Bludgeoning Syria’s economy

The past 12 months have been devastating for Syria’s economy. Gross Domestic Product (GDP) has contracted by several percentage points (possibly by as much as 20 percent), the foreign currency reserves accumulated during the country’s short oil boom have been seriously depleted, the fiscal deficit has at least doubled, the national currency has lost some 15 percent of its value and the confidence the country was starting to gain from international investors has been shaken.

The prospects do not look any better for next year, with western sanctions on the country’s oil and banking sectors gradually starting to impact broader sectors of the economy and the Arab League likely to adopt similar measures.

One of the most frustrating aspects of the last year has been the confusion created by the government over its policies. After decades during which the economy was centrally planned the country adopted in 2005 a “social market” development model, in which the state was expected to limit its intervention to “social services” and to give the private sector more freedom to operate.

The debate over the role and size of the state in the economy seemed to have been finally settled, and until early this year the government had applied this relatively clear road map in spite of its shortcomings and justified criticisms.

Within days of the beginning of protests in the southern city of Daraa in mid-March, however, priorities changed entirely. Subsidies paid on energy products that were deemed “unsustainable” until a few weeks earlier were increased by some 25 percent, civil servants’ salaries rose 30 percent and free trade agreements that had been in place since 2005 were now to be renegotiated.

The moves unsettled analysts and investors and appeared to have been made out of panic rather than on the basis of any rational analysis.

Then, as the year was coming to a close, more confusion came. Minister of Economy Mohammad Nidal al-Shaar, realizing the extent of the damage, said that the decision to raise subsidies and salaries announced in March was “unsustainable” and that the government could not subsidize the economy forever.

The lesson to be drawn from all this is straightforward: You do not solve political problems with economic measures. To protesters chanting “we want freedom,” the government responded by saying “we will pay you better salaries”. The protesters continued to take to the streets because their demands were not met and, as the government was spending above its means, an economic challenge was added to the political problems that remained unanswered.

How dark are the prospects for the Syrian economy?

In the short-term one should not expect miracles. Investment and spending will continue to decline next year, and as foreign currency earnings decrease renewed pressure on the value of the Syrian pound should be expected, with all that entails for inflation and loss of purchasing power.

In the longer term, however, the dramatic political changes that are likely to result from the current unrest carry significant opportunities.

Liberalization alone has not been enough to revitalize the economy and it has in fact highlighted its weaknesses. The country has one of the most diversified economies in the Middle East with four different sectors each generating more than 10 percent of GDP (agriculture, oil and gas, tourism and trade) and three others making up more than 5 percent (manufacturing, finance and real estate). It also benefits from a relatively large market, a well-educated workforce and an extraordinary geographic location.

However, in spite of all these comparative advantages, and years of reforms, Syria attracts less foreign direct investment than its much smaller and resource-poor neighbors, Lebanon and Jordan. And it regularly ranks among the worst performing economies in most global surveys; 14 out of 17 countries in the Middle East in the Doing Business Index of the World Bank and 15 out of 16 countries on the Competitiveness Index of the World Economic Forum.

The underlying reason for this lacklustre performance is a business environment plagued by an overwhelming and corrupted bureaucracy, a judicial system mastered by the well-connected few and a broad sense of unaccountability and lack of responsibility across the state and its institutions.

These are challenges that cannot be solved through economic measures; rather they require deep changes in governance that are unlikely to ever take place under the current political system.


Note: This article appeared first in the December 2011 edition of Executive Magazine