US embassy cable - 04LILONGWE1072

UNCLAS SECTION 01 OF 02 LILONGWE 001072 
 
SIPDIS 
 
SENSITIVE 
 
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, Economic 
SUBJECT: BUNGLED WAGE REFORMS CAUSE LABOR PROBLEMS 
 
 
This message is sensitive but unclassified--not for Internet 
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