* Law paves way for Egypt’s first Islamic bond issue
* Could help support state finances, boost forex reserves
* Analyst sceptical of impact, says it’s “total hype”
* Fitch Ratings sees election timetable pushing back IMF deal
By Tom Perry
CAIRO, Feb 27 (Reuters) - The Egyptian government approved a draft law on Wednesday that will allow the state to issue Islamic bonds, or sukuk, a move that could help narrow a gaping budget deficit and boost foreign currency reserves that have fallen to critically low levels.
Finance Minister Al-Mursi Al-Sayed Hegazy said Egypt could raise around $10 billion a year from the sukuk market - much more than some analysts expect - but added that it would take at least three months to push through the necessary regulations.
Shaped by Egypt’s first Islamist-led administration, the law will also allow private borrowers to issue sukuk. Egypt has never before issued bonds that adhere to Islamic principles, under which the payment of interest is impermissible.
The law will be referred to the Islamist-dominated upper house of parliament before final approval from President Mohamed Mursi. An earlier version of the sukuk law had been criticised by Islamic scholars, forcing a rethink.
With the Mursi administration facing a deep economic crisis, the issuance of Islamic bonds could provide some financial support as parliamentary elections approach. The voting is set to begin in late April and stretch into late June.
Fitch Ratings said on Wednesday the timing meant conclusion of an agreement with the International Monetary Fund on a $4.8 billion loan could be pushed back well into the third quarter.
Foreign reserves have fallen to $13.6 billion - less than the $15 billion needed to cover three months worth of imports - and the deficit is forecast to hit 12.3 percent of GDP by the end of June unless economic reforms are implemented.
The deficit rose by more than a third in the seven months to the end of January from the same period a year earlier, figures released on Wednesday showed.
Hegazy, an expert on Islamic finance appointed earlier this year, said in January that the Islamic Development Bank, a multilateral institution, could be ready to buy around $6 billion of sukuk. He did not make clear on Wednesday whether the $10 billion annual figure referred to state issues alone, or included amounts he expected to be raised by private borrowers.
Others are less optimistic. “There is a total hype over the issue. It is a minor issue that might contribute funding of 10 to 15 percent of Egypt’s needs,” said Osama Mourad, a financial and capital markets expert. “The problem is not with the instruments but with the general investment appetite towards Egypt in times of confusion.”
The economy has been hit by unrest that has driven away tourists and investors, and the Egyptian pound has lost 8.2 percent against the dollar since the end of last year.
The government has said it will resume talks with the IMF next month on a loan that would unlock billions of dollars more of financial support from foreign states and international bodies. But an IMF agreement will also imply austerity measures.
Fitch Ratings said it had expected a deal in the second quarter. “But voting is now set to continue until late June, shortly before the start of Ramadan and the summer holiday season,” it said.
“This need not hold up negotiations, but finalising a programme would probably be more straightforward after contested elections that produced a government with a clear mandate to conclude a deal.”
Egypt reached an initial agreement on the loan in November but postponed final ratification following political unrest in Cairo, which led the government to put off tax increases needed to rein in the deficit.
In a summary of its new plans for the economy released this week, the government said it aimed to increase the foreign currency reserves to $19 billion by the end of June. But it did not say how. The plan will form the basis of talks with the IMF.
The government, in a statement released on Wednesday, described the plan as “much more gradual” than previous proposals. It said the reforms would be spread over a longer time frame, the impact of some of them would reduced while others were entirely dismissed. But it gave no details.