Egypt private sector faces challenges applying new minimum wage increase: Business owners

Ahmed El-Mahdi , Saturday 4 May 2024

Egypt’s private sector is struggling to implement the minimum wage limit the National Council of Wages (NCW) has set recently, while the sector faces challenges on multiple levels, several business owners told Ahram Online.

File Photo: Reuters


The NCW decided in April to raise the minimum wage for private sector workers to EGP 6,000 starting in May, an increase of approximately 71.5 percent, following a similar decision issued for state employees months earlier.

This move will benefit 18 million workers and employees in the private sector, according to the labour ministry data.

The decision came in line with Egypt's commitments to the International Monetary Fund to protect vulnerable groups, against the impact of the second wave of economic and structural reforms backed by the IMF.

Moreover, the decision came to offset soaring inflation in the country that has remained in the double-digit zone for over two years.

Egypt's core and headline inflation rates currently exceed 33 percent.

The latest depreciation of the local currency - with the Egyptian pound losing 55 percent of its value against the US dollar since the devaluation applied on 6 March - has further fueled inflationary pressures and weakened consumer purchasing power.

At the close of transactions on Thursday, the US dollar was traded at over EGP 48/ 1 USD.

The NCW decision mandated the new minimum wage for private sector employees, calculated according to the wage specified in the Labour Law, which includes the employer's contribution to social insurance subscriptions.

Labour-intensive sectors are the most affected by the decision, several business owners said, while exports will suffer due to competition with products from other countries in the external market.

Conditional Layoffs

"Factories will resort to layoffs if there is insufficient demand to meet the new increase in the minimum wage while maintaining a profit margin that protects existing investments,” head of the Printing and Packaging Chamber at the Federation of Egyptian Industries Nadim Elias told Ahram Online.

The printing sector is not as labour-intensive as other sectors, resulting in a minor impact from the increase in the minimum wage on the rise in production costs, ultimately leading to an increase in the price of the final product, he added.

"The salary of highly experienced workers currently ranges between EGP 15,000 and EGP 20,000, whereas newly graduated workers will receive the minimum wage," according to Elias.

Amid the ongoing economic challenges globally, layoffs have become a trend in all markets to save costs. In mid-April 2024, Reuters reported that Tesla plans to lay off approximately 10 percent of its global workforce due to a decrease in electric car sales.

Elias explained that factories are compelled to keep skilled labour due to the significant shortage of qualified workforce in the local market, asserting that enhancing the productivity of Egyptian workers amid the intense competition in both local and international markets will lead to reduced production costs.

Containing inflation rather than raising wages is currently required, Elias argued.

At present, raising wages will lead to increased inflation due to price hikes, especially without the presence of domestic alternatives, he said.

Impact on exports

While foreign markets are replete with products from different countries, raising wages in Egypt’s private sector to EGP 6,000 will negatively affect Egyptian exports, which are already facing intense competition from many countries, such as India, Turkey, and China, Elias said.

Mohamed Abdel-Salam, chairman of the Ready-Made Garments Chamber at the Federation of Egyptian Industries, told Ahram Online that the clothing sector, with its substantial workforce, is particularly vulnerable to the recent rise in minimum wage.

“This is expected to result in a considerable upsurge in labour expenses in the coming period. It will also increase the proportion of labour costs in the product price to 35 percent, up from 22 percent when the minimum wage was EGP 3,500," he explained.

The sector's workforce includes skilled workers earning between EGP 5,000 and 6,000, and assistant workers whose wages average around EGP 3,500. Every 100 machines require 170 workers to operate them, according to Abdel-Salam.

The new minimum wage will lead to assistant workers receiving a total salary of EGP 6,000, prompting skilled workers to seek an increase in their monthly wages to reach between EGP 6,000 and EGP 9,000, he added.

Ultimately, factories will raise the prices of final products, Abdel-Salam stated.

Boosting imports

A rise in local product prices will offer importers a fresh opportunity to re-enter the competition vigorously and expand their market share locally.

This comes after their share dwindled from 90 to 10 percent in favour of domestic production, which could potentially experience production reductions, he said.

The ready-made garment industry is moving to the poorest countries to boost product competitiveness by leveraging lower-wage labour.

According to Abdel-Salam, labour costs in other countries constitute approximately 19 percent of the total price.

Alternative technology

The clothing sector is anticipated to shed approximately 905,000 assistant workers out of a total of 2.2 million, with factories shifting towards high-tech production lines to offset this sizable segment, said Abdel-Salam.

The lower productivity of Egyptian workers compared to their counterparts in competing countries, coupled with the rising wage costs, diminishes the competitive edge of clothing exports in global markets amidst intense competition among nations, he added.

The ready-made garment sector ought to have been exempted from the decision to enforce the minimum wage to safeguard the key competitive advantages for investing in Egypt and to enhance production and export capacities, he said.

Major obstacle

"A significant challenge confronting factories during the implementation of the minimum wage is that only 25 percent of the salary is exempted while calculating the insurance, which will result in an extra cost for factories. The government should have raised the exempted tranche along with the minimum wage," Bahaa Demetri, the chief of the Industry Committee at the National Dialogue, told Ahram Online.

Factories provide a range of benefits to their workers, including transportation, meals, and social support for events such as marriage or bereavement. Additionally, they offer health insurance. Moreover, during times of inflation, factories distribute food parcels to mitigate the effects of rising prices, he added.

Demetri clarified that the percentage set by the insurance will raise production costs for each factory, depending on the type of goods. Nevertheless, reducing benefits remains a viable option for many factories to prevent costs from exceeding expectations.

The benefits provided by factories offer significant advantages to workers, especially since any wage increase is eroded by inflation, he said.

There will certainly be an increase in product prices due to rising production costs, but it will be minimal for the household appliances sector, he added.

Despite the rise in the minimum wage in the private sector, the wages of Egyptian workers remain among the lowest, leading to less investment chances, he opined.

A step to address wage deformities

Farag Abdullah, an economist and member of the Egyptian Association for Political Economy, told Ahram Online that the increase in the minimum wage in the private sector is a step towards addressing discrepancies between wages and consumer goods prices, given that the average increase in prices in recent months amounts to 70 percent.

The NCW is taking steps to rectify these disparities by gradually ensuring that the rate of wage increases equals or exceeds the rate of price increases, according to Abdullah.

He explained that the recent increase in the minimum wage for 18 million citizens aims to alleviate inflationary pressures and maintain purchasing power.

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