SYRIA'S ECONOMY - FRAGILE STABILITY

UNCLAS SECTION 01 OF 03 DAMASCUS 001926

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON ETTC SY SANC
SUBJECT: SYRIA'S ECONOMY - FRAGILE STABILITY

REF: A. DAMASCUS 6280

B. DAMASCUS 641

C. DAMASCUS 1393

D. DAMASCUS 425

E. DAMASCUS 716

F. DAMASCUS 893

G. DAMASCUS 1696

H. DAMASCUS 1273

I. DAMASCUS 6570

J. 05 DAMASCUS 06439


1. (U) Summary. Syria,s economy is benefiting from the high
price of oil and other positive trends, but faces two chronic
economic problems that could become acute in the next two to
three years: decreasing oil production and rising
unemployment. The economy is also hamstrung by a number of
short-term vulnerabilities that have the potential to trigger
economic instability. End summary.


2. (SBU) As one of its strategies for reassuring the Syrian
public during its current confrontation with the
international community, the SARG has tried to create a sense
of economic progress in the country (ref A). The two main
refrains of the SARG,s economic cheerleading have been its
claim that both foreign direct investment (FDI) and the GDP
growth rate are increasing significantly. In late 2005,
Prime Minister Otri announced that the year,s GDP growth
rate would reach 4.5 percent, more than doubling the previous
year,s official rate. Otri,s prediction has subsequently
become the official SARG GDP growth rate for 2005 even though
Syria,s Central Bureau of Statistics has yet to produce the
basic macro-economic numbers to support the assertion.
Independent economists and Syrian businessmen view both SARG
claims as mostly hype, pointing to the lack of construction
on any of the Gulf investment projects (ref B),and to
Syrians' widely held belief that both their purchasing power
and standard of living continue to erode.

Positives
--------------

3. (U) Despite the SARG,s obvious exaggeration of FDI and
GDP growth, Syria does have some economic strengths. In the
last few years, the SARG has succeeded in restructuring its
foreign debt to a relatively low level, approximately 13
percent of GDP. During the same time period, the SARG has
accumulated significant hard currency reserves that its
officials claim approach USD 18 billion, enough for two and a
half years of imports, if true. As an oil exporting country,
Syria,s economy is benefiting from the sustained high price
of oil. The second main pillar of the country,s economy,
agriculture, benefited from better than average rainfall in
2005, though 2006 totals may be modestly lower. Ironically,
its tourism sector benefited from the downturn in Gulf
tourism to Lebanon last year (ref D),and the country also
profits from being the shortest trans-shipment route for Iraq
reconstruction goods coming from Europe or the US. Also,
Gulf investors are undoubtedly sympathetic to the SARG and
willing to echo its upbeat self-assessment of Syria as a good
place to invest (ref C). Finally, the SARG has succeeded in,
at least temporarily, stabilizing its currency after the
Syrian Pound (SYP) devalued dramatically last fall (ref E).

Medium Term-Challenges
--------------

4. (U) There is another side of the coin, however, that is
more ominous. In the medium-term, the SARG faces two
significant economic challenges: crossing over from being a
net oil exporting country to being a net oil importer, and a
population growth rate that continues to outpace its GDP
growth rate. Each year an additional 200,000-plus young
people enter the job market. The official unemployment rate
is currently 12 percent, though most informed observers have
been putting it at over 20 percent for years. The SARG has
recently acknowledged the public sector,s inability to
absorb any significant number of new entrants, though it
continues to ignore the pressing need to restructure and
downsize the public sector. The SARG,s much-touted 10th
Five Year Plan (ref J),has put the onus on the private
sector and FDI to create the vast majority of the new jobs

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needed to reverse the trend of growing unemployment.
Syria,s businessmen, however, continue to prefer to invest
abroad and FDI has generated less than 200,000 jobs total
since 1991, when the SARG enacted its first investment law
designed to attract FDI.


5. (SBU) Added to the burgeoning unemployment, Syria,s oil
production is decreasing annually at a rate of approximately
15 percent. According to the SARG,s own statistics, the oil
sector still accounts for 20 percent of GDP, 70 percent of
exports, and 40 percent of government revenues. At the same
time, consumption rates for oil derivatives are booming:
gasoline consumption increased by 13 percent last year, while
diesel consumption increased by approximately ten percent.
Conventional wisdom holds that within two to three years
Syria will cross over from being a net exporter of oil to
being a net importer, but if last year's consumption trend
continues, the crossover could happen even sooner. Local
economists subsequently view managing the crossover as the
country,s largest economic challenge. When added to the
fact that each year Syria witnesses a significant increase in
the number of unemployed young people, local economists worry
that the country faces potential economic instability in the
medium-term, if current trends are not reversed.

