Syria Syria at a Glance: 2002-03

COUNTRY REPORT

Syria Syria at a glance: 2002-03

OVERVIEW In the aftermath of the September 11th attacks on the US, regional and domestic political tensions have been acutely heightened. While Syria is not one of the countries to be directly targeted in possible US retaliatory attacks, it remains on the US list of countries “sponsoring terrorism”. However, developments so far indicate that the US is relatively satisfied with Syria’s stance. The Syrian authorities have condemned the attacks on the US but they continue to state their opposition to the killing of Afghan civilians and maintain that the groups that they support are not "terrorists" but ones engaged in legitimate resistance to occupation. Real GDP growth should rise from 2.3% in 2001 to 2.8% in 2002 and 3.6% in 2003. The current account will remain in surplus—albeit a declining one, and the fiscal deficit will widen as oil receipts decline. Key changes from last month Political outlook • The domestic position of the president, Bashar al-Assad, continues to consolidate, but recent events will result in a tightening of controls on the opposition and a slowdown in the political reform process. Relations with Israel will remain tense. Economic policy outlook • Mr Assad's reformist agenda remains in place, and reforms are expected to continue to trickle through. However, the process will slow down in the aftermath of recent global political developments. Economic forecast • The expected continued decline in international oil prices will result in falling current-account surpluses over the forecast period. Economic growth will accelerate but remain modest at 2.8% in 2002 and 3.6% in 2003, and average annual inflation will pick up but remain under 4% over the forecast period.

November 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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ISSN 0269-7211

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Syria 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

20 The domestic economy 20 Economic trends 20 Oil and gas 24 Agriculture 25 Infrastructure, banking and utilities

27 Foreign trade and payments

List of tables

9 International assumptions summary 10 Forecast summary 19 Monetary survey 27 Merchandise trade balance

List of figures

6 External trade 6 Oil production 11 Gross domestic product 11 Current-account balance 21 Oil prices

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001

Syria 3

Summary

November 2001

Outlook for 2002-03 In the aftermath of the September 11th attacks on the US, regional and domestic political tensions remain heightened. While Syria is not one of the countries to be directly targeted in possible US retaliatory attacks, it remains on the US list of countries “sponsoring terrorism”. However, developments so far indicate that the US accepts Syria’s stance. Relations with Lebanon have improved but tension is likely to resurface. Relations with Israel will remain tense, and a sustainable improvement is unlikely until Israel withdraws from the occupied Golan Heights. Real GDP growth will accelerate over the forecast period, reaching 3.6% in 2003. Inflation will remain benign and the current account in surplus—albeit a declining one.

The political scene Syria’s reaction to the September 11th attacks on the US, and the “war on terrorism”, was one of qualified support. The government condemned the attacks but called for the battle to be conducted through the UN. The British prime minister, Tony Blair, visited Syria as part of the effort to garner support for the coalition and to attempt to spur a revival of the Middle East peace process. Tens of political dissidents were arrested and face trial accused of violating aspects of “state security”. In October Syria won a two-year seat on the UN Security Council, backed by 160 states, with no US veto and only Israel in opposition.

Economic policy A draft budget was presented for 2002, proposing an annual 10% increase in expenditure to S£356bn (US$7.66 bn). The budget will include a large but unspecified share for investment projects, in an effort to boost the economy and employment, as well as an (also unspecified) increase in civil service salaries. Economic reforms are still the focus of the president’s policy, but progress on this front will slow.

The domestic economy Relatively high prices of crude oil over most of 2001, and higher than expected oil export volumes as a result of illicit trade with Iraq, boosted government revenue and expenditure, and hence growth. Moreover, a steady recovery in the agricultural sector since the 1998-99 drought spurred rural incomes and private expenditure. Following a contraction in 1999 and a difficult 2000, when the economy crawled back into positive growth territory, real GDP is estimated to have expanded by 2.3% in 2001. The first half of 2001 also witnessed strong tourism receipts. Inflation remains subdued.

Foreign trade and First-half 2001 trade data show a small deficit. The overall annual trade and payments current-account balances should be in surplus.

Editors: Hania Farhan (editor); Simon Williams (consulting editor) Editorial closing date: November 5th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report November 2001 © The Economist Intelligence Unit Limited 2001 4 Syria

Political structure

Official name Syrian Arab Republic

Form of state Socialist republic

Legal system Based on the constitution of 1973

Legislature 250-member Majlis al-Shaab (People’s Assembly) directly elected for a four-year term

Electoral system Universal adult suffrage

National elections 1998 (legislative), 2000 (presidential); next election due by 2002 (legislative)

Head of state President, directly elected for a seven-year term. The president appoints the vice- presidents, the prime minister and the Council of Ministers. Bashar al-Assad, who was elected president in July 2000, holds the posts of commander-in-chief of the armed forces and secretary-general of the Baath Party. The vice-presidents are Abdel-Halim Khaddam and Zuheir Masharka

Executive The prime minister heads the Council of Ministers, members of which are drawn from the Baath Party and its partners; last reshuffle in March 2000

Main political parties Seven parties form the ruling National Progressive Front (NPF): Arab Socialist Baath Party; Arab Socialist Party; Arab Socialist Unionist Party; Communist Party; Syrian Arab Socialist Union Party; Unionist Socialist Democratic Party; Union Socialist Party

Prime minister Mohammed Mustapha Miro Deputy prime minister & defence minister Mustapha Tlas Deputy prime minister for economic affairs Khaled Raad Deputy prime minister for social services Mohammed Naji Otari

Key ministers Agriculture & agrarian reform Assad Mustafa Communications Radwan Martini Construction Nihad Mushanteet Culture Maha Qannut Economy & foreign trade Mohammed al-Imadi Education Mahmoud al-Sayeed Electricity Munib Assad Sayeem al-Daher Finance Khaled Mahayni Foreign affairs Farouq al-Sharaa Health Mohammed Iyad Shatti Housing & utilities Husam al-Safadi Industry Ahmed Hamu Information Adnan Omran Interior Mohammed Harba Irrigation Taha al-Atrash Justice Nabil al-Khatib Oil & mineral resources Mohammed Maher Jamal Planning Issam al-Zaim Social affairs & labour Bariah al-Qudsi Supply & internal trade Osama al-Barid Tourism Qasim Miqdad Transport Makram Ubayd

Central Bank governor Bashar Kabbara

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Economic structure

Annual indicators

1996 1997 1998 1999a 2000a GDP at market prices (S£ bn) 690.9 745.6 790.4 821.3 822.4 GDP (US$ bn) 16.1 16.8 17.1 17.7 17.8 Real GDP growth (%) 7.3 2.5 7.6 –1.8 0.5 Consumer price inflation (av; %) 8.3 1.9 –0.8 –1.9b –0.4b Population (m) 14.6 15.1 15.6 16.1b 16.6 Exports of goods fob (US$ m) 4,178.0 4,057.0 3,142.0 3,806.0b 5,001.4 Imports of goods fob (US$ m) 4,516.0 3,603.0 3,320.0 3,590.0b 3,520.9 Current-account balance (US$ m) 40.0 461.0 58.0 201.0b 1,437.2 Foreign-exchange reserves excl gold (US$ m) 2,100.0a 2,075.0a 2,050.0a 2,000.0 2,450.0 Total external debt (US$ bn) 21.4 20.9 22.4 22.4b 22.2b Debt-service ratio, paid (%) 3.6 8.6 6.0 5.9 8.0 Exchange rate (av) S£:US$ 42.90a 44.50a 46.30a 46.30 46.30

November 1st 2001 S£46.5:US$1c

Origins of gross domestic product 1999d % of total Components of gross domestic product 1999d % of total Agriculture 27.3 Private consumption 60.2 Mining, manufacturing, electricity & water 18.5 Government consumption 12.4 Wholesale & retail trade 21.0 Fixed investment 22.4 Transport & communications 13.0 Exports of goods & services 36.4 Government services 8.4 Imports of goods & services –31.4 Finance & insurance 5.1 GDP at market prices 100.0 Building & construction 4.1 GDP at market prices incl others 100.0

Principal exports 2000e US$ m Principal imports cif 2000 e US$ m Crude oil 3,169 Machinery & transport equipment 863 Fruit & vegetables 259 Food and livestock 742 Textiles 317 Metal and metal products 615 Cotton 196 Chemicals & chemical products 397 Total incl others 4,649 Mineral fuels, lubricants & related materials 214 Total incl others 4,033

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total EU 61.7 EU 34.2 Middle East 17.7 Former Eastern Europe 12.7 Turkey 8.0 Asia (inc. China) 8.3 US 3.1 Middle East 8.2 a EIU estimates.b Actual. c Neighbouring countries rate. d Official estimates. e Principal exports and imports are derived from the Central Bank of Syria, Quarterly Bulletin, converted at neighbouring countries exchange rate. Exports of goods and services are taken from the IMF’s International Financial Statistics.

