COUNTRY REPORT Syria January 2001 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom At a glance: 2001-02 OVERVIEW President Bashar al-Assad’s position is politically more secure, which has allowed him to launch a number of liberal political and economic init- iatives. However, with his agenda of reform at odds with elements of the political/military elite, his position remains precarious. Policy initiatives, particularly at an economic level, will be slow to be implemented and subject to revision at the behest of the old guard, as they seek to preserve their interests. The EIU expects growth to rise marginally over the forecast period from 2.4% to 2.6%, while inflation is likely to be kept in check. Key changes from last month Political outlook • Mr Assad’s hard line on defence has entrenched him within the military establishment, but at the expense of higher regional tension. We expect tensions to remain high in southern Lebanon, representing a significant foreign-policy challenge for Mr Assad. • Calls from within Lebanon for an end to Syria’s dominance and a withdrawal of Syrian troops will continue to test Mr Assad’s abilities. Economic policy outlook • Political uncertainty will remain the leading factor determining the business climate. While a raft of proposals for economic reform have been announced, their implementation is likely to be slowed. • Ground-breaking plans have been proposed for financial sector liberalisation, including for the establishment of private banks, to create a local bourse, and to float the Syrian Pound. Economic forecast • Reduced government revenue as a result of a decline in oil prices may limit fiscal expenditure. • Growth will remain modest, held back by the prevailing political instability, while inflation is expected to rise slightly over the forecast period. • The total debt stock will fall in 2001, as the government takes advantage of the oil windfall in 2000 to repay non-disputed external debt.
Transcript
COUNTRY REPORT
Syria
January 2001
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
At a glance: 2001-02OVERVIEWPresident Bashar al-Assad’s position is politically more secure, which hasallowed him to launch a number of liberal political and economic init-iatives. However, with his agenda of reform at odds with elements of thepolitical/military elite, his position remains precarious. Policy initiatives,particularly at an economic level, will be slow to be implemented andsubject to revision at the behest of the old guard, as they seek to preservetheir interests. The EIU expects growth to rise marginally over the forecastperiod from 2.4% to 2.6%, while inflation is likely to be kept in check.
Key changes from last monthPolitical outlook• Mr Assad’s hard line on defence has entrenched him within the military
establishment, but at the expense of higher regional tension. We expecttensions to remain high in southern Lebanon, representing a significantforeign-policy challenge for Mr Assad.
• Calls from within Lebanon for an end to Syria’s dominance and awithdrawal of Syrian troops will continue to test Mr Assad’s abilities.
Economic policy outlook• Political uncertainty will remain the leading factor determining the
business climate. While a raft of proposals for economic reform have beenannounced, their implementation is likely to be slowed.
• Ground-breaking plans have been proposed for financial sectorliberalisation, including for the establishment of private banks, to create alocal bourse, and to float the Syrian Pound.
Economic forecast• Reduced government revenue as a result of a decline in oil prices may
limit fiscal expenditure.
• Growth will remain modest, held back by the prevailing politicalinstability, while inflation is expected to rise slightly over the forecastperiod.
• The total debt stock will fall in 2001, as the government takes advantageof the oil windfall in 2000 to repay non-disputed external debt.
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ISSN 0269-7211
Symbols for tables“n/a” means not available; “–” means not applicable
Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK
7 Outlook for 2001-027 Political outlook8 Economic policy outlook
10 Economic forecast
13 The political scene
18 Economic policy
20 The domestic economy20 Oil and gas24 Agriculture25 Infrastructure and Industry26 Financial and other services
29 Foreign trade and payments
List of tables
10 International assumptions summary11 Forecast summary19 Official Syrian government finances22 Crude oil production27 Consolidated balance sheet of the specialised banks
While the position of the president, Bashar Assad, is politically more secure, itremains precarious. His agenda of reform is at odds with a political/militaryelite he must continue to co-opt to carry out policy changes. While Mr Assadshould be able to deliver on some of the promised political and economicreforms, the process will be slow, and remain at the behest of the old guard,who are keen to maintain their privileges. Given the continuing politicaluncertainty, the EIU expects growth of 2.4% in 2001, rising to 2.6% in 2002. Asteady decline in oil prices will put pressure on fiscal expenditure. Increasedgovernment spending and growth in global non-oil commodity prices may faninflation, although it is expected to remain below 2.5%.
Mr Assad has enhanced his position within the ruling elite, and used it tolaunch a number of liberal political initiatives. His hard line on defence hasentrenched him within the military establishment, but at the expense ofhigher regional tension. Opposition in Lebanon has grown to Syria’s trooppresence, and Mr Assad has sought to compromise. The veteran foreignminister, Farouq al-Sharaa, has used his new found autonomy to launch aseries of foreign-policy initiatives, delicately improving relations with rivalregional powers such as Iran and Iraq, and Turkey.
Reforms have been launched to encourage private-sector investment, rangingfrom fiscal measures to plans for financial market liberalisation—includingproposals for private banks, a stockmarket, and to float the currency. The draftbudget has been prepared for 2001, one of the most timely for three decades,with a projected 16.9% increase in expenditure. Plans were announced torevitalise the industrial sector. A forum was held to encourage foreigninvestment, and there are plans to shake up the housing market.
A long disused oil pipeline to Iraq has been reopened, potentially offering Syriacheaper crude oil and boosting exports, but facing the potential of angeringthe US and UN because the move threatens to break sanctions on Iraq. Anagreement has been signed for a US$1bn regional pipeline initiative. Theoperating contract for a global system for mobile communications (GSM)licence has been delayed further. Lebanese banks have begun doing business inthe free zones.
The government has rescheduled debts with Germany and Iran, with theformer opening up the prospect of better trade with the EU. There are moreregional trade initiatives, but concerns are growing about tariffs with Lebanon.
Editors: Giles Allen (editor); Merli Baroudi (consulting editor)Editorial closing date: January 1st 2001
All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule
250-member Majlis al-Shaab (People’s Assembly) directly elected for a four-year term
Universal adult suffrage
Last elections: 1998 (legislative) and 2000 (presidential); next election due by 2002(legislative)
President, directly elected for a seven-year term. The president appoints the vice-presidents, the prime minister and the Council of Ministers. Bashar al-Assad, who waselected president in July 2000, holds the posts of commander-in-chief of the armedforces and secretary-general of the Baath Party. The vice-presidents are Abdel-HalimKhaddam and Zuheir Masharka.
The prime minister heads the Council of Ministers, members of which are drawn fromthe Baath Party and its partners; last reshuffle in March 2000
Seven parties form the ruling National Progressive Front (NPF): Arab Socialist BaathParty; Arab Socialist Party; Arab Socialist Unionist Party; Communist Party; Syrian ArabSocialist Union Party; Unionist Socialist Democratic Party; Union Socialist Party
Prime minister Mohammed Mustapha MiroDeputy prime minister & defence minister Mustafa TlasDeputy prime minister for economic affairs Khaled RaadDeputy prime minister for social services Mohammed Naji Otari
Agriculture & agrarian reform Assad MustafaCommunications Ridwan MartiniConstruction Nihad MushanteetCulture Maha QannutEconomy & foreign trade Mohammed al-ImadiEducation Mahmoud al-SayeedElectricity Munib Assad Sayeem al-DaherFinance Khaled MahayniForeign affairs Farouq al-SharaaHealth Mohammed Iyad ShattiHigher education Hassan RiyshahHousing & utilities Husam al-SafadiIndustry Ahmed HamuInformation Adnan OmranInterior Mohammed HarbaIrrigation Taha al-AtrashOil & mineral resources Mohammed Maher JamalPlanning Issam ZaimSocial affairs & labour Bariah al-QudsiSupply & internal trade Osama al-BaridTourism Qasim MiqdadTransport Makram Ubayd
Transport & communications 11.9 Exports of goods & services 30.3
Government services 7.9 Imports of goods & services –30.7
Finance & insurance 3.7 GDP at market prices 100.0
Building & construction 3.7
GDP at market prices incl others 100.0
Principal exports 1998c US$ m Principal imports cif 1998 US$ m
Crude oil 1,342 Manufactured goods 1,225
Fruit & vegetables 380 Machinery & transport equipment 916
Textiles 366 Food & livestock 617
Cotton 273 Chemicals & chemical products 501
Total incl others 3,135 Crude materials, except fuels 169
Mineral fuels, lubricants & related materials 156
Total incl others 3,895
Main destinations of exports 1999 % of total Main origins of imports 1999 % of total
Germany 20.9 France 10.7
Italy 12.3 Italy 7.9
France 9.5 Germany 7.1
Saudi Arabia 8.9 Turkey 5.0
Turkey 7.7 China 4.4
a EIU estimates. b actual. c Principal exports figures derive from Central Bureau of Statistics, Statistical Abstract. Exports of goods and services aretaken from the IMF’s International Financial Statistics. d “Neighbouring countries” rate. e Official estimates.
a From IMF’s International Financial Statistics. However, we are awaiting clarification from the Central Bank regarding the sharp increase in exportand import figures from 1 Qtr 2000. Speculatively, it may indicate a change in the exchange rate at which trade data is converted.Sources: International Energy Agency, Monthly Oil Market Report; quarterly figures; IMF, International Financial Statistics.
