COUNTRY REPORT Syria May 2001 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom Syria at a glance: 2001-02 OVERVIEW The recent Israeli strike on a Syrian position in Lebanon, in response to another Hizbullah attack, has heightened tension between Syria and Israel. The strong verbal response from the president, Bashar al-Assad, has improved his domestic standing, but direct confrontation between the two countries is unlikely. The attack also effectively, but temporarily, silenced critics and demonstrators in Beirut against the Syrian troop presence in Lebanon, reviving fears of more intensive direct Israeli attacks on the country. Economic reforms are continuing to trickle through, with recent legislation allowing for the operation of private banks. Real economic growth will average 2.9% over the coming two yearsjust under the population growth rate. Strong oil prices led to a large current-account surplus in 2000 and although this is expected to decline, the current account will remain in surplus over the EIU’s forecast period. Key changes from last month Political outlook • Tensions in relations between Syria and Israel have been sharpened, and further Israeli attacks on Syrian positions inside Lebanon cannot be ruled out, as part of Israel's attempts to silence the Syrian-backed Hizbullah militia. However, direct attacks inside Syria are unlikely, as neither side appears interested in an outright war. Economic policy outlook • Economic reforms will continue, largely in piecemeal form. The president is expected to appoint new members to cabinetor even a new cabinet altogetherlater in the year. This should strengthen his position and facilitate the implementation of further reforms to stimulate growth. Economic forecast • After a difficult two years, 2001 will see the start of a slow pick-up in growth, mainly thanks to relatively strong oil prices and increased government current and capital spending. Inflation will remain subdued, as there is ample slack in the economy.
Transcript
COUNTRY REPORT
Syria
May 2001
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
Syria at a glance: 2001-02OVERVIEWThe recent Israeli strike on a Syrian position in Lebanon, in response toanother Hizbullah attack, has heightened tension between Syria and Israel.The strong verbal response from the president, Bashar al-Assad, hasimproved his domestic standing, but direct confrontation between the twocountries is unlikely. The attack also effectively, but temporarily, silencedcritics and demonstrators in Beirut against the Syrian troop presence inLebanon, reviving fears of more intensive direct Israeli attacks on thecountry. Economic reforms are continuing to trickle through, with recentlegislation allowing for the operation of private banks. Real economicgrowth will average 2.9% over the coming two yearsjust under thepopulation growth rate. Strong oil prices led to a large current-accountsurplus in 2000 and although this is expected to decline, the currentaccount will remain in surplus over the EIU’s forecast period.
Key changes from last monthPolitical outlook• Tensions in relations between Syria and Israel have been sharpened, and
further Israeli attacks on Syrian positions inside Lebanon cannot be ruledout, as part of Israel's attempts to silence the Syrian-backed Hizbullahmilitia. However, direct attacks inside Syria are unlikely, as neither sideappears interested in an outright war.
Economic policy outlook• Economic reforms will continue, largely in piecemeal form. The president
is expected to appoint new members to cabinetor even a new cabinetaltogetherlater in the year. This should strengthen his position andfacilitate the implementation of further reforms to stimulate growth.
Economic forecast• After a difficult two years, 2001 will see the start of a slow pick-up in
growth, mainly thanks to relatively strong oil prices and increasedgovernment current and capital spending. Inflation will remain subdued,as there is ample slack in the economy.
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Bashar al-Assad, Syria’s 35-year-old president, is more politically secure in hisposition, and is expected to push through further economic reforms. Theseshould provide a welcome boost to the business environment in Syria,especially given the drag expected to result from lower international oil prices.Regional political tension is weighing on confidence, but real GDP growthshould nevertheless reach 2.6% in 2001 and 3.2% in 2002. Inflation willremain subdued and the current account will register small surpluses.
Tensions with Israel have risen, after Syrian-backed Lebanese guerrillaslaunched another attack over the Lebanese-Israeli border and Israel respondedby bombing a Syrian radar station. The Syrian government has talked ofretaliation, but is ill-equipped for war. Free-speech debating societies have beenclosed down, and a leading reformer has been stripped of parliamentaryimmunity and charged with violating the constitution. Relations with the USremain confused, but Syria is expected to win a two-year seat on the UNSecurity Council in October. In Lebanon protests against the presence of Syriantroops in the country have continuedalbeit toned down in the light of theIsraeli attack. Such protests are, however, unlikely to lead to the redeploymentof troops back to Syria in the near future.
The latest government finance figures suggest that while governmentexpenditure should increase on last year’s levels, it is unlikely to meetbudgetary projections for 2001. Despite slow economic growth, and lowerinternational oil prices, revenue targets may be only slightly missed, and theEIU does not expect a serious budget deficit. A new property law designed torevive the property market has been passed. The government has allowedlimited foreign-exchange procurement, effectively at the market rate.
Growth picked up in 2000, but remained sluggish. Oil exports stayed strong inthe first quarter of 2001, but there are concerns that this might reflect crude oiltranshipped from Iraq, in breach of UN sanctions. Contracts have beenawarded to construct a cellular network and there are plans to revive the railnetwork. Further reforms to the financial sector have been approved.
Trade figures show that oil earnings led to a visible surplus in 2000. Regionaltrade relations have continued to improve, notably with Iraq and Turkey. Syriahas moved much closer to securing an Association Agreement with the EU,and a deal may be signed later in 2001.
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-AtrashJustice Nabil al-KhatibOil & 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 1998e 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, excl 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
Italy 26.6 Germany 7.0
France 20.6 Ukraine 7.0
Turkey 9.3 France 5.7
Saudi Arabia 8.4 Italy 5.6
a EIU estimates. b Actual. c “Neighbouring countries” rate. d Official estimates. e Principal exports are derived from the Central Bureau ofStatistics, Statistical Abstract. Exports of goods and services are taken from the IMF’s International Financial Statistics (IFS).
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.
Bashar al-Assad, Syria’s 35-year-old president, is continuing to reinforce hisposition within the ruling elite, while gradually pushing through an agenda ofpolitical and economic reforms. Since coming to power on the death of hisfather in June 2000, he has reached an accommodation with the small circle ofgenerals, intelligence chiefs and senior politicians who, in effect, control Syria.The young president has surrounded himself with a close group of like-mindedtechnocrats of his own generation, and is using their assistance in formulatinghis reform programme. If there is a consensus among the upper reaches ofSyrian society, it is that the country needs modernising. While some would liketo emulate the political freedoms of the West, many in power still look to thecontemporary Chinese model of gradually implementing economic reforms,while maintaining tight political control. Mr Assad is seen as the architect ofmany groundbreaking political and economic reforms—such as releasing poli-tical prisoners, allowing greater freedom of association and expression, re-forming investment laws and permitting the establishment of private banks.However, he is clearly constrained in his efforts to reform the economy, whichis in desperate need of modernisation and restructuring, by the conservatism ofthe old guard—whose interests are probably best served by stifling radicalreform.
