At a glance: 2000-01€¦ · COUNTRY REPORT Syria October 2000 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom At a glance: 2000-01 OVERVIEW While the

COUNTRY REPORT

Syria

October 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWWhile the succession to the presidency of Bashar al-Assad was carried outwith remarkable aplomb, serious doubts still remain about his medium tolong-term prospects. Limited economic reform has been undertaken, andwhile the prognosis is for such piecemeal reform to continue, there willremain little prospect of fundamental change over the forecast period, part-icularly as policy initiatives will be subject to revision at the expense of theold guard as they seek to preserve their interests. On the positive side,continued strong oil-price assumptions will help large export revenue togenerate substantial trade and current-account surpluses in 2000-01.

Key changes from last monthPolitical outlook• The pressing challenge of managing a new political dynamic in Lebanon

will serve to test Bashar’s abilities.

• There remains little expectation for the resumption of peace talks withIsrael until domestic concerns are addressed, and even then Syria is un-likely to compromise on its demand for the return of all occupied land.

Economic policy outlook• Political uncertainty still remains the leading factor determining the

business climate.

• New expansionary fiscal measures have been announced, including a 25%increase in all public-sector salaries and a package to tackle un-employment.

Economic forecast• Continuing drought conditions and prevailing political uncertainty

ensure that the EIU’s growth forecast has been revised only marginallyupwards to 1.5% for 2000, and 2.4% and 2.6% for 2000 and 2001,respectively.

• Inflation will increase slightly over the forecast period, fanned by anincrease in government spending.

• Strong oil-price assumptions will see export revenue generate substantialtrade and current-account surpluses in both 2000 and 2001.

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Syria 1

EIU Country Report October 2000 © The Economist Intelligence Unit Limited 2000

Contents

3 Summary

4 Political structure

5 Economic structure

6 Quarterly indicators

7 Outlook for 2001-027 Political forecast8 Economic policy outlook9 Economic forecast

12 The political scene16 Economic Policy

18 The Domestic economy18 Economic trends19 Oil and Gas21 Agriculture21 Infrastructure23 Financial and other services

25 Foreign trade and payments

List of tables

10 International assumptions summary11 Forecast summary20 Crude oil production25 Current account

List of figures

12 Gross domestic product12 Current-account balance/GDP19 Oil prices, 2000

Syria 3


Summary

October 2000

The 34-year-old president, Bashar al-Assad—son of the late Hafez al-Assad—willseek to cement his position, while at the same time launching his own moreliberal, political and economic agenda. At both levels, Bashar and his reformistelite are seeking to bring a new openness, but efforts are being thwarted by the“old guard” of military and political veterans who are loyal to his father’slegacy. If Bashar is able to force through reforms, over the forecast period thecountry will seek to become more attractive to foreign investment, withincreased transparency and the introduction of real financial markets. How-ever, reform will at best be incremental. Rather than trying to purge the ranksof the old guard, Bashar is likely to continue to work within the framework ofthe Baathist system, balancing his reform initiatives with the interests of theold elite. Given the uncertainty, the EIU expects growth of 1.5% for 2000,rising to 2.4% in 2001 and 2.6% in 2002. Inflation will increase slightly, fannedby an increase in government spending, while the continued high oil price willensure current-account surpluses.

Soon after his inauguration, Bashar began a series of political reforms to slowlyopen up the country, ranging from increasing press freedoms, the release ofpolitical prisoners, to an expansion of the use of the Internet. Much has how-ever been carefully resisted by the old guard, and the creaking bureaucracy,preventing effective implementation. The new openness was also felt in neigh-bouring Lebanon—long controlled by Syria—where the Damascus-approvedgovernment suffered badly in the freest election in a decade. On the inter-national front there has been no movement on peace talks with Israel, andresumption is unlikely until 2002 at the earliest.

The government of Mustafa Miro, under the direction of the new president,has launched more economic reforms, ranging from licensing the first foreignbanks in the country’s free zones, to drafting a law for a stockmarket. Thegovernment has also taken advantage of the high price of crude oil to increasestate-sector salaries, and target a reduction of unemployment.

In the absence of government figures, anecdotal evidence suggests theeconomy is still performing sluggishly. However the high price of crude oil isexpected to feed into higher government spending and growth into 2001.

The strong oil price has resulted in a sharp increase in export earnings,producing a positive trade balance that is expected to be maintained throughto 2002 and easing concerns over debt servicing. Further steps have been takento improve trade relations with neighbouring countries, particularly Jordan,Iraq and Lebanon.

Editors: Giles Allen (editor); James Reeve (report checker)Editorial closing date: October 2nd 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2001-02

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Syria


Political structure

Syrian Arab Republic

Socialist republic

Based on the constitution of 1973

250-member Majlis al-Shaab (People’s Assembly) directly elected for a four-year term

Universal adult suffrage

Last elections: 1998 (legislative) and 2000 (presidential); next election due by 2002(legislative)

President, directly elected for a seven-year term. The president appoints the vice-presidents, the prime minister and the Council of Ministers. Bashar al-Assad, who waselected president in July 2000, holds the posts of commander-in-chief of the armedforces and secretary-general of the Baath Party. The vice-presidents are Abdel-HalimKhaddam and Zuheir Masharka.

The prime minister heads the Council of Ministers, members of which are drawn fromthe Baath Party and its partners; last reshuffle in March 2000

Seven parties form the ruling National Progressive Front (NPF): Arab Socialist BaathParty; Arab Socialist Party; Arab Socialist Unionist Party; Communist Party; Syrian ArabSocialist Union Party; Unionist Socialist Democratic Party; Union Socialist Party

Prime minister Mohammed Mustapha MiroDeputy prime minister & defence minister Mustafa TlasDeputy prime minister for economic affairs Khaled RaadDeputy prime minister for social services Mohammed Naji Otari

Agriculture & agrarian reform Assad MustafaCommunications Ridwan MartiniConstruction Nihad MushanteetCulture Maha QannutEconomy & foreign trade Mohammed al-ImadiEducation Mahmoud al-SayeedElectricity Munib Assad Sayeem al-DaherFinance Khaled MahayniForeign affairs Farouq al-SharaaHealth Mohammed Iyad ShattiHigher education Hassan RiyshahHousing & utilities Husam al-SafadiIndustry Ahmed HamuInformation Adnan OmranInterior Mohammed HarbaIrrigation Taha al-AtrashOil & mineral resources Mohammed Maher JamalPlanning Issam ZaimSocial affairs & labour Bariah al-QudsiSupply & internal trade Osama al-BaridTourism Qasim MiqdadTransport Makram Ubayd

Bashar Kabbara

Official name

Form of state

Legal system

Electoral system

Legislature

National elections

Head of state

Executive

Main political parties

Key ministers

Central Bank governor

Syria 5


Economic structure

Annual indicators

1996 1997 1998 1999 2000a

GDP (at market prices; S£ bn) 674.8 731.5 775.8 743.8a 758.5

GDP (US$ bn) 15.9 16.5 17.1 16.2a 16.3

Real GDP growth (%) 7.3 2.5 7.8 –1.5a 1.5

Consumer price inflation (av; %) 8.3 2.3 –0.5 –2.7 0.5

Population (m) 14.6 15.1 15.6 16.1 16.6

Merchandise exports (fob; US$ m) 4,178 4,057 3,135 3,806 4,825

Merchandise imports (fob; US$ m) 4,516 3,603 3,307 3,452 3,416

Current-account balance (US$ m) 81 483 59 270 1,598

Reserves excl gold (US$ m) 2,100a 2,075a 2,050a 1,900a 2,050

Total external debt (US$ bn) 21.4 20.9 22.4 22.7a 22.9

Debt-service ratio, paid (%) 3.9 9.3 6.4 9.4a 10.1

Exchange rateb (av; S£:US$) 42.50 44.20 45.33 46.00 46.50

October 2nd 2000 S£46.00:US$1b

Origins of gross domestic product 1997c % of total Components of gross domestic product 1998c % of total

Agriculture 29.2 Private consumption 68.6

Mining, manufacturing, electricity & water 22.3 Government consumption 11.3

Wholesale & retail trade 19.2 Fixed investment 20.4

Transport & communications 11.9 Exports of goods & services 30.3

Government services 7.9 Imports of goods & services –30.7

Finance & insurance 3.7 GDP at market prices 100.0

Building & construction 3.7

GDP at market prices incl others 100.0

Principal exports 1998 US$ m Principal imports cif 1998 US$ m

Crude oil 1,342 Manufactured goods 1,225

Fruit & vegetables 380 Machinery & transport equipment 916

Textiles 366 Food & livestock 617

Cotton 273 Chemicals & chemical products 501

Total incl others 3,135 Crude materials, except fuels 169

Mineral fuels, lubricants & related materials 156

Total incl others 3,895

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

Germany 13.7 Ukraine 15.6

Turkey 12.7 Germany 6.4

Italy 11.8 Italy 6.2

Lebanon 9.1 Turkey 4.8

France 8.9 France 4.5

a EIU estimates. b “Neighbouring countries” rate. c Official estimates.

