Syria’s Growing Economic Woes: Lebanon’s Crisis, the Caesar Act and Now the Coronavirus

I wrote this short paper for the Arab Reform Initiative.

The already bleak prospects of the Syrian economy have worsened in recent months with the Lebanon crisis, the enactment of the Caesar Act and now the coronavirus pandemic. This paper examines their impact on the Syrian economy and the population at large. While the cumulative impact is hard to assess at this stage, Syria’s population will remain heavily dependent on the international humanitarian effort. The future of this effort will itself depend on major donor countries whose own economies are likely to emerge weakened from the coronavirus pandemic.

Three years after the regime retook the city of Aleppo, marking an important symbolic and material victory, the Syrian economy has still not recovered and few analysts expect any major reconstruction effort to take place any time soon. Among the government, businesses, and the population there is a growing recognition that economic difficulties are here to stay.

The already bleak economic prospects got worse in recent months with three new significant challenges: the Lebanese economic and financial crisis, the Caesar Act enacted by the U.S. Administration, and the spread of the coronavirus pandemic. The cumulative impact of these shocks remains to be seen. At a minimum, the continuation and increase of the humanitarian effort will be crucial. But given the strain the coronavirus is placing on major donor countries, this is not likely to happen, leaving Syria’s already exhausted population at risk of further suffering.

Lebanon: Syria’s gateway to the outside world closes

Lebanon, particularly its banking sector, had represented the Syrian economy’s gateway to the outside world since at least the mid-1950s, and western sanctions imposed on Damascus after the onset of the uprising in March 2011 have only accentuated that role. Lebanon is where Syrian businessmen and individuals deposited their savings and bought their dollars, while its banks issued the letters of credit and other payment facilities Syrian traders needed to import goods into their domestic market.

The restrictions imposed by the Lebanese banking sector and the economic and financial crises faced by that small but dynamic neighbour have changed the rules of the game.

As soon as Lebanese banks started restricting the sale of dollars in August 2019 – even preventing depositors from withdrawing their savings in that currency – the price of the U.S. currency jumped in the Lebanese foreign exchange market followed by the Syrian one. As the Lebanese pound collapsed, the Syrian pound lost ground. At the end of July 2019, the cost of the dollar stood at SYP606 in the black market. It reached SYP635 at the end of August and increased steadily reaching SYP1,040 at the end of January 2020.

This phenomenon is not new. In the mid-1980s the collapse of the Lebanese pound had the same impact on the Syrian currency.

Not only has the dollar become increasingly expensive to buy; the Lebanese banking sector can no longer process trade payments for Syrian importers. The deposits held in Lebanese banks by Syrian businesses are blocked, and the companies they set up in Lebanon to contract with foreign suppliers have become useless.

Wheat imports were the first to be affected by this new situation. At the end of 2019 and beginning of 2020, the government issued three tenders to bid for the import of around 600,000 tons of wheat but failed to sign any purchase contract because all the main wheat importers, who are business figures close to the regime, have their bank accounts in Lebanon. The risk is not negligible: a shortage of wheat, and by extension of bread – a major food staple – threatens the food security of large segments of the Syrian population.

Beyond essential consumer goods, which are increasingly imported because of the widescale destruction of the economy, the import of raw materials and other production inputs is also affected. Shortages of these will not only have an impact on the production processes and the availability of goods in the market but will also negatively affect the jobs market.

The depreciation of the currency also increases the cost of imported products and the rate of inflation and decreases the purchasing power of the population.

Among the other negative consequences of the Lebanese crisis is the sharp decrease in remittances sent into Syria. For decades, Syrian farmers and construction workers in Lebanon have numbered in the hundreds of thousands and contributed significantly to the remittance of dollars into the Syrian economy. The relative importance of these remittances increased during the conflict due to the rise in the number of Syrian refugees abroad and the drop in the other sources of foreign currencies, such as oil exports and tourism, as well as the overall shrinking of the Syrian economy. The crisis in Lebanon has already seen many of these Syrian workers lose their jobs, while those still working have seen their revenues, measured in dollars, drop. Because of the absence of official data, it is difficult to estimate the extent of these losses, but they are clearly substantial.

Finally, the psychological impact is significant. Lebanon represented a safety valve for many Syrians, and that is now gone. One direct impact is that Syrian investors, exposed to Lebanon’s banking sector, will postpone their investment decisions, and wait to assess their losses.

Damascus may seek to capitalise on its reportedly close ties with the current government in Beirut to access some of its money blocked in the Lebanese banks, but its chances of success are slim. The Lebanese authorities have many more pressing priorities to deal with, and, despite all the speculations, the influence of Damascus in the Lebanese political scene is incomparable with what it was before the onset of the uprising in March 2011.