The president, Bashar Assad, begins 2001 politically more secure than when hecame to office after his father’s death six months ago. In that time he hasreached an accommodation with the generals and intelligence chiefs whocontrol the levers of power, and used this as a base from which to launch aprogramme of political and economic reform. Surrounded by like-mindedtechnocrats, Mr Assad has tried to bring modest changes to improve thecountry’s predicament. He has released political prisoners, allowed limitedpress freedom, reformed investment laws, invited foreign banks to openbranches and approved far-reaching financial sector reforms—including theestablishment of private banks, plans to reform the exchange-rate regime andestablish a stock exchange. The new president appears popular, even to anextent within the ruling elite, and is perceived as offering youth, vision, andthe ability to take Syria forward. Yet his position—and therefore the sustain-ability of his political and economic reforms—still remains precarious.Mr Assad is surrounded by an ageing political elite, whose members he mustco-opt to carry out even minor policy changes, and who will continue to offertheir support only so long as he brings economic prosperity, without under-mining their networks of power and patronage. If they perceive his reforms asa threat, they may challenge his programme, and could seek to topple him.Meanwhile, the business community is expecting almost the opposite—an endto mismanagement, corruption, and isolation. Those in the fledgling politicalopposition are expecting wider participation, and an end to three decades ofrepression. Finally, the wider population believes Mr Assad will bring a suddenand sharp increase in wealth. Currently, the president is enjoying a politicalhoneymoon. However, each group will only wait so long for their needs to beanswered.
It is expected that a cabinet reshuffle will be carried out by the end of the firstquarter. The outcome of these changes should give an indication of the extentto which Mr Assad has been able to consolidate his position. During theforecast period, the EIU believes Mr Assad will remain in office and be able todeliver some of the promised liberal political and economic reforms, en-couraging a degree of pluralism, allowing a freer press and more privateownership. However, he will increasingly find himself caught between thecontradictory aims of the various interest groups. Such unresolved tensionsamong the political/military elites, and over the direction of policy, willcontinue to threaten his position and ensure a climate of political uncertainty.
Foreign-policy issues remain dominated by violence in the Occupied Territoriesand the situation in south Lebanon, where Syrian-sponsored Hizbullahguerrillas have taken a dangerous line, attacking the Israeli army in a disputedborder area, assuming that Israel does not wish to open a second military front.Both conflicts have a direct bearing on Syria. Frustration is growing within theNorthern Command of the Israeli army, and senior officers may be seeking an
opportunity to recover the army’s prestige through a military offensive inLebanon. The Israeli government has threatened military raids on Hizbullah,Lebanese infrastructure and Syrian military positions in Lebanon—and evenSyria proper—if Hizbullah continues such border provocation. With an Israelielection due on February 6th and a campaign underway with the current primeminister, Ehud Barak, seeking re-election, we expect tension to remain high insouthern Lebanon. Given the indications of recent polls—that right-wingleader Ariel Sharon may be elected—tensions may increase further. We believeit highly possible that Israel will at some point launch air raids against targetsin Lebanon, although we expect no direct attacks on Syria. Nevertheless, thesituation will represent a significant foreign-policy challenge for Mr Assad.Hizbullah is likely to continue to launch occasional cross-border attacks in thedisputed Shebaa Farms area on the Israel-Lebanon-Syria border, inevitablyleading to an Israeli response. However, ultimately neither Israel nor Syria isseeking a regional war, and we therefore believe any military action will belimited. Despite speculation in Washington that the stalled Syria-Israel peacetalks might be on the agenda, we do not expect progress on this issue over theforecast period. Mr Assad is still not in a sufficiently strong domestic positionto backtrack on the territorial red lines laid down by his father, demanding afull return of the Israeli-occupied Golan Heights.
In Lebanon itself, mostly-Christian opposition groups have increasinglydemanded a withdrawal of Syrian troops from the country since the death ofHafez al-Assad. President Assad will continue to seek an accommodation overthe continued presence of Syrian troops through a strategy of offering dialogueand appeasement. This will be supported by the Lebanese political elite, butrejected by opposition groups. Ultimately we expect Syria to retain its domin-ance over Lebanon throughout the forecast period, although there may beadjustments to the presence of Syrian troops and direct Syrian control. In thewider region, the new president is expected to continue to build support andstrengthen ties. Following visits to Egypt and Saudi Arabia in October 2000,foreign-policy initiatives with Iran, Turkey, and Iraq will continue over theforecast period.
Economic policy outlook
After more than three decades of centralised command economics, Mr Assad isseeking to put the country on the road to reform. Policymakers have ostensiblyacknowledged that the quasi-Soviet system has not brought prosperity andgrowth. Nationalised industries produce poor quality expensive goods, theclosed financial system has driven capital out of the country, hostility to theWest has led to a reliance on outdated, inefficient technologies and livingstandards are stagnant, yet the population is growing sharply. Reforms beganmodestly in March 2000, and in the final quarter of the year, included the earlypassing of the 2001 fiscal budget, and a package of financial measures intendedto legalise private banks, create an equity market and ultimately facilitate aninflow of investment capital. With Mr Assad expected to remain in power overthe forecast period, and in the absence of a prolonged regional militaryconflict, we expect these reforms to continue. The long-awaited appointment
of a new cabinet, largely chosen by Mr Assad, will hasten this process. Takentogether, the first phase of reforms is intended to establish the infrastructurerequired for a market economy—new financial laws, banking reform, andcurrency harmonisation. Towards the end of the forecast period, the reformprocess may broaden, with an attempt to break up the monolith of stateindustries by launching a privatisation programme. At every stage, however,there will be opposition—from military generals in the ruling elite, right downto functionaries in the state bureaucracy—all seeking to protect their privileges.Yet, so long as Mr Assad remains in power, balancing reform with the co-optation of the elites, we believe the process will be allowed to continue.
Syria’s new reformist elite has been fortunate that its arrival in power coincidedwith a period of high oil prices in 2000—resulting in increased governmentrevenue. This windfall helped pay for initiatives, such as rising state salariesand the rescheduling of unserviced debt to Germany. With our oil-price fore-cast suggesting a decline in prices, the government enters 2001 without theluxury of rising revenue. This will put pressure on fiscal expenditure, possiblyforcing a reduction in spending plans for 2001—which were forecast to in-crease by 16.9% in the budget—and certainly constraining future expenditurelevels. Ultimately, this will act as a brake on Mr Assad’s proposed agenda ofstimulating economic growth and raising living standards, and will slow thepace of change.
Government reforms will also extend to monetary policy, with plansannounced to reform the exchange rate, allowing the value of the Syrianpound to be set by the market. The government has also pledged to reform thedistorted system of interest rates and ease political control over monetarypolicy, but any such changes will take place slowly. However, Syria’s multi-tierexchange-rate regime is unlikely to be abolished over the forecast period. Theofficial S£11.225:US$1 rate for favoured importers is likely to remain tocomplement the government’s plans to tackle the problems of the state sector.However, we do expect efforts to continue to be made towards converging the“neighbouring countries” and black-market rates by the end of the forecastperiod. In the meantime, the Syrian public will continue to show a lack ofconfidence in its banking system. Consequently, money supply over theforecast period is more likely to be affected by interest-rate movements inneighbouring Lebanon, along with government spending patterns, which arelargely determined by oil prices.
Industrial raw materials (% change in US$ terms) –4.2 14.2 4.2 9.6
Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP)exchange rates.
Syria is highly dependent on the international price of oil—with crude exportsaccounting for some 55-60% of all export revenue. Revenue from crude salesalso provides the bulk of government earnings, making fiscal policy acutelysensitive to changes in oil prices. Although international prices were still closeto US$25/barrel at the beginning of January, underlying world oil productionalready exceeds demand—the problem being a lack of refinery capacity toconvert oil to those grades that are most needed (notably heating oil). Thus,assuming relative stability in the Middle East, we expect prices to fall quitesignificantly once most of the oil has been refined. The extent to which pricesfall in 2001 may be restrained by OPEC production cuts. OPEC has beenindicating that it will cut production in an effort to stop prices falling tooseverely. However, with the exception of Saudi Arabia, we are not optimisticthat this will occur. Therefore, in 2001, the possibility of insufficient prod-uction cuts, combined with the gradual slowdown in the US economy, willdampen sentiment, putting prices under downward pressure late in the secondquarter, as potentially still high output levels meet the seasonal weakening ofenergy demand. A gradual decline towards US$20/b will follow as supplyoutstrips demand over the forecast period. Given these assumptions, weforecast the average price for dated Brent blend in 2001 at US$23.36/b, fallingto US$19.13/b in 2002.