During the forecast period Mr Assad’s programme of political and economicreforms will remain dependent on continued support from the political andmilitary elite. The young president still needs them on board to carry out evenminor policy changes without undermining their networks of patronage.While gradually strengthening, his position—and therefore the sustainabilityof his reforms—is not yet steadfast. Given Syria’s turbulent political historybefore his father came to power, it is impossible to dismiss the threat of a coup.
The next indication of Mr Assad’s attempts to consolidate his position is likelyto be a government reshuffle. The president has delayed this since coming tooffice, in the hope of gaining more control over the choice of new members.The EIU expects the new government to be chosen soon. We expect Mr Assadto remain in office over the forecast period, and to deliver more of thepromised liberal political and economic reforms, increasing pluralism andallowing a freer press and more private ownership. However, as such moves arelikely to result in a clash with some of the old interest groups, the president’ssuccess will to a certain degree depend on his continued popularity, both insideand outside the country.
Foreign policy issues will remain dominated by relations with neighbouringIsrael, particularly focusing on Syria’s support for the anti-Israeli Hizbullahmilitia in south Lebanon and the Palestinian intifada (uprising). Tensionescalated recently following Israel’s bombing of a Syrian radar station, in returnfor cross-border missile attacks on Israeli soldiers by Hizbullah. Strains betweenthe two countries will persist until a sustainable solution is reached.
Hizbullah—supported by Syria—is expected to continue to provoke the Israeliarmy. Frustration is growing in the Israeli cabinet and within the NorthernCommand of the army over Israel's apparent powerlessness on its northernborder. The attack on the Syrian radar station can be seen as a foretaste of thepolicy of the hard-line Israeli prime minister, Ariel Sharon, who is determinedto hold Syria accountable for Hizbullah’s actions. Over the forecast period weexpect Israel to continue to launch occasional attacks on Lebanon, targetingHizbullah, Lebanese and Syrian military positions, as well as civilian infra-structure. However, the Israeli attacks are unlikely to cross the border intoSyria, as this would lead to all-out war, which neither Israel nor Syria is seeking.
On a bilateral level, Syria’s relations with Lebanon will remain tense. MostlyChristian opposition groups are increasingly demanding a withdrawal of Syriantroops from Lebanon. Mr Assad will continue to seek an accommodation withthe Lebanese opposition movement as best he can, through a strategy ofdialogue and concessions. This is likely to be supported by the Lebanesepolitical elite, but rejected by the opposition groups. Ultimately, we expectSyria to retain its dominance over Lebanon throughout the forecast period,although there may be adjustments to the presence of Syrian troops and todirect Syrian control. In the wider region, Mr Assad will continue to build onrelations with neighbouring Arab countries.
Economic policy outlook
At the heart of Mr Assad’s reform programme are efforts to end three decades ofsocialist-style command economics. The first real wave of reforms began in1991, and the second only started in early 2000—while the president’s fatherwas still in power. Under the direction of the son, reforms have progressedfurther and faster, and the next two years should see even more progress.Recent reforms have included the early passing of the 2001 budget, and apackage of financial measures drawn up in the hope of attracting more capitalinto the country. In January a radical law was passed allowing private banks tooperate in Syria—albeit under fairly strict terms. The government is alsopermitting small-scale currency exchange at the effective market rate, whichcould be seen as a first tentative step towards the eventual unification of theexisting multiple exchange-rate system. Plans for an equity market have beenannounced and a number of bills are being drafted on banking-sectorregulation and tax reform.
Despite the slew of recent reforms, growth and capital inflow will remainconstrained by the cumbersome and weak regulatory, legal and bureaucraticstructures, all of which require a massive overhaul to support the economy. Weexpect these complicated structures to be tackled only gradually.
Budgetary plans for 2001 have, fortuitously, been accompanied by relativelystrong oil prices. Funding for the planned expansionary fiscal programmeshould therefore prove no problem. However, it is unlikely that the authoritieswill be able to meet the targeted expenditure for 2001—which represents anincrease of 16.9% on the previous year’s budget—owing to already existing
delays in capital spending. Nevertheless, at a time when other sectors areproving sluggish, the government expenditure programme will provide anecessary fillip, raising public-sector wages (which are extremely low) andproviding much-needed investment in areas such as infrastructure. Theexpected continued decline in international oil prices over 2001-02 will reducethe funds available for future spending, but this is not expected to stretchpublic finances.
Monetary policy in Syria remains, in effect, absent. Interest rates are set indiscussions with the economy ministry, and have long been fixed at 7%(slightly less for a public-sector borrower and more for a borrower from theprivate sector), regardless of inflation or liquidity conditions. Nevertheless,money-supply growth and inflation have remained under control, and shouldcontinue to be benign over the forecast period. If anything, it could be arguedthat conditions are too tight in Syria, and are partly responsible for the stifledinvestment levels in the country. Given, in effect, zero inflation, real interestrates have perhaps been too high (between 5% and 7%) for more than twoyears. However, we do not expect full interest-rate liberalisation to be effectedover the forecast period.
Despite the largely piecemeal and overall tentative approach to economicreforms, those introduced to the financial sector so far should eventuallyenable a more independent approach to monetary policy, with a more flexibleand market-responsive interest-rate-determination system. In the meantime,monetary policy will largely remain under the aegis of certain ministries, ratherthan an independent central bank.
Economic forecast
Forecast summary(% unless otherwise indicated)
1999a 2000b 2001c 2002c
Real GDP growth –1.5b 1.5 2.6 3.2
Oil production ('000 b/d) 570 545 522 502
Gross agricultural growth –7.5b 5.0 4.0 5.0
Consumer price inflation (av) –2.7 0.0 1.8 2.8
Exports of goods fob (US$ bn) 3.8 4.7 4.3 4.2
Imports of goods fob (US$ bn) 3.6 3.6 3.8 4.0
Current-account balance (US$ bn) 0.2 1.2 0.6 0.3 % of GDP 1.2b 6.9 3.4 1.4
a Actual. b EIU estimates. c EIU forecasts. d Based on the neighbouring countries’ rate.
Syria is highly dependent on oil exports, which accounted for some 70% oftotal export revenue in 2000. As world growth slows sharply from 4.2% in2000 to 2.1% in 2001 (at market exchange rates), primarily reflecting a hard
landing in the US economy, demand from destination countries for Syrianexports (including oil) will slow. Oil prices are also expected to soften. Weexpect the dated Brent blend to average US$24.10/barrel in 2001—down by15% on the average price for 2000—and US$23.98/b in 2002. Growth in theEU (the largest export market for Syrian exports and the main source of itsimports) will ease to an average of 2.6% over the forecast period. Projectedgrowth rates in world food prices of 8% in 2001 and 14.8% in 2002 shouldprovide a generally favourable environment for Syria’s agricultural exports, solong as winter rain levels are sufficient for a good harvest. With grain prices setto rise by 22.8% a year over the forecast period, another season of droughtwould force up import costs significantly.