Some aspects of the Lebanese crisis may have some mildly positive consequences. The fall in the purchasing power of the Lebanese population may increase demand for Syrian products, which are cheaper than many of the products that Lebanon imports from elsewhere – imports represent a significant share of Lebanese consumption. Medical tourism will be another attractive option for the increasing number of Lebanese who are becoming poorer and would seek cheaper healthcare in neighbouring Syria.

The Caesar Act: meaningful long-term consequences

The Caesar sanctions bill that was signed into law late 2019 by the U.S. President will have significant medium and long-term consequences on the Syrian economy, but its shorter-term impact will be less meaningful.

After years of lobbying by various groups supporting the Syrian opposition and discussions and negotiations in the two houses of U.S. Congress, the law was finally approved as part of the annual National Defence Authorization Act in early December before being ratified by the president on 20 December 2019. The text is named after the codename given to a military photographer who defected from the Syrian regime in 2013 and leaked photos of thousands of detainees who were tortured to death in government prisons.

The Act adds to the long set of economic sanctions already imposed on Syria by the United States, the European Union and several other countries, including Switzerland, Canada, Japan, Turkey and countries in the Gulf. Because of the overlapping of many texts and different sanctions regimes, it is not always clear what the Caesar Act will effectively add that is not already there. Below are the main measures associated with the Act and their consequences.

Secondary sanctions

The main characteristic of the Caesar Act is that it imposes sanctions (called Secondary Sanctions) on institutions and individuals from countries other than the U.S. that conduct specific business activities with Syria.  So, rather than targeting U.S. companies of individuals doing business in Syria, the text will go after companies from, say, Russia or China that do business with Syrian institutions that are under sanctions or/and operate in specific industries.

Before the Caesar Act, secondary sanctions on Syria already existed. Both Executive Orders 13582 of 17 August  2011 and 13608 of 1 May 2012, for instance, allow the U.S. President to sanction foreign persons, i.e., non-American individuals and institutions, that deal with Syrian entities that are under U.S. sanctions.

In practice, this measure has been seldom implemented. One case has been Russia’s Tempbank, blacklisted in 2014 for providing millions of dollars to the Central Bank of Syria, and to Sytrol, the government’s oil marketing company, both of which are under U.S. sanctions.

However, while the executive orders enable the U.S. President to act and sanction specific institutions and individuals, they do not oblige him to do so. The main characteristic of the Caesar Act is that it forces the U.S. president to impose certain secondary sanctions.

The Act specifically mentions the following actions:

  • Sanctions on foreign persons who provide significant support to or engage in a significant transaction with the Syrian government or the military forces or contractors acting on behalf of Syria, Russia, or Iran.
  • Sanctions on foreign persons that sell or provide:
    • significant goods, services, technology, or information that facilitates or expands the Syrian government’s domestic petroleum production;
    • aircraft, parts, or related services used by military forces related to the Syrian government; or
    • construction or engineering services to the Syrian government.

The Act also requires the Department of the Treasury to determine whether the Central Bank of Syria is a financial institution of primary money laundering concern and, if so, impose one or more measures that go with that qualification under American law, including increased monitoring of its operations.

The sanctions to be imposed on foreign persons are a freeze on their assets located in the United States and, in the case of individuals, a ban on their entry into the U.S. The Act also allows the president to suspend some or all the sanctions under certain conditions, notably if the violence against civilians has ceased.

Targeted companies

The Caesar Act will likely see in the coming months an increase in the number of companies and individuals that are blacklisted by the U.S. administration because of their business activity in Syria. For instance, Mercury and Velada, two Russian companies which signed in September 2019 oil and gas exploration contracts, could be among these because they are contributing to expanding Syria’s oil production.

Companies contributing to Syria’s reconstruction, such as engineering and construction companies from Russia, Iran, the United Arab Emirates, China or Lebanon, could also be affected.

The number of foreign companies active in Syria is very small, and Iranian companies, as well as some Russian ones, may be insensitive to the threat of sanctions because they either operate in an environment that is already heavily sanctioned, such as in Iran, or because they do not have and do not plan to have operations with western, including U.S., companies.

Others are already taking precautions. For instance, the fact that Mercury and Velada are unheard of is likely because these companies operate as fronts for other more important Russian interests that are trying to protect themselves from the wrath of the American administration.

