CENTRAL BANK, COMMERCIAL BANK OF SYRIA AND FINANCE

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 002504

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LOEFLER
NSC FOR ABRAMS/SINGH

E.O. 12958: DECL: 05/30/2016
TAGS: ECON EFIN EINV SY
SUBJECT: CENTRAL BANK, COMMERCIAL BANK OF SYRIA AND FINANCE
MINISTRY AT ODDS IN FRACTIOUS BANKING SECTOR

REF: A. DMS 1217


B. DMS 2164

C. DMS 2063

D. 05 DMS 5285

E. 05 DMS 6131

F. 05 DMS 6544

G. DMS 2265

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


1. (C) Summary: Contacts report a conflict for authority
over the banking sector among the leaders of the Central
Bank, Commercial Bank of Syria and the Ministry of Finance.
The Central Bank is seeking to claim control of the banking
sector and at the same time establish its own tools of
monetary policy, but is facing resistance from the Commercial
Bank of Syria, which is struggling to retain its central
position in the country's banking industry in the face of US
financial sanctions. In addition, the Ministry of Finance is
seeking to limit the Central Bank's role and prevent any
erosion in its own primacy over financial affairs. Contacts
suggest that the often personal infighting weakens the
chances for real reform of the sector, and further highlights
the widespread lack of faith in the Central Bank's ability to
assume the role of other central banks in the region. End
summary.


2. (C) With the Commercial Bank of Syria (CBS) losing its
primacy due to US sanctions under Section 311 of the
USAPATRIOT Act (ref A),some independent Syrian economists
and private bankers are expressing a new urgency in their
calls for the SARG to reform and consolidate the banking
sector. These contacts state the CBS should be demoted from
the role it has played since nationalization in 1965 as
Syria's de-facto central bank, and forced to compete with the
new private banks for public and private business. In
addition, they argue, the Central Bank should cease its
current primary function of financing SARG deficits under the
direction of the Ministry of Finance and assume an
independent, supervisory role over private banks and monetary
policy. Contacts state that the reform proposals appear to
be gaining some traction. The broad outline for
consolidation of the banking sector is contained in the
recently passed 10th Five-Year Plan (ref B),which some
contacts helped draft. Further, the SARG has announced its
intention to issue treasury bills before the end of 2006 that
would provide the Central Bank with a real tool to conduct
monetary policy, as well as licensing foreign exchange houses
to expand Syrians' legal access to hard currency.


3. (C) Contacts are concerned, however, that sectoral reforms
eventually may be blocked by a lack of political will to make
bold changes to the status quo. The general managers of the
private banks state that the sector lacks clear leadership
and therefore predictability, and that there are too many
different ministries involved in the sector, each trying to
assert some degree of oversight. George Sayegh, General
Manager of Bank of Syria and Overseas, stated that his
balance sheet must be countersigned by the Prime Minister and
the Ministers of Finance and Economy and Trade before they
can be published. Contacts further contend that the sector
is captive to competing political interests among its major
players, and that Minister of Finance Mohammad Hussein,
General Director of the CBS Dureid Durgham, and Governor of
the Central Bank Adeeb Meyaleh are all jockeying for
authority and the ability to shape the sector's future.

Central Bank Governor Vying for Authority...


4. (C) Contacts state that Meyaleh is working actively to
increase his personal authority and the independence of the
Central Bank. He has increased the number of reports that
private banks must submit to the Central Bank in order to
cement the chain of command (ref C),and recently reached out
to the Jordanian Central Bank Governor through the newly
opened Arab Bank Syria to build his regional credentials.
Contacts suggest that he is trying to increase his bank's
authority at the expense of both Hussein and Durgham. In
what European Commission (EC) contacts describe as a snub to
Hussein, Meyaleh recently refused to participate in a
workshop on public bank reform and capacity-building that was
sponsored by the Ministry of Finance and the European

DAMASCUS 00002504 002 OF 003


Investment Bank (EIB) because he felt that the Central Bank
should have played a more prominent role in the workshop's
planning. Basil Hamwi, General Manager of Bank Audi, stated
that Meyaleh considers the CBS to be a rival bank and has
made no move to provide the CBS with access to the
international financial system through the Central Bank or
help facilitate its transactions. Hamwi added that although
Meyaleh has said that he personally disagrees with the US
sanctions against the CBS, he hopes the sanctions will weaken
it so that the Central Bank can become the dominant bank in
the country.


5. (C) Meyaleh reportedly has the support of President Asad,
contacts assert, which gives him clout despite the fact that
he is not a member of the Ba'ath Party and lacks deep ties to
the regime (ref D). Contacts state that he appears to be
riding a wave of influence due to what most interlocutors
consider the Central Bank's successful intervention in
support of the Syrian Pound (SYP) (ref E). Most contacts,
however, have little faith in Meyaleh's ability to lead the
Central Bank. Contacts in the EC, who have instituted a
number of programs to build the bank's capacity, describe
Meyaleh as a self-promoter who lacks technical knowledge,
vision, and management skills. They assert that the EC
Mission's leadership is beginning to view Meyaleh as an
obstacle to banking reform. Even those among Syrian
interlocutors who know and like him state that Meyaleh is
more of a theoritician than a manager. Contacts who claim
inside knowledge of the Central Bank's intervention on behalf
of the SYP state that Meyaleh was fickle in his management of
the process and displayed a poor understanding of currency
issues. Basil el Haffi, a self-proclaimed close friend of
Sahloul, aka Abu Rafiq, the black-market money changer who
allegedly managed the Central Bank's intervention, described
one exchange toward the end of the crisis in which Meyaleh
demanded Sahloul increase the rate of intervention over
complaints from those more expert that a precipitous change
in the currency's value would disrupt trade. A chastened
Mayaleh allegedly returned later the same afternoon ordering
Sahloul to stop the intervention altogether without
explaining his 180-degree change, Haffi reported. The
currency immediately lost value the next day (ref F).

