Syria beyond conflict: the economic test

The geography of the Syrian uprising is a reflection of the significant economic and social crisis faced by large segments of the Syrian population since the early 1980s. The core of the revolution is political, in the sense that its backers are overwhelmingly demanding “freedom and dignity”; but strong underlying economic factors are determining its dynamic – and will weigh on the post-revolution period.

It is, indeed, in the areas that historically formed the core constituency of the Ba’ath party that the protests have been strongest, in particular the southern city of Dera’a that sits at the heart of an agricultural plateau, the cities and rural areas of Homs and Hama, and the suburbs of Damascus.

In the late 1970s and early 1980s, after two decades of strong government investment in the economy and society, most Syrians remained solidly behind the regime against protesters led by the Muslim Brotherhood. Now, after three decades of state divestment, trade liberalisation, neglect of agriculture and of the rural areas, and government priority to the services sector, many Syrians are in the streets calling for the demise of this same regime.

An end to illusion

Hence, the few years of strong GDP growth enjoyed by the Syrian economy in the early 1990s (spurred by a growth in oil output) and in the late 2000s (spurred by the oil boom of the Gulf region and the cash surpluses it generated) hid the fact that since the early 1980s, Syria has not been generating enough economic growth to employ its rising population.

The economy, according to most economists, needs to grow by an average of 8% per annum to generate enough jobs for new labour-market entrants – but it has not reached this level even once since 1980. In other words, unemployment has been increasing every single year in Syria for the last three decades.

These difficulties were compounded by poor government policy-making. The free-trade agreements signed with Turkey and the Arab world in the mid-2000s, for instance, as well as a general reduction in custom tariffs, led to an “invasion” of foreign products in the local market that put countless industrial plants and workshops out of business and, consequently, thousands of people out of their jobs. Similarly, a reduction in agricultural input subsidies accompanied by a severe drought forced tens of thousands of farmers from their lands and reduced the contribution of agriculture from around 25% of GDP to 19% in less than a decade.

In addition, in order to respond to its dwindling revenues, the government drastically reduced its investment and spending, and applied what in practice was a copy of the structural-adjustment programs imposed by the International Monetary Fund (IMF) on emerging countries. This contraction of the government’s role in the economy was most obvious in rural areas, where the core constituency of the Ba’ath party resided.

In the midst of all these difficulties and state divestment, there was one positive consequence: the government managed to accumulate billions of dollars in foreign-currency reserves and save them for future generations, thanks to an oil boom that, albeit short, lasted most of the 1990s.

This is exactly what Syria is set to lose through the international sanctions imposed on its crude exports. The loss of billions of dollars incurred by the government in the last few months because of the sanctions will render the reconstruction of the country and future investment requirements more difficult to fund.

The issues highlighted above point to the tremendous economic problems faced by Syria’s society. There must, indeed, be no illusions. A happy end to the current protest movement, including the establishment of a democratic political system, will not mean an end to Syria’s economic woes. Syrians must recognise the challenges ahead and adopt a new economic strategy that puts economic development and employment at the centre.

 

Note: This article appeared first in May 2012 in openDemocracy.net

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No End in Sight to Syria’s Economic Woes

The Syrian economy did not collapse in 2011, as many, including the Syrian president himself, had predicted, but it has suffered tremendously from the flight of investors, the reluctance of households to spend, a dismal economic policy and international sanctions.

When the protests began in mid-March in Daraa, a city at the center of a neglected agricultural plateau, and then spread to the suburbs of Damascus and to other areas that have experienced economic and social difficulties during the last three decades, the government thought it had understood the motives of the revolt and that it had a ready solution.

THE GOVERNMENT’S DISMAL ECONOMIC MANAGEMENT

Within days of the protests the government announced an increase in salaries and in state subsidies on heating oil as well as the removal of several key figures associated with the liberal economic policy of the past few years. The extent of these “concessions” was substantial: the salaries of civil servants were increased by 20 to 30 percent – in a country where about a quarter of the working force is employed by the state – and the price of heating oil was decreased by 25 percent, although, only a few weeks earlier, the government had deemed its policy of subsiding energy products “unsustainable.”

