The cost of war: Syria’s economy pays a painful price

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Amid killings, international condemnation and aggressive politics, Syria’s macro-economic concerns may not be at the forefront of people’s minds. However, the country is facing harsh economic realities, despite the lack of official information.

Repairing the damage caused by two years of fighting could cost up to $80 billion, says Abdullah al-Dardari, former deputy premier for economic affairs under President Bashar al-Assad. This figure has caused shockwaves, amid warning signs in recent months of a looming fiscal collapse.

“Economics alone can fragment Syria if we go on like this,” Dardari, who served Assad for six years until shortly after the uprising began in 2011, told the Reuters news agency

While waging a military war against opposition fighters, resulting in tens of thousands of civilian casualties, the Syrian government is struggling to address evident economic decline. Dwindling foreign-exchange reserves, rising budget and trade deficits, and the plunging value of the Syrian pound, are the main financial issues.

Reduced to ruins, entire districts in Syria’s main cities now act as a microcosm of the country’s demolished economy. This was not the economic picture two years ago, and even then it was not pretty.

“One of the reasons behind the uprising was the government’s economic deadlock,” said Dr. Samir al-Taqi, director of the Dubai-based Orient Research Center, and a former member of Syria’s parliament. “The ‘do nothing’ scenario in Syria, seen before the crisis, is very stuck in itself, regardless of the uprising.”

Pre-revolution, the country’s economy was worth about $60 billion. Since 2011, it has shrunk by 35-40 percent, and unemployment has soared to 33 percent from 8.3 percent, says Dardari.

Economic losses over the last 22 months stand at about $48.4 billion, almost 82 percent of the country’s Gross Domestic Product for 2010, the Syrian Center for Policy Research reported earlier this year.

The country had been experiencing modest economic growth and reform before the uprising. The government had attempted economic liberalization, with a surge in credit growth, private banking, and trendier retail and food businesses. However, this failed to cushion the economy, and it seemed to be an insignificant reform plan, given that the unrest started because of economic discontent.

“The liberalization of the Syrian economy was always stopped by the mafias surrounding the ruling family,” said Taqi. “The family was never investing their revenues into the country, but mainly investing in the telecoms sector and ‘hit-and-run’ sectors.”

However, more important than the “big figures of the macro-economy” is the “collapse of the micro-economy,” Taqi added. “In Aleppo, about 9,000 small workshops had been producing shoes, mainly exporting, and there had been 10,000 others for textile manufacturing. Most of them are now completely closed.
“Even if they have the money, how can they produce the goods? And even if they have the goods, they’re unsure they’ll be able to sell them. The whole distribution and commercial network is destroyed.”

Other ailing indicators include Syria’s agriculture industry, which once made up 18 percent of annual GDP. It had already been in bad shape for a few consecutive years pre-revolution, largely because of drought. However, agricultural production has now halved due to the conflict, says the U.N. Food and Agriculture Organization, which has called for emergency aid for a sector that provides livelihoods for some 8 million people.

Syria’s tourism sector - about 5 percent of GDP in 2011, says the World Travel and Tourism Council - was not thriving per se before the revolt, but there were promising indicators that the country would become a Middle East hotspot.

Damascus is believed to be the oldest continuously inhabited city in the world, and the country’s geographical location has historically made it a transit route between east and west. Prior to the uprising, the tourism sector directly provided 270,000 jobs.

The collapse of investor confidence, and fears over foreign currency flight, were highlighted in the crisis’s early days, particularly after oil production took a beating. Pre-revolution, Syria produced 400,000 barrels of oil per day, and consumed 300,000, which in theory made the country a self-sustaining producer.

However, international sanctions imposed on the government have forced Syria to dramatically lessen its capacity to refine oil, resulting in domestic shortages. In the past few months, the Assad regime has hiked prices of essential commodities, such as gasoline by 62 percent and oil by 106 percent, the Agence France Presse news agency reported.

“International sanctions, alongside reductions in oil and tax revenues, had led to a fiscal ‘shock’ within Syria,” wrote the SCPR. It expects total public debt to reach 46.2 percent of GDP in 2013, as public investment expenditure decreased to cover the impact of sanctions as the government budget deficit continues to surge.

Despite this, analysts have described a “boom” in oil deliveries this year, as more than a dozen shipments of gasoil reached a government-controlled port in February, with sales reaching over $100 million at current prices. How? Because foreign firms are free to sell to non-state dealers, while the state’s oil-trading and distribution firms are prohibited by sanctions.

Syria had started to allow private firms to import fuel, Reuters reported senior Syrian officials as saying in January. “But even before this announcement was made, late last year the first vessels had already started to arrive from Georgia on the Black Sea and Lebanon in the Mediterranean,” the news agency added. “Firms that deliver to Syria say the buyers are not on the sanctions list, but won’t say who in Syria is buying their fuel.”
Regime ‘mistakes’

Even with the oil peak witnessed at the start of 2013, this year’s budget, unveiled by Finance Minister Mohammad Juleilati, in recent months revealed a more-than-threefold growth in the deficit amid falling revenue and rising expenditure.

Sanctions are affecting the “state budget, exchange rates, foreign currency reserves, general debt, inflation, unemployment and cash reserves,” the state-run Syrian Arab News Agency (SANA) quoted Juleilati as saying in November.

“There’ve been lots of mistakes by the Syrian government,” said Taqi. “They’re no longer capable of controlling the economic deterioration. The economy isn’t only suffering because of the war, but because the government was printing a huge amount of currency. It’s estimated that the Syrian government printed four times the necessary amount of liquid money when inflation rose.”

While the government may be relying on the balance sheets of the central bank and public-sector banks, it is only a matter of time before these resources run out. The deficit was forecast to reach 745 billion Syrian pounds ($10 billion) in 2013, compared with the then-expected deficit of 216 billion pounds ($3 billion) in 2012, SANA reported.

When these resources run out, military warlords will emerge, says Taqi. “What the regime has done is divide the country into wide military areas, where each military leadership is independent, with its own resources,” he added. “This will create warlords, who’ll try to finance themselves in different ways, mainly through the black economy. Those military bodies will turn into a kind of militia, whose main aim is to collect money.”

“If this conflict stops today, we can still save the country and its economy, its society, its unity and sovereignty,” said Dardari. Otherwise, the projections are daunting. Unemployment would reach 58 percent if the war lasts into 2015, and the number of Syrians plunged into absolute poverty, living on less than $1.25 a day, could rise to 44 percent from 12 percent pre-revolution, he added.

Another poignant indicator of the cost of the war is to gauge how far Syria could have developed had there been no crisis. The country has lost nearly two decades’ worth of human-development achievements, says the SCPR.

Although the economy was mired in the political deadlock that encouraged the uprising, Syria’s lost years of social development have been etched with dismal macro and micro indicators.

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