(BLOOMBERG) 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.
The government is trying to eliminate hundreds of top ups that it pays employees, but some workers are taking to the streets to try to block the proposal, and kill Costa Rica’s whole IMF program.
Foreign investors are watching the dispute 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 that rally is at risk if its 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 this month.
The government spends more than 50% of its revenues on payroll, the highest among members of Organisation for Economic Co-operation and Development, and double the OECD average.
The government hopes to pass a bill by May that would overhaul the way it pays its employees, eliminating supplementary payments and replacing these with a single salary scheme. In many cases, workers earn more in top ups than they do from their base salary.
The bill is intended to save the government the equivalent of 1.5% of gross domestic product by 2025 and is a key part of three-year, $1.8 billion deal 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.
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“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.
In January, a group of unions published a manifesto saying that the changes would impose “modern day slavery” and “forced labor.” In February workers began marching through the capital, San Jose, demanding the bill be scrapped, and the IMF program with it.
Unions announced a series of new protests for this month. The marches 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 $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.
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.
Costa Rica bonds soared in January on IMF deal
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 top ups 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 $14,000 per month, according to the University of Costa Rica’s 2019 payroll.
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.”