage bill to 12 percent of GDP by 2020 via wage restraint, limits on recruitment, and voluntary head count reduction.
- Central government wage bill is the largest spending category of the budget, accounting for about half of total expenditure; it excludes wages of local governments and state-owned enterprises.
- Collective bargaining by the Union Générale Tunisienne du Travail (UGTT) determines public sector wages, typically over a three-year period; sectoral unions also negotiate decentralized, sector-specific pay.
- Recruitment:
  - Statute of the Public Service mandates competitive, centralized recruitment (concours), but recruitment became more decentralized since 2011 with line ministries hiring directly.
  - New recruits are hired on a permanent basis after internships: one year for new graduates and contractual workers, two years for other civil servants.
  - Hiring tends to be ad hoc rather than based on systematic personnel needs assessment.
- Redeployment framework: law authorizing redeployment passed in 2014, but implementing regulations faced significant union resistance.
- Compensation system is complex: base salary plus numerous allowances; allowances make up about 60 percent of average pay. All public servants receive common allowances and a performance bonus; some allowances are profession- or occasion-specific.
- Promotions are largely seniority-based and almost automatic; annual performance ratings lack transparency.

### Tunisia — Trends and issues
- Wage bill increased from 10 percent of GDP in 2010 to 14.1 percent of GDP in 2016.
- Authorities’ policy response since the revolution went through two phases:
  - Strong recruitment (2011–14): number of civil service employees rose from 430,000 to about 590,000 by the end of 2015, an increase of about 35 percent. (A negative contribution in 2012 reflects a decline in average wages owing to recruitment of less-qualified workers at lower wages.)
  - High real wage increases (2015–16): multitude of wage settlements led to average nominal wage growth in the civil service of 12 percent in 2016, about 7 percentage points above the average inflation rate.
    - Primary school teachers received pay increases of 11 percent.
    - Medical doctors received increases of 5 percent.
- Public sector wage premiums and labor market effects:
  - Overall public sector wage premium compared with private sector wages was about 20 percent.
  - Wage premium for employees of state-owned enterprises was 34 percent.
  - Wage premium highest for university graduates and close to zero for workers without a high school diploma.
  - About 30 percent of university graduates are officially unemployed (twice the national average), often awaiting public sector opportunities.
- Productivity and private sector spillovers:
  - Labor productivity in the civil service (value added per worker) declined by about 10 percent between 2010 and 2015.
  - Strong hiring during 2011–13, especially for low-skill jobs, contributed to the productivity slump.
  - High reservation wages and preference for civil service careers slow entrepreneurial initiative, dent competitiveness, and contribute to slow private sector job creation.

### Tunisia — Reform challenges and lessons
- Authorities committed to bringing down wage bill spending to 12 percent of GDP by 2020 to channel freed-up resources (policy intent stated; detailed policy steps discussed in source).

*Source: Annex 2. Experience with Public Wage Bill Reforms in the Middle East and Central Asia (excerpts).*

