at a glance: 2000-01 · country report syria july 2000 the economist intelligence unit 15 regent...

COUNTRY REPORT

Syria

July 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWThe death of President Hafez al-Assad on June 10th heralds a new era forSyria. The succession has so far been remarkably smooth, with Bashar al-Assadsecuring the presidency following a national referendum in July, but seriousdoubts remain about his medium- to long-term prospects. There is little ex-pectation for the resumption of peace talks until domestic concerns areaddressed, and even then Syria is unlikely to compromise on its demand forthe return of all occupied land.

Key changes from last monthPolitical forecast• President Assad’s death and the succession of his son, Bashar, marks the

start of a new era for Syria. However, until Bashar has secured his positiondomestically, doubts will persist about his medium to long-term prospects.

• Israel’s move to pull out of south Lebanon in May took Syria by surpriseand, in effect, took away an important political card it had to play in termsof the return of the Golan Heights.

Economic policy outlook• The economic policy outlook has changed somewhat, with political

uncertainty now determining the business climate. Limited economicreform—including attempts to encourage foreign investment, reform thebanking system and introduce greater fiscal transparency—has beeneffected, but there remains little evidence of fundamental change.

Economic forecast• Political uncertainty has caused us to lower our growth forecasts to 1.4%

for 2000 and 2.1% for 2001. Inflation will stay subdued. Remarkably, theSyrian pound’s dollar value strengthened in the wake of Hafez al-Assad’sdeath, hinting that it has been artificially held up. Exports are set to in-crease sharply, buoyed principally by strong oil prices. Substantial tradeand current-account surpluses are therefore likely in both 2000 and 2001.

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Syria 1

EIU Country Report July 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2000-017 Political forecast9 Economic policy outlook

10 Economic forecast

14 The political scene

18 Economic policy

22 The domestic economy22 Economic trends23 Oil and gas24 Agriculture25 Financial and other services

26 Foreign trade and payments

List of tables

11 International assumptions summary12 Forecast summary23 Crude oil production24 Syrian Light crude oil prices25 Agricultural production27 Foreign trade

List of figures

6 Exports fob6 Imports cif

14 Gross domestic product14 Current-account balance

Syria 3


Summary

July 2000

The death of President Hafez al-Assad in mid-June heralds a new era for Syria.The succession of his 34-year-old son, Bashar, has so far been handled rem-arkably smoothly. However, serious doubts persist about Bashar’s medium- tolong-term prospects. Peace talks with Israel, which were already frozen, are nowunlikely to resume before 2002. There will be limited economic reform, in-cluding attempts to improve the investment climate, reform the banking systemand introduce greater fiscal transparency. However, political uncertainty willdetermine the business climate and the EIU has consequently lowered itsgrowth forecasts to 1.4% for 2000 and 2.1% for 2001. Inflation will stay sub-dued. Exports are set to increase sharply on the back of strong oil prices andsubstantial current-account surpluses are likely in both years.

Mr Assad’s death ends 30 years of what was in effect unchallenged rule. Seniorfigures among Syria’s elite have moved quickly to effect the smooth transition topower of Bashar al-Assad, who was inaugurated as president following a nat-ional referendum on July 10th. Israel withdrew its troops from south Lebanonbefore its own 7th of July deadline, leaving Syria in a weak bargaining positionvis-à-vis the Golan Heights. The prospects of peace with Israel now appear moredistant, given recent developments.

The new government has begun positively, by approving the 2000 budget inMay, remarkably early by Syrian standards. The expansionary budget emph-asises investment spending and particularly targets unemployment. On paperthe government appears committed to reform, with new laws to improve theinvestment climate and encourage more foreign capital; however, it will takeenormous political will to effect real change and to push through any reformwhich challenges vested interests.

Oil prices have remained high despite OPEC production increases, and foreignfirms have been sought to increase oil and gas production. Hopes are high for abetter harvest in 2000, although the 1998-99 drought is still affecting agri-cultural production. The tourism sector has continued to expand.

The continued high price of oil has fed through to show a much better tradeperformance for 1999 than 1998. Debt-servicing concerns have eased, but ex-ternal debt stock will remain high as a percentage of GDP, with much unlikelyto be repaid. Limited progress has been made with the EU while efforts tocement regional trade relations have intensified.

Editors: Giles Allen; James ReeveEditorial closing date: July 12th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

July 21st 2000

The political scene

Economic policy

The domestic economy

Outlook for 2000-01

Foreign trade andpayments

4 Syria


Political structure

Syrian Arab Republic

Socialist republic

Based on the constitution of 1973

250-member Majlis al-Shaab (People’s Assembly) directly elected for a four-year term

Universal adult suffrage

Last elections: 1998 (legislative) and 1999 (presidential); next election dueby 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 MeroDeputy prime minister & defence minister Mustafa TlasDeputy prime minister for economic affairs Khaled RaadDeputy prime minister for social services Mohammed Naji Itri

Agriculture & agrarian reform Assad MustafaCommunications Ridwan MartiniConstruction Majid Uzzu al-RuhaibaniCulture Maha QannutEconomy & foreign trade Mohammed al-ImadiEducation Mahmoud al-SayyidElectricity Munib Asaad Saim al-DaherFinance Khaled al-MahayniForeign affairs Farouq al-SharaHealth Mohammed Iyad al-ShattiHigher education Hassan RishehHousing & utilities Husam al-SafadiIndustry Ahmed HamuInformation Adnan UmranInterior 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

Mohammed Bashar Kabbaraa

Official name

Form of state

Legal system

Legislature

Electoral system

National elections

Head of state

Executive

Main political parties

Key ministers

Central Bank governor

Syria 5


Economic structure

Annual indicators

1995 1996 1997 1998 1999a

Nominal GDP (at market prices; US$ bn) 13.6 15.9 16.5 17.1 16.5

Nominal GDP (at market prices; S£ bn) 571.0 674.8 731.5 775.8 760.3

Real GDP growth (at constant 1995 market prices; %) 5.8 7.3 2.5 7.8 –1.5

Consumer price inflation (av; %) 8.0 8.3 2.3 –0.5 –0.5

Population (m) 14.2 14.6 15.0 15.4a 15.9

Merchandise exports (fob; US$ m) 3,858 4,178 4,057 3,135 3,464

Merchandise imports (fob; US$ m) 4,001 4,516 3,603 3,307 3,253

Current-account balance (US$ m) 367 81 483 59 624

Reserves excl gold (US$ m) 2,151a 2,100a 2,075a 2,050a 1,900

Total external debt (US$ bn) 21.3 21.4 20.9 22.4 22.7

Debt-service ratio, paid (%) 4.7 3.9 9.3 6.4 9.5

Exchange rate (av; S£:US$)b 42.00 42.50 44.20 45.33 46.00c

July 12th 2000 S£45.06:US$1b

Origins of gross domestic product 1997d % of total Components of gross domestic product 1998d % of total

Agriculture 29.2 Private consumption 68.6

Mining, manufacturing, electricity & water 22.3 Government consumption 11.3

Wholesale & retail trade 19.2 Fixed investment 20.4

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 1998 US$ m Principal imports cif 1998 US$ m

Crude oil 1,342 Manufactured goods 1,225

Textiles 380 Machinery & transport equipment 916

Cotton 366 Food & livestock 617

Fruit & vegetables 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 1998 % of total Main origins of imports 1998 % of total

Germany 13.7 Ukraine 15.6

Turkey 12.7 Germany 6.4

Italy 11.8 Italy 6.2

Lebanon 9.1 Turkey 4.8

France 8.9 France 4.5

a EIU estimates. b “Neighbouring countries” rate. c Actual. d Official estimates.

6 Syria


Quarterly indicators 1998 1999

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (1995=100) 113.9 105.9 107.1 110.8 110.8 104.5 105.3 n/a % change, year on year 0.9 –4.1 0.0 0.0 –2.7 –1.3 –1.6 n/a

Financial indicatorsExchange rate S£:US$ (av) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23 S£:US$ (end-period) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23M1 (end-period; S£ bn) 247.8 247.1 267.6 282.0 276.5 275.6 287.0 n/a % change, year on year 2.3 9.1 13.2 10.5 11.6 11.5 7.2 n/aM2 (end-period; S£ bn) 347.0 345.6 370.4 390.1 387.8 392.9 406.9 n/a % change, year on year 4.1 8.9 12.5 11.1 11.7 13.7 9.8 n/a

Sectoral trendsCrude oil production (m barrels/day) 0.56 0.56 0.55 0.55 0.54 0.54 0.53 0.53 % change, year on year –1.8 0.0 –1.8 –1.8 –3.6 –3.6 –3.6 –3.6

Foreign trade (S£ m)Exports fob 8,410 7,620 7,740 8,660 7,730 9,140 11,040 10,980Imports cif –11,310 –11,710 –9,000 –11,710 –8,310 –10,810 –8,780 –15,100Trade balance –2,900 –4,090 –1,260 –3,050 –580 –1,670 2,260 –4,120

Sources: International Energy Agency, Monthly Oil Market Report; IMF, International Financial Statistics.

