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. -------------- Prices Are Rising... -------------- ¶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. -------------- And Staying High... -------------- ¶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). -------------- DAMASCUS 00001273 002 OF 002 ...As Are Inflation Expectations -------------- ¶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. -------------- Syrians Remain "Passively Concerned" -------------- ¶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