### Annex 2. Experience with Public Wage Bill Reforms in the Middle East and Central Asia

### Annex 2. Experience with Public Wage Bill Reforms in the Middle East and Central Asia

### Tunisia: comprehensive civil service reform priorities and expected fiscal impact
- Reform objective: reallocate resources to priority public investments that stimulate inclusive growth; wage restraint expected to deliver about half of the total adjustment.
- Wage setting:
  - When the current wage agreement expires in 2019, the government intends to consider civil service wage increases only if economic growth outperforms the current forecast.
  - Plan to simplify the compensation system to reduce the number of profession-specific bonuses and allowances (currently more than 100 regimes exist).
- Hiring control:
  - The number of people hired fell below the number of retirees in 2017, leading to a permanent reduction in head count.
  - In 2018, the government plans to implement a hiring freeze.
  - The office of the Head of Government will have full control over all hiring decisions in line ministries.
- Departure programs:
  - The government committed to identifying up to 25,000 employees during 2017–18 who are willing to leave the civil service, which will save the public wage bill about 0.4 percent of GDP.
  - Two types of departure programs are planned:
    - Voluntary separation program for employees younger than 57 offering a compensation package (authorities are seeking financing for the one-off costs).
    - Early retirement program for workers 58 and older that advances retirement by one or two years; unlike the voluntary program, the early retirement program will not lead to significant net savings over time as higher pension transfers will offset wage savings.
- Human resource management:
  - Functional reviews of main ministries to identify efficiency gains.
  - A dashboard, fed by a modern information technology system, will monitor allocation of human resources across ministries and functions.
  - Creation of la haute fonction publique to improve performance management and recruitment for strategic positions.
- Political and economic constraints:
  - High unemployment, slow job creation, and social pressure to improve living conditions raise resistance to reducing public-sector employment.
  - Reform strategy will emphasize improvements in public service quality and gains from higher public investment, including more private-sector jobs.

### UAE: education—spending, outcomes, and policy directions
- Context and characteristics:
  - Important features: relatively young population, large share of migrants in the labor force, and strong private sector role in health and education.
  - Education spending is estimated at 1.6 percent of GDP a year.
  - Private sector role: 80 percent of primary and secondary students are enrolled in private institutions compared with 31 percent in OECD countries.
  - Demographics: school-age population is 17 percent of the working-age population compared with 29 percent in the OECD.
  - Expenditure per student is above $22,000, more than twice the average in OECD countries.
- Performance gap:
  - Despite high spending per student, UAE PISA scores are at the bottom of those in the OECD economies.
  - In all subjects, more than 40 percent of students are at or below level 2 (OECD’s proficiency threshold).
- Policy options to improve outcomes within current resources:
  - Increase efficiency of education spending by implementing new quality standards for teachers and schools, developing curriculums, introducing a common framework for school evaluation, and promoting STEM and innovation.
  - Consider granting greater autonomy to schools as performance monitoring is enhanced.
- Ensuring equitable outcomes:
  - System fragmentation by provider type, curriculum, and jurisdiction risks disparities.
  - Example: private schools in Dubai following international curricula perform better on PISA than private or public schools following the Ministry of Education curriculum.
  - Average spending per student is estimated to be 50 percent higher in the ADEC public schools than in other public schools.
  - Gender disparity among nationals: lower rates of secondary school graduation and postsecondary enrollment for males.
  - A national exam (piloted in 2017 and planned to be adopted in 2018) should help monitor performance across jurisdictions and systems.

- Annex Table 2.1 entries (as presented in source):
  - UAE1.669171.622,05513433
  - OECD average4.516290.9  9,05214492
  - Denmark6.1  3310.811,83812504
  - Finland5.6  2280.711,04612523
  - Norway6.215310.715,31010534

### UAE: health care—spending profile, pressures, and reform priorities
- Spending and outcomes:
  - Public health care expenditures in the general government increased by more than 0.5 percentage point of GDP during 2011–16, largely reflecting Abu Dhabi efforts to improve health care infrastructure.
  - World Health Organization estimate: public health expenditures at 2.6 percent of GDP.
  - Total health expenditures per capita: nearly $1,500 a year.
  - These figures are substantially below OECD peers even after accounting for a younger population.
- Fiscal pressures and cost of convergence:
  - To approach OECD levels, increasing the number of doctors and nurses would cost as much as 1.3 percentage point of GDP over the next few years.
  - A gradual approach is warranted given fiscal and implementation constraints; additional resources must demonstrably improve outcomes.
- Service delivery and integration:
  - Current system: mix of mandatory health insurance (Abu Dhabi and Dubai, including special insurance plans for government employees and nationals) and government-funded model (Northern Emirates).
  - Greater integration across models could prevent disparities and avoid duplication; could be achieved through better coordination by insurers and providers and eventually a national insurance market.
  - Plans to separate regulatory and service provision arms of the Ministry of Health are a positive step.
- Cost containment and efficiency measures:
  - Enhance monitoring and oversight to enable a universal insurance model at affordable cost.
  - Increase price transparency; implement episode-based payment (bundled payments by medical condition).
  - Promote health information technology for data sharing across insurers and providers; benchmark costs.
  - Review incentive and payment structures for public providers—link allocations to quantity and quality indicators to place public providers on par with private providers.
  - Exercise care with public-private partnerships: Ministries of Finance and Health should develop an inventory of all such partnerships and identify government exposure (for example, through demand guarantees).

