Trends Magazine
2007-05-01 11:28:20Syria is booming, and just in time. The authoritarian state is reaping the harvest of a slow but deliberate process of economic reform even as it grapples with a wartime refugee crisis and its diplomatic estrangement from the West. Private banks, which didn't exist only a few years ago, are doing a brisk trade. High oil prices have translated into robust petroleum sales. Foreign investment is at record highs and the value of non-oil exports has tripled over the last two years. A Syrian stock exchange is expected to open this year and for the first time the government is issuing domestic bonds for local investors. Overall, economic growth is expected to reach 5.6 percent this year, up from 5.1 percent in 2006. "For the first time the Syrian economy is open," says Jihad Yazigi, the editor in chief of The Syria Report, an online financial bulletin. "There is good growth, better than people think." Perhaps most significant, a reformed tax code and new banking laws are casting light on Syria's notoriously opaque commercial activity. Economists say the country's gross domestic product could be as much as a third larger than the official $20 billion estimate because manufacturers, exporters, and lenders habitually understate revenues. One example: In 2005, the European Union said it bought $100 million in garments from Syria at the same time Damascus was reporting an equivalent amount from garment sales overall. Economic reform and revival may have saved the regime of President Bashar Al Assad, coming as it did after years of flat-to-negative growth rates throughout much of the 1990s. As late as early 2005, the World Bank circulated a confidential report that warned Syria was facing chronic budget deficits and possibly bankruptcy if it did not diversify from its dwindling oil reserves, revenue from which accounts for nearly a quarter of gross domestic product, two-thirds of exports, and half of government revenue. To make matters worse, the US government in late 2004 passed the Syrian Accountability Act, a web of financial sanctions on Damascus in retaliation for its occupation of Lebanon and support of militant groups like Hamas and Hezbollah. "The Syrians realized they were up against a wall," says a US diplomat with long experience in the Middle East. "The sheer magnitude of their problems made real reform the only way out."
Troubled legacy. Problems persist, however. Wages are low and poverty is high. The economy needs to grow by about 7 percent to absorb a working-age population that is growing at 3.5 percent annually. The jobless rate is estimated at anywhere between 12 and 20 percent and though price supports on some food items have been lifted, the economy is still heavily subsidized. Add to that the arrival of more than a million war refugees from Iraq, which is placing a huge toll on Syria's schools, hospitals, roads and electricity grids. Nearly half of the exiles are children, according to a United Nation's report, and few working-age émigrés are allowed to hold jobs. Inflation rates have soared by some 10 percent, according to government statistics. Housing prices have tripled in some areas, and the price of food has skyrocketed. While neighboring Jordan, home to another million or so exiles, is turning Iraqis away at the border, Syria has pledged to keep its doors open. "They're the fuel behind inflation," says Samir Seifan, the managing partner at BDO, an accounting and consulting firm in Damascus. "And more are coming every day." And while the regime is gradually modernizing the economy, there is scant sign of political liberalization. Al Assad is still equal parts Generalissimo, Grand Sheik and Mafia Don, and his family members haunt every corner of the economy and security apparatus. Dissent, where it exists, is not tolerated. "After what happened next door, everyone is thinking twice before criticizing the regime," says Iman Khuder, an actress and screenwriter. "We don't want to end up like the Iraqis."
Strong medicine. On the other hand, it takes an authoritarian state to impose reforms that strike at powerful bureaucracies and protected industries. Ironically, Syria has joined US allies like the despotic Egypt and Saudi Arabia in embracing the neoliberal reform agenda of free trade and privatization - the "Washington Consensus" that has been rejected by many democracies. "These reforms are not popular," says Seifan. "If demonstrations were allowed, people would crowd the streets in protest." Even the most cynical Syrian hands are surprised at the depth and substance of the reform movement, which began in 1991 under Hefaz Al Assad, Bashar's father, and accelerated with Bashar's succession after the father's death in 2000. Take the banking sector. In 2005, Finance Minister Mohammad Hussein was struggling with his own bureaucracy to reduce levies on the new private banks, ease bank-licensing requirements, liberalize currency controls, and allow foreigners a majority share in private lenders. Last year, all six of Syria's private banks showed a profit and their deposits had doubled from 2005 levels, to $3 billion. Currency controls have been almost entirely lifted. (The Syrian pound has appreciated to 50.8 to the dollar, up from 53 two years ago, which has become a concern for some exporters.) In February, the government announced foreigners could control up to 60 percent of a private bank's equity. Plans are also in motion to phase out subsidies on such items as heating oil and electricity, which currently account for 20 percent of budget expenditures, and for the restructuring and possible sale of some state-owned companies. Laws have been passed that allow the government to issue treasury bills to local investors and, over the next few years, debt for trade internationally. The government has identified 47 companies it hopes to list on a stock market scheduled to open this fall. "I think that's optimistic, but if we can manage five I'll be happy," says Abdullah Dardari, the deputy prime minister for economic affairs. The evolution of a formal financial sector is drawing much of Syria's vast informal economy out from the shadows. Zouheir Yassar Sahloul, for example, runs Syria's largest moneylender. On any given day, Yassar Sahloul & Sons Co., or Sahloul, as the company is known, trades millions of dollars in foreign exchange and it hires some of Syria's most talented young people as clerks, accountants, managers and lawyers. Sahloul is widely regarded as the most efficient financial institution in Syria, particularly when compared to the nation's sclerotic, state-owned banks. And until two years ago it was completely illegal under a ban on private lending imposed when the economy was nationalized in the early 1960s. But Sahloul was so large and important to the nation's merchants that the government looked the other way. It even used the underground lender for conducting money market operations.
