Syria: Economy

Syria is a middle-income, developing country with an economy based on agriculture, oil, industry, and tourism. However, Syria's economy faces serious challenges and impediments to growth, including: a large and poorly performing public sector; declining rates of oil production; widening non-oil deficit; widescale corruption; weak financial and capital markets; and high rates of unemployment tied to a high population growth rate. In addition, Syria currently is subject to U.S. economic sanctions under the Syria Accountability Act, which prohibits or restricts the export and re-export of most U.S. products to Syria.

As a result of an inefficient and corrupt centrally planned economy, Syria has low rates of investment, and low levels of industrial and agricultural productivity. The IMF projected real GDP growth at 3.9% in 2009 from close to 6% in 2008. The two main pillars of the Syrian economy used to be agriculture and oil, which together accounted for about one-half of GDP. Agriculture, for instance, accounted for about 25% of GDP and employed 25% of the total labor force. However, poor climatic conditions and severe drought badly affected the agricultural sector, thus reducing its share in the economy to about 17% of 2008 GDP, down from 20.4% in 2007, according to preliminary data from the Central Bureau of Statistics. On the other hand, higher crude oil prices countered declining oil production and led to higher budgetary and export receipts.

Water and energy are among the most pervasive issues facing the agriculture sector. Another difficulty the agricultural sector suffered from is the government’s decision to liberalize the prices of fertilizers, which have increased between 100% and 400%. Drought was an alarming problem in 2008; however, the drought situation slightly improved in 2009. Wheat and barley production about doubled in 2009 compared to 2008. In spite of that, the livelihoods of up to 1 million agricultural workers have been threatened. In response, the UN launched an emergency appeal for $20.2 million. Wheat has been one of the crops most affected, and for the first time in 2 decades Syria has moved from being a net exporter of wheat to a net importer.

Damascus has implemented modest economic reforms in the past few years, including cutting lending interest rates; opening private banks; consolidating all of the multiple exchange rates; raising prices on some subsidized items, most notably diesel, other oil derivatives, and fertilizers; and establishing the Damascus Stock Exchange, which began operations in 2009. In May 2008, Damascus raised the price of subsidized diesel by 357%, and in January 2009 the price of fuel oil was raised by 50%. In addition, President Asad signed legislative decrees to encourage corporate ownership reform and allowed the Central Bank to issue Treasury bills and bonds for government debt. Despite these reforms, the economy remains highly controlled by the government. Long-run economic constraints include declining oil production, high unemployment and inflation rates, rising budget deficits, increasing pressure on water supplies caused by heavy use in agriculture, increasing demand for electricity, rapid population growth, industrial expansion, and water pollution.

The government hopes to attract new investment in the tourism, natural gas, and service sectors to diversify its economy and reduce its dependence on oil and agriculture. The government has begun to institute economic reforms aimed at liberalizing most markets, but reform thus far has been slow and ad hoc. For ideological reasons, privatization of government enterprises is still not widespread, but is in its initial stage for port operations, power generation, and air transport. Most sectors are open for private investment except for cotton mills, land telecommunications, and bottled water.

The Bashar al-Asad government started its reform efforts by changing the regulatory environment in the financial sector, including the introduction of private banks and the opening of a stock exchange in March 2009. In 2001, Syria legalized private banking and the sector, while still nascent, has been growing. As of January 2010, 13 private banks had opened, including two Islamic banks. Syria has taken gradual steps to loosen controls over foreign exchange. In 2003, the government canceled a law that criminalized private sector use of foreign currencies, and in 2005 it issued legislation that allowed licensed private banks to sell specific amounts of foreign currency to Syrian citizens under certain circumstances and to the private sector to finance imports. In October 2009, the Syrian Government further loosened its restrictions on foreign currency transfers by allowing Syrians travelling abroad to withdraw the equivalent of up to U.S. $10,000 from their Syrian Pound accounts. In practice, the decision allows local banks to open accounts of a maximum of U.S. $10,000 that their clients can use for their international payment cards. The holders of these accounts will be able to withdraw up to U.S. $10,000 per month while travelling abroad.

