This note is part of the Kyrgyz Republic Programmatic Public Expenditure Review (PER) led by Evgenij Najdov (Task Team Leader) and K. Migara O. de Silva (co-TTL). The PER work was initiated by Orhan Niksic. Faruk Khan took over as task team leader from September 2012 to June 2013. K. Migara O. de Silva’s co-TTL-ship was uninterrupted with primary responsibility for the sector notes on wage bill management, public investments management and intergovernmental transfers.
This note has been prepared by Alexandra Rabrenovic and Maya Gusarova. The team has benefitted from advice and contributions of SebastianEckardt, Bakyt Dubashev, Evgenij Najdov, Helen Edmundson, Zhanybek Ybraiym Uulu (Poverty Reduction and Economic Management Unit), Antonino Giuffrida, Asel Sargaldakova, Nedim Jaganjac, Loraine Hawkins, Son Nam Nguyen (Human Development Unit, Public Health), Paul Marie, Michel Cahu, IgorKheyfets, Gulmira Sultanova (Human Development Unit, Education), John Otieno Ogallo (Financial Management), Tatyana Bogomolova (Human Development Unit, Pensions), and Gulgun Murzalieva (Health Policy Analysis Center, Kyrgyz Republic). Zakia Nekaien-Nowrouz, Sarah Nankya Babirye, Ewelina Lajch and Lilia Saetova provided technical and administrative support. The PER analysis has been conducted in close coordination with government counterparts, with earlier drafts, power-point presentations, and workshops used to support a dialogue on public expenditure policy priorities facing the Kyrgyz Republic. The team is grateful for consultations with the government officials of the Kyrgyz Republic, primarily with the representatives of the Ministry of Finance (including Central Treasury), Ministry of Health, Fund for Compulsory Medical Insurance, Ministry of Education, and State Personnel Service.
The team is grateful to the UK’s Department for International Development (DFID) and the Swiss Economic Cooperation Organization (SECO) for co-financing this programmatic Public Expenditure Review.
1.Executive Summary 6
2.Wage Bill Levels 7
3.Public Employment Levels 9
4.Levels of Wages 13
5.Structure of Wages 16
6.System of Establishment Control 22
7.Fiscal Implications of Different Policy Options to Restrain the Wage Bill Growth 25
Restraining the growing wage bill expenditures while enhancing the performance of the public sector remains one of the government’s major development priorities. Wage bill levels in the Kyrgyz Republic are high compared to the majority of ECA countries, constituting almost one third of government expenditures.1 Outlays on wages grew faster than the economy from 2008 to 2011, squeezing the budget. Wage bill expenditures have almost doubled in the last decade to 12.2 percent of GDP by 2011 (including special means and health wage bill expenditures). The latest increase in wage outlays was due to a significant rise of salaries in health and education in 2010, which boosted the health wage bill twofold and the education wage bill by two-thirds. If the wage bill continues to grow at the pace observed during the last decade—an average annual increase of 0.5 percent of GDP—it will amount to around 14.6 percent of GDP by 2015.
Over the last few years, the government has undertaken important steps towards enhancing pay systems and improving competitiveness of pay in public health and education – sectors accounting for almost 66 percent of the wage bill. Pay systems in the above mentioned sectors were streamlined and the number of allowances reduced, while greater focus was placed on individual performance, through performance pay. However, up until 2012 the civil service pay system has been lagging behind, remaining complex, non-transparent, unfair, and uncompetitive. In light of a significant increase of wages in health and education, unreformed civil service pay limits incentives for career progression in civil service, making it almost impossible to attract and retain qualified staff. Therefore, civil service remuneration reform, launched in summer 20132, remains an important area, where government action is crucial to address inconsistencies and drawbacks within the current system.
The Kyrgyz Republic confronts the need to restrain its public wage bill as part of its mid-term fiscal strategy, as well as the need to improve the performance of the public sector. This complex task can only be achieved via system and policy reforms for determining the employment and wage levels in the public sector, coupled with deep structural reforms in the main sectors of public employment. The analysis, undertaken in this policy note, suggests that the government should consider the following measures and reforms:
It is essential to improve predictability of the wage bill and avoid further ad hoc increase in wages.
Moderate and gradual consolidation of employment can be achieved through:
Consolidating support staff in health and education;
Functional reviews in civil service; and
Structural reforms (e.g. introducing per-capita financing in education).
Any increase of the base pay elements has to be linked to modest and gradual consolidation of public sector employment, and should be limited to inflation as needed.
Establishment controls need to be strengthened through sound monitoring of the number of employees and payroll in all parts of the public sector.
Civil Service Pay Reform has to be undertaken with a unified pay system, gradually introduced at all levels of the government.
This note discusses public sector wage management in the Kyrgyz Republic, by analyzing wage bill expenditure levels over the last decade with a closer examination of dynamics in 2008-2011. The analysis explores the key drivers of wage bill growth—public sector employment and employees’ wages in civil service, public education, and health, as well as institutional mechanisms for their control. Based on the key findings, recommendations are drawn on the options for reduction of the wage bill based on comparative international experience, while also taking into account the specific context of the Kyrgyz Republic.