These announcements had very little impact on the dynamics of the protests, which continued unabated. Protesters in fact reacted angrily; while they had taken to the streets to demand an end to the impunity and corruption of state officials, the government was effectively trying to bribe them! On March 25, a day after the president’s political and media advisor Bouthaina Shaaban announced these decisions, protesters in Daraa chanted: “Oh Bouthaina Shaaban, the people are not hungry (in Arabic the word for hungry – jou’an – rhymes with Shaaban), the people want freedom.”

During the next few months a string of other measures was adopted to appease the regime’s various constituencies. Farmers benefitted from an increase in the procurement prices of those agricultural products they sell to the government, a rescheduling of their debt repayments and the establishment of a fund to help them cope with drought affected areas. University students were given loans and new faculties were opened in remote areas. A fund was established to finance the development of informal housing areas in Damascus and Aleppo, and import tariffs and a consumption tax on key food items were reduced. An increase in the price of fuel oil used by manufacturers was also postponed.

While these measures helped reduce the daily hardship of large segments of the population, the disadvantage was that they increased the fiscal deficit and contradicted the long-term economic policies of previous years. As the year drew to a close, the government seemed to realize that it had gone too far and decided to reduce all overhead public expenses, except salaries, by 25 percent. However, any further measures like, for example, a complete reversal, would now be tantamount to political suicide.

By deciding to rapidly and extensively increase its financial expenditures, the government also demonstrated that its economic decisions were based on a political agenda and the result of panicked reaction, instead of a rational analysis of the economic situation.

After decades during which the Syrian economy was centrally planned, the government adopted in 2005 a “social market” development model in which the state was asked to focus its efforts on social services and infrastructure, while the private sector was to be given more leeway to operate. The debate over the role and size of the state in the economy seemed to have been finally settled, and the government appeared to have a clear road map in spite of its many shortcomings and justified criticism levelled against it.

But now things are much less clear and the government’s unfortunate economic measures created a deep distrust towards it within the business community, which realized very early on that the authorities had no clear plan to fix the dire economic situation.

Thus it is not surprising that from the very beginning of the protests, investors, already afraid of the consequences of the unrest, withdrew from the market. At the end of June for instance, the Syrian Investment Agency reported a 43 percent annual decline in the number of projects it had licensed. The other few indicators available showed a similar trend, although the overall decline can be attributed more to the general economic downturn and lack of confidence in the economy than to government policies. For example, the assets of Syria’s private banks fell by 15 percent on average in the first nine months of 2011, traffic at the country’s two maritime ports fell by some 10 percent during the same period, while traders and retailers reported double digit declines in their turnovers.

INTERNATIONAL SANCTIONS

Although sanctions adopted by a part of the international community (most importantly the Arab League, Turkey, the EU, and the USA, as well as Canada, Switzerland, Japan, and Australia) only added to Syria’s woes, their overall impact on the economy and on the government’s margin of manoeuvre remained limited by the end of 2011.

The import ban imposed on the oil sector by the European Union is probably the most significant of these measures. Syria’s oil sector is a major contributor to the national Gross Domestic Product, to fiscal revenues and to foreign currency earnings. Thus, the closure of a market that represents 90 percent of all crude export is of serious concern to the Syrian authorities. The additional ban imposed on the transport, financing and insurance of oil exports also makes finding new markets extremely difficult.

The ministry of oil announced in December that the country’s oil output had declined from 387,000 barrels a day (b/d) of crude oil before the sanctions to 270,000 barrels. This decline by a third corresponds to most of the country’s oil exports, which were estimated at some 150,000 b/d before the sanctions, which means that the country’s oil exports are now down to around 30,000 b/d with no clear prospect of returning to previous levels anytime soon.

The lack of revenues from oil exports poses a serious threat to foreign currency earnings, which have already been very affected by the absence of tourists and the withdrawal of foreign investors.