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Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices (1995=100) 104.5 105.3 108.4 110.0 103.7 104.9 108.6 110.4 % change, year on year –1.3 –1.6 –2.2 –0.7 –0.8 –0.4 0.2 0.4 Financial indicators Exchange rate S£:US$ (av) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23 S£:US$ (end-period) 11.23 11.23 11.23 11.23 11.23 11.23 11.23 11.23 M1 (end-period; S£ bn) 275.6 287.0 313.3 298.7 306.5 318.6 368.7 368.0 % change, year on year 11.5 7.2 11.1 8.0 11.2 11.0 17.7 23.2 M2 (end-period; S£ bn) 392.9 406.9 473.7 462.8 475.1 493.1 563.5 582.3 % change, year on year 13.7 9.8 13.4 19.0 20.9 21.2 19.0 25.8 Sectoral trends Crude oil production (m barrels/day) 0.54 0.53 0.53 0.53 0.53 0.52 0.52 0.52 % change, year on year –3.6 –3.6 –3.6 –1.9 –1.9 –1.9 –1.9 –1.9 Foreign tradea (S£ m) Exports fob 9,140 11,040 10,980 47,350 56,800 52,290 59,750 n/a Imports cif –10,810 –8,780 –15,100 –44,870 –43,640 –48,360 –50,660 n/a Trade balance –1,670 2,260 –4,120 2,480 13,160 3,930 9,090 n/a a From 1 Qtr 2000, trade data is calculated using an exchange rate determined by the Ministry of Economy and Foreign Trade. Sources: International Energy Agency, Monthly Oil Market Report; quarterly figures; IMF, International Financial Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics In the aftermath of the September 11th attacks on the US, regional and domestic political tensions have been heightened. While Syria is not one of the countries to be directly targeted in possible US retaliatory attacks, it remains on the US list of countries “sponsoring terrorism”. However, developments so far indicate that the US has accepted Syria’s stance. The Syrian authorities have condemned the attacks on the US but they continue to state their opposition to killing Afghan civilians and maintain that the groups they support are legitimate occupation resistance groups, not “terrorists”.

The president, Bashar al-Assad, remains in a strong domestic position. The accommodation that he has reached with the old guard since coming to power upon the death of his father in June 2000 appears to stand. While Mr Assad is likely to install his long-awaited new cabinet over the coming few months, a radical reshuffle may have to wait until the regional political environment is more settled. A new government would allow him more control over policy and the pace of reform, but he would still need to share power with some of the old guard, particularly if Syria is to start negotiations with Israel, as this would require the endorsement and expertise of veteran politicians. Height- ened regional tension will delay the implementation of further reforms, particularly in the political field, as evidenced by a recent clampdown on leading opposition politicians. The Economist Intelligence Unit expects Mr Assad to remain in office over the forecast period and to deliver more of the promised economic reforms, expanding the role of the private sector. Nevertheless, given Syria’s turbulent political history before Mr Assad’s father came to power, the threat of a coup cannot be discounted.

International relations Although Mr Assad condemned the attacks and expressed support for the US, he echoed other opinions in the region that retaliatory action should be spearheaded by the UN. Nevertheless, the Syrian position appears to be acceptable to the US. The Syrian authorities have even expressed their willingness to provide intelligence on Islamist extremist groups (other than those fighting Israeli occupation) to the US authorities, should they require it. A signal of the softer US stance towards Syria came in early October, when Syria won a two-year seat on the UN Security Council, with backing from 160 states, no US veto, and only Israel in opposition.

Other foreign policy issues will continue to be dominated by relations with Israel. Following the escalation of tensions in April and again in July of this year, when Israel bombed Syrian military positions in Lebanon in return for crossborder missile attacks on Israeli soldiers by the Lebanese militia Hizbullah, no further attacks have taken place. However, if there are further attacks by Hizbullah on Israeli soldiers in the still-occupied—but disputed—area of Shebaa Farms, more Syrian-Israeli clashes will result. Strains between Israel and Syria will persist until a sustainable formal solution on the Israeli-occupied Golan Heights is reached. This is not expected to take place during the forecast

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period. However, Israeli attacks are unlikely to cross the border into Syria, as this would be a serious provocation to which Syria would be forced to respond, despite Israel’s clear military superiority. Neither country desires an all-out war.

Since the death of the former president, Hafez al-Assad, Syria’s regional relations have improved significantly. Tensions with Lebanon have calmed after a period of visible discontent with the role that Syria plays in the political affairs of its smaller neighbour. The improvement in relations was largely the result of a Syrian troop redeployment in June from Beirut and the surrounding areas. However, Syria remains the main powerbroker in Lebanon and further difficulties in bilateral relations are expected. In the wider region Mr Assad will continue to build on relations with neighbouring countries, including Turkey and Iran. Relations with Iraq continue to improve, with increasingly important political and trade links. However, the latter may have to become more covert, now that Syria has won a seat on the UN Security Council.

Economic policy outlook

Policy trends Mr Assad’s economic reform agenda remains in place, although further reforms will be delayed in the aftermath of recent global political developments. Under his direction, economic reforms have progressed further and faster than during the rule of his father. The coming two years should see more progress, although this will be constrained by political considerations. Some of the reforms that indicate a radical shift in policy include the passing of a law allowing private banks to operate in Syria, albeit under strict terms. Small-scale currency exchange at the effective market rate has also been permitted, which could be seen as a tentative step towards the eventual unification of the existing multiple exchange-rate system. Ambitiously, plans for an equity market have been announced and a number of bills are being drafted on banking-sector regulation and tax reform. Greater economic co-operation and free trade zone agreements are being discussed (and soon to be implemented) with regional trading partners, such as Lebanon, Jordan, Saudi Arabia, and the UAE. Yet, despite the slew of recent reforms, growth and capital inflow will remain constrained by the cumbersome and complex regulatory, legal and bureaucratic structures, all of which require a massive overhaul.

Fiscal policy While budgetary plans for 2001 reflected the strong oil prices of 2000, with high oil receipts ensuring funding for the planned expansionary fiscal programme, the expected fall in oil prices over the coming two years will strain Syria’s budgetary position. We expect oil prices to decline by 15% in 2002 and 4.5% in 2003. Given the opacity of Syria’s budgetary accounts, it is difficult to assess the exact final impact on the budget. For 2001, it is unlikely that the authorities will be able to meet the targeted expenditure, which represents an increase of 16.9% on 2000, owing to delays in capital spending. Nevertheless, at a time when other sectors are proving sluggish, the government expenditure programme will provide a necessary fillip to demand, raising public-sector wages (which are very low) and providing much-needed investment in areas such as infrastructure. Officials have stated that while the government has no plans to privatise state-owned industries, the private sector is free to set up in all

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industrial sectors, and measures to improve the operational efficiency of public- sector enterprises (such as outsourcing management to the private sector) will increasingly be utilised. Moreover, civil service salaries will be raised by 100% over the coming few years, as part of the effort to combat corruption and improve incentives, as well as attracting better-skilled personnel into to sector. Overall, the budget deficit is expected to widen over the forecast period, averaging an annual 3.1% of GDP.

