Sri Lanka's Public Sector amidst Ageing Demographics
Reforming before Ageing creates more problems?
The size of Sri Lanka’s public sector and the fiscal cost incurred by it have been widely discussed by both academics and policymakers. Successive governments, including the current administration, have proposed downsizing the public sector, yet significant reforms remain elusive. This article looks at the evolution of the size of the public sector in recent years, the fiscal cost, and the impacts of an ageing demographic on these aspects.
Overview of the public sector
As of 2023, the Ministry of Finance reported that about 1.3 million individuals were employed in the public sector, including state-owned enterprises and the armed forces. During mid-2022 to 2024 the government essentially implemented a hiring freeze as part of its expenditure rationalization measures. Public sector services are structured into four hierarchical tiers, each with distinct roles and responsibilities. The (i) primary tier, comprising unskilled, semi-skilled, and skilled labor, accounts for approximately 32% of the total workforce. The (ii) secondary tier, which includes non-technical staff, makes up the largest share at 60%. In 2020, within this group, 244,000 were teachers, while 81,000 were health workers. The (iii) tertiary tier consists of professional staff, representing about 3% of the workforce, while the (iv)senior tier, composed of managerial and administrative personnel, makes up just 5% of public sector employment.
Distribution of Public Service Cadre (Approved cadre excluding Tri Forces and SOEs)
Source : MOF Annual Report - 2023
In the South Asian region, India and Pakistan have the largest public sectors, with government employment accounting for approximately 60% of formal jobs, according to a World Bank report.[1] In contrast, Nepal and Bangladesh have the smallest public sectors, comprising less than 5% of total employment. Sri Lanka falls between these two extremes, with its public sector representing about 15% of formal employment.[2] Comparatively, in Western countries, the public sector accounts for approximately 14.5%[3] of the total workforce in the United States and 18.1%[4] in the United Kingdom.
Public sector has a higher share of female employees
Sri Lanka’s employed population[5] stands at 8 million, with 59% working in either the public or private sector.[6] The private sector accounts for 44% of total employment, with a gender composition of 69% males and 31% females. In contrast, the public sector employs 15% of the workforce, with a more balanced gender distribution of 52% males and 48% females. Female participation among professionals in the public sector stands at 61.5%, with many women working as teachers, nurses, and doctors. This also reinforces the fact that the secondary service level in Sri Lanka is predominantly composed of female employees, underscoring the gendered nature of tiers within the public sector.
Sri Lanka's female labour force participation rate remains low at 32%, a figure that has been stagnated for the past decade. The low rate reflects a limited number of women entering the workforce, with those who do often opting for public sector jobs rather than private sector employment. Notably, the proportion of women in the public sector is 16 percentage points higher than in the private sector, a trend that is driven by factors such as job security, different working hour aspects in roles such as nursing and teaching, and the provision of pension benefits, all of which can make public sector employment more appealing.
Downsizing the public sector
Public sector downsizing has become a key topic of discussion, particularly as the country entered an IMF program aimed at addressing the economic crisis. As of 2022, salaries and pensions for public sector employees amounted to 77% of government revenue. This significant fiscal burden has prompted the government to explore various measures to reduce public expenditure.
One such measure, introduced in mid-2022, involved a substantial reduction in new public sector recruitment. At the same time, Sri Lanka’s aging population has contributed to a decline in the number of active public sector employees, while simultaneously increasing pension-related expenses. Furthermore, professional skill migration exacerbates the existing problem.
1. Suspension of new recruitments
Public sector employment in 2023 saw a 2.9% decline compared to 2022, largely due to the suspension of new recruitments, the downsizing of cadre positions, and retirements. An interesting aspect of this shift is that while the approved cadre (the total number of positions allocated) remains higher than the actual number of employees, this reveals ongoing structural inefficiencies within the public sector workforce. As of 2023, the gap between the actual and approved cadre in Sri Lanka’s public sector stood at 395,000 positions. This means that while the government had approved about 1.75 million positions for public sector employment, only about 1.35 million were filled.
Public Sector Approved & Actual Cadre (Including SOEs & Armed Forces) in millions
Source : MOF Annual Report - 2023
The suspension of new recruits serves as a direct method of curbing the growth of the public sector, while highlighting the need for more effective management of existing resources. Historical trends show that 2023 saw the largest gap between the approved and actual workforce in the public sector. This raises an important question: What does this mean for sectors already facing labor shortages, such as education and healthcare, which is also the largest contributor to the public sector? These essential services rely heavily on a skilled workforce, and a further reduction in staff could worsen existing challenges, leading to decreased service quality, longer waiting times, and lower teacher-to-student ratios, ultimately affecting both the effectiveness and accessibility of these services.
2. Aging Population
Sri Lanka is currently in the final stages of its demographic dividend, which began in 1992 and is expected to end by 2037.[7] This demographic transition is causing a shift in the country’s population structure, with the population pyramid becoming more top-heavy as society ages. As a result, the current working-age population will gradually age, and without sufficient birth rates, there will not be enough young people to replenish the workforce in its current form.
The proportion of individuals aged 60 and above is projected to rise significantly, from 10.2% in 2001 to 29.2% in 2051.[8] This highlights the growing challenge of an aging population, with the number of individuals over 60 steadily increasing. The fiscal implications of this demographic shift are already becoming evident, putting pressure on the economy and public services.
