Egypt’s passing of a draft law to allow the issuance of sukuk (Islamic bonds) has been touted by many as a solution to the North African country’s economic woes.

Plans for any sukuk issuance, including the government’s expected $1bn sovereign sukuk later this year, are unlikely to effectively plug the hole. Indeed, the government’s move into Islamic finance could be seen as much a political play as an economic one.

Egypt is struggling with a large deficit, continued political and social instability, and has been effectively barred from international debt markets due to its poor credit rating.

Cairo sees Islamic finance as a means of tapping into new forms of liquidity, boosting the country’s very low foreign currency reserves and drawing new Arab investors into Egypt. 

The passing of the law comes at the same time the government unveiled its new economic plan, which includes a variety of measures, such as tax increases, to narrow the deficit. The plan is a bid to secure the much-awaited $4.8bn funding package from the Washington-headquartered IMF after talks stalled in late 2012.

The government has set the target of reducing the deficit to about 10 per cent by the end of the fiscal year in June. It is a target many analysts believe to be overly ambitious, and unlikely to be met through the use of Islamic finance tools.

From a practical perspective, sukuk will be bound by the same financial constraints as any other fixed-income product. The issuance will have to be attractively priced to tempt investors, and given the continued political instability and low credit rating, Egypt is going to have to pay highly to issue bonds. 

The planned $1bn sovereign sukuk will at best act as a short-term solution to plug a few holes in Egypt’s economy. Yet the debate surrounding the use of Islamic finance only further highlights the divisions within the current government and the declining level of faith the general population has in its leaders.