Syria at a Turning Point

1
Syria at a Turning Point

• Trends in the Syrian Economy
• University of Reading
• 23rd February 2005
• Dr Ken Charman

2
Syrian Economy

• Closed Economy
• Under performed for many years
• Dependent on oil reserves for foreign exchange
  and macro-economic stability
• Economy in need of diversification

3
Factors in Syrias Favour

• Geographic position between Europe and Middle
  East
• Transit country for oil and consumer goods
• Strong agricultural base
• Established industrial base in heavy and light
  industry
• Private sector accounts for 60 GDP

4
Issues Facing Syria

• Rapid population growth 2.6 per annum
• 40 population under the age of 14
• Growing Demands on education and health
• 70 population earn less than 120 Euros per month
• Growth rates in employment not sufficient to
  absorb growing labour force

5
Policy Requirements

• To achieve faster growth
• Create employment
• Maintain stability (inflation, exchange rates)

6
Oil Sector Dominates

• Oil producing country but not a major producer
• 2.5 billion barrels of exploitable oil reserves
  (10 years supply)
• 2.5 billion cubic metres gas (50 years supply)
• Up till 1990 Syria cotton and textiles 40 total
  export earnings
• Oil exports now dominate (60-75 total exports,
  40-45 total government revenues) during 1980s
  and 1990s

7
Agricultural Sector

• 26 GDP
• Employs 30 workforce
• Considerable state support impact on government
  budget
• Wheat, barley and cotton sold to state marketing
  boards at fixed prices
• Market prices signals do not reach farm gate
• State support has not led to investment (e.g.
  cotton requires irrigation)

8
Industrial Base

• Mining and quarrying - 14 GDP
• Manufacturing - 14 GDP
• Industry sectors
• Oil sector, chemicals, water and electricity,
  wood and furniture, food beverages, textiles and
  yarn
• Low value textiles (yarn) exported
• Protection for local industry has led to low
  productivity and investment

9
Industrial Policy to Date

• Investment financed by oil revenues
• Investment largely unproductive
• At a time when Syria should have been emerging
  from an agricultural producer to a producer with
  a diversified industrial base, oil revenues and
  protectionism have led to un-competitiveness
• Private Sector Development has favoured Free
  Economic Zones favoured tax status, and better
  facilities these do not spill over to rest of
  economy

10
Policy Reform too slow

• Investment Law No. 10 was important step (lower
  restrictions to capital inflows, and tax
  concessions), but was not accompanied by
  structural reforms
• Reforms needed in
• Liberalisation of trade / protectionism
• Undeveloped financial sector
• Incentives facing the private sector

11
Apparent Stability?

• GDP growth 1.4 in 2003, (1.9 2004?)
• Inflation 1 - 3 since 2000
• Trade balance 6.8 GDP 2003
• Fiscal deficit 4.1 GDP
• Foreign exchange reserves high (12.5 billion at
  end 2002 6 months import cover)
• But GDP growth, foreign exchange and government
  revenues are dependent on oil non-oil sector
  contribution is declining

12
Policy Challenges

• Efficient taxation system that captures the
  private sector incomes
• Monetary policy (interest rate policy) that
  addresses inflation and exchange rate (interest
  rates fixed at 7-9 since 1981)
• Liberalisation (reduction in protectionism) that
  encourages competition
• Financial sector developed - to lend to private
  sector

13
Recent Policy Changes Good

• Private banks allowed to operate since 2003 but
  restricted to Free Industrial Zones
• Monetary Policy now with Monetary and Credit
  Council - Central Bank to follow more flexible
  interest rate policy
• Exchange rate liberalisations encouraging but
  traders still need access to finance
• Reserves high enough to allow pegged exchange rate

14
Institutional Policy Required

• Excessive customs regulations / bureaucracy
• Inefficient banking system / lack of access to
  finance
• Regulation system poor (especially for
  utilities), ministries to be policy makers, not
  controllers
• Lack of competition laws agencies to oversee
  implementation of laws reduce barriers to entry
  and restrict abuse of monopoly power
• Independent bodies required to implement policies
  transparent and efficient and accountable

15
Trade is a Priority

• GAFTA EU-Syria Association Agreement provide
  framework for liberalisation
• Short term trade impact negative (increase in
  imports)
• Long term ability of private sector to respond to
  liberalised market.

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Thank you