International assumptions summary(% unless otherwise indicated)
1999 2000 2001 2002
Real GDP growthWorld 3.6 4.9 2.9 3.8OECD 3.1 4.0 1.7 2.5EU 2.5 3.3 2.5 2.6
Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP)exchange rates.
The forecast decline in international oil prices, combined with the impact ofpolitical uncertainty on confidence, weighs heavily on our outlook for realGDP growth in Syria. In the domestic economy, private consumption, whichaccounts for over 60% of GDP, is expected to rise modestly in 2001. This willmainly be a result of the projected rebound in the agricultural sector (assumingno drought during the forecast period), as well as the planned increase ingovernment expenditure in 2001, and, at a later stage, the positive impact ofthe recent economic reforms. Furthermore, a pick-up in construction work inneighbouring Lebanon—where an estimated 400,000 Syrian workers areemployed—should raise remittances. Domestic investment spending will alsoexperience modest growth, as the construction of a number of energy, gas-based and other projects gathers pace. An increase in tourism activity will alsoboost the economy, so long as there is no serious deterioration in the regionalpolitical situation. Overall, we expected the economy to grow by 2.6% in 2001and 3.2% in 2002.
The expansionary fiscal policy adopted in 2001, and expected steady growth inglobal non-oil commodity prices, should lead to modest upward pressure onprices over the forecast period. However, relatively weak growth, sufficientstocks of agricultural products and a lack of other demand-side pressures willkeep inflation benign. We therefore forecast inflation of 1.8% in 2001, up fromzero in 2000. As economic activity picks up in 2002, and prices of importedindustrial raw materials rise further, inflation will rise to 2.8%.
The government has recently taken modest steps to reform the cumbersomemultiple exchange-rate regime, but full unification of all rates is not expecteduntil the end of the forecast period at the earliest. The Syrian Commercial Bank(SCB)—the most important of the six state banks—began trading in January ata rate which, in effect, undercut the current black-market rate, at S£49.80-50.00:US$1. At the time, the black-market rate was S£48:US$1. Prior to thismove, the black-market rate had been remarkably stable, remaining close toS£48:US$1 since the mid-1990s. Provided there are no sudden shocks to theregional and domestic political situation, we expect the government graduallyto expand this experiment, eventually unifying all exchange rates at a rateclose to what is now known as the “neighbouring countries” rate ofS£46.25:US$1.
With average crude oil prices forecast to continue softening, and the globaleconomy slowing, we expect Syria’s export earnings—which are oil-dominated—to fall from US$4.7bn in 2000 to US$4.3bn in 2001 and US$4.2bnin 2002. Under the current expansionary fiscal policy and reform programme,import expenditure should rise to US$3.8bn in 2001 and US$4bn in 2002,leaving a trade surplus of around US$530m in 2001 and US$270m in 2002. Itshould be noted that a large volume of regional trade is unrecorded—mainlywith Lebanon, and, to a lesser extent with Turkey and Iraq. The net outcome ofthe trade with Lebanon is believed to be strongly in Syria’s favour. Overall, weexpect the current-account surplus to fall from 6.9% of GDP in 2000 to 3.4% in2001 and 1.4% in 2002.
In the early hours of April 16th Israeli warplanes launched three separateattacks on a Syrian radar station inside Lebanon, in the mountains aboveBeirut. Three Syrian soldiers, including one officer, were killed. Another sixwere wounded. The raid was the first deliberate targeting by Israel of asignificant Syrian military position since 1982. On that occasion, it was theprelude to war. The decision to provoke Syria was taken this time by Israel’shawkish prime minister, Ariel Sharon. Since Israel ended its occupation ofsouth Lebanon in May 2000, Hizbullah guerrillas—supported by Syriahavelaunched occasional rocket attacks across the Lebanese-Israeli border at armypatrols in a small disputed border area known as the Shebaa farms. In the latestattack on April 14th, Hizbullah killed an Israeli soldier. Under previous Israelileaders, the army response was limited to shelling south Lebanon. This time,Mr Sharon changed the rules and risked direct conflict with Syria.
The link between Damascus and Hizbullah is complex. Since 1967, Israel hasoccupied the Syrian Golan Heights mountain range. Rather than risk directconfrontation, Syria has applied pressure on Israel to leave the area, bysupporting Hizbullah guerrillas in neighbouring Lebanon in their attacks overthe border. The message is intended to be clear: if Israel wants a peaceful borderwith Lebanon, it must withdraw from the Golan. Israel—also seeking to avoiddirect conflict—has likewise played out the conflict in Lebanon, responding toHizbullah attacks by retaliating at Lebanese targets. In the latest incident, bydirectly hitting a Syrian target, Israel has raised the stakes and increased thepotential for a destabilising direct military confrontation.
The Syrians, as well as the international community, were shocked by Israel’sdirect attack and by the apparent change in Israeli tactics into what appears tobe direct confrontation. The initial reaction from Damascus was hostility,voiced by the most senior members of the regime, including the president.They warned that Syria would react at a time of its own choosing—giving anair of escalating tension, and the suggestion of possible armed conflict betweenthe two countries, and therefore, in the region as a whole. However, bystanding up to Israel, Syria’s president, Bashar al-Assad, has arguably been ableto strengthen his own domestic power base. Since coming to office in July2000 the greatest threat to the young president’s position has come from theold guard in the military and security apparatus—close associates of his father.When Mr Assad launched his economic reform programme, he was mindfulthat it might not be well received in those powerful circles. A particular area ofpolicy where Mr Assad remains vulnerable, and the old guard more influential,is security and defence. Israel’s attack, therefore, and the president’s hard-lineresponse, seem to have improved his domestic standing on this front.
Syria’s experiment with free speech, which began soon after Mr Assad came topower in July 2000, has been severely curbed since the start of the year. Thetrigger was a statement—signed by some 1,000 academics and intellectuals andpublished in an overseas Arabic newspaper—criticising the Baath party, callingfor an end to martial law, the release of all political prisoners, the repatriation
Israel bombs radar station,raising regional tension
Damascus talks tough, butwar is still not an option
of Syrian exiles, freedom of the press and free elections. Abdel-HalimKhaddam, one of the most prominent members of the old guard, accusedthose behind the statement of deliberately ignoring the achievements of theauthorities, damaging national unity and trying to start a civil war. The“democracy forum” debating salons—which had been held in the homes ofacademics and opposition figures—were brought to an end as part of thesubsequent crackdown, with organisers informed that future meetings couldonly take place if a copy of the lecture and the names of those attending waslodged with the authorities 15 days ahead of time. Following this, Syria’s mostprominent reformist independent MP, Riad Seif, was stripped of parliamentaryimmunity and charged with “violating the constitution.” Awaiting trial, he isreportedly confident that the crackdown is only a temporary setback, andexpects the forums to return later this year. While the EIU expects a gradualreturn to a more liberal political environment, this may be delayed and moreconstrained than Mr Seif envisages, given developments in relations with Israeland Mr Assad’s domestic political manoeuvring.