Short and long-term consequences

In the short term, it is important not to overestimate the impact the Caesar Act can have on the Syrian economy, which is already largely affected by various other factors, including existing western sanctions. The number of foreign companies operating in Syria is very low, and nothing in the political, legal or business environment currently encourages much foreign interest.

The passing of the Act has seen no specific bouts of panic in Damascus, including no specific impact on the value of the Syrian pound, although most currency traders had already factored in the passing of the law. In the coming months, the impact of the financial crisis in Lebanon will likely be more significant on the Syrian economy than the Caesar Act.

In the medium and long terms, however, the situation is different. The fact that the text specifically targets the construction sector will be particularly harmful to any effort, however limited, to kickstart reconstruction activities in Syria.

Some Emirati companies probably hoped that the recent warming of relations between Damascus and Abu Dhabi would translate into better opportunities for them, and bilateral visits had been conducted by businessmen from the two countries. Lebanese construction companies could also have hoped to benefit from some reconstruction effort, however small. Many of these will now have to reconsider their plans. Similarly, it is likely that Chinese interest in Syria’s economy, which is already not particularly high, will weaken further.

Therefore, while its short-term effects will be limited, the Caesar Act is an additional deterrent to any interest in the Syrian economy by foreign companies and institutions and as such it kills the limited remaining prospects for a large-scale reconstruction of the country.

The dramatic potential consequences of the Coronavirus pandemic

On 22 March, the Syrian government announced the first case of coronavirus in the country and a ban on public transport as it stepped up its lockdown procedures which included the closure of schools, restaurants and various public institutions.

What is particularly worrying in the case of Syria is the dismal state of the country’s healthcare system which has been battered by nine years of conflict and particularly targeted by the regime and Russia’s air force. According to some estimates, up to 50 per cent of the country’s public hospitals are out of service. There is also a shortage of medical equipment and medicines, while health personnel are lacking as a result of migration.

Another serious risk stems from the very high population density in refugee and IDP camps as well as in Syria’s urban centres as a result of the vast destruction of towns and cities, due to overwhelming regime bombings. This has drastically reduced the number of housing units and increased the average number of people living in every home. The lack of proper sanitation systems in many areas is also a source of concern.

As in other countries, the economic and social consequences of the pandemic are likely to be dramatic.

By mid-March, the prices of medical supplies had already increased significantly and despite the government asking state-owned and private sector companies to increase their production of medical devices and products, they are unlikely to meet the needs.

Overall economic demand, which is already low, will weaken further. Almost all business sectors will be affected, particularly retail trade, transport and tourism; and the absence of tourists will also close one of the rare sources of foreign currency revenues. Meanwhile, the limited government resources will have to be reallocated to the health sector and to mitigating the impact of the pandemic rather than to other essential services.

Even before the first positive case was officially recorded, the Syrian pound had resumed its depreciation compared to the dollar, reflecting the nervousness that has already gripped the country. Between 1 and 18 March, the dollar gained 10 per cent in the black market and was traded at SYP1,175 compared with SYP1,070 on 1 March.

A grim outlook for the Syrian economy and society

The near future looks extremely grim for Syrian society and economy.

The consequences of the crisis Lebanon have probably not been entirely felt yet and will be particularly severe. For now, the Syrian economy does not have an obvious alternative to access US dollars and imports.

As to the coronavirus, the government has not yet provided any estimate of the impact of the pandemic on the economy or the health safety of Syrians, but as things stand the picture looks very worrying. A very large number of Syrians are potentially at risk and the healthcare system seems unfit to meet the challenges that the pandemic will impose.

The exhaustion of the population is extreme, and the levels of poverty, frustration and desperation will likely grow and deepen. While the regime was able to count on Russia and Iran for military aid, its allies can do little to really help it on the economic front.

Some expect these difficulties to generate unrest, eventually leading to wider protests, but this is highly speculative and, in any case, unlikely to have meaningful political consequences on the regime.

In these conditions, Syria’s population will remain highly dependent on international humanitarian effort. Given the pressure the Coronavirus is putting on the finances of major donor countries, the future of international aid is itself under question.

Only time will tell if the regime will feel the need to offer concessions to ease its economic isolation. But if the past is any indication, the regime is unlikely to be moved by its people’s suffering.

Where We Stand on the Syria Sanctions

I wrote this piece in The Syria Report on key issues raised in the debate over western sanctions on Syria and I make a number of policy recommendations.

Increasing voices in Europe are calling for the rehabilitation of Bashar al-Assad and accommodating Moscow’s demands to finance the reconstruction of the country. This would mean lifting sanctions imposed on the Syrian regime and its cronies as well as those that target specific sectors of the economy.

