Egypt’s first local-currency sovereign sukuk received robust demand from investors, but the marginal yield advantage over traditional bonds raises doubts about whether Islamic finance tools can meaningfully reduce the country’s soaring debt costs.
The Finance Ministry sold 3 billion Egyptian pounds ($97 million) in three-year sukuk on Monday, structured under an ijara model that uses state-owned assets in Ras Shukeir as the underlying collateral. The offering was oversubscribed by more than five times, with participation from 16 banks including the country’s four Islamic lenders.
Despite the demand, the sukuk priced at an average yield of 21.56%, just 14.3 basis points below equivalent-maturity treasury bonds sold in the same auction session, and 26.2 basis points under conventional bonds issued a week earlier.
While that constitutes a technical win, the narrow spread highlights the uphill challenge Egypt faces in trying to lower borrowing costs amid deepening fiscal stress.
First outing, limited savings
The offering marks the launch of Egypt’s 200 billion-pound domestic sukuk program, aimed at attracting investors who prefer sharia-compliant assets and expanding the country’s financing tools beyond conventional debt. The sukuk benefit from equal tax and accounting treatment as government bonds and will be issued through Egypt’s primary dealer system.
Officials had framed sukuk as a potential source of cheaper and more diversified financing. Yet the results from this first offering suggest that while demand is real, pricing advantages are not yet material—a disappointment for policymakers hoping for a breakthrough as debt costs climb.
Debt costs remain a structural burden
The sukuk auction came just a day after Egypt’s Finance Ministry published first-quarter data for FY 2025/26 showing that interest payments surged to 695.2 billion pounds between July and September 2025—a 54% increase compared with 451.8 billion during the same quarter last year.
This spike in debt servicing comes despite a shift toward monetary easing by the Central Bank of Egypt (CBE), which started cuting interest rates earlier this year for the first time since inflation peaked. The figures underscore the depth of Egypt’s debt burden and suggest that fiscal pressures are likely to persist regardless of monetary conditions.
Economists say Egypt’s current strategy—relying heavily on short-term debt instruments with high yields—has become unsustainable.
The government has acknowledged this risk and launched efforts to lengthen the maturity profile of public debt, reduce reliance on conventional borrowing, and tap into alternative markets, including sukuk and green bonds.
What’s next for Egypt’s debt strategy?
Egypt’s government has outlined plans to raise up to $4 billion from international bond and sukuk markets in FY 2025/26, signaling a continued reliance on market-based borrowing to bridge financing gaps. While external debt continues to mount, the domestic market remains the primary source of short-term funding.
Officials hope sukuk can play a larger role in fiscal management, particularly for development-linked spending in sectors like renewable energy, green hydrogen, clean transport, affordable housing, and ICT infrastructure—all areas targeted by the current government as part of its inclusive growth agenda.
Yet to realize those ambitions, the sukuk program must prove its ability to reduce overall borrowing costs, not just broaden participation.
Meanwhile, some economists say Egypt’s pivot to sharia-compliant and ESG-aligned instruments could support efforts to reduce dependence on IMF lending after the current program ends in 2026—especially if global interest rates begin to ease and investor appetite for frontier markets returns.
