World Bank wants SL to trim public sector

• Calls for gradual public sector ‘rightsizing’ via attrition, stronger payroll systems
• Public service headcount higher than peer economies at 1.21 m, armed forces 3x regional average
• However, warns attrition poses short- to medium-term risks
• Wage cuts not feasible given erosion of real pay, urges phased increases
• Proposes central pay commission, cost-of-living adjustment framework

Sri Lanka must gradually trim its bloated public sector via well-targeted attrition policies focusing on the long term, a recent World Bank report has suggested. 

The State pays public employees less than private sector peers and less than comparable economies, but employs more of them and should gradually trim or “rightsize” the public sector, the World Bank’s Sri Lanka Public Finance Review said.

The report says that in the medium to long term, Sri Lanka can achieve further reductions in public sector employment through well-targeted attrition policies. 

Further headcount cuts in the next two to three years may have adverse effects on service delivery, and the rightsizing of over-staffed sectors and professions should be gradual, recruiting new workers at a slower pace than new retirements, while preserving the availability of frontline education and health workers, the report recommends. 

The desired reduction should be guided by workforce planning and a comprehensive functional review across the Government and quasi-Government sectors, coordinated by the Management Services Department of the Finance Ministry and Public Administration Ministry.

“The desired reduction of the public sector headcount should be guided by workforce planning and a comprehensive functional review of the entire (sector),” the World Bank review said. “The updated staffing structures emerging from such a review would serve as the foundation for a revised, approved public sector cadre, establishing the medium-term objective for staffing adjustments through attrition.” 

It added that to ensure ownership of the process and its outcomes, this exercise should be conducted by each Ministry, Department, or Agency with authority mandated to manage the public sector cadre. 

“This process would establish a bottom-up framework for adjusting the public sector workforce while preserving the flexibility to selectively increase staffing in priority institutions or cadres.”

The World Bank also called for better management and consolidation of HR and payroll data to ensure efficient wage bill budgeting and forecasting. In the short term, it will be crucial to consolidate individual payroll records across the entire public sector with essential personal information for projections. 

Over the medium- to long-term, the Government should consider a modern, centralised payroll system or a full human resource management information system to increase transparency and traceability of payroll expenditures and enable improved HR planning.

Given the considerable erosion of real wages, the report says further reduction of compensation is not feasible. Any increases should be phased and coincide with savings from gradual headcount reduction. 

The World Bank recommends appointing a central pay commission to periodically review equity and competitiveness of compensation, advise on job evaluation and performance incentives, and recommend a cost-of-living adjustment framework to avoid ad hoc allowances that reduce predictability and transparency.

Compensation of public sector workers fell from 7.2% of GDP in 2020 to 5.0% in 2023, driven by declining real wages and a hiring freeze introduced at the onset of the crisis. The wage bill broadly aligns with South Asian peers but is considerably lower than the lower middle-income average. 

In 2023, base salaries across Central Government at 1.3% of GDP, Provincial Councils at 1.0%, and Government-funded public institutions at 0.3% accounted for about half of the wage bill. The other half comprised salary supplements, such as overtime and other allowances, and the non-contributory public sector pension scheme. Spending across these components has decreased since 2020.

Public sector employment remains substantially higher than in peer countries, reflecting occasional recruitment surges and a large security sector. The public service headcount grew by 12% between 2013 and 2020 to a peak of 1.27 million civil servants. 

The hiring freeze reduced the headcount to 1.21 million in 2023, 4% lower than 2020. Employment in State-owned enterprises (SOEs) and Government-funded public institutions was about 212,000 in 2023, roughly 15% of broader public sector employment and 10% lower than the 2019 peak. 

The number of armed forces personnel per thousand inhabitants was three times higher than South Asia and lower middle-income averages in 2023.

Despite high nominal growth, purchasing power has eroded. In cumulative real terms, average public sector wages and pensions decreased by 33% and 26% over the past three years. 

Between 2020 and 2023, average public service wages excluding non-contributory retirement benefits declined from 88% to 62% of per capita GDP. Total average pay, including future pension payments, decreased from 116% to 87% of per capita GDP. 

Government wages are least competitive for highly skilled workers, who make 8% to 22% less than private sector peers. Allowances account for a large share of total pay at 30% to 60%, depending on sector and profession, with more than 30 types identified in the health sector.

The composition of spending has shifted. The share of salaries in education and health of the total wage bill, excluding retirement benefits, increased from 35% to 43% between 2017 and 2023.  Education, health, and general public services together accounted for 56% of wage bill spending in 2023. The defence share fell from 30% to 24% over the same period, while public order and safety declined from 11% to 9%.

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}