Public & Semi government sector employees by Age group, 2016
Source : Census of Public & Semi government sector employees, 2016
Sri Lanka's employed age structure mirrors this trend, with a growing proportion of workers aged 45 and above. This is further evident by the increasing number of pensioners. As of 2023, Sri Lanka had 705,000 pensioners, representing a 25% increase from 2015. This rise in pensioners places additional pressure on government expenditure, emphasizing the need for sustainable pension reforms and effective fiscal planning to manage the long-term impact of an aging population.
The chart below illustrates the steady increase in the number of pensioners over time. With an estimated 35,000[9] public sector employees set to retire, the current budget has only allocated provisions for 17,000 vacancies. This means that more people are retiring than the number of new hires being made. Since public data on the breakdown of pensioners across different sectors is unavailable, it remains unclear how this will affect crucial sectors such as education and healthcare. This trend also poses a potential threat to public security, particularly if similar patterns emerge in critical sectors such as the police and the armed forces. For instance, in the police service, if the number of retirements consistently doubles the number of new recruits, the result over time would be a steadily shrinking police force. Should this trend continue for several years, it could significantly undermine the operational capacity and effectiveness of the police service.
It is important to recognize that employment should not be based solely on political promises or the need to fill positions for the sake of it. Hiring should not be excessive but should focus on filling essential roles, particularly in sectors that are critical to the public's well-being. Therefore, cuts to the public sector or a freeze on recruitment should not be applied universally. Instead, these decisions should be based on a strategic approach that considers the specific needs of each sector, ensuring that vital positions are filled without unnecessary expansion.
Source : MOF Annual Report 2023
Note: While this number shows the majority of the public sector pensioners, not all in the public cadre get pensions. For example, SOEs and Central Bank of Sri Lanka doesn’t get pension from the pension department. This means that the actual number of pensioner are much higher than what is being reported here.
3. Professional Level migration
In 2022 the government decided to issue a circular granting a five-year no pay leave for public officers to pursue opportunities for employment abroad or within Sri Lanka. This resulted in emigration of highly skilled professionals, including doctors, engineers, and other technical specialists, which can cause issues in specific public sector roles.
Impacts of the old age dependency through pensions
This rise in pensioners places additional pressure on government expenditure, emphasizing the need for sustainable pension reforms and effective fiscal planning to manage the long-term impact of an aging population.
Pension Expenditure vs No. of pensioners
Source : MOF Annual Report 2023
When comparing the number of pensioners in 2022 and 2023, it is evident that a 4% increase in pensioners has resulted in a 20% increase in pension expenditure. The rise in pension expenditure could be becasue of the pension payments for new retirees is significantly higher than those for existing pensioners due to higher base salaries and a higher cost of living allowance, contributing to expenditure rising faster. However, as MoF points out, this is also due to returning the mandatory retirement age for government employees to 60 years in 2023.
Pensions as a share of Govt Expenditure excluding interest
Source : MOF Annual Report 2023
This growing disparity between new and existing pensioners’ payments is a crucial factor that must be carefully considered in future pension expenditure planning. As of 2023, pensions accounted for 13% of government expenditure, excluding interest payments. The Treasury expects this proportion to decrease to around 10%-11% by 2026-27. However, achieving this target will likely require pension reforms and additional fiscal adjustments to ensure the sustainability of public finances.
Salaries & Pensions as a share of Government Revenue, %
Source : MOF Annual Reports
As the graph illustrates, public sector salaries & pensions on average as a percentage of total revenue stood around 45%, excluding the period of 2020-2022. However, the period from 2020 to 2022 saw a notable increase to over 75%, driven by the loss in revenue due to tax cuts and the increased hiring into the public sector.
In conclusion, Sri Lanka is at a critical juncture in its demographic transition, with an aging population that poses significant challenges for economic growth and fiscal sustainability. The country is witnessing a shift towards an ageing population, which is already evident in the rising dependency ratio and the increasing number of pensioners. The increase in pensioners and the growing fiscal burden of pension expenditures are key issues that demand immediate attention. With the government's current efforts to manage public sector employment and pension liabilities, the need for comprehensive reforms becomes even more urgent.
This includes decisions on public sector hiring and compensation. The government cannot hire required skilled employs if it does not pay competitively. But higher pay is hard to deliver across a large public sector, especially one that has a large share of unskilled or semi-skilled employees. The implementation and success of digitization would also weigh in heavily on the future of the public sector and it ability to deliver effective, efficient services with a smaller workforce.
Disclaimer: The views expressed are solely those of the author and do not represent the opinions of any organization the author is currently or previously affiliated with. The author assumes full responsibility for any errors or omissions.
[1] https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099062623201039265
[2] Labour Force Survey 2023
[3] United States Public Sector Employment
Strategic Choices in Reforming Public Service Employment, 2001
ISBN : 978-1-349-42491-7
Jonathan Brock
[4]https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/publicsectorpersonnel/datasets/publicsectoremploymentreferencetable
[5] During the reference period, persons who worked as paid employees, employers, own account workers or contributing family workers are said to be employed. This also includes persons with a job but not at work during the reference period
[6] LFS Annual Report 2023
[7] https://srilanka.unfpa.org/sites/default/files/pub-pdf/IPS-and-UNFPA-Report-May-2014.pdf
[8] https://srilanka.unfpa.org/sites/default/files/pub-pdf/IPS-and-UNFPA-Report-May-2014.pdf
[9] 2023 number +additional 5% (assumption based on historical trend of growth)