Hossam Aql, an Egyptian professor of Islamic studies, encountered an unusual question on a religious radio talk show last month: is it acceptable for the government to borrow from the International Monetary Fund?
His answer was yes. In times of extreme need, he said, Muslims are allowed to resort to non Shariah-compliant options. Some groups, such as the ultra-orthodox Nour Party, which had decried the possible loan for violating Islam’s ban on interest, are now saying that Islamic debt can’t replace the $4.8 billion IMF accord. Egypt, rated 12 levels below Qatar, will borrow at about half the rate the emirate paid for sukuk in July.
Egypt’s worst economic slowdown in at least a decade is swaying a debate among Islamists toward those who favor the loan, making it easier for the government to secure the “critical mass” of support that the IMF says is needed for the agreement. Indonesia and Pakistan, the world’s two biggest Muslim countries by population, have both received IMF funds.
“The global financial system might not be compliant with some interpretations of our Shariah,” Aql, who teaches at Cairo’s Ain Sham University, said in a telephone interview Sept. 24. “But it would be foolish of us to demand of others a change in that system as long as we remain reliant on them for the most basic of our needs of goods and services.”
Rise of Islamists
Egypt’s popular uprising last year gave rise to Islamist groups that favor Shariah-compliant financing. The Nour Party, the second-biggest Islamist group after the Muslim Brotherhood, seeks a gradual removal of non-Islamic banks and an end to foreign borrowing, according to its economic program.
The absence of a law allowing sukuk sales leaves the Arab country, which is rated B at Standard & Poor’s compared with Qatar’s AA grade, reliant on non-Shariah compliant debt to finance the budget deficit. The government paid an average yield of 13.6 percent on one-year local-currency notes last week, more than double what similarly rated Lebanon pays, according to data from central banks in the two countries.
The five-year IMF loan would cost Egypt 1.1 percent, according to the government, though the fund has said the terms are still subject to talks. Qatar paid a rate of 2.099 percent on $2 billion in sukuk in July.
The risk premium investors demand to hold Egypt’s dollar-denominated debt over U.S. Treasuries climbed 27 basis points, or 0.27 percentage points, last week to 444, according to JPMorgan Chase & Co. data. That compares with 131 basis points for Malaysia, home to the world’s biggest Islamic debt market and one of the countries that didn’t take IMF aid during the 1997 Asian crisis.
The Egyptian government has touted the IMF loan as the only way to reignite foreign investments, help narrow the budget deficit, which widened to 11 percent of economic output in the fiscal year that ended in June. The Nour Party has bought the argument.
“We support the idea of getting the IMF’s endorsement for the government’s economic program because it will show others that we are on the path of reform,” Tarek Shaalan, head of the party’s economic committee, said by phone Sept. 24. “As long as we can borrow at a lower interest rate, we will continue doing so to reduce the debt burden and get to the point where we can only borrow on terms that are compliant with Shariah.”
Scholars such as Mohamad Akram Laldin, a member of the Malaysian central bank’s Shariah Advisory Council, also say loans by Shariah-compliant lenders including the Jeddah-based Islamic Development Bank, don’t invoke similar confidence among investors like the IMF or the World Bank.
“Unlike the World Bank, which has a bigger capacity, IDB is relying on limited funds from its contributors,” he said by phone Sept. 28. Egypt and the IMF can work out a Shariah-compliant debt structure, though that is a “remote” possibility, he said.
“It’s not up to the IMF to determine whether its lending is Shariah compliant,” Wafa Amr, an IMF spokeswoman, said in an e-mailed response to questions Sept. 29. “We can note, however, that the IMF’s lending terms are usually much more favorable than the terms available on the market.”
Some economists such as Nobel laureate Paul Krugman say the IMF helped worsen Asia’s crisis by dictating a one-size-fits-all policy of higher interest rates and lower government spending -- when developed nations facing slumps typically do the opposite.
Egyptian Finance Minister Momtaz El-Saieed didn’t answer phone calls to his mobile phone seeking comment yesterday.
Some ultra-orthodox scholars still oppose the loan. “Reba, whether small or large is prohibited,” Yasser Bourhami, deputy head of Aldawa Al Salafiya, one of Egypt’s biggest organizations of Salafi Muslims, said in a televised interview last month. Reba is the Arabic term of usury. “The main condition for interest to be permissible is for it to be in the form of administrative fee.”
Persian Gulf Investors
The lower costs shouldn’t slow Egypt’s efforts to develop a sukuk market to lure regional investors, said Shaalan of the Nour Party. “We will push to sell sukuk targeting Persian Gulf investors as a cheaper method of financing.”
Sales of Islamic bonds in the six-nation Gulf Cooperation Council surged to a record $17.8 billion this year, led by offerings from Saudi Arabia and Qatar, according to data compiled by Bloomberg.
Prime Minister Hisham Qandil said Sept. 9 that his government seeks to pass a sukuk law within three months. Sales of sovereign dollar-denominated Islamic debt in the Arab world are so far limited to Qatar, Bahrain, Dubai and Ras Al Khaimah, according to data compiled by Bloomberg.
The yield on Dubai’s 6.396 percent sukuk due November 2014 dropped 65 basis points last quarter to 2.88 percent Sept. 28, data compiled by Bloomberg show. The premium investors demand to hold Dubai’s sukuk over Malaysia’s investment-grade 3.928 percent notes maturing in June 2015 narrowed 144 basis points this year to 143 basis points today, the data show.
The yield on Egypt’s 5.75 percent dollar bonds due April 2020 tumbled 68 basis points last quarter to 5.82 percent, reflecting bets the country would secure the IMF loan after Mohamed Mursi, an Islamist politician, won the presidential election in June. The yield was little changed at 5.81 percent today.
“Failing to secure the money would reverse the recent improvement in sentiment, cast doubt on additional pledged funds and deter foreign investors from buying back into the Egyptian t-bill market,” Liz Martins, Dubai-based senior Middle East economist at HSBC Holdings Plc, said Sept. 27 in e-mailed comments.
The government has already said it may also miss this year’s target of 7.6 percent of gross domestic product.
For Aql, the radio talk show guest, accepting the loan is a no-brainer. “When there’s a an absolute necessity to borrow from external sources to fend off a disaster, such as what we’re seeing in our budget deficit, we cannot issue a blanket ruling calling it forbidden.”