Monetary policy Monetary policy in Syria remains inflexible. Interest rates are essentially set by the Ministry of Economy, in discussion with the Central Bank of Syria, and have long been fixed at 7% (slightly less for a public-sector borrower and more for a borrower from the private sector), regardless of inflation or liquidity conditions. Credit is largely centrally allocated through an annual credit plan. Nevertheless, money-supply growth and inflation have remained under control, and should continue to be benign over the forecast period. If anything, given consumer price deflation over the past two years, real interest rates have been too high and monetary conditions are tight, thus being partly responsible for the stifled domestic investment levels. Insufficient credit to the private sector is another difficulty for the operation and growth of the sector. Although there should eventually be a more flexible approach to monetary policy, with a more market- responsive interest-rate determination system, policy will largely remain under the aegis of certain ministries, rather than an independent central bank. This interest-rate rigidity will be tested if and when private banks begin operations in Syria, but the authorities are unlikely fully to liberalise the interest-rate regime in the forecast period.

Economic forecast

International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.2 2.9 4.2 OECD 3.7 1.0 1.5 3.0 EU 3.3 1.6 1.8 2.5 Exchange rates (av) ¥:US$ 107.8 121.2 124.0 121.5 US$:¤ 0.924 0.903 0.968 1.015 Financial indicators ¤ 3-month interbank rate 4.48 4.28 3.88 4.65 US$ 3-month commercial paper rate 6.32 3.61 2.38 5.13 Commodity prices Oil (Brent; US$/b) 28.5 25.4 21.5 20.5 Cotton (US cents/lb) 59.2 49.9 50.8 57.5 Food, feedstuffs & beverages (% change in US$ terms) –6.1 0.8 14.1 10.9 Industrial raw materials (% change in US$ terms) 13.4 –7.5 3.7 12.8 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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International assumptions Crude oil is Syria’s most important export earner, with oil exports, on average, accounting for some 60% of annual export receipts during 1995-2000. As world growth slows sharply from 3.8% in 2000 (at market exchange rates) to 1.3% in 2001, primarily reflecting a hard landing in the US, demand from destination countries for Syrian exports (including oil) will slow. Economic growth in the EU (the largest export market for Syrian exports) will ease to 1.6% in 2001, but will pick up to 2.5% in 2003. Oil prices are expected to weaken, with dated Brent Blend averaging US$25.4/barrel in 2001—down by 10.8% on the average price for 2000. Average prices should fall to US$21.5/b in 2002 and US$20.5/b in 2003. Despite the anticipated drop, however, Brent prices will remain above their 1990s average of US$18.3/b.

Economic growth Following the contraction of real GDP in 1999 (mainly because of a severe drought) and the small rebound into growth in 2000, real GDP growth should register 2.3% in 2001, rising to 2.8% in 2002 and 3.6% in 2003. This should largely be the result of continued strong oil prices, which will lead to higher government revenue and spending, boosting private consumption. Better rainfall levels will also boost rural incomes and expenditure. However, rising unemployment, officially estimated at around 10% but unofficially closer to 20%, is becoming a source of increasing concern.

Forecast summary (% unless otherwise indicated) 2000a 2001b 2002c 2003c Real GDP growth 0.5b 2.3 2.8 3.6 Oil production (’000 b/d) 550.0 519.5 520.0 515.0 Gross agricultural production growth 3.3b 5.5 5.2 5.5 Consumer price inflation (av) –0.4 1.5 2.7 3.5 Exports of goods fob (US$ bn) 5.0 5.1 4.5 4.4 Imports of goods fob (US$ bn) 3.5 3.6 3.9 4.2 Current-account balance (US$ bn) 1.4 1.3 0.4 0.0 % of GDP 8.1b 7.1 2.3 0.1 External debt (year-end; US$ bn) 22.2 22.1 22.1 22.1 Exchange rates S£:US$ (av) 46.30b 46.30 46.30 46.30 S£:¥100 (av) 42.97 38.19 37.34 38.11 S£:¤ (av) 42.77 41.82 44.80 46.99

a Actual. b EIU estimates. c EIU forecasts.

Although oil prices should gradually decline, oil revenue is expected to remain relatively high, particularly given the continuation of illicit Iraqi crude oil exports to Syria. The reopening of a pipeline between the two countries in November 2000 has led to an estimated 100,000 barrels/day of Iraqi crude being pumped through and sold to Syria at a discount. Syria reportedly uses this for domestic consumption, thereby freeing up more of its own oil for exports. Despite Syria’s election to the UN Security Council and US pressure to stop this illicit trade, we expect it to be maintained in one form or another at least until the current tension in the global and regional political environment abates, thereafter refocusing attention on Iraq. The extra export receipts and govern-

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ment revenue acrued as a result of this illicit trade make stopping it too costly for the Syrian authorities.

Inflation The expansionary fiscal policy of 2001 and the expected rise in global non-oil commodity prices in 2002 should lead to modest upward pressure on consumer prices over the forecast period. However, relatively weak domestic demand, sufficient stocks of agricultural products and a lack of other demand-side pressures will keep inflation low. This will be reinforced by continuing subsidies on some basic commodities, such as bread. We therefore forecast an average consumer price inflation rate of 2.7% in 2002, rising to 3.5% in 2003.

Exchange rates Earlier this year the government took modest steps to reform the cumbersome multiple exchange-rate regime, but full unification of all rates is not expected during the forecast period. The Syrian Commercial Bank, the most important of the six state banks, began trading in January at S£49.80-50.00:US$1, undercutting the existing black-market rate. Prior to this move, the black- market rate had been remarkably stable, remaining close to S£48:US$1 since the mid-1990s. Provided there are no sudden shocks to the regional and domestic political situation, we expect the government gradually to expand this experiment, eventually unifying all exchange rates at a rate close to the prevailing black-market rate.

External sector The Syrian current account will remain in surplus over the forecast period, primarily as a result of a continued trade surplus, mainly driven by the still- strong oil prices. The surplus is expected to narrow from an estimated 7.1% of GDP in 2001, to 2.3% in 2002 and 0.1% in 2003. Merchandise exports should register a total of US$4.5bn in 2002 and US$4.4bn in 2003, largely reflecting the fall in international oil prices. Import spending should rise to US$3.9bn in 2002 and US$4.2bn in 2003, as both consumption and investment demand pick up. The surplus on the services balance will narrow in 2002 as tourism earnings decline given the heightened regional political tensions.

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The political scene

Syria cautiously supports Syria’s reaction to the September 11th attacks on the US, and the US the “war on terrorism” administration’s “war on terrorism”, was one of qualified support. The government condemned the attacks and “terrorism in all its forms”, but called for the battle to be conducted through the UN. Calls were also made to convene a UN conference where terrorism should be defined, its root causes identified so as to eliminate its threat, and a distinction made between terrorism and legitimate national resistance against foreign occupation. Without that definition, the authorities argued, the world could “find itself in a furnace of a continuing war under the pretext of fighting terrorism”. One of Syria’s vice-presidents, Abdel-Halim Khaddam, stated that “if the people’s right to resist occupation is terrorism, then European history must be rewritten and all movements that resisted Nazism must be condemned”.

Syria also made it clear that it would neither support US attacks on Arab countries nor participation by Israel in the coalition. Syria continues to support Hizbullah in Lebanon and certain Palestinian organisations, identifying them as resistance groups fighting Israeli occupation. This is clearly not a view shared by the US administration—at least publicly. Hizbullah remains a US-defined “terrorist group” and its sponsors, such as Syria, are on the list of states that “sponsor terrorism”. However, other developments, such as the election of Syria to a two-year seat on the UN Security Council show a softening of the US stance towards the country. Clearly, it is no longer expedient to have Syria on that list, as the US needs it on board in its new war. To an extent, the accession of the new, modernising president in June last year upon the death of his father renders it easier for the US to soften its anti-Syria stance, although some bilateral co-operation was evident as far back as 1990 after Iraq’s invasion of Kuwait, when Syria was persuaded to join the coalition against Iraq.

UK prime minister visits The British prime minister, Tony Blair, visited Syria as part of the effort to Damascus garner support for the coalition’s “war on terrorism” and to attempt to spur a revival of the Middle East peace process. This was the first visit by a British prime minister to Syria since independence in 1946.

