SARG STABILIZES ITS CURRENCY

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 006544

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 12/18/2015
TAGS: ECON EFIN EINV SY
SUBJECT: SARG STABILIZES ITS CURRENCY

REF: A. A: DMS 6224

B. REF B: 6131

1.(C) Summary. The SARG began intervening last week in
defense of its currency after four months of steady decline.
Though the business community had opposed using the country's
hard currency reserves to defend the pound, the climate for
business had deteriorated to such an extent in recent weeks
that most Syrians quietly welcomed the intervention as an
opportunity to regroup. Even SARG supporters admit, however,
that the SARG's ability to sustain its current measures are
limited and the currency could face increased strain if
international pressure is sustained. End summary.

2.(C) Over the last ten days, the SARG has moved to reverse
the recent ten percent devaluation of its currency (ref B).
The state-controlled press reported on December 7 that
President Bashar al-Asad had met the previous evening with
his economic team to discuss stabilizing the exchange rate
for the Syrian Pound. The same day, the Central Bank of
Syria began an intervention that continues today. As
described to us, the intervention began when the security
services ordered the largest money-changer in Syria's black
market, Sahloul, aka Abu Shafiq (ref A),to move his
operations into the Central Bank. The SARG provides no
public information on its interventions but a business
partner of Sahloul told us that the money changer is
responsible for dispensing hard currency into the black
market. According to him, the SARG decided to intervene with
1.2 billion through the Commercial Bank of Syria (CBS) to
finance imports, and an initial 100 million USD for the
informal sector, with another 100 million USD if needed.

3.(C) The amount of SARG hard currency reserves is also not
public knowledge, but we have heard numbers ranging from 12
to 20 billion USD from contacts in the banking sector.
Besides the secrecy, part of the reason for the conflicting
numbers is due to the way the SARG holds its reserves. The
general manager of one of Syria's new private banks recently
related to us his own understanding of the current status of
the country's hard currency reserves. According to him, the
Central Bank itself holds not more than 4 billion USD in hard
currency. The majority of reserves are held by the CBS, as
much as 12 billion USD currently, with another four billion
USD in various other state-owned banks, for a total of 20
billion USD in hard currency - primarily USD. No matter the
exact amount, it is widely accepted that the SARG has
accumulated significant reserves over the last few years, and
with imports not expected to top 6.2 billion USD in 2006, it
retains the ability to intervene successfully over the
short-term.

4.(C) Syrians all remember the bad old days of the mid-80s,
however, when the SARG had considerable hard currency
reserves but decided to use them to prop up its currency when
it came under pressure following the loss of the generous
development assistance Syria had been receiving from Arab
oil-producing states. The SARG successfully defended the
value of the pound for a year or two, but then ran out of
hard currency. The pound then devalued precipitously,
seriously eroding the life savings of many Syrians. Those
who had been in business at that time are still bitter when
discussing the experience and are convinced that the only
people who profited from the SARG's intervention were regime
insiders who were able to convert their pounds to hard
currency at a favorable rate and then move their assets out
of the country before the collapse. For that reason, the
vast majority of established businessmen have opposed an
intervention up till now (ref B).

5.(C) In spite of that, the SARG's intervention has generally
been welcomed as a respite from what had been a rapidly
deteriorating business environment. A number of businessmen
had told us in recent weeks that they had decided to shut
down their factories because the extreme volatility of the
pound made it impossible for them to gauge the true value of
the currency. Additionally, most businesses lost access to
the black market because of the regressive SARG tactic of
arresting the moneychangers (ref B) and, therefore, could not
finance their business's import needs. (Note. Most
importers still opt to go through the black market to obtain

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hard currency because the CBS is slow, bureaucratic, only
finances certain categories of imports, and to avoid paying
taxes. End note.)

6.(U) The SARG has been quick to declare success.
Previously, with each new development in the investigation of
the Rafiq Hariri assassination, the value of the pound fell
perceptibly. Last week was different. The currency devalued
by half a pound, from 57.50 to 58SP per USD, within an hour
of the Gebran Tueni assassination By the end of the day,
however, the rate was back down to 57.65SP per USD. The next
day, Deputy Prime Minister for Economic Affairs, Abdullah
Dardari, pointed to this as proof that the SARG had taken
control of the exchange rate away from the black market
moneychangers.

7.(C) Comment. The SARG had a relatively progressive plan for
managing its currency: give the Central Bank monetary tools
like treasury bills to manage the currency, increase public
access to formal hard currency exchanges, and formalize the
black market. Unfortunately, the regime opted to revert
instead to the regressive tactics that have failed in the
past. Though temporarily stabilized, the exchange rate will
remain a significant issue for the SARG as long as the
current political crisis continues. It will also remain the
bell-weather for Syrians' confidence in the SARG's ability to
manage the country's economy.


SECHE