- Annex Table 2.2 entries (as presented in source):
  - UAE2.65.4  2.32.61,47825331668.35.9
  - OECD6.85.822.13.93,77932984171.64.8

### Methodological notes on cross-country adjustments (education and health)
- Education adjustment identity (A2.1): public education spending as a product of expenditure per student to GDP per working-age population, public enrollment to total enrollment, enrollment to school-age population, and school-age population to working-age population. Example counterfactual calculation shown: 4.5 percent of GDP X 30.7/84.4 X 16.5/28.8 = 0.9 percent of GDP.
- Health adjustment identity (A2.2): public health spending as a product of health spending per capita for population ages 40–44 to GDP per capita and the sum over age groups of the share of the population times the ratio of group health spending per capita to that of ages 40–44. Using UAE demographics reduces OECD average health spending from 6.8 to 3.9 percent of GDP in the counterfactual exercise.

### Cross-cutting observations from the annex
- Reforms across countries typically responded to high levels and/or fast growth in public wage bill spending crowding out other spending and threatening fiscal sustainability.
- Drivers of wage bill growth and appropriate responses vary by country: decentralization and local hiring/promotion practices (France); excessive reliance on contractual and temporary workers (Jamaica); persistent public-private pay gaps (Honduras, Ireland, Jamaica).
- Reforms often combine short-term employment and compensation measures with structural and institutional changes; isolating the contribution of individual measures is difficult.
- The impact of wage freezes and other measures depends on country-specific factors including hiring practices, wage indexation, and the age structure of public employees; macroeconomic conditions (e.g., inflation) affect savings from wage measures.

*Source: Country authorities; and IMF staff estimates.*

### Annex 3. International Experience

### Annex 3. International Experience with Public Wage bill Reforms

### Use of wage freezes and nominal cuts
- Wage freezes (nominal or real) were widely relied upon across regions (Côte d’Ivoire, Honduras, Ireland, Jamaica, Kenya, Moldova, Netherlands, Portugal, Romania).
- Ireland: wage reductions resulted in the wage bill falling by about 4 percentage points of GDP by 2015.
- France and the Netherlands: wage-bill-to-GDP ratios diminished by less than 0.5 percentage point of GDP thanks to very low inflation after 2010.
- Potential gains from wage freezes depend on inflation: larger gains with higher inflation; full freezes in high inflation environments may dramatically erode purchasing power over a few years.
- Drawbacks observed:
  - Reduced attractiveness of public sector jobs and undermined morale.
  - Nontransparent increases in bonuses and allowances reinforcing compensation distortions (Côte d’Ivoire, Ghana, Portugal).
  - In several countries (Côte d’Ivoire, Jamaica, Moldova, Netherlands, Portugal, Romania, Senegal) wage-freeze effects were partly or fully reversed when measures were abandoned or reversed (Portugal, Romania constitutional court reversals).

### Reforming compensation structures and pay systems
- Objectives: consolidate allowances/bonuses into base pay, map professional categories to common base pay, improve equity and transparency.
- Country experiences:
  - Ghana, Portugal, Romania, Zambia: reforms consolidated allowances/bonuses into base pay and mapped categories.
  - Ghana and Portugal: implementation was gradual and involved up-front wage costs.
  - South Africa and Romania: compensation-structure reforms did not deliver expected reductions in wage pressures.
  - Portugal: new wage grid integrating all careers into a single wage scale adopted in 2014, but roll-out postponed and will not generate short- and medium-term savings.
- Lessons:
  - Reform implementation requires adequate administrative capacity.
  - Up-front fiscal costs can occur when consolidating pay.

