By: M. Javedanfar

03/07/2005

The Syrian economy is characterised by its centralised nature as the Syrian government plays a large role in planning and running the economy. However the biggest income generator for the Syrian economy is the oil sector providing approximately 75% of export receipts. Oil exports also provide the Syrian government with half of its revenues. Services industry and Agriculture sector provide the Syrian government with the rest of its income in descending order.  

Syria is classed as a lower middle-income economy by the World Bank. This is due to the challenges faced by the economy which undermine its performance. The analysis below by meepas aims to list the challenges, followed by solutions adopted by the Syrian government to resolve them. The analysis will be completed with a forecast of the Syrian economy for the year 2006.

Challenges

Syria 's over reliance on oil is one of the main challenges faced by the Syrian economy, especially as the country's current oil resources are dwindling. Estimates vary with the Syrian government saying that it doesn't expect to become a net oil importer until 2020, whilst other foreign analysts place their estimates six or even eight years earlier than that of Syrian government. Unless new oil resources are found the Syrian government will suffer a 50% fall in its revenue when oil is no longer exported. This will have a significant impact on the economy.

Bureaucracy, patronage and corruption are also other major challenges which limit the growth of the Syrian economy. Syria was identified as the 73 rd most corrupt country in the world by Transparency International. This ranking signifies relatively high levels of corruption in the country as it places Syria in the middle of the corruption index alongside other seemingly corrupt countries such as Belarus and Gabon . This has been confirmed by many foreign businessmen who have complained about the difficulties in establishing businesses and/or investment in Syria without assistance or connections with high ranking officials which in some cases includes bribery.

Syria 's economy has also been classed as “mostly unfree” to do business by the 2005 Index of Economic Freedom compiled by the Heritage Foundation. This ranking is an indicator of the difficulties faced by private individuals or companies who wish to set up private enterprise in Syria . Such difficulties are due to strong government control and intervention in areas such as property rights, capital flow and trade policy.

The sanctions placed by the US also hurt the Syrian economy. This is because they restrict Syrian exports to the US whilst placing an embargo on the sale of American goods and investment by American companies in Syria , especially in the oil sector. Employment of hundreds of thousands of Syrian labourers in Lebanon and their annual $2 billion remittances sent home have also been a major source of income for the Syrian economy. However it is expected that their contribution to the Syrian economy will reduce drastically over the next two years due to Syria 's reduced popularity and influence in Lebanon .   

The impact of the aforementioned problems is compounded by the relatively high unemployment rate which currently stands at 20% whilst the labour force in Syria is growing at the rapid rate of about 5% per year. This is in addition to the country's growing population growth rate of 2.6% per year which places more pressure on Syria 's dwindling economic and natural resources.

Solutions

The Syrian government plans to find new oil resources in order to prolong the export of this commodity. However as Syria does not have sufficient technological and financial resources to do this alone, it needs foreign supplies and investment. As a result the government has been inviting foreign firms to apply for exploration tenders in Syria . So far the results have not been very encouraging. This has been due to the sanctions placed against Syria by the US . Such sanctions increase risk of investment in Syria as they have a direct impact on its sovereign rating. As this is a critical issue for the Syrian economy, it is expected that Syria will continue to encourage foreign firms to invest by offering them more favourable terms. Meanwhile the Syrian government is focusing on its gas reserves to replace oil as an export. However so far only Lebanon has been signed as a client for this sector, whilst the expected levels of foreign investment in this sector have not been as forthcoming as planned.

Increased external trade is another method applied by the Syrian government as means of pushing the Syrian economy forward. As a result over the last three years Syria has established a Free Trade Zone with Turkey , whilst planning to establish Free Trade Zones with Iran and with the rest of the Arab world by joining GAFTA (Greater Arab Free Trade Area). Syria is also about to sign an accord with Russia which aims to increase bilateral trade from current figures of $250 million to $1 billion over the next five years. The long delayed Association Agreement with the EU is expected to be signed this year however this depend on Syria completely pulling out of Lebanon in accordance to UN resolution 1559. The implementation of the Association Agreement will be a significant boost for Syrian exports to the EU.    

Furthermore the Tourism sector is expected to play a major part in the future advancement of the Syrian economy. As a result the Syrian government has been developing its tourism infrastructure whilst encouraging investment in the sector especially from Gulf countries. Investments and improvements in Syria 's water management system are also expected to increase employment and exports from its Agriculture sector.

Forecast for 2006

According to the IMF, Syria 's real GDP will grow by 4% for 2005. This figure is generally in line with the forecast by meepas. The main reason for the growth of the Syrian economy by the aforementioned percentage is due to the current high price of oil which has a significant impact on the Syrian economy. However according to forecasts by meepas the real GDP growth figure for the year 2006 is to be revised down by 0.5% to 3.5%. This is despite IMF forecast that oil prices will most probably be at their current high levels by 2006.

The assumptions behind the lower forecast for the Syrian economy are: the impact from loss of remittances sent by Syrian workers from Lebanon (approximately 4% of Syria 's GDP) will be felt on the economy by 2006. It must be noted that this sector has been providing the Syrian economy with much needed foreign exchange and employment for almost 30 years.

Furthermore it is expected that the buoyant trade from Lebanon's ports which has been providing Syria with cheap imports will also reduce significantly thus reducing the income and savings from this source which the Syrian economy has been taking advantage from over the last two and half decades.

Meanwhile the decreasing production capacity at Syria's oil fields due to aging extraction technology and maturity at such fields is expected to reduce the ability of Syria to export oil at its full potential. This will translate into lower income for the Syrian economy and an opportunity cost.

The absence of much needed reforms for the Syrian economy, especially in strategic sectors such as Banking, Telecommunication, Oil production, Oil refining and Port operation is also expected to limit the growth of the Syrian economy. Such absence is also expected to increase state debt due to high costs associated with overstaffing and inefficiency at state controlled organisations. Although the Syrian government has promised reforms, it is the view of meepas that they will not be implemented by 2006. This view is in line with our opinion that the current lack of economic reform suits the business interests of Syria 's ruling elite, especially those running Syria 's security apparatus. As support of such groups is needed by President Assad to run the country, it is therefore unlikely that he will raise their ire by opening up their commercial interests to competition.

Sanctions placed by America against Syria are also expected to continue into 2006. This is in line with the view of meepas that there will not be political reforms introduced at the higher echelons of Syrian authority. Therefore Syria 's anti American stance is expected to continue through support of anti American and anti Israeli groups. As a result the negative economic impacts of the sanctions are expected to continue to limit the growth of the Syrian economy into the year 2006.

In conclusion although the Syrian economy is expected to grow in 2006, this will be mainly due to forecasted high oil prices. The Syrian economy has the potential to witness a more substantial growth rate, however that will largely depend on how wiling the Syrian government is to introduce much needed economic and political reform at the top echelons. Despite limited political reforms declared at the recent Baath party conference in June, the current prognosis for key changes at decision making levels is negative.

End of report

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