FACING DOUBLE-DIGIT INFLATION, SYRIANS NERVOUSLY

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 001273

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/22/2016
TAGS: ECON EFIN SY
SUBJECT: FACING DOUBLE-DIGIT INFLATION, SYRIANS NERVOUSLY
AWAIT AN INCREASE IN DIESEL PRICES

REF: A. DMS 05045

B. DMS 05410

C. DMS 06367

D. DMS 00290

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d


1. (SBU) Summary: Local media is giving increasing coverage
to the issue of inflation, with contacts estimating that the
prices of basic commodities are rising much faster than the
officially reported rate of 6%. Prices have refused to come
down after a series of shocks in 2005, indicating a general
sense of economic unease, exacerbated by rumors that the SARG
is preparing to increase the price of diesel, which is
expected to have a dramatic effect on prices across the
board. In response to inflation, the SARG has begun to take
regressive measures, such as re-instituting price controls,
which are ultimately unsustainable and have done little to
assure Syrians that it can manage the economy. End summary.

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Prices Are Rising...
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2. (SBU) Prices in Damascus have been increasing steadily
since mid-2005, with contacts estimating average inflation in
the cost of basic commodities to be as high as 20%.
Inflation has been most acute in the prices of olive oil,
sugar, tea, clothing and meat, which are important components
of the average Syrian's consumption basket. For example, the
price for five kilograms of olive oil is 50% higher than it
was in August 2005, rising from 850 to 1,250 Syrian Pounds
(SYP). The price of a kilo of meat other than poultry has
risen almost 70% over the past four months, from 150 to 250
SYP, although part of this rise is attributed to increased
demand from fears of Avian Flu. In addition to prices for
basic commodities, prices in the real estate sector, which
itself has been a primary catalyst for overall inflation
throughout 2005, are estimated to have risen at least 30%
over the same time period.

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And Staying High...
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3. (SBU) The increase in prices has occurred in response to a
number of external and internal pressures, but have remained
in a sustained upward trajectory, indicating general economic
unease. Prices on basic consumption goods made their
seasonal increase in September 2005 before Ramadan, which was
exacerbated by rumors that a diesel price increase was
imminent (ref). Prices jumped again prior to the release of
the first Mehlis report at the end of October, and stayed
high as Syrians began hoarding goods in anticipation of
international sanctions. The steep devaluation of the Syrian
pound (SYP),which lost almost 20% of its value in six weeks
before reaching its lowest level in black market trading of
62 to the dollar in November 2005, drove commodity prices
even higher as many importers ceased making orders and demand
for domestically-produced goods increased. The weak pound
and fear of political instability also contributed to
skyrocketing land prices as Syrians shifted liquidity into
real property.


4. (SBU) By January 2006, prices appeared to have gained
their own upward momentum as they continued to rise even
after the SARG intervened to bring the SYP under 55 to the
dollar in December and under 53 to the dollar in March.
Contacts state that the SARG's January decision to increase
the prices of gasoline and cement by 25% and 52%,
respectively, and raise public sector salaries by 5% in
February also fueled inflation (ref). However, contacts
state that the increase in gas and cement prices had little
impact itself on the prices of other goods in the market,
since gas prices disproportionately effect those few Syrians
who can afford cars, and cement had a much smaller effect on
real estate prices than the increase in land values. The
increase's effect on prices, contacts contend, was
psychological, leading Syrians to fear that this was the
first step in the SARG's previously announced strategy to cut
subsidies across the board (ref).

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DAMASCUS 00001273 002 OF 002


...As Are Inflation Expectations
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5. (SBU) Contacts assert that the expectation that the SARG
will reduce the subsidy for diesel in April may very well be
the most important inflationary factor. They caution that an
increase in the price of diesel, which Syrians use to heat
their homes and water, fuel the microbuses and trucks that
bring most Syrians and goods to market, and run generators
and machinery for agricultural production and manufacturing,
will have a much greater effect on prices across the board
than the increase in either gasoline or cement (ref). Rumors
of the reduction in the diesel subsidy abound, with most
contacts saying that the price will increase by more than
70%, from 7 SYP to 12 SYP per liter.


6. (SBU) Contacts among independent Syrian economists argue
that inflation expectations also are high because of the
widespread knowledge that the SARG lacks the necessary
monetary tools to combat rising prices (ref). Most of the
anti-inflationary steps the SARG has taken to date are
regressive (e.g. price controls) and run counter to the plans
for greater economic liberalization espoused by reformers in
government. SARG officials have blamed greedy businesses and
unscrupulous importers for keeping prices artificially high.
Prime Minister Mohammad Otri stated recently that the
government will impose price controls to protect citizens
from inflation. Local press reported on March 20 that the
Ministry of Economy and Trade was setting prices on
children's clothing, which resulted in an immediate outcry
from domestic producers who complained that they would no
longer be able to compete against imports. Contacts also
report that the Ministry recently instituted a new regime
that requires merchants to display price tags, and that
"supply squads" from the Ministry of Economy and Trade, which
impose fines on merchants suspected of selling goods above
the stated price, are more prevalent now in the markets.

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Syrians Remain "Passively Concerned"
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7. (SBU) Most Syrians have adopted a "wait and see" attitude
regarding diesel and other commodity prices, and have done
little so far to change their basic consumption patterns.
Shops and restaurants are still full in the fashionable areas
of Damascus, and contacts suppose that the poor have reduced
consumption and fallen back on extended family to cope with
their eroded purchasing power. Contacts state, however, that
Syrians are beginning to feel the pressure. One contact
compared the general mood of unease to that which prevailed
in the mid-1980s, when Syria last faced international
pressure and the SYP was equally as volatile and eventually
collapsed after the SARG ran out of foreign reserves.


8. (C) Comment: The Syrian market remains uneasy, with
average Syrians preoccupied by rising prices. Meanwhile, the
business community has shown its lack of faith in the SARG
and its ability to manage the economy by refusing to lower
prices even as the SYP regained its value. Given the
volatility of the present situation, some contacts have
stated that the SARG may delay raising the price of diesel to
avoid the possibility of civil unrest. However, civil unrest
still seems unlikely in this authoritarian state where
security forces retain the will to violently supress street
demonstrations.
SECHE