Despite this recent action against the most vocal proponents of free speech, asteady stream of minor political reforms has continued, indicating the regime’sincreased tolerance of (mild) criticism. In February the country’s first privatelyowned newspaper since 1963 was licensed, with the 75,000-copy print run soldout within hours. Al Doumari, or The Lamplighter is a satirical newspaperlaunched by a cartoonist, Ali Farzata close associate of the president. Inanother move, a notorious prison was closed in Palmyra. On the economic andsocial front, state domination of the education sector appears to have ended,with the approval of the establishment of private universities. The move,following a similar decision some time ago with regard to healthcare, reflectsthe growing demands from Syria’s rapidly expanding population and theincreasing pressure on the four poorly funded state universities. ChoueifatInternational School, based in Lebanon, was the first to be given permission toestablish a branch in Damascus, with plans to admit 400 students inSeptember. The government has also announced that Syrians may take part ininternational events for the first time, without obtaining prior permission fromthe authorities.
In neighbouring Lebanon, where Syria’s role in the political process isdominant, debate has intensified over the presence of some 30,000 Syriansoldiers in the country, and over Syria’s continued effective control of Lebanon.The potentially destabilising shouting match began after Israel withdrew itstroops from Lebanon in 2000, and is largely coming from vocal members ofthe Christian community. The latter, in effect, ruled Lebanon before the arrivalof the Syrians in 1982 (the Syrians sent in troops in an attempt to stop theinvading Israeli army from gaining control of the country). The sectariannature of the dispute is raising concerns in Lebanon, reviving memories of the1975-90 Lebanese civil war. In a meeting with a delegation of Lebanese lawyers,Mr Assad sought to appease Lebanese critics by saying that the presence of theSyrian army in Lebanon was “temporary”, and that troops would bewithdrawn after a comprehensive peace agreement had been signed in theregion. This has failed to curb increasingly strident anti-Syrian protests, which
have been met with pro-Syrian demonstrations in Beirut. Both sides of theborder are alarmed at the escalating demonstrations. However, Syria hasprivately made it clear that it has no intention of withdrawing from Lebanon,only to be replaced by Israel. Any concessions it offers to the LebaneseChristians are therefore likely to be limited. Syrian critics, and the debate as awhole, were all but silenced at the height of the argument in mid-April, whenIsrael bombed the Syrian radar station, thereby refocusing attention on thethreat from Israel. However, the respite was only temporary, and the issue ofSyria’s presence in Lebanon will continue to be a source of uncertainty anddisquiet in relations between the two countries.
Mixed signals from the Bush administration
Relations with Washington have been somewhat confused since the arrival of George WBush in the White House. The new US administration appears to have made support forsanctions on Iraq the focus of its Middle East policy. With allegations that Syria isbreaking UN sanctions by transhipping oil (See Oil and gas), some in the Bushadministration—notably the defence secretary, Donald Rumsfeld, and the nationalsecurity adviser, Condoleezza Rice—want Syria to be censured. The US pro-Israeli lobbyis also pushing for Syria to be punished for its support of the Lebanese guerrilla groupHizbullah. However others in the administration, notably the secretary of state, ColinPowell, believe that the US needs Syrian support to maintain sanctions against Iraq, andfear that alienating Syria could lead to the establishment of a an anti-Israeli alliance offrontline states, including Iraq, Iran, Lebanon and the Palestinians. Concerns inWashington have been raised by expectations that Syria will win the election to one often rotating seats on the 15-member UN Security Council in October, having receivedoverwhelming support from the Asian bloc. Syria would begin a two-year term on theCouncil from 2002. Israel has been lobbying hard for the US to oppose the bid, butSyria is expected to receive a clear majority of support from the 189-member GeneralAssembly. The Bush administration, meanwhile, is using the question of candidacy tothe Security Council to encourage Syria to stop breaking sanctions on Iraq, as this coulddisqualify it from holding the seat.
Syria broke ties with Yasser Arafat’s Palestinian Liberation Organisation (PLO)in 1993, when Mr Arafat signed a peace treaty with Israel. However, with anew, young president in Damascus, the breakdown of Israeli-Palestinian peacetalks, and the onset of the al-Aqsa intifada (uprising) in October 2000,Damascus appears to feel that its hard line against Israel has been vindicated.Relations with Mr Arafat have therefore warmed, and the two leaders held areconciliation meeting on the sidelines of an Arab summit in Amman inMarch. The PLO legation in Damascus is set to become an “embassy” of thePalestinian Authority (PA). This represents the final piece in the regional puzzlefor Mr Assad, with Syria having now improved relations with all of itsimmediate neighbours (with the exception of Israel). Since taking office inJune, the president and his foreign minister, Farouq al-Sharaa, have resolvedlong-standing disputes with Turkey, Iraq, Jordan, and now the PA, repairingrelationships that were strained when the president’s father was in power.
Reliable published information on government fiscal affairs is usually scant inSyria, and budgets are generally late, released towards the end of the financialyear to which they apply. The budgets officially balance every year, but outturnfigures are released at least a year later than would be expected, with theoutturn for 1999 only provided in the first quarter of 2001. Budget outturnfigures for 1999 indicate that revenue was on target, with a budget deficitequivalent to 4.84% of GDP, compared with deficits of 4.30% in 1998 and4.10% in 1997. However, given unspecific categories and unclear definitions, itis difficult to make much of an inference regarding the real state ofgovernment finances in Syria, particularly as other sources of data, such as theCentral Bank of Syria’s information on movements between governmentaccounts, often offer a conflicting—even confusing—picture.
However, since the arrival of Bashar al-Assad as president, there have beengenuine attempts to improve the situation. While the 1999 budget, forexample, was presented to parliament for approval on the last day of December1999, the budget for 2000 was approved in May of that year, and the budgetfor 2001 was presented in December 2000.
The budgetary projections for 2001 are looking increasingly unrealistic,particularly on the expenditure side. As detailed in the EIU’s January report, thegovernment has forecast an increase in expenditure of 16.9% for the year, withmuch of the extra spending directed towards a seven-year S£50bn (US$1.1bn)job-creation scheme, an across-the-board increase in public-sector salaries(which we estimate could cost some S£15.6bn), and other new expenditureassociated with the economic reforms.
Official Syrian government finances(S£ bn unless otherwise indicated)
Official budget deficit –30.63 –34.26 –37.00b n/a n/a % of GDP –4.10 –4.30 –4.84 n/a n/a
a Including others.b Does not sum in source.Sources: Central Bureau of Statistics; Ministry of Finance; official statements and speeches; press reports.
