Economists warn of inflationary pressure from PSA payout

RAD­HI­CA DE SIL­VA

Se­nior Mul­ti­me­dia Re­porter

rad­hi­[email protected]

As the Gov­ern­ment pre­pares to pay a ten per cent wage in­crease and rough­ly $3.8 bil­lion in back­pay to pub­lic ser­vants, econ­o­mists say the fi­nan­cial and macro­eco­nom­ic ef­fects must not be un­der­es­ti­mat­ed.

Speak­ing to Guardian Me­dia yes­ter­day, econ­o­mist Dr Mar­lene Attz said the set­tle­ment car­ries “two ma­jor costs”—the one-off back­pay and an ad­di­tion­al $420 mil­lion in re­cur­ring an­nu­al ex­pen­di­ture once the wage in­crease takes ef­fect.

She warned that the sud­den in­jec­tion of spend­ing pow­er could spur in­fla­tion­ary pres­sure.

“As peo­ple get their back­pay, they will now spend more… and that could fu­el some eco­nom­ic ac­tiv­i­ty, but it could al­so lead to cost-push in­fla­tion,” she said.

Dr Attz added that the set­tle­ment was not in­clud­ed in the 2026 na­tion­al bud­get and ques­tioned whether the Gov­ern­ment’s plan to bor­row near­ly $19 bil­lion in the next fis­cal year fac­tored in any part of the wage pay­out.

“The Gov­ern­ment has al­ready sig­nalled in its es­ti­mates of rev­enues its in­ten­tion to bor­row al­most $19 bil­lion… It is un­clear whether that would have in­clud­ed some part of this al­lo­ca­tion,” she said.

She said the is­sue now is how the Gov­ern­ment ad­justs its spend­ing.

“It is not a ques­tion of least risk. It’s re­al­ly how do you re­align and re­al­lo­cate to get the par­tic­u­lar out­comes, and there’s go­ing to be some in­ter­est­ing arith­metic that Min­is­ter (Dave) Tan­coo is go­ing to have to do,” she said.

Mean­while, econ­o­mist and for­mer plan­ning min­is­ter Dr Bhoen­dra­datt Tewarie was al­so con­cerned about the eco­nom­ic im­pact of the pay­out.

He said: “Set­tle­ment may have an in­fla­tion­ary ef­fect de­pend­ing on how much is paid out at once, and de­pend­ing on how pub­lic ser­vants use their mon­ey. Spend­ing on con­sumer goods will push in­fla­tion up. Putting it in sav­ings or in­vest­ment, or re­pay­ment of loans, will help to con­tain in­fla­tion,” Tewarie said.

He added that for­eign ex­change de­mand must al­so be con­sid­ered.

“There is a forex side to this. In­creased con­sump­tion of au­to­mo­biles, house­hold items, can cost the coun­try more forex,” he said.

Tewarie said there will al­so be the fall­out of work­ers in oth­er sec­tors now seek­ing sim­i­lar ad­just­ments.

“Oth­er sec­tors of work­ers will ex­pect equiv­a­lent in­creas­es, and un­less struc­tur­al trans­for­ma­tion takes place in the pub­lic ser­vice, re­forms to im­prove ease of do­ing busi­ness, cus­toms and ports, com­pet­i­tive­ness will fall even more if it costs more to do the same things in the same way,” he said.

He sup­port­ed a phased ap­proach to pay­ments.

“Pay­ing out in tranch­es rather than a full pay­out would be less stress­ful on the Gov­ern­ment and on the coun­try. I think time frames can be worked out and agreed to be­tween the union and the Gov­ern­ment,” he said.

Tewarie said bonds and Her­itage and Sta­bil­i­sa­tion Fund draw­downs may form part of the strat­e­gy.

“The best way to deal with spaced out pay­ments is lo­cal bonds and forex draw­downs from HSF. Be­cause there is bound to be an in­creased forex de­mand from in­creased con­sump­tion. But lo­cal bonds will give the pri­vate fi­nan­cial sec­tor op­por­tu­ni­ties and avoid for­eign bor­row­ings and forex re­pay­ments,” he said.

He al­so not­ed the rev­enue chal­lenge ahead.

“The rev­enue ques­tion re­mains para­mount with in­creased ex­pen­di­ture, ris­ing debt, and no or low growth, and forex de­ple­tion… The Gov­ern­ment can­not avoid the rev­enue ques­tion. Rev­enue can come from busi­ness growth, tax­es, di­ver­si­fi­ca­tion, ex­ports, tourist in­flows, and in­creased in­vest­ment fo­cused on non-en­er­gy ex­ports. A re­struc­tur­ing of the econ­o­my can­not be post­poned,” he said.

Min­is­ter Tan­coo is ex­pect­ed to out­line the Gov­ern­ment’s fi­nanc­ing plan next week.