Damascus survives on war economy

22 July 2014

Although headline macroeconomic figures are worsening, Damascus is being shored up by external sources of funding, meanwhile illicit business networks are feeding off the instability

By any realistic measure, Syria’s embattled economy ought to be on its last legs. The country has been eviscerated by a brutal, three-year-long civil war that has cost in excess of 170,000 lives, forced the evacuation of a fifth of the population and precipitated de-industrialisation on an epic scale.

Headline macroeconomic figures do not make for pleasant reading. According to one credible Syrian bank estimate, the country’s GDP decreased by 3.4 per cent in 2011, 21.8 per cent in 2012 and 22.5 per cent in 2013, when it reached barely $35bn – the after-effects of capital flight and the looting and destruction of factories and commercial operations. 

Figures from the UN Development Programme put the total economic losses up to mid-2013 at $103bn. Another UN agency, the UN Relief & Works Agency (UNRWA) estimates $41.2bn in lost capital stock, with an 81 per cent drop in private investment up to June 2013.

Strained finances

Unemployment is now thought to exceed more than half of the employable population. Unable to generate sufficient tax income to support its war economy, Damascus’ budget deficit has ballooned from 3 per cent of GDP in 2010 to 33 per cent, according to a policy briefing from the European Council on Foreign Relations (ECFR), published in September last year. Public debt has reached 126 per cent of GDP, with the government’s finances strained by the need to import the most basic commodities.

The crisis has affected all sectors of the economy, from tourism – an early victim – to manufacturing, mining and energy. The latter’s contraction is of particular concern, as it was one of the few export-revenue generating sectors.

Syria total economic losses ($m)
GDP loss6,46023,5439,72547,900
Capital stock damage5,14422,7117,19649,640
Military expenditure increase9513,2467285,526
*=To second quarter. Source: UNDP

The government estimates direct losses to the country’s petroleum and mineral resources sectors from the ongoing conflict at $3.4bn, as a result of damage to infrastructure facilities and pipelines. Syria pumped almost 400,000 barrels a day (b/d) of oil before the unrest broke out in March 2011. In contrast, the authorities forecast crude output at 30,000 b/d in 2014 – down by half from last year. And much of that production is in the hands of anti-regime rebels; estimates suggest the government is effectively only getting 16,500 b/d of oil.

Syria will face a struggle in regaining what has been lost in the past three years. The UNRWA report notes that even if the conflict ceased now and GDP grew at an average rate of 5 per cent a year, it could still take the country 30 years to return to the economic level of 2010.

Yet some Syrians are actually doing very well out of the crisis. Although vast areas of the country have been ravaged by war, in significant tracts of the economy, business activity is stubbornly persisting. This has no doubt been made easier by the 15 per cent reduction in Syria’s population (meaning fewer mouths to feed) and the fact that the authorities largely do not bother with providing services to rebel-held areas.

In regime strongholds, such as the coastal cities of Tartous and Lattakia (the main port entries to Syria), a construction boom is under way, as investors relocate their plant and commercial operations to an area that has proved immune to the violence that has decimated Homs and Aleppo.

New licences for industrial plants are being issued in these areas. The logistics may be challenging as business owners looking to relocate from the central region to Tartous can find it difficult to move their machinery there. Traversing the various checkpoints may also require making numerous payments. But the benefits – to be able to supply customers from a region where the port infrastructure allows companies to import with relative ease – outweigh the disadvantages. 

One executive at a large family business headquartered in Damascus told MEED that it had been forced to lay off large numbers of staff, but was now carrying out operations from the Tartous area. Many executives divide their time between Tartous and Beirut, with the occasional visit back to the capital.

Port access

Damascus presents a different picture. Despite boasting Syria’s strongest purchasing power – the 2 million residents in the central area of the city have been relatively unscathed by the conflict – operating a business there is still tough. “The difficulty is in supplying Damascus, it’s not a demand problem,” says a Syrian banker. “It doesn’t have the port access that the coastal cities enjoy. Many plants surrounding the city are without power and non-operational.”

Another reason for increased confidence in Syria’s economic durability is that after wild fluctuations in 2012-13, the pound has stabilised in recent months, albeit at one third of its value before the crisis. The currency has found a semblance of stability that has underscored confidence among traders.

“There have been a few dips, but it has been hovering around the £Syr160-£Syr 165 a dollar range for more than six months now,” says the banker. “Even if it is weaker, for local traders, the stability is a vast improvement on the constant oscillation in the value.”

