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

Entering subsistence

One of the main questions surrounding the Syrian uprising at the beginning of 2012 was if and when an economic collapse would occur. As the year draws to a close, the question has instead become whether one can still talk of “a” Syrian economy as such.

What remains of the country’s formal economy has seriously deteriorated throughout the year. Business activity significantly contracted and although the government has released no estimates, gross domestic product is believed to have fallen by at least 25 percent in the first nine months of 2012. Disintegrating distribution and supply networks, a government increase in energy prices and a hike in the cost of imported items all combined to gradually increase the inflation rate; the consumer price index was up by 40 percent on an annual basis by August.

The Syrian pound, after having resisted all forms of pressure relatively well in 2011, lost ground. From a rate of 60 to the dollar at the beginning of the year, the exchange rate fell to over 80 pounds by mid-November 2012.

An important development has been the expansion of the violence to Aleppo during the summer, a city that had largely remained outside the popular uprising until then. Aleppo is Syria’s largest city by population, but also the country’s main manufacturing hub as well as a major trading and distribution center for agricultural products. The unrest in the city led, among other things, to the closure of its industrial city with some 600 factories suspending production.

However, while observers continue to monitor most formal indicators — such as inflation and the currency rates — as a means to measure investor sentiments, in practice most of the country’s economy now falls outside these numbers.

The expansion of violence and the varying degrees of state control over large sways of Syria have profoundly transformed its economy to the extent that one can now talk of a war economy, the creation of new business networks and the development of various new forms of trade, including smuggling, looting and kidnapping.

Some areas of the country are still firmly under state control and as such continue to be provided by regular government services — these include the provinces of Latakia, Tartous and Suweida as well as the central parts of Damascus. In these parts of the country the supply of products continues at relatively normal levels, although prices have skyrocketed.

Other areas have little left of the state, such as the rural parts of Aleppo, Idlib, Hama, Homs and Daraa. Meanwhile, the cities of Aleppo and Der-ez-Zour are under constant bombardment and have almost no business activity to speak of, while the northeast of the country is growing increasingly autonomous in the management of its day-to-day affairs. Looting is common in areas where inhabitants have fled; smuggling to and from neighboring countries has exploded as the government’s control over its borders weakened, customs tariffs increased and formal international banking transactions are at a standstill; kidnapping for ransom is widespread.

As the autumn pushed on, the government finally began to express more openly its concerns for the near future. In a well-publicized statement, the deputy prime minister in charge of economic affairs, Qadri Jamil, said in September that in the absence of a political solution to the crisis gripping the country, the economy was heading towards “a stroke” by the end of the year. Jamil was forced to retract his statement a few days later, but the damage was done.

Meanwhile, in early October, the Minister of Agriculture Subhi al-Abdallah encouraged his fellow citizens to “grow whatever they could grow and raise whatever animal or chicken they could raise.” Abdallah’s words echoed a prevailing sentiment in Syria: slowly but surely, the economy was moving towards subsistence mode.

The depth of distress in the economy, reflected in these statements, points to the major challenges ahead for Syria’s future decision makers. Syria may manage to rebuild relatively quickly its physical infrastructure, but it will require a very significant redefinition of economic policy, an overhaul of existing business and trade ties and a formalization of much of its economic activity before the country truly recovers from the devastation it is facing.

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

Stored value in troubled times

The unrest gripping Syria may have created havoc on the economy, but there is one industry that has benefitted from the turmoil — the real estate sector.

Within days of the beginning of the protests last March, frantic construction activity began across most of the country’s informal areas. Syrians seized on a relaxation of strict construction rules and a general weakening of state control to rush and build in areas and lands normally out of their reach. The government, facing countrywide protests and with no appetite for causing further discontent by clamping down on small scale developers, kept its eyes closed.

One year later, there are up to half a million new housing units that are believed to have been built, leading to a temporary surge in the price of building materials and labor, and a change in the landscape of many suburban and rural areas. Although in the last few weeks construction activity has largely returned to normal, this temporary boom has shed light on the importance of the real estate sector in the Syrian economy and society.

In a region that, historically, has rarely been stable, that has seen countless invasions and that sits on the crossroads of several trading routes, the attractiveness of investments that can act as stores of value is great — and this obviously applies to real estate as it does with gold. Few Syrian men, for instance, can be considered to have succeeded in life — and for that matter can dream to marry — unless they own at the very least a residence. Thus, beyond its purely economic logic, investment in real estate has a social weight of its own. In recent years, several factors encouraged investment in the sector. They include excess liquidity held by Syrian expatriates and Gulf investors on the back of booming oil prices; limited other investment opportunities — because the Syrian business environment, comparatively to other countries in the region, remains very poor — and negative real interest rates; finally, supply bottlenecks in several segments of the market, including quality commercial properties and upscale housing properties, played a role. Thus, in the mid-2000s, several of the major regional developers, such as Majid Al Futtaim, Emaar and Qatari Diar, announced the launch of a variety of projects across the country, while local investors focused on smaller scale ventures.

