new rules regarding bonuses and allowances, as well as expected efficiency gains from the reforms. Below, we attempt a very preliminary estimate of the potential fiscal implications, based on many simplifying assumptions.<sup>29</sup> The analysis must be interpreted with caution, however. In addition to making a number of simplifying assumptions, the analysis does not attempt to incorporate potential efficiency gains from the reform<sup>30</sup> —which are highly uncertain—in estimating the fiscal impact of the different options for the reform.

**The simulations confirm that Options 1 and 3 are the most expensive, even in the medium**

**term** (Figure 15). In the first 3 − 5 years, the dynamics of the wage bill is dominated by the oneoff adjustment costs. Growth of the wages bill would be substantially higher under Option 1 and Option 3 even when the costs of adjustments are evenly spread—over 3 years in Option 1 and 2 years in Option 3. After the adjustment to the new salary scale is completed, the growth of the wage bill would converge to the steady-state growth rate as in other options, which is driven by the growth in civil servants in the priority sector (10 percent of the work force in that sector each year) and the automatic annual salary increase (6 percent each year). The wage bill would be permanently higher because the higher wage growth in the first few years would not be compensated by lower growth in the subsequent years.  As a result, wage rigidities would worsen, the fiscal deficit would significantly expand, and debt would reach a possibly unsustainable level. More specifically, as a share of GDP, the wage bill would rise from 8 percent to 15 percent (under Option 1) and 11 percent (under Option 3), instead of falling to 7 percent by 2017 as expected under the baseline. The fiscal deficit would expand to 13 percent (under Option 1) and 9 percent of GDP (under Option 3). Debt as a share of GDP would reach 63 percent (under Option 1) and 50 percent (under Option 3).

29 Specifically, we assume that (i) the number of civil service employees will grow by 10 percent per year in the priority sectors (education and health), and 0 percent per year in other sectors; (ii) distribution across the civil servants will remain the same; (iii) after the initial salary adjustment, the annual automatic salary of 6 percent is maintained (as assumed in the Government’s study). These are common assumptions across all options. In addition, under Option 1 and Option 3, we assume the costs of adjustments are evenly spread over 3 years and 2 years, respectively. For example, under Option 1, a third of the existing employees are brought under the new salary scale in the first year (t+1), another third in the second year (t+2), and all existing employees in the third year (t+3). Under Option 3, a half of the existing employees are brought under the new salary scale in the first year (t+1), and the remaining half in the second year (t+2). During the adjustment period, it is assumed that there will be no automatic adjustment of salaries but newly hired employees are paid according to the new salary scale. Note that under Option 2, only salaries of those below the initial average will be raised to the average for the grade. Salaries of those above the initial average are assumed to be frozen. See Appendix 2 for more detail.

30 The rationalization of pay scale is expected to bring about improved public sector performance—though better job satisfaction, worker motivation, and attraction and retention of qualified professionals—as well as more orderly management of wage bill—through better control of bonuses and allowances. See Government of Burundi (2012) for more detail.

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