Syria 7


Outlook for 2000-01

Political forecast

The death of President Hafez al-Assad in mid-June appears to herald a new erafor Syria. To many observers, the promotion of Bashar al-Assad to president canonly be good news for a country badly in need of political and economic re-invigoration. Bashar and his associates in academic and business circles—forthe most part young and often Western-educated—are aware of the economy’sstructural inadequacies. For the past year or so they have been increasingly out-spoken about the need for a thorough overhaul of the country’s bloated andplodding bureaucracy; for the reinvention of an ossified, state-run bankingsystem; and for the liberalisation of exchange controls and the unification ofSyria’s multiple exchange rates. Adding depth to these verbal attacks, Basharhas been at the forefront of an anti-corruption drive and played a part in theformation of a new and relatively energetic cabinet earlier in the year.

The vital question is whether Bashar will now be able to take this reformfurther; and indeed, whether he will be able to survive as president. He hassome things in his favour. First, the transition from father to son has beenhandled with remarkable aplomb. Bashar has won the support of the formalorgans of power and was elected president in a national referendum held onJuly 10th. Though something of a sham, the referendum is an important mile-stone for Bashar, as it will make it hard for a potential challenger to push hisclaim with any moral authority. Second, most Syrians are desperate to avoiddisorder of any kind. This extends beyond the minority Alawi sect to includelarge swathes of the Sunni majority, who are genuinely grateful for the relativestability that Hafez al-Assad bestowed on the country. For many Syrians, whostill have vivid memories of the chaos of the 1960s, allowing the Assad politicaldynasty to be extended is a price worth paying if a period of disorder andpossible bloodshed can be avoided. Third, Bashar will also be able to rely on thesupport of younger men such as his brother-in-law, Asif Shawqat, and anotherconfidante, Bahjat Suleiman, who now have senior positions within thesecurity services.

However, there are equally serious obstacles for Bashar to overcome. His majorhandicap is his military inexperience. Prior to the death of his elder brother,Bassel, in a car crash in 1994, Bashar was training in London as an ophthalm-ologist, with no evident political ambitions. He was then rushed through basicmilitary training and quickly promoted to head a Republican Guard brigade.Following his father’s death, he has been appointed commander-in-chief of thearmed forces (a post his father also held). However, this has failed to convincethe old guard of military commanders, dominated by the minority Alawi sect,who are at the core of the Baathist regime. Many of these men have seen activeservice against Israel and are scornful of Bashar’s credentials. The most formid-able dissenters were forced to take early retirement as Hafez al-Assad attemptedto smooth the path for his son’s succession. However, with Assad senior gone,these men will certainly attempt to reassert their influence, either by moulding

Domestic politics

8 Syria


Bashar’s behaviour to suit their interests, or by removing him frompower altogether.

Bashar’s political inexperience will also count against him. Prior to the adventof Hafez al-Assad’s “correctionist” rule, Syria’s post-colonial experience wasdefined by short-lived and extremely unstable socialist and Arab Nationalistgovernments. Hafez al-Assad’s success lay in jettisoning ideology in favour ofclan- and sect-based networks that distributed jobs and other favours in returnfor political loyalty. These networks were located initially within the airforce—his original powerbase—but have been extended to inform the behaviour of theentire military, party and civil service. Bashar’s emphasis on liberalisation andderegulation is clearly at odds with this system, but any attempt to dismantle itwill provoke fierce resistance.

Ultimately, Bashar’s best hope of surviving may be as a compromise figure. TheAlawite military commanders are a fractious group. Each may ultimately preferBashar as president, as a rival’s accession could presage a comprehensive purgeof the other’s powerbase. However, securing the support of these “strongmen”will entail compromise in all senses. Bashar and his associates may be allowedto tinker with some aspects of Syria’s business environment—for example, byfurther easing exchange controls and encouraging foreign investment in somesectors of the economy—but initiatives that threaten the sinecures of the oldguard will not be tolerated. In addition, any foreign investment that is attractedwill invariably be channelled through the agencies that the old guard and theirsons have spent years developing.

Nor will compromise with Israel be encouraged. Suspicion of the Jewish stateruns deep within the military and much of the population, and in any case,Bashar has shown no indication that he is willing to back-track on the terri-torial “red lines” that his father laid down during the abortive negotiationsbetween the two countries. Even if Israel were to offer the full return of theGolan Heights, the attendant conditions would probably prove to be un-acceptable for a young president with uncertain domestic legitimacy. For in-stance, Israel is keen to place limits on the size and movement of the Syrianarmed forces in the event of any peace deal. Such a proposal would face strongresistance from Syria’s military commanders. For these and other reasons, theEIU does not now expect a peace agreement to be signed between Israel andSyria before 2002 at the earliest.

Lebanon will present a more pressing challenge for Syria’s young president.With Israel departed from southern Lebanon, many Lebanese Christians—emboldened by the death of Hafez al-Assad—are pressing for a withdrawal ofSyrian forces from their country. These demands are likely to increase as theLebanese parliamentary election (due in August) approaches. To bolster hiscredibility at home, Bashar will have to deal with this dissent decisively whilemaintaining the delicate sectarian balancing act that is the Lebanese politicalsystem. He will also have to formulate an effective policy for south Lebanon.Fostering an unstable Lebanon-Israel border may boost Bashar’s “ArabNationalist” credentials, but it could just as easily provoke Israeli air assaults onBeirut or, possibly, against Syrian military targets within Lebanon.

International relations

Syria 9


Economic policy outlook

In the short term the tentative process of economic reform, initiated in 1999, isexpected to accelerate. A cabinet reshuffle is likely in July. Although the currentcabinet under the prime minister, Mohammed Mustapha Mero, was onlyformed in March, Bashar will be keen to promote his supporters as soon aspossible (the economy and foreign trade minister, Mohammed al-Imadi, couldwell be a casualty of the reshuffle). We also expect the anti-corruption drive tobe accelerated and there is likely to be a number of forced retirements of civilservice personnel (again in July). Their replacements will almost certainly besupporters of Bashar. Further moves to unify the currency, probably around theS£46:US$1 “neighbouring countries” rate are also likely, and there have beenrecent attempts to improve the investment climate. For example, it is now nolonger a crime for Syrians to hold foreign currency, and some efforts have beenmade to simplify Investment Law No. 10.

Nevertheless, given the domestic political uncertainty, economic reform will atbest be a gradual, piecemeal affair, and vulnerable to a sudden reversal shouldBashar be removed from power. The old guard will fight hard to maintain itsprivileges. Its members will insist that they retain access to cheap foreign ex-change (that is, at the “official” rate of S£11.225:US$1) and that Law No. 10does not become so transparent that their special import licences are devalued.A recent initiative to revitalise the banking system by inviting foreign banksinto specially designed “free zones” may be well-intentioned, but the fact thatforeign banks could not simply be invited into the economy as a whole under-lines the degree of vested interest still to be overcome. In addition, the anti-corruption drive can only be taken so far before it begins to impinge on thenetworks of nepotism and kickbacks at the heart of the Baathist system. Athicket of often contradictory and invariably petty laws forces businessmeneither to pay bribes or seek “associations” with senior politicians and bureau-crats (which, in practice, amounts to the same thing). This situation has notsimply evolved, but was carefully designed by Hafez al-Assad’s regime. With norecourse to the rule of law, businessmen are forced to wed themselves to thepolitical elite. This both enriches the elite and ensures that an independenteconomic class cannot develop. For Bashar to challenge this system success-fully, he would have to undertake a fundamental reworking of the politicaleconomy. The new president is unlikely to be in a position to effect this for thenext eighteen months at least.

The opacity of fiscal policy is another facet of this system. There appear to havebeen some efforts made to improve budgetary transparency: the new cabinetreleased the 2000 budget in record time (relatively speaking—the previousbudget was released only a few days before the end of the fiscal year); and thereare reports that fewer exchange rates were used when drawing up spendingplans. However, the budget reveals little else about the government’s fiscalintentions. The budget is nominally “balanced”, but this is a function of gov-ernment borrowing, the amount of which is not disclosed. Detailed spendingplans are not released and large chunks of oil revenue also appear to be missingfrom the accounts. Consequently, analysis and forecasting of fiscal policy is

Policy trends

Fiscal policy

10 Syria


little more than a guessing game. However, it is safe to assume that the govern-ment will have been hugely relieved by the ongoing upturn in oil prices (oilrevenue accounts for over 80% of government income) and the return of therains to Syria’s parched agricultural land. The effects of the 1999 drought weresufficiently severe to prompt some fairly sizeable migration to urban areas,where unemployment is already high. The government probably increasedcurrent spending to relieve pressure on already stretched urban social servicesand find employment for at least some of the new arrivals, although casualempiricism suggests that spending did not increase by as much as previouslyforecast. The outlook for oil prices is generally good and, coupled with Bashar’sneed to win political support, current spending can be expected to accelerateover the next 18 months. However, even such general analysis should be treatedwith great caution, as it is impossible to tell what problems the absence of datamay be obscuring.

