New Minimum Wage Hike: Pressuring Private Sector Business Owners?

May 26, 2024


As Egypt navigates through economic reforms and inflationary challenges, the private sector finds itself in a tight spot with the recent approval of a minimum wage hike by the National Council of Wages. Issued in April, this decree commands private enterprises to raise minimum wages for employees to EGP 6,000, taking effect from May.

This move aligns with President Abdelfattah El-Sisi’s initiative to uplift wages nationwide, aimed at mitigating economic challenges exacerbated by IMF-supported reforms.

The 5th rise in two years

The recent uptick marks the fifth minimum wage adjustment within two years. In January, the wage rose from EGP 3,000 to EGP 3,500, followed by increments to EGP 2,400 in January 2022, EGP 2,700 in January 2023, and EGP 3,000 in July 2023.

However, the Egyptian private sector continues to grapple with challenges stemming from a prolonged foreign exchange scarcity, persistently high interest rates inflating operational and investment expenses, and broader concerns tied to the nation’s investment climate, compounded by escalating tensions in Gaza.

“Egypt’s economic crisis has sent shockwaves through its financial sector, with ramifications felt well beyond the realm of balance sheets and stock markets. Ordinary citizens are bearing the brunt of this turmoil, grappling with surging inflation that disrupts household budgets, strains purchasing power, and reshapes the labor market dynamics,” said Ahmed Elmestkawy, senior economist at the General Authority for Free Zones and Investment (GAFI), in an interview with Business Monthly.

Pressure on business owners

Elmestkawy highlighted that the recent decision to raise minimum wages in the private sector carries significant implications for both employers and workers.

For employers, the increase in minimum wage substantially elevates labor costs, placing added pressure on small and medium-sized enterprises (SMEs) already operating within tight budget constraints.

Moreover, Elmestkawy noted that this action directly impacts companies’ profit margins, particularly those reliant on low-skilled labor. Sectors such as retail, hospitality, and manufacturing are expected to bear the brunt of these changes.

He further said that this rise in operating costs due to increased labor expenses compounds existing challenges, such as the substantial hike in lending interest rates, which currently stand at 28.5%. Additionally, the impact of the recent devaluation leading to an increase in customs dollar rates adds further strain to businesses.

Elmestkawy also pointed out that the hike in minimum wages could contribute to a rise in unemployment, as some businesses may find it challenging to absorb the added labor costs, potentially resulting in layoffs or reduced working hours.

Furthermore, he suggested that businesses may respond by either raising prices or seeking operational efficiencies to offset the impact.

Elmestkawy highlighted potential challenges for export-oriented industries like textiles and ready-made garments, which could struggle with increased production costs, impacting their competitiveness in global markets.

There’s a risk that employers may resort to informal employment practices to evade paying the higher minimum wages, he added.

A challenge for the industrial sector

Similarly, Mohamed El-Bahy, a member of the Board of the Federation of Egyptian Industries, told Business Monthly that such a move could compel business owners to downsize their workforce or reduce wages for other employees to accommodate the increased budget for minimum wage hikes.

He highlighted the disproportionate impact on the services sector, where many workers rely on commissions and tips rather than fixed wages, such as those in cafes and gas stations.

El-Bahy also pointed out a legal complication, noting that the investment climate in Egypt prohibits the establishment of specific salaries or pricing products in the industrial sector. This suggests that setting minimum wages in this sector may not align with existing laws.

“In the realm of business decisions, timing is just as crucial as the action itself. The industrial sector continues to grapple with challenges stemming from significant fluctuations in the local foreign exchange market over the past two years and persistently high interest rates,” El-Bahy added.

Toll on employees

Since the outbreak of the war in Ukraine in March 2022, Egypt has remained entrenched in double-digit inflation, with the latest official statistics from the Central Agency for Public Mobilization and Statistics (CAPMAS) revealing a staggering rate exceeding 32%. This has had significant impacts on Egyptian workers, as outlined by Elmestkawy in three main areas: decreased purchasing power, increased poverty and loss of savings, and job insecurity.

Inflation has significantly diminished the purchasing power of Egyptian workers, Elmestkawy said, making it increasingly difficult for them to afford essential goods and services. The soaring cost of living has transformed once-affordable necessities into unattainable luxuries, he added.

Elmestkawy noted that around 30% of Egyptians live below the poverty line. “The ongoing crisis has exacerbated financial hardships, leading to the depletion of savings and leaving many families vulnerable to economic instability,” he added.

Moreover, as businesses contend with mounting operational expenses, layoffs have “regrettably become a widespread occurrence for numerous workers.” This pervasive job uncertainty casts a shadow over the labor market, intensifying concerns about the prospect of widespread unemployment.

“In summary, while the intent of the new minimum wage is to improve conditions for workers, its execution necessitates a delicate equilibrium to avert unintended repercussions for businesses,” Elmestkawy emphasized to Business Monthly. “The wage hike could exert inflationary pressures if businesses transfer higher costs to consumers. Therefore, close monitoring by the Central Bank of Egypt is essential, and coordination between monetary and fiscal policies is crucial.”