BUDGET DEFICIT THREATENS SYRIA'S ECONOMIC GROWTH

UNCLAS DAMASCUS 000132 SIPDIS SIPDIS STATE FOR NEA/ELA; COMMERCE FOR 4520/IEP/ANESA/ONE/NWIEGLER; TREASURY FOR ISM/SINGER E.O. 12958: N/A TAGS: ECON EFIN ENRG EPET PGOV SY SUBJECT: BUDGET DEFICIT THREATENS SYRIA'S ECONOMIC GROWTH -------------- SUMMARY -------------- ¶1. The 2008 Syrian budget typifies the lack of SARG transparency by significantly underreporting petroleum revenues, defense expenditures, and the cost of subsidies. Even though the official numbers are suspect, local economists agree that the SARG's acknowledgement of a 128-percent increase in the budget deficit is a significant indicator of Syria's true economic health. Also likely to be underestimated, the reported USD 3.85 billion deficit represents nearly 10 percent of Syria's estimated 2008 GDP. SARG officials attribute the increased deficit primarily to petroleum-related circumstances. Syria's oil revenues are projected to decline proportionately with decreased production, while high oil prices mean that Syria will be paying more for imported refined petroleum by-products, such as diesel. Since publishing the budget, the SARG has announced various measures under consideration to increase revenues, such as re-writing corporate tax codes, issuing Treasury bills, and implementing a VAT in 2009. Ultimately, economists say, the SARG must also cut costs by lowering all fuel subsidies or risk severe inflation and currency devaluation. End summary. -------------- BUDGET DEFICIT INCREASES BY 128 PERCENT -------------- ¶2. The 2008 SARG budget forecasts an unprecedented deficit of USD 3.85 billion, a 128 percent increase from 2007. This deficit represents 9.8 percent of the estimated Syrian GDP of USD 39.1 billion. In keeping with past practices, the SARG stated that it will cover USD 3.63 billion of the deficit by drawing on Central Bank reserve funds and finance the remaining USD 213 million through external loans and Treasury bills. Syrian economists worry that such a large deficit cannot be sustained without driving up inflation -- already officially estimated at 8.9 percent -- and retarding Syria's projected GDP growth of 4.5 percent in 2008. -------------- SUBSIDIES AND DECLINING OIL REVENUES TO BLAME -------------- ¶3. Economic reformers point to government fuel subsidies as the primary reason behind the ballooning deficit. As Syria transitioned to become a net-importer of refined petroleum products in 2006, the SARG faced not only higher market prices for fuel but also significantly increased public demand. While the 2008 budget allocates only USD 500 million for all "price controls," the quasi-independent business journal Al-Iqtisadiyah estimated the price of diesel subsidies alone at USD 3.76 billion for 2008. Similarly, at the end of 2007 Finance Minister Muhammad al-Hussein told local media that the total cost of all subsidies would amount to USD 7.14 billion in 2008, or roughly 18 percent of GDP. ¶4. The 2008 budget also projects that total revenues will decrease by 19 percent from 2007 to USD 8.15 billion, with oil export revenues of approximately USD 2 billion providing 24.6 percent of the total. Oil revenue calculations assume a price of USD 42 per barrel for heavy crude and USD 51 per barrel for light crude, so actual revenues are likely to be doubled if the price of oil remains in the USD 90-100 range. Additionally, the budget assumes Syrian oil production will fall to just 360,000 barrels per day (bpd) in 2008, almost evenly divided between heavy and light crude oil. -------------- SEEKING