The Central Bank has managed to bring the Syrian pound back down into a manageable trading range. It had plunged to an exchange rate over 100 pounds to a dollar. It is now below 100 to a dollar. How did it do this?
Reports are that the central bank sold only 2 million dollars. Yes, only 2 million dollars in order to calm the market. One friend reported paying 113 pounds for a dollar in Aleppo on Wednesday 7 March. On Thursday morning, the pound had risen to a range between 89 and 91 per pound. Six hours later it hit 103. The rate was bouncing all over the place between 85 to 113 per dollar; there was no real price.
If the Central Bank can hold the price of the pound below 90 per dollar, it will be doing very well. That is where it really belonged before the revolution. Syria had been pursuing a suicidal strong-pound policy for years. The artificially high rate of 47 pounds to a dollar ignored imbalances in the economy. It undercut Syrian exports and inflated the cost of doing business in Syria, which has too many impediments and too few attractions for foreign investment.
Most important, however, was that the strong currency encouraged Syrians to buy foreign goods well beyond their means. In effect, the government was giving Syrians free foreign currency to buy cars and other goods that the country could ill afford. This made Syrians feel good, but it ignored the real costs. The strong currency ignored the decline of oil revenues. The government was ignoring its costs which were rising. The government needed to down size and let go of workers, but it refused to do so, preserving the bloated and inefficient public sector industries.
Government costs of expanding subsidies were also draining the treasury. Fuel and food subsidies were sky-rocketing with the growing population and rising commodity prices.
The government has cut its expenses by half in allowing the currency to fall to 89 pounds to a dollar.
Traditionally economic bubbles are followed by a fall of asset prices by roughly 45%. The Syria currency has fallen by 45%, should it stay at 89 pounds to a dollar. Of course, Syria is not going through a tradition economic bubble because it has a broad-based social revolution on its hands, but one should not ignore the economic causes of the Arab Spring. Economic failure underpinned this revolution.
If the Syrian revolution succeeds, it will be important for the revolutionary government not to repeat the bad economic choices of the Assad regime. Of course opposition parties have been almost silent on their economic prescriptions and plans, if they in fact have any. The cause of this silence is because most Syrians know precious little about economics, but more importantly opposition parities do not want to tell Syrians the bad news. They will have to cut government jobs and expenses.
If the Assad regime is forced to cut government jobs, stop subsidies, and allow the currency to trade at a more manageable rate, it will be blamed for the collapse. The new government will escape much of the blame for the terrible shape of the Syrian economy and will escape the necessity of imposing an austerity plan, which must be done by someone.
The new Egyptian parliament faces a gargantuan task in dealing with the economic troubles bequeathed it by Husni Mubarak. Few believe that it will be able to swiftly guide Egypt down the road of significant belt tightening and the rationalization of a public sector and monopoly industries that are not competitive.
The Syrian uprising is being driven largely by political factors, but one should not ignore the numbers. Ehasani, who has been writing for Syria Comment for over five years, has consistently warned us that Syria’s economic numbers do not add up. Eventually, reality would mug Syrians.
About the author: Syria Comment - Joshua Landis
Joshua Landis maintains Syria Comment and teaches modern Middle Eastern history and politics and writes on Syria and its surrounding countries. He writes “Syria Comment,” a daily newsletter on Syrian politics that attracts some 3,000 readers a day. It is widely read by officials in Washington, Europe and Syria. Dr. Landis regularly travels to Washington DC to consult with the State Department and other government agencies. He is a frequent analyst on TV and radio.