Syria: The businessman can't play his hand.

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By:
Schreeve, Gauin
Published on:

Syria faces its most serious economic crisis since the advent of the correctionist movement -- jargon for the coming to power of President Hafez Assad in the early 1970s. Private-sector businessmen with long memories say the present financial crisis is the worst since the Ba'athist socialist revolution, which led to a series of coups and to economic chaos in the mid-1960s.

For the private businessmen -- there are not many -- there is a certain irony in the present situation. They are fulsome in their praise for the peace and stability the country has enjoyed during the past decade under President Assad, but they are sceptical about the government's recent calls for them to play a more active role in the economy. For despite the publicity hype surrounding incentives, especially for the tourist industry, the private businessman in Syria works with one hand tied behind his back and the other handcuffed to the public sector.

Although tied in this way in an ailing economy, the Syrian entrepreneur continues to make money, even if not quite on the same scale as in the 1970s. Most of it is overseas or in unproductive sectors such as property, exacerbating the country's critical foreign currency shortages.

More than 1,000 people are said to have been arrested in a swoop on black market currency operators which began in January, but it is impossible to verify figures. The clamp-down lasted a lot longer than previous efforts. There is now the almost inescapable feeling among Damascus businessmen that the action against the blackmarketeers had all the elements of a government shooting itself in the foot.

The main reason the black market has been allowed to flourish for the four years since the last attempted crackdown has been simply that everybody, including government and public sector companies, needed it. It is commonly accepted in the streets and alleys that make up the ancient Souk al-Hamidieh where the blackmarketeers flourish that the government has been its largest customer.

Seven years ago the government created 12 public sector companies, each to specialize in a particular area such as roads, sewerage and construction. The companies were capitalized at 100 million Syrian pounds (Syr pounds) each and given a lot of exemptions. To attract quality staff, salaries were double those of the poorly paid public sector. One of the biggest companies was the Military Housing Establishment (MHE), which employs about 60,000 people. Its salary bill alone is estimated at 1.4 billion Syr pounds. It has taken some of the major construction contracts, such as the Banias power station.

MHE needs all the work it can get to meet its huge salary bill and other expenses. It and the other companies were given considerable freedom to operate. They were entitled to use the private sector to import goods on their behalf and all difficulties were put aside, even, critics allege, to the point where import licenses were dispensed with. The private sector initially was paid in local currency by MHE and other public-sector companies; the private sector then bought foreign exchange in the black market. But the private sector got cold feet. It started to demand that the companies pay in foreign currency. The public sector companies, needing such goods as iron bars for reinforcing concrete, of which there is a considerable shortage, had to meet the private sector terms, so they raised foreign exchange in the black market.

With this source now cut off and the private sector sitting tightly on foreign deposits (even though they are small compared to the nation's overall needs) the government faces a foreign exchange crisis of huge proportions; it has no foreign currency reserves to speak of and a mounting debt burden, mainly to Eastern Bloc countries. Its current account deficit of $1.9 billion in 1984 was an improvement on the 1983 figure of $2.2 billion but 1985 and 1986 are expected to be worse despite a complete freeze on imports and an apparently successful crackdown on smuggling from Lebanon.

While Syria's present economic woes have in many respects been due to its own mismanagement, the main reason has been the considerable regional recession caused by the slump in world oil demand and price. This has led to a huge slide in foreign remittances; there has also been a cutback in payments by oil-rich Arab countries supplied under the 1978 Baghdad agreement in support of Syria's role as a front-line state. Arab governments had pledged $1.8 billion but only Saudi Arabia is now thought to be a regular contributor. Syria's support for Iran in the current war with Iraq has done little to endear Damascus to its rich Gulf neighbours.

To a certain extent the problem has been alleviated by the discovery by Shell and Pecten Syria Company of good quality crude oil in eastern Syria. Production is expected to reach 40,000 to 60,000 barrels a day by August this year. It is being fed to the Homs refinery along the pipeline formerly in use between Syria and Iraq. This will be of considerable help as the refinery has until now relied on Iranian crude to mix with Syrian oil. But the war, logistical problems of getting the oil to Syria and Syrian payments difficulties have led to a fall-off in Iranian oil imports. The Iran-Syria agreement is for the supply of six million tonnes; one million free for the fight against Israel and the rest to be paid for in a mixture of barter and cash. Part of the barter includes plane loads of Iranian tourists to Damascus. But Syria has no cash.

Debt-servicing costs are thought to be more than $400 million a year but the true extent of Syria's foreign debt is hidden by a wide range of barter deals. Syria's domestic production is limited, and most of it is in hock to eastern European countries. The country's trade deals with Romania alone are estimated to have reached 2 billion Syr pounds. Romania now takes up to 25% of Syria's exports in payment, mainly in oil and raw cotton. There is little else available for barter so Syria's eastern European debt is now said to be seriously in arrears.

