Syria’s hunger games

In an alarming report published early July, the World Food Programme and the Food and Agriculture Organization of the United Nations warned of the catastrophic state of the Syrian agricultural sector and of the serious threat that the decline in farming production presents to the population’s food supply.

The crisis is so serious that a few days before the beginning of Ramadan, a month when predominantly Muslim countries typically see a peak in food consumption, the Minister of Economy announced that the government would dip into its strategic reserves to provide sufficient food for the population.

According to the joint WFP/FAO report, wheat production, which is essential because bread is a staple food of the population, is in freefall. The wheat harvest this year is estimated at 2.4 million tons, 15 percent less than last year and 30 percent less than the average production of 3.5 million tons in the preceding three years.

Stocks are also low, officially at 2.9 million tons at the beginning of this year but in reality probably much lower because many storage silos have been destroyed. The report estimates that some 1.4 million tons will need to be imported in order to meet the needs of the population.

Every day in Damascus and across Syria, bakeries providing bread at the government-subsidised price now witness hours-long queues, while the market price of bread has increased threefold.

Meanwhile, the sugar beet harvest is estimated at only a third of last year’s yield, at 400,000 tons. Sugar beet is also a staple of the Syrian diet, and Syrians are among the largest per capita consumers of sugar beet in the world. Here too imports are required to meet demand, and a tender for the purchase of 276,000 tons from world markets was issued in June. The livestock sector, which traditionally accounts for some 35 percent of the Syrian agricultural production, is also vulnerable. The number of sheep fell from 15.5 million to 11 million heads, while exports, traditionally at 3 million heads and generating around $450 million per year, will fall to 100,000 in 2013. In the rural areas of Syria many households own livestock that often constitutes most, if not all, of the household income.

The poultry industry, which generated nearly 1 million direct and indirect jobs, has lost nearly half of those jobs and two-thirds of its production units. This alarming situation is rooted in factors now well-established. The violence of Syria’s ongoing civil war, which has spread to almost all of the country, is a main factor. It has displaced and exiled many farmers; destroyed infrastructure, equipment, fields, livestock; and prevented farmers from accessing their fields, obtaining inputs and marketing their products.

The sanctions imposed by the West are also to blame. Although no specific sanctions target agriculture, except for those on chemicals that have reduced the supplies of pesticides, the measures taken against the banking sector and the establishment of a blacklist of public entities have scared away foreign companies, causing shortages of many inputs. Finally, the fivefold increase in the value of the dollar against the Syrian pound has led to an explosion in the cost of imported inputs, and banking loans have dried up.

This decline in farming output is causing serious concerns in Damascus. As food supplies have grown tighter in urban areas, inflation has skyrocketed to the triple digits, and many Syrians have seen their diets reduced to bread and sugared tea. The options the government has at hand are limited. It is seeking to encourage production at all costs, including, for instance, paying higher prices to farmers for their crops, especially wheat and sugar. The price paid to sugar growers actually increased 50 percent year-on-year. Last October, the Minister of Agriculture also advised the population to grow fruits and vegetables and raise chickens in their backyards and gardens. The remark reflected the level of concern of the authorities and the partial transformation of the Syrian economy into a subsistence economy.

Now that the government has dipped into its stocks, it remains to be seen what other options it has left. These “strategic” reserves were supposed to be used only in an “emergency situation”, which probably fits as the best description of the state of the Syrian agriculture and economy today.

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

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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

The Lebanese can benefit from Syria’s chaos

Syria’s ongoing destruction has impacted the Lebanese economy in various ways, but its eventual reconstruction could bring rich opportunities to its smaller neighbor.

The first two years of the Syrian conflict have seen a massive influx of refugees who have added to the large, existing Syrian workforce. According to Lebanese government estimates, more than 1 million Syrians resided in the country at the beginning of 2013 (both refugees and non-refugees) — the equivalent of a staggering 25 percent of the Lebanese population — while estimates from the United Nations High Commissioner for Refugees have documented 486,000 refugees as of May 22, both registered and waiting to be registered.

This flow has had, and will continue to have, a significant impact on the weak Lebanese state and its physical infrastructure. The number of Syrian children that will require schooling in Lebanese state institutions in September 2013 is expected to rise significantly, with some analysts forecasting their enrollment to be on par with the current number of Lebanese pupils. The water and electricity networks will not be spared, particularly during the summer, while traffic congestion is already on the increase.

