IMF Advises Cuts to The Bahamas’ Public Sector Wage Bill

NASSAU, The Bahamas, Friday October 13, 2017 – Against the backdrop of staggering debt, the International Monetary Fund (IMF) has advised the Hubert Minnis administration to make drastic cuts to the tune of US$70 million to the country’s ballooning public sector wage bill. And it didn’t stop there.

At the end of its Article IV consultation, the IMF issued a report in which it urged the Government to embark on a fiscal consolidation exercise, and also underscored the need for urgent action to reduce subsidies to state enterprises and the implementation of pension reform.

The Fund raised concern that ahead of the May 10 general elections there was “lax spending controls”, and it  pointed out that “the public sector wage bill increased sharply in fiscal year 2017”.

“Staff recommended reducing the wage bill to, at most, the level observed in fiscal year 2016, which would yield savings of 0.8 per cent of GDP—relative to fiscal year 2018,” the IMF report said.

It noted that about 30 to 40 per cent of public sector employees are “non-essential temporary workers” and advised authorities to implement “a hiring freeze, and cap compensation for re-hired pensioners”.

With respect to state-owned enterprises (SOEs), the Washington-based financial body said that sizable transfers to SOEs reached 2.1 per cent of GDP in the previous fiscal year and “continue to be a drain on the budget”.

It noted that such institutions represent a significant contingent liability for the central government, with their combined debt reaching 18 per cent of GDP in 2016.

The IMF called for the reduction of subsidies and transfers to the historical average (financial year 2005-2016) would yield savings of up to 1.25 per cent of GDP relative to financial year 2018.

“To this end, staff recommended adjusting prices of services provided by SOEs to cost recovery levels and restructuring these corporations and other public entities to improve their efficiency. A first essential step is the establishment of effective financial oversight over these corporations,” the report said.

On the issue of pension reform, The Fund called for civil servants to share the burden of financing their own retirement income. This is currently borne 100 per cent by the Government.

“Pension payments have trended up to an estimated 1.1 per cent of GDP in fiscal year 2017, and population aging will increase them further,” the IMF warned.

“Staff recommended transforming the civil servants’ pension system into a contributory regime in the near term, with contributions commensurate with benefits, and with a view to move to a defined-contribution scheme in the medium term. Setting contributions at five per cent of wages for pensionable employees could yield revenues for 0.3 per cent of GDP.”

The IMF said the proposed combined measures could save taxpayers more than US$200 million annually.

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