SyriaEconomicReport SYRIA’S MACROECONOMIC PROGRESS NOT TO OVERSHADOW ITS DRASTIC REFORM REQUIREMENTS u The Syrian economy is currently witnessing an improvement in output performance, though still far below the prevailing potential of the economy. According to the International Monetary Fund (IMF), Syria’s real GDP growth rate has reported close to 3% in 2005 (4.5% according to official Syrian estimate). It is worth recalling that the Syrian economy had reported an average real GDP growth of 1.8% per annum, according to the same figures, over the period extending from 1999 to 2004. Non-oil GDP growth may have risen to about 5.5% in 2005, from 5% in 2004 according to the IMF, mainly driven by business investment, household consumption and non-oil exports. Despite the relative improvement in economic conditions, Syria’s September private demand continues to suffer from the lack of adequate financing, restricting its leverage effect on growth, and from a below potential private consumption and investment component in view of prevailing uncertainties. u Over the past year, the Syrian economy has benefited from rising oil prices and a regional post-Iraq war boom translating into 2006 larger inflows emanating from workers remittances, tourist receipts and foreign investment activity. However, the widening political uncertainties and the drastic reform requirements, despite the progress recently reported, continued to dampen growth performance. Oil dependence is also a significant concern as oil production is on a declining trend. According to the IMF, Syria will become a net oil importer within four to six years, with oil supplies likely to be exhausted in a couple of decades. u When discounting the effect of the decline in oil production, the economy seems to be in a relatively healthier state. Preliminary statistics suggest a strengthening of domestic demand together with a robust performance of exports may have boosted non-oil GDP growth to about 5.5% in 2005, from 5.0% in 2004. Growth was yet coupled with a significant rise in inflation, as average annual CPI inflation reported 7.2% in 2005, compared with 4.4% in 2004. In spite of the favorable price impact of lowering tariffs, the increase in inflation was the effect of the improved domestic demand on one hand but also the depreciation of the exchange rate towards the end of the year on the other hand. u The political pressures that Syria was subject to has put the Syrian Pound under pressure in the last quarter of 2005, with the local currency’s exchange rate loosing ground to 60 Pounds per US$ from close to 50 Pounds earlier. Authorities reacted by intervening on the foreign exchange market and raising interest rates by two percentage points, restoring positive real interest rates, before the exchange rate retreated back to the SP 53-55 bracket. The country is actually believed to be well placed to defend the value of the national currency, as a result of both the significant position of the state-owned banks and of the control that the Central Bank retains over foreign currency transactions, even as some laws are relaxed. u Syrian authorities look fully aware that the key to enhanced economic performance is through structural adjustment reforms. A number of adjustment reforms have already been launched in the aim of encouraging private entrepreneurship, promoting market mechanisms, opening the economy to the rest of the world, liberalizing the financial system and strengthening the medium term fiscal outlook. The basis for Syria’s economic policy over the coming period is the recently disclosed five-year plan covering the years 2006 to 2010. The plan identifies financial sector development, business environment enhancement and trade liberalization as the core areas of structural reforms to accelerate growth (to 7% by 2010), lower unemployment (to 8% by 2010) and reduce poverty. The plan hinges over far-reaching fiscal reforms, the unification of the exchange rate and the strengthening of the monetary policy framework. u Although the plan did not devote a great deal of attention to the detail of economic policy, the underlying direction of the plan, calling for a gradual reduction in the state’s involvement in the economy, displays serious commitment to reforms. Such a commitment to reforms was actually quite evident recently, bearing in mind that the problems afflicting oil output provide a necessary and sufficient incentive for implementing reforms. For indicative purpose, we mention, among others, the gradual move towards a floating exchange rate system, the change of interest rates for the first time in 20 years, the establishment of private banks for the first time in decades, etc. Within the same context, the government seems to be willing to introduce a stream of unpopular economic measures whenever required, as witnessed recently when petrol prices rose by 