6 Syria


Quarterly indicators

1998 1999 20003 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

PricesConsumer prices (1995=100) 107.1 110.8 110.8 104.5 105.3 108.4 n/a n/a % change, year on year 0.0 0.0 –2.7 –1.3 –1.6 –2.2 n/a n/a

Financial indicatorsExchange rate S£:US$ (av) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23 S£:US$ (end-period) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23M1 (end-period; S£ bn) 267.6 282.0 276.5 275.6 287.0 313.3 n/a n/a % change, year on year 13.2 10.5 11.6 11.5 7.2 11.1 n/a n/aM2 (end-period; S£ bn) 370.4 390.1 387.8 392.9 406.9 438.8 n/a n/a % change, year on year 12.5 11.1 11.7 13.7 9.8 12.5 n/a n/a

Sectoral trendsCrude oil production (m barrels/day) 0.55 0.55 0.54 0.54 0.53 0.53 0.53 0.52 % change, year on year –1.8 –1.8 –3.6 –3.6 –3.6 –3.6 –1.9 –3.7

Foreign trade (S£ m)Exports fob 7,740 8,660 7,730 9,140 11,040 10,980 n/a n/aImports cif –9,000 –11,710 –8,310 –10,810 –8,780 –15,100 n/a n/aTrade balance –1,260 –3,050 –580 –1,670 2,260 –4,120 n/a n/a

Sources: International Energy Agency, Monthly Oil Market Report; IMF, International Financial Statistics (IFS).

Syria 7


Outlook for 2001-02

Political forecast

Syria’s new president Bashar al-Assad has brought youth and vision to thecountry’s leadership, something long desired, and notably absent from thelater years of his father’s rule. Although the 34-year-old has been in office forjust a few months, already a modest breeze of reform is being felt in thecountry. This is evident in an incremental increase in political freedom—ranging from the release of political prisoners to improving access to theInternet. At an economic level, investment laws have been reformed, foreignbanks are being invited to establish themselves and there is a draft law for theestablishment of a stock exchange.

The new president has brought to office a group of like-minded youngtechnocrats, seeking to develop his vision for the country, and modernise aneconomically backward Syria. Yet despite his abilities and ambitions, Bashar isclearly not fully in control of Syria. He is surrounded by an array of political“strongmen”, whom he must co-opt to carry out even minor policy changes.These are men at the head of the military, security services, and the ArabSocialist Baath party who were loyal advisors to his father, and individuallycontrol the levers of power. The policies of Bashar and his technocrat elite arefiltered through these “strongmen”, who have repeatedly in recent monthstoned down policy, and limited implementation. In addition, at a lower level,Syria’s creaking bureaucracy is unwilling to accept radical change.

The EIU expects Bashar to offer up a range of more liberal political andeconomic policies during the forecast period. These are anticipated to en-courage modest political pluralism, a freer press, more private ownership, thedevelopment of capital markets and a more balanced relationship withLebanon. However, at every step of the way, Bashar will find the political oldguard impeding progress. He may continue to work within this framework overthe forecast period, balancing his reform initiatives with the interests of the oldguard to secure their support. Controlling politics in Syria is a complexbusiness, weaving together the clan and sect loyalties of senior officials, andoffering patronage in return for political loyalty. Bashar's emphasis on liberal-isation and deregulation is clearly at odds with the existing system. Anyattempt to dismantle it will provoke fierce resistance and therefore there is thepossibility of conflict arising. Contingent on the strength of his domesticposition, Bashar may take a gamble and seek to purge some of these figures.There is also the constant threat that some of these “strongmen” may decide toseize power for themselves, if for example they perceive a threat to theireconomic interests. Ultimately, Bashar's best hope of surviving may be as acompromise figure. The Alawite military commanders are a fractious group andeach may ultimately prefer Bashar as president to a rival's succession. Never-theless, the ever-present fear of confrontation, and its implications, will lead tocontinued political uncertainty.

Domestic politics

8 Syria


Addressing domestic concerns has been a priority for the new president sincethe death of his father in June. However, the fourth quarter of 2000 will seeBashar take his first tentative steps into foreign policy, with probable visits toEgypt, Saudi Arabia, and the Gulf states, possibly including trips to neigh-bouring Jordan, Lebanon, and Turkey. With limited domestic authority—andin the shadow of his father—Bashar is currently not in a sufficiently strongposition to consider entering into overt peace talks with Israel, which mayultimately require painful land concessions few senior political or securityfigures would be prepared to consider. In any case, Bashar has shown no indi-cation that he is willing to back-track on the territorial “red lines” that hisfather laid down. A far more pressing concern is for Bashar to consolidate hisdomestic position. We do not now expect a peace agreement to be signedbetween Israel and Syria over the forecast period.

Syria’s other main foreign policy concern, Lebanon, is almost seen as adomestic policy issue. Syria has politically dominated Lebanon for a decade,taking all foreign and defence policy decisions for the country, and approvingall senior politicians. Under Hafez al-Assad, no opposition was allowed toSyria’s dominant position in Lebanon. The arrival of Bashar has seen thispolicy ease slightly. Many within Lebanon resent Syria’s presence, and arecalling for a withdrawal of its troops. These calls became more vocal, notablyfrom Christian groups following the Israeli pull-out from south Lebanon inMay. A parliamentary election in Lebanon was held from late August to earlySeptember, and allowed for non-conformist candidates critical of Syria, tostand for and enter parliament for the first time since the end of the civil war.The move came as a complete surprise to most Lebanese, and was seen as areflection of Bashar's influence. The Syrian president is looking to redraw hiscountry’s relationship with Lebanon and it is likely that control will be easedduring the forecast period, with Bashar seeking to steer the ties towards a morestate-to-state relationship. However, as with other issues, Bashar must maintainhis credibility amongst the Damascus elite, and therefore cannot be seen to beacting weakly with regard to Lebanon. If there is any direct threat to Syria’sposition, for example, from the Lebanese Christian community, he will have tocounter it using the same brutal methods frequently employed by his father.Failure to do so would risk his position at home.

Economic policy outlook

Bashar is clearly the architect of the economic reform initiatives launched bythe government of Mohammed Mustafa Miro when it came to office in April.Although a new cabinet is expected to be appointed soon, modest reforms willcontinue over the forecast period—as long as Bashar remains in power. Thesewill result in more conducive legislation for foreign investors, and somelimited financial deregulation. The reforms will at best be a gradual, piecemealaffair and vulnerable to a sudden reversal should Bashar be removed fromoffice. Bashar’s anti-corruption drive will continue, although it can only be takenso far before it begins to impinge on the networks of nepotism and kickbacks atthe heart of the Baathist system. For Bashar to challenge this system successfully,he would have to undertake a fundamental reworking of the political economy.

Policy trends

International relations

Syria 9


He is unlikely to be in a position to implement such a change during theforecast period. However, the anti-corruption drive will remain as a usefulmechanism to be employed on a selective basis, although it is not clear howmuch of an effect it will have on the investment climate, given that it isperceived largely as a witchhunt, hostile to Bashar’s opponents.