### Controlling employment levels: hiring limits and attrition
- Strategies: limit new hiring, rely on attrition-based reductions, align public sector size with population or working-age-population over the long horizon.
- Examples:
  - Ireland: public sector moratorium on recruitment and incentivized retirement plans.
  - France: employment caps from 2006 and attrition targets (replacing only 1 of 2 retiring civil servants) during 2007–12; measures later phased out or reversed and wage bill rose slightly again.
  - Portugal and Romania: replaced only a fraction of retirees.
  - Ghana, Kenya, Moldova, South Africa: attrition rules implemented in specific sectors.
- Note: Temporarily limiting employment growth below population growth can significantly reduce wage bill in young, fast-growing populations (example: Millennium Challenge Account countries).

### Public sector restructuring, payroll management, and HR systems
- Effective restructuring requires time, technical capacity, and political will.
- Honduras: public employment census plus wage/hiring freezes led to wage bill declining by about 2.5 percentage points of GDP during 2014–15; census helped identify irregular (ghost) workers.
- Portugal: developed a comprehensive government employment and remuneration database in 2011 to enhance oversight and transparency.
- Payroll and HR management improvements:
  - Malaysia: rebalanced centralized HRM to give spending ministries more flexibility.
  - South Africa: remuneration commission created in 2013 to examine pay and working conditions.
  - Honduras: 2014 census followed by automation of payroll payments to validated workers.
  - Sub-Saharan Africa in the 1990s: censuses identified ghost workers.
  - Kenya and Nigeria: biometric monitoring used to identify ghost workers.
  - Jamaica: full roll-out of a centralized HRM and payroll system expected to take 4–5 years.
- Implementation timing: developing effective payroll management systems and rolling out single wage grids can take several years and may not deliver short-term savings.

### Short-term impacts versus medium-term sustainability
- Short-term: wage and hiring freezes proved effective in containing wage bill growth in the short run.
- Medium-term: many reforms did not provide lasting savings when phased out or reversed (Côte d’Ivoire, France, Zambia, Romania, Portugal).
- Country experience suggests medium-term wage bill management supplemented by structural reforms of public employment and pay are key to sustaining short-term gains.

### Country-specific impacts and lessons (select highlights from Annex Table 3.1)
- Côte d’Ivoire:
  - Medium-term strategy for 2014–20 to lower the wage bill from 44 to 35 percent of tax revenue.
  - Lesson: integrating administrative and financial HR management is key.
- France:
  - Across-the-board wage freeze; limited impact due to low inflation and policy reversal.
  - Lesson: greater coordination between wage decisions and budget process; need for legal control of local government employment.
- Ghana:
  - Introduction of a single spine salary structure; wage bill to GDP ratio increased by 2 percentage points.
  - Lesson: fragmentation of HRM complicates reforms; new pay scales require fiscal space.
- Honduras:
  - Wage freezes in 2014 and 2015; elimination of vacancies; wage bill declined by 2.3 percentage points of GDP.
  - Lesson: flexible employment framework and exit strategy from short-term measures are critical.
- Ireland:
  - Cutting incomes of public employees, recruitment moratorium, incentivized retirements; by 2015 public sector wage levels fell back to 2005 levels.
  - Lesson: large reductions are challenging but possible with agreement and limited industrial action.
- Moldova:
  - High wage bill at 9 percent of GDP; short-term containment measures produced budgetary savings in 2010–11 but total wage bill in 2012 was 0.3 percentage points of GDP higher than 2011.
  - Lesson: nonstructural reforms contain wage bill only short-term; strong political will needed.
- Philippines:
  - Replaced across-the-board bonuses with performance-based bonuses; wage bill gradually decreased since 2011 as percent of GDP and performance improved at low fiscal cost.
  - Lesson: performance bonuses can improve service delivery with limited fiscal cost; measuring performance is challenging.
- Portugal:
  - Progressive wage cuts, suspension of 13th and 14th month salaries, single salary scale introduced; in 2010–2014 the wage bill was reduced by 2 percentage points.
  - Lesson: attrition effective; constitutional court rulings and reversals limited long-run success.
- Romania:
  - Nominal wage cuts, attrition, removal of special salaries; many measures were phased out or reversed and the wage bill rose slightly again.
  - Lesson: structural reforms and policy consistency needed; some measures ruled unconstitutional.
- South Africa:
  - Employment freezes in 2015 and 2016, voluntary severance, pension restructuring, allowances consolidated, salary scales simplified; close to a 10 percent reduction in public employment by 1999.
  - Lesson: political will and social dialogue are key; combination of wage and employment measures necessary for rapid sustainable reduction.
- United Kingdom:
  - Pay and recruitment freezes and pension reform (raising retirement age, increasing contribution rates, moving from final salary to career average DB plans); reforms largely successful in controlling the wage bill.
  - Lesson: clear policy goals facilitate reforms.
- Zimbabwe:
  - Hiring freezes and nominal wage freeze since 2014; freeze on positions not successful in containing civil service growth; wage growth driven by restoration of real wages eroded by hyperinflation.
  - Lesson: difficult to contain wage bill while ensuring service delivery; need a clear credible wage bill target anchored in fiscal objectives.