Meanwhile, we expect world trade to grow by 8.2% in 2001 and 7.2% in 2002,but Syria will ultimately gain little from this, because of its highly protectivetrade barriers and multitude of other restrictions. The forecast expansion inworld food prices of 10.6% in 2001 and 14.1% in 2002 will aid agriculturalexports, so long as winter rain levels are sufficient for a good harvest. However,
with grain prices expected to expand by 22.8% over the forecast period,another season of drought will force import costs up significantly.
The forecast contraction in oil prices, combined with Syria’s continued politicalrisk, weighs heavily on our outlook for growth. While we expect privateconsumption growth—the principal component of GDP—to rise over theforecast period, the prevailing political uncertainty will continue to limitgrowth in this component. Positive factors, however, include an expansionaryfiscal budget in 2000, coupled with the secondary effects of modest economicreforms witnessed so far. Additionally, the return to office of the businesstycoon, Rafiq al-Hariri, as prime minister in neighbouring Lebanon—which iseconomically tied to Syria—is expected to boost spending levels significantly.We believe the “Hariri effect” will bring international investment interest toSyria and Lebanon as a collective economic unit—for example, the Egyptiangas deal agreed in December 2000. (See Oil and Gas)—and improve prospectsfor remittances from Lebanon—where an estimated 500,000 Syrian workers areemployed. Investment spending is therefore likely to see some modest growth,as construction of a number of energy projects gathers pace. Assuming rela-tively good harvests, the agricultural sector, affected by drought for the pasttwo years, should see growth. Collectively, taking these factors into account,we expect the economy to grow by 2.4% in 2001 rising marginally to 2.6%in 2002.
Forecast summary(% unless otherwise indicated)
1999a 2000a 2001b 2002b
Real GDP growth –1.5 1.5 2.4 2.6
Oil production ('000 b/d) 535.0b 512.1 493.5 490.0
Gross agricultural growth –7.5 1.0 3.0 3.0
Consumer price inflation (av) –2.7c 0.5 1.7 2.3
Exports of goods fob (US$ bn) 3.8c 4.7 4.1 3.7
Imports of goods fob (US$ bn) 3.6c 3.6 3.8 3.9
Current-account balance (US$ bn) 0.2c 1.4 0.7 0.1 % of GDP 1.2 8.2 4.3 0.8
a EIU estimates. b EIU forecasts. c Actual. d “Neighbouring countries” rate.
The expansionary fiscal policy adopted in 2000 and a steady growth in globalnon-oil commodity prices will lead to a modest upward pressure on prices overthe forecast period. Nevertheless, relatively weak Syrian growth and the lowlevel of capacity utilisation in the economy will ensure inflationary pressuresremain in check. We therefore expect inflation to rise to 1.7% in 2001—upfrom the forecast 0.5% in 2000—increasing further to 2.3% in 2002, as pricesof imported industrial raw materials increase further and government spendingfeeds through to private consumption.
We expect the unification of the neighbouring countries and black-marketexchange rates to be a central element of the government’s plans for exchangerate reform. The black-market rate has been remarkably stable in recent years,remaining close to S£50:US$1 since the early 1990’s. This stability along withgovernment recognition that unification would increase foreign exchange—allowing for greater flexibility—makes it an attractive proposition. We aretherefore forecasting that the government will attempt to unify the rates ataround S£48:US$1. Timing of the move is not yet clear—but is expected by theend of the forecast period provided relative political and economic stabilityprevail. However, the abolition of the multiple fixed exchange-rate regime isonly likely to be addressed once the objectives of state sector reform arecompleted. The official S£11.225:US$1 rate for favoured importers will there-fore be maintained over the forecast period to aid state sector development,whilst the S£23:US$1 customs rate is likely to be abolished.
We estimate that export earnings for 2000 will have risen to US$4.66bn onhigher oil revenue. However, as oil prices fall in 2001, export revenue will easeto US$4.15bn, falling further to US$3.75bn in 2002. Given the uncertaintysurrounding the Iraqi-Syrian oil deal, we are not yet incorporating anyprojections into our forecasts for 2001-02—until the situation is furtherclarified. Given the current expansionary fiscal policy and reform programme,we expect import expenditure to increase leaving a visible trade surplus ofUS$393m in 2001—down from a surplus of US$1.09bn in 2000—slipping intoa deficit of US$171m in 2002. It should be noted that a large amount of trade,mainly with Lebanon, but also with Turkey and Iraq, is unrecorded. The netoutcome of that with Lebanon is thought to be strongly in Syria's favour. Weexpect Syria to record a current-account surplus of US$738m (4.3% of GDP) in2001, falling to US$149m (0.8% of GDP) in 2002. Efforts to reschedule dis-puted debt have eased Syria’s debt-service position—though the total externaldebt stock will remain high. Support through fresh disbursements at con-cessional terms from Arab Gulf governments, will provide financing supportshould Syria require it, as oil prices soften.
Less than six months into office, and President Bashar al-Assad’s more liberalagenda of policies—combining efforts to undertake a thorough restructuring ofeconomic activity alongside a new political openness—are slowly permeatingSyrian life. In November and December of 2000 these political initiatives weredirected largely towards improving Syria’s poor human rights record, andencouraging a greater degree of freedom of expression. An estimated600 political prisoners, who had been opponents of the rule of Hafez al-Assad,were freed from the infamous Mezze prison, with plans announced to nowturn the institution into a museum—symbolism which was not lost inDamascus. Those released included communists, members of the MuslimBrotherhood, and others from smaller leftist and Islamic parties outlawed inthe 1980s. In December Syrian authorities also released some 54 Lebanesepolitical prisoners—including four Palestinians—detained by Syrian forcesduring the Lebanese civil war (1975-90). This appeared to be a move aimed atplacating certain elements in Lebanon calling for the redeployment of Syriantroops and an end to its influence in Lebanese affairs.
At the end of November, following a reshuffling of the heads of various statemedia outlets in July, the president lifted restrictions on which organisationscan publish newspapers, a move expected to lead to a host of new publications.The decision, taken at a meeting of the Regional Command (RC) of the rulingBaath Party, will specifically allow for the seven parties in the NPF (NationalProgressive Front) coalition (nominal multiparty system created by Hafez al-Assad made up of the Baath Party and several small left-wing parties) to publishand distribute newspapers publicly. However, the law does not coveropposition organisations such as the Muslim Brotherhood and there were alsolimits to these latest press freedoms with, for example, the information min-ister, Adnan Omran, ruling out in the same month the possibility of anyprivately owned publications.
The president also began a process to try to reform the leadership of the all-encompassing Baath Party, which dominates the state. The programme beganmodestly, with a series of new appointments to the leadership of the party inSyria’s second city, Aleppo. Supporters of the president say these are a first steptowards a root and branch reform of the whole party, to remove hardliners andbring in reformers. Plans were also announced in November to bring severalsmaller parties, such as the Syrian Socialist Progressive Party, into more in-fluential positions. However, Mr Assad is taking the party reform slowly,mindful not to overplay his hand and always aware that the military strong-men on which his leadership depends will resist any changes which couldundermine their own positions.
Beyond such party issues, there have been fresh reports that a reshuffle of thegovernment is imminent. Mr Assad is aware that any further success in hisreform programme will require a replacement of ageing conservative ministers,who were largely appointed because of their loyal support for his father ratherthan their ability, with members of his own team who can be expected to bring
stronger government support for political and economic reform. Reports havebeen circulating in Damascus for almost six months that a cabinet reshuffle isimminent. However, Mr Assad is trying to limit the influence of the regime’smilitary strongmen in choosing the next cabinet, and has therefore repeatedlydelayed the reshuffle awaiting an opportune moment when his own views andsupporters can fully prevail. It is widely expected that some of the ministersfavoured by Mr Assad—notably the planning minister, Issam Zaim—willreceive higher profiles, as the older generation, including the economyminister, Mohammed al-Imadi, and the finance minister, Khaled Mahayni,make way. Meanwhile, the round of biannual army and security promotionsare due to take place in January. The results of which could provide an import-ant indicator as to the strength of Mr Assad’s position and the direction thatpolicy is likely to take.