With world crude prices still at historically high levels, the government tookadvantage of this windfall in the third quarter of 2000 to launch severalexpansionary and apparently extra-budgetary fiscal packages. These includedan increase to state-sector salaries of 25%, and measures aimed at reducingunemployment. However, even though spending may increase in real terms,fiscal policy will continue to remain as opaque as ever. Detailed spending plansare not released and large chunks of oil revenue also appear to be missing fromthe accounts. The budget is nominally “balanced”, but this is a function ofgovernment borrowing, the amount of which is not disclosed. With oil pricesexpected to remain high in 2000-01, the government will be in a better posi-tion to afford its own spending plans, allowing it to continue this expan-sionary fiscal policy.

The Syrian public's lack of confidence in its own banking system rendersinterest-rate manipulation an ineffective monetary tool. Consequently, moneysupply in the forecast period is more likely to be affected by interest-ratemovements in neighbouring Lebanon, along with government spendingpatterns, largely determined by oil prices. Syria's multi-tier exchange-rateregime is likely to be maintained over the forecast period. However, we expectfurther convergence to occur between the “neighbouring countries” and black-market rates, moving towards parity by the end of the forecast period. Theofficial rate of S£11.225:US$1 will be maintained for favoured importers, as willthe comparably insignificant S£23:US$1 “customs rate”.

Economic forecast

We forecast world trade to increase by 10.1% in 2000, 7.9% in 2001, and 7.3%in 2002, although Syria will ultimately gain little from this because of itshighly protective trade barriers and multitude of other restrictions—despiteminimal moves being made to reduce them. Our forecast expansion of worldfood prices by 4.2% in 2001, and 10.4% in 2002, will aid agricultural exports,as long as winter rain levels are sufficient for a good harvest. By far the mostimportant factor for the Syrian economy is the outlook for oil prices, whichrepresents the mainstay of the economy. Prices have remained high despiterepeated attempts by OPEC to stabilise them by increasing output in 2000. Inearly September, benchmark Brent Blend was trading above US$35/barrel, buthas since fallen below US$30/b following the US decision to release strategicreserves. With demand in East Asia showing no sign of easing, oil prices willremain strong for the rest of 2000 and into 2001. In 2001 the gradual slow-down in the US economy, coupled with higher oil production, will dampenmarket sentiment, putting prices under downward pressure late in thesecond quarter, as rising output meets the seasonal weakening of demand. We

Fiscal policy

Monetary policy

International assumptions

10 Syria


have therefore revised our previous assumptions for benchmark Dated brentand now expect an average price of US$28.88/b for 2000, US$25.44/b in 2001and US$19.38/b.in 2002.

International assumptions summary(% unless otherwise indicated)

1999 2000 2001 2002

Real GDP growthWorld 3.5 4.9 4.2 4.1OECD 2.9 4.1 3.1 2.7EU 2.3 3.4 3.0 2.6

Exchange rates (av)¥:US$ 113.9 106.7 104.0 102.0€:US$ 0.939 1.072 1.058 0.952SDR:US$ 0.731 0.768 0.775 0.738

Financial indicators¥ 2-month private bill rate 0.27 0.26 0.43 0.98US$ 3-month commercial paper rate 5.18 6.40 6.55 5.25

Commodity pricesOil (Brent; US$/b) 17.9 28.9 25.4 19.4Gold (US$/troy oz) 278.8 283.2 275.0 270.0Food, feedstuffs & beverages

(% change in US$ terms) –18.6 –6.1 4.2 10.4

Industrial raw materials (% change in US$ terms) –4.3 14.9 8.7 2.3

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) rates.

Despite the positive oil-price assumption, we remain relatively bearish aboutSyria’s growth prospects. This is a function of a number of factors, the mostimportant and least tangible being political uncertainty. Bashar’s position is farfrom secure and the threat of political upheaval cannot be ruled out. Whateverthe political outlook holds, this uncertainty will limit private consumption, theprincipal component of GDP. Economic prospects for Lebanon in 2000—wherean estimated 500,000 Syrian workers are employed—remains discouraging andremittances to Syria are likely to dip, dampening local purchasing power. How-ever, we do still expect private consumption to increase over the forecastperiod, driven by high oil revenue despite a fall in production, the subsequentincrease in government spending and a high population growth rate. Further-more, prospects for remittances from Lebanon should improve if the formerprime minister, Rafiq Harriri, is confirmed in office, as he is expected to boostspending levels significantly. Investment spending will see some modestgrowth, as construction of a number of energy projects gathers pace. This willbecome more apparent in 2001-02. Crucially, however, as we no longer expecta peace deal with Israel to be in place over the forecast period, this will affectlocal consumption, with lower than expected tourist numbers and the post-ponement of spending on tourism infrastructure. Assuming relatively goodharvests in the forecast period, the agricultural sector, affected by this year’sdrought, should see growth. As a result of these factors, we expect the Syrianeconomy to grow by 1.5% in 2000, rising to 2.4% in 2001 and 2.6% in 2002.

Economic growth

Syria 11


Forecast summary(% unless otherwise indicated)

1999a 2000b 2001c 2002c

Real GDP growth –1.5b 1.5 2.4 2.6

Gross agricultural growth –7.5b 1.0 3.0 3.0

Consumer price inflation Average –2.7 0.5 1.7 2.1

Government balance (% of GDP) –0.1 0.3 –0.2 –0.5

Exports of goods fob (US$ bn) 3.8 4.8 4.5 3.9

Imports of goods fob (US$ bn) 3.5 3.4 3.6 3.8

Current-account balance (US$ bn) 0.3 1.6 1.2 0.3 % of GDP 1.7b 9.8 7.0 1.9

External debt (year-end; US$ bn) 22.7b 22.9 23.1 23.4

Exchange rates S£:US$d (av) 46.00 46.50 47.00 47.00 S£:¥100d (av) 40.38 43.59 45.19 45.10 S£:€d (year-end) 46.21 41.83 48.48 51.23 S£:SDRe (year-end) 63.14 58.84 63.91 64.75

a Actual. b EIU estimates. c EIU forecasts. d “Neighbouring countries” rate. e Official rate.

New complete data from the IMF show that prices contracted in 1999 by 2.7%,continuing the trend from 1998. Relatively weak Syrian growth and thecurrent low level of capacity utilisation in the local economy will help to keepinflationary pressures in check over the forecast period. Some threat, however,does exist in the form of increases in government spending, particularly topublic-sector wages and a steady growth in global non-oil commodity prices.We therefore expect inflation to return in 2000, at little more than 0.5%, risingto 1.7% in 2001 and 2.1% in 2002, as prices of imported industrial rawmaterials increase further and government spending feeds through to privateconsumption.

The Syrian pound’s black-market rate remained remarkably stable in the wakeof the death of Hafez al-Assad; indeed the currency’s US dollar value actuallystrengthened to around S£46-47:US$1, from S£50:US$1. This is counter-intuitive and hints at intervention, either by the government or some otherfriendly state. This aside, the black-market rate is now extremely close to the“neighbouring countries” rate of S£46:US$1. We continue to anticipate furtherconvergence, assuming political stability, and by the end of the forecast periodthe two rates should be at parity. However, the official rate of S£11.225:US$1will be maintained for favoured importers, as will the S£23:US$1“customs rate.”

Overall export revenue is expected to reach US$4.83bn for 2000—buoyedprincipally by robust oil earnings—falling slightly to US$4.53bn in 2001 andUS$3.89bn in 2002. We expect a steady increase in import spending, over theforecast period, leaving a visible trade surplus of US$1.41bn in 2000, dipping toUS$945m in 2001 and US$124 in 2002. It should be noted that a large amountof trade, mainly with Lebanon, but also with Turkey and Iraq, is unrecorded.Putting a figure to this trade is futile, but the net outcome is thought to be

Inflation

Exchange rates

External sector

12 Syria


strongly in Syria’s favour. Invisible flows are also subject to unreliable data andrevisions to official data by the Central Bank of Syria, which render analysishighly problematic. In the absence of other comprehensive data sources, wehave incorporated the bank’s figures into our historical series; on this basis, weexpect Syria to record current-account surpluses of US$1.6bn (9.8% of GDP),US$1.18bn (7% of GDP) and US$327m (1.8% of GDP) for 2000, 2001 and2002, respectively. A positive external financing position will allow Syria tomake payments on its non-disputed external debt, but the total external debtstock will remain high as a result of disputed debt owed to the former SovietUnion and East Germany, which is unlikely to be repaid. Syria may turn toSaudi Arabia in 2002 to finance spending plans as oil prices soften.