To attract investment and to ease access to credit, the government allowed investors in 2007 to receive loans and other credit instruments from foreign banks, and to repay the loans and any accrued interest through local banks using project proceeds. In February 2008, the government permitted investors to receive loans in foreign currencies from local private banks to finance capital investment. Syria's exchange rate is fixed, and the government maintains two official rates--one rate on which the budget and the value of imports, customs, and other official transactions are based, and a second set by the Central Bank on a daily basis that covers all other financial transactions. The government passed a law in 2006 which permits the operation of private money exchange companies. However, a small black market for foreign currency is still active.

Given the policies adopted from the 1960s through the late 1980s, which included nationalization of companies and private assets, Syria failed to join an increasingly interconnected global economy. Syria withdrew from the General Agreement on Tariffs and Trade (GATT) in 1951 because of Israel's accession. It is not a member of the World Trade Organization (WTO), although it submitted a request to begin the accession process in 2001 and again in 2004. Syria is developing regional free trade agreements. As of January 1, 2005, the Greater Arab Free Trade Agreement (GAFTA) came into effect and customs duties were eliminated between Syria and all other members of GAFTA. Syria's free trade agreement with Turkey came into force in January 2007. Syria is a signatory to free trade agreements with Jordan, India, Belarus, and Slovakia. In 2004 Syria and the European Union initialed an Association Agreement; the ratification process had not been finalized as of March 2011. Although Syria claims a recent boom in non-oil exports, its trade numbers are notoriously inaccurate and out-of-date. Syria's main exports include crude oil, refined products, rock phosphate, raw cotton, clothing, fruits and vegetables, and spices. The bulk of Syrian imports are raw materials essential for industry, petroleum products, vehicles, agricultural equipment, and heavy machinery. Earnings from oil exports as well as remittances from Syrian workers are the government's most important sources of foreign exchange.

Syria has produced heavy-grade oil from fields located in the northeast since the late 1960s. In the early 1980s, light-grade, low-sulphur oil was discovered near Dayr al-Zur in eastern Syria. Syria's rate of oil production has been decreasing steadily, from a peak close to 610,000 barrels per day (bpd) in 1995 down to approximately 379,000 bpd in 2008. In parallel, Syria’s oil reserves are being gradually depleted and reached 2.5 billion barrels in January 2009. Recent developments have helped revitalize the energy sector, including new discoveries and the successful development of its hydrocarbon reserves. According to the 2009 Syria Report of the Oxford Business Group, the oil sector accounted for 23% of government revenues, 20% of exports, and 22% of GDP in 2008. Experts generally agree that Syria will become a net importer of petroleum by the end of the next decade. Syria exported roughly 150,000 bpd in 2008, and oil still accounts for a majority of the country's export income. Syria also produces about 22 million cubic meters of gas per day, with estimated reserves around 240 billion cubic meters or 8.5 trillion cubic feet. While the government has begun to work with international energy companies in the hopes of eventually becoming a gas exporter, all gas currently produced is consumed domestically. Demand for electricity is growing at a rate of about 10% per year and is barely met by current generation capacity, and ongoing and planned projects are not expected to be sufficient to meet future demand.

Some basic commodities, such as bread, continue to be heavily subsidized, and social services are provided for nominal charges. The subsidies are becoming harder to sustain as the gap between consumption and production continues to increase. Syria has a population of approximately 21 million people, and Syrian Government figures place the population growth rate at 2.37%, with 65% of the population under the age of 35 and more than 40% under the age of 15. Approximately 200,000 people enter the labor market every year. According to Syrian Government statistics, the unemployment rate in 2009 was 12.6%; however, more accurate independent sources placed it closer to 20%. Government and public sector employees constitute about 30% of the total labor force and are paid very low salaries and wages. Government officials acknowledge that the economy is not growing at a pace sufficient to create enough new jobs annually to match population growth. The UN Development Program announced in 2005 that 30% of the Syrian population lives in poverty and 11.4% live below the subsistence level.

Syria has made progress in easing its heavy foreign debt burden through bilateral rescheduling deals with its key creditors in Europe, most importantly Russia, Germany, and France. Syria has also settled its debt with Iran and the World Bank. In December 2004, Syria and Poland reached an agreement by which Syria would pay $27 million out of the total $261.7 million debt. In January 2005, Russia forgave 73% of Syria's $14.5 billion long-outstanding debt and in June 2008, Russia’s parliament ratified the agreement. In 2007, Syria and Romania reached an agreement by which Syria will pay 35% of the $118.1 million debt. In May 2008, Syria settled all the debt it owed to the Czech Republic and Slovakia.

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