Gov’t to launch tax-backed sukuk to tap corporate cash reserves

The Madbouly government is preparing to issue tax-backed sukuk for the first time, allowing corporate taxpayers to purchase sovereign-yield-bearing certificates today and surrender them to clear future tax liabilities, after President Abdel Fattah El Sisi approved the proposal, according to an Ittihadiya statement. The government expects the tax-exempt instrument to lower its borrowing costs and debt-service bill, offering a more stable alternative to conventional treasury bills.

How it works: Each issuance will carry a fixed, tax-exempt yield for its full term, with the Finance Ministry setting the rate before each issuance based on the Central Bank of Egypt’s (CBE) credit and discount rate and prevailing market conditions, a senior government official tells EnterpriseAM. That means later issuances could carry different rates as market conditions change, helping keep the instrument attractive enough for taxpayers to park liquidity in the sukuk rather than deploy it elsewhere. Companies “will compare it as an alternative to utilizing their funds in Treasury bills,” Al Ahly Pharos Head of Research Hany Genena tells us, describing the sukuk as another option for the “optimal allocation of their excess cash.”

What are the benefits for taxpayers? “The new sukuk will be treated as an advance payment toward tax liabilities,” the official explains, adding that “this spares taxpayers from future accumulated delay penalties, while offering a tax-exempt yield that exceeds the central bank’s corridor discount rate.”

No new law needed: The mechanism has been sitting unused in the Income Tax Law since 2005, according to the official, giving the Finance Minister the authority to issue the certificates and set their tax-free return. This would be the first time the provision is activated.

Why it matters: The government is looking for cheaper ways to bridge a large funding gap. The Finance Ministry plans around EGP 3.4 tn in new sovereign debt against an EGP 4 tn financing gap this FY, while interest payments currently eat up 70-80% of tax revenues. Genena sees the sukuk as an alternative to conventional T-bill and bond issuance that could lower the ministry’s funding cost — but says diversification alone has value: “It’s going to be just another way to secure funding,” he says, “even if at equal cost.”

Why corporate Egypt? “Corporate Egypt has been piling cash” over the past two years, Genena says, while the CBE has “withdrawn from the funding market” and the banking system has become “very overstretched.” Foreign investors are still participating in the T-bill market, but their contribution has become “on and off” amid regional volatility, he adds. That leaves cash-rich corporates as a “more stable, more secure” pool of funding for the state.

DATA POINT- The Finance Ministry issued EGP 1.4 tn in various debt instruments during the first six weeks of the current FY, up roughly by EGP 200 bn compared to the same period a year earlier, according to recent Finance Ministry data seen by EnterpriseAM.

More in the toolbox: The ministry is studying other future receivables that could be brought forward through similar structures, the official tells us.