The main aim behind this planned increase in expenditure is to boost thestagnant economy and provide some of the much-needed infrastructure tosupport growth, in the aftermath of the severe drought of 1998/99 and in thelight of relatively strong oil prices in 2000 and 2001. Within the overallincrease, spending on investment is set to rise by 22% and current expenditureby 14%. However, given the delays to capital spending so far this year, it seemsincreasingly unlikely that these targets will be met. On the revenue side,despite the fall in oil prices, oil revenue continues to be healthy (perhaps dueto transshipped Iraqi oil—see Oil and gas). We expect oil prices to decline froman average of US$28.4/b in 2000 to US$24.1/b in 2001. Notwithstanding sloweconomic growth, revenue targets may be only slightly missed. Overall, weexpect the final deficit to be slightly lower than that projected by theauthorities.
Given the structures of government institutions, monetary policy remains, ineffect, the responsibility of the economy ministry and is secondary to fiscalpolicy. Interest rates are fixed in discussions with the ministry, and little else isused by the Central Bank to control monetary aggregates through indirectmonetary policy. Credit is centrally allocated (via an annual credit-allocationplan), and much of what is available for credit in the country ends up in thehands of the public sector (all banks have so far been owned and operated bythe state). The private sector therefore suffers from a severe shortage of creditfrom domestic sources, and the Syrian entrepreneurs who have access go tooffshore (largely Lebanese) banks for funding. This is more expensive andconstrains the growth of the private sector.
Despite their non-active monetary policy, the authorities have been largelysuccessful in controlling the monetary aggregates and inflation. Externalfactors, such as drought and relatively low international prices for Syrianimports over the past few years, have also helped. In 1999 there was aconsumer-price deflation rate of 2.7%, and there was no increase in officiallyreported inflation in 2000.
After announcing in late 2000 that it was seeking to revive the housing market,the government in February 2001 passed legislation (approved by thepresident) to liberalise the rental sector. A government survey had earlier foundthat some 16% of the 2.46m housing units in the country were empty. Despiterelatively strong and growing demand for homes, property owners werereluctant to rent their properties because the prevailing rental law gaveenormous powers to tenants at the expense of property owners. Landlordscould not, for example, increase rents or evict tenants, and a tenant could passon a rented apartment to heirs without consulting the owner. As a result, mostproperty owners preferred to leave an apartment empty until they could sell it,rather than take in tenants who could stay indefinitely, paying a low rent. Theresult was the proliferation of empty apartment blocks in the main cities. Onereal-estate broker estimated that there were at least 250,000 empty apartmentsin Damascus alone, with many cases, where property was rented, of tenantspaying less than S£1,000 (US$20) a year for apartments valued at aroundS£30m (US$600,000).
The new law changes the basis of rental contracts, allowing property owners toset annual rent at between 5% and 8% of the value of a property when signinga new tenancy agreement. For existing tenants, owners will be allowed toincrease rent only gradually, initially by a multiple of five.
One of the most significant of the recent reforms took place in January, whenthe government allowed official foreign-exchange procurement at what wasformerly the black-market rate. For much of the past three decades Syria hasoperated a complicated exchange-rate and trade system involving an array ofofficial exchange rates, with certain individuals and public-sector institutionsallowed to import goods using a much appreciated exchange rate—in effect, ata subsidised price. Othermore depreciated rateswere applied to imports forthe private sector, rendering those more expensive. This has acted as a drag onthe development and competitiveness of the private sector. Furthermore, longlists of allowed and “negative” (not allowed) imports were in place. While thelatter have been somewhat simplified, the exchange and trading systemremains inefficient. Strict rules also apply to export earnings. When anexporter receives the international price for a commodity, he must surrender apercentage of the foreign-currency receipts to the authorities at a fixedexchange rate (known as the “surrender requirement”), usually via the SyrianCommercial Bank (SCB) and within six to nine months of receipt. This, ineffect, results in exporters being short-changed for their exports, receivingfewer Syrian pounds than the effective market rate implies. The surrenderrequirement currently stands at 25%, and the exchange rate used is close to theeffective market rate. The requirement is being reconsidered, and has recentlybeen abolished for exports of fruits and vegetables.
Until recently, unofficial foreign-currency trading was illegal and punishable byfine and imprisonment, as was holding foreign currency. As part of the reformprocess to encourage capital flow into the country, organisations andindividuals are now allowed to open foreign-currency bank accounts. Themany exchange rates have also been reduced to two main official rates: anofficial budget rate of S£11.20:US$1 and a widely used “neighbouringcountries” rate of S£46.25:US$1. However, several other rates still exist and areused for various currency calculations. As a result of applying different rates todifferent items in different years, it can seem impossible to reconcile balance-of-payments data.
Interestingly, over the past six or seven years, the black-market rate (alsoknown as the free rate) has been remarkably stable, ranging betweenS£48:US$1 to S£52:US$1. The rate currently stands at some S£50:US$1.Increased tourism revenue and transfers from Lebanon must account for partof this stability, as both official private-sector and public-sector exports havebeen relatively stagnant over this period, and the Central Bank is not reportedto have intervened in the currency market for some time. Illicit trade withLebanon may also be partly responsible for the currency’s stability.
Under the new reforms, the SCBthe only state bank authorised to engage inforeign-currency transactionsis now allowed to undertake small-scale tradingin foreign currency at a rate of S£50:US$1.
At the time of the reforms earlier this year, the black-market rate stood atS£48:US$1. By trading at S£50:US$1, the state in effect undercut this rate,possibly in an attempt to soak up US dollar liquidity and further build foreign-currency reserves, while at the same time aiming to help exporters. Foreign-exchange booths have been opened in several prominent places in centralDamascus, run by the state or by specifically licensed parties from the privatesector. The booths offer to buy US dollars from tourists at a buy/sell spread ofS£49.80-S£50:US$1. There are few restrictions on who can sell dollars, but thegovernment is keen to build dollar reserves, and has said that only specificgroups and individuals are authorised to buy dollars—with the private-sectoroperators mostly restricted to pilgrims making the annual hajj (pilgrimage) andthose travelling overseas for medical care.
The move has seen the black-market rate driven down to the new official rateof S£50:US$1. There have been reports that the Central Bank is buying someUS$200,000 a day, with plans to raise this to US$1m a day. Private money-changers in Syria remain illegal, and unofficial dealing in foreign exchange isstill punishable by a large fine or imprisonment. Most unofficial foreign-currency trading therefore takes place on the borders with neighbouringLebanon and Jordan.
Although not an officially stated policy, it seems that the authorities are in the(gradual) process of unifying the exchange-rate system, with the ultimate aimof having one exchange rate, once the country’s debt-repayment problems areresolved. Syria has been in negotiations with several bilateral creditors to settleSoviet-era debts with the post-Soviet and former Eastern European countries(its previous backers). (January 2001, pages 30-31).
a End-April. b Restricted use.Sources: Central Bank of Syria; EIU.
