Syria: ECONOMY

ECONOMY



Overview: Syria had a relatively well-developed agricultural and industrial base at independence in 1946, but following independence the economy underwent widespread structural change. When the Baath Party became the major political force in the 1960s, Syria’s economic orientation and development strategy were transformed. Government-sponsored land reform and the nationalization of major industries and foreign investments confirmed the socialist direction of the country’s economic policy. With the high oil prices of the 1970s, Syria experienced a shift away from the traditional agrarian base to an economy dominated by the services, industrial, and commercial sectors, but a series of crises in the 1980s caused the economic climate to shift again, this time from prosperity to austerity. The government instituted limited reforms to respond to the burgeoning crisis, but the pressing economic problems required a radically restructured economic policy in order to improve performance. The principal challenge of reform is to modernize and transform an inefficient centralized economy.



Unlike many of its Arab neighbors, Syria has a diversified economy that is not overly dependent on oil. However, economic development has been hampered by a number of internal and external factors and has not kept pace with population growth. Historical problems affecting economic growth in Syria include a preoccupation with the Israeli threat and an obsession with internal order; massive defense and security spending has taken precedence over economic reform. Additionally, the overstaffed and inefficient public sector of the predominantly statist economic system has drained the economy by soaking up government expenditures and foreign exchange. Modest reforms are beginning to have a positive impact, and some sectors that were exclusively state-operated have opened to private-sector participation and foreign investment. New investment laws have encouraged private-sector growth by gradually expanding the list of goods that the private sector may produce or import and have permitted private competition with the government in some areas, such as textile and pharmaceutical manufacturing. However, the government continues to control strategic industries, such as oil production and refining, telecommunications, air transport, power generation and distribution, and water distribution, as well as the price of key agricultural goods. Moreover, resistance from senior regime members, entrenched interests, and a bureaucracy staffed with unskilled workers has hampered the reform effort. Assad remains committed to reform, but the effort is not comprehensive or integrated.



Gross Domestic Product (GDP): World Bank estimates place the total GDP for 2003 at US$21.5 billion, up from US$19.9 billion in 2002. The World Bank measured Syria’s GDP growth at 2.5 percent in 2003, down from 3.2 percent in 2002. A U.S. government estimate of Syria’s GDP growth was 3.5 percent in 2001 and 4.5 percent in 2002. GDP per capita was estimated to be US$1,165 in 2003. The agriculture sector historically accounted for the largest share of GDP, but it has been displaced by services and by mining and manufacturing. In 2003 agriculture accounted for 28.5 percent of GDP, industry for 29.4 percent, and services for 42.1 percent.



GOVERNMENT Budget: In 2004 government revenues were estimated at US$6.1 billion and expenditures at US$7.4 billion, including capital expenditures of US$3.6 billion. Public debt was equivalent to 89 percent of gross domestic product (GDP).



Inflation: Consumer price inflation was estimated to be 1.5 percent in 2004.



Agriculture: Agriculture is a high priority in Syria’s economic development plans, as the government seeks to achieve food self-sufficiency, increase export earnings, and halt rural out-migration. The agriculture sector generates more than 25 percent of the national income and employs about 30 percent of the labor force. Agriculture constituted 28.5 percent of GDP in 2003 and 25 percent of nominal output in 2002, of which livestock accounted for 16 percent and fruit and grains for more than 40 percent. Most land is privately owned, a crucial factor behind the sector’s success. About 28 percent of Syria’s land area is cultivated, and 21 percent of that total is irrigated. Most irrigated land is designated “strategic,” meaning that it encounters significant state intervention in terms of pricing, subsidies, and marketing controls. “Strategic” products such as wheat, barley, and sugar beets, must be sold to state marketing boards at fixed prices, often above world prices in order to support farmers, but at a significant cost to the state budget. The most widely grown arable crop is wheat, but the most important cash crop is cotton; cotton was the largest single export before the development of the oil sector. Nevertheless, the total area planted with cotton has declined because of an increasing problem of water shortage coupled with old and inefficient irrigation techniques. The output of grains like wheat is often underutilized because of poor storage facilities.



Forestry: Less than 3 percent of Syria’s land area is forested, and only a portion of that is commercially useful. Limited forestry activity is centered in the higher elevations of the mountains just inland from the coast, where rainfall is more abundant.



Mining and Minerals: Phosphates are the major minerals exploited in Syria. Production dropped sharply in the early 1990s when world demand and prices fell, but output has since increased to more than 2 million tons in 2001. Marble, gypsum, stone, salt, gravel, and sands are also produced but generally not for export.



Industry and Manufacturing: The industrial sector, which includes mining, manufacturing, construction, and petroleum, accounted for 29.4 percent of gross domestic product (GDP) in 2003 and employed about 30 percent of the labor force. The main industrial products are petroleum, textiles, processed food, beverages, tobacco, and phosphates. Syria’s manufacturing sector was largely state dominated until the 1990s, when economic reforms allowed greater local and foreign private-sector participation. Private participation remains constrained, however, by the lack of investment funds, input/output pricing limits, cumbersome customs and foreign exchange regulations, and poor marketing.