The exact method of financing any deficits which occur is also a matter of spec-ulation. The finance minister, Khaled al-Mahayni, has alluded to “borrowing”,but it is not clear if this refers to foreign or local borrowing. The increase in thecountry’s short-term external debt in 1998—a year of low oil prices—suggeststhat the government borrowed its way out of trouble on that occasion. Analternative that has been used in the past is borrowing from the central bankthat has been used in the past, although as inflationary pressures are stillsubdued, it appears that the government resisted this temptation in 1999. TheSyrian public’s lack of confidence in its own banking system renders interest-rate manipulation an ineffective monetary tool. Consequently, money supply islikely to be affected more by interest-rate movements in neighbouring Lebanon.There has been a slight easing of rates in recent months, but the determinationof the Banque du Liban (the Lebanese central bank) to defend the value of theLebanese pound, coupled with the likelihood of further rises in US rates,suggests that these will remain relatively high for the next two years at least.

Economic forecast

Syria’s protectionist policies will prevent it from taking full advantage ofexpected increases in world trade of 7-8% in both 2000 and 2001. Whether theforecast contraction in global food and feedstuff prices in 2000 is a benefit or acost will depend on whether Syria’s agricultural sector is in deficit or surplus (itis still too early to say). By far the most important factor for the Syrian economyis the prognosis for oil prices (oil generates some 55-60% of export revenue).Prices for the benchmark Dated Brent softened following Saudi Arabia’sannouncement in July that it was willing to add 500,000 barrels/day to themarket. There may be some further softening if other OPEC members followsuit; however, we expect average prices to remain robust in 2000, at a minimumof US$24.50/barrel. A slowdown in US demand in 2001 will be only partlyoffset by strong energy demand in East Asia, and average prices should ease toabout US$20/b. These are upward revisions to our previous assumptions.

Monetary policy

International assumptions

Syria 11


International assumptions summary(% unless otherwise indicated)

1998 1999 2000 2001

GDP growthUS 4.3 4.2 5.0 2.9OECD 2.4 2.9 3.7 2.9EU 2.6 2.2 3.1 2.8

Exchange rates (av)US$ effective (1990=100) 119.3 116.4 117.5 112.9¥:US$ 131 114 108 104US$:€a 1.12 1.07 0.97 1.04

Financial indicatorsUS$ 3-month commercial paper rate 5.34 5.18 6.50 6.63¥ 2-month private bill rate 0.72 0.27 0.05 0.64

Commodity pricesOil (Brent; US$/b) 12.8 17.9 24.5 20.0Cotton (US cents/lb) 65.3 53.1 59.0 68.0Food, feedstuffs & beverages

(% change in US$ terms) –13.9 –18.6 –2.8 5.3

Industrial raw materials (% change in US$ terms) –19.6 –4.3 16.8 8.8

a Ecu pre-1999.

Despite the upward revisions to our oil-price assumption, we are far morebearish about Syria’s growth prospects than previously. This is a function of anumber of factors, the most important (and least tangible) being political un-certainty. Bashar’s position is far from secure and a return to a more hardlineregime (involving considerable political upheaval) cannot be ruled out. Even ifhe survives, this uncertainty will dampen private consumption, the principalcomponent of GDP. We still expect private consumption to increase in both2000 and 2001—driven by higher oil revenue and a high population growthrate—but many Syrians will opt to defer spending where they can until thepolitical picture becomes clearer. Moreover, economic prospects in Lebanonthis year, where some 500,000 Syrian workers are employed, are not good, andremittances to Syria are likely to dip, which will again dampen local pur-chasing power.

Investment spending will see some modest growth, as construction of a num-ber of energy projects gathers pace (this will become more apparent in 2001).Crucially, however, we no longer expect a peace deal with Israel to be in placeby next year. Spending on tourism infrastructure will therefore be deferred(lower tourist numbers will also have an impact on local consumption). Weremain relatively confident that the slowdown in oil output can be reversed—if only temporarily—and we expect export volumes to increase this year andaccelerate in 2001. We are also assuming relatively good harvests in both yearsof the forecast period, which will boost exports of cotton, fruit and vegetables.Imports will follow investment and consumption patterns and are likely toshow only modest growth. Taking all this into account, we have revised ourreal growth forecast for this year to 1.4%, rising marginally to 2.1% in 2001. Itshould be noted that this is well below the rate of population growth (aforecast 3.2% in 2000) and real incomes are therefore expected to cont-inue their decline.

Economic growth

12 Syria


Forecast summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP growth 7.8 –1.5 1.4 2.1

Agricultural production growth 22.2 –7.5 4.0 3.0

Gross fixed investment growth 3.3 0.0 2.0 2.0

Consumer price inflation (av) –0.5 –0.5 0.5 1.0

Government balance (% of GDP) –3.4 –4.5 –5.6 –6.7

Exports of goods fob (US$ bn) 3.1 3.5 4.4 4.0

Imports of goods fob (US$ bn) –3.3 –3.3 –3.4 –3.6

Current-account balance (US$ bn) 0.1 0.6 1.1 0.6 % of GDP 0.3 3.8 6.4 3.5

Total foreign debt (year-end; US$ bn) 22.4 22.7 22.9 23.2

Exchange rates (av)S£:US$d 45.33 46.00a 47.00 49.00S£:¥100 34.63 40.38a 43.71 47.00S£:€e 50.77 49.01a 45.55 50.96

a Actual. b EIU estimates. c EIU forecasts. d “Neighbouring countries” rate. e Ecu pre-1999.

We are forecasting relatively robust growth in global non-oil commodity pricesthis year and next, but weak Syrian growth and the considerable slack in thelocal economy will help to keep inflationary pressures in check in both years.Prices contracted in 1998 according to the IMF (although it has revised itsfigure slightly) and we suspect that this trend continued in 1999. We expectinflation to return in 2000, reflecting the hesitant recovery of private con-sumption, but this will only amount to around 0.5%. A further small increaseto 1% is likely in 2001, as prices of industrial raw materials rise further andgrowth accelerates.

The Syrian pound’s black-market rate has remained remarkably stable; indeed,the currency’s dollar value actually strengthened in the wake of Hafez al-Assad’s death, to around S£46-47:US$1, from S£50:US$1. This is counter-in-tuitive and hints at intervention, either by the government or some otherfriendly state. This aside, the black-market rate is now extremely close to the“neighbouring countries” rate of S£46:US$1. We continue to anticipate furtherconvergence, and by the end of the forecast period the two rates should be atparity. However, the official rate of S£11.225:US$1 will be maintained forfavoured importers, as will the S£23:US$1 “customs rate”.

Syria’s export performance in 1999 was slightly worse than we earlier antici-pated, at US$3.46bn, according to the latest IMF data. The Fund also puts im-ports (cif) at US$3.83bn, which suggests that imports (fob) totalled US$3.25bn(in line with our previous estimate), giving a trade surplus of US$210m. Weexpect this positive export performance to continue in 2000, buoyed princi-pally by robust oil earnings, which are forecast at US$2.65bn. Non-oil earningswill show some recovery after last year’s drought and we expect overall exportsto reach US$4.35bn. Oil earnings will dip slightly in 2001, to US$2.25bn, as aslight increase in output is more than offset by the decline in prices. Non-oilearnings are expected to continue their modest recovery, but overall export

Inflation

Exchange rates

External sector

Syria 13


earnings will be down, at around US$4bn. Import patterns are more difficult toanticipate, given historical volatility and the government’s tendency period-ically to squeeze import spending; however, we expect steady increases toUS$3.42bn and US$3.59bn in 2000 and 2001, respectively. This will leave avisible trade surplus of US$934m in 2000 (the highest since 1991), dipping tojust over US$400m in 2001. It should also be noted that there is a large chunkof trade, mainly with Lebanon, but also with Turkey and Iraq, that is unrec-orded. Putting a figure to this trade is futile, but the net outcome is thought tobe strongly in Syria’s favour.