The political scene

On July 17 Bashar al-Assad, the 34-year-old son of late president Hafez al-Assad,was sworn in as Syria’s new president. The move came little more than amonth after his father’s death, and completed a smooth transition of power,which had been carefully orchestrated by his father’s aides. The previous week,Syrians had gone to the polls to confirm Bashar as president. He “won” 97.29%of votes cast. However, this was more a reflection of the power of his father’sone-party state, than any real sense of popularity. Bashar had been groomed forpower since the unexpected death of his brother, Basel, in a car crash in 1994,and in recent years had been given control of specific portfolios, such asneighbouring Lebanon, to prepare him politically for the eventual succession.Nevertheless, he has entered office without grass-roots backing in the army orsecurity services. Bashar will be able to rely on the support of elements of ayounger generation who hold senior positions in the military and securityservices, such as his brother in law, Asif Shawqat. However, to many of the oldguard of military commanders, many of whom have seen active service againstIsrael, Bashar’s credentials do not meet their requirements. As a London-trainedophthalmologist, he lacks the military nurturing and experience many feel isrequired to control Syria.

Bashar is inaugurated asnew president

Syria 13


Concluding the shift in power, the ruling Arab Socialist Baath party—whichhas been the single party in power for three decades—held its ninth partycongress. Changes were made to the Regional Command, which is in effect thepolitburo of the party. Twelve new members were elected to the 21-memberexecutive, to reflect recent changes in the ruling elite. These included theprime minister, Mohammed Mustafa Miro; the foreign minister, Farouk al-Sharaa; the deputy prime minister, Mohammed Naji Otari; and the localadministration minister, Salim Yassin. The new members of the RegionalCommand are all seen as non-ideological experts and technocrats close toBashar. Prominent members of the old guard also retained their positions,including the powerful Sunni first vice president, Abdel-Halim Khaddam; thesecond vice president Zuheir Masharka; the parliamentary speaker, Abdel-Qader Qaddoura; and the veteran defence minister, Mustafa Tlas.

Bashar was expected to reshuffle the government in July. However, localanalysts suggest that he will have to wait until he feels more secure in his ownposition, as the longer he leaves the reshuffle, the more control he can haveover the new cabinet, and therefore the more reformers he will be able to bringinto government. This is reportedly creating tension within the old guard, whowanted the new government formed soon after the inauguration. However,with the old guard having orchestrated the transitional period, it would havebeen impossible to undertake a reshuffle without their influence being felt.When it does take place—which we expect before the end of the first quarter of2001—there are indications that Mohammed Miro will remain as primeminister, while the foreign minister, Farouq al-Sharaa, will be appointed to thevice presidency, and be replaced by a diplomat. Two other vice presidents whoserved under Hafez al-Assad, Abdel-Halim Khaddam and Zuheir Masharka, areexpected to retain their posts as a concession to the old guard.

Foreign visitors who have met Bashar since his appointment say he is clearly a“master of his brief”, with a sharp understanding both of Syria’s problems, andthe regional and international situation. Edward Walker, a US envoy whovisited him in August said that despite Bashar's limited political experience hewas “astute and well informed… and interested in our viewpoint”, with “aclear commitment to the peace process.” One Damascus diplomat describedBashar as a “new dynamic force at the centre. A man who means what he says,and wants to move forward”. While continuing to receive foreign visitors andboost economic ties, Bashar will embark upon several regional trips over thenext quarter, including a planned visit to Egypt and possible visits to Jordanand Saudi Arabia. This reflects a conscious attempt to raise Syria’s profileinternationally, but most particularly to consolidate ties within the Arab world.This should, in turn, help to encourage the inflow of much-neededinvestment. However, while Bashar has a vision for the new Syria, his biggestproblem is in implementing his policy decisions unimpeded by the old guardand the bureaucracy.

Since Bashar began to take a more direct part in government, his more liberalhand has been felt in political and economic policy. With his accession topower, policy initiatives have been accelerated. Internet access in Syria is

Fresh appointments toBaath party ruling council

Foreign visitors say Basharis “master of his brief”

Modest series of politicalreforms begin

A cabinet reshuffle is stillexpected

14 Syria


severely restricted for political reasons, but in July, the Syrian ComputerSociety—long a pet project for Bashar—announced plans to introduce 200,000new Internet connections by 2001, in addition to the 7,000 already available.Also in July, Bashar issued a decree—as part of his pledge to bring Syria into theInternet age—calling for the creation of Internet technology departments atfour Syrian universities. Press and media freedom have also increased—thoughmodestly. Bashar changed the heads of state-run media organisations, in-cluding newspapers Tishreen, Al-Thawra, as well as television and radio, and thestate press agency. In July, and under new management, Al-Thawra began anoffensive, criticising the information minister, Adnan Omran, for a speech inwhich he said “no poverty” exists in Syria. Two weeks later the same news-paper criticised the state television service for “forcing” viewers to switch tosatellite to watch reliable news. The government also announced that “all typesand models” of satellite receivers could be imported, ending restrictions onreceiving foreign satellite television. A ban was also lifted in the third quarteron the poetry of an anti-regime rebel, Nizar Kabbani, who died in 1998.

Bashar has been in office for only a few months, but there are clearly a numberof new policy initiatives which bear his hallmark. However progress is slow,and often it seems policies are announced, but then never implemented, orcarried out on a much smaller scale. Close observers of the Syria regime suggestBashar's progress is being impeded by the cortege of ageing advisors and powerbrokers he inherited from his father. These “strongmen” include militarygenerals such as Mr Tlas, and senior politicians such as Mr al-Sharaa. Forexample, in July the international Arab daily newspaper al-Hayat reported thatSyria would pardon “tens” of political prisoners. In reality, the scale of releaseshas been muted. A Lebanese member of the Muslim Brotherhood wassubsequently released, along with a number of Jordanian political prisonersheld in Syrian jails. The strategy of these strongmen appears to be to temperBashar’s policy initiatives, either by adulteration or by slowing their imple-mentation in order to maintain what they see as a necessary stability and theirhold over the country and major policy direction; they are willing to allowBashar to effect token gestures, but little more substantial. Clearly, thissituation may be difficult to sustain. Bashar may either have to choose hismoment, and purge the ruling elite—a move which risks provoking a coup—ormore likely he may continue to work within the framework of the Baathistsystem, gradually assuming more power at the expense of the old guard, andallowing him the ability to remove some of these figures one by one.

One example of the resurgence of the old guard, was the return on July 22ndof General Hikmat Shihabi, army chief of staff for 24 years. Following thetargeting and arrest of the former prime minister, Mahmoud al-Zubi, andothers, General Shihabi fled into exile in June, after rumours circulated that hewould be arrested in the continuing “anti-corruption” campaign. However, formany in the ruling elite, targeting General Shihabi was seen as the last straw.The Syrian general who controls Lebanon, Ghazi Kenaan, allowed his formerboss to leave unmolested via Beirut. General Shihabi was seen off at Beirutairport by Mr Khaddam, and Lebanon's former prime minister, Rafiq Harriri.Many saw such defiance of the new regime as a clear challenge. A month later,

Shihabi returns, reflectingresurgence of old guard

“Strongmen” impedeprogress

Syria 15


General Shihabi returned to Damascus, and was immediately given anaudience with the new president, suggesting that once again the “strongmen”had been at work behind the scenes looking after their own, and seeking to“guide” the young Bashar.