20% overnight to over US$ 2 per gallon as a result of the needed reduction in petroleum subsidies. Such a reform momentum, which has undoubtedly contributed to the improvement in economic efficiency, suggests a general awareness of the need and a strong commitment to structural adjustment reforms. u The prospects of the government pushing ahead with significant economic reforms should critically determine the pace of Syria’s economic performance in a medium to long term horizon. The economic policy outlook for Syria in view of needed structural reforms is provided in the concluding section of this report. A detailed analysis of the recent conditions in the real, monetary, government and foreign sectors of the Syrian economy is first required in what follows before putting in perspective the economic challenges facing Syria over the years ahead. The Syria Economic Report can be accessed via internet at the following web address: http://www.banqueaudi.com S Real Sector p2 Bank Audi sal - Audi Saradar Group Bank Audi Syria s.a T Research Department Headquarters: Youssef Azmeh Square N External Sector p3 Banque Audi Plaza, Bab Idriss Mouhafaza Building - Damascus Riad El Solh - Beirut - Lebanon P.O.Box : 6228, Damascus - Syria E Public Sector p4 P.O.Box : 11 - 2560 Tel : 963-11-2454868 T Tel : (01) 994000 Fax : 963-11-2248510 N Financial Sector p5 Telefax : (01) 985622 E-mail : [email protected] E-mail : [email protected] O Conclusion p8 C Gross Domestic Product Investment Bureau asserted that the number of licensed projects US$ billion in 2005 doubled to 550, having an aggregate value of US$ 7.8 35 7% billion, and out of which 237 are industrial ventures. Although 27.3 30 3.7% 3.7% 5% these figures indicate the government’s interest in bolstering 24.7 industrial activity, they do not indicate what is actually 25 2.3% 22.7 21.0 3% materializing. Indeed, manufacturing and mining output 22.8 2.9% 20 16.8 3.1% increased by 1.4% at constant prices in 2005. 19.9 1% 15 1.0% This focus on the agricultural and industrial sectors comes as oil -1% 10 production, the most important source of foreign currency receipts and a major driving force behind economic growth, is 5 -3% -3.1% facing many challenges. The primary and secondary sectors 0 -5% 1999 2000 2001 2002 2003 2004 2005 accounted for almost 50% of GDP in 2005 (23% and 27% respectively). Nominal GDP Real GDP growth rates Source: IMF Syria is the only substantial oil producer and a net exporter in the Levant region. However, oil production is dwindling, as a result of technological obstacles and exhaustion of oil reserves. Production declined from 500,000 barrels/day to 414,000 barrels/day in 2005, 1. REAL SECTOR with further decline expected in 2006. In contrast, consumption is on the rise, putting pressure on net oil exports. Syria has been 1.1. Primary and secondary sectors putting significant efforts to attract the best offers from The Syrian economy is heavily dependent on agriculture activity, international companies for new explorations, in addition to remittances from Syrians living abroad and most importantly on turning more and more to the use of natural-gas power plants oil revenues. The agricultural sector accounts for 23% of GDP, instead of oil. employs almost one third of the labor force, and generates one Syria's main oil producer is Al-Furat Petroleum Co. (AFPC), a fifth of exports. Main crops are cereals, cotton, sugar beet and joint venture between the Syrian Petroleum Company (SPC), olives. The primary sector takes priority in the Syrian economy in Shell, and PetroCanada. Oil exploration activity has been slow in the context of a high growth population and as the government is recent years due to unattractive contract terms by SPC, poor implementing a strategy to secure food self-sufficiency, raise exploration results, and concerns about the possibility of export earnings, and lower rural urban-migration. additional US sanctions. For these reasons, only a few companies Indeed, 2005 was a fruitful year and the agriculture sector was a out of more than a dozen operating in the country in 1991 remain major growth driver. Agriculture output rose by 3.0% in real in Syria at present. terms, compared to 2004. Wheat production reached around 5.5 Syria's two refineries are located at Banias and Homs and are million tons (22% higher than the previous year), cotton 1 million producing 239,865 barrels/day. Syria is planning to construct a tons (26% year-on-year growth), and citrus 850 thousand tons third refinery in Deir el-Zor to supply products to the eastern part (almost unchanged from 2004). Syria has become a grain, of the country. Syria has signed a memorandum of understanding vegetables and fruits exporting country, possesses 87 million olive with a Russian company for the construction of a US$ 2.7 billion trees, and is among the top olive oil producers in the world.