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Wage hike can spark inflation, experts warn

People shop at a supermarket in Beirut. (The Daily Star/Mohammad Azakir)

BEIRUT: Enacting a wage hike for public sector employees would spur inflation if paid in full rather than in installments, economists told The Daily Star Monday.

“The increase in wages would surely lead to a hike in demand on commodities which, in turn, would result in an upward change in prices and cause inflation,” Economist Ghazi Wazneh warned.

But Wazneh said the level of inflation could be minimized if the salary scale was paid in installments over four years. “I [would advise] the government to pay the salary scale in installments over four years because a cash injection of LL2,765 billion ($1.843 billion) would certainly lead to great inflation,” he added.

“We will not be able to eliminate inflation but we can try to minimize it this way,” he said.

In the past couple of weeks Lebanon has witnessed a wave of protests by civil servants and teachers in public and private schools represented by the Union Coordination Committee aimed at putting pressure on lawmakers to approve a wage hike draft law.

The salary scale bill was approved last week by Parliament’s Joint Committees following a series of marathon sessions.

However, MPs failed to reach an agreement on when the wage hikes should come into effect, whether they should be calculated on a retroactive basis and if they should be paid in installments.

Lawmakers also remained divided over the extent of the increase in the value-added tax and on details of the raises for teachers, prompting Speaker Nabih Berri to postpone the debate and voting on the draft law until Tuesday.

The failure to reach a final agreement on the salary scale has also prompted the UCC to call upon all public sector employees to participate in the strike on the same day.

Head of the UCC Hanna Gharib said that the strike was designed to protect the salary scale and ward off attempts to pay it in installments.

But economists insist paying the wage hike in installments is necessary because it could help curb inflation.

“If the salary scale is paid in installments we would reach an inflation rate of 2 percent instead of 4 percent,” Wazneh said. “It is way too much to inject this great sum of money into the market since it constitutes around 3.5 percent of the GDP.”

Former Finance Minister Jihad Azour shared Wazneh’s views, saying the approval of the salary scale would cause an increase in prices in addition to triggering certain adjustments in the education fees, medical costs and rents for instance.

Azour explained that average public sector salaries became much higher than average private sector salaries for equivalent jobs. “This will put upward pressure on the salary scale in the private sector,” he said, adding that introducing other adjustments in the private sector salaries would push the economy into a vicious circle of increasing salaries and prices that would create stagflation.

“Our economy is already witnessing slow growth so if you add inflation to it, you will trigger stagflation,” he added.

Stagflation occurs when the economy isn’t growing but prices are.

However, Louis Hobeika, an Economics and Finance professor at Notre Dame University, argued that the approval of the wage hike will not spur inflation provided that Lebanese industries that are operating below capacity increase production to meet the forecast increase in demand.

He said Lebanese industries are producing below their potential due to the economic slowdown and could increase the supply of goods to balance any increase in demand and keep prices stable.

Hobeika added that the wage hike would finance itself since an increase in consumption would increase the state’s revenues from VAT.

He added that the approval of the salary scale should go in parallel with fighting corruption and improving the collection of taxes.

“We should not increase taxes but we should improve its collection,” he added.

 
A version of this article appeared in the print edition of The Daily Star on April 15, 2014, on page 5.

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Summary

Enacting a wage hike for public sector employees would spur inflation if paid in full rather than in installments, economists told The Daily Star Monday.

Wazneh said the level of inflation could be minimized if the salary scale was paid in installments over four years.

Economists insist paying the wage hike in installments is necessary because it could help curb inflation.

Stagflation occurs when the economy isn't growing but prices are.

However, Louis Hobeika, an Economics and Finance professor at Notre Dame University, argued that the approval of the wage hike will not spur inflation provided that Lebanese industries that are operating below capacity increase production to meet the forecast increase in demand.


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