How Could the Ninth Pay Scale Affect the Macroeconomy

The government has approved the Ninth National Pay Scale, or new salary structure, for government officials and employees. The pay structure had remained pending since 2015, leading to widespread speculation in different circles. Recently, the long-awaited pay scale received final approval at a cabinet meeting chaired by Prime Minister Tarique Rahman. It is an important decision in the country’s socioeconomic context.

On the one hand, the announcement has brought significant relief to government employees. On the other hand, it has triggered deeper analysis of its possible impact on the macroeconomy. However, an analysis of the structure of the pay scale, the economic thinking behind it and its possible impact on ordinary people and the private sector presents a picture that is both hopeful and cautionary.

A review of the structural aspects of the pay scale shows that the existing 20 grades for government employees have been retained, while major changes have been made to basic salaries. The biggest surprise is at the lowest level. Cabinet Secretary Nasimul Gani said after the cabinet meeting that the minimum starting basic salary for Grade 20 has been increased from Tk 8,250 to Tk 20,000, an increase of around 142 percent.

At the other end, the basic salary for Grade 1 has been set at Tk 156,000. Salaries from Grade 1 to Grade 11 have been increased by up to 100 percent.

This structure makes one thing clear: the government has made a serious effort to reduce income inequality. In particular, the greater focus on lower-income employees appears highly relevant to the current high prices and rising cost of living.

Information and Broadcasting Adviser Zahed Ur Rahman also said in his remarks that the government had essentially tried to reduce inequality through the pay scale. Nearly 12 years after the formation of the Eighth Pay Commission, the recommendations of the Ninth Pay Commission will undoubtedly provide significant economic protection to lower-income government employees.

However, the biggest challenge of this massive initiative lies in its financing. According to government estimates, around 2.4 million regular military and civilian employees and 925,000 retired employees will benefit from implementation of the new pay structure.

Overall, the additional annual financial cost of implementing the new salary structure for this large group of people is estimated at around Tk 105,580 crore. At a time when domestic revenue collection is not particularly satisfactory, arranging such a huge amount of money is literally a Herculean task for the government.

Finance Minister Amir Khosru Mahmud Chowdhury announced in his budget speech in Parliament that the pay scale would be implemented in phases. Tk 44,000 crore has also been allocated for it in the current fiscal year’s budget. However, concerns remain over how the remaining funds will be arranged.

Policymakers are also well aware of where such a large amount of money will come from.
Prime Minister’s Adviser on Finance and Planning Dr Rashed Al Mahmud Titumir openly acknowledged that the government would increase domestic resource mobilisation and, if necessary, borrow from banks. He also said there was no reason to view borrowing negatively if it had a positive impact on the economy.

However, the basic principle of economics is that when the government borrows heavily from banks, credit flows to the private sector tend to contract. Economist Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), has also raised this concern in his analysis.

According to him, if the pay scale is fully implemented within one year, the government may have to borrow more heavily from banks or cut the Annual Development Programme (ADP).

He noted that around 80 percent of ADP allocations are normally implemented. Therefore, the government could use the approximately Tk 60,000 crore that may remain unused for this purpose. However, transferring funds from the development budget to non-development or operating expenditure, such as salaries and allowances, could slow the country’s infrastructure and structural development in the long run. Such a move would not be healthy for an emerging economy.

Phased Implementation

The government’s caution in implementing the new pay scale is evident from its implementation process. To manage inflation, sudden pressure on the budget and the impact of the global economic slowdown caused by the ongoing conflict between Iran and the United States, the government has decided not to implement the pay scale all at once. Instead, it will be implemented in three phases.

According to the decision, basic salaries will be provided in three phases between July 1, 2026 and July 1, 2027. The associated allowances will be implemented together from January 1, 2028.
Cabinet Secretary Nasimul Gani also made it clear that the decision would be implemented gradually over the next two fiscal years to avoid the pressure that could arise if all the money were released into the market at once. The government’s delayed or phased implementation strategy is expected to help reduce the impact of a sudden shock on the macroeconomy.