In contrast to the oil sector, which the government controls entirely, the severe restrictions on US dollar transactions imposed by the United States government have had an impact on broad segments of society. The Syrian government, businessmen and individuals alike have been affected. The fact that the Euro can still be used enables many transactions to continue to take place, but there is no doubt that financial relations with the outside world have been seriously disrupted.

The impact of the asset freeze on a long list of Syrian entities and individuals – on whom travel bans were also imposed – is more difficult to assess. While initially many had doubts over their efficacy as most of the listed individuals are believed to have foreign accounts held under the names of middlemen, the combined impact of these measures by most Western countries and the Arab League has created a sense of encroachment. It is not entirely a coincidence that the Arab League plan to send monitors to the country was accepted by the government after the imposition of sanctions by Arab countries and that the lifting of these sanctions was initially among the main demands of the government for it to accept the monitors.

However, the idea of imposing sanctions has been a controversial one for many Syrian analysts, including members of the opposition. While proponents of the sanctions have encouraged the export ban on crude oil “because oil export revenues directly enter the pockets of the government” as they say, one can argue that many expenses also “come out directly from the pockets of the government!” Civil servants salaries, subsidies, health care centers and schools catering to the overwhelming part of the population are covered by the government. If it were to make cuts in public sector expenses, would it prioritize the security services or social services?

If a quick end to the crisis engulfing the country was clearer, the impact of these sanctions would be limited; if not, the consequences could be dire for the people.

The plight of the Iraqi people is still in the minds of many Syrians. Hundreds of thousands of Iraqis fled to Syria in the last decade not only because of the violence in Iraq, but also because twelve years of international sanctions destroyed the Iraqi economy, physical infrastructure and social fabric.

PROSPECTS FOR 2012

While violence and general unrest affected large parts of the country since the beginning of the protests, people began to feel the pain of the economic downturn on a large scale only towards the end of the year.

There are now daily power cuts across Syria, with up to 3 hours a day in central districts of Damascus and much longer ones in the rest of the country. Cooking gas is extremely difficult to find, while heating oil is being sold on the black market at twice the government-set price. These difficulties are caused by many factors, including lower government revenues, the disruption of supply lines following attacks on pipelines, corruption, smuggling, and international sanctions.

How these difficulties will affect the political scene and the popular revolt gripping the country is difficult to assess. Although the growing number of unemployed people may be tempted to take to the streets and join protesters, the reactions of the population remain largely shaped by the evolving political events rather than by the daily economic difficulties.

The attitude of investors is also being closely watched. The lack of large protests in the central parts of Aleppo and Damascus, the country’s two largest cities and economic powerhouses, has been widely attributed to the continued support of the business community for the authorities.

However, the picture is much more nuanced and in reality many members of the business community deserted the authorities very early on. In July, for instance, the Deir-ez-Zor Chamber of Commerce and Industry, in Syria’s eastern region, issued a formal statement harshly condemning the conduct of the security services in the city. Across much of the country, where the strongest protests have taken place, businessmen have generally followed calls for strikes and other forms of civil disobedience and many are also believed to be actively financing the uprising.

Two indicators to watch in the coming weeks and months will be the movements of the foreign value of the Syrian pound and the rate of inflation. Contrary to the expectations of many, the government had managed until the end of last year to maintain a grip over them. Retail prices for most basic commodities remained largely under control, while the Central Bank of Syria had managed to limit the loss in value of the Syrian national currency. In black market transactions the Syrian pound was trading at the end of the year at a value depreciated by 25 percent from its pre-March level compared to the US dollar – the decline was not insignificant but nowhere close to a crisis.

The reasons for the strength of these two indicators for most of last year are difficult to discern. Low inflation was probably caused by a strong reduction in spending by Syrian households who prefer to hoard their savings, good crops that have kept the price of food items low and the reduction in customs tariffs and consumption tax rates on a wide range of products.

The relative strength of the Syrian pound is more difficult to explain as there is no data from the Central Bank on the extent of its involvement in the currency market or on the size of its foreign assets. Some have argued that Iraq and Iran are funding the Syrian government and pouring billions into the Central Bank’s account but there is little hard evidence so far to back these claims.