Negative effects have also been felt by Lebanese businesses. The conflict in Syria has frightened off tourists and dipped confidence in the economy. Demand from Lebanese households has declined and so has investment, according to Banque du Liban, Lebanon’s central bank. The conflict has also significantly increased the cost to insure and transport exports to Lebanon’s traditional trade partners, such as Iraq and the Gulf. Meanwhile, Lebanese investors in Syria, particularly those in the financial services industry, have taken major losses.

This is not, however, the full picture. In the summer of 2012, the expansion of violence to Syria’s two largest cities, Damascus and Aleppo, drove thousands of urban dwellers from the Syrian middle class and business community to Lebanon. This led to a surge in demand for rented housing across the country and to a rise in consumption. The presence of Syrian patrons at restaurants in Beirut’s Hamra district and beyond is ample proof of that. Investment is still lagging, though by the spring of 2013 an increasing number of Syrian investors were reportedly starting to establish offices or set up shop in and around Beirut.

More relevant to the longer term, however, is the effect of the war and of the Syrian economy’s disintegration on the often-complicated relations between Lebanon and Syria

Already, the decline in Syria’s economic output has improved Lebanon’s trade balance with its eastern neighbor. According to Lebanese customs, Lebanese exports stood at $296 million in the first four months of 2013 — more than the total of 2012, which reached $294 million. While this is partly due to transit trade of energy products to the sanctions-hit Syrian government, there is also evidence that this is the consequence of a massive decline in Syria’s output, especially in the farming sector, creating intense demand for essential goods and commodities from abroad. This represents a reversal of a historic trend; Syria’s more competitive agricultural products used to regularly flood Lebanese markets.

Even if the conflict were to end today, the Syrian economy would need years before it recovers. Replacing destroyed infrastructure and housing alone is expected to cost tens of billions of dollars. The UN’s Economic and Social Commission for Western Asia forecasts, for instance, that when reconstruction begins, demand for cement in Syria will be at some 30 million tons per annum, or three times the level of demand prior to the conflict — a rise in demand that will benefit the Lebanese building materials industry.

After a decade during which Lebanese financial sector capital and know-how benefited from Syria’s economic liberalization, it’s now likely that the country’s smaller industrial and agricultural sectors will find strong new opportunities in post-conflict Syria.

It is still too early to make a comprehensive assessment of the impact of the war on bilateral relations, but there is little doubt that Lebanese investors, across all business sectors, are going to be major beneficiaries of Syria’s reconstruction effort. This will be a strong incentive for solid ties between the two countries, but whether politicians have a grasp of the importance of nurturing these ties is, obviously, a different story.

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

The EU’s pointless oil gesture

On April 22, the European Union lifted its embargo on Syria’s oil exports to enable the purchase of crude oil from the opposition. The diplomatic move also permitted the sale of oil equipment to the opposition and allow the investment in oil fields located in rebel-held areas.

Sanctions imposed by the EU in September 2011 banned the purchase of all crude oil produced in Syria as well as its transport and the insurance of the tankers that transported it. While other Western countries have imposed their own set of sanctions, the EU’s has a more significant impact. Prior to the uprising, the bloc purchased more than 90 percent of all exported Syrian crude.

The rationale behind the decision to partially lift the sanctions appears to be that it will give more financial clout to the opposition, enabling it to finance the purchase of weapons and to spend and invest in the areas under its control.

However, the actual impact on the ground is less clear. Indeed, while most oil fields are now out of the direct control of the central authorities in Damascus, the groups that actually control them are varied and have sometimes competing agendas.

Syria’s oil fields are spread in two broad areas: the first around the city of Deir ez-Zor, in the east, which produced around 100,000 barrels of per day (bpd) prior to the uprising; and the second in the province of Hassakeh, in the north and north-east, which produced some 250,000 bpd.

The former is under the control of disparate groups of fighters, including local tribesmen or fighters affiliated to radical Islamist groups such as Jabhat al-Nusra. The continued fighting in the region and the fighters’ lack of experience in the oil industry has reportedly led to the eruption of many well fires. In early April, the minister of oil announced that three wells with a cumulative daily output of more than 2,000 barrels of oil had burned. The cumulative loss from all the well fires is estimated by the ministry at the equivalent of around 750,000 barrels of crude. At current global prices, this is some $75 million.

Apparently, the government continues to control some smaller fields and manages to procure additional amounts through purchase agreements it has entered into with some of the groups that control the other fields — unconfirmed reports include even Jabhat al-Nusra among these groups.

Meanwhile, many locals are using their control of oil wells to generate new sources of income and wealth, leading many of them to abandon the fight against the regime.

