One year into its latest five-year plan, Damascus is facing tough choices. In the year ahead, it must decide just how many of its 1.4 million civil servants it will lay off – out of a workforce of 5.3 million – and how many underperforming state-owned companies it will sell.

But the biggest challenge could be trying to persuade private investors to get involved. “We need a drastically different business environment in the country,” says Abdulla Dardari, Deputy Prime Minister for Economic Affairs.

The challenge is simple enough. Oil, which has traditionally been its major source of international earnings, is running out. Unless discoveries are made, Syria is expected to become a net importer of oil in 2010. At the same time, unemployment among its overwhelmingly young population is high. About 60 per cent of Syrians are aged under 25 and as many as 61 per cent of them are jobless.

The IMF describes the challenges posed by the depletion of oil reserves as daunting. The World Economic Forum ranks Syria 125 out of 131 countries for financial market sophistication, and 128 for the prevalence of foreign ownership.

One of the biggest problems holding back the economy is bureaucracy. “There are 1.4 million people with very low efficiency and productivity,” says Dardari, referring to the vast numbers of civil servants.

However, he insists that the government is not about to make tens of thousands of its citizens redundant, and would prefer to see the state sector reform itself.

“The civil service should be transparent and merit-based,” he says. “It should be pro-business and pro-citizen.”

But if all that is to happen, it seems impossible to avoid making a lot of people redundant. As Dardari says: “You cannot change the rule without changing the people who implement the rule.”

Such issues are likely to reach a critical point in the coming months. In early November, the cabinet’s economic committee approved a proposal to reform state enterprises, including the possibility of closing loss-making companies. Better-performing companies could be listed on the stock market or sold to investors.

At present, there is no agreed shortlist of companies to be privatised, but Damascus says several public companies will be listed on the stock market in two to three years.

Underlying these changes is the need to reduce the budget deficit, which has been growing, partly because of fuel subsidies.

“There is a problem and it has to be fixed.” says Dardari. “The system of energy subsidies is no longer viable. In 2008, $7bn will be spent on subsidies. That is not a number any developing country can sustain. We must restructure the management of public finances to make sure they are efficient and transparent. The people of Syria have the right to know where their money is being spent. There are difficult issues to be tackled.”

The government has decided the best way to deal with its problems in the long term is to open up the economy to the world. It is targeting a GDP growth rate of 7 per cent by 2010, and wants to reduce the official unemployment rate of 8.3 per cent.

But regardless of how much reform occurs in the state sector, these targets cannot be achieved without outside assistance. The effort to attract international investors is critical and the government appears willing to listen to criticism from them.

“Syria needs at least $3-4bn of investment to achieve its unemployment and growth targets,” says Dardari.
“The best way for us to move faster is the pressure from investors who say if you want me to do business in this country you have to change this and this. It is an interactive process.”

It will require a long-term charm offensive to change much of the business world’s image of Syria. In the past, companies have struggled to secure funding from the private sector to do business in the country, either from Syria’s own underdeveloped banking sector, or from international bankers too apprehensive to get involved.

Corporate culture

The other critical difficulty is dealing with bureaucracy, with international companies requiring a good local partner to guide them through the processes.

The business sector is immature in many ways. Daudi Lelijveld, projects manager for Cargill Sugar, a shareholder in the country’s first sugar refinery, complains of the absence of a corporate culture in the country.

“Everything you do you have to start from scratch yourself,” he says. “Simple things such as safety culture, communications, salary banding – they are not there or not at any level you can use.”

His company has invested $100m in the country’s first sugar refinery, in Jandar in the northwest, which is one of the country‘s largest private sector industrial projects. “We have succeeded,” he says. “But not without blood, sweat and tears, and some ongoing angst.”

Just 23 days before the factory was due to start operations, it still did not have a guaranteed supply of fuel to power the plant. And the communications system between its local headquarters in Damascus and the plant in Jandar was unreliable.

A corporate culture that is recognisable to international investors could take a long time to establish itself, but, in the meantime, progress is being made in other areas of the business sector.

