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Syria - Economy

Syria's most acute economic problems must eventually be addressed to maintain the state's long-term viability and sustain regime stability in the short-term, but this did no happen. Starting in March 2011, Syria witnessed an extremely violent civil war. The 2011 uprising evolved into a crippling and violent civil war.

Syria's burgeoning population suffered from an estimated 25-30% unemployment rate, with some 35% of the workforce employed by the public sector. Inflation was rampant in Syria; even upper-middle class Syrians are having trouble putting food on the table and paying rising utility and fuel bills. The true rate of inflation, estimated at over 30 percent in 2008, was never acknowledged by the Syrian government. According to the Syrian Deputy Prime Minister for Economic Affairs Abdallah al-Dardari, however, in 2009 the average Syrian was spending 42 percent of his income on food.

Syria is historically rich. It was the center of some of the most ancient civilizations on earth. Thirty four civilizations have been recorded in Syria, beginning with the Halaf period (4500-2500 B. C.) and ending with the recent Syrian Arab Republic. Damascus, the capital, is the oldest continuously inhabited city in the world (from 10,000 to 8000 BC). People from most parts of the world moved to settle in this land because of its fertility and perfect geographical location between three continents. Today, Syria is still home to diverse ethnic and religious groups. However, throughout history, several natural disasters, such as drought and earthquakes, and human-made emergencies, mainly regional conflicts, have struck the country.

Syria has been subject to US economic sanctions since 2004 under the Syria Accountability Act, which prohibits or restricts the export and re-export of most US products to Syria. In response to regime brutality against peaceful protesters beginning in 2011, the U.S. Government imposed additional sanctions beginning in April 2011, designating those complicit in human rights abuses or supporting the Asad regime. Sanctions in August 2008 prohibited the export of U.S. services to Syrian and banned U.S. persons from involvement in the Syrian petroleum sector, including a prohibition on importing Syrian petroleum products. The European Union, Japan, Canada, and other countries have also implemented a range of bilateral sanctions on the Syrian government.

Syrian Arab Airlines (Syrian Air) has proven to be the regime asset most vulnerable to unilateral U.S. sanctions, and where the effect of sanctions is most obvious to the Syrian public. Due to its inability to obtain spare parts or purchase new aircraft, by 2008 Syrian Air's operational fleet had been attrited from 15 known aircraft (6-Airbus A320, 6-Boeing 727, 2-Boeing 747, 1-Tupolev 134) to just six (5-Airbus A320 and one Boeing 747, scheduled to require a heavy D maintenance overhaul in October 2008). In September 2008 Syrian Air executives reported that the airline's management intended to sell its two Boeing 747s and six Boeing 727s rather than attempt to overhaul them. Finally, in February 2009 export licenses were issued by the Department of Commerce to Boeing to overhaul Syrian Air's two aging 747s.

Russia had repeatedly offered to sell Syrian Air new aircraft at a substantial discount, but Director General Hazem al-Khadra of Syria's Civil Aviation Authority told local reporters that the Russian planes do not have the U.S.-made Airborne Collision Avoidance System (ACAS), which he asserted is an International Civil Aviation Organization (ICAO) requirement for all commercial aircraft. The semi-independent daily newspaper al-Watan reported 25 August 2009 that Syrian Air had completed the legal and technical negotiations for the lease, with the option to buy, of two TU 204 aircraft with advanced navigation equipment to comply with EU requirements, to be delivered in early May 2010. Due to Syrian Air's inability to procure new Airbus or Boeing aircraft as a result of U.S. sanctions, the airline was looking to Moscow and Tupolev aircraft as an alternate source of supply.

Syria is a middle-income developing country with a diversified economy based on agriculture, industry, and energy. During the 1960s, citing its state socialist ideology, the government nationalized most major enterprises and adopted economic policies designed to address regional and class disparities. This legacy of state intervention and price, trade, and foreign exchange controls still hampers economic growth, although the government has begun to revisit many of these policies, especially vis--vis the financial sector and the country's trade regime. Despite a number of significant reforms and ambitious development projects of the early 1990s, as well as more modest reform efforts currently underway, Syria's economy still is slowed by large numbers of poorly performing public sector firms, low investment levels, and relatively low industrial and agricultural productivity.