For the past ten years, Syria has been the ultimate power broker of its smallerneighbour Lebanon, having helped end the 15-year civil war. Many inLebanon resent the continued presence of some 20,000-30,000 Syrian troopson its soil, and Syria’s domination of politics, for example controlling allforeign and defence policy decisions, as well as senior political appointments.Bashar’s new style of government reform and openness appears to be beingapplied to the portfolio of Lebanon, as new more relaxed policies are alreadybeginning to be felt in Syria’s small neighbour. In August and September aparliamentary election was held in Lebanon. As in the two previous electionssince the war, Syria used its clients in the country to prevent any candidatesstanding who were opposed to Syria’s continued presence. In the event—byaccident or design—Syria’s proxies in Lebanon did not rig the ballot aspreviously. Candidates who had fallen out of favour with the Syrian elitescored big wins, including Mr Harriri. In addition, a tiny number of candidatesvehemently opposed to Syria’s presence won seats in office. After the resultswere announced, the Syrian regime, through Al-Thawra, said the results were“welcomed” even though an administration chosen by Syria in 1998 nowlooks set to be ousted. Many see this as a clear shift in Syria’s policy towardsLebanon, suggesting a more liberal approach. However, other suggestions arethat the Damascus elite is fragmenting, and backing different politicalgroupings within Lebanon. As one commentator put it, “the question is didBashar truly shift his patronage in Lebanon, or has he let the situation slip outof control.”

Since the death of Mr Assad in June, both Syria and Israel have been talking upthe prospects of a peace between the countries. Both sides have publicly saidthere are few obstacles to an agreement. Regional and international players,including Jordan’s King Abdullah, and the UN secretary general, Kofi Annan,have spoken to Bashar then announced that Syria is seeking to make peace.The reality is not so clear-cut. Bashar would undoubtedly like to end the stateof war with Israel, which would be a positive step to opening Syria up andencouraging more investors, as well as the resultant flow of aid packages thatwould follow. But any peace deal would require compromise. Israel has for33 years occupied the Golan Heights mountain range in southern Syria. WhileIsrael's current prime minister, Ehud Barak, has said he is prepared to give mostof it back in exchange for a comprehensive peace deal, and normalisation ofrelations, Israel will not return all the land, and Syria will probably have tomake some territorial compromise to reach an agreement. Bashar's domesticposition within the ruling elite is not strong and he therefore has little room inwhich to manoeuvre. The late Hafez al-Assad was committed for three decadesto making no concessions over land. If Bashar were to enter talks, and go backon his father’s commitment, he would face strong opposition that couldthreaten his position at home. It is unlikely therefore that Bashar will enter

Talk but no action inpeace process

Grip loosens on Lebanonduring the election

16 Syria


into overt peace talks with Israel before the latter part of the forecast period,and certainly not until he has strengthened his position domestically.

Economic policy

Following his inauguration as president, Bashar al-Assad made a speech toSyria’s parliament that was seen as verging on the “revolutionary”, in the waythat it broke with tradition. Under Hafez al-Assad, the country becameaccustomed to speech after speech, emphasising the “success” of Syria’ssocialist system. Bashar’s speech on July 17th broke new ground. He had beenexpected to eulogise his father, but instead sketched out a political andeconomic program to rationally address the country’s problems. He began bybriefly praising his father’s legacy of political success, but then went on tocriticise many aspects of policy in the previous 30 years. He told a visibly-shocked parliament that “performance on the economic front was irregularand this was addressed by issuing laws and edicts that were often knee-jerkreactions to individual incidents”. State bureaucracy, he said, had become a“major obstacle” to development, adding that Syria needs to modernise lawsand breakdown bureaucratic obstacles: “It is necessary to draft a wise economicpolicy to address the imbalances between our imports and exports, to redressour balance of payments, to reform our economy so that it can take its role inthe new world order”. Bashar warned Syrians not to rely on the government todo everything for them: “Syrians must go out and take the initiative and notwait for the state to do it for them…. Nobody has a magic wand to fix all this.We have to prioritise and to make sure that the process of change is a means toan end and not our ultimate goal.”

Bashar faces an uphill struggle in addressing Syria’s economic problems. Thecountry is dominated by an all-encompassing public sector, with highly in-efficient state-owned enterprises created at a time when Syria had close rel-ations with the then Soviet Union. Bureaucracy and corruption are hugebarriers to growth and development. Additionally, economic development isarguably hindered by an insular mindset and the fact that much of thebureaucracy and government are hostile to unfettered capitalism.

However,—as he outlined in his inauguration speech (See Political scene)—Bashar seems personally committed to reforming the economy, and making itmore market oriented. Bashar’s influence began to be felt on policy in themonths before his father’s death in June. This was most notable with a series ofeconomic reforms launched by the new government in April and May,including the revision of a foreign investment law, and the removal of holdingrestrictions on foreign currency. In the third quarter, the focus shifted to thepolitical level, with Bashar’s succession, and further reforms were temporarilyshelved. Leading into 2001, Bashar is expected to again refocus attention oneconomic reforms. But as well as the obvious challenges of reviving theeconomy, Bashar's task is complicated by personal political considerations. Thenew president must not only proceed his reforms, but maintain power at thesame time. Like the “strongmen” of the old guard, many members of Syria'spolitical elite are also at the centre of webs of bribes and kickbacks. The more

The transition delaysfurther reforms

Bashar makes“revolutionary”

first speech

Syria 17


Bashar tries to campaign against corruption, and remove needless layers ofbureaucracy, the more he will undermine the patronage networks of thosearound him. He must therefore tread carefully, take into account suchconsiderations and either take only small steps, or first find ways to cement hisown position before embarking upon far-reaching reforms.

The state newspaper Tishreen reported in August that the government hadaccepted an offer of advice and consultation from the World Bank on how toattract investment to the country. The newspaper said that “The World Bankand the International Finance Corporation have said they are prepared toproduce studies on all aspects relating to support for investments in Syria,”adding that “the studies will deal with ways to develop a clear strategy toencourage investments by establishing a legal framework”. In conclusionTishreen reported that “the Syrian authorities have welcomed favourably anydevelopment likely to attract Arab and foreign capital and channel it intoprojects which sustain the economic infrastructure”.

For the moment, Syria’s oil exports of some 325,000 barrels/day—out of totalproduction estimated at 520,000 b/d—represent the country’s most importantexport item, with revenue from oil accounting for some 65% of all exportrevenue. With crude oil prices at a ten-year-high, the government has receiveda welcome windfall in the form of much increased oil revenue. The boostcomes as the economy is slowly recovering from a recession, after two years oflow government spending. As a result the government has taken advantage ofthe oil windfall to increase spending. In August it was announced that salariesin the public sector would increase across-the-board by 25%, effective fromSeptember 1st, while army and civil service pensions would be increased by20%. Syria has some 1.4m public employees, and the increase, if carried out, isexpected to result in a sharp rise in spending. One analyst said that statesalaries represent 50% of all government expenditure, and that the move willrepresent a 12.5% extra-budgetary increase. Independent observers had hopedany increase in public-sector salaries would be accompanied by reform of thecreaking bureaucracy, but the government pointedly failed to suggest therewould be any fresh reforms.

Also taking advantage of the oil windfall, another extra-budgetary spendingpackage was launched in the third quarter to tackle unemployment. In July theprime minister, Mohammed Mustafa Miro, announced a S£80bn (US$1.7bn)package to “solve the problem of unemployment and the labour market,”according to Tishreen. Although no specific details were announced of how themoney would be spent, or where it would come from, the newspaper said thatthe plan would “create jobs.” Subsequently, the newspaper announced thatSyria’s Higher Council for Investment has approved a number of ventureprojects that will see the creation of some 2000 new jobs, focusing on theproduction of lubricants, vegetable oils, cables and irrigation works. Gov-ernment figures put unemployment at below 10%, but unofficial estimates aremore than double this figure. Syria has one of the highest population growthrates in the world, with an annual increase of some 3.3%. Demographerssuggest that, as a result, an extra 200,000 new workers enter the labour market

Package to tackleunemployment announced

State takes advantage ofhigh oil prices

Government turns toWorld Bank for help

18 Syria


every year, requiring high levels of economic growth just to keep pace with thegrowing labour force. Syria will require a far more serious cash injection intothe economy, the creation of far more jobs and other measures, such asincreased transparency to encourage foreign investment, if it is to transform itsstagnatory economy and unemployment crisis.

The domestic economy

Economic trends

Syria’s official growth figures are at best highly optimistic, and at worstfabrication. Government officials have, for example, variously reported realgrowth of more than 5% each year towards end-1990s. However, even anelementary look at the economy would suggest the country suffered a recessionin 1999, as a result of the then low oil prices, and a serious drought. However,only now are figures emerging of the full extent of the 1999 slowdown.One leading independent observer of the Syrian economy has produced datasuggesting government spending in 1999 was between 25% and 33% belowthe budgeted figure for that year. Given that such a large percentage ofeconomic activity is controlled by the state, he argued that the countrysuffered a clear contraction in that year—largely underestimated at the time—which inflation figures certainly seem to support.

