Costa Rica is trying to rein in one of the world’s highest public sector wage bills, pitting powerful unions against the government and the International Monetary Fund (IMF).
The government is trying to eliminate hundreds of “pluses” (supplementary payments) that it pays employees, but some workers are taking to the streets to try to block the proposal, and kill Costa Rica’s entire negotiated IMF loan program.
Foreign investors are watching closely. The nation’s dollar bonds are the top performers in emerging markets this year, on optimism, the government will prevail and cut its chronic deficit. But it is all at risk if the IMF bill gets greatly watered down in the face of protests, according to Fernando Losada, director of emerging market research for Oppenheimer & Co. Inc.
“Execution risks remain high,” Losada wrote in a note.
The government spends more than 50% of its revenues on payroll, the highest among members of the Organisation for Economic Co-operation and Development (OECD).
The government hopes to pass a bill by May that would overhaul the way it pays its employees, eliminating pluses and replacing these with a single salary scheme. In many cases, workers earn more in pluses than they do from their base salary.
2018 Scare
The bill ratifying the deal the government made with the IMF is intended to save the government the equivalent of 1.5% of Gross Domestic Product (GDP) by 2025 and is a key part of the three-year, US$1.8 billion loan with the IMF. It would help the country curb a fiscal deficit that widened to 8.1% of GDP last year.
Costa Rica nearly suffered a full-blown financial crisis at the end of 2018, when its bonds and currency crashed as investors lost patience after years of failure to cut borrowing.
“There hasn’t been a public employment reform in our country since 1953,” Economic Planning Minister Maria del Pilar Garrido said in an interview this month.
“Modern-day Slavery”
In January, a group of public sector unions published a manifesto saying that the changes would impose “modern-day slavery” and “forced labor.”
In February public sector workers began marching through of San Jose, demanding the bill be scrapped, and the IMF program with it. Last October, for some two weeks, protesters were in the streets, barricading major routes and violence outside of Casa Presidencial, wanting the government to end, at the time, negotiations with the IMF.
The government backed down, setting up a round table discussion format, In January a deal was struck.
The marches this month have so far been peaceful.
The IMF will conduct a first review of the extended fund facility on Oct. 15, according to the program. Approval would unlock roughly US$290 million in funding.
“The reforms envisaged under the Public Employment Bill, expected to be approved by end-May, will help improve the efficiency and equity of the public sector,” IMF mission chief for Costa Rica Manuela Goretti said in a written response to questions.
Bond Rally
Costa Rica’s dollar bonds soared in January when the country agreed to its deal with the IMF. The nation’s dollar bonds due 2045 now yield 7.3%, down from more than 10.7% a year ago.
Workers have access to 260 incentive payments, and these have grown faster than their base salaries. These include things like bonuses for port workers who work more than 26 feet (8 meters) above ground level, and extra for employees at the government oil refinery who perform tasks in very hot buildings.
A law passed at the end of 2018 fixed such pluses in nominal terms in order to slow their growth. Some of the more controversial ones, such one-off payments for getting married and having children, or a 6% bonus for completing “functions considered highly complicated” have been eliminated in recent years.
The employment reform bill also seeks to cap performance-based bonuses and make the president the highest-paid government official. Currently, more than 2,000 government employees earn more money than the president, local newspaper La Nacion reported. Some tenured university professors earn as much as US$14,000 per month, according to the University of Costa Rica’s 2019 payroll.
Investor Concern
The government withdrew most of its other proposed legislation this week in an effort to focus on public employment changes.
Earlier this month, legislators agreed in a committee vote to exclude universities from the bill, raising concern from investors that more public institutions could gain similar treatment and water down the reform. Lawmakers have presented more than 600 motions to be debated in plenary discussions.
“The political pushback is worrisome,” Siobhan Morden, a managing director for Amherst Pierpont Securities, wrote in a note Tuesday. “The public wage reform remains the litmus test for the IMF program and merits close scrutiny on whether there is sufficient political support for approval.”
With notes from BNNBloomberg.ca
