Cyclopedia Of Economics 1st edition

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Syria, Economy of

Well into the 1980's, Syria - which could have been the Switzerland of the Middle East - was derided as its North Korea. Belligerent, steeped in paranoia and xenophobia, and socialist to boot - it revolved around the personality cult of the current president's father, Hafiz al-Assad.

The Western media reported how Syria colonized Lebanon, suppressed the Sunni majority at home, and aided and abetted unsavory terrorist organizations inside the region and without. It is still on the USA's black list, though not a member of the tripartite "axis of evil".

These perceptions are gradually changing. Under the leadership of the soft-spoken, 37 years old ophthalmologist, Bashar al-Assad, Syria seems to be bent on re-joining the international community. In his inaugural address, Bashar encouraged "positive criticism" of the regime, suppressed a nascent personality cult centered around him, and called for economic liberalization.

On March 29, the Syrian parliament rubber-stamped a law, tabled by the Ministry of Economy and Foreign Trade. According to Sana, the state news agency, the act established a Monetary and Credit Council. But its most daring departure from past practices was to allow banking joint ventures between the government and the private sector.

Applying firms must still be at least 51% owned by Syrians. The Central Bank will start accepting applications on April 20. A January cabinet decision to allow foreign owned banks to operate in Syria still awaits the habitually-glacial presidential approval.

This ends four decades of ruinous government monopoly, the result of a nationalization campaign by the triumphant Ba'ath party in 1963. Deputy Prime Minister for Economic Affairs, Khaled Ra'ad, said that some 50 foreign banks are interested to set up shop in Syria. This may be an exaggerated figure. One hundred applications were reported following a late 2000 law opening the door to private investment in the banking sector - yet not a single license was issued hitherto.

Foreign, tax-exempt, banks have been allowed to operate in Syria's five free zones since June 2000. But the conditions were so onerous that not many did. Only "first rank" banks with $11 million in capital - in foreign exchange - were supposed to be let in. They were permitted to transfer and receive foreign exchange, usually on behalf of foreign clients. Yet, even these mundane operations were hobbled by a mountain of restrictions and regulations.

A year later, the free zones became nests of money laundering. Six (now five) obscure Lebanese banks provided services to less than 300 clients. Few others followed. The Oxford Business Group quotes a senior Lebanese banker:

"...The CEO of Lebanon's Byblos Bank, Francois Bassil, which is one of the five Lebanese banks established in Syria's free trade zones, told a London-based newspaper that the banks saw almost no activity. He cited problems in Syria's economic and financial environment, as well as the lack of a financial reform law. In a positive step, Syrian media reported in mid-February that one of France's largest commercial banks, Societe Generale was looking to set a up a network in Syria through the bank in France and its Lebanese affiliate, Societe Generale de Banque au Liban.

Despite this disheartening prelude, Syria has no choice but to liberalize its moribund and ossified banking sector. In recognition of this inevitability, Bashar al-Assad, the current president, has shuffled most of the economic positions in his cabinet last December.

He surrounded himself with reformers, some of them Western-educated, as he is. Four of them are members of his "Syrian Computer Society", a hotbed of reform. A notable appointment is Ghassan al-Rifai, the Minister of Economy and Foreign Trade, who spent 30 years with the World Bank. Among his many achievements, he was an active member of the team that launched MIGA - the Bank's Multilateral Investment Guarantee Agency.

This " palace coup" did not go down well with old, Ba'athist, hands and with entrenched economic interests - some of them criminal - in both Syria and Lebanon. Resentment and dejection are mounting and may yet lead to open confrontation. To placate them, the Syrian government has decided not to pursue the privatization of state companies and their numerous sinecures.

Xenophobia and sentiments against liberalization and deregulation are not limited to Ba'athist interest groups. In "Emerging Syria 2002", published by the Oxford Business Group, IFC Senior Investment Officer, Bassel Hamwi is quoted as saying:

"While on a business trip to Syria in 1998 in the wake of the far eastern economic collapse, a Syrian official boasted to me that the Asian Tigers had become vegetarian. Surprisingly, the same antagonism towards liberalization was echoed by many of the private sector businessmen I met as well.

Up to that point, Syrians had chosen to insulate themselves not only from the risks inherent in the global economy, but also from its potential rewards. Two years later, however, it was a very different picture with the government making a concerted effort to open up to the financial world by allowing private banks to be established for the first time in some 40 years. The international community quickly took notice, and considered Damascus' efforts as a welcome signal that further liberalization was ahead.

The local community, however, was more divided. Indeed, Syrian businessmen were happy at the prospects of not having to travel abroad to service their banking needs. But one question that seemed to be on the minds of many was: 'Would liberalization bring about a financial crisis similar to that experienced in East Asia?'"

