October 15, 2015 / 1:00 PM / 2 years ago

UPDATE 2-Egypt weakens pound as forex crisis looms

(Adds economist, analyst quotes, background)

By Eric Knecht

CAIRO, Oct 15 (Reuters) - Egypt's central bank allowed the Egyptian pound to weaken on Thursday to 7.83 per dollar from 7.73, the first official depreciation since July and a move economists say is needed to ease a foreign currency crisis and support dwindling reserves.

The Egyptian central bank sold $39.6 million at a cut-off price of 7.8301 pounds per dollar at its Thursday auction, a 0.10 pound increase from its Tuesday auction.

The pound also weakened on the parallel market, with two traders quoting 8.22/25 pounds to the dollar, weaker than the 8.15/18 quoted on Tuesday.

Egypt is grappling with a foreign currency shortage that has crippled the ability of businesses to import.

Economists say the crisis has been exacerbated by an overvalued pound, the maintenance of which has cost the country billions in currency reserves since the 2011 uprising.

Foreign currency reserves, which stood at about $36 billion before the uprising, were $16.335 billion at the end of September despite billions of dollars in Gulf Arab aid since mid-2013.

Economists say easing the forex crisis requires restoring tourism, a pillar of the economy largely frozen since the 2011 uprising, and lowering the energy import bill, which drains about $700 million to $1 billion of hard currency every month.

As part of its efforts to attract foreign investment, Egypt has sought to tame a once-thriving currency black market with measures such as a cap on dollar-denominated bank deposits.

While the measures have largely succeeded in drying up the black market for dollars, they have also starved manufacturers of foreign currency they need to import raw materials and machinery, stifling economic output.

The perception that the pound remains overvalued has also kept many foreign investors on the sidelines and their badly needed foreign currency from entering Egypt.

"Many foreign institutions are waiting for the pound to depreciate so they can time their investments and not be exposed to a depreciating pound once they get into the market," said Allen Sandeep, director of research at Naeem brokerage in Cairo.

"Everyone we speak to is waiting for the depreciation to happen," said Sandeep, who expects further depreciation in the short-term.

Allowing the pound to weaken in a controlled way could boost exports and attract further investment, but it also raises Egypt's already large bill for imported fuel and food staples.

Analysts say those concerns, as well as fears that devaluing the pound will fuel inflation in a country where huge swathes of the population live hand-to-mouth, are behind the central bank's reluctance to act decisively.

But recent pressure on emerging market currencies has cast the Egyptian pound as particularly overvalued.

"The EGP has been appreciating in real terms in last few months and reached its peak in 2015, in light of international currencies losing value," said Hany Farahat, senior economist at CI Capital.

"Although the structural challenges facing the balance of payments indicate that devaluation will not solve all the problems...it certainly is the basic step that must be taken towards improving our FX base," said Farahat. (Reporting by Eric Knecht; Editing by Toby Chopra)

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