The celebration of suffering

The announcement by French Foreign Minister Alain Juppé on April 17 that Syria’s foreign currency reserves had halved since the beginning of the popular uprising in the country is hardly something to celebrate. Valued at $17 billion at the end of 2010, they would now be standing at some $8.5 billion according to Juppé’s estimate.

Providing a correct measure of Syria’s foreign reserves has always been problematic. While in most parts of the world foreign reserves are handled by the central bank, in Syria they are managed by two separate institutions: the Central Bank of Syria and the Commercial Bank of Syria (CBS). This is a consequence of the fact that CBS has been acting for decades as the bank of all public sector enterprises, including the Syrian Petroleum Company whose exports of crude oil were the main source of the Syrian government’s foreign reserve accumulation in the last 20 years.

The foreign assets previously known to be held by these two banks, however, adds up to only about $10.7 billion — somewhat short of $17 billion. One explanation for this, according to some insiders, is that not all reserves are calculated at the same conversion rate, with some pegged at 47 Syrian pounds to the United States dollar (the going rate at the end of 2010), and others at 11.5 pounds to the dollar (a rate the government used in some transactions until the late 1990s). The conclusion of all this is straightforward: you cannot rely much on Syrian central bank data.

But let’s go back to Mr. Juppé. The French FM made his announcement a few days before foreign ministers of western countries were set to meet in Paris to discuss additional sanctions on Syria. The collapse of Syria’s reserves was presented as a success for the international community in using sanctions to inflict damage on the Syrian economy — and, as a consequence, on the regime, as many analysts would have us to believe.

However, one needs to be clear: rejoicing in a country losing in less than a year assets it took decades to accumulate is simply insane, if not cruel. The implosion of Syria’s middle class and a gradual decline in the average purchasing power began in the mid-1980s, when a severe foreign currency crisis reduced the country’s reserves to the equivalent of less than one month of imports. Things began to improve only from the latter part of the decade when the first oil fields discovered by Royal Dutch Shell and Total S.A. began production.

Syria’s production of crude oil then increased gradually until it peaked at around 600,000 barrels per day in 1996. The period witnessed strong economic growth but also the implementation of a strict austerity program by the government, similar in many ways to the stabilization measures applied by the IMF in various countries across the world.

This program was strongly criticized by economists, and has been blamed for the state’s disinvestment from vast segments of the economy and for the stagnation in real incomes, but it had one benefit, namely saving foreign reserves for future generations.

This is what Syria is now set to lose. Not only are years of efforts being spoiled, but it is the reconstruction of the country that is rendered more difficult; future investment requirements that are made more difficult to fund. One good argument for this state of affairs, from the point of view of Western governments at least, is that a weakening of the state — because that is what the fall in reserves is about — would lead to a weakening of the regime and as a consequence to its fall.

There is historical precedent. This is exactly what many decision makers were saying in 1990 when sanctions were imposed on Iraq. We all remember the consequences of that, not least that Sadam Hussein stayed in power for 12 more years. In the meantime, the Iraqi population suffered, its social fabric was destroyed, and millions were displaced and driven into poverty. Failed sanctions were then followed by an American-led invasion.


Note: This article appeared first in the May 2012 edition of Executive Magazine

The tipping point

After months resisting the pressure, the Syrian pound dived in January against the United States dollar and other international currencies, forcing the central bank to announce that it would begin a managed float of its currency in a dramatic departure from a five-decade-old policy of strictly regulating foreign exchange transactions.

While the American dollar traded at around 60 pounds in black market dealings at the end of December, it quickly rose to 63 pounds in the first days of the year before crossing the 70 pound mark by mid-January. Since the beginning of the popular uprising in March 2011, Syrian analysts have been predicting the collapse of the national currency. However, contrary to the most pessimistic projections, the pound managed to stand its ground for months, falling to only 51 pounds per dollar in August, five months after the beginning of the protests — a decline of roughly 8 percent relative to its pre-crisis level of 47 pounds.

The relative strength of the currency for this extended period of time was a consequence of a number of factors including an aggressive strategy by the central bank, which by August had reportedly spent some $2 billion, or 10 percent of its foreign reserves, to defend its currency. Other factors were sensible policy choices by the bank, including a rise in interest rates and restrictions on the sale of foreign exchange by money traders, as well as a decline in imports resulting from a strong contraction in investment and spending, which partly helped offset the decline in export earnings. Still, the last weeks of 2011 saw a rapid increase in the rate of decline. The combined impact of the general downturn in business, poor economic policy and international sanctions had taken its toll on the currency. Another key factor was likely the beginning of the application of the European Union embargo on oil exports in November. Indeed, oil revenues made up in 2010 some 20 percent of Syria’s total foreign currency earnings and a much larger share of the government’s export revenues.

One other factor, however, also explains the rapid deterioration witnessed at the beginning of this year. In an interview on Syrian TV early January, Minister of Economy Nidal al-Shaar said that the government’s priority was to “preserve the country’s foreign reserves and not to defend the currency.” These few words alone may have triggered the rush to the greenback.

By declining to go too far in the defense of the currency, Shaar was echoing the advice of many economic analysts: if the international value of the pound must be defended, it must not be done at any cost — i.e. at the expense of the foreign currency assets.

Indeed, Syria’s foreign reserves, painfully accumulated during the country’s short oil boom of the 1990s, will be almost impossible to recover once they are spent, given that Syrian oil fields have been largely depleted, while by selling its foreign assets now the government would be mortgaging the country’s future.

Also, in spite of the serious consequences it will have on the purchasing power of the population, already largely dented by decades of poor growth, the devaluation of the pound can provide new opportunities for Syrian exporters and make local manufacturers better able to compete with imports. Finally, the fall in the value of the currency is a natural consequence of the political stalemate and of the economic crisis faced by the country, and in a certain sense more accurately reflects the real status of the economy.

By deciding to partially float the currency, the central bank may ease the supply of foreign currencies in the market and help reduce pressure on the pound. However, there is little doubt the fall in the value of their currency will have a serious psychological impact on Syrians. Indeed, the majority of them still remember the dark days of the 1980s when a serious economic and foreign currency crisis led, in less than two years, to a precipitous decline in the value of the pound from 3 pounds to 50 pounds per dollar.

The period marked the beginning of the end for Syria’s middle class. Twenty-five years later, the Syrian population is helplessly taking a second hit and wondering how difficult the years ahead will be.


Note: This article appeared first in the February 2012 edition of Executive Magazine