Some economic implicatios of large salary increase for government employees: a computable general equilibrium model analysis for Botswana

Abstract

This study analysed the economic implications of the 2019 salary increase for Government employees in Botswana. The study used the static computable general equilibrium (CGE) model that has been calibrated to the 2011 social accounting matrix (SAM) database for Botswana for 2011. The shock examined is a 16.5 percent increase in Government employees’ wages. The simulation results showed that increase in public sector incomes has contractionary effects on the economy. GDP at both market prices and at factor costs and absorption decreased in the short run. While household consumption and government budget deficit increased, investment, employment, indirect taxes, total imports and exports decreased and there was a depreciation of the exchange rate. Household welfare gain was disproportionately distributed to households in cities and towns and less to those in rural areas. The impact on activities was also uneven. The construction, other manufacturing, general government and other mining contracted whereas others sectors expanded. The policy implication that arise is that, the increase in government wages should be implemented with another policy tool to ensure that the beneficial effects of salary increase on households is not accompanied by contraction in economic activity.