The Baath Party
The Arab Baath Party was founded in Damascus in 1941, as a vehicle to unite the Arabpeoples of the Middle East into a single Arab nation, recreating a mythical lost unity,with the term “Baath” meaning “renaissance”. The party espoused socialism, non-alignment and opposition to imperialism and colonialism. The Baathists took power inSyria in 1963 on a platform of “unity, freedom, and socialism”; beginning a programmeof nationalisation, and outlawing most other parties, to turn Syria into an effective one-party state. Hafez al-Assad led a pragmatist “nationalist group” within the party, lessdoctrinaire about socialism, favouring a militant posture on the Arab union, and hostilitytoward Israel. Despite constant manoeuvring, the nationalist faction worked alongside amore ideological faction in an uneasy coalition until 1970, when Mr Assad came topower in a coup. In 1972 in the first of many ‘purges’ he created a nominal multipartysystem, forming the National Progressive Front (NPF) made up of the Baath Party andseveral small left-wing parties including the Syrian Arab Socialist Union, and the SocialistUnion Movement. For three decades, Hafez al-Assad governed through the Baath PartyRegional Command, a committee of less than two dozen members, with the party nomore than a rubberstamp for his rule, its creaking leadership of old men resembling thecommunist parties in the Soviet Union and China. With power in the Baath Party areflection of loyalty to the old president, and given its indirect but all pervasive controlof much of the economy and business, reform of the party is seen as essential if the newpresident’s national reforms are to be a success. However, ultimately, reform is unlikelyto be enough. Meanwhile, it has been reported that the Baath party election—set forthe 26th January 2001—is expected to be less arranged around the “principle ofappointment” than in previous elections.
A fledgling opposition grouping has been formed around a prominent memberof parliament, who has long been one of the few within Syria permitted tooffer any political criticism. Riad Seif, an MP and businessman who runs afootwear manufacturing company, was long seen as one of the few Syrianfigures with a “licence” to criticise the regime—although only modestly. Evenduring the days of Hafez al-Assad, Mr Seif was able to meet members of theforeign media, and challenge specific government policies—although he couldnever go beyond this to challenge the institutions of state, or the president. InSeptember 2000 a new momentum was given to this fledgling opposition
when some 100 writers, artists, and intellectuals—including Mr Seif—publishedan appeal for more democracy and freedom of expression, in overseas Arabicnewspapers. With the winds of change now blowing through the country,Mr Seif has become a focal point around which an opposition is beginning tocoalesce. He has begun to host discussion forums at his Damascus homeseveral times a month dubbed “Friends of the Civil Society”, where others whohave long been silenced come to debate issues, ever mindful the meetings areattended by informers for the regime. Syrian authorities have allowed suchactivities to take place and in fact have sanctioned debate on matters such aseconomic reform in the Syrian press. However, while giving critics of theregime the opportunity to voice their criticisms openly and publicly, at thesame time, this limited expression allows the state to monitor their activitiesmore effectively.
In November 2000 rural conflict over land rights flared up in the southernregion of Suwayda, leaving more than 20 dead and scores injured by December.The violence was centred between members of the region’s majority Druzepopulation and local bedouin—both settled and nomadic—who are Sunni. It isreported that the dispute started in the village of Rahi, near Suwayda as a resultof trespassing nomadic bedouin. When the dispute turned violent, it spread toinclude neighbouring areas and continued as elements of the Druze populationsought reprisals against Sunni villagers suspected of collaborating with thetrespassing nomads. Elements of the Druze population were even able to taketheir grievances to Damascus—demonstrating in front of the Interior ministry.The authorities response was ineffective. Army Units initially sent to quell theviolence were unable to contain it. Ultimately it took a further deployment ofsome 5,000 men to put an end to the disturbances. While speculationsurrounding the authorities’ slow response inevitably drew comparisons withthe government’s disquiet with Lebanese Druze—calling for an end to Syria’spresence in Lebanon—conflicts over land rights with trespassing bedouin arecommonplace and do not come as a surprise.
However, the length of time it took to quell the violence does not augur wellfor stability, given the fact that Syria is renowned for its internal securityorganisations and their ability to deal with domestic disturbances effectively.Improving living standards and providing economic prosperity for Syrians area paramount part of Mr Assad’s platform. He has been fortunate in that hisaccession to power has coincided with a period of high oil prices. However, MrAssad’s reform-minded government risks raising expectations, then not beingable to meet them. If he is unable to fulfil these promises, then in a climate ofimproving—albeit extremely limited—political expression, people may beencouraged to air their grievances more openly. The authorities will have to beable to both approach this carefully and deal with it effectively.
While Mr Assad may be pursuing a liberal domestic agenda, on the issue ofdefence and the peace process, he is taking a much harder line. His positionstems from his longstanding admiration for Lebanon's Hizbullah guerrillamovement, which is widely seen in the Arab world as the only army to ever“defeat” Israel, when the Israeli army was forced to withdraw its troops from
Mr Assad takes a hard lineon external security
Rural conflict in Suwaydaclaims more than 20 lives
southern Lebanon in May 2000. Outlining his foreign-policy thoughts at anArab summit, Mr Assad said the best option for the Arabs is “peace with force,that is the peace of the strong”. He continued to say that he believed thatHizbollah’s so-called defeat of Israel—forcing them to withdraw from southLebanon in May 2000—will act as a deterrent against possible futureIsraeli attacks.
Mr Assad’s reliance on Syria’s ageing military elite to stay in power has alsoadded another rationale to this new, more forceful, policy towards Israel. Hisemphasis on hardline rhetoric—true to Syria’s perceived regional role under hisfather—will serve to appease military generals. But, even they are under noillusions; Syria is in no position to go to war with Israel—nor would it beseeking to. However, coming at a time when there is increased tension in theMiddle East because of the ongoing confrontation between Israel and thePalestinians, coupled with Hizbullah’s continued belligerence in southLebanon, Mr Assad's new policy risks raising regional tension.
Syria has long provided support to Hizbullah in its long running battle withIsrael. But after Israel's withdrawal from Lebanon, the guerrilla army lost itsraison d’être. Flirting briefly with the idea of concentrating attention onmainstream Lebanese politics, it reverted in early October to type, relaunchinglow intensity hostilities with Israel, ostensibly to recover a disputed area offarmland on the border known as Shebaa Farms. Given what he sees as theArab world’s debt to Hizbullah, Mr Assad has supported the group’s newmilitary initiative. However in Israel, Hizbullah’s actions are being seen bymany as evidence that withdrawal from Lebanon has not brought peace tonorthern Israel, and that ultimately, the Israeli army will have to return to thebattlefield. Israeli politicians and military leaders have repeatedly threatened toattack Syrian targets in Lebanon, and even in Syria itself, if Damascuscontinues to support Hizbullah. Combining such factors with upcomingelections in Israel in the first quarter of 2001, it is clear Hizbullah has thepotential to drag both Israel and Syria into a wider conflict which would be inneither states’ interest. While Syria’s military elite sees Mr Assad’s rhetoric as auseful tool, the generals are not in a position to go to war with Israel. In Israelthe response is less benign, with the military preparing contingency plans for adirect conflict between the states.
When Hafez al-Assad died in June, the prospects for a peace deal with Israeldimmed, because the new president was considered not to have the moral ormilitary authority within the regime to make the kind of tough concessionsover land and security that would be required to sign a peace with Israel. If hehad agreed to a deal with Israel and gone back on his father’s pledge to recover“every atom” of the Golan Heights, it is likely he would have been oustedimmediately in a coup. The rebirth of the Palestinian intifada in October haspolarised Arab-Israeli relations further, making any peace deal between Israeland Syria seem even less likely. The upcoming prime ministerial election inIsrael has also made the situation more volatile.
The victory of George W. Bush in the US presidential election, and the arrivalof his new team may cast a glimmer of light on prospects for peace—despitethe new administration’s need to prioritise domestic economic matters. Evenbefore his inauguration, an interview with one of Mr Bush’s senoir Middle Eastpolicy advisors, Edward Djerejian, published by the Washington Post inDecember, suggested the new administration may advise Israel to abandonhopes of an immediate peace deal with the Palestinians, and instead urge it tosign a peace with Syria. The logic of such a strategy is inescapable. An Israeli-Syrian deal would require a relatively simple exchange of land for security—Israel would return land on the Golan Heights seized in the 1967 war, Syriawould offer peace and normalisation of relations. The deal would therefore bemuch simpler to achieve than trying to find a resolution to the intractablePalestinian-Israeli issues of, for example, sovereignty over Jerusalem, and thereturn of refugees. However, a Syria-Israel deal remains highly unlikely—Mr Assad is still not in a strong enough position domestically and is extremelyunlikely to enter into talks with Israel until the Palestinian question hasbeen addressed.
