Syria: On the brink of economic collapse

Syria is on track to suffer the longest recession in the region due to continued violence, rising inflation, prolonged drought and dwindling monetary reserves. Published in MEED, 30 August 2012

As the battle continues to rage in the commercial centre of Aleppo, in the suburbs of the capital Damascus and in other towns and cities, it is becoming harder for Syria’s economy to function normally.

Many government departments, including the Central Bank of Syria and the Finance Ministry, have stopped releasing information about what is happening with the economy, but indications of the damage the crisis is wreaking are clear nonetheless.

According to independent reports, tourists have stopped visiting the country, investment has all but dried up and hundreds of thousands of Syrians have fled to neighbouring countries. For those that have stayed behind, the fighting between rebels and the army means it can be difficult for people and goods to move around in safety.

Currency depreciation in Syria

Inflation has also been rising rapidly, particularly since the start of this year. When the uprising began in March 2011, inflation was running at an annual level of about 3 per cent, according to the Central Bureau of Statistics in Damascus. In January, it was 16 per cent and had climbed to 33 per cent by May.

The Syrian pound is also losing value. The official exchange rate has dropped by 40 per cent since the crisis began, but the unofficial black market rate has tumbled by far more.

“The Syrian economy is in a very bad situation,” says the chief economist at one of Lebanon’s largest banks, which also has a presence in Syria. “Inflation is very high. The state has been printing money to pay salaries and this will cause inflation. There has been a huge depreciation in the value of the Syrian pound. It used to be about £Syr40 a dollar, but this has now increased to £Syr100.”

In addition, the Damascus Stock Exchange, which is dominated by banks and insurance firms, continues to languish, with few trades and declining prices. The main market index was trading at 823 points at the start of August, compared with 994 points at the same point in 2011 and 1,489 points in August 2010.

The Washington-based Institute of International Finance (IIF) estimates that Syria’s gross domestic product (GDP) fell 6 per cent in 2011 and will fall a further 14 per cent this year. If the fighting continues all year, the IIF says the contraction could be as much as 20 per cent.

If these figures prove accurate, it will mean that Syria will suffer a longer recession than any other country involved in the Arab Uprisings and, with the exception of Libya, a deeper one too. In Libya’s case, its economic performance was shattered by the collapse of oil sales during the fighting, but the resumption of exports meant it was able to stage a fairly swift recovery. Rebuilding Syria’s more diversified economy will be a longer and more complex process.

“There is definitely a large contraction in the economy,” says Garbis Iradian, deputy director for the Middle East at the IIF. “It is a broad-based crisis. The drop in tourism, direct investment and other sectors, such as manufacturing, are a big drag on the economy. On top of that, the harvest this year was not good. The economic pressure will be very tough.”

Food shortage for Syria

The consequences for many Syrians are bleak, particularly in rural areas. A report released in early August by the Agriculture & Agrarian Reform Ministry in conjunction with two UN agencies, the World Food Programme (WFP) and the Food & Agriculture Organisation, estimated that up to 3 million people will require food, crop and livestock assistance in Syria over the coming year, with half of them needing urgent food assistance in the next three to six months.

Almost half the population lives in rural areas, where farming accounts for about 80 per cent of jobs. A severe drought in recent years had already made life difficult for many farmers, but the situation has got far worse since the uprising began. According to the Joint Rapid Food Security Needs Assessment, the cost of damage to crops, livestock and irrigation infrastructure is running at about £Syr122bn ($1.9bn).

“While the economic implications of these losses are quite grave, the humanitarian implications are far more pressing,” Muhannad Hadi, country director for the WFP in Syria, said when the assessment was released. “The effects of these major losses are first and most viciously felt by the poorest in the country.”

As well as the domestic pressures, the economy is suffering from international sanctions that have been imposed and gradually tightened by the EU, the US, the Arab League, Turkey and others. The EU and US sanctions include asset freezes on leading figures in the regime, as well as arms and oil embargoes. Arab League and Turkish sanctions target government assets and impose restrictions on trade and financial transactions.

As a result, international investment and tourism have collapsed. The IIF estimates that Syria’s foreign exchange earnings from exports, tourism, foreign direct investment and remittances fell from $21bn in 2010 to $16bn in 2011. The drop in tourism is particularly stark. Damascus earned $6.1bn from tourism in 2010, but this year the IIF forecasts that it will make just $200m. As a percentage of GDP, tourism receipts have fallen from 10.8 per cent to less than 1 per cent over that period.

Increasing number of Syrian refugees

Those that are able to are fleeing the country into Turkey, Jordan, Lebanon or Iraq. Once they cross the border, many have nowhere to go but refugee camps. The office of the UN High Commissioner for Refugees (UNHCR) says it is currently offering assistance to 112,000 people in countries neighbouring Syria, but it thinks the actual number of refugees is probably higher.

Wealthier Syrians are checking into hotels. According to Lebanese media reports, for example, there has been a surge in demand for hotel rooms from Syrians, with hotel occupancy rates now at 70-80 per cent as a result. This has helped to make up for the shortfall in tourists coming to Lebanon from the region.

Whether they can leave the country or not, many Syrians have been moving their assets out. Billions have been withdrawn from the Syrian banking system and transferred abroad. The IIF estimates that transfers to Iran, Russia, Turkey and elsewhere have amounted to a net loss of $10.5bn for the Syrian banking system over the course of 2011 and 2012.

The parlous state of the economy means the government could start running out of money. Official reserves plummeted during the crisis and are now all but used up. The IIF says the country will only have enough reserves to cover less than a month’s imports by the end of 2012.

Tax revenues have been falling due to the fast-eroding economy, but the government’s spending levels have had to remain high, not least on army wages and supplies. As a result, there is a widening fiscal deficit that is expected to reach 14 per cent of GDP this year. As it is no longer possible to access foreign markets for loans, the government is thought to be borrowing heavily from local banks to cover the shortfall, although there are no official figures for this and it is not clear what the interest rate might be.

Government ministers have continued to claim that the economy is functioning normally. Economy and Foreign Trade Minister Mohammad Mihbek said at a meeting with the Aleppo Chamber of Commerce on 13 July that any rises in prices were simply due to greed or corruption rather than anything else. A few days later, Adib Mayaleh, governor of the central bank, described international news coverage about the falling value of the Syrian pound as “exaggerated and untrue” and designed to provoke panic among the country’s citizens.

Nonetheless, reports by the official government news agency Sana often reveal some telling problems. A report on the cabinet meeting of 7 August included news that Electricity Minister Imad Khamis had briefed his colleagues on the difficulties in transporting fuel to power plants.

Economic collapse

The dangers that all these economic problems pose to the regime are clear enough and have long been recognised by President Bashar al-Assad. In one of the few speeches he has made since the uprising started, he told an audience at Damascus University on 21 June last year “the most dangerous thing we will face is the weakness or the collapse of the Syrian economy”.

In fact, it seems more likely that it will be a military rather than an economic defeat that finally pushes Al-Assad out of power, but economic factors may well play a critical role in fuelling his opposition. Beyond that, the longer the war rages inside the country, the longer and harder the recovery will be.

“Before the crisis, the fundamentals in the economy were strong,” says Iradian. “Syria never had high debts – government debt in 2010 was less than 30 per cent – and it had large official reserves. Overall, it is a diversified economy, it doesn’t rely on oil like some other countries, and entrepreneurship is very strong.

“The recovery depends on what kind of transition there is. If Damascus gradually moves to democracy and there is a unity government with no fighting, it could take the country several years to recover, but I’m not that optimistic about the near term. It will be hard to recover the lost output.”