The situation steadily deteriorated throughout 1985 and the trigger that set off the crackdown on the money changers was the sudden and startling fall in the value of the Syrian pound in December. Syria has two official exchange rates, a tourist rate, an airline-ticket rate and a black market rate. The black market rate reflects the true market rate for Syrian pounds in Jordan and Lebanon where there is a healthy trade in the Syrian currency.

In July 1984 the Syrian pound was trading in Lebanon at about 8 Syr pounds to the dollar. A year later it had fallen to about 10 Syr pounds but then as the economic environment, not just in Syria but throughout the region, deteriorated the black market rate for the pound plummeted. For a period in December it was falling at about 1 Syr pound a day on the blackmarket reaching at one point about 18 Syr pounds to the dollar; in March the two official rates were 5.4 Syr pounds for private-sector imports and 3.9 Syr pounds for public-sector imports and for Syrians travelling abroad. The tourist rate went up in March from 8.25 Syr pounds to 9.75 Syr pounds to the dollar. And the blackmarket rate was 15 Syr pounds to the dollar.

Syria's now undisputed role as the champion in the Arab conflict with Israel, together with its peacekeeping efforts in Lebanon, have exacted a heavy price. The government's budget claims defence spending alone accounts for more than 50% of total planned annual expenditure, but this is just the official version. It does not take into account the millions of dollars of defence-related imports channelled into the country through private-sector companies, very many of them owned and run by former military men.

For example, an important import company called WAMACO is owned by Wadih Moukabari, a former commander-in-chief of the Syrian airforce. Several other firms include brigadiers, generals and colonels from all branches of the armed forces. Their contacts are invaluable, especially in an environment in which the private-sector businessman spends 90% of his working week lobbying the right officials.

These companies are responsible for importing a wide range of telecommunications equipment, radar, generators (the country suffers from continual power cuts) and military spares of all kinds. Many of them, such as Abdul-Rahman Hariri, a former general and now owner of MEMCO, are said to have excellent contacts with western European suppliers such as Marconi Systems, Wang Computers and King Trailers of the UK. This huge area of activity means that defence is estimated by observers to account for about 70% of all national spending.

It is this military or government-related import activity together with parts of the textile and agricultural industries which forms the backbone of the Syrian private sector. The rest amounts simply to small traders and the beginnings of joint government-private cooperation in tourism. It is to this sector that the government says it is looking in its drive to boost the country's economic development. Few doubt that the American-trained Economy and Foreign Trade Minister, Mohammad Imady, is committed to this sector but there are questions about whether he has the political clout to force the pace.

Government statistics suggest that the private sector amounts to about 34% of "gross fixed capital formation" in 1984. Officials talk glibly of the private sector accounting for some 30 to 40% of gross domestic product. The reality is that the private sector plays a much smaller part. Only about 10% of the country's annual non-defence imports were handled by the private sector in the past three to four years, and even this has largely dried up; importers in Damascus all report having done no business for between six and 11 months. One or two are now looking at a couple of deals but there remains the vexed question of foreign exchange.

The government is not convinced by the private sector's complaints. With so many officials -- from the top down -- running their own businesses on the side the government is well aware of the private sector's access to foreign exchange when it needs it. There is also little doubt that vast sums of money are being held abroad by Syrian businessmen. It is almost impossible to quantify the size of these foreign holdings, but it is estimated that about $200 million-worth of imports into Syria in the past two years were financed from foreign sources.

Aware of this, the government has resorted during the past 18 months to a number of ploys to get Syria's businessmen to finance more of the country essential imports from these foreign sources. By and large the private sector has not been fooled. Letters of credit were introduced in 1983 for all imports but they can be issued only by the country's sole commercial bank, the state-owned Commercial Bank of Syria (CBS). None has been issued for about 18 months and there is said to be queue of up to two years.

In early 1985 the government announced that an importer with a valid licence would have to deposit with the CBS in local currency 100% of the value of the goods to be imported. After 365 days, so the theory went, the CBS would meet the foreign exchange obligation. The private importer was faced with an impossible situation. Nobody in the international market was going to give him 365 days credit with the dubious hope that at the end, CBS would have the foreign exchange to pay up. The importer had to wait for a year in the hope there would be the foreign exchange. More often than not there wasn't any and after a year most of them got their money back from the bank, without interest.

In September the ruling was relaxed slightly with the importer having to deposit only 50% with the bank. Then the government came up with the shrewd idea to allow its importers to use their own foreign exchange resources to pay for goods. This meant that if the importer wanted his goods immediately he could pay for them but he had no chance of getting his foreign exchange back. The supplier, having received his money, was not going to go through the hassle of then trying to get more from the CBS after the credit period.

