ISLAMABAD: The International Monetary Fund has advised the government to increase the retirement age and contain pensions bill as part of a reform programme.

Pakistan’s federal expenditure on salaries and pensions is estimated at about Rs450 billion, including pension expenses of about Rs171bn for the current financial year. Provincial pay and pension bills are much higher than the federal bill.

As part of public expenditure reforms programme, the IMF has suggested increase in the retirement age as a way out of rising pension bill due to improved life expectancy rate. This is one way of reducing the pension bill and, at the same time, making better utilisation of expertise of senior bureaucrats.

There have been proposals from the senior bureaucracy for increasing retirement age to 62 years from 60 but the federal and provinial governments have discouraged such proposals mainly because of political incentive in providing jobs to a growing younger population.

Of the federal government’s pension bill of about Rs171bn this year, about Rs125bn pertained to retired workforce of the armed forces.

“Public wage bill reforms should target structural change that strengthens the link between pay and productivity, improve hiring process and ultimately raise efficiency in the provision of public services,” said the IMF, adding that this should also be coordinated with reforms in other areas, especially in labour intensive health and education sectors to ensure that objectives are aligned.

Furthermore, the increase in the wage bill should be commensurate with the provision of services and growth of fiscal space, it said.

The IMF advice came at a time when the government is reluctant to increase salaries and pensions in the next budget to absorb the impact of over 100 per cent raise already provided by the PPP government. But the government is under pressure from its employees for a raise.

Sources said the Economic Advisory Committee of the government which shared its initial thoughts with the federal government over the weekend as part of budget-making consultations is also reported to have viewed that about 120pc increase in salaries in five years of the PPP government had worsened the government’s service delivery. Due to these increases, the share of salaries in the administrative expenditure had increased from 60pc to 88pc.

The IMF is of the view that regardless of whether the immediate goal is to contain the growth of the wages bill or to create the fiscal space to accommodate a large one, an important challenge is to attract the necessary staff to ensure that public services are provided in an efficient manner. “Increasing the link between pay increases and employee or team performance and periodically assessing employment levels in line with the functions of the government should ensure retention of skills while improving efficiency”.

It said that reforms to public sector wages and employment could generate substantial savings and bolster long-term growth, particularly where public sector wages are higher than those prevailing in the private sector or the size of the public employment is disproportionate to the services provided to the economy.

But the IMF is opposed to voluntary separation. It said downsizing that is part of reorganisation of government services and that target specific positions and functions is likely to be more successful in achieving permanent reduction in employment than an untargeted, across-the-board cut in employment. “The literature on civil service reform suggests that voluntary departure schemes have not been very effective, as they suffer from adverse selection problems.”