Speaking at a press conference June 8, Finance Minister Mohamed Maait said that the bill would allow Egypt to join the Islamic finance market where sukuk issuance amounts to $2.7 trillion.
Maait noted that the ministry began communicating with the various ministries regarding projects that would serve as guarantees for future sukuks. He said that a team from the ministry will communicate with international investment banks to identify potential markets for issuing bond offerings and issue price.
Maait continued that joining the Islamic finance market would attract new Egyptian and foreign investors based on the principles of Sharia in both local and foreign currencies.
On May 17, the Senate (upper house of parliament) gave final approval for the sukuk bill, based on the joint committee made up of the parliamentary financial, economic affairs and investment committee, and the constitutional and legislative affairs committee.
In a report submitted to the Senate, the joint committee recommended approval of the bill, because it aims at providing the necessary funding to new investment projects, restructuring government projects and financing the state’s budget.
The committee viewed that the bill is favorable for investments, as sukuks would make various financing mechanisms available to the government. After the banks served as a main financier, now individuals and non-bank financial institutions will be allowed to invest there, particularly since they go in line with the principles of Sharia, pursuant to Article 2 of the constitution, it added.
The article states, “Islam is the religion of the state and Arabic is its official language. The principles of Islamic Sharia are the principle source of legislation.”
Under the bill, Sharia-compliant sovereign bonds consist of securities issued by the Ministry of Finance for the very purpose of financing the state’s public budget. They are common shares in the ownership of assets or services or both, or in the assets of a particular project or investment activity.
Although the bill stipulates that sukuks are issued with a maturity of 30 years, they may be issued again for a similar period.
Despite its approval, some parliamentarians objected to the bill because it offers foreign investors the opportunity to have shares in important national projects, which they believe would negatively affect Egypt’s national security.
During parliament’s plenary session June 6, Diaeddine Daoud, a member of parliament for the 25-30 bloc, denounced the bill as an instrument to control important national projects through sukuk offering in vital projects such as the Suez Canal or the Aswan Dam.
He demanded that the country’s vital projects be protected from such a financing instrument, out of fear that it reaches the Suez Canal, the Aswan Dam or any other important national project.
Speaking to Al-Monitor, Daoud said his bloc rejected the bill because it would lead to more debts and increase public debt, which the future generations will have to bear.
“The annual installments reached 1.14 trillion Egyptian pounds [$72.7 billion], which includes the installments and interests owed by the government to foreign [lenders]. How can the government pay off these debts by approving this bill that will increase them [the debts] to reach record numbers,” he warned.
Daoud said another reason for rejecting the bill is that it will pave the way for radical religious parties to invest in Egypt, such as supporters of political Islam or Muslim Brotherhood members, similar to the former regime of Hosni Mubarak. Back then, he explained, the Brotherhood took control of large parts of the Egyptian economy. “As we [in the bloc] believe in a civil state, we refuse to have any religious [move] linked to reviving the economy.”
Basant Fahmy, an economic expert and former member of the parliamentary Economic Affairs Committee, told Al-Monitor that the government has begun considering sukuks, which is one of the most important nontraditional financing instruments, at this particular time in order to promote the national economy and overcome the challenges Egypt is facing. She said that the government seeks to finance the state’s general budget through these sukuks and to restructure debts.
On June 15, parliament approved the budget for fiscal year 2022. Maait said during the parliamentary session that the government seeks to reduce the deficit — which is the difference between expenditures and revenues — to 6.7% of the gross domestic product (GDP).
On Dec. 20, 2020, the Ministry of Finance said that the budget deficit amounted to 462.7 billion Egyptian pounds ($29.5 billion) in fiscal year 2020, which is the equivalent to 7.89% of GDP.
On Jan. 11, the Central Bank revealed that Egypt’s external debt rose by about $1.847 billion, thus hitting $125.337 billion at the end of September 2020, compared to $123.490 billion in June 2020.
In an attempt to bridge the budget deficit, the Central Bank issued June 13 treasury bills worth 18.5 billion Egyptian pounds ($1.18 billion), on behalf of the Ministry of Finance.
Fahmy said that the government took too long to offer this type of financing instruments, to attract and increase investments naturally through specific projects and activities made available to investors so they can choose what suits them. This is unlike treasury bills, which consist of borrowing money and paying them off during a certain period, she noted.
She added, “The bill will therefore attract a new class of investors that did not exist before and did not participate in any investments in the issuance of financing and debt instruments by the current government.”
Commenting on the national security concerns, Fahmy said that the holder of the instrument will have ownership of the asset offered by the state for a specific period, for five or 10 years, and a maximum of 30. When this period is over, the government will have the right to refuse any renewal, which means that the bill does not pose any danger to national security, she explained.
Fahmy concluded, “In light of the challenges facing the government, all obstacles negatively affecting the flow of foreign investments into the country need to be overcome, because that impedes the national economy. This is particularly true since many countries have implemented the law for decades, and have not been exposed to any national security risks.”
Malaysia, Saudi Arabia, Indonesia, the United Arab Emirates (UAE), Qatar and Turkey have acquired more than 93% of globally listed Islamic bonds, with 47% for Malaysia, 18.2% for Saudi Arabia, 13% for Indonesia, 9.5% for the UAE, 3.4% for Qatar and 2% for Turkey.