Since the 1999 slowdown, there has been some modest recovery in theeconomy. In the absence of any official figures for the third quarter, anecdotalevidence from business leaders would suggest that this recovery is continuing.With crude oil prices at a 10-year-high, it can be expected that greatergovernment revenue from oil exports will feed into the economy to fuel thisgrowth further. The large spending packages announced in the third quarter—if carried out in full—will also increase consumption. Yet in the wake of thedeath of Hafez al-Assad, there is still a sense of political uncertainty which isholding back any serious economic expansion. As a result, the EIU estimatesthat the Syrian economy will grow by 1.5% in 2000, rising to 2.4% in 2001 and2.6% in 2002.

Figures released for foreign investment in Syria for 1999 reveal the urgent needfor reform. Foreign investment totalled US$47.6m according to an officialreport quoted in Al-Baath’s economic weekly edition. These figures representedless than 1% of total foreign investment in all Arab countries. France was thelargest contributor to foreign investment with over a third of the share, whilethe industrial and agricultural sectors were the largest recipients of investment.Syria’s economy may be open to foreign investment, but the reform of obsoletelaws and amendments to the administrative system are required to boostinvestor confidence and encourage investment. Additionally, without improve-ments to the transparency of the state apparatus, any foreign investment thatis attracted will have to be channelled through the thicket of “old guard”

Figures reveal depth of1999 fiscal slump

Growth is now expectedto increase

Foreign investment figuresreleased

Syria 19


agencies, which would dilute the benefit it would otherwise have had to thenational economy

Oil and gas

Crude oil prices have remained remarkably high since late August, despiteattempts by OPEC to stabilise prices. In early September crude prices rose aboveUS$35/barrel for the first time since the Gulf war. On September 10th OPECagreed to increase output by some 3%, or 800,000 barrels/day to ease supplypressures. While Syria is not a member of OPEC, the organisation’s actions areimportant to the Syrian economy as they help to dictate the oil price andconsequently Syria’s oil revenue. Members agreed that if crude prices remainabove US$28/b in October, a further increase in output would be considered.But even with such increases in production, the EIU predicts that prices willremain high in the fourth quarter and into 2001, given the impending arrivalof the northern winter, low inventories, and the continued strong globaldemand, particularly from East Asia. (See Economic Forecast). Such assump-tions and the continuation of relatively high oil prices will be welcome news tothe government, and a further boost to the economy, which will necessitate allthe help it can get if it is to stimulate growth and development.

New figures released by the International Energy Agency (IEA) report thatSyria’s oil production stood at 520,000 barrels/day in the second quarter,predicting it would stay at this level in the third quarter, but fall to 510,000 b/din the fourth quarter of 2000. Production has been falling in recent years, asmany fields discovered in the 1960s reach maturity. Current output is forexample heavily down on its 604,000-b/d peak in 1996. With the country soacutely dependent on oil earnings, concern is growing about the outlook overthe next decade, when reserves are expected to begin to be exhausted. Further-more, with a population growth of some 3.3% per year, rising domesticdemand is expected to force a reduction in export revenue over this period.

To counter these trends, the government has sought to squeeze more oil out ofexisting fields—by making efforts to increase foreign management

IEA says output falling

Oil prices remain high

20 Syria


involvement—as well as looking to new prospective developments. Accordingto the Syrian oil minister, Mohammed Maher Jamal, the government isinvolved in talks with a “a number of international firms” regarding foreigninvolvement in the oil and gas sector, including Dublin Oil of Canada—part ofthe multinational Lundin group—with which it is close to signing an agree-ment to operate fields in the north-east of the country.

Crude oil production(’000 b/d; av)

1999 20001995 1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr

Output 610 588 570 550 540 540 530 530 535 530 520

Source: International Energy Agency, Monthly Oil Market Report.

Mr Jamal has sought to refute any claims that oil production at current levels isonly sustainable until the end of the decade by suggesting that stableproduction will continue—given the quality of some reserves and existingtechnology—until 2020. He added that plans are afoot to construct two newrefineries in addition to the ones at Homs and Banias. However, while two newdiscoveries were announced by Syria Shell earlier in the year—a statement isstill to be made on the extent of their viability—claims of sustainable prod-uction until 2020 (without empirical confirmation and substantiated backing),as with others emanating from Syrian official sources must be treated with alarge degree of scepticism. Furthermore, investors have often complained aboutthe restrictive terms on offer for exploration and development in the Syrian oiland gas sectors. If Syria is to rely on foreign involvement to improve revenuepotential, it will have to continue to acknowledge the need to change theseterms in order to attract investors.

Syria is also pinning hopes on rising gas production. Mr Jamal said in Augustthat the country currently produces 460m cu ft/day of gas, saying this willnearly double by 2005 to 850m cu ft/d. Given the relatively small size of Syria’sgas fields, most oil majors have shown little interest in the market, particularlygiven the complex government bureaucracy. The only notably exceptions areConoco of the US and Total Fina Elf, who are developing some fields and aredue to complete construction of a large gas treatment plant by around mid-2001 in the Deir al-Zor area (see Syria country report; 3rd Quarter 1999).

One of the main problems for the gas sector is that most gas is located in thenorth-east of the country, while the population centres are in the south-west.In July a small step to easing this mismatch was made with the announcementthat a Dutch company, A Hak Pijpleidingen, had been awarded a contract toconstruct a US$46m-pipeline from newly developed gasfields in the Palmyraarea to the city of Aleppo. The 200-km, 24-inch diameter pipeline will be usedto supply gas to a 1,000-mw power station in the city, recently constructed byMitsubishi Heavy Industries of Japan. Bids are also said to be under study for agas pipeline from Homs to the Mediterranean port of Banias.

New pipeline deal is signed

Gas production set toincrease

Minister claims“sustainable production

until 2020”

Syria 21


Agriculture

Better rainfall during the 1999-2000 winter has improved the water table,although they still remain well below average (see Infrastructure) The 1999drought was responsible for decimating production of some crops, however,despite poor rainfall, agriculture—which accounts for one third of GDP—hasbeen less affected. The volume of annual rains is a crucial issue for farmers. Agovernment committee formed to address the shortage said in July that 90% ofSyria’s water is consumed by agriculture, and called for “non-viable” plant-ations to be closed. It also called for new company licences to be issued only ifplans are in place for water recycling. According to the Al-Hayat newspaper,other anti-drought measures taken by the Syrian government to alleviate theproblem include the adoption of a new scheme to move from traditionalirrigation methods to more modern and efficient methods within the nextfour years. The co-operative Agricultural bank will provide the necessary loansto local farmers and water well-owners to help implement this plan.

Harvesting has begun in Syria’s cotton fields, with expectations of a crop of900,000 tonnes of raw cotton, according to an official at the agricultureministry. This is expected to translate into 270,000 tonnes of ginned cotton, afigure much lower than the 324,000 tonnes predicted by industry monitorCotton Outlook. In 1999 Syria produced some 892,000 tonnes of raw cotton,exporting 180,000 tonnes of ginned cotton. For 2000, as a result of increasedlocal market demand, Syria only plans to export around 150,000 tonnes.Traditional markets for Syrian cotton are Italy, Spain, France, Portugal, south-east Asia and North Africa. Syria is one of the world’s top ten cotton producers,with cotton a main export earner, along with wheat and barley.