One of the focuses of the Syrian elite towards the end of 2000 was the nigglingquestion of relations with Lebanon. Syria has dominated its smaller neighboursince the end of the civil war there a decade ago, and today there are some25,000 Syrian troops stationed in Lebanon. Mr Assad’s government maintainsits control for both ideological and pragmatic reasons. Syria has never recog-nised Lebanon's creation as a sovereign state, created by France in 1920, andequally finds it useful to control the country to counter balance any potentialfor Israeli influence. The death of Hafez al-Assad in June encouraged Lebanon'sopposition Christian groups and others to begin to challenge Syria’s position.In recent months a rising chorus of political statements in Beirut—even fromthose considered longtime friends of Syria such as the Druze leader,Walid Jumblatt—has forced Syria to react. Initially Syria, and its proxy leadersin Lebanon, sought to suppress the opposition movement. In early November,for example, Mr Jumblatt was in effect banned from Syria for refusing towithdraw criticism. But more recently, Mr Assad has tried to engage theLebanese opposition movement, for example, releasing Lebanese politicalprisoners held in Syria, withdrawing some troops from Beirut and holding outthe prospect of dialogue if the demonstrations cease. This strategy of appease-ment has, however, appeared to embolden critics in Lebanon as they continueto seek an end to Syrian interference in Lebanese affairs. Elements of theopposition are unlikely to stop until Syria agrees to a full troop withdrawal.
While Mr Assad has had his hands tied with Lebanon, the foreign minister,Farouq al-Sharaa, has used his role under the young president to launch aforeign-policy initiative to boost Syria’s ties with neighbours, regional, andworld powers. Using careful diplomacy, he has improved relations with bothIran and Iraq, and warmed relations with Turkey—even though the latter has amilitary pact with Israel. He has also launched initiatives with longtime alliessuch as Russia, while not losing sight of the US and Europe. Such designs canbe interpreted as a part of a strategy designed to strengthen Syria’s overallposition, both regionally and internationally. By seeking to build multiple
alliances and relationships—particularly with Turkey and Iraq, countries withwhich it has had well-documented differences—Syria will reduce its depend-ency on any one country so as to offer it greater flexibility to meet withdifferent challenges.
Following a modest opening to Iraq two years ago, Mr Sharaa has nowaccelerated the rapprochement with the government in Baghdad. High-leveldelegations have travelled between the countries, including trips by the Iraqideputy prime minister, Tariq Aziz, to see Mr Assad. As well as co-operating overoil (See Oil and Gas), an agreement has finally been signed over the exactlocation of the common border, with reports that civilian traffic is now beingallowed to travel freely across the frontier for the first time in decades. TheDamascus administration clearly wants to see improved relations with Iraq,both for security and economic reasons. But it has also tempered its desire notto upset the West, or Iraq’s bitter rivals Iran and Kuwait. In November ties wereexpanded with Iran, through a series of high-profile ministerial visits. Relationswith Turkey, which soured in the 1990s over Syria’s support for the Kurdishmovement, and the Turkish government’s growing military ties with Israel,have also improved. A host of Syrian and Turkish officials travelled betweenthe countries promising to co-operate on issues such as security, organisedcrime and drug smuggling. The Syrian vice-president, Abdel-Halim Khaddam,recently visited Turkey in preparation for a trip Mr Assad is expected to make toAnkara in early 2001 to cement the new dialogue.
Economic policy
At the beginning of December the government presented a draft 2001 budgetto parliament. The move was unprecedented, marking one of the first times inalmost three decades that a budget for the fiscal year January-December waspresented before the start of that budget year. The 1999 budget, for example,was offered to parliament at the end of December 1999. The 2000 budget waspassed in May 2000—in itself considered exceptional. Such delays have longbeen used to put downward pressure on spending, with ministries forced tostick to the limits of the previous year’s budget until the new one is passed.However, the government of the prime minister, Mohammed Mustapha Miro,came to office in March 2000 committed to fiscal reform, and the early 2001budget can be seen in the light of this policy. Yet, though timely, the newbudget was still characterised by many of the opaque and enigmatic fiscalpractices which became popular under the tenure of Hafez al-Assad. Thebudget was officially balanced, although it included a component of foreignborrowing within the revenue accounts, implying the existence of a deficit.Also, within the revenue figures, there was no reliable measure of governmentearnings from oil exports—the largest single revenue earner. On the expend-iture side, no reliable figure was given for the defence budget, and many otherspending figures were considered highly suspect—largely because substantialareas of spending are thought to be undertaken entirely off-budget. Never-theless, though flawed, many aspects of the budget suggested that underMr Assad’s new regime fiscal management is improving.
The budget forecast expenditure of S£322bn (US$7bn at the “neighbouringcountries” exchange rate). Revenue was also forecast at S£322bn, but includedwithin it a figure of S£28.52bn for “foreign resources” which are assumed to beforeign loans, suggesting the existence of a deficit. No similar figure was givenfor domestic loans, making it impossible to gauge the size of that deficit. Onthe expenditure side, the forecast figure of S£322bn represents a S£46.6bn or16.9% increase over spending in the 2000 budget. Much of this increase wasearmarked to pay for a 25% across-the-board rise in state-sector salaries, a 20%increase in state pensions and measures to tackle unemployment which wereintroduced in mid-2000. Taking into account these changes, the average civilservice salary is believed to have risen from US$90 to US$110 a month. With atotal of 1.4m public-sector workers in Syria, this would signify a cost to thegovernment of around S£15.6bn, or US$336m, representing about one-third ofthe forecast increase in government spending. A figure of S£37.32bn wasallocated to debt servicing, export and price subsidies. While detailed spendingplans are not made available, the finance minister, Khaled Mahayni, specifiedthat the government would continue with its programme of economic reformsand efforts to boost the private sector, targeting investment in new infra-structure, with special allocations to finance projects in electricity, irrigation,agriculture and the oil sector.
Official Syrian government financesa
(S£bn unless otherwise indicated)
1999 2000 2001
Expenditure 255.30 275.40 322.00 % increase, year on year n/a 7.87 16.92 Current spending n/a 108.40 123.68 Extractive Industries 8.64 10.28 11.45 Investment spending n/a 132.00 161.00 Debt servicing & export price subsidies n/a 35.00 37.32
Revenue 255.30 275.40 322.00 % increase, year on year n/a 7.87 16.92 Taxes & duties 82.69 85.91 115.93 Exceptional financing 65.50 67.50 68.63 of which: foreign loans n/a n/a 28.52 domestic loans n/a n/a n/a Budget deficitb n/a n/a n/a
a The Syrian budget is characterised by opaqueness and a lack of transparency. b Revenue figure isthought to include any deficit, giving the appearance that the budget is always balanced.Sources: Ministry of Finance statements; press reports; MEES.
More details were announced in November 2000 regarding government plansto tackle unemployment. After initially suggesting a package totalling S£80bn,the cabinet adopted a S£50bn plan towards the end of the year to create440,000 jobs, targeting those aged between 18 and 24 years. The package wassaid to include a range of vocational training programmes as well as soft loansto help start small businesses. Syria has one of the world's highest populationgrowth rates—at more than three percent per year—and according to analysts,needs to create 200,000 jobs annually to absorb those entering the labour
market. The state newspaper Tishreen quoted the planning minister, IssamZaim, as saying in November that 72% of those considered unemployed areaged between 15 and 24, explaining the emphasis on youth unemployment.
At the beginning of December Syria’s most powerful body, the RegionalCommand of the Baath Party, approved a series of groundbreaking reforms torecreate a financial services industry, and herald the end of the state’smonopoly over the sector. Plans were approved for the establishment of privatebanks, to create a local bourse, and to float the Syrian Pound (see financial andother services). However, while these reforms can be regarded as the mostsignificant step to date in the president’s economic reform program, theirprogress is likely to be marked by conflict and complications which will serveto slow their implementation.
An international forum was held in November in an effort to encourageforeign investment, and raise overseas awareness of the government’s reformplans. Some 300 bankers, investors, and policymakers from more than a dozencountries and international bodies—though mostly from Syria and Lebanon—heard government representatives outline the principles of Syria’s reformprogram—in effect to establish a legal and governmental framework to draw ininvestment and revive the private sector. Opening the forum, Mr Miro said itwas intended to allow Syrian policymakers to “get acquainted” with the needsand requests of potential investors to help guide the direction of futurereforms. But on the sidelines, many foreign representatives attending said thegovernment had to take more drastic measures to win investor confidence.
At a meeting of the leadership of the ruling Baath party in December, it wasannounced that it had been agreed to put forward a package to reform bothprivate and state industries. Reforms are expected to offer incentives in theform of tax breaks and reduced customs duties on imported raw materials (seeforeign trade and payments). However, they are not expected to include anyplans for privatisation. In November the minister of state for planning, IslamAim, told Reuters that Syria was not planning to privatise its public sector, butwanted to make it more competitive. The loss-making industrial sector hasbeen an enormous burden to the state and it is believed that the strategy ofplanned reforms will be to focus on strengthening successful industries, whileeradicating loss-making ones. According to one Syrian analyst, the reforms areexpected to give state companies more flexibility to form independent holdingcompanies and to decide on suitable policies relating to employment, invest-ment, sales and wages.