The domestic economy
Economic trends
Measuring economic activity in Syria is problematic, given the absence ofreliable figures. Economic growth data are often reported extremely positively,despite evidence to the contrary. For example, in 1998 the government re-ported a real GDP growth rate of 7.8%, when sectoral and anecdotal evidence
strongly suggested a growth rate ofat besthalf this figure. Similarly, thesevere drought of 1998/99 is almost certain to have resulted in a contraction ofthe economy by some 1.5% at least, despite the compensation of rising oilprices in 1999. The authorities admit to a stagnant 1999, but not to an actualsizeable contraction. For 2000, taking into account anecdotal evidence of lowerthan usual rainfall in much of the country, with relatively good rains reportedin just the coastal areas, the EIU estimates that the economy grew by some1.5%, with the effect of the poor rains somewhat tempered by strong oil prices.However, in March 2001 the Al Baath government newspaper reported growthfor 2000 of 8.3%. We expect growth gradually to pick up to 2.6% in 2001 and3.2% in 2002. Initially, the main driver behind this will be the positive impactof strong oil prices and a return to relatively normal rainfall levels. At a laterstage, the impact of the recently implemented economic reforms, which shouldboost inward (and local) investment levels, will support stronger growth.Planned increases in government expenditure will also contribute. However,until further reforms to the economy materialise, growth rates will remainhighly vulnerable to the vagaries of weather and international oil prices.
After registering deflation of 2.7% in 1999 and no increase in prices in 2000,we believe that inflation will remain subdued over the coming two years, withno significant wage, demand or supply-side pressures forecast. Food itemsconstitute the largest part of the consumer price index (CPI), and there arereportedly large stocks of the main agricultural products in the country (suchas wheat and barleyexports of which were vastly reduced in the years ofdrought). There should not be any significant upward pressure on prices fromthis avenue. However, the real picture of inflation is somewhat complicated bysubsidies on many food and non-food items, which are also available atunsubsidisedhigherprices (presumably the more expensive product is ofhigher quality).
Overall, we expect (officially reported) inflation to pick up to 1.8% in 2001 and2.8% in 2002, largely reflecting higher government expenditure and increasesin housing costs, as the new rental law comes into effect (see Economic policy).Higher international import prices will also feed into domestic prices in 2002(see Outlook for 2001-02).
Oil and gas
Oil exports remain Syria’s most important source of foreign exchange, despiteslowing domestic production levels and declining international crude prices.The International Energy Agency (IEA) estimates that Syria’s output in the firstquarter of 2001 averaged 530,000 barrels/day (b/d)well down on the pro-duction peak of 588,000 b/d attained in 1996. The steady decline inproduction levels since 1996 has largely been the result of problems associatedwith old technologies and mature fields, as well as a lack of explorationactivity. Oil reserves are (unofficially) forecast to last little more than a decade,at current levels of extraction and excluding new exploration efforts. The risingdomestic demands for energy are also diverting an increasing volume of oilinto domestic energy generation, thereby reducing exports. The authorities are
intending to use some of the planned increase in gas production to produceenergy for domestic consumption, thereby freeing up more oil for export.
On average, oil generates some 55-60% of Syria’s export earnings. Theeconomy is therefore, highly dependent on international oil prices. The sharpincrease in prices in 2000—which saw the benchmark Brent crude trade aboveUS$30/barrel for much of the yeargave the government a revenue windfall inthat year. Initial (unofficial) figures suggest that oil earnings accounted forsome 70% of total export revenue in 2000. The easing of oil prices towardsend-2000 and into early 2001 (with Dated Brent trading at around US$25/b inApril), will lower revenue both this year and next. Given the impendingnorthern hemisphere summer, and concerns about a slowdown in the USeconomy in 2001, the EIU expects the easing of oil prices to continue, resultingin an average price of US$22.5/b in the second quarter. Prices should risemodestly towards end-2001 (as the northern winter sets in), giving an averageannual price of US$24.1/b, falling slightly to US$24/b in 2002.
Crude oil production(’000 b/d; av)
20011996 1997 1998 1999 2000 1 Qtr 2 Qtra
Output 588 570 550 570 550 530 520
a IEA forecast.Source: International Energy Agency (IEA), Monthly Oil Report.
IEA figures for Syria’s oil exports were revised sharply upwards at end-2000,reflecting a sudden and unexpected increase in exports in November. Thiscoincided with the completion of repair work on an ageing oil pipeline fromthe northern Iraqi oilfields of Kirkuk to Syria’s Mediterranean port of Banias.The 880-km twin 80-cm pipeline, which once had a capacity of 1.1m b/d, wasclosed in 1982 when the two countries broke off diplomatic relations. In themid-1990s relations began to thaw, and the countries decided to rehabilitatethe pipeline. However, Iraq has been under UN sanctions since its invasion ofKuwait in 1990, and may not export oil through this avenue without UN
agreement and monitoring. Syria has insisted that the pipeline has only beenopen for tests, but there have been reports that Iraq has been pumping oilthrough the pipeline at a rate of between 100,000 b/d and 150,00 b/d. It isreported that this oil has been sold to Syria at a deep discount to theinternational price, and that Syria has used it for domestic consumption, thusfreeing up more Syrian oil for export. In December 2000 Syria reportedlyexported the equivalent of 500,000 b/d, a sharp increase on its typical monthlyexport volume of 340,000 b/d. Traders said that oil exports returned to morenormal levels in January 2001, but then rose again in March to some440,000 b/d.
The new US administration led by George W Bush has made supporting UNsanctions against Iraq one of its main foreign policy aims in the Middle East. InFebruary the US secretary of state, Colin Powell, visited Damascus, andrepeatedly asked the Syrian president, Bashar al- Assad, if the pipeline would bebrought under UN control. Mr Powell said he “went back to the question threetimes”, and each time there was “solid agreement”. However, the agreementwas never confirmed in public on the Syrian side. The US said it would supportthe use of the pipeline, so long as revenue passed through the UN oil-for-foodcommittee. Iraq, however, has said it has no plans to ask that the pipeline bebrought within the UN regime, as it has all the export capacity it currentlyneeds. Yet, at the same time, Iraq’s oil minister, Amir Mohammed Rashid, hasannounced plans for a second pipeline across Syria, with a capacity of 1.4mb/d, saying that tenders are to be issued later in 2001. The status of the pipelineuse thus remains officially unclear, but there are strong signs that oil has beenpumped through it to Syria.
UN sanctions against Iraq are due to be reviewed in June. If it became clear thatSyria is in breach of these sanctions at that time, this could have a negativeimpact on its attempt to obtain a seat on the UN Security Council in October(see The political scene). We therefore expect a sharp reduction in the use ofthe pipeline and in Syrian oil exports over the coming few months.
