By Asma Alsharif and David Stamp

CAIRO, March 21 (Reuters) - Egypt's revival of a scheme meant to protect foreign buyers of government debt and stocks will struggle to achieve a wider aim - easing an acute dollar shortage.

Earlier this month the central bank reopened a modified version of a mechanism last used in 2003 which ring-fences dollars invested in Egyptian securities.

This aims to reassure foreigners that they can recover their hard currency when they sell.
But with no end in sight to the slide in value of the Egyptian pound, foreigners fear that any pounds they earn on their investments will be worth fewer and fewer dollars.

"Although a similar scheme was successful a decade ago in halting a drop in the value of the Egyptian pound at a time when foreign currency reserves were low, the current economic and political landscape is very different," said Oliver Coleman, an analyst at the Maplecroft risk consultancy.

"Egypt is a far less attractive prospect (today)," he added.

Whereas Egypt eventually stabilised the pound a decade ago under autocrat Hosni Mubarak, the current democratically-elected Islamist government has a much looser grip on the country.

Turmoil since the fall of Mubarak two years ago has shaken business confidence, pushing the Egyptian pound sharply lower even though the central bank has spent more than $20 billion from reserves in trying to prop the currency up.

With reserves now at a critically low $13.5 billion, covering little more than two months' imports, the central bank is tightly rationing dollar supplies through currency auctions.

A $4.8 billion loan from the IMF has yet to materialise and many investors and businesses are finding it nearly impossible to get hold of dollars through the banking system. This is forcing them to accept highly unfavourable black market rates.

DOLLAR RATIONING

Under the "Foreign Investors' Repatriation Mechanism", reopened on March 17, foreign currency inflows through commercial banks are sold to the central bank and parked in the Foreign Investment Fund. When investors sell their Egyptian assets, they can then withdraw the sum in dollars from the Fund.

But Mona Mansour, chief regional economist at CI Capital, doubted the mechanism would achieve its wider aims, especially after the public prosecutor froze the assets of 23 investors and officials including some from Saudi Arabia and the United Arab Emirates, while it investigates alleged stock market manipulation.

"As long as the political risk remains high and investors have their accounts frozen, I don't see foreign inflows materialising," she said.

While a court overturned the asset freeze on March 20, the investment climate remains fraught, with a number of senior business figures under investigation or subject to travel bans.

But the overriding concern for foreigners is that a further slide in the pound could wipe out even the relatively high returns - 12-14 percent - on Egyptian treasury bills.

At 6.7881 to the dollar - the cut off at Thursday's foreign exchange auction - the pound has now lost 9 percent since just before the central bank dollar sales began late last year.

Its value has fallen to 7.0-7.25 on the black market and forward contracts imply a dollar will cost at least 8.28 pounds a year from now.

"It is most unlikely that any Egyptian-pound denominated debt will be of interest to foreigners at the moment," said Gabriel Sterne at Exotix in London.

Sterne believes local banks could keep on buying government debt. "The state-owned banks in particular can be relied upon," he said. "They have increased their share of T-Bill holdings from 14 percent to 22 percent of the stock between January 2011 and November 2012, and there is plenty of scope to increase further."

But that won't bring dollars into the economy - and meanwhile the budget deficit is soaring to unaffordable levels.

Egypt has yet to start negotiating in earnest for an International Monetary Fund deal which was agreed in principle last November, but delayed due to violent protests.

The government forecasts the deficit will hit 189.7 billion pounds ($28 billion), or 10.9 percent of gross domestic product, in the year to June, up from 166.7 billion a year earlier.

This assumes urgent economic reforms are made. Without them, the deficit is forecast to hit 12.3 percent of GDP.

"An IMF deal would be a key endorsement which would signal to all concerned that Egypt gets back on the right path to work through its current difficulties," said Giyas Gokkent, Group Chief Economist at Bank of Abu Dhabi.