By Asma Alsharif

CAIRO (Reuters) - Egypt's war on black market currency traders is not going to plan. One month after a devaluation that was supposed to ease an acute dollar shortage in the banking system, clandestine business is booming in cafes, shops and flats.

The central bank, which hoped the 13 percent devaluation would relieve downward pressure on the Egyptian pound, has cracked down on exchange bureaux trading far outside its set range.

And yet the gap between the official and black market rates, which briefly narrowed with the devaluation, is now wider than ever, with dealers buying and selling dollars for 20 percent or more above the official rate of 8.78 pounds.

Traders say the crackdown has only exacerbated the crisis. People with dollars are shunning the official financial system, starving it of foreign currency. This is putting yet more pressure on the pound, with potentially dire consequences for inflation, investors' confidence and economic growth.

"No one sells dollars to the banks any more. They all prefer to go to the black market which will pay them more," said one banker who asked to remain anonymous. "The dollars don't come into the banking system any more and the central bank's dollar reserves are not enough to support the country's import needs."

Egypt has struggled to restore growth since the 2011 uprising that toppled President Hosni Mubarak scared away tourists and foreign investors - vital sources of the foreign currency it needs to import everything from fuel to food.

Eradicating the black market is essential to restoring investors' confidence, easing the risk that the pound's volatility will erase their profits.

Already, foreign investors are struggling to repatriate earnings because the central bank's reserves have more than halved since 2011 to about $16.5 billion in March. This has made it hard for them to convert pound earnings into foreign currency through the banking system.

Even before last month's devaluation, which was accompanied by the launch of financial instruments aimed at attracting hard currency to the banks, the central bank had resorted to legal force. In February, it revoked the licenses of four exchange companies with 27 offices.

Since then, the expected influx of dollars has failed to materialize and this month it referred 15 more exchange firms to public prosecutors. Then on Wednesday the central bank said it had revoked the licenses of nine more companies for manipulating prices of dollars in the parallel market.

REPEATED OFFENCES

"The decision ... comes after repeated offences by these companies which distorted the exchange market and has harmed the national economy," said Gamal Negm, deputy central bank governor, in remarks published by the state news agency MENA.

Negm added that the bank is working on a new law that could raise the punishment for violators to a prison sentence.

Bankers say the clampdown has backfired because as it became riskier to deal on the black market, the dollar strengthened against the pound and people began hoarding foreign currency to speculate on the rate. This pushed the U.S. currency yet higher, and the pound hit a record low of 11.50 to the dollar this week.

"Traders are speculating on the dollar and those who need dollars for imports can't find the dollars and must buy them from traders and speculators, so the black market rate is putting theEgyptian economy in a tight spot," said Ziad Waleed, an economist at Beltone Financial.

Any further official devaluation would threaten to fuel inflation, a politically explosive development in a country where millions live in poverty. That leaves the central bank with few weapons in its arsenal.

One trader described the situation as a standoff, saying that while the central bank is trying to punish black market dealers, it does not have the resources to fight them.

"We will secure ourselves and we will continue to work and we will do it carefully, as if we were dealing in drugs. We will hoard the dollars and we won't sell. Where will the central bank get dollars from?" he said.

EASY EVASION

Just a few blocks away from one Cairo exchange bureau, a trader sipped coffee at a downtown cafe as he closed deals over the telephone away from the prying eyes of the authorities.

"Do you have riyals?" he asked another trader, quoting the black market rate for the Saudi currency. "I will take all of it."

This is one example of how easily traders are adapting to tighter oversight.

They quote official rates at the exchange bureaux, which are closely monitored, without making any deals. Business is then done at cafes or elsewhere at black market rates, dealers said.

Outside the bureaux, young men puff on cigarettes and whisper to customers: "Dollars? Euros?"

"No one buys or sells at the official rate, so as soon as the customer leaves there are guys standing outside to catch them and deal with the unofficial rates," said another exchange bureau manager in downtown Cairo.

It should be easy to clamp down on these men, but traders say agents of the Interior Ministry's General Department of Public Funds Crime Investigation Unit, which is responsible for tackling illegal trading outside the bureaux, are easily bribed.

Reuters spoke to 10 traders who either work, own, or collaborate with exchange bureaux and all said that their operations run smoothly thanks to bribes and favors that are given to Public Funds forces and central bank employees.

"It does not put a dent in profits," said one exchange bureau worker, adding that a single branch of the company he works for makes around 6 million Egyptian pounds ($675,680 at the official rate or about $522,000 on the black market) in profit each month on black market trades alone.

The Interior Ministry spokesman did not respond to requests for comment and officials at the central bank, which does not have a spokesman, were not available for comment.

Exchange bureaus are licensed to operate with a certain amount of funds but most have offices or apartments where business is carried out off the books.

"If they close the exchange bureaux we will continue to work from the streets and this way the dollar price will reach 13 or 15 pounds per dollar," one trader said.

LUGGAGE SHOPS AND CARS

President Abdel Fattah al-Sisi has made economic revival a priority but is also mindful of protecting the poor, with his government slowing cuts to subsidies which keep down some food and fuel prices but burden the budget.

If the central bank is forced into repeated devaluations to keep up with the black market, this would be a nightmare for authorities trying to stabilize the economy.

But so is the current situation, where the public sector functions at an official exchange rate wholly disconnected from the rest of the economy which has to deal on the black market.

Black market activity is fast and efficient.

In Cairo, a luggage store manager took 20,000 pounds from his wooden desk in return for $2,000, a deal made with a customer who had been turned down at the exchange bureau next door. The operation took under a minute.

One trader showed Reuters a car he uses to transfer funds to clients in rubbish bags hidden in the boot. "The largest amount this car carried is the equivalent of 11 million Egyptian pounds," he said proudly.

(Editing by Michael Georgy)