TO INCREASE REVENUES, CUT COSTS -------------- ¶5. While the internal debate over cutting diesel subsidies continues, the SARG had already enacted some measures to reduce costs and increase revenues by late 2007. On September 1, the government raised the price of electricity by a scaled-average of 34 percent. In November, the SARG also increased the prices of gasoline and water, by 20 percent and 37 percent, respectively. Over the same period, President Asad issued a decree to issue Treasury Bills in 2008 to partially finance the deficit. Consultants say that additional steps under consideration are aimed at increasing tax collection. They argue that the Syrian private sector is responsible for 67 percent of GDP, but contributes a disproportionately low percentage of tax revenues. In addition to modifying the corporate tax laws to better capture lost revenues, the government also plans to implement a Value-Added Tax (VAT) in 2009. -------------- THE "OFFICIAL" NUMBERS -------------- ¶6. According to the published budget, the SARG allocation by ministry is as follows: Ministry Millions USD Percentage Defense 1,445 12 Interior 289 2.4 Foreign Affairs 103 0.9 Information 80 0.7 Immigration 1.2 0.0 Higher Education 464 3.9 Education 801 6.7 Culture 37 0.3 Labor/Social Affairs 22 0.2 Health 140 1.2 Economy 11 0.1 Finance 2,444 20.4 Agriculture 383 3.2 Irrigation 129 1.1 Petroleum 314 2.6 Industry 153 1.3 Electricity 541 4.5 Water 151 1.2 Building 18 0.1 Tourism 25 0.2 Trade 31 0.2 Telecommunications 185 1.5 Transportation 272 2.3 Grain Storage 70 0.5 Presidency 32 0.3 Parliament 10 0.1 Prime Ministry 151 1.3 Justice 38 0.3 Housing 103 0.1 Local Admin/Envinronment 1,284 10.7 Governorates 593 4.9 Waqf 7.6 0.0 Investment Capital / for Private Sector 20 0.2 Price Stabilization (subsidies) 500 4.0 Reserve Credits for Investment Projects 940 8.0 ¶7. 2007-2008 BUDGET COMPARISONS (Millions of USD) 2007 2008 Percent Chg Revenues: Taxes and duties 4,052 4,385 8.2 Fees and royalties (oil) 942 932 -1 Contributions of State enterprises (Surplus and depreciation) 4,795 1,986 -58.6 Other income 284 852 200 Total 10,073 8,155 -19 Expenditures: Total 11,760 12,000 2 -Current 6,600 7,400 12 -Capital 5,160 4,600 -11 External grants and loans tied to projects -Under capital expenditure 1,686 3,844 128 "Financing Gap" 359 213 -41 External "Arab" financing 0 0 0 Central Bank borrowing 1,327 3,631 173 ¶8. FUNCTIONAL BREAKDOWN OF EXPENSES (Millions of USD) 2007 2008 Percent Chg Current 6,600 7,400 12 Chapter I - Salaries 2,013 2,283 13 Chapter II - Admin 470 528 12 Chapter IV - Transfers 675 719 6 Chapter V - Pensions 1,535 1,882 22 Defense 1,369 1,445 5.5 Presidency/parliament 37 42 14 Chapter III - Capital 5,160 4,600 -11 Total 11,760 12,000 2 ¶9. BREAKDOWN OF INCOME SOURCES (Millions of USD) 2007 2008 Percent Chg Direct Taxes 3,365 3,525 5 - Businesses 2,500 2,390 -4.4 - Salaries 126 140 11 Indirect Taxes 687 856 24 - Electricity Consumption 36.4 42 15 - Customs 320 460 44 - Stamps 174 192 10 - Fees 34 42 23 Total taxes and duties 4,052 4,385 8 Services and royalties 942 932 -1.0 - Oil royalties 882 849 -3.7 Contribution of state enterprises (surplus) 4,795 1,986 -58.6 - Extraction industries 2,639 21.6 -99 - Banks and finance 451 715.5 58 - Converting industries 304 186 -39 - Transportation and Communications 779 809 4 - Electricity, gas, water 249 2 -99 Other income 284 852 200 Total revenues 10,073 8,155 -19 Revenue deficit 1,686 3,844 128 Financed by: External loans / grants 359 213 -41 Central Bank borrowing 1,327 3,631 173 CORBIN