Actions taken by the U.S. Administration and by the European Union since November 2018 have tightened sanctions, while legislative progress on passing the Caesar Act in the US Congress is set to raise the stakes on the issue.

It may be therefore time to provide an assessment of the impact of these sanctions and of what should be done in the coming weeks and months.

What the sanctions are not responsible for

While some voices blame the sanctions for almost all Syria’s economic ills, the single most important reason for the dramatic economic and social conditions is the largescale destruction of the country over the course of the past eight years, mostly, although not exclusively, at the hands of the Syrian regime and the Russian air force, who are responsible for the destruction of half of the cities of Aleppo, Homs and Deir-ez-Zor, and of dozens of smaller cities and towns across the country.

In these cities and towns, much of the physical infrastructure, production capacity and housing units have been wiped out. Medical facilities have, among other key assets, been specifically targeted by the Syrian and Russian air forces. The Syrian society and its economy pay and will continue to pay for many years ahead the price of this destruction.

Of course, the U.S., with its destruction of Raqqa, and Turkey, with its facilitation of the looting of Aleppo’s manufacturing base, also hold a major responsibility, in addition to Iran, armed opposition groups and armed groups from various other sides.

Other factors explain these terrible economic conditions, including the flight of capital and of the middle class, the massive depreciation of the Syrian pound, the fragmentation of the country into various areas of control, the monopolies and oligopolies held by powerful business figures in the domestic market, and the ubiquitous role and presence of the regime’s corrupt networks.

Policies by the government, with the complicity of its foreign allies, have been no less detrimental.

In 2014, the government renewed for 20 years the licenses of the country’s two mobile phone operators at terms that strip the Syrian treasury and by extension the population of much needed funds. The Syria Report has calculated that between 2015 and 2018 some SYP 200 billion (equivalent to around USD 450 million) have been handed to the shareholders of these two companies at the expense of the treasury. There are no financial or legal justifications for the change in the license terms; only the greed of shareholders of these companies, i.e., regime cronies or people associated with them, enabled it.

Similarly, the government has ceded to Russia’s Stroytransgaz 70 percent of all the revenues generated by the production and export of phosphate. This is hundreds of millions of dollars that the government is giving up annually, for the next 49 years, for the sake of satisfying the greed of oligarchs close to Moscow, again at the expense of the treasury and the Syrian population at large.

One could add to these policies the reduction in subsidies on various oil products that have pushed up significantly consumer prices or the funds the government has allocated to the luxurious Marota real estate development at the expense of much more needed social housing projects that are deprived from cash.

All this does not answer the question of whether sanctions should be maintained and under what terms, but they are important to rationalize the debate and understand that sanctions are far from being the main reason for Syria’s economic woes.

Two types of sanctions

Western sanctions imposed on Syria since 2011 can be divided into two broad segments: those targeting individuals and entities associated with the regime and those aimed at business sectors.

A few hundred Syrian individuals and entities are under sanctions from the U.S. and EU either because they are core members of the regime’s political, military and security bodies, or because they provide support to the regime in a way or another.

In January, the EU sanctioned 11 individuals and five companies, most of which are involved in Marota City, an upscale real estate development in Damascus slotted for construction on land where thousands of disenfranchised opposition supporters had lived, and from which they have been expropriated and expelled. In the weeks and months ahead more business figures could be blacklisted, because most of the new war lords and recently-emerged investors, many of whom serve as fronts for regime individuals, are still omitted. Except for regime supporters, few voices call for removing these sanctions.

The other type of sanctions involves targeting business sectors such as oil, electricity, information technology and banking, among others. They involve, for instance, a ban on the export of power turbines and their spare parts to Syria, a ban on the provision of telecommunication equipment or the import of Syrian oil products.

This set of sanctions is the most disputed because it contributes to shortages of goods and services in the market and is an obstacle to trade and investment and, hence, to economic wellbeing.

Of course, contrary to the Iraqi scenario, these are not UN-imposed sanctions and Syria still trades with dozens of countries around the world and as such can theoretically procure almost any product it needs from other countries. Large exemptions also exist for western agricultural, pharmaceutical and other non-sensitive goods.

Claims that sanctions strengthen the illegal and corrupt networks of the regime are also exaggerated. These networks always existed and prior to 2011 and the sanctions, they were already gaining an increasing hold on the economy.

Also, in many areas the impact of the sanctions is not as meaningful as the Syrian regime pretends. For instance, while the government cannot buy electric power turbines from western countries it could still procure them from Russia or Iran. It doesn’t, not because of the sanctions, but because it doesn’t have the financial means to do so and its allies won’t fund it.

