IN 1970, the year President Asad came to power, Syria received $3 million in cash aid, recorded by the IMF under the heading of official unrequited transfers. Not much more came in the next two years, but things started to improve in 1973, the year of the October war with Israel. From that time on, Asad has managed, most of the time, to harness his political interests to cash flows and other forms of aid, mainly from the Gulf Arab states. Between 1973-93, the cash aid totalled just over $16,000 million, averaging $800 million a year. But in 1993, the record shows transfers of only $40 million, and there is little evidence to show of much more cash flowing in 1994 or 1995. Asad appears to be losing his golden touch.

The last big bonanza for Syria was the 1990-91 Gulf crisis. In exchange for sending some 20,000 troops to Saudi Arabia, thereby signing up as a member of the Western-led anti-Iraq coalition, Asad received substantial benefits: sufficient cash to re-equip his armed forces with modern aircraft, tanks and long-range missiles; and the funds to build power stations, establish a working telephone network and improve water and wastewater facilities.

Gulf states also pledged finance for two major industrial schemes, a steel mill and a phosphatic fertiliser plant, both of which have stalled at the tender phase for more than three years.

No initiative

These two projects are symbolic of the general economic situation. No significant economic initiative has been taken by the government since the passage of a private investment law in 1991 (see page 14). That law resulted in the establishment of numerous of new private projects, but most of them are small scale. Financing for investment projects is almost entirely from equity, either in the form of repatriated funds or, on occasion, public subscriptions. It is simply impossible for Syrian businesses to borrow domestically for new projects, and it is difficult and expensive for them to borrow abroad.

This problem will not be remedied until Syria’s banking and finance system is modernised and the government has reached a settlement with its creditors about its external debts.

On banking reform, the prospects are for a very gradual change. The first step was the signing in June of an agreement with the EU, involving ECU 4.8 million ($6.8 million) in grants to finance improvements to the existing system, dominated by the state-owned Commercial Bank of Syria. Only when this programme is complete, or at least well under way, is there any prospect of opening up banking to the private sector or allowing foreign banks to establish a presence in Syria. The government has prepared a draft stock exchange law, but it has still to see the light of day.

Syria’s difficulties in meeting its debt service obligations have meant that project finance has been severely constrained. The only schemes going ahead are in the cash-rich oil sector or financed by Gulf Arab states. Otherwise, suppliers have to wait in line for letters of credit, which sometimes take over two years to be opened and confirmed. Syria is off cover for most international export credit agencies. ‘We have orders,’ says the local manager of a large European corporation, ‘but they are meaningless without finance.’

Syria got into serious difficulty with its debt servicing in the 1980s, when the regime faced severe Western political pressures, and the economy suffered from the effects of four consecutive years of drought.

Arrears

At the start of the 1990s, some $200 million in commercial bank debts was rescheduled, and the new schedule of payments is being scrupulously met. The government has also resumed interest payments on its World Bank debts, with the result that arrears have been kept steady at around $400 million. However, no serious steps have been taken to settle the arrears, with the result that Syria has no access to fresh World Bank finance.

The largest component of Syria’s $16,000 million external debt is owed to Russia for military supplies from the former Soviet Union. This is unlikely ever to be paid in full, but fitful efforts are being made to reach agreement on some of the debts.

More contentious is the $1,000 million or so of arrears on Syria’s debts to its main trading partners: Japan, Germany, France and most other EU states. The government has held serious discussions about this problem, and is making some small payments. However, no real solution is in sight. As one European diplomat puts it: ‘The seeds have been sown, but we have not yet seen any fruits.’

For Syria, failure to resolve these problem means also that it has failed to reap the fruits of two EU financial protocols worth over $400 million in total. A number of small grant agreements have been signed in respect of the protocol, but it is understood that no European Investment Bank loans – which make up the bulk of the programme – will be disbursed until the arrears owed to individual EU member states have been cleared up.

Leading the debt discussions is Economy & Foreign Trade Minister Mohamed al-Imady, regarded as the one figure in government sympathetic to the demands of the business community for more market-oriented reforms. However, Al-Imady’s liberal economic credentials are leavened with the powerful sense of nationalism evident in all Syrian officials. He insists that dealing with the debt problem must not involve Syria submitting to the dictates of an IMF programme. The government’s financial books remain firmly closed to outside observers, and that is the way Syrian officials like it.

Glacial pace

The absence of externally imposed targets means that economic reform in Syria is a most leisurely affair. The exchange rate system, for example, has been tinkered with so that most transactions in Syria are now governed by an informal free market rate, known as the neighbouring countries rate. This has remained steady at about $1=£Syr 42 for the past five years – the currency is actually traded at a premium of about 15 per cent in Lebanon and Jordan. However, Law 24, introduced in 1986 to stop black market currency dealing, remains on the statute books, providing for long jail sentences for anyone found to be in unauthorised possession of foreign currency.

Syrian businesses have proved resourceful in managing to operate in these conditions. They are free to finance imports from export accounts or from funds held offshore. However, letters of credit may not be opened until the full value of the transaction, plus fees, is transferred to the Commercial Bank of Syria. Liberalisation moves at a glacial pace. The latest measure was the early-1995 decision to allow residents to use credit cards. This means that possession of a credit card is no longer deemed to be an attempt to smuggle hard currency out of the country.

The stability of the exchange rate has been an indication that, over the past five years, Syria has been able to meet most of its current foreign exchange requirements. But it has still been unable to pay its historic debts, and business people say they fear the relatively prosperous conditions of the early 1990s may be coming to an end.

Business people have been reassured that Middle East peace will bring fresh economic benefits to Syria and provide a stimulus for more economic reforms. However, neither the peace nor the benefits have materialised, and Syria’s economic prospects are once more looking rather bleak.