“It is complex, but it is improving,” says Gordon Carrick, senior vice-president of operations for Petro-Canada, of the business sector in Syria.

Taxation has been scaled back, which has helped. In the 1990s, the top level of tax was 93 per cent. Today, the average income tax is about 22 per cent. VAT is due to be introduced in January 2009. According to Dardari, such reforms mean tax revenues have increased from less than $1bn in 2003 to almost $6bn in 2006.

Tariffs on international trade have also been cut. The maximum tariff was 255 per cent but this has been reduced to about 55 per cent. There is no doubt that trade levels have benefited. In 2002, the value of exports was about $3.7bn, $3bn of which was oil, while imports were less than $4bn. In 2006, exports reached about $11bn.

The banking system is another area that is showing signs of progress. Regulations have been passed in recent years covering conventional and Islamic banking, insurance and micro-credit institutions. Restrictions have also been eased on the interest rates banks can offer.

Easing regulations

There are now seven conventional private banks, two Islamic banks and six state-owned banks. Private sector banks have been growing fast, with deposits increasing by $1.5bn a year on average, according to the Central Bank of Syria. But state-owned banks still dominate the sector, with $25bn of the $31bn total deposits in the country held in their vaults. There is only one branch of a private bank for every 500,000 people.

The central bank has also been reforming its activities. Abid Mayaleh, its governor, points to legislative changes in 2007 that “clearly state the need for the Finance Ministry to stop depending on direct borrowing from the [central bank] to finance the budget deficit”.
“The central bank has been the principal source of borrowing to fund government debts and the budget deficit,” he says.

The next big issue confronting Mayaleh is the need to relax controls on foreign exchange. “Look at countries that have done this in haste, such as Algeria. They have paid a heavy price. We have to do this gradually,” he says.

Others think the government could be bolder. “The foreign currency restrictions have to be lifted to allow more foreign investment,” says Bassel Hamwi, deputy chairman and general manager of Bank Audi in Syria. “It would pose very few risks.”
Sanctions do not make the situation any easier. Since early 2006, the central bank has been using euros rather than dollars for all public transactions, to circumvent US sanctions.

It is in the area of technology that sanctions could prove most difficult, with so many electronic goods having US-made components.

However, Amer Moujtahed, director of information technology at Syriatel Mobile Telecom, says business continues despite sanctions. “The embargo is not a show-stopper for us,” he says.

“We should not underestimate or over-estimate the impact of US sanctions on Syria,” says Dardari. “Their impact is limited, but it is a deterrent [for investors] to come to Syria. Despite the regional situation, which is not the friendliest, Syria has committed to go forward whether we receive international help or not.”

Table: Syria economy

2003 2004 2005 2006 2007f
Population (million) 17.6 17.9 18.3 18.7 19.3
Workforce (millon) 4.6 4.3 4.7 5.3 na
Unemployment (%) 10.8 12.3 8 8.3 na
Nominal GDP ($bn) 22.7 25 28.6 34.9 36.9
GDP per capita ($) 1180 1290 1380 na na
Real GDP growth (%) 1.1 8.6 4.5 5 3.9
Government accounts (% of GDP)
Revenue 28.8 27.2 24 21.9 22
Oil-related revenue 14.7 11.2 7.1 4.5 3.8
Non-oil revenue 14 16 16.9 17.4 18.2
Expenditure 31.4 31.4 28.4 27.6 27
Budget balance -2.6 -4.2 -4.4 -5.7 -5
Non-oil budget balance -17.3 -15.4 -11.6 -10.2 -8.9
External accounts
Exports (£Syr bn) 284 373 455 524 na
Imports (£Syr bn) 218 359 462 479 na
Current account balance (% of GDP) 3.5 2.4 1.1 2.6 na
Oil sector
Crude oil production (‘000 barrels a day) 477 462 431 400 370
Net oil exports (‘000 barrels a day) 282 187 130 70 56

na=not available

Sources: Central Bank of Syria; IMF