However, the qualitative edge of western technology and know-how and the weight of the dollar and euro in international financial flows are so important that western sanctions impact Syria’s economic relations with all the world, even with the regime’s allies.

Banking transactions have been particularly affected as western financial institutions have become very reluctant to conduct any business with Syrian, or Syria-related, entities. As a consequence, Syrian importers need to go through the Lebanese banking system or use the Hawala system, which leads to increased transaction costs and higher end prices for local consumers.

Foreign businesses are also afraid from entering the Syrian market out of fear that they could be targeted by sanctions or because of reputational risks. The result is a shortage of much needed investments.

In November 2018, OFAC, the sanctions arm of the U.S. Treasury, warned that it would “aggressively target” all actors of the maritime industry, including shipping companies, insurance firms and banks, that are involved in transporting oil products to Syria.

This had an immediate impact. It contributed to the shortages of energy products we currently witness across Syria, which are generating increased hardship, including making it more difficult for Syrians to heat themselves or cook. These shortages also induce higher transport costs and consumer prices. There are obviously various other reasons for the oil shortages, including the corruption of regime networks and the higher demand due to the cold winter, but the American action is key here.

This measure, however, also hit the government’s pocket. Iranian supplies, which represent the bulk of Syrian oil imports, are probably the largest source of fiscal revenues. Indeed, Tehran provides the oil on a credit basis to Damascus, which sells it for cash to households and businesses, reaping up to USD 1 billion in annual revenues, which represent anywhere between 25 and 33 percent of all government income. These shortages highlight the broader sanctions dilemma. Resuming oil supplies would help the regime enrich itself again, but it would also reduce hardship for ordinary Syrians.

Beyond this specific measure, most indicators point to the fact that the net impact of sector-based sanctions on the economy as a whole is negative – even if their role in the country’s economic woes is far from being as meaningful as the regime pretends.

Do sanctions serve a political purpose?

The question then becomes whether sanctions, whose formal objective is to extract political concessions, are worth it. If western sanctions had an impact on the population as dramatic as, say, those imposed on Iraq after 1991, there should be no debate on the subject. Sanctions should be lifted outright, without delays or conditions. That’s obviously not the case in Syria, but even then, given that sanctions still harm the population, there should be convincing arguments for maintaining them.

We believe that we should apply two criteria as we consider our position on the issue. First, the lifting of sanctions should be tied to attainable and realistic political objectives that involve long-term benefits to the population. Arguing, for instance, that they should not be removed until, say, Assad leaves power would render them useless. Second, there should be a convincing argument that sanctions can help extract concessions. If there are no indications that the regime could make concessions, the viability of the sanctions would have to be questioned.

From a historical perspective, there is limited evidence that sanctions lead to radical political change and in the Syrian case very few would argue that they could lead to a fall of the regime. However, we believe that concessions from the regime could be gained on a range of issues, even if that does not happen in the short-term. From a Syrian national interest perspective, two come immediately to mind: the fate of the hundreds of thousands of people who have disappeared or are sitting in the regime’s dungeons and the millions of refugees who seek security guarantees before returning home.

Raising these two issues serves to highlight key humanitarian and political demands, but also the fact that while the debate on the sanctions mostly addresses their impact on the Syrians residing in regime-held areas, there are other categories of the population whose interests need to be taken into account.

There are also indications that sanctions can help force the regime into concessions.

First of all, there is the insistence with which the Syrian authorities, but also Moscow, push for lifting sanctions. The regime and its allies want their removal more than anything else. The Syrian regime wants to enable its cronies to access again international financial markets directly or through their fronts, while Iran and Russia see a potential reconstruction drive as a business opportunity for their companies. Today, even regime supporters acknowledge that sanctions serve as a leverage.

Then, Moscow has shown that when it wants to it can extract significant concessions from the regime. When it comes, for instance, to granting its oligarchs access to the lucrative phosphate mines near Palmyra, Moscow had no difficulties forcing Damascus’ hand. At the political level, the numerous decisions taken at the Astana tripartite meetings with Ankara and Tehran show that Moscow can impose its will on its Syrian ally. There is no reason to believe that Moscow cannot force Damascus to make concessions that would improve the living conditions of all Syrians, those living inside and outside, by providing information on the disappeared and serious guarantees to the refugees.

Finally, an important aspect of the debate is the lack of alternatives. In other words, except for sanctions, there are very few leverages left to extract any form of concessions from the regime. Returning diplomats to Damascus could be one, although the extent of the concessions that Damascus would be ready to make on the issue is not clear. As to reconstruction funds, they could only come after sanctions are lifted. It must be clear that lifting sanctions unconditionally would be an enormous economic, financial and political boost for the regime and if that were to happen, we would have to forget about any prospect for a return of the refugees, for information on the disappeared, for freedom for the detainees, and for any form of even very modest political reform steps.

