By Asma Alsharif
CAIRO, March 7 (Reuters) - Egypt's interbank market has stagnated this month after the flurry of activity in February caused by an influx of foreign inflows died down.
The interbank market was reactivated in early November following a central bank decision to abandon the currency peg of 8.8 pounds to the U.S. dollar in the hope of unlocking currency inflows and fighting a black market for dollars which diverted funds away from the banking system.
Bankers said the interbank market was stagnant in the first few months after the float as banks struggled to meet pent up dollar demand from their own clients, leading the pound to devalue to almost 20 per dollar in December, but in February inflows poured in and banks began selling excess dollars on the interbank market.
An influx of hard currency from foreign investors attracted by the high yields of Egyptian treasuries in February, after the successful $4 billion Eurobond sale, combined with a decline in dollar demand from importers resulted in a few weeks of activity in the interbank market.
"There was a snowball effect which started after the sale of the Eurobonds ... The funds came in and the dollar price started declining and people started to panic and sell their dollars," said one Egypt based banker who declined to be named for not being authorised to speak to the media.
This resulted in the dollar weakening against the Egyptian pound to reach 15.75 per dollar and banks said interbank activity flourished in early February, with some banks' transactions averaging around $15 million per day, although others said it was less.
"The market is fragile and not very deep so if $200-300 million enters the market at once they can make a difference," the banker said.
Banks had been holding the pound at near $16 per dollar since mid-February despite a pick up in dollar demand and declining inflows of dollars, causing a black market to re-emerge and divert liquidity from banks once more.
"Foreign investors did not leave but no new inflows came in either and the market stopped for a bit at that level ... In the third week of Feb things started slowing down. Currently there is no supply and the interbank market is stagnant," the banker added.
Another Egyptian banker said banks will need to raise their rates for the dollar in order to attract more liquidity into banks and fight the re-emerging black market.
"The interbank volumes are back to levels before the floatation. All banks have issues with the foreign currency because clients are withdrawing their dollars and selling at the black market," he said.
On Tuesday banks raised rates for buying dollars to around 17.40 per dollar, up from 16.75 a day earlier, in the hope that they will attract flows back into banks but one black market trader told Reuters they are buying dollars at a range between 17.45-17.65 and trying to sell at a range between 18.5-18.3.
(Reporting by Asma Alsharif, editing by David Evans) ((firstname.lastname@example.org; +20225783290; Reuters Messaging: email@example.com))