Panel Session 1 : Economic and Investment Outlook for Syria

David Hale
Chairman, Hale Advisers LLC


Syria has begun a process of economic reform which could ultimately give her the status of an emerging market. After a long period of state domination, she is encouraging the development of private sector financial institutions while enacting legislation to set the stage for the establishment of a stock market. If these reforms continue, global fund managers could start to invest in Syria as early as 2008.

The Syrian economy confronts both challenges and opportunities. The challenges are well known. The U.S. has imposed sanctions on Syria because of allegations that Syria is aligned to terrorist movements such as Hamas and Hezbollah. Syria’s oil production is declining and could create major financial problems for the government in a few years. In trying to become an emerging market, Syria confronts numerous microeconomic challenges analogous to Eastern Europe in the early 1990’s. Syria has a much larger private sector today than Eastern Europe did in 1990, but the state has completely dominated the financial system since 1963 while imposing many restrictions on foreign trade and investment. The government will have to pursue a policy of progressive microeconomic liberalization in order to reduce these barriers and engage effectively with the global economy.

Syria also presents great opportunities. The Middle East is currently awash in surplus liquidity because of high oil prices. Arab investors have been funneling money into real estate and other private equity deals in Syria. The rise of China as a great economic power will give Syria alternatives to traditional markets in Europe. China has invested a billion dollars in the Syrian oil sector in a joint venture with India. Chinese firms plan to put textile factories in Syria in order to take advantage of the country’s large cotton supply. There may also be an opportunity in the new year for Syria to improve relations with the Americans. The Congress has created a special commission under former Secretary of State James Baker to search for solution to the current political and military impasse in Iraq. The Baker report could propose that the Bush administration engage more effectively with Iraq’s neighbors to seek solutions to Iraq’s problems. This could provide a window for the Assad government to talk directly with the Bush administration and set the stage for a better relationship. If the U.S. could see Syria playing a helpful role in stabilizing Iraq while also promoting peace with Lebanon and Israel, it might be possible to eliminate the sanctions which now exist on trade and financial transactions.

There can be little doubt that the most immediate challenge facing Syria is declining oil output. Domestic oil production has fallen by 20% during the past five years and could decline another 20-30% by 2015. Meanwhile, oil consumption has increased to 15 million tones and could rise to 20 million tones by 2015. In such a scenario, Syria would become an oil importer rather than an oil exporter. The decline in oil production could reduce Syria’s exports and curtail government revenue. The IMF estimates the revenue losses for the government could be as large as 10% of GDP. Syria will therefore have to curtail the generous subsidies it now provides for petroleum products. Syria will probably also have to restructure its tax system in order to find alternatives to oil. At present, government revenues are modest compared to other countries in the region. Tax revenues are currently equal to about 10.4% of GDP compared to 13.7% in Egypt, 15.8% in Jordan, 15.7% in Lebanon, and 21% in Turkey.

The government has begun the process of financial liberalization. It allowed the re-establishment of private banks two years ago. Six banks are now operating in the country and have enjoyed large growth in deposits since 2005. Syria needs a private financial sector in order to improve resource allocation and provide more credit for business. In 2005, credit for the private sector was equal to 25% of GDP compared to 86.2% in Jordan, 75.9% in Lebanon, 59% in the UAE, and 44.4% in Egypt. The government has also enacted legislation to create a stock market. Syrian bankers estimate that there are about 50 private companies with the potential to go public. The government could also use the stock market to privatize state owned companies in sectors such as telecommunications, transportation, and infrastructure. During the past two years, stock markets elsewhere in the region have boomed because of the surplus liquidity produced by high oil prices. If Syria opens a new market in 2007, it would also benefit from this excess liquidity.

