Posted by Joshua on Friday, February 6th, 2009
Is Syria setting a Price Tag on a US Brokered Peace with Israel?
By Ehsani2 and Joshua Landis
Syria Comment, 6 February 2009
No country has escaped the recent global economic catastrophe. The world is now caught in a vicious negative loop in which weakness begets more weakness. The Titans of banking are almost all insolvent. Indeed, the recent global economic data have been breathtaking in their depression-sized declines. Although slow to respond, policy makers have recently thrown everything they have at the problem, but to little avail. Global wealth destruction has been too great and too fast to reverse. Stock markets have swooned by nearly 50%, losing some $30 trillion in wealth. The global drop in house prices is estimated to have caused a further $30 trillion in losses. The world’s pocketbook is $60 trillion lighter than it was a little over a year ago. This number is higher if one adds to it other assets that have also declined in value. The staggeringly large bailout packages are but a drop in the bucket when compared to the problem they are designed to solve. At the beginning of the crisis, the consensus was that only the US would be effected by a problem that many saw as being distinctly American, but as 2008 wore on, it became clear that Europe and the emerging markets were being hit just as severely as the U.S. While the effect on individual countries has varied, no country has escaped unscathed.
What about Syria?
With an embryonic banking sector, low leverage ratios, and no stock market, Syria seemed ideally positioned to escape the brunt of the global rout. But Syria has not been so lucky. Gathering storm clouds are evident in the shifting statements of Syrian Government officials.
I list below a few examples of the worried pronouncements of Syria’s economic leaders during the last month.
Mohamed Al-Hussein (Finance Minister, Jan 26th): “If the Syrian economy slows down while the drought of the past few years continues, then the situation will be difficult” –
Two days later on the 28th, the Government decided to call a special cabinet meeting to “discuss the state of the manufacturing sector and the need to help and modernize it to help it confront the effects of the global economic crisis”
On Feb 3rd, the finance ministry issued a new decree restricting importers of Chinese products to stick directly to the country of origin. This measure was aimed at “protecting the local manufacturers”.
On the same day, the President issued legislative decree No. 6, establishing a commission for the development and promotion of exports.
Amer Loutfi (Minister of the Economy and commerce): “The new challenges that Syria expects to face as a result of falling petroleum revenues, increased competition in global markets, and adherence to lower tariffs demanded by world trade organizations forces us to develop and diversify our exports and to help our domestic manufacturing base.
These statements and decrees indicate growing government anxiety. Syria is headed for difficult economic times. But it is Deputy Prime Minister for the economy, Abdullah Dardari’s interview with Reuters that really captures Syria’s revised economic outlook:
Here are some key quotes:
“The U.S. should lift its economic sanctions on Syria before relations improve between the two sides. The lifting of such sanctions will likely have a positive effect on increased foreign investment in the country”.
“Though the effect of the sanctions has been limited judging by the nearly 30% increase in foreign direct investment, the lifting of sanctions will remove psychological barriers for some foreign investors”.
On the subject of the impact of the global economic crisis on Syria, Mr. Dardari was blunt:
“Syria’s foreign trade makes up 70% of GDP and this means that the country’s dependence on external factors is very large. We are studying the ways this crises is affecting investments into the country. Syria hopes to attract investments in infrastructure projects that include energy, electricity, better roads and airports and it hopes to do this through a partnership between the private and public sectors.”
Mr. Dardari proceeded to specify that “Syria’s infrastructural needs are estimated to cost 50 billion dollars over the next 10 years.
In addition, Syria needs to build some 200,000 residential units within five years; it must construct some 40,000 additional hotel rooms by 2015 in order to accommodate the expected 8 million tourists by that year.
Syria’s politicians are much like those in other countries. Few predicted the extent to which their economy would be hit by the global credit crisis. The Russian ruble is under serious attack by currency traders and has fallen more than ten percent over the last few days. On Wednesday, Kazakhstan was forced to devalue its currency by 25 percent. Scores of countries are experiencing the same economic losses.
