Egypt's new minimum wage: Crunching a squeezed budget

A new minimum wage of LE1200 for public sector and government workers starting January 2014 may put pressure on Egypt's strained finances

The Egyptian government has said it will raise the minimum monthly wage for all public sector workers to LE1,200 ($171), without specifying how the raise will be implemented or funded.
The decision was announced in a televised press conference on Wednesday evening by Prime Minister Hazem El-Beblawi and Deputy Prime Minister Hossam Eissa. The latter's statements suggest that that the government took the decision hastily.
"We thought that we couldn't wait any more," said Eissa, who also serves as minister of higher education and is not part of the cabinet's economic team. He said that setting a minimum wage “is a sweeping popular demand” that was delayed and that “the people started to say that the government is hesitant."
Eissa said that the government has formed committees to look into the economic consequences of the decision before 1 January 2014, the date when the new minimum wage will come into effect.
"The committees will look into what resources we can get in the short and medium term to avoid negative consequences of this [wage] increase," explained Issa.
Egypt's squeezed state finances leave little room for manoeuvre. The deficit in the 2012/13 fiscal year which ended in June 2013 reached LE240 billion ($34 billion) or 13.8 percent of GDP.
In 2013/14, the government forecasts a deficit of 9.1 percent, a target mainly built on the assumption that economic growth will pick up during the year, leading to a sizeable 43 percent increase in tax revenues. The budget was deemed "too ambitious" even before the announcement of the minimum wage rate.
But the first quarter of 2013/14, which will end on 30 September, is almost over; and Egypt is yet to find closure to its political woes.
Further turmoil and uncertainty would make the interim government's 3.5 percent expected economic growth "very hard to materialise," Mohamed Abu Basha, economist at Cairo based investment bank EFG Hermes told Ahram Online.
If tax revenues do not see the expected rise, a likely scenario according to Abu Basha, the government will have to resort to either increasing borrowing or cutting into other expense items to finance the minimum wage rate.
"They will probably finance this through borrowing; the schemes for saving on fuel subsidies are still unclear," he added.
Governmental plans to cut the energy subsidy bill – amounting some LE120 billion – by at least 20 percent, are still in their early trial phases, making them unlikely to reap fruit in the current fiscal year.
The cost of the implementing the new minimum wage rate will depend whether the government will revisit the whole wage structure of public employees or just bump up the wages of those at the bottom –the former being much more costly.
Any increases in public wages – already comprising nearly a quarter of all government expenses – would further tighten the budget. Wages have grown from LE86 billion in 2009/10 to LE171 billion expected in 2013/14, a whopping 99 percent growth in five years.
Similarly, interest expenses will grow by around 150 percent in the same period; together with wages they will equal more than 50 percent of total government expenses.
The government said it would also impose a maximum wage rate, and lay off a number of highly paid “consultants” in different ministries. This should make some funds available to cover the minimum wage; but will not cover the bulk of the cost.
Raising the salaries of Egypt's six million public employees through borrowing "will not leave any significant room for public investments," said Abu Basha.
In August, the government announced a “stimulus package” that entails pumping LE22.3 billion ($3.2 billion) into investment projects over the coming year to revive Egypt's battered economy.
The package will be mainly paid for by aid pledged by Gulf Arab states in the wake of the ouster of president Mohamed Morsi on 3 July.
"The aid is just a one-off item; what will we do in 2014/15?" Abu Basha asks.
Fear of inflation
Economists worry that sudden rises in disposable income would put inflationary pressure on the economy given that those who will benefit from the rate have a high marginal tendency to consume, directing all extra income towards consumption.
"Retailers will tend to raise prices on expectations of a higher purchasing ability," Reham El-Dessouky, a Cairo-based economist told Ahram Online. "But we still need more information to determine the how the minimum wage will influence inflation."
Annual urban inflation eased to 9.7 percent by the end of August 2013, driven by a slight appreciation of the Egyptian pound against the dollar.
The pound is now trading at the official rate of LE6.9 to the dollar. A limited black market exists where the exchange rate is slightly higher.
"Public workers are less than quarter of the work force, so we still have to wait to see the private sector's minimum wage," El-Dessouky added.
The government said on Wednesday that representatives of workers and businesses have asked for more time to discuss a minimum wage rate for the private sector –which will come with its own set of complications.
“Maybe they will devise a scheme where the minimum wage would not all be cash but would include benefits,” El-Dessouky said.
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