... While Riding a Weak Horse


6. (C) Reflecting both Meyaleh's poor leadership and the
years of neglect playing a secondary role to the CBS and the
Ministry of Finance, contacts complain that the Central Bank
lacks the facility to perform the core functions of a central
bank. An International Monetary Fund (IMF) senior economist
stated that the Fund has expressed grave concerns about the
Central Bank's current lack of skills and capacity,
specifically noting a perceived lack of political will to
oversee the private banking sector according to international
standards. Abdul Kadr Housrieh, a partner with Ernst & Young
Syria and an informal advisor to the Deputy Prime Minister
for Economic Affairs, stated that the Central Bank also lacks
a working Consumer Price Index (CPI) or the trained staff to
update it, and therefore has no ability to stabilize prices
or accurately set interest rates. In addition, contacts
state that the bank has no monetary policy per se, instead
controlling money supply and the exchange rate by
manipulating the black market.


7. (C) Contacts among private bankers further state that the
Central Bank currently has no mechanism to facilitate
inter-bank transfers, which historically have been the
responsibility of the CBS. Ali Deeb Zataar, General Manager
of Arab Bank Syria, stated that in an effort to avoid
interfacing with the CBS due to Section 311 sanctions, Arab
Bank has attempted to conduct inter-bank transfers for trade
finance through the Central Bank. Zataar stated, however,
that due to the Central Bank's lack of basic infrastructure,
he faces high transaction costs and risks in completing even
simple transactions. In order to transfer money for trade
finance through the Central Bank, Zataar has to physically
transport cash to the Central Bank to initiate a transfer,
and his ability to complete the transaction often requires
Meyaleh's personal intervention. Zataar further stated that
as a result of these difficulties, he has been compelled to
send cash to other banks in bulk in his staff's unarmored,
personal automobiles.

DAMASCUS 00002504 003 OF 003



The CBS fights to Retain Dominance...


8. (C) Despite Meyaleh's moves to increase his authority at
the expense of the CBS, contacts say that Durgham is
resisting any change and is working hard to maintain the
CBS's dominant position. The CBS remains Syria's largest
bank, holding most of the country's foreign accounts and the
majority of its foreign reserves. In an attempt to emphasize
the CBS's vitality, Durgham announced record profits last
year, although most contacts claim that this may be more hype
and accounting tricks than reality. He recently has used
public events to try and lure private sector clients to the
CBS by emphasizing improvements to its products and services,
while alternately making it more difficult for existing
customers to leave the bank by increasing the commission it
charges for cash withdrawals. Contacts say that Durgham is
searching for ways to keep the bank connected to the
international financial system through third-party
institutions. Bassel Hamwi, General Manager of Bank Audi,
stated that Durgham called him about running CBS business
through Bank Audi. Hamwi declined the request, he assured
us, but added that Durgham is approaching the other private
banks who may accept the offer given the volume of business
that the CBS could provide.


9. (C) Durgham's efforts to keep the CBS dominant depend upon
continuing political support from the Minister of Finance,
contacts suggest. Durgham still has that support, although
its depth is unclear since most people involved in the sector
state that his personal relationship with Hussein is poor.
In addition, Durgham's father Ahmed was removed from the
Ba'ath Regional Command during the June 2005 reorganization
of the Ba'ath Party leadership, which also weakened Durgham's
position. All of this may explain why, to date, he has been
conspicuously alone in his public efforts to contain the
fallout from Section 311 sanctions.


... But Authority Rests with the Minister of Finance


10. (C) Most contacts state that Hussein currently is the
final arbiter on financial issues and is attempting to
consolidate control over all aspects of the banking and
monetary sectors under the Ministry. He heads the economic
bureau of the Ba'ath Party's Regional Command, which gives
him access to President Asad and an increased ability to
influence the country's economic policy. Hussein reportedly
does not like Meyaleh personally, and is attempting to
control the development of the private banking sector.
Apparently showing his willingness to take any opportunity to
undercut Meyaleh, contacts state that Hussein recently
overruled the Central Bank Governor and limited the amount
Syria's private banks could invest in new private insurance
companies, even though most contacts believe that the
decision was short-sighted and bad for the sector (ref G).
In addition, Hussein allegedly is considering allowing SARG
entities to own up to 25% of new private banks, which
contacts fear would provide the Ministry with greater control
over the sector.


11. (C) Comment: The general consensus among contacts is that
the banking and monetary sectors lack leadership and
direction. The seeming zero-sum contest among the principals
may be an inevitable by-product of the regime's "divide and
rule" management style. Minister of Finance Hussein
currently is allied with CBS Director General Durgham against
Meyaleh at the Central Bank in the struggle for control of
the banking sector, but Hussein's support appears to be
conditional and limited by his latent personal dislike of
Durgham. This leaves Syria in the unenviable position of
needing to undertake reforms while its key financial
institution is in decline under the pressure of Section 311
sanctions, and before any other institution is capable of
filling the ensuing vacuum.
SECHE