Agriculture
In early March the European Commission (EC) complained to Syria about an“excessive increase” in cotton exports to the EU. It said that large quantities ofSyrian cotton and cotton fabrics were being sold in the EU at prices that werelower than those of other competing exporters (such as Turkey and otherEuropean manufacturers), because of what the EC said were unfair Syriangovernment subsidies to the sector. The commission threatened to end cottonimports from Syria unless volumes were reduced. However, the Syrianargument can be considered strengthened by the fact that the EU’s own farmsector is hugely subsidised. The dispute led the Syrian government to delayscheduled talks with EU representatives, intended to lead to an EU AssociationAgreement and free-trade deal (see Foreign trade and payments). The EUimported some 30,150 tonnes of Syrian cotton in 2000, sharply up from thelevel of 2,430 tonnes in 1995.
Recent figures for the 2000 cotton harvest bear out earlier predictions that itwould be a good year. Raw cotton production stood at 1.06m tonnes, up by14.5% on the 1999 total, from a planted area of 256,000 ha, an increase of 5%on 1999. Lint output was estimated at 360,000 tonnes, up by 18% on thefigure for 1999, reflecting a rising yield in part attributable to the four newforeign-made spinning mills recently brought on line. The good harvest wasattributed to favourable weather conditions in the final months of 2000, aswell as the larger seeded area. For 2001, the seeded area has been reduced to230,000 ha, with forecasts of lint cotton output of 322,000 tonnes. Thereduction in the cotton-planting area in part reflects a decision by theagriculture ministry to reduce cotton production in favour of crops that arecurrently imported, such as corn. Syria remains the world’s tenth largest cottonproducer, exporting 80% of its annual crop.
Agricultural production(’000 tonnes)
1996 1997 1998 1999 2000a
Wheat 4,080 3,031 4,112 2,691 3,104
Barley 1,653 983 869 424 400
Seed cotton 760 1,047 1,018 926 1,060
Lint cotton 264 367 335 305 360
Sugar beet 974 1,126 1,202 1,269 1,300
Olives 648 403 785 401 807
Grapes 540 452 590 387 400
Tomatoes 409 407 555 610 610
Apples 302 356 362 283 320
Watermelons 201 272 403 259 270
a Estimates.Source: UN Food & Agricultural Organisation (FAO) website.
Olive, fruit and vegetable production also climbed sharply in 2000, in partbecause of base-year factorsthe drought-induced low levels recorded in1999but also reflecting a steady improvement in yields. Olive output reacheda new record of 806,500 tonnes, up by 101% on the 1999 crop of 400,000tonnes, putting Syria among the top ten global producers, accounting for some4% of world supply. Citrus fruit producers also had a good season, withprovisional reports of total output of some 800,000 tonnesalmost double thefigure for 1999. The total area planted with citrus trees stood at 28,000 ha in2000, up by 12% on the 1995 level. Fruit production is one of the fewagricultural industries dominated by the private sector, and its exports are nolonger subject to the foreign-exchange “surrender requirement” of 25% (seeEconomic policy).
Infrastructure and services
In January the state telecommunications provider STE awarded contracts totwo private-sector companies to establish rival cellular telephone networks.
The two groups were the Lebanese telecoms company Investcom and theSyrian-Egyptian venture SyriaTel, which comprises the Egyptian telecomscompany Orascom and Syrian partners. Each company was awarded a 15-yearcontract to establish a cellular network with a capacity of 850,000 subscribers,at an estimated cost to each firm of US$500m. The companies will pay aninitial fee of US$20m for the contracts, then will share revenue with thegovernment on a scale rising from 30% to 60% over the course of theagreement. Equipment for the new networks will, at least initially, be providedby Ericsson of Sweden and Siemens of Germany. The move is consideredsignificant because it is the first time that a private-sector company—includinga foreign partner—has been awarded a contract to provide such an important(and historically sensitive) public service.
The two full networks will replace a pilot scheme launched in February 2000 byInvestcom, Ericsson, and Siemens, at a reported cost of US$31m. The pilot gridhad a capacity for 60,000 subscribers, but only attracted some 13,000, largelybecause the government set the connection charge at US$1,200, in a countrywhere the average monthly wage is US$150. Prices have been set lower underthe new contracts, at US$400 for a connection, with monthly subscription feesof US$12, and per-minute call costs of 15 US cents. At the end of the contracts,the two companies will hand over all equipment to the government, in linewith the terms of the build-operate-transfer (BOT) contracts.
In March the government announced plans to revive the country’s 2,800-kmrail network. Use of Syria’s slow and ageing fleet of diesel trains has been insteady decline, with passenger numbers falling from 1.8m in 1995 to 848,000in 1999. Most passenger traffic has moved to the roads, reflecting a steadyimprovement in road conditions, with the length of total surfaced roads risingby 10% between 1995 and 1999. Earlier this year the state railway companysaid that it was seeking bids to build the country’s first electric rail network,with initial plans for lines running to the Lebanese and Jordanian borders, andthrough the suburbs of Damascus. The expansion is forecast to cost someUS$500m, and no official mention has been made of the source of funding.Rail links have also been re-opened to Iran—a 60-hour ride via southernTurkey, costing US$35 for a one-way ticket—and there are plans to reviveregular links to Jordan and Iraq.
The first quarter of 2001 saw the introduction of important economic reformsin the financial sector. Legislation approving the establishment of privatebanks (January 2001, pages 26-28) was passed by parliament. In Marchparliament also approved legislation to establish principles of banking secrecy.The latter is intended to help draw expatriate Syrian capital into the country.Syrians are believed to have overseas holdings of some US$60bn-100bn, withmuch of the money passing through, or deposited in, the banking sectors ofneighbouring Lebanon and, to a lesser extent, Jordan. Both domestic andforeign investors had been calling for a bank secrecy law, so that Syria couldbegin to compete with Lebanon, which has long offered confidential privatebanking.
In February 2001 the Council of Ministers also approved a draft law to set up astock exchange. The proposed bourse, to be established with initial capital ofUS$2m, will be operated by the Federation of the Syrian Chambers ofCommerce. Legislation for the exchange should be approved by parliamentlater in the year. However, the project may be too optimistic, given the currentstate of the financial sector. Enormous reforms are still required in the areas ofbanking, corporate governance, regulatory requirements, the legalenvironment and information provision and transparency.
Overall, the new financial-sector legislation has been welcomed by businessleaders seeking the creation of more efficient financial and capital markets.However, even when the legislation is introduced, it will take some time fordepositors and bank clients to trust bank executives to maintain totalconfidentiality, given the current structure of the Baath party and the securityapparatus. The reforms are also incomplete and somewhat hesitant. Forexample, the law drafted in December allowing for the creation of privatebanks stipulates that each bank must be 25% owned by the Syrian state, andmajority owned by Syrians—measures certain to deter many foreign investors.It is expected that interest will mainly come from Lebanese banks in the initialstages, with many potential investors waiting until conditions become clearer.
