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Syria Faces A New Economic Reality – OpEd

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By Ehsani for Syria Comment

The recently announced import suspension prohibits the import of  all products that have a customs duty of over 5 percent. This notice also covers countries that Syria signed a free trade agreement with (Turkey, Ukraine and the Arab countries for example).  The original signed free trade agreements will no longer be fully adhered to.

As expected, the Ministry did issue a list of products which received an exemption from the ruling.  There are 51 items on this list. The first 17 are of the food products variety like meat, fish, cashew nuts, almonds and bananas.  Some of the details on the list are mind-bogglingly trivial.  The type of fish that was exempted from the ban for example was sword fish which made it to item number 5. Fish (with teeth) from the south pole or Australia also made it to the exemption list at number 6. But the sword fish were dropped again in item 7 which allowed all fish other than sword fish or those from the south pole and Australia.

The rest of the items are mostly medical in nature. Examples include x-ray machines, various Lab equipments, Dental chairs, and prescription and sun glasses.  The only vehicles allowed are buses for the local public transportation companies, fire and ambulance trucks as well as fork lifts. Mobile phones (current customs duty of 10%) were also exempt from the ruling.  This suspension is effective for all imports after September 22, 2011 (those who used a local bank prior to this date are exempt). Overall, the complexity of this ruling can only be appreciated when one delves into even more detail of what is banned and what is not.

The General Reaction to the Ruling

The deputy Minister of the Economy and Trade was in Aleppo today. He was in a packed room of businessmen at the city’s Chamber of Commerce. Several passionate pleas were made to rethink the decision and to exempt more products. Many explained how they already have goods on the way and wondered what they would with them (they did not have an L/C open before September 22nd).  One wondered why cashew nuts were exempted when the U.S. used to be the largest supplier of this product (Vietnam and India are now the world’s largest exporters).  To every question, the deputy Minister’s response was to ask that they do so in writing and when the Ministry receives their written questions, it will study them in detail and see how they can help. To which one food importer responded that it would be too late as his goods are already at the border and by the time his letter reaches Damascus and be read he would have already thrown away his rotting produce.

One can read more about these shock waves hitting the Syrian business community. In the meantime, government has tried its best to argue that the decision has both pluses and minuses. On the minus side, the government is aware that prices of the recently banned items will rise rather significantly. Indeed, reports of price hikes close to 40 percent have already been reported on few electronic items while companies like Sony, Sharp and others have suspended their sales in the country altogether. While the government did not mention it, the other minus will stem from the fact that the grey market will now flourish as illicit trade fills the inevitable void that will develop. On the plus side, the Minister of the economy and trade has tried to argue that this decision will help local producers and employment. The argument appears logical at first. However, by referring to the measures as “temporary”, one fails to see how local producers will add to expensive capacity and hire new employees knowing that the decision can be reversed anytime. Local manufacturers are unlikely to invest in new machinery and equipment in this atmosphere. As it is, a number of industrialists have put expansion or new projects on hold over the last few years as the government has proved incapable of delivering sufficient electricity capacity.

Syria’s external Accounts undermined by its fixed exchange rate

This article argues that while the decision to suspend imports for these products appears to have been caused by the recent sanctions imposed by the US and EU, Syria’s external accounts were already being undercut by the fixed exchange rate policy that had encouraged imports and discouraged exports for years.  In the end, the authorities have found it expensive and difficult to finance the insatiable demand for foreign made products at the rate of SYP 47 to the dollar while revenues from oil production and exports fell steadily.

The 2012 Syrian Budget Rises by 59%

In addition to the pressure stemming from an imbalance in its foreign trade position, the other main problem in the economy comes from the government budgeting situation.  Just yesterday, the state increased its expenditures by 59 percent when it announced its new budget for 2012. The Social subsidies alone will amount to 29% percent (US$ 7.72) of all government expenditures . This means that one third out of every Dollar that the government spends will go to supporting a hugely expensive subsidy program that has spiraled out of control thanks to the country’s demographics and illicit trading (especially in mazot – fuel oil). How large is the budget and total government expenditures this year? The number is $US 26.5 billion or 50 per cent of total nominal GDP. This is an astoundingly high number.

Failure to Tax

The US$9.8 billion jump in expenditures this year needs to be funded by increased tax collection in a business environment that will be extremely challenging. One of the examples of an obvious and gaping hole in the government’s ability to collect taxes comes from custom duties on imports. While the government imposes duties close to 50% on many products, the 2009 government revenue from this area indicates that the treasury was only able to collect US$ 0.56 billion or 4.3% of the total value of goods imported. Following the recent sanctions on Syrian crude exports, it seems that the country was able to export around 110,000  barrels per day.  Revenues from such exports used to be in the range of  $3.0 billion. Given the recent sanctions and even when alternative buyers are found, it is expected that this can only take place after a hair cut is offered on the globally traded price. This is likely to further erode the government’s ability to earn much needed foreign exchange. It is possible that the difficulties of finding buyers will be such that talk of barter trades will soon be discussed. Iran already does this with its own crude exports. Indeed, this morning the Financial Times claims that Syria is unable to find any buyers for its oil (See Story below).

The pros and cons of a stable exchange rate:

Since the last currency crisis in the mid-1980, Syria has defined both political and economic success by the stability of its foreign exchange regime.   The central bank used the stability of its foreign exchange as the main metric of successful economic management.  This metric did not include economic growth, employment level or the balance of payments as targets. Stable exchange rate led to inflation stability and this is all that mattered to the economic planners.

In a flexible exchange regime, a loss of competitiveness or a widening trade imbalance usually results in a weaker currency which acts as self-correcting valve that restores the initial imbalances over time. Artificially fixed exchange rates deprive an economy from such a correcting mechanism. This is what happened in Syria. While this policy seemingly held imported inflation in check, it was causing significant damage to external accounts.  As the country adopted the new social market economy and import restrictions were lifted, an import orgy was now underway.  This was augmented by free trade agreements with the Arab world and later with Turkey.  Local producers who lived for decades under the comfortable protection of “himaye wataniye” were now under assault from a global market place that was more efficient and competitive than them.  It did not take long for Syrians to dump their manufacturing hats and transform themselves into importers. Throughout this worsening export/import imbalance, the currency value did not budge.  The Central Bank intervened at any sign of SYP weakness.

For Syria to continue to finance importers at the rate of SYP 47 to $1 dollar, it needed matching foreign currency receipts from its exports, remittances or tourism.  The hopes were high when it came to the latter two.  Thanks to a steady fall in oil production and exports however, the country’s ability to accumulate serious foreign currency was becoming harder to accomplish.  In spite of such trends, the foreign exchange regime was never modified to weaken the SYP to help make imports more expensive and/or to give local producers a much needed slight competitive advantage.

Proponents of the stable fixed Exchange rate regime pointed to stable inflation as the primary objective and how allowing the SYP to devalue will harm the economy. In reality, however, what transpired is that the government exhausted its ability to finance the country’s increasing appetite to import. Much has been discussed of the fact that the Central Bank sits on a comfortable foreign exchange reserve position of nearly US$ 18 billion. In reality, this number is impossible to verify. The official government data and accounting is simply not transparent enough to confirm such claims. More transparency is highly desirable in an effort to reduce speculation and rely on factual data during such a critical period. In the meantime, the only thing certain is that the government has decided to conserve on whatever foreign reserves it has at its disposal to prepare for an extremely challenging economic times in the period ahead.

Syria Comment - Joshua Landis

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.

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