Unreliable data also render analysis of invisibles flows highly problematic.Revisions to official data in late 1999 temporarily transformed a small current-account surplus for 1998 into an alarming deficit of US$600m. The CentralBank of Syria has since reverted to its original estimates, but the changes leaveus with little confidence in the invisibles data. In the absence of other com-prehensive data sources, we have incorporated the bank’s figures into our his-torical series; on this basis, we expect Syria to record current-account surplusesof US$1.06bn (6.4% of GDP) and US$567m (3.5% of GDP) in 2000 and 2001,respectively. Our considerable concerns over the reliability of the historical datashould be noted, as should our suspicion that there are large amounts of in-visible flows that are not registered (we suspect, for example, that remittancesfrom Syrian workers in Lebanon have been underestimated historically). Allprojections that draw on these data must therefore be treated with caution.

Syria’s external debt stock will continue to rise, even though its external finan-cing position is in surplus, driven largely by increases in interest arrears on thecountry’s outstanding debt to the former Soviet Union and East Germany. Syriahas made periodic attempts to secure a write-off of this debt, on the groundsthat the countries concerned no longer exist, but so far without success. Theremay have been some forgiveness had a peace deal with Israel been secured, butthis now appears a remote prospect. Syria will make payments on its non-disputed external debt, most of which is owed to official creditors and is long-or medium-term debt. Following an agreement concluded in 1999, Syria willalso make annual payments of some US$50m to Iran for debt incurred duringthe 1980s, although the bulk of the funds is expected to be reinvested in Syria.Its actual (as opposed to due) repayments will reach around 11% of its exportearnings—relatively low for a poor, developing country. We expect Syria’sexternal debt to total US$23.15bn by end-2001.

External debt

14 Syria


The political scene

In the early hours of Saturday June 10th President Hafez al-Assad died at hisDamascus home of a heart attack, aged 69. He ruled for 30 years, in a countrywhich in the previous 20 years had witnessed more than a dozen militarycoups. Mr Assad maintained his position—and Syria’s stability—through use ofmilitary force and secret police, as well as tactical brilliance, demonstrated bythe way in which he played factions off against each other. The fallout fromthe most fundamental change in Syrian politics for 30 years is still being felt inDamascus, with uncertainty surrounding the future of the regime. Mr Assadhad been grooming his son Bashar since 1994 as his heir. The 34-year-oldpolitical novice was inaugurated as president following a national referendumon July 10th.

Many had predicted an immediate bloodbath in Damascus, and a series ofcompeting coups, after the death of Hafez al-Assad. However, the immediatetransition so far appears remarkably smooth and well-orchestrated. Within anhour of the announcement of the president’s death, parliament amended aclause in the constitution to bring down the minimum age of presidentialcandidates from 40 to 34, enabling Bashar to stand. The following day Basharwas promoted from colonel to lieutenant-general, making him commander-in-chief of the armed forces. In the days leading up to the state funeral, there werethousands of organised demonstrations across Syria in support of Bashar. Whiledemonstrators will not have been formally coerced, the Syrian regime will havemade it in their best interests to attend. Even in the town of Hama, where morethan 10,000 people were killed by the army in 1982 after an Islamic politicaluprising, there was no public dissent. Bashar was soon appointed head of theruling Arab Socialist Baath party, which in its first congress in 15 years electedhim to secretary of the Regional Command (the party’s top policy-makingbody) and nominated him for president. On June 27th his candidacy wasendorsed by the Majlis al-Shaab (People’s Assembly) and a national referendumwas set for July 10th. Despite his autocratic rule, Hafez al-Assad insisted on a

Death of Assad brings anend to 30-year rule

Transition to Basharappears smooth so far

Syria 15


referendum to “re-elect” him every seven years, as required by the constitution.He “won” each vote by more than 99% and Bashar was duly “elected” with asimilar result—97.2%.

Bashar al-Assad

Bashar al-Assad is the third of Hafez al-Assad’s five children. After graduatingfrom the Lycée français in Damascus, he studied medicine at DamascusUniversity, and went on to specialise as an ophthalmologist at the TishreenMilitary Hospital. In 1990 he departed for postgraduate training in London. Hiscareer as an eye doctor was cut short in 1994 by the death of his elder brother,Bassel, in a car accident, when he was brought back by his father to be groomedas the new heir. That he had little apparent interest in politics was evident fromthe fact that he had chosen a job and a location as far removed as possible fromthe Syrian political elite. Reluctant to be back home, Bashar began training atthe military academy in the northern provincial city of Homs, going on a crash-course as a tank commander. Here he began forming links with other officers ofhis generation—like him the sons of the old guard—such as the sons of thedefence minister, General Mustafa Tlas. In 1999 he was made a colonel in theRepublican Guard. On leaving the military he assumed Bassel’s position asnominal head of the technology-orientated Information Society, which becameknown as his venue for addressing major policy issues of the day. He also usedthe position in the Information Society, coupled with his own apparent fascin-ation with technology, to open Syria to the Internet, and foster the creation ofthe country’s first pilot global system for mobile communications (GSM)network. It is unclear how far his knowledge of business and economics ex-tends, although several years ago he began to chair meetings of the EconomicsSociety, also known as the “Tuesday club”, which fosters open debate and frankcriticism of the government. On entering the political fray, he was given theLebanon portfolio by his father, replacing the veteran Sunni politician and vice-president, Abdel-Halim Khaddam. As Hafez al-Assad's health began to fail,Bashar took on a more prominent role, but his political views are as yet largelyunknown. He is 34 years old, speaks fluent Arabic, English and French,and is unmarried.

Even before the death of his father, Bashar was slowly being given more powerand responsibility within Syria. He was said to have had a hand in nominatingmembers of the new government, led by Mohammed Mustapha Mero, theprime minister, in March and was at the forefront of an extensive anti-corruption drive. Much of this was a legitimate attempt to stem the endemiccorruption of a stagnant centralised state system (April 2000, page 19). At thesame time it provided a guise under which Bashar and his father were able toremove from power individuals who may have sought to prevent Bashar’ssuccession. Following the change of government, Mahmoud al-Zubi—who hadbeen prime minister for 13 years—was accused of corruption, and expelled fromthe Baath party. In May, according to authorities, he “shot himself” at his homeafter police came to take him to be questioned by a judge. Inevitable specul-ation surrounded his death, particularly in light of the fact that he may haveimplicated other more senior and influential officials at his trial. It is reportedthat no government officials dared attend his funeral. Mr Zubi had been

Bashar pushes on with“anti-corruption” drive

16 Syria


charged with illegally receiving commissions from a deal costing US$250m tobuy six airbus aircraft for Syria’s national airline. Several of his associates werealso charged, including the former transport minister, Mufid Abdel-Karim, andformer deputy prime ministers, Salim Yasin and Mohammed Haider. Mean-while, General Hikmat Shehabi, the army chief-of-staff for 24 years andformerly one of Hafez al-Assad’s closest allies, was forced into exile for fear hemight oppose Bashar. This move came just one month after another powerfulmilitary man, the head of military intelligence, General Ali Douba, was forcedto retire and replaced with a Bashar-loyalist, General Hassan Khalil.

Senior political, military and security leaders from Hafez al-Assad's inner circleworked quickly after his death to see Bashar move smoothly into power. UnderHafez al-Assad’s guidance and absolute command, Syria was run for 30 years bya tiny number of senior generals from the Alawite community, along with theheads of military intelligence and senior politicians. Thanks to the extensiveefforts of his father, Bashar can now count many of these as close allies: thedefence minister of 28 years, General Mustafa Tlas; the new head of militaryintelligence, General Khalil; his chief-of-staff, Brigadier-General Asif Shawqat(who is married to Bashar’s sister); General Bahjat Suleiman, head of the in-ternal branch of the State Security Service; and Farouq al-Shara, the urbaneforeign minister. However, there are others who are crucial to the continuationof the regime who may not have been consulted, or may have politicalambitions of their own.

Immediately after the death of Hafez al-Assad, his disgraced brother Rifaat saidhe was going to return from exile in Spain to seize power, and called thenomination of Bashar a “farce”. Rifaat led an unsuccessful coup in 1983 againsthis brother, and was subsequently driven into exile. There are reports sugg-esting he may have been attempting to buy the allegiance of several high pro-file military figures in Syria. However, within Damascus there is little supportfor Rifaat, and his threat can be discounted. Nonetheless, there are some withinthe country who do represent a real danger, and could topple Bashar in a coup.Primary among these is the small number of veteran Alawite generals who ineffect run the country, and some of whom Bashar and his father were recentlyworking to remove. Unlike Rifaat, these men will not expose themselves bymaking political statements, but if they choose to act, will do so swiftly whenthey consider the time to be right—either if they fear Bashar is not capable ofdefending their privileges, or if they have their own ambitions for power. Withonly qualified support from this powerful elder generation, Bashar will have tobe careful to protect their vested interests if he is to maintain their loyalty. Asecond possible challenge is from the Muslim Brotherhood (ironically Rifaatwas responsible for subduing this organisation when he massacred more than10,000 people in the northern city of Hama in 1982). However, the MuslimBrotherhood is largely disorganised, and it would take a long time for it to forma serious threat. A third challenge could come from the leaders of the country’sSunni Muslim majority, a group which forms the backbone of the Syrianeconomy. Many of these have long resented being ruled by minorities from theAlawite community. It was of note that in the days after the death of Mr Assad,the most senior Sunni politician in the country, vice-president Abdel-Halim

Potential exists for seriousthreats to Bashar

Political allies areparamount

Syria 17


Khaddam was out of public view, even though he was nominally actingpresident. In addition, state newspapers were ordered not to print his picture.Clearly there was concern that Mr Khaddam could represent a threat.

