* Egypt abandoned currency peg to dollar last week
* Shortage of dollars continues to pressure pound
* Government urges Egyptians to shun black market (Adds closing rate)
By Asma Alsharif and Eric Knecht
CAIRO, Nov 7 (Reuters) - Egypt’s pound weakened on Monday, its second day as a freely trading currency, and traders said they expected further declines as a severe dollar shortage in the banking system was stifling liquidity.
The central bank abandoned the pound’s peg of 8.8 to the dollar last Thursday, devaluing it by a third before unshackling the currency in an effort to attract inflows of capital and crush a booming black market in dollars.
The pound traded at an average of about 16.83 to the dollar on Monday, but movements were volatile and spreads wide as banks tested the interbank system for the first time after years of strict central bank control over the currency.
On Sunday the pound dropped to around 16 from 15.50, but interbank trading volumes were small as banks held on to the few dollars they had.
“Today we have done no deals. Yesterday there were conversations but we had no accepted transactions,” said a trader at one bank.
Import-dependent Egypt has struggled to attract dollars and revive the economy since a 2011 uprising that ended Hosni Mubarak’s 30-year rule drove away tourists and foreign investors, essential sources of hard currency.
As the currency peg drained its foreign reserves, the central bank introduced capital controls and rationed dollars, forcing importers to turn to the black market for their needs.
The pound reached a record low of 18 per dollar on the black market four days before the float as fears grew that the government would be unable to carry out reforms required for a $12 billion loan from the International Monetary Fund that was announced in August.
But importers and dealers who bought at the top of the market are unlikely to sell until the pound hits 18, bringing dollars flooding back into the banking system to stimulate trade and stabilise the currency.
“Anyone who speculated last week bought dollars at high rates and, so far, current rates do not cover the cost of purchase for most of them,” one banker said. “The rate will need to hit 18 Egyptian pounds or so to the dollar before they off-load, if they do.”
IMPORTERS’ WOES EASE
The slide on the black market prompted a boycott by frustrated importers who realised they would be unable to pass on the increased cost to customers struggling with 14 percent inflation. The importers’ boycott drove the rate back to 13 per dollar, giving the central bank an opportunity to drop the peg.
Some bankers and black market dealers predicted the black market would reopen, however, if banks proved unable to find enough dollars to supply the market.
Banks have been opening daily until 9 p.m. to accept dollar deposits and sales from Egyptians who had stashed dollars under their mattresses to hedge against inflation.
The government has placed public announcements on Egyptian radio calling on Egyptians to shun the black market, blaming it for fuelling inflation, and instead to use the banks.
It was not clear how many dollars had come into banks since the float. Some economists said the government was betting on clinching the agreement with the IMF, which should bring a fresh injection of hard currency into the economy.
“There will not be an active interbank market before banks cover their short positions and banks are currently afraid to cover their short positions in order not to make losses so they are buying and selling to clients,” said one banker.
Importers, who had been forced to source all their hard currency from the black market for months, said they had obtained dollars from the bank since the float.
“We got about 60 percent of our needs today and this is more than we have gotten in months. We were jumping for joy. If we keep getting these levels we can get a good pipeline going and it won’t be a problem,” said one commodity trader.
Another trader who received a large amount of dollars he had been waiting for said: “It’s getting a bit easier now to get yourself covered from the bank so it’s a good thing.” (Additional reporting by Ahmed Aboulenein; Writing by Lin Noueihed; Editing by Gareth Jones, Larry King)