The domestic economy
Oil and gas
The government and foreign companies operating joint ventures in the oilsector, continued to benefit from high international oil prices in the fourth
quarter of 2000 despite growing volatility and a slump in December. Extrarevenue from export sales has boosted government income, and improvedfunding for exploration. In the continued absence of official government figures,one analyst estimated the state would earn more than US$3bn from oil sales in2000, some 60% higher than estimates for 1999. With reserves only expectedto last a further ten years, the government is seeking to offset the steady fall inproduction by allowing foreign oil companies to try and squeeze more outputfrom existing fields. The government’s decision earlier in the year to startoffering contracts to foreign companies to manage and develop fields currentlyrun by state companies has roused fresh international interest in the oilmarket. The government is also said to be preparing tenders for new explor-ation contracts in the Northeast, worth several hundred million dollars.
According to the International Energy Agency (IEA), in its monthly Oil MarketReport, forecasts for Syria’s oil output in 2000 and 2001 have been reviseddown. The IEA forecasts output in the fourth quarter of 2000 falling below500,000 barrels/day to 490,000 b/d, with an average for the year of510,000 b/d. For 2001 it forecasts a decline to an average of 480,000 b/d. TheEIU forecasts a slower decline in output. We expect output to fall to495,000 b/d in the fourth quarter of 2000—averaging 512,000 b/d for 2000,falling to 494,000 b/d in 2001 as the Syrian government makes attempts toslow the rate of decline in production and maximise output—particularlywhile oil prices remain high.
Given the steady domestic demand for oil, it had been expected that thedecline in output in late 2000 would be mirrored in exports. However, inDecember international buyers noted a sharp increase in exports of light crude,a rise estimated by some analysts at around 65,000 b/d, or more than 20% ofSyria’s total oil exports. Exports of heavy crude are also reported to have risenby as much as 60,000 b/d. This unexpected increase in oil exports coincidedwith the completion of work repairing a pipeline to carry light crude fromnorthern Iraq across Syria to the Mediterranean coast, leading to speculationthat Syria was buying Iraqi oil for domestic consumption in order to exportmore of its own.
a International Energy Agency (IEA) forecast.Source: IEA, Monthly Oil Market Report.
The pipeline, which connects Iraq’s northern Kirkuk oil fields with the SyrianMediterranean port of Banias, was closed in 1982 after Syria sided with thegovernment in Tehran in the Iran-Iraq war. With relations between Syria andIraq improving, the two governments agreed to reopen the pipeline in 1998,and repair work began to restore its capacity to some 1.1m b/d. Since the GulfWar, Iraq has been under UN sanctions which require that revenue from anyIraqi oil sales is channelled through the UN oil-for-food committee, and usedfor humanitarian aid purchases. Neither Syria nor Iraq has approached the UNsanctions committee seeking approval to use the restored pipeline. There werewidespread reports from the end of October 2000 suggesting that Iraq wasprepared to offer Syria up to 200,000 b/d of oil through the pipeline at heavilysubsidised prices, with Syria using this for domestic consumption, andexporting more of its own supplies. The reported increases in export volumesof Syrian light crude in December has increased speculation that Iraq hasindeed begun exporting crude to Syria. Taking into account these reportedincreases in exports, such a move could bring the Syrian government up toUS$3m in daily revenue. On this basis, the net gain, if indeed Syria is to buy oilfrom Iraq—which would be purchased at a discount (thought to be around75% of Brent blend)—could amount to around US$440,000 daily or as much asUS$160m on a yearly basis.
However, buying oil on such a large scale from Iraq would place Syria on acollision course with the UN Security Council, and the new US administration.The new Secretary of State, Colin Powell—who is due to take up his positionfrom January 20th—has said that enforcing the Iraq sanctions is at the top ofhis foreign-policy agenda—although they are expected to be repackaged torebuild their legitimacy. Syria has repeatedly assured the UN and the USadministration it does not intend to break sanctions, but oil analysts can findno other explanation for the sharp rise in output.
Lebanon, under its business tycoon prime minister, Rafiq al-Hariri, is alsotrying to take advantage both of Syria’s own gas reserves, and the newlyrepaired Iraqi oil pipeline, with plans under discussion in late 2000 for both gasand oil pipelines to supply Lebanon's power stations. It has been proposedunder an agreement between Syria and Lebanon to begin the restoration of anoil pipeline damaged during the civil war in Lebanon, which would allowLebanon to receive crude oil from Iraq. The rehabilitation work is expected tocost between US$2m-3m. According to the Lebanese English language news-paper, the Daily Star, a Syrian-Lebanese technical committee hopes to completework on restoring the pipeline by the end of January 2001 in order to carry outa first trial supply of oil from the Syrian city of Homs to Tripoli in Lebanon.However, Tripoli’s refinery is expected to need 4-6 months of repair to berestored to former capacity—less than 20,000 b/d.
The Lebanese Energy, Water Resources and Oil Minister, Mohammed AbdulHamid Beidun, also announced that a contract has been signed with the Syriangovernment on supplies of its gas to the Lebanese power plant Deir Ammar, forwhich a new gas pipeline is to be built. The pipeline, which will run fromTelkah in Syria to Deir Ammar in north Lebanon is to be built at a cost ofUS$12m-15m. According to Mr Beidun, by 2002 Syria is expected to supplyLebanon with 6-7m cu metres/day of gas through the new pipeline.
In December the governments of Egypt, Lebanon and Syria signed anagreement to build a US$1bn regional gas pipeline to market Egyptian andSyrian gas. The agreement stipulated the establishment of two companies tobuild and operate the pipeline which would start near Arish in northern Egypt,run under the Mediterranean to Lebanon and then on to Syria with hopes to
transport gas onto Turkey and Jordan. Al-Sharq (Orient) company will buildand operate a 250 mile undersea pipeline at a cost of US$800m, runningoutside Israeli territorial waters, and market Egyptian gas. Israel has long beenseeking such an agreement with Egypt, and Lebanon took advantage of currenttension between Egypt and Israel over the Palestinian uprising to clinch thedeal. The second firm, The Arab company, will build and operate a 250 mileland pipeline at a cost of US$200m and market Syrian and Egyptian gas. Theproposed project which could start in six months is expected to take four yearsto complete. Funding for the project is yet to be clearly spelt out. Egyptian oilminister, Sameh Fahmy, said financing was to be discussed by thethree countries, with borrowing “within reasonable limits” an option.
It has been suggested that Lebanon will import a total of 12m cu metres/day ofgas through the pipeline. After the initial Lebanon-only stage of the venture—Lebanon is expected to consume 6m cu metres/day with the remaining gas tobe shipped across to Syria, giving the country a lucrative new role as a regionaltranshipment hub to Turkey and Jordan.
Agriculture
A poor start to the rainy season—which begins in September, but is mostplentiful between November and March—raised concerns that the country washeading for another drought year, with the implication that crop productionand economic growth would be affected. Two years previously, a droughtdecimated production of major crops such as barley and wheat, tipping thecountry into recession and leading to widespread rural hardship. However bylate-December precipitation levels had improved, and the central city ofAleppo had received 74mm—only some 17% below average for the period. Thelevel of rainfall is critical for the arable sector because according to 1998 figuresfrom the UN Food and Agriculture Organisation (FAO), only 1.2m ha of land isirrigated representing just 19% of the total cultivated area.
Credible figures for arable production are rarely released by the Syriangovernment, with the most authoritative information instead coming from theFAO. After the 2000 harvest season, the FAO forecast that Syria’s wheat prod-uction for the year would be 3.2m tonnes, a sharp rise of 19% on its measure ofwheat output the previous year. However, wheat was one of the crops badlyaffected by the 1998/99 drought, making the 1999 harvest a bad benchmark.Looking at other crops, the FAO noted a continued fall in barley production,forecasting 400,000 tonnes in 2000, less than one-half the equivalent figure for1998 of 926,000 tonnes. Barley planting areas are the least irrigated, andanalysts say producers are still recovering from the 1998/99 drought.
According to Mohammed Suhad Jubara, head of the state-run cotton authority,raw cotton production for 2000 is expected to have increased by 22%. By theend of November 1.033m tonnes of raw cotton had already been purchased bythe cotton authority from farmers. Figures issued by the government showexpectations that Syria’s cotton fields are forecast to yield a total crop of 1.1mtonnes by the end of 2000 as compared with 900,000 tonnes for the previous
year. This is expected to translate into 375,000 tonnes of ginned cotton, ofwhich some 267,000 tonnes are expected to be exported. The increase in prod-uction can be attributed to a combination of an expansion in the final seededarea with appropriate climatic conditions during April and May 2000, andimproved cultivation methods—boosting yield per hectare levels. Cottonproduction is predominantly irrigation fed and therefore is not as dependenton the rains as other agricultural products.