Infrastructure

One of the biggest problems facing many countries in the Middle East in futureyears is the scarcity of water in the region, resulting from mushroomingdemand, and limited supply. Syria is in a stronger position than Israel andJordan, but is nevertheless facing a growing problem. The state newspaperTishreen recently quoted a ministry of agriculture official as saying gross waterresources from rainfall for the 1998/99 season (November-March) were at26.7bn cu metres—57.4% of the average annual rainfall of 46.5bn cu metres.This winter’s rainfall (1999/00) improved the level of gross water resources to30.13bn cu metres, but this still only amounted to 64.5% of average rainfall,according to the newspaper. Although the better rains allowed water rationingto officially end in Damascus in early 2000, the city, as elsewhere in thecountry, is still suffering from a shortage. Many areas of the capital routinelyhave no tap water after 5 pm, yet at the same time, public fountains in thecentre of the city are using many thousands of litres of water every day.One water consultant said that as recently as 1985, wells could be dug inDamascus to a depth of 15 metres to obtain water, but that today it is necessaryto dig to at least 50 metres. There are concerns that if the coming rainyseason—rains begin to arrive in October, although the season does not usually

Government to adopt newanti-drought measures

Domestic water shortagecontinues

Estimates are of 150,000tonnes of cotton for export

22 Syria


start properly until November—again results in low rainfall, the ongoingdrought will begin to have a permanent effect on the country’s water table.

Despite the shortages, Syria in the third quarter began exporting water toneighbouring Jordan via the river Yarmuk. The government agreed to pump60,000 cu metres/day for two months during September and October, to helpalleviate Jordan’s even more serious water shortage, offering a total of 3.5m cumetres of water. The move is seen as part of on-going efforts to improverelations between the two states.

Syria’s water shortages are set to worsen following the announcement by thehead of Turkey’s state water authority that it will be difficult to supply Syriawith the normal agreed levels of water over the next few months. For bothcountries, the sharing of the water of the Euphrates and the Tigris is a majorconfrontation point, particularly in light of the scarcity of water in the region.Under a bilateral protocol agreed in 1987, Turkey is supposed to supply Syriawith 500 cu metres of water per second. However, after an unusually dryseason, water levels in Turkish dams are dangerously low, threatening acuteenergy shortages for Syria’s northern neighbour. This resulted in the averageflow of water to Syria being reduced to less than one third of the agreed

Turkey limits water flowto Syria

Syria begins exportingwater to Jordan

Syria 23


amount for September, and next month—if water levels do not improve—itcould be reduced further. Syria claims the reason behind the problem lies withthe proliferation of dams constructed by Turkey on the Euphrates. This itclaims has resulted in a reduction of the water flow it receives. However, fortheir part, Turkey counters that Syria is guilty of not making effective use of allthe water it receives—largely as a result of an outdated and inefficient watersystem. Such developments are again threatening to bring the issue of waterback to the forefront of relations between the two countries.

Syria’s tourism authority has approved a plan for the construction of aUS$40m-project in the city of Latakia on the Mediterranean coast. The projectto build a five-star hotel complete with its own port and island is part of a jointinvestment project submitted by Syria’s Arab development group and SaudiArabia’s Bin Laden group—part of the newly formed Arab Investment HoldingCompany (see Financial and other services).

Financial and other services

In April, as part of the new government’s economic reform plans, it wasannounced that foreign banks would be allowed to enter the country, in a bidto increase funding for local businesses. In August the first modest steps weretaken, with licences issued to three banks from neighbouring Lebanon,allowing them to operate in the country’s five free zones. The banks—SociétéGénérale Libano-Européenne de Banque (SGLEB), and Banque Européennepour le Moyen-Orient (BEMO), and Fransabank—have each said that theyintend to begin operations before end-2000. Syria’s many local banks werenationalised in the late 1960s, and are today all owned, operated, managed andsupervised by the government. They are criticised by business leaders for beinginefficient and offering only basic services. There are, for example, no cash-point machines, cheques, or credit cards in Syria. Commercial loans are alsoextremely hard to obtain without using connections.

Under the licences, the banks will be allowed to lend to companies operatingin the free zones, but not take deposits. Most of the businesses in these areasare export-oriented enterprises with close links to the expatriate community.Five other banks, including the British Bank of the Middle East, part of theHSBC group, have also applied for the restricted licences, according to aministry official. The licences set a minimum requirement that the banks haveUS$10m of capital for the first branch, and US$1m for each subsequentbranch. Given the state of the banking sector, Syrians have long put moneyover the border in Lebanese banks, and the move is seen as encouraging theseLebanese institutions to reinvest some of these funds back into the country.While many in the business community welcomed the move, few non-Arabinternational banks are expected to find the terms appealing, with mostwaiting for permission to enter the full internal market, rather than berestricted to the small free zones. One international banker based in Beirut saidthat international banks will be watching the progress of the Lebanese banksbefore considering their next step.

Foreign banks are givenfree-zone licences

Commercial operations infree zones will be limited

Plan approved forUS$40m-resort project

24 Syria


In early September it was announced that a law has been prepared, and isbeing studied by an ad-hoc parliamentary committee, to allow both foreignbanks to enter the full internal market through joint ventures, and to create astockmarket. Official sources said the new banks would be required to be 25%owned by the Syrian state, and have a minimum capital of S£1bn (US$20m)The banks would be allowed to offer traditional banking services, such aslending, savings, and foreign exchange. The Economy and trade minister,Mohammed al-Imadi, said that there are also efforts underway to introducebanking secrecy laws, although he offered no details.

Regarding the proposed stock exchange, the state newspaper Tishreen saidcompanies seeking to list would be required to have a minimum capital ofS£10m (US$200,000). It added that the planned bourse would be supervised bya committee headed by the economy ministry, and including representatives oflisted companies, the Central Bank of Syria, the Commercial Bank of Syria, theUnion of Chambers of Commerce, and stock brokers. Private and foreigninvestors have long sought the creation of a stockmarket, to provide liquidityto the industrial sector, with many firms complaining it is close to impossibleto obtain loan and equity financing for commercial ventures.

Four large Saudi Arabian investment companies have clubbed together tolaunch a US$100m investment fund—the Arab Investment Holding Company,formed under Investment Law 10. The four firms are: Saudi Oger, DallahAlbaraka Group, Saudi Bin Laden Group, and First Saudi Investment Company.A spokesman for the new company said revisions to Law 10 in the secondquarter of the year, allowing foreign investors to lease land, and loweringcorporate tax rates, had prompted the move. The venture is to focus oninvestments in tourism, real estate, and industry. One insider said its firstinvestment may be in the telecommunications sector, pointing at the plannedintroduction of a full global system for mobile communications (GSM)network.

Although the fund appears to have a legitimate base, it is hard not to commenton its timing. The chief company behind the fund is Saudi Oger, owned by theLebanese billionaire, Rafiq Harriri. He is also the former prime minister ofLebanon, and is seeking Syrian support for a return to office following theLebanese parliamentary election in August and September. The launch of aconfidence-boosting investment fund cannot hurt his chances of winningSyrian support.

Following the easing of laws regarding the holding and use of foreign currency(see Country report July 2000), the changing of money at rates other than theofficial rate of S£11.225:US$ will no longer be prohibited. According toTishreen, plans are afoot to start a state company exchanging foreign currencyat the black-market rate—around S£47:US$—rather than at the vastly over-valued official rate. The plans finalised by the Syrian finance ministry willallow Syrians to exchange money freely at branches of the company to be setup around the country, the newspaper said. As yet, no details have been madeavailable as to when this service will begin.

Saudi firms launchUS$100m-fund

Foreign currency laws arerelaxed further

Law is discussedto open bourse

Syria 25


International companies were to submit bids by mid-September for theestablishment of a permanent GSM telephone system to replace the pilotscheme which began operating in February. The government-owned SyrianTelecommunications Establishment (STE) said that it will award two 15-yearbuild-operate-transfer (BOT) contracts with a total capacity of 1.7m subscribers.The system has a planned launch date of February 2001. Given their existinginvestments in the pilot venture, the two existing operators; Syriatel backed byOrascom of Egypt and Siemens of Germany, and Investcom, backed byLebanese investors and Ericsson of Sweden are expected to be the two consort-iums to operate the network. Reports say that under the STE plan, thetwo successful bidders will pay 30% of revenue as royalties for the first threeyears, 40% for the next three years and 50% for the remaining period. Theroyalty will rise to 60% should the bidder wish to extend the contract further.Interest in the offer has been tempered by the lack of success of the pilotscheme, which is serving fewer than 15,000 subscribers, despite capacity of60,000. Many blame the low level of interest on subscription charges ofS£60,000 (US$1,300 at the neighbouring countries rate).

