Economy, Domestic Economy

Civil Servants and Economic Growth

Civil Servants and Economic Growth Civil Servants and Economic Growth

The Rouhani government pays a great deal of attention to the supply side of the economy. However, for the sake of its own survival and that of economic growth, it should do more to spur a fresh wave of demand-driven growth too.

In particular, the Rouhani government should award pay rises to civil servants, an important social class, more than what has been included in next year’s budget bill.

Next year’s budget, which last week was submitted to the parliament for consideration, recommends an annual rise of 14 percent in salaries paid to state employees.

However, two reasons can be pointed out why it would be safer for the economy and for the government to promote higher pay rises. Firstly, inflation is unlikely to fall below 14 percent next year, which would imply further reductions in real wages for government workers.

President Hassan Rouhani’s announcement that “curbing inflation is the [government’s] main goal in the next year’s budget” repeats his stance since coming to power in 2013, although the president has already done a good job in reducing inflation. But the economists warn that the government should not set its projected inflation target below 14 percent for the next fiscal year.  

Secondly, the Rouhani administration already has a record of overestimating real prices. One example is oil. For this year’s budget, approved last March, the government targeted oil prices averaging $100/bbl. In reality however, the price has now plunged to near half of that estimate.  

While the sharp decline in oil price was to an extent unpredictable when the budget was approved, it hasn’t come out of range regarding the recent developments. US shale oil has been booming over the past years and East Asian growth has disappointed since last year. The Iranian government now looks set to stick to the $70/bbl benchmark for next year, although some analysts, who sound more right with each passing day, have predicted Brent crude of $50/bbl for the next few months, i.e. the first half of 2015.

The government may once again overestimate the oil price, despite its insistence on precise decision-making. Oil revenues are predicted to make up 31.5 percent of government coffers, which is still a sizeable amount, although significantly less than the oil’s weight in the budget in the previous years.

Another overestimation will possibly lead to an unexpected budget deficit, as well as a sharp depreciation of the national currency and a higher inflation rate.

The official rate of the greenback against rial is set to rise only 7.55 percent in next year’s budget, from 26,500 rials per dollar to 28,500. However, the rising US economy and falling oil prices have already pushed the increase in value of the free-floating dollar to about double the officially planned increase. In recent weeks, the rial has lost more than 13 percent of its value. The dollar is currently traded at more than 34,000 rials. The official exchange rates must be set using realistic estimations; otherwise the fluctuations will inflict heavy damage on the economy, partly because the government uses the official rate as an implicit subsidy for importers. In turn, these higher subsidies and import costs are likely to take down the value of the rial further if the government cannot compensate them with higher exports.  

Besides, if western sanctions against Iran remain in place, the rial would shed more of its market value, experts warn.

  Need for Bonuses

Civil servants are a social class consisting of 2.3 million Iranians, according to comments made back in May by Mohammad Askari Azad, acting vice president for management and human resources development. The state sector has grown significantly during the time of Ahmadinejad. Academic Ervand Abrahamian estimated that during Mohammad Khatami’s last term as president (2001-2005), the amount of civil servants reached only 850,000.

As a result, the state sector has become an even more crucial backbone, not only of the supply side of the economy, but also of the demand side, over the past few years. But state employees have seen significant cuts in their real wages over these years. In last year’s budget, civil servants saw their wages rise by only 20 percent, at most, while inflation was running at 34.7 at the end of the last fiscal year, according to the Central Bank of Iran.  

Increasing workers’ purchasing power is also an essential component of the ‘resistance economy’, which seeks to reduce Iran’s dependence on oil sales. Higher wages could spur domestic production, which in turn would help the economy add more jobs on a monthly and also a yearly basis. Higher wages would also expand the tax base, which would naturally lower government’s overreliance on oil. Administration officials pointed out in October that the growth rate of 4.6 percent in spring of this year was exceptional and would most probably not happen again. Apart from mathematical reasons, that is because this growth was driven almost exclusively by the supply-side through sanction relief. Growth in real wages could subsequently stimulate economic growth by spurring domestic production and exports.

The Rouhani administration enjoys the benefit of economic professionalism. Also, the president can blame many problems on the dire state of affairs he inherited from Ahmadinejad. But as the resumption of the fledgling economic recovery is delayed by the extension of Iran-P5+1 nuclear talks, employee discontent may be the next problem for the government to deal with. Last month, workers’ representatives filed a complaint against the Supreme Labor Council (SLC), claiming that the council had failed to keep their real wages up to the level applied last year (ended March 21, 2014).

Therefore, a reasonable idea would be that the government avoids such confrontations with workers next year and court their votes instead by means of increasing their real wages. In the long-run, this will make the economy more resistant by leading to higher productivity rate, increase in supply and reduction of unemployment.