Infrastructure and Industry
The Syrian Telecommunications Establishment (STE), the state telecoms prov-ider, has further extended a deadline for tenders to build and operate twocellular networks. The original tender, which had a closing date of earlySeptember, was extended twice because of a poor response from internationalcompanies, who have expressed concern over the regulatory framework,among other factors. Industry analysts say three regional companies met theoriginal deadline: Orascom of Egypt, Investcom of Lebanon, and Telsim ofTurkey. In addition, it is understood that three bidders joined the tender by theextended deadline of 31st October. These included a joint Lebanese, Syrian andKuwaiti consortium—including NMTC (National Mobile TelecommunicationsCompany) of Kuwait; Al-Awael of Saudi Arabia and Cylotel. A decision isexpected to be made in the first quarter of 2001, with a contract to be signed inMarch or April. Meanwhile, there are suggestions that STE is holding out for abid from one of the global market leaders, rather than accept an offer from aregional company.
The tender is to operate one of two rival networks, each with a capacity of850,000 users, for 15 years, at an estimated investment cost of US$500m. Muchof the reluctance of bidders has also been attributed to the limited success of apilot venture, launched in February 2000 by Investcom and Ericsson ofSweden, which attracted only 15,000 subscribers, though this was blamed onthe high access costs, with subscription charges of S£60,000 (US$1,300) for aline. (See Country Reports, July 2000/October 2000) The pilot scheme was dueto end in February 2001 and be replaced by the new networks, but analysts saythe continued delay to the tender deadline has made this date nolonger realistic.
Work has started on a large tyre factory in Deraa, close to the southern borderwith Jordan. The project is significant because it is being constructed by anewly formed venture, founded under Investment Law Number 10. The lawwas passed back in 1991 to encourage foreign investment with a series of taxbreaks, but proved unworkable because even with its special provisions, inwardinvestors still faced a mountain of red tape and Soviet-style barriers to invest-ment, for example preventing any repatriation of earnings or profit. Law 10was eventually revised in early 2000 (See Country Report, July 2000; p.20)easing investment restrictions, with this the first major project launched underthe new rules. The Syrian Tyre Company is 82.5% owned by a US-based Syrianexpatriate, Frederick Sudan, with Chinese industrial investors holding a further15%, and the remaining 2.5% taken up by a Damascus businessman, Bashir
Hejazi. When production begins in early 2002 the plant is expected to employ900 workers, and have an initial capacity of 1.1m tyres a year, intended tosupply the local and regional market. Under the revised Law 10, the companywill be exempt from profit or earnings tax for seven years.
Commercial bids have opened for a contract to build a 100-km four-lane dual-carriageway from Latakia to Ariha. Industry sources say bids fromeight companies have been received. Syria’s Mount Kassioun Company hasemerged as the early front runner with the lowest bid at US$171.7m, followedby Kuwait’s Mohamed Abdulmohsin Kharafi & sons (US$206.5m) and Al-Khodary Group of Saudi Arabia (US$243.5m). The awarding of the contractwill specifically consider the technical quality of the bids which according tosources will account for 40% of the points awarded in the final evaluation. Theproject is to be financed by two Kuwaiti based organisations, the Arab Fund forEconomic and Social Development (AFESD) and the Kuwait Fund for ArabEconomic Development (KFAED).
The government announced it was studying ways to increase the number ofapartments available for rent, specifically in Damascus, by introducing a newrent law. A study by the housing ministry completed in 2000 found that thenumber of empty apartments had doubled since the 1970s, to an estimated16% of the housing stock. It said that in 1994 there were 2.46m housing unitsin the country, but just 84% of these occupied. The rise in vacant apartmentsand a stagnation in real estate activity was attributed in the report to a 1952rental law, which protects the right of the tenants to such an extent thatowners prefer to leave an apartment empty, rather than risk letting. As well asplanning to revise this law, the government announced in September a schemeto build 10,000 small 80 square metre apartments, to be sold at S£400,000(US$8,700) each, with credit facilities offered allowing instalments over15 years with an interest rate of 4.5% interest.
Financial and other services
At the beginning of December, the Regional Command of the Baath Partyapproved a series of groundbreaking reforms for the financial sector (seeEconomic policy). It was announced that private banks would be legalised, astockmarket would be created, and the Syrian Pound would have its exchangerate set by the market. Of these developments, the most significant is thedecision to reform the banking sector and to allow the establishment of privatebanks. Privately owned banks, along with many companies, were nationalisedback in 1963, when the Baathists first came to power. Faced with time-consuming bureaucracy and poor service, companies and individuals requiringthe most basic financial transactions bypassed the institutions to conduct mostbusiness for cash, using private banks in neighbouring Lebanon and Jordan todeposit money or take loans. As an example, Lebanese banks are reported tohave issued some US$1bn of loans in the past two years to finance tradebetween Lebanon and Syria alone. As a result, the entire state banking sector iscurrently thought to have deposits of not much more than US$5bn (at the“neighbouring countries” exchange rate, S£46:US$1).
Consolidated balance sheet of the specialised banksa
(S£ ‘000m)
Total assets/ Claims on liabilities Deposits economic sectors
1992 218,015 111,014 124,079
1993 390,487 149,733 204,500
1994 376,672 166,364 172,936
1995 432,379 184,952 204,029
1996 490,111 199,856 213,730
1997 546,826 229,128 237,801
1998 570,253 238,095 232,867
1999 (1st half) 569,472 250,036 233,150
a Commercial Bank of Syria, Industrial Bank, Agricultural Co-operative Bank, Real Estate Bank,Popular Credit Bank.Source: Middle East Economic Digest, MEED.
With Mr Assad’s avowed intention to allow the private sector to bring to lifethe Syrian economy, the re-establishment of private banks has been seen as thefirst step to establishing a secure environment for investment and crucial tostimulating domestic economic growth. The government has said specialisedeconomic and monetary committees are now preparing draft laws, but thedetails so far released on the regulatory framework continue to have the gov-ernment holding a large stake in all banks, and have foreign ownershiprestrictions maintained. No date has been given for the start of operations,although the expectation is that the first institutions will be running byJune 2001.
Regulatory framework
• The government has said a detailed regulatory framework is still being drawn up forprivate banks, but has outlined basic principles:
• Each bank must have capital of at least S£1.5bn (US$30m), with the governmentowning at least 25%, and Syrian nationals or institutions owning at least 51%—althoughno one individual can own more than 5%.
• Up to 49% of a bank may be owned by foreign nationals or foreign institutions—with the express approval of the prime minister. (Although there are some indicationsthat preference will be given—even limited to—Arab nationals and institutions.)
• Banks can issue shares, and be listed on the planned Damascus stock exchange.
• The Central Bank of Syria will supervise bank activities, and approve all boardmembers of the private banks.
The decision to allow private banks came just months after the governmentdecided as an interim measure to allow several Lebanese commercial banks toopen operations in Syria’s seven free-zones, with their activities restricted tocompanies doing business within the zones. (See Country Report, October2000) Four Lebanese banks have now received licences, and started operations.
Societe General Libano Européenne de Banque (SGLEB), for example, hasopened a branch in the Damascus free zone, and started taking deposits andissuing loans. Several other Lebanese institutions, including Banque Audi andByblos Bank, are said to be preparing to make a similar move. Because of thestrong business links between Syria and Lebanon, Syrian authorities have saidthey expect Lebanese banks will also be among the first to receive fullbanking licences.
Although there were fresh announcements in December that a stockmarketwould be established, no new details of the project have been revealed (SeeCountry Report, October 2000; p.24). Similarly regarding plans to float theSyrian pound, few details were offered beyond a general principle to end thecurrent system of multiple exchange rates, instead having the price of thecurrency established by the market. Currently Syria has three official exchangerates, the “neighbouring countries” rate of S£46.5:US$1, which covers nearly85% of the country's transactions, the official rate of S£11.225:US$1, and thecustoms rate of S£23:US$1. The black-market rate at the beginning of Januarywas some S£48.5:US$1.
The move towards banking liberalisation has not taken place unopposed. InSeptember, after the first Lebanese banks began to receive licences, some MPsopposed the plans for private banks and a securities market, expressing fearsthat opening up to foreign banks would compromise Syria’s financial inde-pendence. These MP’s were able to prevail upon the government and a movewas subsequently announced to convert some existing financial institutionsinto new state banks as a challenge to the liberalisation plans. The stateNational Savings Fund was converted into a new institution; the Savings Bank,and two similar ventures are planned. The Savings Bank said it would begin togrant loans to industry and tourism projects, and that it had been mandatedby the government to oversee the introduction of credit cards. It has sub-sequently offered a S£200m (US$4.35m) tender for a turnkey project to beginto introduce the cards, with a launch date set at June 2001. Some analysts havesuggested that opposition to the private banking initiative, coupled with theefforts to revitalise the state banking sector, was seen as a veiled challenge tothe president’s plans, and led to the decisive legislation passed by the RegionalCommand in December.