The exchange rate strengthened from a low of £Syr320 to the dollar in July 2013 to about £Syr140 by the end of 2013, before slipping down to £Syr165 in March, where it has broadly stayed since. The currency stabilisation coincided with the stabilisation of the conflict.

Whereas in 2012 the Al-Assad regime appeared to be facing an existential crisis, over the past year, it has gradually rolled back the opposition forces assisted by Lebanon-based Shia militia group and Iran. The government is now seeking to besiege rebel fighters in Aleppo. Many traders are no longer expecting the collapse of the regime and this has transmuted into more confidence in the economy. 

The Central Bank of Syria has played its part, pumping dollars into the market and clamping down on black-market moneychangers.

The ability to maintain a balance between supply and demand for foreign currencies has enabled the government to pay out $300m-$400m a month on refining imported fuel and improving food supplies.

External funding

But there are other factors that explain the stabilisation of the currency and the durability of basic economic functions in regime areas. One is Al-Assad’s ability to tap external sources of credit support, notably Iran.

As early as July 2011, there were reports that Tehran was ready to prop up its ally in Damascus with financial assistance to the tune of $5.8bn, provided in the form of cash and oil supplies. Then, in 2013, Iran granted two credit facilities worth a combined $4.3bn, says the ECFR report. The first, worth $1bn, was intended to fund imports and the other, worth $3.6bn, was dedicated to the procurement of oil supplies.  

New groups… are being empowered at the expense of the traditional business class

Jihad Yazigi, European Council on Foreign Relations

The report cites two examples of the use of these credit lines that were made public in December 2013. Three Iranian tankers were docking every month in Syrian ports, paid for by the oil credit line. The General Foreign Trade Organisation has also issued a tender for the purchase of food products to be paid through an Iranian bank.

The strengthening of the Syrian pound is not purely a matter of external credit lines; it is also in some ways down to the contraction of the economy, which has led to much weaker consumption and crimped demand for hard currency.

There is another driver behind the currency stabilisation, and it is a counter-intuitive one. The massive funding that found its way mostly from Gulf donors to the rebels boosted liquidity in the Syrian economy. Although focused on rebel-held areas, this cash has inevitably seeped into regime-held areas in the form of hard currency.

“A major portion of the rebel opposition is earning their pay in foreign currency and if they want to buy goods or food then they need to convert it into Syrian pounds. This is injecting dollars into the market and easing pressure on the pound,” says the banker.  

Allied to this phenomenon is the evolution of new trade relationships within Syria that have afforded the regime the ability to extract revenues from private sector operators.

There are even economic ties developing between rebels and regime forces, with Al-Nusra Front Islamists selling quantities of oil back to the government in exchange for cash – a solution amenable to both sides.  

Even though rebels control part of the road links to Jordan near Deraa on the border, Damascus has continued the food trade with Jordan, importing 2.5 million tonnes of wheat last year. The government has been savvy in ensuring commodity importers have been able to ensure sufficient supplies of flour, rice and sugar, despite these being subject to US and EU sanctions. Using private sector front companies, traders have taken funding from the government and then imported quantities of these commodities under their own name, but which are really paid for by Damascus.

The stabilisation has even enabled the regime to start the reconstruction process, with mending roads and repairing buildings top of the list.

As bizarre as it may seem, Damascus is now looking to engage firms in project activity. In June, the General Commission of Water Resources signed a e193m ($263m) contract with Russia’s Stroytransgas to implement the first phase of the Tigris irrigation scheme, with installation of the main pumping station in Ein Diwar.

Also in June, the Damascus governorate council approved an initiative for establishing a holding company to fund infrastructure and housing projects in new zoning areas.

Illicit business

None of this should conceal the true extent of the damage. One of the biggest dangers for the long-term health of Syria’s economy is that the past three years has created economic networks that feed off the violence and instability.

The UNRWA report says one outcome of the economic devastation was politically influential cartels stripping state assets through plundering and pillaging of resources and which now have a stake in prolonging the conflict.

Jihad Yazigi, the author of the ECFR report, notes that as security has collapsed, an informal economy comprising looting, kidnapping and smuggling has become an important source of income. “Entirely new business networks, often illicit, are emerging and new groups and individuals are being empowered at the expense of the traditional business class,” he says. 

When the time comes, the rebuilding of Syria will be one of the biggest tasks ever undertaken in the region. The fear now is there are too many vested interests that will prevent the reconstruction getting under way.

Key fact

Syria’s GDP decreased by 22.5 per cent in 2013, compared with 21.8 per cent in 2012

Source: Syrian bank

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