Because land prices are not controlled by the state, real estate is one of the few domestic avenues for investment with realistic and safe returns. Activity in the construction sector tends to mirror changes in the economy. Investment Law No. 10 of 1991, which opened the country to foreign investment in some areas, marked the beginning of a strong revival, with growth in real terms increasing over 2001 and 2002.



Energy: In 2001 Syria reportedly produced 23.3 billion kWh of electricity and consumed 21.6 billion kWh. As of January 2002, Syria’s total installed electric generating capacity was 7.6 GW, with fuel oil and natural gas serving as the primary energy sources and 1.5 GW generated by hydroelectric power. A network totaling 45 GW linking the electric power grids of Syria, Egypt, and Jordan was completed in March 2001. Syria’s electric supply capacity is an important national priority, and the government hopes to add 3,000 MW of power generating capacity by 2010 at a probable cost of US$2 billion, but progress has been slowed by a lack of investment capital. Power plants in Syria are undergoing intensive maintenance, and four new generating plants have been built. The power distribution network has serious problems, with transmission losses estimated as high as 25 percent of total generated capacity as a result of poor quality wires and transformer stations. A project for the expansion and upgrading of the power transmission network is scheduled for completion in 2005.



The first commercial oil field began production in 1968, but Syria did not begin exporting oil until the mid-1980s. Although Syria is not a major oil exporter by Middle Eastern standards, oil is a major pillar of the economy. Exact oil output levels are difficult to obtain, but according to one U.S. government estimate, Syria produced 522,700 barrels per day (bbl/d) in 2004 and consumed 265,000 bbl/d in 2001. The oil sector of the economy faces many challenges, such as a decline in output and production resulting from technological problems and a depletion of oil reserves. Reserves reportedly peaked at 590,000 bbl/d in 1996 and have fallen to 535,000 bbl/d in 2003 or a total of 2.4 billion barrels in 2004. Since older fields have reached maturity, oil production is expected to continue its decline. Meanwhile, consumption is rising, which means that Syria could become a net oil importer within a decade. To counteract this problem, Syria has intensified oil exploration efforts. Another option is switching electric power plants from oil-fired to natural gas-fired. Proven natural gas reserves, approximately three-quarters of which are owned by the Syrian Petroleum Company, were estimated at 240.7 billion cubic meters in 2004. The primary challenge for the natural gas industry is logistics: reserves are located mainly in northeastern Syria, whereas the population is concentrated in the west and south. In 2001 Syria reportedly both produced and consumed 5.8 million cubic meters of natural gas. Several projects are underway to increase natural gas production, including an onshore pipeline network connecting Egypt, Jordan, Lebanon, and Syria.



Services: Services accounted for 42.1 percent of gross domestic product (GDP) in 2003 and employed 39.7 percent of the labor force (including government) in 2002.



Banking and Finance: The financial services sector is nationalized. Six specialized state banks (the Central Bank of Syria, Commercial Bank of Syria, Agricultural Co-Operative Bank, Industrial Bank, Popular Credit Bank, and Real Estate Bank) each extend funds to, and take deposits from, a particular sector. The Central Bank of Syria controls all foreign exchange and trade transactions and gives priority to lending to the public sector. The Industrial Bank also is directed more toward the public sector and is undercapitalized. As a result, the private sector often is forced to bank abroad, a process that is more expensive and therefore a poor solution to industrial financing needs. Many businesspeople travel abroad to deposit or borrow funds. It is estimated that Syrians have deposited US$6 billion in Lebanese banks. The U.S. sanctions of May 2004 may increase the role of Lebanese and European banks because a ban on transactions between U.S. financial institutions and the Central Bank of Syria will create an increase in demand for intermediary sources for U.S. dollar transfers.



Syria has no investment banks, private insurance companies, or foreign banks, although five foreign banks were given licenses in December 2002, in compliance with Law 28 of March 2001, which allows the establishment of private and joint-venture banks. Foreigners are allowed up to 49 percent ownership of a bank, but may not hold a controlling stake. It is unclear what range of services private banks will be allowed to offer or what impact they may have on the demand for financial services. Syria has no equity or official currency markets. Legislation was passed in 2001 to establish a stock market, but the necessary regulatory and structural requirements are currently inadequate.



Tourism: The number of non-Arab visitors to Syria has doubled since the 1990s to 1.1 million in 2002, but this figure includes all visitors to the country, not just tourists. The total number of Arab visitors in 2002 was 3.2 million, most coming from Lebanon, Jordan, Saudi Arabia, and Iraq. Many Iraqi businesspeople set up ventures in Syrian ports to run import operations for Iraq, causing an increased number of Iraqis visiting Syria in 2003–4. Tourism is a potentially large foreign exchange earner and a source of economic growth. Tourism generated more than 6 percent of Syria’s gross domestic product in 2000, and more reforms are being discussed to increase tourism revenues. As a result of projects derived from Investment Law No. 10 of 1991, hotel bed numbers had increased 51 percent by 1999 and increased further in 2001. A plan was announced in 2002 to develop ecological tourism with visits to desert and nature preserves. Two new luxury hotels are scheduled to open in Damascus at the end of 2004.



