BUNGLED WAGE REFORMS CAUSE LABOR PROBLEMS

UNCLAS SECTION 01 OF 02 LILONGWE 001072

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STATE FOR AF/S ADRIENNE GALANEK
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE PLEASE PASS TO TREASURY FOR INTL AFFAIRS/AFRICA/LUKAS
KOHLER

E.O. 12958: N/A
TAGS: ECON ELAB EFIN EINV KMCA MI
SUBJECT: BUNGLED WAGE REFORMS CAUSE LABOR PROBLEMS


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distribution.

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SUMMARY
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1. (SBU) Government wage reforms that took effect in October
have produced some unrest among civil servants. Hospital
workers briefly struck in Lilongwe early this month, and
teachers are threatening to strike in Blantyre. The problems
center on miscalculations in a consolidated pay packaged
designed to rationalize a complex structure of allowances.
While the situation will likely be resolved soon, the GOM has
little room for more mistakes.


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WELL-INTENTIONED REFORMS CAUSE STRIKES
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2. (U) Civil service workers in health and education have
been protesting over the last two weeks against the effects
of civil service wage reforms passed in September. Health
workers at Lilongwe's Kamuzu Hospital went on strike for a
few days at the beginning of November, and teachers in
Blantyre are threatening to strike if the issue is not
resolved in the next month. The crux of the issue is that
the reform package resulted in a net decrease in take-home
pay for workers receiving special professional allowances.


3. (U) The reforms were a World Bank and International
Monetary Fund structural objective, aimed at addressing huge
pay disparities between different levels of the civil
service, as well as containing a runaway structure of
allowances. Years of political tinkering under the previous
administration had created a grossly lopsided pay structure,
with the lower rungs of the scale among the worst-paid in
Africa, and the top rungs significantly higher than regional
norms. For example, a promotion from the senior-most
mid-level rank to the lowest senior-level rank involved a pay
increase of roughly 500 percent. The pay package raised
salaries between 25 and 80 percent, weighted toward the lower
grades.


4. (U) The other issue was the allowance structure, under
which higher-ranking employees enjoyed substantial tax-free
income from allowances for fuel, housing, food, and
professional incentives (often amounting to over half of
employees' gross income). Allowances had steadily increased
over the past decade, becoming more top-heavy and less
standard among different ministries over time. The reforms
attempted to clump all compensation as taxable pay, paving
the way for greater regularity across the government and
facilitating future adjustments. While the change increased
the gross cost of government salaries, the added revenue from
a higher taxable base partially offset the increase.


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WHAT DO YOU MEAN, LESS PAY?
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5. (SBU) Unhappily, the Ministry of Finance miscalculated
several pieces of the package, forgetting to include
professional allowances for health workers and teachers in
the base pay computations, and miscalculating the net effect
of taxing the entire package. The result: lower net pay for
many mid-level civil servants. After health workers walked
out at the capital city's main hospital, GOM officials
reinstated the professional and housing allowances, and
hospital staff returned to work. Now teachers are
threatening to walk out over the same issue, but have held
off on the strength of promises to restore the allowances, at
least pending a final resolution.


6. (U) Minister of Finance Goodall Gondwe has admitted the
error publicly, and Ministry officials are busy re-vetting
pay calculations. In a recent briefing, Gondwe described
this sort of problem as "normal" based on his experience at
the International Monetary Fund (IMF). He expects to have
resolved the last of the problems by year end, with little
effect on the budget.


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COMMENT: MORE MISTAKES, MORE PRESSURE
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7. (SBU) The magnitude of the pay reform problems are another
indicator of a lack of wherewithal at the Ministry of
Finance. As the recent budget exercise showed, the Ministry
often gets the details wrong even as they deal successfully
with a massive change in fiscal direction. Though
rationalizing government salaries is crucial to getting
fiscal policy under control, the risk attached to fumbling
the reforms is great. Though organized labor is generally
weak in Malawi, government has perhaps the best-organized
workforce in the country, and it might be able to force
expensive concessions if it feels sufficiently threatened.
So far, this qualifies as a minor dispute, more embarassing
than damaging. But with no room in the budget for mistakes,
and with Malawi's fiscal resolve under an IMF microscope,
Government can ill afford anything approaching a serious
labor dispute.


GILMOUR