The president, Bashar al-Assad, had stated his support for a “war against terrorism”, but he did not support the coalition in the bombing of Afghan civilians or in defining “occupation resistance groups” as “terrorists”. This view is common to all in the region, and Mr Assad was in line with that regional position. While Mr Blair had called on Israel to conform to international law and UN resolutions, he urged Syria to curb its support to groups such as Hizbullah and the Popular Front for the Liberation of Palestine (PFLP). Mr Assad said that Syria saw things “with both eyes” and that “Israeli terrorism” against the Palestinians should also be stopped as part of this “war against terrorism”. Firm but polite disagreements did not deter Mr Blair from seeing the silver lining. He described his meeting with the Syrian president as a “candid discussion”, and urged both sides to bridge their “fundamental misunderstandings”, as he reiterated the importance of peace negotiations, particularly within the context of the Mitchell report on the way forward for

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the Middle East peace process. Mr Blair also recognised that Mr Assad had a domestic audience to address and claimed that in private the president had been more conciliatory. British officials pointed to his private acceptance of the right of Israel to exist, as well as his condemnation of the September 11th attacks on the US.

Political dissidents are Domestic politics over the past quarter has been dominated by the arrests of rounded up tens of political dissidents, including members of parliament, who had responded to the president’s previous suggestions of political reforms by launching debating forums critical of the regime. On August 9th, independent parliamentarian Maamoun Homsi was arrested after publishing a ten-point manifesto for political change. He was charged with “defaming the state and trying to change the constitution by illegal means”, and later accused of tax evasion, which he denies. On September 1st, Riad al-Turk, a 71-year-old communist activist was arrested after giving a lecture critical of “hereditary succession”. Mr Turk had been imprisoned for 17 years without charge by Mr Assad’s father, and released only three years ago.

Stalling or reversal of the “Damascus Spring”?

Upon coming to power in June 2000, the reform-oriented president, Bashar al-Assad, began to quietly encourage a new political openness in the effective one-party state where dissent has been suppressed for more than three decades. Some prisons were closed, some political prisoners released, and the small community of liberal intellectuals felt emboldened to begin criticising the system, becoming increasingly strident and calling for an end to the Baath party’s monopoly on power and rampant corruption. However, the ruling elite is composed of ageing generals, security chiefs and veteran politicians, who are unaccustomed to criticism, which they rightly fear threatens their power and interests. By early 2001 the old guard was tiring of what it perceived as unceasing criticism by those it accused of ignoring the “achievements” of the regime and “encouraging sectarian rifts” by suggesting the minority Alawi community’s grip on power was not beyond question. It was apparently impressed on the president that encouraging democracy could only reduce his authority and threaten stability. Political forums were banned in February, but the turning point came in August when there was a stronger crackdown on dissent. Although dissent has lessened, and remains limited to a small liberal minority, the crackdown does not appear to have reduced the resolve of dissidents. Given the liberal and reformist inclinations of the president, strains within the ruling elite are likely to become more evident as the president increases pluralism. Although the “Damascus Spring” may have stalled, or even gone into reverse, it is likely to return gradually with further accommodation to critics and debate, once there has been a more sustainable improvement in relations with Lebanon and the current tense regional political environment becomes more settled.

A week later, Riad Seif, an independent MP, businessman, and head of the recently-formed National Dialogue Forum was arrested. Perhaps the best- known Syrian dissident, in 2000 he launched in his home the political debating “salons” which were outlawed in February. Having sought for six months to obtain a newly required license, Mr Seif held a meeting on the day before his arrest, which drew some 200 people and discussed the legitimacy and sustainability of one-party rule, the release of political prisoners and the

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lifting of martial law, which has been in force for over three decades. In late October Mr Seif and Mr Homsi were referred to a criminal court on charges of “seeking to change the constitution by illegal means” and if convicted could face life imprisonment.

In an open trial, Mr Seif denied the charges. The trials of dissidents in open court marks a significant change since the death of Hafez Assad, when political detainees were tried behind closed doors. The younger Mr Assad has already implemented political reforms that included the release of hundreds of political prisoners, the closing of political prisons, and allowing a greater degree of pluralism. However, it appears that the old guard have warned him that unless he cracked down on dissent, social and political instability would increase, and that he has been obliged to follow their advice. This approach appears to have started earlier in the year, following demonstrations and unrest in August in Beirut against Syrian hegemony in Lebanon. Moreover, under the pretext of the current tense regional political environment, this clampdown appears more “warranted”, and is in line with the severe clampdowns against the opposition and political dissent in neighbouring countries, such as Jordan.

Syria wins a two-year seat On January 1st 2002 Syria will join the UN Security Council, having received on the UN Security Council 160 out of 177 votes at a General Assembly meeting in October. For two years it will hold one of ten non-permanent seats, alongside the five permanent members, the US, UK, France, Russia and China, each of whom can veto Council decisions. Damascus last held a seat in 1970-71. On this occasion, Syria had been assured a place since March 2001 when it ran unopposed as a member of the 50-nation Asia grouping. Syria’s UN ambassador pledged to use the position to “work for international peace and security”. The position was strongly opposed by Israel, which accuses Syria of supporting terrorism, with one Israeli cabinet minister describing the move as a bad joke given the ongoing US campaign against terrorism. While Syria remains on the US list of countries “sponsoring terrorism” the US administration did not oppose the move, despite pressure from certain lobbies in Congress, because of the overwhelming support of the General Assembly. Since the US had successfully blocked Sudan’s election to the same seat last year, despite its running unopposed, this suggests that the US does not want to alienate Damascus

However a State Department spokesmen commented that “the US will continue to express its concerns to Syria regarding terrorism… and will expect Syria to meet its obligations to respect human rights and fulfil all Security Council resolutions”. As a non-permanent member, Syria will not be able to block Security Council decisions, but its presence gives the government access to all Council deliberations. The move has been seen in Damascus as a diplomatic coup, vindicating its stand against Israeli occupation. But despite gaining the seat, Syria will face growing pressure from Western countries to adhere to UN Security Council resolutions, notably sanctions against Iraq. Since late-2000 Syria has been buying subsidised crude oil from Iraq in contravention of UN sanctions (see The domestic economy: Oil and Gas). It now seems likely that, at least for a period, it will curtail these purchases or utilise less overt means of doing so. This will have a negative impact on government revenue and expenditure, and hence on growth.

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New law legalises private A new law regulating the print media had been pledged as a measure of newspapers—with limits political reform, but has effectively formalised controls. The “Printing and Publications” decree replaced a 1949 law which imposed vague restrictions on the print media. The new legislation formally allows the publication of private newspapers for the first time in many decades. This provided legislative support for the licensing of several non-government newspapers earlier in 2001, including a satirical weekly, Al-Doumari, and the Syrian Communist Party newspaper, Al-Nour. One government newspaper described the legislation as allowing “total freedom to all kinds of publications, bookstores, and publishing houses”. However the legislation also imposes severe restrictions and penalties. It bans publication of information that might harm national security, unity of society, the security of the army, the country’s international ties, the country’s dignity and prestige, the national economy and monetary security. Information about the army’s strength, weapons, and equipment, apart from that published officially, is also banned. Any publication that calls for a change in the country’s constitution in an unconstitutional way, or calls for civil disobedience, is also banned. Thos e judged to have breached the law face a penalty of three years’ imprisonment and a fine of up to S£1m (US$21,505). The legislation also increases the powers of the minister of information to prohibit foreign publications if they are deemed a “threat to national sovereignty, illegal or immoral”.

Overall the law seems to reflect conflict between the reform-oriented sections and the old guard within the regime. It is also clear that given the political crackdown against the opposition movement in recent months, the reformists have yet to win the day. A similar law, which has been in preparation since mid-2000 but has yet to be passed, intends to legalise political parties outside the ruling coalition. However, it is also likely to be riddled with controlling and restrictive clauses.

Cabinet reshuffle still to Since the president first came to power in June 2000 there have been persistent materialise reports of a government reshuffle. It has been assumed that he will use it to increase the number of his own more moderate and technocrat allies and lessen the influence of senior members of the administration who were contemporaries of his father. However, given recent global events, it is likely that a radical reshuffle will be delayed until the regional political environment is more settled, and that when it does take place, the president will retain some of the old guard in cabinet, largely because of their power and influence, but also because of the skills and expertise which will be needed if peace negotiations with Israel are started.