Labor: In 2004 the Syrian labor force was estimated to total about 5 million. An estimated 39.7 percent worked in the services sector (including government), 30.3 percent in agriculture, and 30 percent in industry and commerce in 2002. About 70 percent of Syria’s workforce earns less than US$100 per month. Unemployment in Syria increased in the second half of the 1990s, and unofficial estimates put the figure at more than 20 percent in 2002. Anecdotal evidence suggests that many more Syrians are seeking work over the border in Lebanon than official numbers indicate. Each year more than 200,000 new job seekers enter the Syrian job market, but the economy has not been able to absorb them. In 2002 the Unemployment Commission (UC) was established, tasked with creating several hundred thousand jobs over a five-year period.



Foreign Economic Relations: Syria has good trade relations with neighboring Arab countries and enjoys free-trade arrangements with Algeria, Bahrain, Egypt, Kuwait, Libya, Morocco, Oman, Qatar, Sudan, and Tunisia as part of the Greater Arab Free Trade Area (GAFTA). Syria applies strict enforcement of the Arab League boycott of Israel, which is frequently a hindrance to trade. In late 2001, Syria submitted a formal request to join the World Trade Organization (WTO), having withdrawn from the WTO’s predecessor, the General Agreement on Tariffs and Trade, in 1951 to protest Israel’s membership. However, Syria will have to make significant changes in its current trade rules in order to qualify for WTO membership. Syria also is eager to enter into association with the European Union. Trade relations with the United States have been disrupted by the U.S. imposition of sanctions against Syria in mid-2005.



Imports: Imports in 2003 totaled an estimated US$4.8 billion free on board. The main commodities imported were machinery and transport equipment, electric power machinery, food and livestock, metal and metal products, chemicals and chemical products, plastics, yarn, and paper. The primary sources of imports were Germany (7.2 percent), Italy (7.1 percent), China (6.3 percent), France (5.9 percent), and Turkey (5.4 percent). Syrian imports accounted for 7.2 percent of the gross domestic product in 2003, down from 29.5 percent in 2002.



Exports: Exports in 2003 totaled an estimated US$5.1 billion free on board. The principal commodities exported were crude oil, petroleum products, phosphates, fruits and vegetables, cotton fiber, clothing, meat and live animals, and wheat. The main recipients of exports were Germany (20.9 percent), Italy (12.6 percent), the United Arab Emirates (7.6 percent), Lebanon (6.2 percent), Turkey (6 percent), France (5.4 percent), Croatia (4.8 percent), and the United States (4.1 percent). Syrian exports accounted for 7.4 percent of the gross domestic product in 2003, down from 38.3 percent in 2002.



Trade Balance: In 2003 Syria had an estimated trade balance of US$300 million.



Balance of Payments: The official data for the Syrian economy are unreliable because of significant and contradictory revisions to the official statistics by the Central Bank of Syria. However, certain trends can be discerned. A surplus was possible during the period of 1999–2001 because of an upward trend in world oil prices and some recovery in Syria’s agricultural exports. A surplus was also possible between 2001 and 2002 because of a surplus in visible goods trade and a surge in trade with Iraq. Between 2001 and 2003, Syria imported Iraqi crude oil at a discount for domestic use, which freed up Syrian crude for export and added significantly to Syria’s foreign reserves. However, a deficit in the balance of payments is likely for 2003 as a result of the cutoff of trade and oil flows from Iraq. In 2003 the current account was estimated at –US$72 million. Foreign exchange and gold reserves were estimated at US$3.3 billion in 2004. Remittances from workers abroad and foreign aid traditionally cover Syria’s budgetary and trade deficits.



External Debt: In 2004 Syria’s estimated external debt totaled US$21.6 billion. Syria is seeking to reschedule its bilateral debt, but a huge outstanding debt to the former Soviet Union remains a serious issue.



Foreign Investment: Figures on foreign direct investment in Syria are not available. However, despite recent reforms, Syria’s state-controlled economy is not conducive to foreign investment. The problem is exacerbated by the lack of access to international money and capital markets for investors.

Foreign Aid: In 1997 foreign aid totaled an estimated US$199 million. The World Bank reported that as of July 2004 it had committed a total of US$661 million for 20 operations in Syria. One investment project remained active at that time.



Currency and Exchange Rate: Syria’s currency is the Syrian pound (SP or SYP), equal to 100 piastres. The Syrian pound is pegged to the U.S. dollar and trades at both official and free-market rates. According to the Central Bank of Syria, the official exchange rate has been SP11.20–11.25 per US$1 since 1998; in early 2005, the bank gave the prevailing “neighboring markets rate” as SP46.0–SP46.5 per US$1. Other sources cited a free-market rate of SP51.91 to US$1 in early April 2005.



Fiscal Year: Calendar year.