Foreign trade and payments

Fresh data from the IMF’s monthly International Financial Statistics—based onSyrian government figures—present a complete series of current-account datafor 1999, which show the trade balance moving into surplus for the first timesince 1997. It also reveals a 14% decline in income from services. This canlargely be attributed to falling receipts from tourism—particularly from Gulfvisitors—as the effects of the 1998 oil-price slump fed through. However, risingoil prices in the second half of 1999 boosted export revenue, offsetting suchfalls in revenue and helping Syria to register a current-account surplus ofUS$270m for the year.

Current account(US$ m)

1996 1997 1998 1999

Goods: exports 4,178 4,057 3,135 3,806

Goods: imports –4,516 –3,603 –3,307 –3,452

Trade balance –338 454 –172 354

Income: credit 534 421 389 356

Income: debits –1,017 –1,006 –995 –899

Income balance –483 –585 –606 –543

Services: credit 1,833 1,604 1,795 1,547

Services: debits –1,555 –1,489 –1,481 –1,552

Services balance 278 115 314 –5

Current transfers: credit 630 504 525 466

Current transfers: debit –6 –5 –2 –2

Current transfers balance 624 499 523 464

Current-account balance 81 483 59 270

Source: IMF, International Financial Statistics (IFS).

Bids expected forfull GSM network

IMF figures reveal atrade surplus

26 Syria


Strong oil prices have continued to boost export revenue, increasing govern-ment earnings, and improving the country’s trade balance. No official tradefigures have been released since full-year 1999 data, but analysts suggest full-year export figures for 2000 will be well above the US$3.81bn recorded for1999. With the country still recovering from the 1998-99 recession, it isexpected that for 2000, Syria will record a surplus in excess of US$1bn on thetrade account—the first time since 1991. The EIU forecasts crude prices willcontinue to remain high into 2001, and as a result, we expect Syria to continueto gain from this in its exports revenue.

In July the government passed a decree to ease restrictions on importing cars.While the country has some 1.2m vehicles, individuals have been banned fromimporting cars for 35 years. Most were imported through the state car importer–—Sayarat—or through private investment companies posing as transportfirms. Under the decree, individuals will be allowed to import petrol-drivencars so long as they are no more than two years old. However, a permit will stillbe required from Sayarat, and be subject to high import taxes and restrictions.For example, an imported car must be paid for in hard currency, which mustcome from government approved export earnings, with duties on cars rangingfrom 190% to 255%.

Having resolved a debt-service problem in April, the Japanese government iswarming to the idea of investing in new infrastructure in Syria. In thethird quarter, it granted US$12m in aid to upgrade the water supply facilities inthe province of Damascus, which will improve the provision of drinking waterfor some 200,000 inhabitants. Under the program, Japan will provide pumps,generators, pipes and other equipment for nine districts. In the same period,Japan provided 4,000 tonnes of wheat flour as emergency food aid to droughtstricken areas, valued at some US$900,000.

Japan has long been the largest OECD donor to Syria, largely as a result of itspolicy of providing aid to Middle Eastern states to ensure warm relations andsecure sources of oil. Japan is dependent on imported oil, and suffered con-siderably during the oil crisis of the early 1970s. In Syria, Japan has invested ina number of infrastructure projects in recent years, spending an estimatedUS$1.2bn on electricity generating plants. These have eased Syria’s electricitysupply problems, and reduced power cuts in Damascus to a low level. Japanprovides some US$25m a year in grant and technical aid, as well as the muchlarger development projects it invests in. The Syrian government has repeat-edly asked Japan to fund the renovation of existing ports, and the constructionof two new facilities, in the northern city of Tartous. Japan has said this is thenext “obvious” large project, which is estimated to cost some US$10m, but it isyet to agree to go ahead with funding.

The new government of Bashar al-Assad has continued in its efforts to furthertrade ties in a flurry of regional initiatives. In August, following several highlevel talks, Syria and Jordan signed four agreements aimed at increasing tradeand improving economic co-operation, particularly in the fields of agriculture,transportation, tourism and industry. On August 13th Syria began exporting

Oil prices continue to boostforeign account

Government easesrestrictions on imported cars

Japan provides more aid

New funding isconsidered for ports

Efforts continue toboost trade

Syria 27


water to Jordan via the river Yarmouk to the King Abdullah dam to ease itsneighbours water shortages (see Infrastructure). The talks approved executivemeasures to start construction of a dam on the Syrian-Jordanian border at thecost of US$150m and addressed progress on linking the two countries’electricity grids, as part of a regional project to share electricity, which includesIraq, Lebanon, Egypt and Turkey.

Syria and Lebanon moved closer towards creating a planned common marketin the third quarter of 2000, when Bashar ratified an earlier agreementliberalising trade in agricultural goods. The deal is intended to allow aprogressive reduction in barriers on agricultural products over five years.Lebanese producers claim Syria restricts the import of Lebanese agriculturalproduce, while allowing Syrian goods to be “dumped” on the Lebanese market.An agreement between the two countries, establishing joint customs offices onthe border which had been made in 1997 was also ratified. Additionally, sinceJanuary 1st 1999 an agreement to gradually reduce duties on Syrian andLebanese industrial goods to zero in four years has theoretically been in force.However,, Lebanese exporters again say that the agreement is being flouted bySyria. The privately owned Lebanese newspaper al-Mustaqbal recentlypublished figures indicating that Lebanese exports to Syria fell from US$5.99min the first quarter of 2000, down from US$6.22m in the first quarter of 1999,while Syrian exports to Lebanon grew from US$51.49m to US$71.4m for thesame period.

Syria has in recent years sought to improve its relations with neighbouringIraq, having sided against Iraq in the 1980-88 Iran-Iraq war, and then sidedwith the US in the 1990 Gulf war. Efforts began in 1998, when the joint borderwas opened to businessmen and diplomats. In 1999 an Iraq interests office wasopened in Damascus (See Country report July 2000). In the latest effort toboost ties, a 60-year-old rail link between the two countries was reopened inAugust. A service is now running once a week between Aleppo, and thenorthern Iraqi city of Mosul. The two countries have also announced a plan toincrease joint trade to US$1bn annually, within the context of the UN oil-for-food regime. Syrian-Iraqi trade is currently estimated at some US$450m a year,most of which is unrecorded.

Additionally, work has been underway for some time to reopen the trans-Syrian oil pipeline between Kirkuk and Banias, after Syria reportedly signed adeal to reopen it to take Iraqi oil to Syrian coastal ports in February 1999.According to Iraqi sources, the pipeline was repaired earlier this year in Marchand is capable of transporting 300,000-350,000 barrels/day, although we haveno confirmation of it being ready to resume service on the Syrian side. WhileIraq will require UN approval to begin exporting oil via Syria, the governmentin Damascus will see the pipeline most significantly as an opportunity to gaina viable source of income. Additionally, it could possibly serve as a potentialpolitical lever in obtaining US concessions—political or economic—vis-à-vis USefforts to deprive Saddam Hussein of any sources of income that may abet themaintenance of his regime or Iraq’s weapons development programme.

Trade deal is ratifiedwith Lebanon

Rail link opens with Iraq,seeks to boost trade

28 Syria


Following co-operation agreements with Saudi Arabia, Jordan and the UAE (seeCountry report July 2000), Syria has concluded a similar agreement to establisha free-trade zone with Qatar, as part of the drive to promote inter-Arab tradeand economic integration in the region. Efforts to step up economic co-operation with Russia have also been made with the signing of an agreementto avoid double taxation between the two countries. Talks also focused onincreasing co-operation in the banking, energy and irrigation sectors, butparticularly in the oil and gas industries.

In other developments, Iran are reportedly close to concluding an agreementto build a US$200m-cement plant in Syria. Speaking at the 47th DamascusInternational trade fair, the Iranian industry minister, Gholamreza Shafei,stated that Iran also planned other joint investment projects, including thebuilding of ten grain silos with a storage capacity of 1m tonnes. According tothe Syrian minister of planning, Issam Zaim, the petrochemical industry isanother likely area of co-operation. The annual volume of trade between thetwo countries is estimated to be around US$90m.

Further co-operationagreements are signed

At a glance: 2000-01€¦ · COUNTRY REPORT Syria October 2000 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom At a glance: 2000-01 OVERVIEW While the

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