Prime Minister Atef Obeid issued a directive on 24 March ordering ministries, economic authorities and all public and private sector companies earning revenues in hard currency to transfer these revenues to local banks and convert at least 75 per cent of these proceeds into Egyptian pounds. The directive is backdated to apply to all revenues earned since 1 January.

The move is intended to boost the supply of foreign currency at banks and to weaken the parallel market by depriving it of hard currency from the corporate sector. The reluctance of local banks to sell foreign currency due to continued shortages has helped the black market to flourish since flotation in January, although the gap between 'official' and 'parallel' rates has closed slightly over the last month. The parallel black market was offering average rates of about $1=£E 6.30 in late March, compared with commercial bank rates of about $1=£E 5.70.

The Central Bank of Egypt has made several attempts to bridge the exchange rate gap in the last month, including the provision of $1,200 million in reserves to commercial banks to enable them to offer foreign exchange services to customers rather than hoarding dollars. But banks have also received instructions to limit the amount of hard currency withdrawals clients can make to $10,000 a day.

Local bankers warn that the latest measure may be counter-productive in the long-term. 'If there were to be a truly free-floating exchange rate, there would be no need for such a directive,' says a report produced by the local EFG-Hermes. 'The concern here is that market participants, both individuals and corporations, will fear further controls - for example, on transfers of capital - and will take anticipatory steps. Furthermore, over time the private sector can be expected to develop mechanisms that allow it to circumvent the current regulations. as has happened in other countries with similar rules, such as China and Russia.'

Industry sources say that many companies are already preparing to transfer revenues to offshore accounts to avoid the new regulations. 'This has really hit the market like a bomb, and the fear is we're moving back to the old days when you kept your money under a mattress,' says a Cairo-based lawyer.

Lawyers also warn that the new capital controls may create serious legal problems for the government in the long-term. Senior legal sources at the Court of Cassation have indicated that, if it can be established that the decree amounts to an expropriation of company assets, it may violate foreign exchange and foreign investment legislation.

Egypt has endured five years of flat economic growth and a recession in the tourist industry, the country's main hard currency earner. Over this period the central bank's declared foreign currency reserves fell to $14,000 million at the end of 2002, from a peak of $20,000 million in 1997.