What should be done?

We believe that the following set of measures should be adopted:

  • Define a set of clear objectives tied to a gradual and selective lifting of sector-based sanctions. Use them to extract political concessions on the fate of the detainees, on providing security guarantees for the return of refugees and on reversing the largescale expropriations and the real estate development projects affecting people’s property rights. Of course, all these measures should involve clear monitoring processes.
  • Reverse measures that harm most the population, such as the recent measures on shipping oil to Syria, and facilitate the movement of goods that deserve exemption, including all humanitarian items as well as spare parts for key civilian infrastructure.
  • Keep the sanctions targeting individuals and entities and expand them to include the elite that emerged during the war and that continues to loot the country and profit from its closeness to power to amass wealth at the expense of the population.
  • Maintain measures on the banking sector despite the negative effect on regular account holders. Removing financial sanctions would restore venues for money laundering, make it easier for the regime to finance its militias and amount to surrendering the last remaining important negotiating card against it.
  • Capitalize as much as possible on the few other cards against the regime. In particular, no form of diplomatic ties should be reestablished with Damascus. It would be senseless to return diplomats without any concession from the regime, because it would entail giving up a negotiating card for free. Before they were withdrawn, western diplomats had remained in Damascus for up to one year after the beginning of the uprising without any concessions from the regime to show for.

What Comes Next? Rebuilding the Middle East

This short text is my contribution  to the Arab Horizons report recently published by the Carnegie Endowment for International Peace.

Before planning for what comes next, we need to understand the consequences of economic policies implemented in the Middle East and North Africa (MENA) region before 2011.

These policies—including a reduced role for the state, lower fiscal deficits, and foreign trade liberalization—were largely liberal in nature and helped generate relatively high growth rates. However, they also had negative consequences. Fewer, not more, jobs—in Syria, the labor participation rate fell from 52.5 percent in 2002 to 42.7 percent in 2010; increased income inequality; and a continued brain drain. Since 2011, the destruction of several Arab countries has cost hundreds of billions of dollars, which has only added to the region’s woes.

Better governance and an improved business environment, as is often recommended by international institutions, may generate higher growth. But if growth does not create jobs or reduce inequality, how will that solve our problem? The MENA region must rethink its economic development model by challenging orthodox views and well-entrenched economic and business interests.

Three broad policies must be pursued:

  • Investing in governance through state institutions will be key for the successful reconstruction of Arab countries. The role of the government should be maintained not decreased. The fabric of Arab societies has been largely destroyed and the populations brutalized and impoverished. The state, as a guarantor of public interest, should continue to play a leading role in the economy, particularly through investment in capital-heavy infrastructure projects, education, and health as well as spending on safety nets. In addition, only central states have the capacity, means, and legitimacy to manage the massive financial and human efforts that will be required to rebuild these countries.
  • Ambitious industrial policies, in particular focusing on labor-intensive sectors, should be pursued through a combination of infant industry policies, favorable taxation (in many MENA countries, taxes on financial revenues are much lower than those on business profits and wages), and support for investment, for instance through subsidized loans or research and development. The industrial sector provides significant added value and is potentially a major employer of qualified individuals, which will help reduce the brain drain. Investments in that sector also tend to be more stable, with a longer-term outlook.
  • The income distribution between capital and wages must be rebalanced. Competition should not be a reason to push for ever-lower labor costs and flexibility in the management of the workforce. Higher wages and more stability and protection for the workforce means more incentive to spend in the economy and save, which encourages investment. In many countries in the region, wage earners pay income taxes at a higher rate than businesses. Fairer taxation and better collection only ensure more revenues and legitimacy for governments.

For economic development in the Arab region to succeed, the young men and women of this region must be put back to work under terms that raise their incomes and preserve their dignity.

Opinion: No Reconstruction for Syria

Assad’s allies Russia and Iran will not foot the money needed to bankroll the upcoming rebuilding phase, Jihad Yazigi writes

Opinion: No Reconstruction for Syria

Across the Middle East, investors and politicians are banking on the reconstruction of Syria to generate new business opportunities and kickstart their economies, which have been seriously battered since the popular uprisings of 2011.

The cost of the reconstruction, which is estimated at anywhere between $100 billion and $300 billion, confirms the very high stakes that Syria’s reconstruction represents for the whole region.