Reconciliation visit of A long-planned visit by Yasser Arafat, the Palestinian leader, to Damascus, was Yasser Arafat postponed postponed in late September. The meeting was intended to conclude a rapprochement between the Palestinian Authority and the Syrian government, after relations broke off in 1993 following Mr Arafat’s signing of an interim peace treaty with Israel, a move which was condemned by Syria for its unilateralism and which led to Damascus emerging as the focal point for anti- Arafat Palestinian factions. The gradual improvement in relations between the two sides was made possible by the accession of Mr Assad to the presidency,

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following the death of his more hardline father in June 2000, and by the complete breakdown of peace negotiations between Mr Arafat and Israel last year. These two developments removed both personal and political barriers to reconciliation. Mr Arafat and Mr Assad met in March on the sidelines of an Arab summit in Jordan.

Since the breakdown of the Palestinian-Israeli talks, the accession to power of Bashar al-Assad, the beginning of the second Palestinian intifada (uprising) in October 2000 and the hardening of the regional position towards Israel, Syria has enjoyed warmer relations with virtually all Arab states.

Golan settlements further Somewhat unnoticed among the events taking place across the region in the depress peace prospects third quarter was a decision by the Israeli government to approve new house- building projects on the Golan Heights, a vast plateau seized by Israel from Syria in the 1967 war and annexed several years later. Any peace deal between Syria and Israel (which still appears distant) is expected to centre on Israel handing back the territory in exchange for Syria recognising Israel’s right to exist and normalising relations. Peace talks in 1999 were broken off over disputed sovereignty of a small strip of land on the Israeli side of the range. As any deal would almost certainly require Israel to remove all settlements from the land, the new Israeli house-building programme places yet further obstacles in the way of talks. On a visit to the plateau, the hardline Israeli prime minister, Ariel Sharon, underlined the chasm between the two sides, stating that settlement of the Golan was “one of the most beautiful successes and achievements in the history of Zionism” and adding that Israel should “develop the Golan Heights, its Jewish population and its settlements to make it an irreversible reality”. In typical form, Mr Sharon later added that he was ready to restart negotiations with Syria “without preliminary conditions”. The continued conflict over the Golan is effectively the single reason why Syria continues to sponsor Hizbullah guerrillas in southern Lebanon launching attacks on Israeli positions.

Mr Miro’s visit concludes Syria continued its political reconciliation with neighbouring Iraq with a visit rapprochement with Iraq by the prime minister, Mohammed Mustapha Miro, to Baghdad in August. This followed a series of formal political and trade agreements signed over the past two years. Although the visit was dominated by economic matters, with the two countries planning to boost bilateral trade to US$1bn annually, it also marked one of the final steps ending decades of hostility which culminated in Syria’s backing of Iran in the 1980-88 Iran-Iraq war. Syria reopened its diplomatic mission to Iraq in May, after Iraq sent formal representatives to Damascus in mid-2000. The two countries have reopened their borders and sharply reduced visa restrictions on each other’s nationals. The Syrian state airline now has several flights to Baghdad, and Syrian goods, especially processed food, have become common on the Iraqi market. Both countries continue to deny that Syria is buying discounted crude oil from Iraq, in breach of UN sanctions (see The domestic economy: Oil and Gas). For Mr Assad, achieving the reconciliation represents another strand in rebuilding regional alliances, undoing the consequences of his late father’s policies which often led to Syria’s isolation. However, recent signs indicate that at a more micro-level,

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trade relations between the two countries are somewhat tainted, as some Syrian traders have not been abiding to a united pricing system for exports .

Economic policy

Draft budget for 2002 In mid-October, a draft budget was presented for 2002. As part of the process of forecasts a 10.6% expansion improving fiscal management, the early presentation was a positive step, being one of the first occasions in many years when budgetary discussions started before the beginning of the financial year. The budget proposes expenditure of S£356bn (US$7.66 bn), compared with S£322bn in 2001 (a 10.6% increase). The budget is believed to include a large but unspecified share for investment projects, in an effort to boost the economy and employment, as well as an (also unspecified) increase in civil service salaries. As usual with Syrian budgets, the figure for proposed revenue matched expenditure at S£356bn, leaving a balanced budget. The budget is expected to go before parliament for ratification by early November.

Figures suggest 2002 budget Published information on government fiscal policy is notoriously impenetrable deficit of 3.2% of GDP and unreliable. No breakdown of the proposed budget has been released, but some reports suggest that current expenditure is planned at some 40% of the total, and investment expenditure at 40-45%. The balance is reported to be earmarked for debt servicing. On the revenue side, non-tax and tax and excise revenues will fall short of budgeted expenditure, and foreign loans (largely from Arab institutions) are expected to make up the difference between budgeted expenditure and budgeted revenues. The Economist Intelligence Unit expects the budget deficit for 2002 to be around 3.1%, up from an estimated 2.5% in 2001.

The overall proposed budgetary expansion of 10.6% continues a broad trend of expansionary fiscal policy since 2000. According to official figures expenditure climbed 7.8% in 2000, and it was budgeted to increase by 16.9% in 2001. The planned capital expenditure for 2001 could not be delivered, and it is believed that some of that has been transferred to the 2002 budget. Part of this expansionary effort has been funded by increased (unaccounted for) revenues from the illicit import of Iraqi oil. No budget outturn figures have yet been released for 2000 or the first nine months of 2001.

Projects worth S£4.55bn As part of its fiscal expansion programme, the government announced a multi- approved year investment plan intended to create 605,000 jobs and raise economic growth to 5% by 2005, through overall investment of S£50bn (US$1.08bn; see August, page 17). Details were released in the third quarter of a number of new projects launched as part of this programme by the Supreme Council for Investment, a government body charged with directing state funds into new public companies in sectors where economic opportunities are perceived to exist. The Council announced some 50 projects, with a total capitalisation of S£4.55bn, targeted at the information technology, health, industry, agriculture and transport sectors. Some of the projects announced include a project involving the construction of a timber processing plant in the poor north-east

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of the country at al-Raqqah at a cost of S£2.3bn; a domestic computer assembly industry in Damascus costing an estimated S£75m (US£1.61m); and the construction of a hospital on the outskirts of Damascus at a cost of S£979m (US$21.1m). The Council also approved 47 different transport-based projects worth S£1.2bn, mostly in the form of improving the road and rail network.

The president, Bashar al-Assad, is especially interested in the field of technology and the Syrian government intends to launch a mammoth programme for technological development. The government has recently announced it will set up the Technopolis project within a free zone near Homs, central Syria, over an area of 100 sq km.

State-sponsored efforts to The principle aim of the overall spending programme is to stimulate growth develop industry continue and create jobs, keeping pace with the country’s high population growth rate which is estimated to bring 200,000 school-leavers onto the labour market each year. Unemployment is officially estimated at around 10%, but unofficial estimates put the figure closer to 20%. At a landmark investment conference in London in early July, Issam al-Zaim, the planning minister, said that the new five year plan will include developing light industry and offering government loans to the unemployed to launch small businesses. The public sector will provide around 65% of the total planned investment, with private-sector funding sought for the remainder. Much of the public-sector investment will be targeted at infrastructure, but there will also be an effort to turn around inefficient and loss-making state enterprises, making them more market- oriented and profit-making, through contracting out management to the private sector (see August, page 17). Although the programme is sincere in its aims, it is unlikely that the existing public bodies, given their poor track record, are best suited to launch new commercial projects. Equally, without more investor-friendly legislation, transparent business practices, and an effort to reduce stifling and overwhelming bureaucracy, private-sector participation will be constrained.

Net credit to government The latest IMF International Financial Statistics (IFS) figures on domestic credit, falling which stop at April 2001, indicate that net claims on the government have continued to decline, with the government—on a net basis—paying back its liabilities. The downward trend in net claims on the central government has been in place for much of the 1990s, with the figures turning negative from 1999, implying that the government became a net depositor rather than a borrower. The composition of this net figure—until 2000—indicates that the central government has continued to borrow from the banking sector, but has also been increasing its deposits at those banks. The same trend is evident in the government accounts with the monetary authorities (the central bank). However, rather than leave more funds to the private sector by utilising its deposits for spending purposes, the government appears to have chosen to continue borrowing at the same time as it was building up its deposits, thereby reducing funds available for private-sector credit. This trend seems to point to a better than apparent position of government finances. The net foreign assets position of the government and the state-owned banking sector supports this

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conclusion, with net foreign assets rising by around US$3bn in 2000 over their levels in 1999, and by a further US$688m in the first four months of 2001.