Short-Term Vulnerabilities
--------------

6. (SBU) In addition to its medium-term economic problems,
the SARG has three major short-term liabilities: rising
prices, the potential return of a highly volatile exchange
rate, and increasingly unsustainable expenditures for
subsidies. Subsidies are expected to cost the SARG an
estimated USD 5.5 billion in unbudgeted expenditures this
year (ref F). Added to the SARG,s official 2006 budget
deficit of USD 1.2 billion, this year's deficit could
approach as high as 30 percent of GDP, if the SARG does not
lower subsidies. (Note. The SARG,s revenues are also not
fully accounted for in the budget, which further complicates
accurately projecting the potential size of the SARG deficit.
End note.) Though the SARG has a plan for gradually lifting
subsidies, the regime has recently backed away from
implementing scheduled price increases of basic commodities
out of fear of potential social unrest (ref G),and concern
over feeding the SARG,s second economic liability ) rising
prices.


7. (U) Importers and local manufacturers started raising
prices last fall when the Syrian Pound (SYP) devalued by over
ten percent. For the last three months, the increase in
prices of basic commodities and the adverse impact they are
having on the average Syrian has become a persistent news
story in the state-controlled press. In addition to delaying
the lifting of subsidies, the SARG has responded to rising
prices by blaming unscrupulous businessmen for the increase
and has redoubled its efforts to enforce price controls (ref
H). The fact that prices have continued to rise even after
the SARG successfully intervened to reverse the precipitous
fall in the SYP,s value highlights the link between rising
inflation and the SARG,s third economic problem ) an
unsustainably high exchange rate.


8. (SBU) The SARG continues to spend an unspecified portion
of its hard currency reserves in the black market to drive
down the exchange rate for the US dollar. Before the SARG
began its intervention on December 8, 2005, the SYP had
devalued from 53.10SP to over 60SP per USD (ref E). As of
today, the official rate is 51.95 while the black market rate
is 52.20 per USD and both rates are continuing downward.
Local economists often choose 55SP per USD as a potentially
sustainable rate of exchange for the SYP and are at a loss to
explain, from an economic perspective, why the SARG continues
to intervene to artificially overvalue its currency. They
point to the apparent contradiction of the SARG,s stated
priority of encouraging exports to diversify its export base
from oil with its ongoing drive to overvalue its currency,
which makes its exports more expensive and less competitive.
Most Syrians explain the SARG,s action as an attempt to
teach a lesson to those who bought dollars last fall when the
SYP was seemingly in free-fall, and to discourage them from

DAMASCUS 00001926 003 OF 003


doing so again should the SYP show similar volatility.

Predicting the Future
--------------

9. (SBU) Complicating the SARG,s ability to successfully
maintain its intervention is the fact that a huge portion of
Syria,s economy remains in the informal sector (ref I).
Both the SYP,s devaluation and its continuing revaluation
have been driven by the black market. The UNDP estimates
that 35 percent of the country,s work force is in the
informal sector. All Syrian businesses keep multiple sets of
books, which ensures the government has no accurate
assessment of current business activity in the country.
Smuggling is rife, so the SARG's trade numbers are equally
off base. The expatriate work force is huge and repatriates
its earnings primarily through the informal sector. All of
this means that even if the SARG,s economic numbers were not
slow and manufactured, they would still risk being seriously
inaccurate.


10. (SBU) Comment. The SARG is not sufficiently competent to
actively manage its economy, but still shows prowess at
stifling new business activity through its inefficient public
sector and its promotion of corruption. The high price of
oil and current lack of international pressure, however, have
lightened the consequences of its economic mismanagement and
malfeasance on the Syrian public. Still, the SARG is taking
no serious action to avoid the economic shoals ahead, which
only increases its economy's vulnerability to a drop in the
price of oil or renewed international pressure. With its
economic liabilities continuing to grow, it seems to be only
a matter of time before its current fragile stability is
threatened.
SECHE