Inflation Remains the Biggest Concern

Despite these positive aspects, the biggest concern is inflation. The country’s traditional market system is so unstable and dependent on syndicates that even the slightest news of a salary increase for government employees can lead to sharp increases in the prices of essential goods, house rents and transportation costs. The country is already experiencing high inflation of around 8 to 8.5 percent.

If the money supply increases without a corresponding increase in the supply of goods and services, inflation could rise further. Professor Saima Haque Bidisha, an economics teacher at the University of Dhaka, has pointed out that attempts could be made to profit by creating artificial shortages in the supply of goods in the market.

According to her, excessive borrowing from the banking sector to finance the pay scale could put pressure on revenue management and indirectly fuel inflation.

Information Adviser Zahed Ur Rahman has also acknowledged that the salary increase carries some risk of inflation. To address this risk, the government must strengthen market monitoring from now on. The Ministry of Commerce and the Directorate of National Consumers’ Right Protection should adopt a zero-tolerance policy so that dishonest traders cannot artificially raise prices through hoarding on the pretext that salaries have increased.

Higher Pensions for Retirees

One humanitarian and commendable aspect of the new pay scale is the decision concerning retired employees and pensioners. Under the Ninth National Pay Scale, net pensions will be increased by up to 100 percent to provide relief to pensioners. However, the increase will not be applied at the same rate to everyone. Instead, a progressive or tiered system has been adopted. Those receiving a pension of Tk 9,000 or less will receive a 100 percent increase.

Those receiving Tk 9,001 to Tk 20,000 will receive a 75 percent increase. Those receiving Tk 20,001 to Tk 30,000 will receive a 65 percent increase. Those receiving Tk 30,001 to Tk 40,000 will receive a 60 percent increase. Those receiving more than Tk 40,000 will receive a 55 percent increase. Through this structure, elderly citizens who spent the best years of their lives serving the state will be able to cope, at least to some extent, with the rising costs of healthcare and living expenses in their later years. This is a feature of a welfare-oriented state and deserves recognition.

Pressure on the Private Sector

The final concern is the country’s broader private sector. There are around 1.4 million government employees and another 900,000 pensioners, bringing the total number of beneficiaries to around 2.3 to 2.4 million. Outside this group, however, millions of people are employed in the private sector, agriculture or self-employment.

Private-sector workers will directly bear the impact of any inflationary wave created in the market by the increase in government salaries. The private sector is already under severe pressure because of the energy crisis, rising production costs and weak revenue collection. Economist Saima Haque Bidisha has rightly said that the pay scale could create significant pressure and frustration in the private sector.

On the one hand, their cost of living will increase. On the other hand, rising business costs may make it difficult for private companies to increase employees’ salaries. This disparity could create a form of psychological and economic division in society. To deal with this situation, the government must extend support to the private sector.

Dr Bidisha has suggested that incentives could be provided to the private sector. Steps should also be taken to reduce production costs by ensuring uninterrupted electricity and gas supplies so that companies can gradually adjust the salaries and allowances of their employees.

If the government can make visible progress in improving the ease of doing business, the private sector will be better able to overcome this shock. Otherwise, the wide gap in living standards between the public and private sectors could create social instability in the long run.

In conclusion, after a long gap, a new salary structure for government employees was highly reasonable and necessary. Considering inflation, the decision to increase the salaries of lower-level employees by up to 142 percent is a bold step.

However, the success of the decision will depend on how it is managed after implementation. There is no guarantee that increasing salaries will reduce corruption. Nevertheless, the government needs to adopt a reasonable system. The government’s main tasks now are twofold.

First, it must maintain a balance between bank borrowing and cuts to the ADP so that the macroeconomy does not suffer a major setback.
Second, it must strictly control the market so that inflation does not overwhelm ordinary people.
Only by keeping the private sector afloat through incentives and ensuring a balanced economic environment can the Ninth Pay Scale become a successful driver of overall national development and secure a positive place in the country’s economic history.

Author: Journalist and Columnist

rintuanowar.com