Monetary survey (S£ m) Apr 1999 2000 2001 Net foreign assets 335,448 473,449 505,418 Total domestic credit 254,432 234,564 198,850 Net claims on central government –730 –29,509 –60,677 Claims on official entities 179,817 187,462 181,937 Claims on the private sector 75,345 76,611 77,590 Source: IMF, International Financial Statistics.

While the central government is building up net assets, claims on the public sector were on an upward trend until the beginning of 2001, when they started slowly to decline. In the year to April 2001 claims on parastatals fell by 3% on the December 2000 levels. However, the parastatals continue to rely heavily on the banks for funding, further crowding out private-sector borrowing. The trend for 2001 as a whole is estimated to have continued, with those entities borrowing increasing amounts from the banks.

Credit to the private sector The monetary survey also indicates that claims on the private sector have been severely constrained increasing, but at a slow rate and from a very low base. After rising by 1.7% in 2000, they increased further by 1.3% over the first four months of 2001. The rate of increase is even lower on an April year-on-year basis. Overall, some 67% of all domestic credit went to the public sector in 2000, and this figure fell to 61% in April 2001. Total domestic credit extension fell by 15.2% in the year to April, after falling by 7.8% in 2000 compared to its 1999 levels. This reflects the poor state of the economy, and the crowding out of private sector investment by the public sector. The situation is poor due to the fact that all banks are state-owned and have to take instructions from the government regarding the bulk of their lending activities. When private banks begin to operate in the country, the private sector may receive a boost as credit availability should improve. However, total credit to the private sector is somewhat under- estimated due to the fact that most large Syrian entrepreneurs now bypass Syrian banks and borrow from banks in neighbouring countries, such as Lebanon and Jordan, for their business purposes. At the same time the growth of small businesses is severely constrained by the lack of credit facilities.

On the deposit side, the shortcomings of Syrian banks lead many Syrians to use Lebanese banks for transactions. These offer the added security of strict bank secrecy laws in Lebanon. Some estimates put the Syrian deposits in Lebanese banks at around US$6bn—equivalent to around 35% of the total liabilities of the Syrian deposit money banks. Some of these deposits should find their way back into the country after private banks prove their viability in Syria.

The domestic economy

Economic trends

Oil and agriculture buoy Due to the paucity and lateness of data on the trends of the Syrian economy, it economic growth is difficult to make specific conclusions on economic trends. Yet given the relatively high price of crude oil over most of 2001 (see Oil and gas), and higher than expected oil-export volumes as a result of illicit trade with Iraq, the hydrocarbons sector has contributed strongly to government revenue and expenditure, and hence to growth. Equally, a steady recovery in the agricultural sector (see Agriculture) since the 1998/99 drought will have also spurred rural incomes and private expenditure. Following a contraction in 1999 and a difficult 2000, when the economy crawled back into positive growth territory, real GDP is thought to have expanded by some 2.3% in 2001, driven by oil receipts and the agricultural rebound. The other sector believed to have experienced a good year is tourism. Newly released Ministry of Tourism figures suggest a steady growth in the sector in 2000, and although this will have slowed down in late 2001 (because of regional and international political concerns), tourism revenues are believed to have declined only marginally on their 2000 levels. It was reported that some 3m tourists arrived in the country in 2000, up 4.9% from 2.86m in 1999. Tourism revenues rose from US$52.4m in 1999 to US$74.4m in 2000.

Growth evident but business Discussions with local business figures suggests that business confidence across confidence subdued the economy is low. There is a widespread perception that the Syrian economy remains stagnant, despite evident sectoral expansion in agriculture, oil and tourism. Anecdotal evidence suggests that demand is sluggish and orders are relatively low. Yet the minister of economy, Mohammed al-Imadi, correctly insisted that the country was not in recession in a recent interview with a state newspaper. However, he forecast growth of 5% in 2002, a figure which most analysts, including the Economist Intelligence Unit, believe to be too ambitious. This is even more so given the expected continuation in the decline in international oil prices in 2002 and 2003. The precarious regional political situation also threatens to constrain growth through its negative impact on tourism and investment.

Inflation remains low Given that domestic demand is stagnant and goods are in plentiful supply with a healthy agricultural season, inflationary pressures remain subdued, and 2001 is thought to have registered a consumer price inflation rate of less than 2%. The low inflationary environment is expected to be somewhat counteracted by the expected increase in public-sector salaries, as well as the forecast increase in the global prices of manufactures and non-oil commodity prices.

Oil and gas

Lower world growth Syria is not a major global oil exporter, nor a member of OPEC, but oil exports reduces oil prices play a central role in the economy. Given that more than 60% of annual

export revenue comes from the sector, the fortunes of the economy are highly dependent on international oil prices. The effect of the September 11th attacks on the US will exacerbate the global slowdown, which was in place prior to the attack, following a strong performance in 2000 when global growth reached 3.8%, led by US growth of 4.1%. The world economy is estimated to have slowed down drastically in 2001. Indeed, this is the sharpest deceleration in growth since the 1973-74 oil-price shock. This has lowered demand for oil and, following a 60% increase in oil prices in 2000, 2001 is expected to end with a decline in the average price of the benchmark dated Brent Blend of around 11%. The decline in oil revenue will constrain government revenue and expenditure, and hence real GDP growth.

As a result of the downward pressure on oil prices, OPEC announced at the end of October that the organisation is considering restricting supply as demand is expected to fall further, particularly if oil prices decline below US$20/b for a sustained period. However, the organisation is reluctant to be seen to be exacerbating the global slowdown, particularly given the current difficult global political environment, which is rendering the outlook for the oil market even more uncertain.

Illicit Iraqi oil imports It is widely accepted that the country has witnessed a steady fall in both oil continue but may soon fall production and exports as existing fields have matured and no new discoveries have been brought on line. The International Energy Agency (IEA) estimates that production in June and July was maintained at 520,000 barrels/day (b/d), but that August saw a drop to 510,000 b/d, leaving an estimated average production for the third quarter of 2001 closer to 510,000, with September levels expected to be around those of August. The decline in production is largely the result of the maturation of existing fields, limited exploration for new reserves, and relatively inefficient extraction by the state oil sector because of the need for new capital investment. Greater energy demand caused by high population growth is also diverting an increasing volume of oil into domestic energy generation, leading to a greater decline in exports than in production. Ultimately, the government aims to satisfy domestic demand for energy from the increased production and supply of gas, thereby freeing up more oil for export.

However, since the fourth quarter of 2000 Syrian oil exports have increased markedly after a long-disused oil pipeline from Iraq was brought back into use, with Syria buying Iraqi crude at a discounted price, in breach of UN sanctions. This oil was used for domestic consumption, thereby freeing up more of its own production for export. Both Syria and Iraq deny that the pipeline is operating on anything other than a trial basis, and there are plans to build a new pipeline in compliance with UN sanctions. However, despite the official denials, there is no other explanation for the surge in Syria’s oil exports since the end of 2000. The average volume passing through this pipeline is believed to be in the range of 100,000-200,000 b/d.

Oil trade with Iraq will Given Syria’s new position as a non-permanent member of the UN Security drop due to Syria’s new Council (UNSC) from January 1st 2002, we expect the use of this pipeline to UNSC seat diminish, or at least to become more covert, as the government will be under pressure from some of the five permanent members of the Security Council to comply with UN sanctions or risk losing its UNSC seat. We still expect the pipeline to remain in use due to the essential contribution the extra oil revenue makes to government revenue and expenditure, at a time when international oil prices are falling. This should be the case at least while international attention is not focused directly on Iraq, but towards Afghanistan and the war on Osama bin Laden’s al-Qaida organisation.

