Syria's looming economic disaster
By Artem Perminov
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KRASNODAR, Russia - While government forces are still fighting the opposition in Syria, the economic and financial state of Bashar al-Assad's regime is continuing to deteriorate. The devastating civil war has put the country's economy at the edge of collapse.
The closure of factories, disrupted communications, rising unemployment, a growing shadow economy, prices increases, and a serious shortage of many vital goods and services have
accompanied the upheaval in Syria. Since government resources are being depleted, the economic implications of the Syrian crisis work against Assad's regime in the long run.
The financial difficulties for the Syrian authorities began soon after the outbreak of the civil war in 2011. Since the government is not able to collect taxes in the necessary amount due to the current turmoil and because of its elevated military and security expenditures, a budget deficit has been increasing steadily during the conflict, estimated to be around 10% of the GDP.
Though the current Syrian public debt is about 45% GDP (in many developed countries this figure exceeds 100%), it will be difficult for Assad's government to pay it off. Due to the unraveled infrastructure and industry, it is unlikely the Syrian authorities will find enough income in the mid-term. New loans are the only way in this situation to service the debt.
As the international community has imposed economic sanctions against Assad's regime, Syria may address requests for new loans to its political allies - Russia, Iran, and, possibly, China. Russia and China will not finance the Syrian government infinitely, as there is no clear prospect for the outcome of the crisis. Additionally, pressure by the United States and European Union makes it difficult for other powers to help Assad.
His staunchest ally, Iran, can provide just limited aid as it faces the same problems - economic sanctions undermining its economy. However, Tehran can afford defiance toward the international community since its oil industry allows the government to balance its budget, while Syria cannot rely on oil exports. Thus, Syria's public debt is likely to become an ever heavier burden for Assad's regime.
Another trouble for the Syrian economy is the fall in the exchange rate of the Syrian pound. The exchange rate is determined by country's growth rate and by the amount of goods and services it can sell abroad. Since the civil war has seriously damaged infrastructure and industry, and the Syrian gross domestic product fell by about 30% in 2012. According to the CIA World Factbook 2013, Syrian exports have been reduced by more than 50% due to the destruction and economic sanctions.
Before the crisis, about 50% of Syrian goods and services were directed to the Gulf States. Now, when almost all Arab states have imposed economic sanctions against Assad's regime, Syria is unable to export to them.
These developments entailed major capital outflows from Syria. Lack of foreign currency in the local market has caused an increase in the cost of buying US dollars or other foreign exchange rate, and, therefore, a drop in the value of the Syrian pound. In fear of a further exchange rate fall, Syrian nationals and foreigners have started to sell their stocks of the local currency and buy US dollars; that has hastened the depreciation of the pound. Thus, since the outbreak of the war in 2011, it has fallen from about 47 pounds to the US dollar to around 230 pounds against the US dollar.
To prevent further depreciation of the pound, the Syrian Central Bank began selling its foreign currency reserves. Additionally, the government has restricted dollar sales, toughened legislation against the illegal exchange market, and launched a media campaign to convince the population that the exchange rate drop is the result of external conspiracies and that the national currency is stable, amongst other measures.
Economic history suggests that measures by both the central bank and the government are useless in the long run. Reserves sales have a temporary effect and do not prevent the exchange rate falling when depleted. Before the crisis, Syria had about US$17 billion of foreign currency reserves; these are now estimated to be around $4 billion.
Government steps do not comply with market economy rules. As the population seeks to minimize its losses, it will not respond to the authorities' statements. Tough laws against black currency markets will not disrupt shadow activities because the law enforcement will not be able to conduct total control. Thus, time is not on Assad's side. The longer the crisis lasts, the harder it will be for the regime to find resources to conduct a military campaign.
Moreover, even if government forces succeed in defeating the opposition, tough economic hardship is likely to plague Syria in the future, as international sanctions will not be abandoned, the problem of a debt burden and the depreciated pound will not be solved by themselves, and capital stocks and labor force losses will not recover rapidly.
In addition, a bright future does not await Syria if the opposition comes to power. Since the country's infrastructure and industry have entirely unraveled, the new government will need funds to start an economic recovery. These funds may be gained only from external sources, with few alternatives.
First are the Gulf States. Most likely, they will provide aid if there is an Islamist government loyal to them. The Egyptian experience suggests that Islamists are not effective economic managers, and thus their potential takeover of power in Syria is unlikely to get it out of economic troubles despite financial assistance from the Gulf monarchies.
The second alternative is the West and international institutions, such as the World Bank and the International Monetary Fund. Despite this alternative seeming to be more preferable, since these organizations provide economic consulting in addition to financial aid, it does not guarantee that Syria's economic problems can be overcome, as the final decision-making on the economy is the prerogative of the country's political leadership.
Thus, the only way for Syria to cope with the hard economic implications of the civil war is for the government to be able to conduct an effective economic policy subject to market-economy rules. However, neither government nor opposition has any economic plan for post-war Syria, not to mention any specific steps they will take or any economic professionals to plan and carry out the necessary steps.
Artem Perminov is an independent analyst on Middle East affairs and terrorism based in Krasnodar, Russia. He consults Russian authorities about issues related to the field.
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