In the first month of 2012 things began to change. The pound lost another 15 percent by the end of January, leading to a spike in retail prices.

The coming weeks will probably be decisive with regards to the ability of the economy to sustain increasing pressures, although the total absence of official data – itself an indication that things are not going as well as the government would like us to believe – makes it extremely difficult to provide a clear forecast.

The major factor weighing on the country’s future prospects is the lack of any serious political initiative by the Syrian authorities to solve the economic and political crisis. Until then it will be difficult to foresee an end to economic distress and the chance of a recovery.

Note: This article appeared first in February 2012 in Perspectives, a publication by the Middle East office of the Heinrich Böll Foundation

Getting Syria back to work

The Syrian government’s admission in early December that the actual rate of unemployment in the country was anywhere between 22 percent and 30 percent testifies to the depth of the social crisis the society has gone through in the last three decades. The new estimates, provided by Radwan Habib, the minister of labor and social affairs, are at least twice the previously acknowledged rate of 11 percent. According to Habib, the new findings are the result of a field survey conducted by his administration. The fact that the range is so wide — from 22 to 30 percent— raises questions on the quality of the survey, but there is little doubt that the new figures are a more accurate reflection of the situation in the job market than the previous data based on the number of people registered with job offices. According to most analysts, the Syrian economy needs to be growing by 7 to 8 percent a year for its unemployment level to stabilize. This very high threshold is a consequence of the rise in productivity and in the size of the workforce, which increases on average by 3.5 percent every year. People entering the job market today were born 20 years ago, when the population growth rate stood at above 3 percent. Meanwhile, female participation in business activity is also on the rise and increases the number of people seeking to enter the job market – currently estimated at around 200,000 per year.

Indeed, since the early 1980s Syria’s gross domestic product (GDP) has almost never been sufficient to accommodate its expanding workforce. Put another way, Syria has witnessed almost 30 consecutive years of unemployment growth. The challenge before the government — the current one or any forthcoming one — is therefore huge: How to create the conditions for the economy to grow fast enough to meet the demand for jobs.

One solution to the problem would be to focus not only on the level of growth but on its quality, on how to attract investment in the sectors of activity that are most labor-intensive and potentially generate the most added value, such as agriculture and manufacturing.

This new policy would represent a shift from the priorities of recent years, when Syria’s decision-makers focused on trade liberalization and the development of the services industry. Indeed, finance, tourism, trade and transport, in addition to real estate, have been the main engines of growth in the last few years. Although Syria has much to gain from a strengthening of its services sector, the neglect of farming and industry has cost it dearly in terms of employment, and prevented it from building a strong production base. A lot has already been written on the catastrophic performance of the Syrian agricultural sector, which suffered from several consecutive years of drought starting in 2007 and from poor policy-making decisions, including a steep increase in the price of agricultural inputs when farmers were most in need of help.

The consequence of all this has been to force tens of thousands of farmers from their ancestral lands and to reduce the contribution of the sector from around 25 percent of GDP to 19 percent in less than a decade. Free trade agreements with Turkey and the Arab world, as well as a general reduction in custom tariffs, have also led to an ‘invasion’ of foreign-made products that put countless industrial plants and workshops out of business and consequently thousands of people out of their jobs. The textile sector, one of the most labor-intensive industries, has been particularly hit by the lifting of the ban on garment imports.

The resolution of this predicament is obviously not only an economic or social issue for the government but it is also political. Unsurprisingly, many of the protests taking place across the country since March 2011 are occurring in the areas most hit by poverty and neglect, such as  Daraa, located at the center of an agricultural plateau in the south of the country, and the poverty belt around Damascus.

There must be no illusions. A happy end to the current protest movement, including the establishment of a democratic political system, will not mean an end to Syria’s economic woes. Syrians must recognize the tremendous challenges ahead and adopt a new economic development strategy that puts employment at its center.

 

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