While it is tempting to blame the global crisis for the inevitable economic weakness ahead, Syria’s manufacturing sector has been battling on a number of fronts for the past few years. For decades, it enjoyed protection from foreign imports under a program called “national protection or Himaye wataniye“. High tariffs on imports gave local producers a false sense of security as they sold inferior products at high prices.
Recent economic reforms have opened Syria’s doors to a great array of new imports; tariffs between Arab states have been eradicated, forcing Syrian manufacturers to compete with inexpensive imports for the first time. Chinese goods, falsely labeled as “made in the UAE” are now entering Syria with few mark ups. To make matters worse, the Syrian pound has risen in value against the dollar at the same time that the government has slashed subsidies on petroleum and electricity. Local producers are reeling from these many challenges.
Government officials have responded with a few stop gap measures to protect local producers, such as restricting the source countries of products and by threatening to buy the products that carry suspiciously undervalued invoices. Importers commonly avoid paying import duties by low-balling purchase prices on their invoices for non-Arab produced imports. While such measures sound reassuring, they are notoriously hard to implement and police. Syrian import duties are simply too high and importers will continue to find ways to avoid exorbitant duties, whether by outright smuggling or by falsifying invoices. It is very hard to keep inexpensive foreign manufactures from getting into Syria. This is a war that local producers stand little chance of winning.
Syria needs to use the recent drop in commodity prices to devalue its currency and improve its export competitiveness. It also needs to broaden its tax collection base. This can be done by lowering exorbitant import duties that force merchants to cheat and by tightening income tax collection on the country’s wealthy and well off. If Syria’s burdensome system of subsidies is continued, the government will have to find ways to rob Peter in order to pay Paul.
Mr. Dardari’s interview is noteworthy for two reasons. Until recently, the official line of the Syrian government has been that the economic sanctions imposed by the United States were harmless because the country was able to attract the foreign investment it needed despite them. Mr. Dardari now admits that the lifting of the sanctions will “remove a psychological barrier” to new investment. Indeed, Mr. Dardari argues that the lifting of economic sanctions should be an important condition for resuming full dialogue with Washington. One can only conclude that US sanctions have been a serious impediment to foreign investment in Syria and a drag on the economy. Undoubtedly, so long as President Bush was in the White House and calculating how he could hurt Syria, Damascus had to put on a good face and deny that sanctions were working, whether out of stuborn pride or simply to notify Washington that it would not “do a Qadhafi” or knuckle under to threats. Now that Obama is speaking the language peace and reconciliation, Damascus can be more honest.
While it is true that Damascus has incurred little foreign or domestic debt, the fact remains that Syria’s infrastructure must undergo massive improvements on the order of $50 billion over the next ten years in order to grease the wheels of commerce and keep its main industries, such as textiles, cotton spinning, plastics, cement, and canning from being done in by cheap imports. Oil refining, electric plants, modern ports, well built highways, and modern airports are all in short supply. Syria needs major capital outlays in order to prosper. Without proper infrastructure and dependable and inexpensive electricity, no company will chose to open a new factory in Syria. This is the first time that a Syrian official has attempted to place a price tag on the task at hand. Attracting close to $ 5 billion a year will not be an easy, but it is not impossible if Syria’s stars are all alligned.
What are the political implications of Dardari’s statements?
- Is the elimination of sanctions and $50 billion worth of infrastructure improvements a price tag being placed on a potential US brokered peace with Israel? Gulf countries, the World Bank, and other international investors and donors will undoubtedly be asked to contribute to Syria, whereas US taxpayers will have to subsidize the large compensation package that Israel will demand in for Golan.
- Is Dardari floating a balloon in the never ending internal war between socialists and free traders? Is this only the latest chapter in the skirmishes between those officials who seek to protect vested interests in state-run companies, subsidies, worker unions, and Baathist politics and those merchants who want modernization, peace now, and pro-Western policies that place development needs over Syria’s regional role?
- Is Dardari merely warning Syrians that they face tough times ahead?
- Is he trying to shift blame for his inability to push economic growth to 7% by the year 2010, something he promised he would achieve five years ago?