Inflating Syria’s crisis

The Syrian government announced in June the imposition of new restrictions on private sector imports, a move that reflects the authorities’ growing nervousness as all economic and financial indicators are in the red.

In a decision issued on June 10, Syria’s Ministry of Economy and Trade required all traders to apply for an import license before conducting any import transaction. While this license already exists for many items, it is now extended to products that were exempted from it, such as food products and medicines. After obtaining their license, importers will also need to find their own source of financing and will no longer be able to rely on the Central Bank of Syria (CBS) to buy their foreign currencies. By increasing paperwork and making it more difficult for importers to access foreign exchange, the government hopes to slow or discourage impåorts.

At the same time, the ministry announced that it would use state-owned enterprises to import directly a list of key food items such as sugar, rice, tea, coffee and canned food. The ministry will import these items using foreign currencies purchased from the CBS at the official rate, which, in mid-June, stood at only half the black market value.

By importing certain products directly, the government hopes to solve two problems. First, by buying currencies at the CBS’s official rate, it reduces the cost of imports and therefore limits the rise in inflation. Moreover, it ends the practice of many importers who bought foreign currencies from the CBS only to sell them back on the black market and make a profit, instead of using them to finance their imports. The latest decision reflects the growing concern of the authorities over rising inflation, which is running in the triple-digits, and falling foreign currency holdings, which are estimated to have declined to less than $5 billion from $17 billion in March 2011. However, it is only one step further in a policy of curbing the level of imports that began almost two years ago.

In September 2011, the government banned the import of all products that had a customs tariff of 5 percent or more. The idea was to save foreign currencies that would otherwise be used to import “luxury products”, cars in particular. The outcry from the business community was such that the government was forced to reverse its decision 10 days later.

Then, in February 2012, customs tariffs on a long list of consumer products were increased to between 40 percent and 80 percent. The measure, which was officially justified by the need to protect local production and to slow demand for foreign currencies, buried for good the policy of trade liberalization that had begun when Bashar al-Assad came to power some 10 years earlier.

The opposition’s seizure of the north-east part of the country in the first quarter of this year contributed to an increasing sense of urgency in Damascus. The region is, indeed, the source of all the oil wealth of the country and of much of its agricultural resources.

As it is now unable to access these resources, the government is forced to turn to global markets to buy petroleum products and grain and, hence, use its foreign assets. The Ministry of Petroleum and Mineral Resources recently said, for instance, that the government needs about $500 million per month to finance its oil purchases. The $6 billion needed for a year’s worth is more than the total estimated remaining foreign exchange reserves of the CBS.

The government is also trying to offset these pressures by relying increasingly on its political allies. In May the governor of the CBS announced that Iran had provided, or was preparing to provide, to Damascus a total of $7 billion in the form of concessionary loans and credit lines.

This growing political dependence and the rising economic pressures are having an impact on the national currency. The Syrian pound dropped in value from 150 pounds to the dollar at the end of May to 190 pounds on June 17. While this surge is partly the result of the announcement by the Obama administration that it intends to send arms to the opposition, it is symptomatic of the slow, and apparently irreversible, decline of the Syrian economy.

Note: This article appeared first in the July 2013 edition of Executive Magazine

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