In practice, however, only a handful of these landmark projects took off. Emaar’s Eighth Gate commercial development — which will host the Damascus Securities Exchange — located in the upscale Damascus suburb of Yaafour is the only one of significance that has moved ahead. Almost all the others remain burdened by endless bureaucratic and regulatory obstacles as well as legal disputes over land ownership. Indeed, beyond the traditional problems faced by all investors wishing to do business in Syria, many other hurdles hamper a proper expansion of the real estate industry. The lack of sufficient land and of proper zoning in many parts of the country, in particular in the densely populated urban centers, have led to a rise in informal housing, which represents today a staggering 40 percent of all housing units in the country, and to a lack of investment opportunities. Similarly, state control and administration over huge portions of land in city centers, for instance in the Central Business District of Damascus, have rendered any major commercial development in these areas almost impossible. Another impediment is the very low average rental yield of most properties across the country. It is not uncommon, for instance, for a mid-size residential property located in the center of Damascus and worth around $400,000 to be rented out at less than $10,000 per annum, or an average yield of 2.5 percent, very low not only by international standards but also by regional ones.

In the near term, the best hope for the sector lies, ironically, in the unrest gripping Syria. Indeed, nearing two months into 2012, the Syrian Pound lost 14 percent of its value compared to the US dollar — coming on top of a 34 percent decline last year — while the inflation rate has reached double digit levels. Both these factors encourage the role of the sector as a store of value. In the longer-term, however, the broader political dynamics will weigh in much more on the development of the real estate industry, and unless the current stalemate comes to an end quickly, real estate can only resist significant disinvestment, as is happening in the rest of the economy, for so long.


Note: This article appeared first in the March 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

Bludgeoning Syria’s economy

The past 12 months have been devastating for Syria’s economy. Gross Domestic Product (GDP) has contracted by several percentage points (possibly by as much as 20 percent), the foreign currency reserves accumulated during the country’s short oil boom have been seriously depleted, the fiscal deficit has at least doubled, the national currency has lost some 15 percent of its value and the confidence the country was starting to gain from international investors has been shaken.

The prospects do not look any better for next year, with western sanctions on the country’s oil and banking sectors gradually starting to impact broader sectors of the economy and the Arab League likely to adopt similar measures.

One of the most frustrating aspects of the last year has been the confusion created by the government over its policies. After decades during which the economy was centrally planned the country adopted in 2005 a “social market” development model, in which the state was expected to limit its intervention to “social services” and to give the private sector more freedom to operate.

The debate over the role and size of the state in the economy seemed to have been finally settled, and until early this year the government had applied this relatively clear road map in spite of its shortcomings and justified criticisms.

Within days of the beginning of protests in the southern city of Daraa in mid-March, however, priorities changed entirely. Subsidies paid on energy products that were deemed “unsustainable” until a few weeks earlier were increased by some 25 percent, civil servants’ salaries rose 30 percent and free trade agreements that had been in place since 2005 were now to be renegotiated.

The moves unsettled analysts and investors and appeared to have been made out of panic rather than on the basis of any rational analysis.

Then, as the year was coming to a close, more confusion came. Minister of Economy Mohammad Nidal al-Shaar, realizing the extent of the damage, said that the decision to raise subsidies and salaries announced in March was “unsustainable” and that the government could not subsidize the economy forever.

The lesson to be drawn from all this is straightforward: You do not solve political problems with economic measures. To protesters chanting “we want freedom,” the government responded by saying “we will pay you better salaries”. The protesters continued to take to the streets because their demands were not met and, as the government was spending above its means, an economic challenge was added to the political problems that remained unanswered.

How dark are the prospects for the Syrian economy?

In the short-term one should not expect miracles. Investment and spending will continue to decline next year, and as foreign currency earnings decrease renewed pressure on the value of the Syrian pound should be expected, with all that entails for inflation and loss of purchasing power.

In the longer term, however, the dramatic political changes that are likely to result from the current unrest carry significant opportunities.

Liberalization alone has not been enough to revitalize the economy and it has in fact highlighted its weaknesses. The country has one of the most diversified economies in the Middle East with four different sectors each generating more than 10 percent of GDP (agriculture, oil and gas, tourism and trade) and three others making up more than 5 percent (manufacturing, finance and real estate). It also benefits from a relatively large market, a well-educated workforce and an extraordinary geographic location.

However, in spite of all these comparative advantages, and years of reforms, Syria attracts less foreign direct investment than its much smaller and resource-poor neighbors, Lebanon and Jordan. And it regularly ranks among the worst performing economies in most global surveys; 14 out of 17 countries in the Middle East in the Doing Business Index of the World Bank and 15 out of 16 countries on the Competitiveness Index of the World Economic Forum.

The underlying reason for this lacklustre performance is a business environment plagued by an overwhelming and corrupted bureaucracy, a judicial system mastered by the well-connected few and a broad sense of unaccountability and lack of responsibility across the state and its institutions.

These are challenges that cannot be solved through economic measures; rather they require deep changes in governance that are unlikely to ever take place under the current political system.


Note: This article appeared first in the December 2011 edition of Executive Magazine