All of the groups mentioned here could seek to challenge Bashar, and overcoming months they will watch his actions carefully for signs of weakness. Fornow there is unity, but how things progress will depend on how adept Basharis at duplicating his father’s skills in the delicate art of balancing the interestsof the various power centres and ensuring their loyalty.

The death of Mr Assad eclipsed another event which in itself was a consid-erable shock to Syria. On May 24th Israel completed a lightening withdrawal ofits troops from south Lebanon. Israel had occupied parts of Lebanon for22 years, ostensibly to protect its northern border from guerrilla attack. Syriahas dominated the remainder of Lebanon since the mid-1980s, and has at least25,000 troops stationed there. With Syrian support, the Lebanese Islamicguerrilla group Hizbullah fought an increasingly successful military campaignagainst the occupying Israeli troops, leaving Israel with a growing flow ofcasualties. In the late 1990s internal opposition to the occupation grew in Israel,leading consecutive governments to pledge to withdraw Israeli troops in ex-change for guarantees that its northern border would be secure from guerrillaattack. As well as south Lebanon, Israel also controls the disputed Golan Heightsmountain range. Syria wants Israel to end its 33-year occupation of the Golan,which divide the two countries. Hafez al-Assad had long supported Hizbullah’sattacks on Israel as a means of encouraging it to enter peace talks and eventuallyto withdraw from the Golan area. Syria was therefore wrong-footed in Maywhen Israel withdrew only from Lebanon, in effect removing Syria’s trump cardfor bargaining the return of the Golan. It was during the fallout from the Israeliwithdrawal that Mr Assad died, leaving a policy vacuum over south Lebanon.There is now a tense calm in the south of the country, and Lebanese politicalleaders are awaiting direction from Bashar on whether to allow in UN peace-keepers to shore up the fragile peace, or put pressure on Israel once again byallowing instability to return.

Another major Lebanese issue will dominate Bashar's agenda. In the wake ofthe death of Hafez al-Assad, one of the most prominent features about thefuneral for local observers was the presence of hundreds of Lebanese polit-icians. Syria’s control over Lebanon at the political level is absolute, and anypolitician seeking high office requires Syrian support. Mr Assad and his gen-erals routinely intervened in Lebanese domestic politics to arbitrate betweenrival politicians. A parliamentary election is due in Lebanon in August, and priorto his death, many Lebanese politicians had begun making the short journey toDamascus to seek Hafez al-Assad’s blessing to run for parliament. Bashar willnow have to take over this role as Lebanon's ultimate power-broker. Having beencharged with managing policy on Lebanon for several years, he is familiar withmany aspects, but until now, only Hafez al-Assad—a master tactician—seemedto have fully understood the minutiae of rivalries between leaders of thedifferent Lebanese political communities. Many will therefore be watching care-fully as Bashar is called in to arbitrate, for example, among the minority Druze

Israel seizes initiativein Lebanon

Beirut will be a critical testof Bashar’s abilities

18 Syria


community over alleged gerrymandering in Mount Lebanon, or between rivalShia Muslim guerrilla groups in the south.

Leading up to the death of Mr Assad, and in the weeks since, there have beenrepeated calls for peace talks to restart between Syria and Israel. While Syria ispressing for the return of the Golan, Israel wants Syria to accept a peace treatyand agree to a normalisation of relations. Unprecedented talks were held inDecember 1999 in the US, between the Israeli prime minister, Ehud Barak, andMr al-Shara; the talks broke down because neither side seemed prepared tocompromise over its position. Syria is demanding a withdrawal from “everyatom” of the Golan—as Hafez al-Assad put it—but Israel wants to retain con-trol over the north-eastern shore of lake Tiberias, a vital source of its water.

Israel has been demanding early gestures to indicate political normalisation,but Syria is refusing any gestures that deviate from its long-standing position.Meeting the UN secretary-general, Kofi Annan, in late June, Mr Shara con-firmed that there was to be no change in Syria’s line vis-j�vis the GolanHeights. He said that Syria was willing to resume peace talks with Israel at anytime, but would not compromise on its demand for a return of all occupiedland. Given Bashar’s relative political inexperience and the potential threat ofinstability at home, it is unlikely he will be in a position to resume peace talksuntil he has secured his position domestically (See Outlook for 2000-01).

Economic policy

On May 11th parliament approved the state budget for the year. By the stan-dards of industrialised countries, this may seem late, but for Syria it is a markedimprovement on the budget in 1999, which was only passed on December29th of that year. This change is the product of the reformist government ofthe prime minister, Mohammed Mustapha Mero. The “early” approval was allthe more surprising because it came less than a month after the new govern-ment came to office. Business leaders welcomed the speed with which the newbudget was presented, seeing it as a positive sign that the new government is atleast nominally committed to reform.

Syria’s budget figures are highly unreliable and subject to much political mani-pulation to ensure they match the requirements of the regime. There is, forexample, no figure released for military spending. Most Western analystsassume that military spending is extremely large, an assumption vigorouslypromoted by Israel, which is technically at war with Syria and sees such ass-umptions as justification for its own sizeable and growing military budget.However, all observations of the Syrian army within the country, and its forcesin Lebanon, would suggest defence spending is exaggerated both by the regimeand its enemies. Nevertheless, there is no reliable figure available. The budget isalso considered to misrepresent oil earnings, a large percentage of which areassumed by Western analysts to be siphoned off to pay for the unknownmilitary budget. Reported spending on other sectors is also routinely thoughtto be manipulated for various political reasons.

There is little expectationof renewed peace talks

Figures are stillhighly unreliable

2000 budget ispassed “early”

Syria 19


Given these apparently large omissions, the published budget figures cannot beconsidered to reflect real spending and revenue, although it is clear the gov-ernment is making efforts to improve disclosure. The 2000 budget sets ex-penditure (and revenue) at S£275.4bn (US$5.92bn at the neighbouringcountries rate), a reported 7.78% increase over the figure for 1999. Taking intoaccount government revisions regarding budget expenditure in 1999, the 2000budget would actually represent a 24.7% increase over 1999 figures if it were torealise its targets. The finance minister, Khaled al-Mahayni, stated that theproposed budget’s revenue was balanced after taking into account local andforeign loans. However, he did not specify what the deficit would be withoutsuch loans. Most analysts assume the government routinely runs budgetdeficits, but borrowing is disguised within revenue figures so that each year thebudget appears relatively balanced. Syria has a complicated array of officialexchange rates, ranging from S£11.2:US$1 to S£46:US$1, depending on thetransaction. The black-market rate is currently S£48:US$1. This makes plannedgovernment expenditure for 2000 some US$5.92bn using the neighbouringcountries rate, which is slightly higher than the black-market rate figure ofUS$5.73bn. According to one well-placed analyst, as part of reforms to fiscalreporting, the government has moved all government transactions—with theexception of foreign trade and customs—to the rate of S£46:US$1. This shouldmore honestly reflect actual expenditure.

On passing the budget, Mr Mero stated that it was being pushed through“early” so investment funds could be released. With budgets often passed wellinto the year, ministries routinely continue spending according to the previousyear’s plan. The “haste” of the 2000 budget would suggest there was, at least, adesire to make some changes to ministerial expenditure, rather than stick tothe 1999 targets. Of the S£275.4bn allocated to the budget, S£132bn or 47.9%has been specified to finance investment projects. According to Mr Mahayni,this proves the new government’s commitment to economic development. Theremaining S£143.4bn will be allocated to current expenditure, including sub-sidising certain commodities, mainly sugar and rice, and paying instalmentson foreign debts. Accounting for the 7.78% (S£20.1bn) increase in budgetrevenue, Mr Mero stated that the additional funds were being made available tomeet several requirements relating to national defence and the completion ofsome industrial and agricultural projects. The reference to military spending isunusual. The Syrian government is renowned for never mentioning any figuresrelating to defence spending.

