Identifier
Created
Classification
Origin
06DAMASCUS2164
2006-05-09 12:37:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Damascus
Cable title:  

THE SARG'S NEW ECONOMIC SCORECARD

Tags:  ECON EFIN EINV ETRD EIND ELAB EAGR ENRG SY 
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UNCLAS SECTION 01 OF 03 DAMASCUS 002164 

SIPDIS

SENSITIVE
SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LEBENSON
NSC FOR ABRAMS/DORAN/SINGH

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD EIND ELAB EAGR ENRG SY
SUBJECT: THE SARG'S NEW ECONOMIC SCORECARD

REF: A. DMS 1926


B. DMS 1696

C. 05 DMS 6389

D. DMS 0196

UNCLAS SECTION 01 OF 03 DAMASCUS 002164

SIPDIS

SENSITIVE
SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LEBENSON
NSC FOR ABRAMS/DORAN/SINGH

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD EIND ELAB EAGR ENRG SY
SUBJECT: THE SARG'S NEW ECONOMIC SCORECARD

REF: A. DMS 1926


B. DMS 1696

C. 05 DMS 6389

D. DMS 0196


1. (SBU) Summary: The recently enacted 10th Five-Year Plan
presents a number of quantifiable targets for reaching seven
percent annual GDP growth and represents an agenda for reform
against which the SARG's progress can be measured. The plan
assumes that broad-based reform will allow the SARG to meet
its targets despite significant economic obstacles and
resource constraints, but offers few specifics on how or when
those reforms will be implemented. The plan, therefore, has
many detractors who are less than optimistic about its
chances of success. End summary.

THE SARG'S ECONOMIC SCORECARD


2. (SBU) President al-Asad signed into law the SARG's 10th
Five-Year Plan on May 7, covering a period ostensibly from
January 2006 through the end of 2010, after months of
inaction and three days of Parliamentary debate. The plan
establishes as a goal the gradual transformation of Syria's
economy from centrally-planned to market-based, obtaining
annual growth rates in GDP of five to seven percent and a
resulting eight percent reduction in poverty by the end of

2010. Since Asad assumed power in 2000, the SARG has claimed
a commitment to reform while offering few concrete
obligations. Contacts who have worked on this plan defend it
by pointing to the specific economic and poverty reduction
targets it establishes, and its emphasis on directing
resources toward Syria's most impoverished regions in the
South and Northeast. Detractors point out that the SARG has
yet to develop comprehensive benchmarks or the implementing
details to reach the targets, and that the plan's success
depends upon the SARG immediately instituting broad-based
economic reforms that it so far has been unwilling to do.

All agree, however, that the plan will become the SARG's
scorecard on economic reform.

BENCHMARKS FOR PRIVATE INVESTMENT


3. (SBU) The plan's success in achieving high rates of annual
GDP growth hinges on the SARG's ability to attract private
sector investment. The plan estimates that Syria needs $36
billion in total investments by 2010 to reach its growth
target, $17 billion from the public sector and $19 billion
from the private. The plan aims to limit SARG investment
spending and support for existing or new State Owned
Enterprises (SOEs) to an average 14 percent of GDP per year
for five years, a relatively modest increase of two percent
over the average level of government investment spending on
SOEs during the previous five years. The investment goal,
according to contacts, is to gradually open the economy to
greater competition by supporting the private sector and
attracting foreign direct investment (FDI).


4. (SBU) The SARG faces a number of obstacles toward
achieving higher levels of private sector investment,
however. Investors are plagued by a lack of access to
credit, since Syria's private banks still are unwilling to
increase their loans-to-deposit ratio. In addition, the SARG
continues to crowd out private investment through its
unwillingness to reduce public spending and support for SOEs-
actually increasing its allocation for public sector
investment by eight percent in the 2006 budget to $3.9
billion, or 18 percent of GDP. Further, most private
investors are hesitant to increase their commitments or
exposure to risk due to the poor investment climate, which is
characterized by high corruption, poor contract enforcement,
the lack of an independent judiciary, and the SARG's slow
pace of reform. Although the plan specifically mentions
steps to address these obstacles, including providing small
and medium enterprises (SMEs) with greater access to loans
and credit facilities through both public and private banks,
and allowing foreign investors to repatriate profits, the
private sector remains largely skeptical of the SARG's
ability to deliver on its promises.


5. (SBU) New private investment is critical for the SARG to
make headway on one of its most pressing economic challenges-
burgeoning unemployment (ref A). The plan calls for public

DAMASCUS 00002164 002 OF 003


and private investment to create 1.3 million new jobs by 2010
and cut the official unemployment rate of 12 percent in half.
With the SARG budgeting for the creation of just over 58,000
jobs in 2006, the private sector would have to create
approximately 140,000 new jobs to meet the plan's first year
employment goal- four times the rate in 2005.


6. (SBU) Meeting these employment targets depends on the
SARG's willingness to liberalize the economy. The SARG
continues to be the single largest employer, and its central
role in the energy and power sectors, as well as agricultural
supply chains, chokes off private sector job growth in these
key sectors. Although the tourism sector holds promise, most
investors are moving forward cautiously with their projects
as the political and economic climate remains unclear. While
the plan mentions SMEs, including those with fewer than nine
employees, as a possible source for Q jobs, the SARG lacks
basic information on their number and aQrbtive capacity
since most operate in the informal sector.