Traffic through Syria’s main international airport at Damascus increasedsharply in the summer, reflecting a better-than-expected tourist season. Sel-ective figures released by the civil aviation authority to the local press indicatedthat 167,195 passengers passed through the airport in June 2000, 13% higherthan for the same month in 1999. The volume of cargo handled increased by1.4% over the same period. In the wake of these figures, it was announced thata new airline for internal and regional flights was to be established, breakingthe monopoly of Syrian Airlines over domestic air travel. The new carrier,which is yet to be named, will be 25% owned by Syrian Airlines with privatesector investors taking up the remainder. The airline is expected to start withtwo aircraft, growing to ten, and serving Syria’s major cities as well as some inneighbouring Lebanon. Tickets will be priced at the same level as Syrian
Government suggests planto float currency
New state banks areto be established
New air carrier planned asairport traffic increases
Airlines. Meanwhile, according to the Syrian official news agency (SANA), Syriahas ordered three civilian radar systems worth a total of US$29m from theAnglo-Italian company AleniaMarconi Systems to be installed at Damascus,Aleppo and Latakia airports. Installations of which should be completedby mid-2002.
Internet web crawler
President Bashar Assad’s pet project is to improve Internet use in Syria. While in theshadow of his father, he devoted energies to the Syrian Computer Society, obtainingpermission for select institutions to have Internet access, despite the concerns of those inpower. A government ISP (Internet Service Provider)—under the state telephonecompany—was established in 1997, but subscription limited to state institutions,companies, and the offices of selected professionals. Costs were prohibitive, with aninstallation fee of S£5,000 (US$108), a monthly subscription of S£2,000 (US$44), andan hourly access fee of S£120 (US$2.60). Consequently, Syria has one of the lowestInternet penetration rates in the region, with less than 8,000 subscribers out of apopulation of 16.6m. In July 2000—after Mr Assad succeeded his father—monthly rentalfees were cut by one-half, and the government committed itself to increase access to200,000 subscribers by the end of 2001 as a handful of Internet cafes opened. However,security chiefs have set limits to the Internet access. The state telephone companyremains the only ISP, ensuring the regime can monitor and intercept all communication,and bar access to Israeli as well as some US sites. Syrians cannot obtain access at home,and institutions with multiple users are required to keep meticulous records. The smallnumber of Syrians who try and get round the rules by dialling ISPs in neighbouringLebanon face heavy fines if caught. There are reports one European mission had itstelephone lines cut earlier in the year for making regular overseas calls to obtain Internetaccess.
Foreign trade and payments
High prices for crude oil for most of 2000 have continued to feed through toSyria’s foreign accounts, having a strong impact because oil typically accountsfor between 55-60% of all export revenue. According to the governmentnewspaper, Tishreen, the country recorded a trade surplus for the first quarter of2000 of S£2.5bn—equivalent to US$54.5m at the “neighbouring countries”exchange rate. Tishreen attributed the surplus to higher government revenuefrom international oil sales, saying that earnings from crude exports in the firstquarter stood at S£35bn (US$761m)—a figure in line with EIU estimates thattotal oil revenue for 2000 will reach around US$3bn. Tishreen said the firstquarter oil earnings were 50% higher than for the same period in 1999. Itoffered two other export revenue figures for the first quarter, noting that textileexports stood at S£5.2bn (US$113m), while agricultural exports stood atS£2.1bn (US$46m).
In November neighbouring Lebanon began to sharply cut its import tariffs, inan effort to revive economic growth. Tariffs on raw materials imported by
industrialists were cut to zero. Given the porous nature of the Syrian-Lebaneseborder, many in Syria’s business community grew concerned that their ownmarkets would be under threat, because most raw materials imported into Syriaface at least a 15% customs duty. These fears were given high-profile coveragein a front-page article in Tishreen. The government responded at the end ofDecember, announcing that it would begin to cut customs duties, specificallyon imported raw materials, but denying a link with the Lebanese move. Theissue was a timely indication of the growing interdependence of the two neigh-bouring economies. Under a 1998 agreement, customs duties on industrialgoods traded between Lebanon and Syria are due to be reduced by 25% a yearbringing them to zero by 2002 and creating a virtual customs union betweenthe states. Many in Syria fear the deal will expose the uncompetitiveness ofdomestic production methods. Meanwhile members of the Lebanese businesscommunity complain Syria is not fully adhering to the agreement. Citing, asan example, illegal “customs” tariffs charged on all goods passing fromLebanon into Syria—Lebanese exporters are forced to pay a bribe of up toUS$100 for every truck entering Syria across the main Masnaa crossing, evenfor goods in transit.
Towards an Association Agreement with the EU
Reaching a deal on German debt was the last important hurdle for Syria to improve itsrelations with the EU, having settled similar debt problems with France in 1996, and Italyin May 1990. In late December 2000, the planning minister, Issam Zaim, travelled toBrussels for the fifth round of talks on signing an Association Agreement—part of the EU’sinitiative to strengthen ties with Mediterranean states. To make progress, Syria mustcommit to reducing trade barriers over 12 years, improve its human rights record, respectintellectual property rights, as well as adhere to other fiscal, economic and socialstandards. The December talks were principally to discuss the second round of funding(MEDA II), to consider progress and structural adjustments to shift from a command to amarket economy. Under MEDA I, which ran from 1996 to 2000, the government wasgranted €105m, but of that only €35m of projects were even planned. At the end ofDecember, following the German debt settlement, an agreement was signed betweenthe EU and Syria to provide funding to train experts on archaeological restoration for athree year period. The 2m grant will help to preserve Syria’s cultural heritage andpromote excavation activities, in turn helping to develop Syria’s tourism industry andproviding a boost to the economy. However, despite the recent announcementsconcerning reforms, EU officials continue to remain doubtful that Syria will make theprogress required in order to join the proposed free-trade area by 2010.
Taking further advantage of strong oil revenue, the government made freshmoves in the fourth quarter of 2000 to tackle the debt legacy of the past threedecades. Syria owes some US$22bn in foreign debt, much of which—theproduct of Cold War loans from the former Soviet Union and East Germany—has been disputed by Syria, claiming that these states no longer exist. InOctober, after extensive negotiations, an agreement was reached with Germanyover debts of some US$800m—most of which was owed to what was then EastGermany. Syria stopped debt servicing after German reunification in 1989.Under the terms of the new agreement, DM1,300m (US$572m) of debts will be
repaid over 20 years ending in 2020, with a five-year grace period. Germanyalso agreed to exempt Syria from a further US$170m of mostly interest pay-ments. The agreement led to an immediate thaw in relations between thetwo countries, with the German Chancellor Gerhard Schroeder paying a statevisit and offering a US$27m loan to co-finance water projects. There were alsohopes in Damascus of an improvement in export credit facilities.
The European Investment Bank (EIB), the EU’s long-term financing institution,has resumed lending to Syria. Following the settlement of the German debtissue, Mr Schroeder announced that his country was lifting its reservationsregarding financing by the EIB. The end to German opposition has paved theway for much needed economic assistance for Syria. A loan for €75m wassigned on December 14th 2000 during an EIB delegation visit to Syria headedby the EIB vice-president, Francis Mayer. The loan is to be used for electricitysubstation and distribution projects as part of a US$238m project—to providefor the construction and expansion of 21 substations, and the laying of 733 kmof overhead powerlines and 40 km of underground cables—aimed at improv-ing the local electricity network. It is to be financed over 20 years with a five-year grace period and a subsidised rate of interest.
In another move to take advantage of strong oil revenue, the governmentsettled a long running debt with Iran, which dated from the 1980s, when Iransold oil to Syria on easy credit terms in return for diplomatic backing in Iran'seight-year war with Iraq. In 1998 Iran agreed to write off interest arrears, whichrepresented close to one-half of the US$1.02bn debt, in exchange for Syriaagreeing to repay US$500m over 10 years. Iranian finance authorities said Syriahas now chosen to settle the rescheduled debt in full. The agreement reached isreported to involve Syria paying its debt by “financing” Iranian investment inSyria—the money repaid to Iran would be used to finance Iranian projects inthe country. Syrian ministerial sources said the move was taken to improvepolitical and trade relations, and pointed to planned Iranian involvement in anumber of industrial projects, including a US$200m cement plant in Homs.
Syria’s large and unresolved external debts and poor repayment record havelong hampered its access to international capital markets. Insiders say thegovernment of Mohammed Mustapha Miro has taken the decision to settlemajor debts on the promise that the door will then open to bilateral, multi-lateral and ultimately private-sector financing. The decision to take advantageof the export revenue windfall while oil prices remain high to address externalfinancing issues was of paramount importance. If the oil markets become lessfavourable to Syria, it will need to be on good terms with potential creditors toseek financing deals that would allow the president, Bashar al-Assad, tocontinue his reform program.
The government also pushed forward in the fourth quarter of 2000 with effortsto improve regional and international trading relations. At the regional level,trade agreements were signed with Egypt and Bahrain, while on a wider level,an agreement was signed with China to improve trade relations, with Chinaexpressing an interest in buying Syrian crude.