Syria suffered its worst drought for 25 years in 1998-99, sharply reducingproduction of some crops. The government depends heavily on income fromthis sector and from hydrocarbons revenue. Official fiscal outturn figures for1998/99 (fiscal year starting July 1st) have now been released. There is of courseno mention of a budget deficit, but the state newspaper, Tishreen, reported inMay that government expenditure was S£45bn—or 17%—below expectationsfor 1999. It stated that government income from agriculture was S£20bn—lessthan half of S£50bn, the typical annual figure according to the government. Inaddition, it said investment in manufacturing declined by 1.85% during theyear, and investment in trade services was 9.7% lower. Given that the govern-

1999 figures highlighteconomic slowdown

Investment spendingis emphasised

Expenditure is reportedlyset to grow

20 Syria


ment relies so heavily on oil-related revenue and that oil revenue surgedfollowing OPEC’s production cuts in March 1999, it is difficult to specify whythere was a cut in spending.

Legislation was passed in the second quarter of 2000 to improve the investmentclimate, amending a 1991 law that was intended to open the country up toforeign capital. Investment Law No. 10 was originally introduced in May 1991to encourage foreign investment by offering tax holidays, and exemption fromsome import restrictions (See Country Profile 2000). The government licensedsome 1,600 projects totalling US$7.5bn under the law, with only some 65% ofthe ventures now complete. Foreign companies which did try to work with thelaw said that they still faced a myriad of regulations. The new amendments,within Decree 7 of 2000, include the following.

• The decree enshrines into law the protection of private assets from nation-alisation and expropriation, stating that private-sector projects “cannot be con-fiscated by the government or any other body”.

• Foreign investors can now repatriate all invested funds in hard currencyout of the country if they choose to abandon a project before it is completed. Ifa project is successful, profits can be transferred out of the country every year,and any increase in invested capital can also be transferred out after five years.Previously, business owners who saw their projects appreciate in value andwanted to sell could only repatriate out of the country as much money as theyhad put into a project.

• Investors will no longer have to convert inward-invested funds at theofficial rate of S£11.225:US$1, but instead will be allowed to convert funds atthe “neighbouring countries rate” of S£46:US$1, which is close to the black-market rate of around S£48:US$1.

• Investors will be allowed to own or rent land on which to build projects.Previously, the government or Syrian nationals had to own at least 25% ofthe land.

• The five-year tax holidays under Law No. 10 are extended to seven years ifa company exports more than 50% of production; or is built in a rural area(defined as areas outside Damascus, Homs and Aleppo); or is “technologicallyadvanced”; or invests “large amounts” of capital; or employs “large numbers”of workers.

• For investors enjoying five-year tax breaks, taxes on companies’ net profitswill be reduced by around 15 percentage points for two subsequent years,following the expiry of the tax holiday period (down from previous figures ofoften above 60%).

Another new law, Decree 6 2000, formally allows Syrian citizens to possessforeign currency. Previously, possession of foreign currency was technicallypunishable by prison terms of up to ten years, but it was rarely enforced.Adding to the confusion, Syrians have been allowed to open US dollar bankaccounts at government banks since 1996. Use of foreign currencies is wide-spread, but while the law remained on the statute books, it was a barrier to

Foreign currencyrules are eased

Attempts are made toencourage foreign

investment

Syria 21


investor confidence. The new decree states that “the possession of foreigncurrency, payment orders in foreign currency and precious metals is no longerpunishable by law, whatever the value involved”. However, changing money atother than the official rates is still illegal, and all transfers in and out of thecountry must be declared. At the same time, moves to liberalise the operationalmethods of the infamous Economics Court have been made. The EconomicsCourt is the institution responsible for dealing with economic crimes and delib-erating on sentences for offenders. It has been suggested that once charged,defendants will be permitted release on bail rather than being lockedup unconditionally.

In further steps, the government has announced that foreign banks will beallowed to open branches in Syria for the first time. Banks with at leastUS$11m in capital will be permitted to operate in the country’s five free eco-nomic zones, to finance commercial and industrial activity. Currently all banksin the country are government-owned and this therefore represents a first moveby the new government towards opening up its financial sector. Commercialbanks operating in the region said they welcomed the move, but thought fewinstitutions would be interested in the free zones alone, with most seekingdirect access to the wider Syrian market. Of the free zones operating in Syria,the one at Damascus airport is thought of as potentially the most lucrative,followed by those at Tartous and Latakia. Deira, based on the Syrian-Jordanianborder, opened in May (See Foreign trade and payments).

The current banking system is in urgent need of reform and was largely dividedup to reward the late president’s allies (influential Baath party members withinsufficient experience and little regard for reform). A case in point was theappointment of Mohammed Bashar Kabbaraa as governor of the Central Bankof Syria. Mr Kabaraa is a former presidential advisor with little or no bankingexperience. Allowing foreign banks to operate within the free zones will ineffect form a separate banking system for Arab and foreign investors, inde-pendent of Syria’s archaic system. Success largely depends on the interestshown by foreign banks, who are thought to be relatively apathetic. However,the move may help to attract foreign investment and serve to augment thepolicy of economic and financial reform initiated by the new president, Basharal-Assad, while mostly managing not to offend and alienate loyalist factions,by stopping short of dismantling the status-quo. In another move aimed atreactivating and developing the economy, a draft law is being prepared to est-ablish a stockmarket, although no date has yet been set. However, this is atopic that has frequently come up in government reform plans, and has yet tobe acted upon. The same scepticism will therefore surround this offering.

On paper, the many changes appear to be a valid attempt to improve theinvestment climate and encourage more foreign capital. Mr Mero’s govern-ment, following the lead of Bashar, certainly seems committed to these changes.Yet there is so far scant evidence that those outside the circle of governmentadvisors are ready to support the moves. Even with the new regulations, thebureaucratic machine moves extremely slowly in Syria. The representative ofone foreign multinational in Damascus said he had been unable to obtain any

Government enticesforeign banks

Banking systemneeds reform

There is little evidenceof real change

22 Syria


information from the ministries of economy or finance about how to take ad-vantage of the new more-liberal regulations, despite repeated calls. “None ofthese changes has even begun to percolate down”, he said. It is likely to take aneconomic revolution to change the established economic practices prevalentin the country.

The domestic economy

Economic trends

The economy and foreign trade minister, Mohammed al-Imadi, said in Junethat economic growth averaged 5.5% in real terms over the past five years,estimating income per head to be US$1,243. According to the London-basednewspaper, Al-Hayat, Mr Imadi also suggested that real growth in 1999 was7.8%. This appears remarkably similar to official figures released by the CentralBureau of Statistics (CBS) for 1998 (1st Quarter 2000, pages 21-23). It seemsclear that these figures are hopelessly optimistic. There is a widespread beliefthat the economy contracted in both 1998 and 1999. The EIU estimates thatthis contraction amounted to 1.5% in 1999 and, although the same canprobably be said of 1998, until further official data is made public we are not ina position to revise the official figure for GDP growth for that year of 7.8%. Oilrevenue has now sharply increased thanks to higher international crude prices,and the government appears to have produced an expansionary budget for2000. On the basis of this, as well as anecdotal evidence from the Damascusbusiness community, and other indicators, we now believe the economy isgrowing, albeit modestly. We therefore predict real GDP growth of 1.4% for2000 and 2.1% for 2001.

According to the Lebanese newspaper Al-Mustaqbal al-Arabi, unemployment inSyria in 1999 was 9.5%. However, this seems a huge underestimation. With anannual population growth rate of 3.2%, among the highest in the world, andan unofficial estimate of some 200,000 people joining the workforce each year,Syria’s unemployment problems are set to become more acute. Many analystssuspect unemployment to be around 20%, with under-employment accountingfor up to another 25%. In its budget for 2000, the government has investedS£80bn in an emergency plan aimed at targeting growing unemployment. Ithas allocated revenue for the creation of 92,322 jobs, but this falls woefullyshort of the number entering the labour market each year. According to Al-Mustaqbal, the unemployment rate amongst the 15-29 age group stands at85.5%. This seems catastrophically high even by Syrian standards and must beviewed with scepticism until more reliable figures are released. Nevertheless,with 56.4% of the population under 19 years of age, the unemploymentproblems are likely to worsen and will require urgent attention.

Despite the death of Hafez al-Assad, the black-market exchange rate hasremained remarkably steady, even strengthening against the US dollar. Havingremained stable at S£50:US$1 for some time, the black-market rate fell back to

GDP figures are at besttheoretical

Scepticism overunemployment figures

The exchange ratestrengthens

Syria 23


S£51:US$1 in January, but has since strengthened and in early July was standingat S£47.40:US$1. Speculation is that this rate has been shored up, either by thegovernment or some other friendly state in order to maintain confidence in theSyrian economy. Support for the rate lends credence to the view that thegovernment is likely to move towards using the neighbouring countries rate(currently standing at S£46:US$1, compared with the official rate of S£11.2:US$1)for all government transactions except foreign trade and payments, althoughno formal announcements have been made (See Economic policy). Syria’sexchange-rate system is confusing, with several different rates relating todifferent transactions (See Outlook for 2000-01).