*Annex 3. International Experience with Public Wage bill Reforms — source content provided*

### Annex 3. International Experience with Public Wage Bill Reforms

### Annex 3. International Experience with Public Wage Bill Reforms

### Country case studies: key findings and reform measures
- Jamaica
  - Fluctuating wage bill due to accumulation of arrears that are cleared every few years.
  - Contractual and temporary workers comprise a significant share of the government workforce.
  - Significant public-private pay gap.
  - Wage freezes between 2010 and 2012.
  - In 2013, an agreement with labor unions to further freeze wages in order to reduce wage spending to 9 percent of GDP.
  - The filling of vacated posts being reviewed and approved by the Post Operations Committee (the Ministry of Finance and Planning, the Office of Services Commission, and public sector unions).
  - The medium-term goal is to keep the wage bill at 9 percent of GDP.
  - Hiring restrictions appear to have reduced the relative number of younger full-time permanent employees.

- Kosovo
  - Fast-growing wage bill due to wage hikes and additional hiring.
  - Since 2018, a budget rule to limit the increase in the wage bill to no more than nominal GDP growth.
  - Tighter link between the wage bill and overall economic developments.
  - Changes in nominal GDP translate into caps on the public sector wage bill with a considerable lag.

- Mali
  - Steadily increasing wage bill due to increasing recruitment in priority areas and increase in the base pay and allowances.
  - Compensation payments to civil servants not properly recorded.
  - Reforms linking pay to employee performance.
  - Improved monitoring of public workforce.
  - Attempted, but failed, to reform financial incentives for staff from the tax and customs departments.
  - As of 2016 the outcomes of the staff census not disclosed.
  - Vigorous resistance has largely stalled policy reforms on human resource management.

- Moldova
  - High wage bill at 9 percent of GDP due to high public employment.
  - Wages low relative to the private sector while affected by a political cycle.
  - Short-term measures to contain the wage bill, e.g., postponing wage increases, freezing employment, and cutting permanently vacant positions.
  - In 2012, merit-based promotions and basic salary increases became more formalized.
  - Budgetary savings in 2010–11.
  - The cost of the civil service reform was not trivial. While being lower than the 2009 peak, the total wage bill in 2012 was 0.3 percentage points of GDP higher than the 2011 level.
  - Nonstructural reforms can contain the size of the public wage bill only in the short run.
  - Strong political will is important for the reforms to succeed; most of the reform efforts have been weakened during preelection periods.

- Philippines
  - Enhanced public service delivery and accountability.
  - Replacing across-the-board bonuses to all civil servants with performance-based bonuses.
  - The wage bill has gradually decreased since 2011 as a percent of GDP indicating that the introduction of performance-based bonuses was not fiscally costly.
  - Improved performance at unit and individual levels.
  - The system of performance bonuses has improved public service delivery at a low fiscal cost.
  - The overall view of the performance-based bonus system was positive among government employees.
  - Measuring performance in the public sector is challenging.