Although Christian Arabs, Armenians, and some Shia are represented among Syria's business class, the vast majority are Sunni. Almost all business elites are fluent in English and have children or other close family members living in the U.S., Canada, U.K., or France. Among the Sunni middle and upper classes, their affinity for the West is, perhaps counterintuitively, matched by a growing outward religiosity. The Sunni elites' angry reaction to widespread rumors of Shia proselytizing among Syria's poor is believed to have influenced President Asad's late 2007 decision to request a replacement for Iranian Ambassador Mohammad Hassan Akhtari from Tehran. The Syrian business community generally views Iranian economic activity in Syria with skepticism, wary of the ruling Alawite relationship with Shia Iran.

Despite 40 years of a centralized Ba'athist economy, the Syrian private sector is remarkably vibrant and sophisticated. In foreign trade and investment, Syrians are seeking the latest technology, best business practices, and trustworthy partners. Many Syrian traders are experienced international businessmen, though government bureaucrats, who are somewhat less experienced with global business practices, often prove among the toughest negotiators. Many businessmen are multilingual (Arabic/English/French; occasional Russian/German), while most government officials speak only Arabic.

Negotiations for a sale, whether with a government agency or a private individual, are often exasperating for Western companies. The negotiations are usually protracted in the extreme and it is therefore not advisable for companies to make their best offer first. Government agencies follow a practice called "price-breaking." After tender envelopes are opened, bidders are invited to participate in a meeting in which the purchasing agency requests that each bidder revise his price. Such meetings can become an open auction, and sometimes the company with the lowest original bid does not win the contract. It is fairly common that bidders are able, through agents and other contacts, to gain access to proprietary information about competing bids allowing them to underbid their competitors.

Despite the mitigation of the severe drought that plagued the region in the late 1990s and the recovery of energy export revenues, Syria's economy faced serious challenges. With almost 60% of its population under the age of 20, and a growth rate (3.5%) among the world's highest, unemployment higher than the current estimated range of 25%-30% is a real possibility unless sustained and strong economic growth takes off. Oil production has leveled off, and financial aid flows from the Gulf have slowed.

Taken as a whole, Syrian economic reforms were initially incremental and gradual, with privatization not even on the horizon. The government, however, has begun to address structural deficiencies in the economy such as the lack of a modern financial sector through changes to the legal and regulatory environment. In 2001, Syria legalized private banking; private financial institutions may emerge in 2002, as may a nascent stock market. Beyond the financial sector, the Syrian Government has enacted major changes to rental laws, and is reportedly considering similar changes to the commercial code and to other laws, which impact property rights.

Commerce has always been important to the Syrian economy, which benefited from the country's location along major east-west trade routes. Syrian cities boast both traditional industries such as weaving and dried-fruit packing and modern heavy industry. Given the policies adopted from the 1960s through the late 1980s, Syria failed to join an increasingly interconnected global economy. In late 2001, however, Syria submitted a request to the World Trade Organization to begin the accession process. Syria had been an original contracting party of the former General Agreement on Tariffs and Trade but withdrew in 1951 because of Israel's joining. Major elements of current Syrian trade rules would have to change in order to be consistent with the WTO. Syria also continues to discuss a possible Association Agreement with the European Union that would entail significant trade liberalization.

The bulk of Syrian imports have been raw materials essential for industry, agriculture, equipment, and machinery. Major exports include crude oil, refined products, raw cotton, clothing, fruits, and grains. Earnings from oil exports are one of the government's most important sources of foreign exchange.

Of Syria's 72,000 square miles, roughly one-third is arable, with 80% of cultivated areas dependent on rainfall for water. In recent years, the agriculture sector has recovered from years of government inattentiveness and drought. Most farms are privately owned, but important elements of marketing and transportation are controlled by the government.

The government has redirected its economic development priorities from industrial expansion into the agricultural sectors in order to achieve food self-sufficiency, enhance export earnings, and stem rural migration. Thanks to sustained capital investment, infrastructure development, subsidies of inputs, and price supports, Syria has gone from a net importer of many agricultural products to an exporter of cotton, fruits, vegetables, and other foodstuffs. One of the prime reasons for this turnaround has been the government's investment in huge irrigation systems in northern and northeastern Syria, part of a plan to increase irrigated farmland by 38% over the next decade.