Oil and gas

Canada’s Tanganyika Oil has signed a deal to take over development of an oiland gas field in the north-east of the country, which has been operated by thestate-owned Syrian Petroleum Company (SPC) since the late 1970s. The moveis significant, because it is the first time a foreign operator has taken over anexisting SPC field, and industry sources say it is likely to lead to several similardeals in the future. Tanganyika, an affiliate of Sweden’s Lundin Oil, has beengranted rights to the Oude Development Block, covering 403 sq km andincluding one producing field. The field, discovered in the late 1970s, has41 drilled wells, of which 17 are active, and produces 2,000 barrels/day of oiland 27m cu ft/day of gas. Tanganyika has said the fields are not being fullyexploited, and expects to improve output. Geologists have predicted the areahas oil reserves of more than 2bn barrels, and gas reserves totalling 700bn cu ft.Tanganyika has exclusive rights to develop the field and share ownership for25 years of any extra oil produced over the current 2,000 b/d. In exchange it iscommitted to invest at least US$5m in the first two years. Bids are also underevaluation from two groups, France’s TotalFinaElf and the British-Dutch majorRoyal Dutch/Shell, for a contract to increase production in another existingfield, Suwaidiyeh, which is close to the Iraqi border in the far north-east andproduces mostly heavy crude. The field has been operated since the early 1960sby SPC. The contract is to increase production from the current 90,000 b/d to150,000 b/d, and upgrade pipeline capacity to match.

Crude oil production(’000 b/d; av)

1999 20001995 1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr

Output 610 588 570 550 540 540 530 530 535 530

Source: International Energy Agency, Monthly Oil Market Report.

Oil prices have stayed strong in the second quarter, with the benchmark BrentBlend remaining above US$29/barrel in early July. Saudi Arabia has signalledthat it might raise its output by a further 500,000 b/d, either unilaterally or aspart of a joint increase, and on top of OPEC’s agreement to raise quotas fromJuly 1st by 708,000 b/d. This should place a modest downward pressure onprices. However, given low global inventories, and the approaching northern

Oil revenue remains high

Foreign firms are sought toincrease production

24 Syria


winter, the EIU forecasts prices will continue to remain high. We expect Brentto average at least US$24.5/b in 2000, slipping to US$20/b in 2001, as prod-uction is stepped up and the market becomes less tight. The high price will en-sure continued strong oil export revenue for Syria—oil accounts for some59% of all export revenue. Given the apparent willingness of SPC to allow moreforeign direct participation in field development, we expect there to be renewedinterest in squeezing more production out of existing Syrian fields throughsuch contracts. At the end of May Syria’s oil output stood at some 520,000 b/d.We believe in the short term this figure will remain unchanged, but in 2001output will increase to some 550,000 b/d as production efficiency improves.

Syrian Light crude oil prices(US$/b; term)

1998 1999 2000 Year Sep Oct Nov Dec Year Jan Feb Mar Apr May Jun

Prices 11.90 22.11 21.44 24.33 25.78 17.42 25.32 27.11 26.69 22.03 26.34 29.00

Sources: Oil Market Intelligence; Bloomberg.

Work has been underway for some time, reportedly in conjunction with Frenchcompanies, to repair an oil pipeline to carry Iraqi crude from the Kirkuk fieldacross Syria to the Mediterranean port of Banias for export. This developmentcomes within the framework of improving economic ties with Iraq (See Foreigntrade and payments). The Iraqi trade minister, Mohammed Mahdi Saleh, saidin May that work would be completed by August, but that the restart of exportsthrough the pipeline could not begin until approval had been received fromthe UN oil-for-food committee, which oversees the sanctions on Iraq imposedsince 1990. Mr Saleh said the pipeline would initially have a capacity of300,000 b/d, which could be increased to 1.2m b/d.

According to the state newspaper, Tishreen, Syria is to supply 3m cu metres/d ofgas to Lebanon from an as yet unspecified date in 2000. The 107-km pipeline,which is expected to cost S£1.17bn, will run from the Syrian city of Homs tonorthern Lebanon. Lebanon, which prefers to ship gas from Syria, owing tolower shipment costs, has requested supply to be doubled to 6m cu metres/d.

Agriculture

Syria’s agricultural sector—which accounts for around one-third of GDP—is stillrecovering from poor rainfall during the 1998-99 winter (November-March),which only amounted to half normal levels. However, hopes are high of a much-improved harvest this year. Rainfall improved in the 1999-2000 winter, with forexample, water rationing ending in Damascus in late March. Water tables arestill low, and there has been unusually sharp criticism of water managementfrom the state-run press. Only 15% of Syria’s landmass typically receives morethan 350 mm of rain a year, making the volume of annual rains a crucial issuefor farmers, especially as regards water-sensitive crops such as wheat and barley.Some crops, such as barley, were badly affected by the 1998-99 drought; prod-uction of barley more than halved, according to figures from the UN Food and

Iraqi transit pipeline is setto re-open

Syria to supply gasto Lebanon

Agricultural production isstill affected by 1998-99

drought

Syria 25


Agriculture Organisation (FAO). According to the FAO, production in 1999 wasdown to 424bn tonnes from 869bn tonnes in 1998. These figures appear to bea radical revision of the latest available official figures (April 2000, page 21).While the underlying numbers may differ, the consensus is still that the 1998-99 drought had a significant effect on all rainfall dependent crops, forcing thegovernment to import more in order to meet demand. It was reported that“record” quantities of barley had to be imported to satisfy demand for animalfeed, although exact figures have still not been made available.

Agricultural production(‘000 tonnes)

1996 1997 1998 1999

Wheat 4,080 3,031 4,112 2,691

Barley 1,653 983 869 424

Cotton linta 264 367 335 305

Sugar beet 974 1,126 1,202 950

Olives 648 403 785 401

Grapes 540 452 455 452

Tomatoes 409 407 555 250

Apples 302 356 362 273

Watermelons 201 272 274 275

a Terms for defining cotton production differ according to source. For the purposes of clarification,cotton lint is the same as ginned cotton.Source: UN Food & Agriculture Organisation (FAO).

One of the few glimmers of hope in recent months has been cotton. Therewere initial fears that only 190,000 ha would be planted, because of concernsover the poor rains, but the final seeded area was reported to be 234,000 ha.Production is now expected to be around 305,000 tonnes, which is only marg-inally down on figures for 1998 of 335,000 tonnes. Cotton has not been asaffected by the lack of rain as other agricultural products. This is largelybecause it is predominantly irrigation-fed. Cotton has accounted for up to 9% ofexports in recent years, with Italy, Taiwan and Turkey representing the largestbuyers. World cotton prices have recovered from a 14-year price slump inDecember 1999, with quotes for July shipments of Syrian cotton at 59.5 cents/lb.Together, the factors would suggest an increase in export revenue from cotton.According to the EIU’s global commodities forecast, consumption is expected torun ahead of production over the forecast period, helping to force stocks down.However, global stocks will still remain relatively high. Nevertheless, we expectworld cotton prices to rise, holding at 59 cents/lb for 2000 and rising to68 cents/lb for 2001.

Financial and other services

Tourism in Syria has been steadily growing since the 1990 Gulf War, with thenumber of visitors at close to 900,000 a year. About 35% of these are believed tobe from the West. Capacity at the luxury end of the market is around 8,000 bedsin the five-star bracket, with occupancy estimated at 80% during the summer

Cotton planting is higherthan expected

Tourism sector continuesto expand

26 Syria


months. Consequently, much attention has focused on contracts for buildingnew hotels. Several developments took place during the second quarter of 2000,including the awarding of a US$19m contract for the construction of a200 room Sheraton in the northern city of Aleppo. Hilton of the UK is alsoreported to be involved in talks regarding a project in Damascus, while workhas started on the foundations for a 350-room US$100m Four Seasons hotel inDamascus, in which the Saudi Arabian entrepreneur, Prince al-Waleed Bin Talal,has a major stake. The potential for instability affecting the tourism industrycannot be overlooked given the current state of affairs in Syria and uncer-tainties in the region as a whole. In 1996 growth in the tourism industry washit by Israel’s 16-day bombardment of neighbouring Lebanon.

