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Commentary

Syria’s economy is nearing the brink

A fruit vendor waits for customers in Damascus, Syria, Sunday, Dec. 11, 2011. (AP Photo/Muzaffar Salman)

In recent weeks the crisis in Syria has risen to a new pitch. Arab League sanctions have left the country isolated and President Bashar Assad is now facing internal and external challenges to his rule.

This turn of events has led some to speculate that the regime is close to collapse. This prediction is probably premature and the event that will conclusively shift the balance of power against Assad has yet to happen. However, what is clear is that fractures have emerged in Syria’s economy since the uprising began last March, and they have already begun to pose serious problems that will be hard to reverse.

Syria’s economy is contracting rapidly. It is estimated that since the protests began, the country’s gross domestic product has shrunk by as much as 20 percent. Revenues from oil and tourism, two important sources of foreign income, have almost disappeared. Recent Arab League sanctions have closed the trading route between Turkey and the rest of the region, cutting customs revenues.

The Syrian Central Bank has not reported its figures since May, which suggests there is a problem. In March, the government had around $18 billion in foreign currency reserves. It is believed that as much as $5 billion of this has been spent since then. The Arab League’s blacklisting of the Central Bank will complicate its operations and impede the transaction of aid money into the country.

As the Central Bank’s currency reserves are depleted, it will become trickier for the government to support the Syrian pound at the official rate of 47 pounds to $1. On the black market the value of the pound against the U.S. dollar has fallen to 62 pounds to $1, which means that Syrians have lost some 25 percent of their spending power. Imported goods have suddenly become very expensive and life in Syria is becoming difficult for ordinary people. There are shortages of baby milk and heating oil across the country, including in Damascus.

This fall in the value of the pound has led Syrians to offload their currency. This has been complicated by the sanctions and financial pressure imposed on Syria. The United States has put pressure on Lebanese banks, which have served the Syrian market for decades, not to open new accounts for Syrian citizens. The aim, presumably, is to block transactions in and out of the country. However, there are still loopholes. The money-changing kiosks of Beirut have been doing a brisk business with Syrians. Businessmen who are still exporting goods into Syria say that it is still possible to transact in some Gulf currencies, although this method is unlikely to stay open for long.

The Syrian government’s management of the economy since the uprising started is confused and seems to be driven by panic. During the last decade the government had gradually lifted subsidies on basic goods as part of its reform program, to create a stronger free market. Following the start of the uprising, it quickly restored some of these subsidies in a bid to quell the protests. Public workers’ salaries were increased by 30 percent. However, Economy Minister Nidal al-Shaar recently said that the cost of these subsidies was unsustainable.

So what effect will the country’s economic problems have on the political situation? Disruption of daily life due to economic problems may persuade Syrians who have remained neutral that the situation is untenable, forcing them to take to the streets. The salaries of government workers were already meager and are now smaller due to the weakening of the pound. This could add to the mood of revolt.

There have been reports that the military has not been able to pay some of its soldiers due to a lack of funds. If true this is obviously a problem for the regime as the army has largely remained stable, despite the stream of desertions. However, it should be remembered that much of Syria’s military consists of conscripts who are paid very little in the first place. Support for the regime among the military rank and file is not fueled by good pay and conditions, but rather by ideology or a fear of punishment if they are caught deserting.

Where can the Syrian government turn to for financial aid? Its last remaining allies of significance are Russia and Iran. Iran has its own economic problems but presumably would be willing to provide assistance to Syria due to its strategic importance. However, the sanctions on both countries must mean that transacting money into Syria will become increasingly challenging. Russia is a possible source of aid but it appears to be less dedicated to Bashar Assad’s survival.

In the long term, if the Syrian regime endures, the restoration of the country’s economy will be difficult to achieve. It’s likely that for as long as Assad remains president, Syria will continue to face economic sanctions. Confidence has been deeply shaken by the uprising of 2011 and it will be hard to convince foreign investors to return.

It is also unlikely the regime will ever be able to implement reform that can unleash the country’s economic potential. Bureaucracy, corruption and the monopolies of senior figures such as the president’s cousin, Rami Makhlouf, will remain. As long as these problems continue, so will the protests against the Assad regime.

Christian Henderson is director of Dunlin Consultants, a London-based market research and risk advisory consultancy focusing on the greater Middle East region. He wrote this commentary for THE DAILY STAR.

 
A version of this article appeared in the print edition of The Daily Star on December 20, 2011, on page 7.

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