Total Syrian exports for August 2001 were some 1.73m tonnes or 407,000 b/d. Before the reopening of the pipeline exports were typically 330,000 b/d. It is believed that there was a small reduction in oil exports in October, which may indicate that the authorities wish to be seen to be curbing this trade. Oil traders report that the state-owned oil-trading company, Sytrol, has indicated to forward buyers that volumes will be lower in 2002, by as much as 30-40%, implying that the regime intends to reduce the illicit trade, or at least its visibility. However, Sytrol has made statements about cuts before and these have not always materialised. Syrian loading schedules show that its intake of Iraqi crude in November is expected to be 193,000 b/d—10% lower than in October. Domestic production is estimated at 512,000 b/d for November, while domestic consumption in the month is expected to run at 294,000 b/d. This would leave Syria with only 218,000 b/d of export capacity. But the loading schedule indicates that 411,000 b/d will leave the country, implying that the difference will be met from Iraqi oil imports. The slight decline in volumes to 432,000 b/d in the October export schedules indicates imports of around 214,000 b/d of Iraqi crude for the month.

Other industry analysts believe that the reduction was necessary because of domestic refinery requirements and regional instability, and that Sytrol is keeping back some stock for either domestic use or for sale on the spot market. Sytrol may be hoping to secure higher revenues by keeping back more cargoes to sell on a spot basis every month, as it has occasionally done this year at a premium to the official selling price set for term customers. By lowering term volumes, Syria would not be caught short if the Iraqi supply dwindles, but could gain a few more cents per barrel by selling extra cargoes on the spot market, if domestic refiners continue to be fed Iraqi crude. Term volume discussions are still preliminary, with final allocations expected later in

November. Iraq may also have boosted Syrian supplies to shore up support ahead of the next UN discussions at the end of the current phase of the oil-for- food programme in late November, when the pipeline issue is likely to resurface as the US and the UK attempt to crack down on smuggling.

New pipeline planned for Economic and trade co-operation between Syria and Iraq is progressing well Syrian-Iraqi oil trade and in many areas. A free-trade agreement is being discussed, many products are already traded, and mutual representative offices have been opened. A joint project is the planned new oil pipeline linking the two (under UN supervision), for which a choice must soon be made regarding the company that will construct the pipeline. The two countries agreed in 1998 to build a new pipeline through Syrian and Lebanese territory with a capacity of 1.4m b/d to replace the old one, which was opened in November 2000 after 19 years of closure.

Shell considering further According to a report in Al-Hayat, a daily newspaper, at the end of September, investment in Syria Jeroen van der Veer, vice-chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group, visited Damascus and had discussions with high- level Syrian officials. The two parties discussed the establishment of new oil- excavation projects by Shell. Shell started operations in Syria in 1978, but it did not succeed in its search for oil in the country until 1984. In 1992, it produced 400,000 barrels of oil and became the largest oil-producing company in Syria.

Meanwhile, in an effort to maintain oil production levels, attract modern recovery technology and spur interest in its gas sector, negotiations are taking place on some of the five blocks on offer in Syria, and announcements could be made ahead of the December 31st deadline. Syria put five of 24 unassigned blocks to tender in June. Three are relatively unexplored, high-risk areas containing mainly gas prospects, while two are said to have oil potential. There appears to be a fair amount of interest so far, a possible sign that Syria may have relaxed its usually stiff contract terms. Conoco and TotalFinaElf, who are already active in the country, are looking to enter long-term projects, while smaller firms like BHP of Australia and Tanganyika Oil of Canada are also reportedly interested.

Conoco, TotalFinaElf The oil minister, Mohammed Maher Jamal, announced in mid-September that $400m project completed a US$400m gas project undertaken by Conoco of the US and TotalFinaElf of France was completed six months ahead of schedule. This project will allow Syria to use the associated gas currently being flared at its Deir al-Zour oilfields. Mr Jamal said that Syria had piped 1m cu ft of gas on that day as a first step to feeding a 425m cu ft/day (cf/d) plant from which it would be supplied to domestic users. Conoco, the lead operator, and TotalFinaElf each hold a 50% stake in the project, which includes the construction of a gas-gathering system and processing plant, as well as a 155-mile pipeline to carry 150m cf/d of residual gas to the national grid, feeding power stations.

Talks with Egypt and Given falling oil production and rising domestic demand for energy, Syria may Cyprus over gas supplies well become a net oil importer within a decade, unless new finds are discovered and extracted. Attention has therefore switched to gas as an

alternative source of energy for both domestic use and exports. In August the country entered into negotiations with Egypt and Cyprus, concerning the exploration of offshore areas and gas exports to Cyprus, via an underwater pipeline from Syria. Work is understood to have begun on determining territorial zones, which will lead to three-way agreements between the countries concerned, expected in 2002. The government has also proposed supplying natural gas to Cyprus, which has limited domestic energy resources, through construction of a pipeline costing up to US$250m, although this project remains at a very early discussion stage.

Agriculture

Crop production witnesses Syria has enjoyed a good agricultural harvest in 2001, with yields of both strong year wheat and barley, the main cereal crops, rising markedly. The Ministry of Agriculture attributes the increases to good climatic conditions, with adequate rainfall and suitable growing temperatures through the year. Wheat output is forecast by the ministry at 4.75m tonnes in 2001, up from 3.1m in 2000. Wheat planting during the year covered an area of 1.67m ha, virtually unchanged from the 1.68m ha of 2000. Domestic wheat consumption is expected to be 3.12m tonnes a year, and allowing for some 250,000 tonnes required for seeding, this will leave more than 1m tonnes available for export. Barley production, which is very rainfall dependent, increased to 1m tonnes from 211,000 tonnes in 2000. Barley consumption, mostly for animal feed, is forecast at 850,000 tonnes, leaving much of the rest for seeding.

Other agricultural crops have also benefited from the favourable conditions. Lentil production rose sharply to 338,000 tonnes from 73,018 tonnes in 2000. Chickpea output increased to 120,000 tonnes from 64,500 tonnes. Olive output is forecast at 900,000 tonnes, grapes at 688,000 tonnes, citrus at 841,000 tonnes, and sugar beet at 104 million tonnes.

Increases in the output of grains, particularly of wheat, are often not fully utilised, because of losses resulting from poor storage facilities. Projects to improve silo facilities have been under way, and in the third quarter the ministry announced that grain capacity had reached 4m tonnes, up from around 1m tonnes in the mid-1990s. There are projections that this will increase to 5m tonnes by the end of 2002.

Cotton harvest exceeds Cotton output, which is Syria’s main agricultural cash crop, remained close to 1m tonnes its 2000 levels, with 2001 production forecast at some 1.06m tonnes by the end of the harvesting season (end-October), compared to some 1.1m tonnes in 2000 and 926,000 tonnes in 1999. It is expected that the government will pay around S£3.75bn (US$81m) to buy the raw cotton from farmers. The raw cotton is expected to yield around 350,000 tonnes of ginned cotton and 625 tonnes of cotton seed. Some 210,000 tonnes of ginned cotton is expected to be exported while the remaining amount of 140,000 tonnes would be consumed locally. The main importers of Syrian cotton are Italy, France, Germany, Switzerland, Russia and Belgium, as well as several Arab states such as Jordan and Lebanon. The cotton-planted area rose to 257,000 ha in 2001, up from 236,000 ha in 2000. All cotton-planted areas are irrigated.

Syria’s cotton output has seen a steady increased from 334,000 tonnes in 1970, largely as a result of an intensive programme to improve irrigation and planting methods which increased the planting yield from 1.6 tonnes/ha in 1980 to 4 tonnes/ha in 2001. As well as an important cash crop, the industry directly and indirectly supports some 15-20% of the workforce, according to official figures, through cultivation, processing and textile manufacturing. As a result of the sector’s increasing importance, the government has recently opened this previously state-owned industry to private-sector investment.

Infrastructure, banking and utilities

Decision apparently made Interest in the construction sector increased modestly with a number of new on the Four Seasons bids projects tendered and others reaching the construction stage. Most projects are in the tourism and power sectors. Activity in the tourism sector is being spurred by a 20-year government development plan, providing tax breaks, exemptions, and other attractions for foreign investors. The state has also set aside US$100m for the construction of 13 new hotels in Damascus.