A pilot global system for mobile communications (GSM) cellular telephonenetwork was launched in Syria in February, with capacity for 60,000 subscribersin the Damascus and Aleppo areas. However, interest in the network hasproved to be limited, with reports suggesting just 3,500 subscribers have signedup so far. Business leaders say the main obstacle to the success of the network isthe high connection charge—currently some S£60,000 (US$1,300 at the neigh-bouring countries rate)—and the limited geographic coverage. Two consortiaoperate the network, Syriatel, backed by Orascom of Egypt and Siemens ofGermany, and Investcom, backed by Lebanese investors and the Swedish firmEricsson. There is some expectation that the Syrian TelecommunicationsEstablishment—the regulator—will sanction a cut in the connection price toaround S£15,000, paving the way for more customers, and increasing hope ofserious bids for a permanent network after the one-year pilot scheme ends.

Foreign trade and payments

The continued high price of crude oil on international markets has fed throughto Syria’s official full-year trade figures for 1999, leading to an increase in exportearnings, and a reduction in the visible trade deficit. Syria is dependent on oilincome, which in 1999 represented 65% of all export earnings. According to thestate-run newspaper Al-Baath, total exports for 1999 were S£38.88bn,(approximately US$3.46bn at the inflated official rate of S£11.2). Imports for theyear stood at S£43.01bn, leaving a visible trade deficit of S£4.13bn. This com-pares with IMF figures for 1998, showing exports of US$2.9bn, imports ofUS$3.9bn, and a deficit of US$1bn. According to the government figures, thevalue of exports rose by 13.8% over 1998 (a 19.9% increase over 1998 IMFfigures), while the value of imports fell by 1.8%. Of exports for 1999, the largestitem was oil and oil derivatives, accounting for US$2.1bn or 65%, followed byagricultural exports of US$470m, accounting for 14%, and textiles, accountingfor US$408m or 12%. The continued resilience of agricultural export earningscomes despite the ongoing effects of the 1998-99 drought. Of total exportearnings, some US$2.55bn or 77% came from the public sector, reflecting thecontinued dominance of the state in the economy, despite recent governmentefforts to redress the balance. Of imports, the bulk were industrial goods, whichaccounted for US$1.1bn or 29% of import expenditure. A further US$370m, or

Cellular network flounders

Higher crude price feedsthrough to trade figures

27

EIU Country Risk Service July 2000 © The Economist Intelligence Unit Limited 2000

9.7%, was spent on imported textiles, a similar amount on food, US$330m onvehicles and US$320m on pharmaceuticals.

Foreign trade(US$ m)

1998 1999 % change

Exports (fob)a 2,890 3,464 19.9

Imports (cif) –3,895 –3,832 –1.6

Balance –1,005 –368 63

a Exports listed under “international transactions” in IFS. Those listed in the “balance of payments”tend to be some US$200m greater. This discrepancy is due to the use of multiple exchange rates.Source: IMF, International Financial Statistics.

Although official Syrian government figures have to be treated with a greatdeal of caution because of the lack of transparency, the apparent reduction inthe full-year visible trade deficit is in line with EIU projections that the higherinternational oil price would feed through to the external account, leading to asharp rise in full-year export earnings. The marginal fall in imports recorded isbest seen as a lagging indicator, reflecting the tail end of an economic slow-down which the country has suffered for the past three years. The 1.6% fall inimports in 1999 is far less than the 8.2% fall in 1998, and the 20.2% fall in1997. Given our forecast of weak growth, there will be a moderate increase inimports on the back of some growth in consumption and investment. Weexpect imports to reach US$3.4bn in 2000, which is far below the US$4.5bn for1996. Meanwhile, the continued high price of oil on international markets willsupport stronger export earnings, as will better harvests in the agriculturalsector, as it continues to recover from the drought of 1998-99. Exports for 2000are thus expected to reach US$4.35bn, leaving a trade surplus of US$934m.

Increased oil earnings have improved Syria’s ability to repay external debt. Oneof the first acts of Mohammed Mustapha Mero’s government was to reassureJapan over its erratic debt repayments. Japan agreed in 1995 to reschedulesome US$100m of government-guaranteed commercial debt over ten years. Inearly 2000 the Japanese government said that it was concerned about repay-ments on the debt, which it said had become “erratic”, noting that there hadbeen late and missed payments in both 1999 and early 2000. At the time, theJapanese government said that it might be forced to withdraw short-term tradecover. Reliable independent sources say the government agreed in April to payUS$40m in overdue debt servicing, on top of the original US$100m. TheJapanese government has said it is now satisfied that repayments haveresumed, but is still closely watching the situation. It has been holding out theprospect of providing medium- to long-term trade cover, and some US$100min project loans to upgrade the Latakia and Tartous ports, if the debt-arrearsissue is resolved and the political situation stabilises. Syria is also seeking afurther US$61m from the Islamic Development Bank (IDB) in order to financeport upgrades, as part of its strategy to enhance the efficiency and compet-itiveness of its ports in the Mediterranean. As well as upgrading the facilities,

Further trade gainsare expected

Debt-servicing concernswill ease


the plan is to finance the expansion of the port at Tartous, including an in-dustrial free zone, potentially for the assembly of electronic goods.

While the debt-issue with Japan has been resolved for the short term, there isstill no visible effort on the part of the government to resolve aroundUS$10bn-12bn of outstanding debts to Russia and a further US$900m owed toGermany. Syria’s debt position is complex. Much of the US$22bn it owes datesback to the Cold War, mostly stemming from arms transfers. The mainsuccessor countries, Russia and Germany, claim the debt should be paid tothem, but Syria claims that the debt is no longer valid as the predecessor statesthat originally lent the debt no longer exist. Both debt issues have long seemedunlikely to be paid and are anticipated to remain so. Meanwhile, Romania hassigned a consultancy contract to recoup over US$100m of US$160m in overduedebt originating from the same period.

Syrian authorities have finally ratified the framework convention that definesthe conditions under which the EU will release its funding under the MiddleEast Development Agreement (MEDA) programme. Having blocked the con-vention for some time, this releases some €105m of funding for variousprojects covering electricity and telecommunications and within the social andcultural sectors. Following the establishment of an association agreement inMay 1997, Syria has made little progress on implementing economic reformsthat the EU requires in order to join the proposed free-trade area by 2010.Concern has been expressed at how slowly talks have progressed and despitethis ratification the EU has doubts over Syrian commitment.

The new government, formed under Mr Mero in March, has increased effortsto cement regional trade ties. A 6-sq-km Syrian-Jordanian free-trade zone,located on the common border, was opened in May, after spending 25 years atthe planning stage. Goods produced in the zone will be free of customs dutiesif intended for export. In June the Syrian government also signed a deal withQatar to reduce tariffs on imported goods by up to 70% by 2002, and 100% by2003. In May the joint Syrian-Turkish economic committee met for the firsttime in 12 years when they discussed matters of commercial co-operation.Improving relations between Syria and Turkey have been politically driven,since their low point in October 1998 when they came close to conflict overKurdish groups operating from bases in Syria (See Country Profile 2000, page9). A trade fair was also held in Damascus, focusing on boosting trade relations.Talks included discussions over potential gas projects and electricity transferbetween the two countries. Syria is known to suffer from a growing demand forpower, increasing at a rate of 12% per year, although Syrian officials are quickto stress self-sufficiency in this sector. Syria recently began exporting power toLebanon and is completing construction of two power plants in Aleppo and Al-Zara, which are expected to generate 1,600 mw of power between them.

According to the state-owned newspaper Al-Baath, Syria and the UAE havesigned a double taxation avoidance treaty aimed at encouraging mutual invest-ments and trade between the two countries. The UAE’s finance and industryminister, Hamdan bin Rashed al-Maktoum, also stated that the two countries

New government seeks toboost regional trade

Limited progress withthe EU

Debt to Russia andGermany remains unpaid

29

EIU Country Risk Service July 2000 © The Economist Intelligence Unit Limited 2000

were considering the establishment of a joint free-trade area. On a similar note,consultations have now reached an advanced stage on plans to set up a jointfree zone between Syria and Saudi Arabia, lifting all administrative restrictionsand customs fees imposed on commodity exchange between the two countries.

Relations between Syria and Iraq have been improving since being severed in1980 after Syria sided with Iran during the Iran-Iraq war. Since 1998, a processof normalisation has facilitated the reopening of borders (albeit only for bus-inessmen and diplomats) and a process of co-operation on economic andcommercial matters. In 1999 Iraq opened an interests mission and a tradecentre in Damascus as co-operation in the fields of oil and mineral resourcesunder the UN oil-for-food programme augmented (See Oil and gas). Discussionshave also centred around the importing of pharmaceuticals, detergents andfoodstuffs through the port of Tartous. Such developments have started toresult in an increase in the volume of trade between the two countries, withIraq planning to double its imports of Syrian-produced medicines to 1m tonnesin 2000. However, illegal trade activities or smuggling already accounts for a fairproportion of trade between the two countries.

Trade ties with Iraqcontinue to improve

at a glance: 2000-01 · country report syria july 2000 the economist intelligence unit 15 regent...

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