FOR a state so often seen as a pariah, Syria has been extraordinarily adept at securing foreign aid. In the period between 1977-92, Syria received cash transfers from Gulf Arab states of almost $15,000 million in total, helping the government sustain a defence burden that amounted to some 50 per cent of current budget expenditure.

The emphasis of the aid shifted after 1991 to supporting specific projects, but the amounts were still impressive. Over $3,000 million has been provided in the past two years, again mainly from the Gulf, allowing Syria to buy power stations, a 700,000-line telephone network and a new sewage system.

This aid has been supplemented since the mid-1980s with oil exports that are now earning Syria about $2,000 million a year. The economy has also benefited from dramatic improvements in agriculture, brought about by a combination of good weather and price liberalisation.

However, the benefits of aid, oil and good harvests have not in themselves been sufficient to put the Syrian economy on a healthy footing. One symptom of the economic malaise is Syria's debt problem. The country is burdened with external debt of about $16,000 million, roughly equivalent to total gross domestic product. Most of the debt is owed to the former Soviet Union, and is unlikely to be repaid. However, the government's failure to meet its obligations on much of the remaining debt has meant that its ability to secure fresh credit from sources other than the Gulf Arab states is limited.

The largest block of Western debt is owed to the World Bank. Arrears on this debt are about $400 million. The government is making sufficient payments to ensure that the arrears are not increasing, but there is no sign of it paying back the full amount. The total arrears on debts to Syria's main trading partners are about $600 million. The largest creditors are Japan, Germany and France, owed around $100 million each. Because of the debt problem, Syria is off cover for almost all Western export credit agencies.

The government has told creditors that it will pay its debts once the sums involved are agreed. However, creditor governments say Syria appears to have decided that it will be in line for substantial debt relief once a peace agreement is reached with Israel, and there is no reason for haste in dealing with arrears. Of the European creditors, only Belgium has negotiated a debt settlement. Japanese officials say they believe Tokyo's official debt will be repaid to allow fresh aid programmes to be agreed. Japan is proposing to lend $500 million for the 600-MW Al-Zara power project. This is on top of $410 million provided by Japan for a similar-size plant now being built at Jandar, south of Homs. By contrast, France and Germany are suspected by the government of using their influence in Brussels to slow down disbursement of EU aid funds as a means to put pressure on Damascus to pay its debts.

Debtor

The preferred approach of international creditors to problem debtors is to set up a multilateral framework for rescheduling through the Paris Club. However, Syria has ruled out such an approach, which would require the government to submit to the rigours of an IMF programme. The government has been able to take this stance because its economic plight is not so desperate that it must submit to IMF dictates. The current account was healthily in surplus in 1989-92, thanks mainly to the contribution of oil revenues, and only moved into deficit in 1993 because of a surge in private-sector imports.

The absence of IMF pressure has meant that Syrian economic reform has been carried out entirely at the slow and deliberate pace set by the government. The investment climate has been liberalised in gradual steps starting in 1978. The exchange rate system is in a transitional phase, with three effective rates in operation, and an informal pool of hard currency created by the proceeds of exports and available to importers. The banking sector is a state monopoly, and is likely to remain so for the foreseeable future. Trade barriers are being slowly removed. Last year the ban on cigarette imports was ended, and two months ago a 15-year ban on banana imports was lifted. The next reform on the agenda is the establishment of a capital market, but there is no definite sign of when that will take place.

The government has recently carried out a reform to the public sector, after three years of debate. But this measure, enshrined in decree 20 of September 1994, entails no change to the structure of the public sector. The only change is to allow state-owned companies to decide on projects and financing autonomously. No details are given as to how public-sector companies will be able to finance new schemes. In practice, the government is pursuing a policy of benign neglect towards the public sector. Areas of investment such as cement and yarn production are being opened up to the private sector, and the government is encouraging private enterprises to inject resources into state-owned companies. This policy is being carried out discreetly, and the government maintains an official policy of rejecting privatisation.

Projects in the public sector stand no chance of going ahead unless they have financing. This is even the case in the oil sector. One foreign contractor with long experience in oil projects in Syria says he has learned to detect tender invitations that are aimed at helping the client carry out studies, on the basis of bids submitted, without having to pay for a consultant. These tenders rarely result in contracts being awarded.

Even where financing is available, there is no guarantee of a speedy contract award. Notorious examples are the Al-Zara steel complex and the Palmyra fertiliser plant which have been subject to contract negotiations for two years without any sign of an early award. Both schemes have received finance from Gulf Arab states.

The government now faces a potential financing crisis for new projects, as aid from the Gulf is starting to decline. Projects affected by this include the revamps of the Homs and Baniyas refineries. This vital programme is based on the need to modernise the two refineries and shift production to the lighter end of the market to take account of the fact that gas is replacing oil as the principal source of fuel for power stations. However, the project has got off to a slow start, and there is no firm offer of finance.

The difficulties lying around the corner for Syria in dealing with its debt problems and raising project finance strongly suggest that the government is looking forward to a fresh stream of aid flowing after a peace agreement is reached with Israel. Syria will be able to survive without such aid, but it will not be able to achieve the kind of development needed to raise living standards and keep pace with its more dynamic neighbours.