Foreign trade and payments
Trade data for 2000 have been released, showing total export revenue ofS£210bn (US$4.5bn at the “neighbouring countries” rate), a rise of 13% yearon year. Revenue from oil and oil-related exports stood at S£147bn,representing 70% of all export earnings for the year. After oil, the largest exportearners were cotton, vegetables, livestock, fruit, textiles and phosphates.
The total import bill for the year stood at S£187bn, a 6.7% increase on the1999 import bill. The largest area of expenditure was on imports of machineryand spare parts, followed by electrical equipment, fertilisers and medicine.Overall, Syria enjoyed a trade surplus of S£23bn in 2000, more than twice thefigure for the previous year. This was largely a result of the strong oil pricesover the period.
More detailed half-year figures for 2000 have also been released. These showthat public-sector exports earned 84.6% of total export revenue in the first halfof 2000, with the private sector accounting for 15.4%. So far as imports areconcerned, the public sector was responsible for just 23.9% of the total. The EUremained Syria’s largest destination for exports—mainly oil—accounting for68% of total revenue, followed by Arab countries, which collectively accountedfor 13.5% of earnings. The main source of imports to Syria was likewise the EU,which provided 25% of the total. This was followed by the countries of theformer Soviet Union and Eastern Europe, with 18%.
Imports of goods fob 79,100 175,300 88,500 187,000 Public sector n/a 48,098 21,200 n/a Private sector n/a 127,202 67,300 n/a
Trade balance –9,800 10,547 15,700 23,000
Sources: Central Bureau of Statistics; press reports.
Matching tariff cuts with Lebanon
In the EIU’s January report, we noted a government decision to cut customs duties. Thewidely held view in Damascus was that the move was intended to match sharp tariffcuts in neighbouring Lebanon, which had led to an increase in smuggling across thelong and porous Lebanon-Syria border. In the first quarter of 2001 details of the cutswere released, with official tariffs reduced on some 100 imported products used as rawmaterials in the industrial sector. Tariffs for these were uniformly lowered to 1%, from ashigh as 35%. Although the move has been welcomed by Syrian industry, and isexpected to reduce some cross-border smuggling, it is not likely to have an immediatepositive effect on the competitiveness of Syrian products, as much more needs to bedone to improve their quality. Many businesses already import goods into the countryusing under-invoicing as a way of reducing their customs liability. The announced cutsare limited to 100 items, with relatively high duties remaining on all other goods,particularly on luxuries, such as new cars.
During the first few months of 2001 the government continued to seek warmerpolitical and trade relations with neighbouring states (see The political scene).These included Iraq, Turkey, Jordan and Lebanon. Of potentially greatesteconomic importance are ties with Iraq, which was formerly one of Syria’slargest trading partners. Iraq broke off diplomatic ties with Syria in the early1980s, over Syrian support for Iran during the Iran-Iraq war. Relations were re-established in 1988, but only in 1997 did the two countries sign an agreementto re-open borders and re-establish trade relations. Ties have since warmed,with the border restored to commercial traffic, a transhipment oil pipelinereopened (see Oil and gas) and air links re-established.
As a result, trade between the two countries has increased dramatically, and isreported to have reached some US$500m in 2000. The Syrian governmentexpects this to rise to US$1bn in 2001. The steady rapprochement between thetwo countries was sealed in March with a free-trade agreement committing thetwo sides to a steady reduction of economic barriers. The agreement containedfew specifics. At the same time, an agreement was reached codifying sharing ofthe waters of the Euphrates and Tigris rivers—water is one of the mostimportant concerns in the region.
With Iraq subject to UN sanctions, the stronger Syrian-Iraq trade ties have ledto some unease internationally, not least because all revenue from trade withIraq is required to go to the UN sanctions committee, which then spends it onfood and humanitarian goods. Syria has privately assured the US that the newtrade agreement is not intended to breach the sanctions, although Syria, likemany other countries both inside and outside the region, has long said that itis opposed to the sanctions.
Relations with one of Syria’s other important neighbours, Turkey, have alsocontinued to improve. In the mid-1990s ties were at an historic low, and therewere fears of outright conflict over Syrian support for Kurdish rebels insouthern Turkey. Political disputes have also raged about Turkish restrictions tothe flow of the Euphrates river, despite Turkey’s agreement to water-sharing in1987. Turkey’s military co-operation agreement with Israel is also a point ofcontention. Nevertheless, trade and economic ties have blossomed over thepast few years, with Syrian exports to Turkey totalling some US$450m a year—80% of these oil exports—and imports around US$200m. Since Bashar al-Assadassumed the presidency in 2000, there have been a number of high-levelbilateral visits, and this co-operation is expected to improve further over theforecast period.
Efforts to sign a free-trade Association Agreement with the EU moved forwardsignificantly in the first few months of this year. The proposed agreement willform part of the EU’s Euro-Mediterranean programme, intended to open a free-trade zone between the EU and the Mediterranean states by 2010. In Februarythe president of the European Commission (EC), Romano Prodi, visitedDamascus, where he announced that he believed a deal could be concluded byend-2001. Part of the new momentum for Syria to sign a deal so quickly iscoming from neighbouring Lebanon. The Lebanese prime minister, Rafiq al-Hariri, himself a businessman and proponent of free trade, is determined to seeLebanon sign an Association Agreement by mid-2001, to the extent that it hasbecome one of the main planks of his government’s economic policy.However, there is concern in both countries—as well as in the EU—that thelong and porous Lebanon-Syria border would lead to a high level of smugglingunless Syria signed a deal at the same time.
A meeting between Syria and EC representatives was therefore scheduled forMarch, but was delayed after an unrelated call from the Commission for Syriato reduce its cotton exports to the EU (see Agriculture). When the meetingeventually took place in Damascus in April, talks focused on resolving specificissues, such as the free movement of industrial and agricultural goods. Syriasubmitted initial lists of industrial goods to be covered by the agreement, andattempts were made to resolve the country’s greatest concern—that the EUopen its markets to Syrian agricultural exports. EU representatives also soughtto dispel the Syrian belief that the EU is in favour of a deal as a way to push fordomestic political change in Syria.
Relations with Turkeycontinue to warm
Syria is closer to signing anEU Association Agreement
From the EU’s perspective, the greatest concern was with Syria’s fledglingeconomic reforms. When similar deals were reached with Egypt, Tunisia, andMorocco, reforms were already well under way, but this is not the case withSyria, which is only just beginning its (gradual) reform programme. Aid wasalso discussed, particularly to help restructure the manufacturing sector. Someindependent estimates believe that it would take US$5.7bn over the next tenyears to bring the sector up to a sufficiently competitive level. Syria also calledfor a greater slice of the EU aid budget for the region, having received just 1.2%of the US$24.4bn budget in 1990-98, while Israel received 32% of the total. Afurther meeting was scheduled for July, to be held in Brussels, which EUofficials said could be the final stage before a deal was signed.