The private-sector importer also baulked at this technique for another reason. As most imports are for the public sector -- the private sector is simply an intermediary between the foreign supplier and the public sector -- the importer was always in danger of being paid in local currency at the official rate for private importers of 5.4 Syr pounds to the dollar. The true cost to the private importer is the black market rate of (in March 1986) about 15 Syr pounds to the dollar.

Then on March 10 the government tried again with Decree 107. This reduced the deposit period from 365 to 180 days and expanded considerably the list of goods the private sector would be allowed to import. It still excludes sensitive goods such as telecommunications equipment. But private-sector importers were sitting tight; they were not going to take the bait. Nor had they made much use of another clause which allowed them to hold 50% of foreign sales in a foreign currency account at CBS.

And it appears that few Syrian emigrants have taken up the offer to deposit up to $300,000 in a foreign currency account with CBS. Three months after the deposit the authorities will allow 75% to be used for imports. Stories abound of the ever-resourceful Syrians buying these emigrant licences. But the overall picture is one of severely reduced trade with many private sector importers saying they will be pleased to reach just 10% of their 1984 turnover; last year was disastrous.

The private sector says that if the government is serious about wanting it to play a more prominent role in the economy, then the government must sort out the foreign exchange mess. Essentially, the government must find a substitute. There is one suggestion of setting up a new bank capitalized at 100 Syr pounds million to be known as something like The Syrian Bank for External Trade. It will deal solely with foreign business and, theoretically, take the place of the black market. So far nothing has been done about it.

But perhaps the most important complaint of the small private sector is about the government's inconsistent handling of the economy. Policy is conducted in an ad hoc way; decisions are taken on a whim and legislation changed by memoranda. Government criticism of the private sector is that it is too concerned with short-term trade and obsessed with the fast buck. Few in the private sector are prepared to countenance medium- to long-term investments.

There is virtually no private industrial sector in Syria in which the businessman has taken a long-term view. The business community argues that the lack of consistent long-term policy militates against investment. Nobody, the businessmen argue, is going to sink money into something which is not going to be given a fair chance of succeeding. The Damascus free port zone is quoted as an example of erratic government dictates. The free zone was set up with the proper legislation and the private sector poured money into infrastructure and services. All was going well until a new man took over in government and the whole project was cancelled on a whim and with a memo. The zone is almost empty and unused.

Likewise the government has switched from allowing free imports to the prestigious international Damascus Trade Fair to demanding 360 days cash-on-delivery for all equipment. Importers can still get goods to the fair on consignment but have to send them back at their own cost if they don't want to meet these conditions. The present state of the market and these new rules are forcing many of the top private-sector equipment suppliers to think hard about whether to take part in the 1986 fair.

There is no real private sector in Syria. There are businessmen who are not employed by the public sector and there are the public-sector employees with private business interests. But there is no free market economy where a private sector operates within the dictates of supply and demand. Everything is determined by government, from the hiring and firing of staff to the salaries that may be paid and when increases may be given. Government sets prices and determines the levels of profit that the private sector may make.

The system of pricing in Syria is based on a fictitious value of the Syrian pound. A businessman may make a predetermined profit of, for example, 20% on electrical goods and 45% on spare parts. But these percentage profit add-ons have to be calculated on the over-valued official exchange rate of 5.4 Syr pounds to the dollar compared with the true rate of 14-15 Syr pounds. This leads to widespread practices of fictitious invoicing or no invoicing at all.

Government interference extends to most areas of production and marketing. This results, in many instances, in poor productivity but, more importantly in monopolistic behaviour. Imports of television sets are severely restricted. Sets are assembled from kits by the state company Syrionics. The quality is excellent but because of the monopoly, prices have soared. This in turn has encouraged a flourishing smuggling trade in much cheaper Japanese TVs through Lebanon.

Agriculture is largely in the hands of the private sector, but all pricing and marketing is in the hands of the bureaucrats. It is the total absence in official circles of commercial common sense that irks private businessmen; it is also perhaps one of the most fundamental impediments in the economy. And despite protestations to the contrary, it is also potentially the biggest stumbling block for the new concept in Syria of mixed private/public-sector companies.

It is now accepted that Syria needs to produce and export to finance its massive military machine. It also needs to feed, clothe and employ a population of nearly 12 million people, most living in cities such as Damascus, Aleppo and Latakia. There are 2.5 million people in Damascus alone compared with 300,000 some 20 years ago. Population growth is between 2% and 3% a year.

That Syria has the human resources to meet the challenge is in no doubt. Syrians are accepted as being among the elite in expatriate business circles throughout the region. But the private sector knows it will have to wait in the wings. The country's leaders are set on a different course at the moment which is wholly political in content and direction. So far its friends are picking up the tab, but it cannot be assumed that they will do so forever.