BENCHMARKS FOR REDUCED SPENDING & INCREASED REVENUE


7. (SBU) In seeming contradiction to its job creation goals,
the plan also establishes targets for a less expansionary
fiscal policy and low inflation. The plan specifies that the
SARG shoQ maintain budget deficits equal to approximately
three percent of GDP, down from a budgeted 9.5 percent in
2005, and sets an inflation target of five percent. In
addition, the plan calls for the SARG to reduce its "current
expenditures," which covers all non-investment spending
including salaries and subsidies, to approximately 20 percent
by 2010. Further, the plan calls for a 75 percent reduction
in subsidy costs over the five-year period.


8. (SBU) The SARG again faces a number of obstacles related
to meeting its spending targets. To meet its growth goals
listed above, the SARG must be committed to increase spending
to create the 58,000 new public sector jobs in 2006.
Additionally, declining oil revenues will make it difficult
for the SARG to maintain its deficit targets without major
fiscal reform, specifically a reduction in subsidies and
price supports (ref B). The size of the obstacle also is
much larger than the SARG's official numbers admit. Last
year, the SARG budgeted $500 million for subsidies through
its price stabilization fund, but spent approximately $4
billion on subsidies for oil products alone. This year the
discrepency is expected to grow even larger.


9. (SBU) The plan assumes that the SARG can control deficits
from the revenue side by introducing a Value Added Tax (VAT)
on consumption to dramatically increase its tax receipts from
a baseline of 8.7 percent of GDP in 2005 to 16 percent in

2010. Qeloping the tax base and other reliable sources of
income is a critical fiscal issue in the face of steadily
declining Q revenues. The biggest obstacle to achieving
this goal is the SARG's inefficient tax system, which
contacts say the government must completely modernize. In
addition, it has to update its commercial registry and
provide incentives, such as a reduction in income tax rates,
to bring more SMEs into the formal sector. Finally, the SARG
woulQave to engage in an extensive public education
campaign about proper accounting practices to raise
compliance rates and stop the practice in which SMEs hide
profits from the tax department by keeping multiple sets of
books.

BENCHMARKS FOR OIL AND GAS


10. (SBU) In addition to its focus on establishing
alternative revenue sources, the plan seeks to direct
investment toward stabilizing the rate of oil production.
According to the plan, Syria must flatline its production at
350,000 barrels per day (bpd) through 2010 to achieve and
sustain high growth. The SARG's ability to reach its target
is predicated on its ability to bring thousands of barrels of
new production on line and offset the rate of decline in its
aging fields estimated to be 15 percent annually (ref C).
Without new production, Syria's oil output will approach
350,000 bpd already by the end of this year.


11. (SBU) The plan also assumes that Syria will be able to
increase its gas production from the current level of 22

DAMASCUS 00002164 003 OF 003


million cubic meters (mcm) of gas per day, to 32 mcm/day by

2010. According to the plan, Syria will substitute natural
gas for oil in industry and energy production domestically,
thereby freeing up more oil for export. While Syria has
modest proven gas reserves, approximately 13.1 trillion cubic
feet (tcf),the sector needs to attract significant foreign
investment to tap its reserves, increase processing capacity
and convert its industrial and power generation
infrastructure to run on gas at a time when established
Western companies like Conoco Phillips are divesting their
Syrian assets (ref D).

BENCHMARKS FOR TRADE


12. (SBU) The plan calls for increased private sector
involvement in exports to help reduce the balance of payments
deficit to 6.6 percent of GDP by 2010. The plan sets a
target of increasing the value of exports to cover 80 percent
of imports, based primarily on a 15 percent annual increase
in private sector exports each year. According to the SARG's
most recent trade statistics, exports covered approximately
half of imports during the first half of 2005. The trade
deficit in the private sector grew by approximately 45
percent in 2004, the last time the SARG published figures on
the subject, and has shown signs of accelerating since GAFTA
went into effect last year.


13. (SBU) In order to reverse this trend, the SARG would have
to increase the efficiency and competitiveness of its export
sector, and begin to provide incentives to promote export
growth. For instance, the SARG would have to drop price
supports for agricultural raw materials like cotton that
drive up the prices of textiles, which already face stiff
competition abroad, and reduce tariffs and taxes that are
levied on exports to non-Arab countries. In addition, the
SARG would have to change its policy of currency support,
which currently has overvalued the Syrian pound at the
expense of exports, to provide long term currency stability.
Finally, ceasing its support for inefficient SOEs also would
help the export sector grow, where overemployment, waste,
corruption, and near monopoly control over the supply chains
make locally-produced goods for export uncompetitive in
quality or price.


14. (SBU) Comment: The optimists among our contacts view the
10th Five-Year Plan as Syria's first step, despite its
imperfections, toward a market economy. Most interlocutors,
however, claim that unrealistic assumptions, formidable
obstacles, and lack of specific details for implementation
will keep it from being the reform agenda that Syria needs.
Everyone agrees, however, that the plan is hugely ambitious
and would require significant effort and political will to
have any chance of implementation. The SARG's efforts in
this regard are not off to a very auspicious start,
squandering the first five months of the plan to get it
ratified and signed, which is arguably the easist part.
SECHE