The fields located further to the north, around the city of Hassakeh, are to some extent under the control of the armed wing of the Democratic Union Party (DUP). The DUP is the best armed Kurdish party and has remained at an equal distance from both the regime and the opposition. Kurdish rebels are relatively well organized and disciplined, and the fields are located in a region that has avoided much of the chaos witnessed near Deir ez-Zor.

The situation of the Suwaydiyah field, the largest Syrian oil field, which is located around Qamishli, is not clear but even if it were technically still under the control of the government, in practice the whole surrounding area is held by the Kurds.

Here, too, the Syrian government continues apparently to access some of the oil produced, either thanks to its relatively good ties with the DUP or because it also purchases oil from the groups in charge in the region.

This picture of the current state of Syria’s oil sector is further complicated by the disrupted distribution networks across the country. Not only are the fields under the control of groups that fall outside the scope of the political wing of the opposition; even if the opposition managed to put some order in its ranks and ensure that all oil produced in rebel-held areas fell under its control, it would still have the task of managing the logistics behind the transport and export of the crude.

The partial lifting of the embargo will do no harm to the opposition. But given current facts of the ground, it will struggle to make any significant impact.

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

Syria can’t afford to break apart

As violence expands across Syria, fears over the future of the country are increasing. They range from the potential use of chemical weapons in the conflict to the unleashing of a full-fledged sectarian war and to the potential disintegration and partition of the country along sectarian and ethnic lines.

Regarding the latter risk, it is likely that economic factors will play an important role in terms of its impact on the centralization/decentralization debate and on how any future partition of the country could affect economic policies.

The issue that comes first to the mind is obviously the north-eastern part of Syria, inhabited to a large extent by a Kurdish population. While prior to the conflict the demands of the Kurds were mainly limited to linguistic and cultural rights, there are now increasing calls for the creation of an autonomous region. The issue is particularly sensitive because Syria’s northeastern region is home to the country’s largest reserves of crude oil.

Indeed, while fields located near Deir Ez Zor, where the population is overwhelmingly Arab, generated most of Syria’s crude output in the 1990s, their production has now fallen from more than 400,000 barrels per day (b/d) in 1996 to around 100,000 b/d in early 2011. The fields around Hassakeh, near the Kurdish region, now extract more than 250,000 b/d of crude and hold most of the country’s reserves; these fields are now to a large extent under the control of the Kurdish Democratic Union Party.

Besides oil, however, the northeast is also host to most of Syria’s wheat and cotton crops. Because bread is Syria’s main staple food and cotton is key to the development of the large textile industry, keeping control of the region will be of utmost importance for any future Syrian central government.

The fears over a Kurdish region with wide autonomous powers may be exaggerated in view of the relatively small size of the population, the lack of a major urban centre — Qamishli, the largest city in the Kurdish region, is home to only around 200,000 people — and the fact that Kurds are actually spread across the country; the largest concentration of Kurds is in Aleppo, which has a majority Arab population. Still, the debate on how to share the resources of the state between the central government and the various provinces making up the country will be of particular importance when it comes to the Kurdish-dominated parts of Syria.

Another region of Syria that matters in the debate over decentralization or partition is the coastal area, where a large portion of the population is Alawite. While the issue of a potential independent Alawite state was raised during the French mandate, it has largely died out since and was reignited only in the last few months with the growing sectarian tones of the conflict gripping the country. Besides the fact that Sunnis and Christians probably represent up to 50 percent of the population of that region, the economic challenges that such a region would face would be numerous.

Syria’s coastal region has very limited manufacturing and agricultural basis. Except for a refinery in Banias, a single power plant and an old cement plant, manufacturing is limited to light industries and agriculture to tobacco and citrus fruits.

Some argue that Lebanon has managed to remain independent with as little resources. However, Syria’s coastal region has none of Lebanon’s large expatriate community, significant human resource wealth and excellent know-how in the financial, touristic, education and health sectors.

The debate over the sharing of the resources of the central government goes, however, beyond the sectarian/ethnic issue. Syria’s small cities, spread across most of the country, such as Rastan, Talbisah and Tel Kalakh, have paid an extremely heavy price in the uprising and are likely to demand a much larger share of the government’s money and investment programs than other less affected regions — including parts of the country inhabited by minority groups, such as Suweida or the Christian city of Mhardeh.

What will the policy of any future government be on these issues and what impact will it have on issues such as development programs or political representation? With more time passing, the challenges for future Syrian governments are increasing. It is time the opposition starts thinking about them.

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