In practice, however, there is little chance that any reconstruction process will happen unless a comprehensive political deal is reached, which is itself very unlikely.

No funds

The countries and institutions that have the money and which traditionally fund such large-scale financial efforts, namely the Gulf countries, the European Union, the United States and, through it, the World Bank, have, indeed, lost the Syrian war. Saudi Arabia is not going to put money in a country that is controlled by Iran. As to the EU and U.S., they want a political deal before proceeding to transfer funds to Syria. While some think that the fear of refugees will eventually push the EU to pay the bill, rebuilding ties with the Syrian regime would carry serious political costs, which only increased after the chemical attack in Khan Sheikhoun.

Meanwhile, the countries that have won the war, Russia and Iran, do not have the financial means to pay for reconstruction. Since 2011, both countries have put significant effort and money into the war – Russia has actually made profit out of killing Syrians, through the various export deals won by its arms industry – but they have provided very little in terms of direct economic aid, except for oil supplies by Tehran.

Some expect China to fill the gap, but all signs coming from Beijing point to the unwillingness of the Chinese authorities to get much involved in a country that is in the midst of various regional and international tensions and rivalries. Also, both Iran and Saudi Arabia are important suppliers of crude to China, which will be reluctant to antagonize either of them. In addition, wherever China has invested in emerging countries, such as in Africa, it has demanded in exchange access to these countries’ natural resources. Syria has few of these and they have anyway already been taken by Russia and Iran.

Some Syrian government officials, realizing the obstacles they are facing, have argued that they would rely on public-private partnerships through private investors and local banks. However, not only have most of Syria’s prominent investors left the country but local banks are in no shape to provide funding. At the end of June 2017, the combined assets of Syria’s 14 private sector banks stood at $3.5 billion, which is less than a 10th of the assets of a single large bank in Lebanon or Jordan, such as Bank Audi and Arab Bank.

No strategy

The problem is not only one of finance though, it is also the lack of any broad and comprehensive reconstruction strategy.

The only policy followed by the government appears to be prioritizing the interests of Russia and Iran, on the one hand, and regime cronies on the other.

Moscow and Tehran want, indeed, a payback for the political and military support they have provided to the regime over the past years. Russia has already acquired, for instance, the rights to develop Syria’s phosphate mines and oil and gas fields, and much of the revenues from these resources that could have been used to fund reconstruction will actually go to Russian companies. In a recent bilateral meeting between Syrian and Russian officials, the only major infrastructure project under discussion was not investment in much-needed housing infrastructure or water networks, but the construction of a rail track linking the phosphate mines to the port of Tartous in order to facilitate and reduce the costs of exporting phosphate to the benefit of the Russian company exploiting the mines.

Meanwhile, Iran is preparing to provide a loan of $1 billion to the Syrian government – a very small amount in view of the needs – under the condition that the money will be used exclusively to buy Iranian products. Tehran’s money is therefore as much a help to Iranian companies than to Syria’s economy.

On the other hand, the government is directing the limited money it has to fund projects that will benefit business figures linked to it. The main symbol of this is the Basatin al-Razi real estate project located in the Mazzeh district of Damascus, from which thousands of Syrian families have been expelled and dispossessed.

Many Syrians call the Basatin al-Razi project “the Syrian Solidere” because of its planned high-rise buildings and tramway lines, and the fact that it is dedicated to the very small segment of the population that can afford to buy expensive housing.

However, even though the overwhelming demand now is for popular housing to replace the hundreds of thousands of houses that were destroyed during the war and the very limited lending capacities of local banks, the government instructed one of the state-owned banks to use its cash to fund the infrastructure works for the project.

Basatin al-Razi makes little economic sense but could generate huge profits for a few individuals; this is what the government is prioritizing.

False premises

Fundamentally, the expectations of a reconstruction drive in Syria are built on false premises. The last example of a large reconstruction effort in the region is that of Lebanon. In that case there were the following elements: 1) A political deal backed by the main regional and international players; 2) the prominent role of Rafiq Hariri, a powerful man with strong economic and political networks around the globe; 3) a vision for what reconstruction should be based on, i.e. repositioning Lebanon, and Beirut, as an intermediation center between the Middle East and the West; 4) strong financial support from Saudi Arabia.

In the case of Syria today all these elements are missing. The reconstruction of Syria is unlikely to start anytime soon.

This article was first published in the Syrian Observer on November 29, 2017

No End in Sight to Syria’s Economic Woes

Most estimates of the economic cost of the Syrian war point to a total bill of around $250 billion as at the end of 2015. This number includes both the direct costs of the destruction, that is, the amount it would cost to replace what has been destroyed, such as residential buildings, factories and their machinery, power plants, oil wells and other infrastructure, and indirect costs to account for what the Syrian economy has lost in terms of economic output.

