HIGHLIGHTING FRAGILITY OF REFORM, REGIME LOYALIST

C O N F I D E N T I A L DAMASCUS 006367

SIPDIS

SIPDIS

NEA/ELA
NSC FOR ABRAMS/DORAN/SINGH
TREASURY FOR GLASER/LEBENSON
EB/ESC/TFS FOR SALOOM

E.O. 12958: DECL: 12/01/2015
TAGS: ECON EFIN SY
SUBJECT: HIGHLIGHTING FRAGILITY OF REFORM, REGIME LOYALIST
ANNOUNCES NO REDUCTION IN SUBSIDIES

REF: A. DMS 5045


B. DMS 5909

C. DMS 6131

Classified By: CDA Stephen Seche, reasons 1.5 b/d


1. (C) Summary: A regime insider recently announced that the
SARG will not reduce the subsidy on diesel or other basic
commodities, publicly contradicting Deputy Prime Minister for
Economic Affairs Abdullah Dardari and effectively
marginalizing the work of a committee of reformers tasked
with developing a long-term strategy of subsidy reduction.
Taken with other recent public rebukes, the latest comments
indicate the current ascendancy of anti-reform elements in
the SARG, who argue that the government cannot afford reform
given the current political environment. End summary.


2. (SBU) During a session of Parliament last week, Mahmoud al
Abrash, speaker of Parliament and mouthpiece for the regime,
publicly marginalized the work of a special committee tasked
with developing a plan to gradually reduce subsidies on
diesel and other basic commodities. Abrash stated that
"rumors" of a possible reduction in subsidies were untrue,
adding that the Regional Command, which includes the
President and SARG officials with policy-making authority,
had decided not to reduce subsidies on any commodities. His
comments come as winter approaches and as average Syrians-
who spend as much as 1/4 of their monthly income on diesel to
heat their homes- are increasingly nervous about their
declining purchasing power in the face of 10-15% inflation,
according to unofficial figures, and the 10% decline in the
value of the Syrian Pound (SYP).


3. (C) Abdul Kader Husrieh, an economist with Ernst & Young
who is one of the intellectual authors of the committee's
recommendations, derided the announcement as a political
decision without economic merit. He added that Abrash's
comments highlight the split in the SARG between those who
are trying to build a long-term agenda for reform and those
who believe the SARG should act in crisis mode and forsake
reforms as long as the external pressure is so severe. Other
high-profile, public contradictions of the reformers indicate
that the latter group is ascendant, and that reformers have
less influence (ref B). Amin el Sharkawi, the Assistant UN
Resident Representative in Syria who is providing technical
assistance to the SARG on political and economic reform,
stated that while Dardari is primarily alone in pushing for
reform, he is facing a "tidal wave" of anti-reform sentiment.



4. (SBU) The special committee, made up of reformers in and
out of government, had recommended that the SARG reduce the
subsidy on diesel by 5 SYP per year until the price matches
the world price in 2010. In addition, the committee
recommended that the SARG offset rising prices with up to a
40% increase in public sector wages and an annual cash
payment to each Syrian citizen. Reformers argued that the
plan was a realistic attempt to tackle the fiscally
unsustainable subsidy program, in which the SARG spends
approximately 220 billion SYP (3.8 billion USD) per year-
almost half of its projected income in 2006- to keep the
consumer cost on basic, non-agricultural commodities
artificially low. The subsidy for diesel alone, which
Syrians use to heat their homes and transport goods to
market, costs 100 billion SYP (1.9 billion) per year
according to unofficial figures, while fueling a smuggling
trade that sends an estimated 20% of Syria,s subsidized
diesel into neighboring countries (reftel).


5. (C) Comment: Abrash,s statement on subsidies comes in the
context of other regressive and politically motivated SARG
actions on the economy, which remind reformers as well as
average Syrians that the Baath Party and security forces
remain in control of the country's economic future (ref C).
However, the high cost of subsidies is a looming problem with
which the SARG must contend as it faces the loss of oil
revenue in the mid-term. As Husrieh plainly stated, the
reduction of subsidies is a medicine that the country has to
take, and the longer it waits the more bitter it will taste.
SECHE