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* Foreign investors' funds to be ring-fenced at central bank
* Scheme expanded to foreign purchases of government debt
* Local banks reaching limits of t-bill purchases
* Foreigners may remain cautious due to turmoil, no IMF deal
By Asma Alsharif
CAIRO, March 17 Egypt opened a scheme on Sunday allowing foreign investors in its financial markets access to dollars despite a hard currency shortage, a move which analysts said aimed to attract external funding for the soaring state budget deficit.
The central bank said it was restarting a mechanism helping foreign investors to repatriate their funds that was last used in 2000-2003 - also a period of dollar shortages when the Egyptian pound's value fell sharply.
Previously the scheme covered purchases on the stock market. However, the central bank said in a statement that the "Foreign Investors' Repatriation Mechanism" would now be expanded to cover treasury bills and bonds.
"In addressing the central bank's responsibility for moving the Egyptian economy securely through the exceptional circumstances that the country is going through, it has decided to reenact those mechanisms starting Sunday," the bank said.
The mechanism requires foreign currency inflows through commercial banks be sold to the central bank and ring-fenced in the Foreign Investment Fund. When investors sell their Egyptian assets, they can then withdraw the sum in dollars from the Fund.
The statement did not make clear whether the scheme applies only to new purchases of Egyptian assets or if it would also cover existing investments. Central bank officials were not available for comment.
Egypt has endured two years of political instability, driving tourists and foreign investors away and draining its foreign reserves. These fell to a critical level of $13.5 billion at the end of February from $36 billion just before the uprising that ousted President Hosni Mubarak in 2011.
The Egyptian pound has lost more than 8 percent against the dollar since the end of last year and central bank has rationed dollars through auctions to commercial banks to slow the slide in the pound and the reserves.
Hany Genena, head of research at Cairo-based Pharos Investment Bank, said the scheme aimed to offer security at a time of deteriorating state finances.
"It gives confidence to foreign investors that their funds invested in Egypt will not be utilised to finance the balance of payments," said Hany Genena, head of research at Pharos Cairo-based Pharos Investment Bank.
A MAJOR HEADACHE
Egypt's current account deficit narrowed in July-December, data showed on Thursday, but economists said it remained a major headache that is adding to pressure on the government to do a deal with the International Monetary Fund.
The government agreed with the IMF on a $4.8 billion loan last November but requested a delay the following month due to violent protests. Since then it has forecast its budget deficit will soar to 12.3 percent of GDP in the year to June unless it makes reforms.
The IMF's Director for the Middle East and North Africa Masood Ahmed met Prime Minister Hisham Kandil on Sunday but gave few details beyond saying that very good progress had been made and technical discussions would continue.
In the absence of an IMF deal, the central bank appeared to hope foreigners would resume buying government debt which they had largely dumped after the 2011 revolution.
Genena said hard-pressed local banks were reaching the limits of how much in treasury bills they could buy. "This is to attract foreign investors to come in. They added the T-bills to this fund because many of the banks have reached the ceiling to finance the government," Genena said.
"We ended up in a situation where we need foreign banks to invest in the T-bills. Banks have no more capacity to finance the government," he added.
However, foreigners may remain cautious while the IMF deal and Egyptian politics are up in the air. Egypt and has rejected the possibility of short-term IMF financing during its current political uncertainty.
Parliamentary elections were supposed to start next month but a court cancelled President Mohamed Mursi's decree calling them. An appeal against the ruling was postponed on Sunday for a week.
Fitch agency cut Egypt's sovereign credit rating by one notch to B in January, citing weakening public finances, pressure on reserves and political upheaval. It assigns the country a negative outlook, indicating the potential for further downgrades in the next 12-18 months.
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