Several more months, if not years, are expected to run before the war effectively ends, meaning that Syria is likely to face a final war bill well upward of $300 billion, which is equivalent to around six times the level of its gross domestic product (GDP) in 2010, the year that preceded the uprising.

Also, GDP has now fallen to around $27 billion,[1] from $55 billion in 2010.  The government has not published any macroeconomic data since 2011 and accurate figures are hard to find. In this blog, most figures come from three separate reports on the state of the Syrian economy published during year 2016 by the International Monetary Fund,[2] the Syrian Centre for Policy Research[3] and the United Nations Economic and Social Commission for Western Asia (ESCWA).[4]

Prior to the war, Syria had one of the most diverse economies in the Middle East region. Agriculture contributed to around 20 percent of economic output, as did energy and trade while a number of other sectors contributed between five to 15 percent including construction, finance, transport and manufacturing.[5] Tourism was also growing and represented an increasingly important source of foreign currency earnings, thus contributing to reducing the dependency on oil exports.

The structure of GDP has now changed. The destruction of most economic sectors has led to a relative increase in the share of both agriculture, which now contributes to around a quarter of total output, and government expenses.

While agriculture production also declined in the past five years, other sectors contracted more rapidly, which explains the rise in their share of GDP. The relatively growing size of agriculture carries risks, however, because the sector is rainfed; making it vulnerable to poor rainfall. A drop in agricultural output would further exacerbate rural-urban migration and increase the price of food products in local markets.

As to the public sector, it now employs around 50% of the Syrian workforce, up from around a quarter in 2010; which is the natural consequence of massive layoffs from businesses that have either shut down or downsized their operations. Still, salaries to civil servants are the only considerable expense item of the government outside military expenditure. According to the IMF, government investments, which represented up to a third of the budget in 2010, fell to a dismal $98 million last year, equivalent to 2.3% of the budget.

The destruction has also had a significant impact on the balance of payments and foreign currency reserves and increased the country’s need for foreign financing. The central bank’s holdings of foreign assets are down from $20 billion to less than $1 billion, while the balance of payments deficit is at $4.1 billion from a surplus of $3.3 billion in 2010.

The loss of state’s sovereignty over the east and northeast parts of the country also means it has no more access to resources produced in these areas. As a consequence, it is forced to import products it used to produce and export previously, such as oil, which is imported from Iran, and wheat, bought from Russia. The government is also forced to rely on Iranian loans to fund all these major imports.

Today, the main sources of foreign currency earnings are aid from the UN and other international humanitarian organisations, estimated at around $1 billion, and remittances from expatriates, many of whom left because of the war, at some $1.2 billion. Ironically then, two consequences of the war, humanitarian aid and expatriates, are contributing to the rare positive numbers in the Syria’s economy.

Last but not least are the social consequences of the war. Unemployment is estimated at a staggering 60% of the working force, while poverty is impacting more than 85% of the population. The significant rise in prices, partly a consequence of the devaluation of the Syrian pound has destroyed the purchasing power of the Syrian population. Since 2011, the dollar has seen its value multiplied by ten in the Syrian forex market, from 47 to around 540 pounds. The average salary, for the few who still have a job, is down from $200 to $60 today.

The picture of the near future doesn’t look any rosier. GDP is forecast to decline further by 6.5% and 5.0% this year and next.

Therefore, regardless of how we look at the developments in Syria, the picture is daunting. The only meaningful solution to stop the country’s collapse is to end the war, which is unlikely to happen anytime soon.


[1] Syria at War: Five Years On. United Nations Economic and Social Commission for Western Asia (ESCWA), [Online]. 2016. Available at https://www.unescwa.org/publications/syria-war-five-years

[2] Gobat, Jeanne. Kostial, Kristina. IMF Working Paper, Syria’s Conflict Economy. International Monetary Fund, [Online]. June 2016. Available at https://www.imf.org/external/pubs/ft/wp/2016/wp16123.pdf

[3] Syria Confronting Fragmentation, Impact of Syrian Crisis Report, Quarterly based report 2015. Syrian Center for Policy Research, [Online]. February 2016. Available at http://scpr-syria.org/publications/confronting-fragmentation/

[4] Syria at War: Five Years On.

[5] Statistical Abstract. Central Bureau of Statistics (Syria), [Online]. 2011. Available at http://www.cbssyr.sy/yearbook.htm

This article was first published in the Arab Development Portal