- Portugal
  - High wage bill due to generous wages.
  - Organization of civil service characterized by large inefficiencies.
  - Across-the-board attrition and cuts in the number of temporary workers.
  - Introduction of progressive wage cuts and suspension of the 13th and 14th month salaries.
  - Promotions, performance bonuses and mobility-related salary changes have been frozen.
  - Single salary scale introduced.
  - Structural reforms to improved oversight, limit inefficiencies, and increase flexibility in the management of human resources.
  - In 2010–2014, the wage bill was reduced by 2 percentage points.
  - General government employment declined from 14 to 11 percent of the working-age population.
  - Attrition was the main instrument for employment rationalization.
  - These reforms have been largely effective in containing the wage bill.
  - Wage cuts proved less successful in curtailing compensation spending due to successive adverse Constitutional Court rulings and recent reform reversals.

- Romania
  - Fast-growing wage bill due to both wages and employment.
  - Fragmented wage bill management.
  - Nominal wage cuts.
  - Attrition-based reduction in public employment.
  - Rationalization of nonbase pay, removal of special salaries, discounting payments for overtime work, and elimination of 13th month salaries and holiday bonuses.
  - Strengthened wage-setting processes for state-owned enterprises.
  - Many of measures were phased out or reversed and the wage bill rose slightly again.
  - Structural reforms as well as consistency between policy measures are needed to rein in the wage bill over the medium and long term.
  - Some of the more drastic measures were ruled unconstitutional.
  - Beyond legal challenges, the reforms failed to address important distortions in the pay and employment system.

- South Africa
  - Growing wage bill due to a new compensation framework.
  - Employment freezes in 2015 and 2016.
  - Introduction of a voluntary severance package, combined with attrition and redeployment.
  - Pension benefits restructured.
  - Allowances consolidated into the base salary.
  - Salary scales simplified.
  - Job categories consolidated.
  - Close to a 10 percent reduction in public employment by 1999.
  - Political will and social dialogue are key for the success of the reforms.
  - Across-the-board employment restrictions could yield some savings in the short term, but they are not efficient.
  - Achieving a rapid and sustainable reduction in the wage bill requires a combination in the wage bill requires a combination of wage and employment measures.

- United Kingdom
  - Fast-growing wage bill.
  - Pay and recruitment freezes.
  - Reform of pension benefits: raising retirement age, increasing contribution rates, and moving from final salary to career average defined-benefit plans.
  - Modernized terms and conditions of employee contracts.
  - Reform automatic progression pay.
  - Reforms have been largely successful in controlling the wage bill.
  - Having clear policy goals facilitates reforms.

- Zimbabwe
  - High and fast-growing wage bill due to high employment and wages.
  - Extensive allowances.
  - Hiring freezes.
  - Nominal wage freeze since 2014.
  - A number of direct interventions based on salary and employment audits.
  - The freeze in positions has not been successful in containing growth in the civil service. Employment has continued to grow as service delivery priorities have overridden the commitment not to increase staff numbers.
  - Wage growth has been driven mainly by the need to restore public service real wages that were eroded by hyperinflation during the 2000s.
  - It is challenging to contain the wage bill while ensuring service delivery.
  - A clear and credible wage bill target should be anchored in fiscal objectives.

### Model-based simulations: small DSGE model (search and matching frictions)
- Model purpose and calibration
  - A small dynamic stochastic general equilibrium (DSGE) model is used to simulate the impact of alternative policies on the labor market, growth, and fiscal position.
  - The model allows the public and private sectors to interact and is a suitable tool for examining the effects of public wage bill policies on the economy.
  - Model draws on Gomez (2015), expanded by search and matching frictions and calibrated to a representative economy in the region.
  - Steady-state levels of labor income tax, the debt-to-GDP ratio, unemployment, public employment and private employment have been set to correspond to those for the Egyptian economy.
  - Parameters characterizing labor market frictions replicate the stylized facts of labor markets in the region.