Although tenders have yet to be officially finalised for the second-stage superstructure of the biggest project so far, the Damascus Four Seasons Hotel (see August, page 23), it was reported in October that Fouad Takla, a local firm, won the contract to build the superstructure. The award of the contract for the 350-bed hotel followed weeks of negotiations between the client and Fouad Takla, the Arabian Construction Company (ACC) of Lebanon and Athens- based Joannou & Paraskevaides (J&P Overseas). The contract is believed to have been awarded at a renegotiated price of US$42m, more in line with the client’s budget. The lowest bid submitted in June came from ACC at around US$47m, followed by J&P Overseas and Fouad Takla, with quotes of some US$49m each. Fouad Takla should fulfil the contract over a period of 27 months. The construction of the hotel’s substructure was finished on schedule by Bauer of Germany and CAT of Lebanon in May. The Kingdom Holding Company of Saudi Arabia is the majority shareholder in the Syrian-Saudi client company.

The US$95m project, which will be Syria’s largest hotel, is 65% financed by Prince al-Waleed bin Talal, a Saudi billionaire, with the remainder provided by the Ministry of Tourism. The project for the 34-floor hotel was signed in January 1998, and is being built on a 13,000 sq metre plot in the city centre, close to the existing Meridien hotel. The second stage is expected to begin in 2002, with the whole project scheduled to be completed at the end of 2003.

Work is also proceeding at the Aleppo Sheraton, in the Bab al-Faraj district of the city. The Mohammed Abdulmohsin Kharafi and Sons group of Kuwait is the contractor for the US$19m project. The Cham Palaces and Hotels Group, which has a string of outlets around the country, has announced plans to renovate its hotels and to develop a chain of three- and four-star hotels near major historical sites. The group has just completed an 18-hole golf course, the first in Syria, near one of its existing hotels. It opened at the end of September and is proving popular with foreign embassy staff and other expatriates, and to many Lebanese golfers.

Activity in the construction sector however, is expected to slow, with some projects not yet under construction being delayed because of the slump in regional tourism in the aftermath of the September 11th attacks on the US. Most sector analysts believe that while the long-term potential for tourism remains bright, the completion of projects already underway will result in an over-capacity at the top end of the market given expected lower arrivals in the near-term.

Kuwait funds new power The Kuwait Fund has recently offered Syria a US$320m loan for public works projects projects. These are expected to include the financing of power project upgrades and conversions, linking Damascus, Hama, and Aleppo to an electricity grid, and developing natural gas reserves for possible export. Kuwait has pledged to offer other financial and technical assistance to develop Syria’s nascent gas sector, which the government intends to be the main driver of power generation in the future, freeing more oil for export. In total, Syria has received some US$1.92bn in concessionary loans and grants from Kuwait since 1991, and the latest loan comes despite the Syrian government’s increasingly close relations with Kuwait’s bitter enemy, Iraq.

Syria’s first credit card The Commercial Bank of Syria (CBS) is planning to issue the country’s first ever system planned for 2002 hard-currency credit card next year as part of an effort to improve and modernise its services. The bank’s chairman stated that the bank has already agreed with Visa of the US to issue the plastic cards for Syrians who hold hard currency accounts in Syria. State-owned CBS dominates the Syrian banking market, and has added that it will issue Visa cards in local currency at a later stage. The bank is also engaged in a modernisation drive, linking to the Swift international banking network and investing in new technology to link all its 55 branches, thereby enabling a more reliable and speedy transfer of funds and data throughout its network.

The bank’s chairman stated that one of the main factors that paved the way for the introduction of credit cards was the authorities’ decision to fix the exchange rate at a realistic value—even undercutting the going black-market rate—at the beginning of 2001. Syria introduced the “non-commercial rate” at S£50.3:US$1, when the going black-market rate was marginally lower, to entice dealers to change money at the state-run banks rather than on the black market.

This rate remains in place for people selling dollars and is reviewed daily to reflect changes in market conditions. However, it does not cover any official dealings and is limited to customers who want to change their money for private purposes. The “customs rate” of S£23:US$1 and the neighbouring countries rate of S£46.5:US$1 are more widely used, particularly the latter, which is used for 85% of foreign currency dealings. At the end of September, the difference between the “non-commercial rate” and the black-market rate was only 10 piastres (S£1=1100 piastres). In conjunction with the Ministry of Economy, other banks are also experimenting with the introduction of technology, with some conducting trials using Automated Teller Machines.

Foreign trade and payments

First-half 2001 trade figures In mid-October the government released trade figures for the first half of the show strong growth year. Exports, according to the figures published in the local press, stood at S£119.5bn (US$2.57 bn). This represents a 14.8% increase over the first half of 2000. Of the total export earnings, oil was reported to account for S£88bn, a 19.8% increase over the estimated first half figure for 2000. Cotton and textile exports were reported to have earned S£10 bn, while revenue from fruit and vegetable exports stood at S£5bn. Imports for the first half were reported to be S£120bn. This represents a 35.5% increase over estimated first half imports for 2000. Although these figures are provisional, the trend of rising exports can be accounted for by the high price of crude oil during that period, and the rising production of the agricultural export sector. Higher imports are in line with increased government capital expenditure at the time of high oil prices.

The government figures suggest a near balance of visible trade in the first half, with a deficit of US$10m. This compares with an estimated trade surplus of US$335m for the first half of 2000. The deterioration can largely be attributed to the reported increase in imports. No figures have yet been released for invisible trade or the overall current and capital accounts. For the second half of 2001, the trade balance is likely to have deteriorated, in line with the decline in oil prices. However, given the added volume of oil exports over the period (due to the illicit trade with Iraq), the balance is estimated to have remained in surplus of some US$1.5bn for the year.

Merchandise trade balance (US$ m) 2000 2001 Jan-Jun Jan-Jun % change Exports 2,239 2,570 14.8 Imports 1,904 2,580 35.5 Trade balance 335 –10 – Source: Official preliminary estimates.

First-half 2001 tourism According to a report in August in the Al-Sharq al-Awsat, a London-based earnings are healthy newspaper, Syria’s Ministry of Tourism announced that some 1.5 million tourists visited Syria in the first half of 2001. This figure translates into a 20% rise compared with the corresponding period of the previous year, when 1.25 million tourists visited the country. During the same period 155,000 tourists arrived from the Arab Gulf states. In 1999, the latest year for which there is detailed information, over 50% of all tourists come from Lebanon and Jordan, with Lebanon alone accounting for 32%. Less than 6% of the total of 2.68m tourists originated from the EU, and less than 1% from the US. The global downturn in 2002 will, therefore, have a less dramatic effect on Syria’s tourism sector than that of other countries such as Egypt, since most of the tourists originate from the region and are more used to regional political instability.

Trade co-operation with By end-2001 Saudi Arabia and Syria plan to reduce customs rates imposed on Saudi Arabia increases bilateral trade by 50%. These rates are planned to decline by an additional 25% next year, and by 2003 all customs duties on bilateral trade between the two countries will have been removed. Trade between the two countries tripled between 1994 and 1999, and moves for further economic co-operation are underway. The two countries recently signed an agreement facilitating overland transport of passengers and goods and the establishment of cultural and information programmes. Annual Saudi-Syrian trade in 2000 amounted to US$487.2m. Syrian exports to Saudi Arabia, which include food products— mainly fruits and vegetables—reached US$363m, while Saudi Arabian exports to Syria, mainly consisting of oil-derived goods such as industrial lubricants, amounted to some US$124m.

Government considering In early August, it was reported that the government is considering applying to joining WTO join the World Trade Organisation (WTO). Given Syria’s commitment to economic reform and freer trade, such a step would seem probable in the long run. The Ministry of Economy will be charged with preparing a study on the impact of such an agreement on Syria’s economy. The authorities are acutely aware of the lack of competitiveness of Syrian industry as well as the barriers in the EU and US to agricultural exports, where Syria has a comparative advantage. Syria was one of 23 founding members of the 1948 General Agreement on Tariffs and Trade (GATT), which was replaced by the WTO in 1995, but it withdrew in 1951 when Israel joined. The Ministry of Economy appears to be in favour of joining the WTO, but the Ministry of Finance is less keen, given its potential loss of revenues from customs and excise duties.

Moves to sign an Association Agreement with the EU have been faced by the same hurdles, as the authorities fear that the country will not be able to withstand regional and international competition. The Syrians also fear that the agreement will lead to interference in domestic politics and the pace of domestic reforms. The agreement remains stalled.