Syria has produced heavy-grade oil from fields located in the northeast since the late 1960s. In the early 1980s, a light-grade, low-sulphur oil was discovered near Dayr az Zawr in eastern Syria. This discovery relieved Syria of the need to import light oil to mix with domestic heavy crude in refineries. Although its oil reserves are small compared to those of many other Arab states, Syria's petroleum industry accounts for a majority of the country's export income. The government has successfully begun to work with international energy companies to develop Syria's promising natural gas reserves, both for domestic use and export. U.S. energy firm, Conoco, completed a large natural gas gathering and production facility for Syria in late 2000.

The oil sector has been a pillar of the Syrian economy since the mid-1980,s. By 2005 it accounted for approximately 20 percent of GDP, 65-70 percent of exports, and 50 percent of government revenue. Oil production reached its peak in 1996, producing over 600,000 bpd, and has been in steady decline since, to approximately 379,000 bpd in 2008. At the same time, Syria is facing rising consumption of gas and electricity, seven and nine percent respectively, which further decreases the amount of oil available for export. If these trends held, Syria was expected to switch from being a net exporter to become a net importer of oil before 2010. Syria became a net importer of petroleum products in 2009, and oil sanctions temporarily increased the ratio of imports to exports.

Local economists and proponents of economic reform highlight this shift as being the most compelling economic event facing the country. They argued that without comprehensive action to open up and diversify the economy, the country will soon face a significant economic crisis. In fact, higher crude oil prices countered declining oil production and led to higher budgetary and export receipts before international sanctions on Syrian oil cut revenue to the Syrian Government by $2 billion, according to the Syrian Minister of Petroleum in January 2012.

Ad hoc economic liberalization continued to provide hope to Syria's private sector. In 1990, the government established an official parallel exchange rate (neighboring country rate, or NCR) to provide incentives for remittances and exports through official channels. This action improved the supply of basic commodities and contained inflation by removing risk premiums on smuggled commodities.

Over time, the government increased the number of transactions to which the more favorable neighboring country exchange rate applies. The government also introduced a quasi-rate for noncommercial transactions in 2001 broadly in line with prevailing black market rates. Nonetheless, some government and certain public sector transactions are still conducted at the official rate of 11.2 Syrian pounds to the U.S. dollar or at other rates, and exchange-rate unification remains an elusive goal.

Given the poor development of its own capital markets and Syria's lack of access to international money and capital markets, monetary policy remains captive to the need to cover the fiscal deficit. Interest rates are fixed by law, and most rates have not changed in the last 20 years. Some basic commodities continue to be heavily subsidized, and social services are provided for nominal charges.

Syria made progress in easing its foreign debt burden through bilateral rescheduling deals with its key creditors in Europe, most importantly Russia, Germany, and France. Syria also settled its debt with Iran and the World Bank. In December 2004, Syria and Poland reached an agreement by which Syria would pay $27 million out of the total $261.7 million debt. In January 2005, Russia forgave 73% of Syria's $14.5 billion long-outstanding debt and in June 2008, Russias parliament ratified the agreement. In 2007, Syria and Romania reached an agreement for Syria to pay 35% of the $118.1 million debt. In May 2008, Syria settled all the debt it owed to the Czech Republic and Slovakia.

Syria withdrew from the General Agreement on Tariffs and Trade (GATT) in 1951 because of Israel's accession. It is not a member of the World Trade Organization (WTO), although it submitted a request to begin the accession process in 2001 and again in 2004. Syria had developed regional free trade agreements, which have been largely suspended as trading partners seek to express disapproval of the Syrian regimes violence against protesters. The Greater Arab Free Trade Agreement (GAFTA) came into effect in January 2005, and customs duties were eliminated between Syria and all other members of GAFTA. Syria's free trade agreement with Turkey came into force in January 2007 but has been compromised by retaliatory steps by both parties, given Turkeys reaction to the Asad regimes violent response to the demonstrations.

By 2009 Asad had presided over significant changes in economic policy that were primarily driven by Syria's diminishing oil reserves -- long the regime's primary source of revenue -- and its decreasing influence over the Lebanese economy. The most significant reforms included liberalizing Syria's trade regime to authorize the direct import of most consumer goods, re-introducing private banking into the financial sector, and cutting government subsidies on refined petroleum products.

The reform program exposed political fissures between the generally pro-Western, pro-reform private sector and the Ba'ath Party, who feared the reforms threaten the system of patronage and corruption that has sustained their dominant socio-economic position and might lead to irreversible political freedoms that could bring down the regime. While Bashar managed to remain above the fray of day-to-day economic debates, his supporters said he is simply pursuing the "China model" of economic development while maintaining firm political control.



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