The Syrian government has also begun to liberalize foreign trade after a long period of highly protectionist trade policies. Syria has significantly reduced tariffs on most categories of trade. It has signed free trade agreements with other Arab countries and is moving towards a deal with Turkey. It has had extensive discussions with Europe about improved trade links but the Americans have lobbied Europe to delay completing the deal. The next step would be to join the WTO. Despite the American sanctions and state control of the financial system, Syria has enjoyed some success in attracting FDI. Its stock of FDI was worth over $12 billion in 2004 compared to $4 billion in Jordan, $2.3 billion in Lebanon, $4.4 billion in the UAE, and $20.4 billion in Saudi Arabia. Syria has attracted foreign investment to its energy sector from Britain, Canada, France, and China. Syria will need a more robust environment for trade and investment because of its rapid population growth. The population has already grown from 3.5 million in 1950 to 16.2 million in 2000. The United Nations is projecting that it could rise to 36.3 million by 2050. Syria also has a large diaspora of citizens living in the Gulf countries, Europe, and North America. If the economy does not expand, more educated people will leave the country to seek their fortunes elsewhere.

The great political challenge now confronting the Syrian government is to improve relations with the American government and remove the sanctions now inhibiting trade. The U.S. has a long history of using sanctions as an instrument of foreign policy. In 1999, the U.S. lost nearly $9 billion of foreign trade because of sanctions on Iran, Iraq, Cuba, Libya, and Yugoslavia. There is a clear political pattern to American trade with the Middle East today. The U.S. signed an FTA with Jordan four years ago. Its imports have therefore skyrocketed from $229 million in 2001 to $1.23 billion in 2005. Jordan now has a $622 million trade surplus with the U.S. compared to a deficit of $110 million in 2001. The U.S. has also signed free agreements with Morocco, Bahrain, and Oman but they have not yet had time to change trade flows. The U.S. had no trade with Libya before 2003. Since sanctions were lifted, it has boomed. In the first 8 months of 2006, the U.S. had $1.7 billion of imports from Libya and exports of $183 million. Trade with Iraq has also boomed since the occupation. U.S. imports from Iraq have grown from $3.5 billion in 2002 to $9 billion last year. Despite the large size of the Iranian economy, the U.S. has minimal trade with that country. In 2005, the U.S. had imports from Iran of only $174.5 million compared to $168 million in 2000. The U.S. has modest trade with Syria. In 2005, it imported $323 million of goods and exported $115 million. But as Jordan’s experience will testify, this trade could probably triple or quadruple if Syria were able to end sanctions and pursue an FTA with America.

Former Secretary of State James Baker is going to produce a report on America’s Iraq policy later this year. There have been suggestions in the press that Baker will propose that the U.S. should do more to seek help from Iraq’s neighbors in stabilizing the country. Baker will encourage the Bush administration to re-engage both Syria and Iran. Such proposals could provide an opportunity for the Assad government to develop friendlier relations with the U.S. and relax the sanctions which now exist on commerce. The U.S. has had a difficult relationship with Syria for many years. It has long accused Syria of supporting terrorist movements such as Hamas and Hezbollah. The U.S. is concerned about Syria’s increasingly close relationship with Iran. The U.S. is opposed to Syrian attempts to dominate Lebanon. There was a major improvement in U.S.-Syrian relations in 1991 when the Assad government supported the war with Iraq. The U.S. also had high hopes for the new government under President Bashar Assad in 2000. But the conflicts in Lebanon and Israel as well as Syria’s failure to support the 2003 occupation of Iraq have produced many new strains and tensions. President Assad has said that he wants to improve relations with America, but he has low credibility in Washington because of the legacy problems with Israel and Lebanon. The Iraq crisis will provide him with a second chance to re-establish better ties with the Bush administration.

The transformation of Syria into a truly market oriented market with a robust financial system has only just begun. There is a great deal which Syria can accomplish unilaterally and without changing its foreign policy. But if Syria could pursue a foreign policy which turned America from a foe into a friend, it could significantly boost its prospects for boosting trade and investment. The Assad government should therefore regard its foreign policy as a potential instrument of economic reform. It should attempt to capitalize on America’s problems in Iraq to improve relations with the Bush administration. The Iraq war has so far been a hardship for Syria. It has disrupted trade and produced 2 million Iraqi refugees now living in Syria. It has also increased fears of sectarian violence within Syria itself. But every crisis produces potential opportunities and Iraq is no different. The Syrian government should attempt to take advantage of Iraq’s problems to revitalize the relationship with America. It would not only enhance the prospects for peace and stability in the region. It could also help to enhance the prospects for economic reform and growth within Syria itself.


©2006 Hale Advisers, LLC.   All rights reserved.
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