Egyptian pound weakens on black market despite central bank's efforts

CAIRO, March 20 (Reuters) - The Egyptian pound weakened on the black market despite central bank moves to close the gap between dollar demand and supply by pumping U.S. currency into the market, bankers and currency traders said on Sunday.

Egypt, which relies heavily on imports, has been starved for hard currency since a popular uprising in 2011 drove away many tourists and foreign investors.

A black market for dollars has sucked up liquidity from the banking system and put a strain on the country’s foreign reserves while the central bank had been keeping the pound artificially strong.

On Monday the central bank devalued the currency to 8.85 per dollar from 7.7301 but strengthened it on Wednesday to 8.78 per dollar as it adopted a more flexible exchange-rate policy.

To cover the imports of essential goods and dollar overdrafts at banks the central bank sold $2.4 billion over the past two weeks. That equates to 15 percent of its reserves, which tumbled to $16.5 billion in February from around $36 billion before the uprising.

“The market needs much more than the amounts that were injected by the central bank, especially since dollar inflows to the country are halted,” one currency trader told Reuters.

“The demand for dollars has no end to it. It’s like food and water. We have businessmen that need dollars every day.”

Shortly after an exceptional sale of $1.5 billion to cover overdrafts at banks on Wednesday, bankers said they were requested to deposit the same amount of dollars they received back into the central bank for one year at an interest rate of 1.2312 percent.

That move partially offsets the efforts to eradicate the black market for dollars, bankers said. The rest of the central bank injections were used for imports of essential goods.

“The money from the last exceptional sale was returned as a deposit at the central bank so there was no fresh money actually pumped into the market,” one banker said, adding that demand for dollars remains higher than supply in the market.

Despite the central bank moves to narrow the gap between official and unofficial rates, the Egyptian pound weakened on the black market to a range between 9.50 and 9.55 per dollar, compared with about 9.40 per dollar last week, currency traders said without giving transaction volumes. (Reporting by Asma Alsharif; Editing by David Goodman)