Syria's tottering economy can be salvaged only by the introduction of a functioning, competitive, well-capitalized, and foreign-managed banks. The EU made this abundantly clear to President al-Assad in his talks last month about an EU association agreement with Pascal Lamy, the EU's trade commissioner. The same message was trumpeted by an EIB (European Investment Bank) visiting delegation.

Close to 60% of Syria's exports - c. $1.5 billion - are received by the EU. Syria also imported $2.9 billion from the EU last year.

The Heritage Foundation Index of Economic Freedom ranked Syrian banks as 5 - very high level of restrictions. It expounded thus:

"The banking system is completely controlled by the government, which owns all of the country's major banks, and most banks lend only to the public sector. According to the Economist Intelligence Unit, "Syria's financial services are poor, unsophisticated and a serious obstacle to economic development.

There are five banks working alongside the Central Bank of Syria, all of them state-run and state-owned... CBS (Syrian Central Bank) discount rates to the private sector have been fixed at 9% since 1981 (7% for the public sector) irrespective of the rate of inflation. As a result, real interest rates have often been negative in times of high inflation."

Though state-owned, Syrian banks are woefully under-capitalized. The only retail network in the country, the "Commercial Bank of Syria" had less than $25 million in foreign currency reserves in 2000, according to government figures. There are $9 billion on deposit in state banks.

The Central Bank of Syria supervises the Commercial Bank of Syria, Industrial Bank, Agricultural Cooperative Bank, Loan and Savings Bank, Real Estate Bank, the General Syrian Insurance Agency and the General Postal Savings Establishment. These provide the entire range of banking services - but in a cumbersome, costly, and maddeningly inefficient manner.

The banks are subject to intense political meddling. Interest rates are purposefully negative. Public and mixed-sector enterprises crowd out private sector lending. Additionally, Syria has no capital or foreign exchange financial markets to speak of. Surprisingly, non-residents often fare better than locals: they can obtain (Syrian currency) loans based on bank guarantees.

Laws and regulations are often contradictory. Law number 24 prohibits Syrians from holding foreign exchange. Law number 10 permits Syrian investors to deal in foreign currency. This is merely one of a myriad examples.

Corruption is rife. The general director of "Commercial Bank", Nadim Mithqal, was arrested a fortnight ago. According to "Tishreen", an official daily, he diverted loan re-payments to an unidentified, but "marginal", foreign bank. The damage is estimated to be a sorely-needed $5 million. The Miro government seized on this opportunity to re-iterate its demand to limit the term of bank directors to four years.

Syria's banks were treated by the late al-Assad as Ba'ath fiefdoms and venues of patronage. In 1995 he appointed a lackluster but well-connected presidential advisor with no previous banking experience, Mohammed Bashar Kabbara, as governor of Syria's oft-idle Central Bank. Syrian bankers complained bitterly - though anonymously - about this appointment to the Middle East Economic Digest. The latest developments may have made them happier - though, probably, in the Syrian tradition, only incrementally so.

The Department of Defense has repeatedly accused the country - still on the State Department's list of terror-abetting polities - of shipping weapons and materiel, such as night goggles and jamming systems for satellite global positioning devices, across the border to Hussein's depleted and besieged forces. Arab volunteers, some bent on suicide attacks, have been crossing into Iraq from an accommodating Syria.

Donald Rumsfeld, the American Secretary of Defense, called these unhindered flows "hostile acts". The CNN quoted former CIA director James Woolsey calling the Syrian regime "fascist". Even Colin Powell warned Syria that it is facing a "critical choice".

According to the Kuwaiti daily, Al Rai Al Am, in a related incident, U.S. special forces have demolished a pipeline which delivered more than 200,000 barrels of heavily discounted oil a day from Kirkuk in Iraq to Syria, in defiance of repeated American requests. A railroad link between the neighboring countries was also blown up. Western sources denied both these reports.

Structures within Syria's military and secret services, acting through business fronts, have been implicated in arms trafficking from Syria to Iraq, including, according to the pro-Israeli Forward magazine and the Israeli daily, Ha'aretz, anti-aircraft missiles, rockets and Scud missile guidance systems, tank transporters and antitank missiles from Russia, Yugoslavia, Ukraine, Belarus and Bulgaria.

The American Israel Public Affairs Committee, a powerful Jewish lobby, intends to capitalize on such bad blood. Its executive director, Howard Kohr, told various media recently that AIPAC will target the transfer of missile technologies from Russia to Syria, Iran and North Korea, two of which are charter members of the "axis of evil" together with Iraq.

On Monday, repeating accusation aired last December by Prime Minister Ariel Sharon, Brigadier General Yossi Kupperwasser, a senior officer in the Israeli intelligence community, told the Foreign Affairs and Defense Committee of Israel's Knesset that Syria was harboring Iraqi chemical and biological agents and long-range missiles. Even the Americans found these charges too outlandish to endorse.