- Scenario 1 — Limiting public vacancies while increasing public investment
  - Policy mix: permanent decrease in public vacancies by one-fifth and a temporary autoregressive increase in public investment by 0.5 percentage point of GDP.
  - Outcomes:
    - Public employment decreases following a reduction in public vacancies, so unemployment rises.
    - Private sector production and employment increase by 0.5 percent in response to higher public investment.
    - Most of the unemployed are absorbed by the private sector.
    - Policy mix effective in creating fiscal space in the longer run (0.8 percent) and providing public investment.
  - Comparative counterfactual: alternative in which public vacancies decrease permanently and public investment remains unchanged shows less favorable outcomes for private production and employment.

- Scenario 2 — Increase in private sector productivity under different public wage-setting rules
  - Higher private sector productivity:
    - Increases private sector wages.
    - Reduces the public wage premium.
    - Motivates the unemployed to search for jobs in the private sector, leading to lower employment in the public sector.
    - Increase in private employment outweighs the reduction in public employment and leads to lower unemployment.
    - Lower public employment translates into a lower public wage bill and improved overall fiscal position.
  - Special case — public sector wages set to protect the size of public wage premiums:
    - Public wages follow private sector wage developments but also influence their development.
    - Such a wage-setting rule helps smooth out responses of public wages and other economic variables over time.
    - It might lead to a spiral of ever-increasing public and private wages.

### GIMF model calibrated to Saudi Arabia: complementary policy simulations
- Simulation setup
  - Model: Global Integrated Monetary and Fiscal (GIMF) model of the IMF calibrated to Saudi Arabia.
  - Two scenarios analyzed with a neutral impact on the overall fiscal balance in Scenario 1; Scenario 2 adds targeted social transfers.

- Scenario 1 — Decrease public vacancies and increase public investment by 1 percentage point of GDP (budget-neutral)
  - Short-run effects:
    - Higher public investment (1 percentage point of GDP) leads to real GDP above the baseline by 0.2 percent.
    - Reduction in public employment reduces real GDP in the medium term.
  - Medium/long-run effects:
    - Medium term: real GDP falls below the baseline mainly due to lower employment in the public sector.
    - Long run: real GDP reaches levels above the baseline mainly due to faster accumulation of public capital.

- Scenario 2 — Same as Scenario 1 plus social transfers targeted to liquidity-constrained households (1 percentage point of GDP)
  - Outcomes:
    - The negative adjustment in real GDP due to lower public employment is less dramatic compared with Scenario 1.
    - The higher real GDP is accompanied by a permanent deterioration in the overall fiscal balance by 1 percentage point of GDP.

### Cross-cutting lessons and constraints from country cases and simulations
- Reforms that combine reductions in public employment with increases in public investment can boost private sector output and employment, and create fiscal space in the longer run.
- Targeted social transfers can mitigate short-run negative effects of lower public employment but may worsen the overall fiscal balance (permanent deterioration by 1 percentage point of GDP in the simulated case).
- Wage-setting rules that protect public wage premiums can dampen adjustments but risk inducing wage spirals.
- Attrition and hiring restrictions are commonly used instruments; attrition has been an effective tool in several cases (Portugal), but employment freezes alone may be insufficient (Zimbabwe).
- Political will and social dialogue are recurring prerequisites for successful implementation and sustainability of reforms.
- Nonstructural measures and short-term freezes can provide temporary containment but structural reforms are required for medium- and long-term wage bill sustainability.
- Legal and constitutional constraints (e.g., court rulings) can limit the effectiveness of nominal wage cuts and other measures.

*Source: Annex 3. International Experience with Public Wage Bill Reforms, from "Public Wage Bills in the Middle East and Central Asia."*

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_Source: https://www.imf.org/-/media/files/publications/dp/2018/45535-mcddp-public-wage-bills.pdf_