Favorable climate. Two years ago, Zouheir was skeptical of the government's commitment to reform. Today, he is one of a dozen or so financiers applying for a license to open a new bank - Syria's first Islamic bank, in fact. Sahloul, meanwhile, is expected to become a licensed foreign exchange trader within the next few months. "Our banking industry is just starting," Zouheir says. "The government has provided a favorable climate by easing currency controls and I believe there will be more changes in the future. We expect positive results." Raed Karawani, a young attorney, is advising Sahloul through the application process. He says the number of joint stock and limited liability companies now doing business in Syria has risen from 117 in 2004 to more than a thousand today. The value of foreign direct investment is thought to have doubled from 2005 levels, to about $1 billion, though accounts vary due to a lack of reliable data. Major deals have been signed by real estate developers from such oil-rich states as Dubai and Saudi Arabia, as well as cement and agribusiness concerns from Europe and the US. France's Lefarge is building a $100 million cement plant, for example, and Cargill is developing a sugar refinery. Fromageries Bel, S.A, the owner of the Laughing Cow cheese franchise, operates a wholly owned subsidiary in Syria. But perhaps the most significant new entry into the Syrian market is Karawani himself, who was trained in Canada and England but chose to come home to practice law. "I could have worked at HSBC somewhere, but it's much more interesting here," Karawani says. "A lot of qualified Syrians who were abroad are coming back."
Capital gain. Not only are Syrian professionals returning from abroad, so is Syrian capital. The Syrian Accountability Act may have banned imports of things like commercial jets and sophisticated oil-drilling equipment, which are either made by American companies or have considerable US content, but it turned out to be more of a blessing than a blight on the Syrian economy overall. As US Treasury officials moved to shut down Syrian accounts held abroad - particularly in Lebanon, which Damascus evacuated in 2005, depositors repatriated their capital to Syria, causing a liquidity glut and a surge in investment. "It used to be the clean money stayed in Syria while the dirty money was held abroad," says Samer Kahwaji, the manager of a small trading company based in Damascus' ancient Souk Hammadiya. "But now the dirty money has returned. Thank goodness for those sanctions." Even the refugee crush is not without dividends. For years, Adnan Al Maliki, an Iraqi garment trader, bought ladies dresses and pant suits from Syria for sale in his boutiques in Baghdad. When the insurgency forced him to shut his factories in Iraq, he compensated for the lost production by doubling orders from Syria. "The quality of Syrian material is the best," says Al Maliki between sips of tea in a Damascene coffeehouse. "We'll always have our contacts here, this country that opened its doors to us." Overall, Syrian exports rose to nearly $7 billion last year, up from $6.3 billion in 2005. A free trade agreement signed with Turkey in 2004 has galvanized Syrian manufacturing, ranging from agribusiness to knitwear and white goods. National Textile Group, a $24 million-a-year Damascene knitter, had to expand its capacity last year from 6,000 tons of yarn to 7,500 tons to meet rising demand. "Business is brisk," says Bassel Maleh, director of exports. "Syria is changing. The trade deal with Turkey has put us on the map."
Looking better. Revenues from Syria's most valuable export - oil - may also rebound if negotiations for new investment in the nation's refining capacity bear fruit. Output slipped to 404,000 barrels a day last year from 414,000 in 2005. But the government is in advanced talks with China about developing two refineries that would process 210,000 barrels of imported crude oil per day, and is in initial discussions with China for a third refinery, near the coastal city of Banyas. It has signed an agreement with a Venezuelan-Iranian joint venture to redevelop an existing refinery at Homs and hopes to line up partners to develop new reserves that will guarantee daily output of 350,000 barrels of light crude to 2030. "It took us a while because we realized you can't just spend $2 billion on oil refineries," says Dardari. "But things are looking better now than they were just a few years ago." Dardari admits it will be difficult to persuade the world's top oil companies, particularly American ones, to do business in US-embargoed Syria. But in other sectors, the road to Damascus is largely unobstructed and increasingly well traveled. Syria is no Dubai, but neither is it the isolated fiefdom it was under Hafez Al Assad. The regime shows no signs of backpedaling on economic reform, even as it keeps the brakes on political reform.