Bahrain must curb populist tendencies

Seven months into Bahrain’s debate on the budget, and the standstill between the government and the elected Nuwab council seems hardly any closer to resolution. In anticipation of the Nuwab council’s extraordinary session scheduled on June 24 to vote on the revised draft, the government has agreed to a number of expansionary measures, including a BD105 million (Dh1.02 billion) increase in social assistance for 2013 and 2014 each, in addition to an increase of BD77 million and BD80.8 million for 2013 and 2014 respectively in pensions.

But it has fiercely rejected the MPs’ central demand, namely a 15 per cent increase in salaries across the board for 45,000 civil servants. Clearly, the MPs’ position makes little economic sense: not only is a 15 per cent salary increase largely unjustified, but social assistance and pension hikes are both a more fiscally prudent option and a better means for supporting vulnerable segments of the national population.

So is a 15 per cent salary increase for civil servants across the board justified? Have civil servants truly witnessed faltering real income growth over the past several years?

Figures published by the Central Informatics Organisation — Bahrain’s statistical authority — and the Labour Market Regulatory Authority (LMRA) suggest that average monthly wages of Bahrainis in both the private and public sectors grew at around 61.4 and 42 per cent respectively between 2003 and 2010, considerably outpacing total price inflation which was a mere 9.9 per cent over the same period. In other words, Bahrainis’ real buying power witnessed a significant overall improvement over most of the past decade.

To be exact, the 9.9 per cent CPI growth between 2003 and 2010 takes into account a basket of goods, thereby masking the worryingly high price inflation that has hit the food and beverages sector in particular. According to the LMRA, prices of food and beverages inflated by 34.6 per cent over the seven-year period; between January 2007 and January 2009 alone, the average price of 1 kg of rice — a basic staple — increased an astounding 164.8 per cent, from BD4.43 to BD7.30.

Inflationary pressure

Yet, these hardly justify a 15 per cent increase in public sector salaries across the board, especially if one were to consider the inflationary pressure such a step itself could eventually generate.

To the frustration of the MPs, the government seems resolved — in its rejection of their demand to raise public sector salaries by 15 per cent — to heed the International Monetary Fund’s (IMF) warning that if current spending patterns were to be maintained, Bahrain’s prospects for fiscal sustainability within the next few years appear bleak. Although the IMF noted the country’s improved fiscal situation in 2012 — largely thanks to the end of technical disruption of oil production in the field of Abu Sa’afa and to cuts in gas subsidies to domestic industrial — it pointed to Bahrain’s astronomical breakeven oil price estimated at around $115 (Dh422) per barrel.

The Fund’s prediction that public debt to GDP could jump to 61 per cent by early 2018 has prompted ratings agency Moody’s to consider revising Bahrain’s investment grade on weaker growth prospects.

A quick look at the structure of Bahrain’s fiscal spending reveals three major problematic areas where the government will ideally seek to practise fiscal restraint. First, in 2012, civil servant salaries amounted to an astounding BD1.2 billion — or about 50 per cent — of a total recurrent expenditure of BD2.4 billion.

Second, according to the proposed 2013-14 budget, direct state subsidies for food, water, electricity, etc., will constitute BD623.4 million per year, slightly over a quarter of the total recurrent expenditure.

Cost of subsidies

Finally, the proposed budget indicates that indirect oil and gas subsidies to domestic industrial users will cost BD878.3 million and BD960.6 million for 2013 and 2014 respectively, although the government is reportedly taking steps to scale back.

Even as a mechanism for lifting living standards, social assistance and pension increases enjoy the advantage of being directed to the benefit of particularly vulnerable segments of the population, namely the retired and the poor. The social assistance scheme is also progressive, since the amount of support is associated with income: heads of households who earn less than BD300 will receive BD100, those earning between BD301 and BD700 will receive BD70, and finally those earning between BD701 and BD1,000 will receive BD50.

By contrast, a 15 per cent public sector salary increase is flat and indiscriminate; it applies across the board to both low- and high-income civil servants, with no regard for social criteria such as household status, vulnerability and so on. Moreover, an increase neglects nationals employed in the private sector, estimated at around 92,500, who outnumber the civil servants. By contrast, social assistance and pension hikes apply to both sectors alike.

All in all, the intransigence of MPs is comprehensible. In economies such as the Arab Gulf states where the state receives the majority of its income from a source like oil, increases in spending are not met with higher taxes or cuts to other programmes, as is the case in other economies. From an individual perspective, therefore, it is rational for ‘the average Mohammad’s’ — and by extension for their representatives in parliament — to demand spending increases, particularly since these are hardly associated with any immediate, perceivable costs to the pockets of individual citizens.

With an eye on next year’s elections, MPs are relentlessly competing among themselves in making the 15 per cent salary increase a cause celebre. To top it off, the strong perception of public sector corruption among Bahrainis creates the appearance of a zero-sum game: the belief that any wealth not spent or handed out to citizens will likely end up illicitly siphoned off into a private real estate project or a Swiss bank account. Bahrain ranks 53rd in the 2012 Corruption Perception Index.

Sound economic policy

The government and the Shura council, whose members are appointed by the King, have a welcome role to play here in countering the Nuwab council’s populist tendencies by arguing in favour of sound economic policy. The country’s significantly improved political situation as compared to 2011’s unrest also provides more room for the government to avoid expensive populist handouts.

But ultimately, the case for economic sense will hinge upon the ruling establishment’s seriousness in battling corruption as a confidence-building measure and upon added government transparency in budgetary decision-making.

— The writer, a Bahrain-based economic and political analyst, writes regularly on Bahraini and Arab affairs.