Despite fears publicly expressed by Bashar al-Assad and other senior Syrian officials, Syria is unlikely to be the next target of the coalition forces. It is an American strategic asset. An ardent historical foe of Iraq, it joined the American-led coalition in the first Gulf War and the war on terrorism.

Syria also voted for resolution 1441 in the Security Council, calling for Iraq's disarmament under pain of war. It is also indispensable to any lasting Middle East settlement. The administration torpedoed the Syria Accountability Act, a Congressional attempt to impose sanctions on Damascus. According to the official Syrian news agency SANA, Tony Blair called al-Assad to inform him "that Britain disagrees completely with those who promote the targeting of Syria".

In an interview to the London-based Arabic language al-Hayat newspaper, Powell denied any intention to invade either Syria or Iran. But the conspiracy-minded noted the revival, by Israel, of a plan to carry oil from Mosul to Haifa, through a disused pipeline running via Syrian territory. Hooman Peimani in Asia Times concluded:

"Unless the pipeline were redirected through Jordan, another country bordering Israel and Iraq with normalized relations with Israel, the pipeline project will require a different regime in Syria. In other words, regime change in both Iraq and Syria is the prerequisite for the project. As (Israeli Minister of National Infrastructure, Yosef) Paritzky did not mention a redirecting option, it is safe to suggest that the Israelis are also optimistic about a regime change in Syria in the near future."

The demise of Hussein's pariah regime spells economic trouble for Syria. Still largely a socialist command economy, it has only recently embarked on a hesitant and partial path towards market reforms. Iraq served as both the source of cheap energy and a captive market for shoddy Syrian goods. Bilateral trade, excluding oil, amounted to $2 billion, according to the Khaleej Times, a United Arab Emirates daily.

Syria, itself a fledgling oil producer, re-exported some of the Iraqi crude and much of its own output through a pipeline leading from Kirkuk directly to the port of Banias. It reaped between $500 million to $1 billion annually from such arbitrage. Syria extracts  about 400,000 barrels of crude per day and c. 8 billion cubic meters of natural gas a year.

Lebanon is another paradise likely to be lost to Syria in the wake of the Iraq war. The country, largely occupied by the Syrian security apparatus, has been divvied to lucrative fiefdoms controlled by politicians belonging to the late Hafiz al-Assad's old guard.

The Lebanese economy and its financial sector are far superior to Syria's. But the United States is pressing a reluctant Syria to terminate its "occupation" of Lebanon and, thus, to let the West dismantle the infrastructure of terrorist organizations, such as the Iran-backed Hizbullah, that thrive there.

Observers say that the subtraction of the Iraqi and Lebanese windfalls is a blessing in disguise. It will force Syria to modernize, reform its bloated public sector, restructure or genuinely privatize its numerous state-owned enterprises, develop its energy sector and introduce the rudiments of a monetary policy and a banking system. Syrian manufacturers have already begun to develop markets in other Arab countries and in East Europe.

Not all is lost. Syria, a largely agricultural country, stands to enjoy bumper crops this year. Its ports will inevitably serve as the entry points for goods used in Iraq's reconstruction. Such traffic will be a boon to its budding service industries.

Nor is Syria as isolated as the United States and Israel might wish it was.

Jordan and Syria signed on Sunday an agreement to construct the $87 million Al Wihda dam on the northern Yarmuk River which flows from Syria to its neighbor. It will add 80 million cubic meters of drinking and irrigation water to Jordan's dilapidated supplies. The facility will be erected by Ozaltin, a Turkish construction firm, and financed by Jordan with loans from the Abu Dhabi Development Fund and the Arab Fund for Economic and Social Development.

Turkey has also been reaching out to Syria and Iran in a belated effort to counter an emerging Kurdish polity within a federated postwar Iraq. Days after Colin Powell departed Turkey in the belief that fences have been mended, Iranian Foreign Minister Kamal Kharrazi visited Ankara and Turkish Foreign Minister Abdullah Gul announced an imminent trip to Syria.

According to SPA, the Saudi Press Agency, Iranian President Mohammad Khatami is scheduled to travel to Syria and Lebanon in early May. President Bashar al-Assad briefly stopped in Tehran in March this year to discuss the brewing crisis in Iraq. This flurry of summits indicates the formation of a broad front aimed at countering certain American allies - notably the Kurds. The participants also aspire to affect the future shape of their region. It is a tall order and they may well be too late.

As Richard Murphy, US Assistant Secretary of State for Near Eastern Affairs from 1983 to 1989, recently told the Daily Telegraph:

"There's a perception that the time has come to spread democracy in the Middle East. Their view is that the US paid heavily on September 11 for having not stood by its principles in dealing with autocracies in the Middle East."


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