THE DOWNWARD SPIRAL SYRIA’S LIMITED RESPONSE TO THE ECONOMIC CRISIS
9 May 2021
1
Contents Acknowledgements 1
Key points 1
Introduction 2
External influences on Syria’s economy 3
Part I: The Syrian economy 4
Factors contributing to economic collapse 4
Monetary policy during the Syrian conflict 6
Economic outcomes: The double deficit 9
Exchange rate trends and inflation 10
Quantitative analysis 11
Data 11
Methodology 11
Part II: The effect of currency depreciation on inflation 13
Product and market-level analysis 15
Future scenarios 15
Part III: Policy scenarios 19
Response 1 19
Monetary contraction to curb inflation 19
Response 2 20
Import substitution boosting local economic growth and productivity 20
Response 3 21
Removal of sanctions, increased humanitarian aid and financial assistance 21
Conclusions 22
Appendix 24
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ACKNOWLEDGEMENTS
HAT would like to acknowledge the work of monetary policy expert, Professor Andrea Presbitero who led this paper along with the HAT Syria team.
KEY POINTS
A combination of internal (protracted conflict, poor monetary policy, corruption) and external (sanctions, Lebanese financial crisis, COVID-19) factors are contributing to an ongoing economic crisis within Syria.
The Syrian government and its Central Bank are extremely constrained in their abilities to curtail the current currency depreciation, and without a major change in the status quo, current trends will continue.
Syrian pound depreciation-driven price increases outpace inflationary wage growth; according to our price modelling, a 10% increase in SYP deprecation produces an immediate 4% increase in food prices and 2% increase in wages.
According to the scenarios posted in this report, the Syrian pound could depreciate as much as 72% in 2021.
Additionally, there may be a further 88% increase in food prices, and 38% decline in household affordability.
Due to the double deficit faced by the Syrian government (budget deficit coupled with a large current account deficit), there is virtually no policy instrument which could be used to counter the economic trend, without significant external support.
The budget deficit coupled with a growing current account deficit points to a likely scenario that Syria will engage in expanding the money supply in order to cover the financial gap, which will consequently spur on further depreciation and devaluation.
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INTRODUCTION
The ongoing economic crisis in Syria is having ‘pass-through’ coefficients (the effect of a profoundly negative impact on the inflation on prices). To complement this, a humanitarian situation, particularly in scenario analysis shows the extent to which relation to increasing levels of extreme food prices could increase (and consumer poverty, food insecurity and poor access to purchasing power could decline) based on livelihoods. Since the start of the conflict, the the pressures on the exchange rate coming Syrian pound has lost over 98% of its value – from the fiscal and current account deficits, most concerning is that 30% of this loss came coupled with the lack of sufficient during the first quarter of 2021, showing international reserves. quickening deterioration rather than development. The consequences the crisis Given the dramatic humanitarian crisis and have led to widespread inflation, resource the unfolding of an economic and financial scarcity, and growing unaffordability among crisis, the most effective, yet unlikely policy Syria’s population, the majority of whom are intervention highlighted is the mobilization barely able to afford basic goods and services. of humanitarian and financial aid coupled with a lift of international sanctions to cope Many organizations are now asking how the with worsening food insecurity. economic collapse will continue to evolve Domestically, there is little that can be done and what may be expected in the near future. to change the current trend. The dramatic Moving from the most recent developments, collapse in government revenue and the and taking into account high levels of reduction in foreign financial inflows uncertainty and the limited available worsened by a number of negative external information and statistics on key economic shocks (the decline in remittances, the effect indicators, this paper discusses how the crisis of sanctions, the Lebanese financial crisis and came about, the current state of play, and COVID-19) leave little room for a further potential policy options available to the contraction of fiscal policy, which would be Syrian government. needed to reduce the pressure on the exchange rate and stabilize the economy and To be able to anchor the discussion on some little to no room for budgetary expansion, evidence, the analysis uses granular market- needed to boost local economic and level price data to gauge the sensitivity of humanitarian needs. wages and food prices to changes in the exchange rate. These are based on estimated
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EXTERNAL INFLUENCES ON Lebanese financial systems. This not only SYRIA’S ECONOMY prevented access to financial capital used for imports, it also increased inflation as Economic sanctions imposed by the EU and importers were hit. Then, at the end of the US targeted the trade and financial September 2019 the Syrian Central Bank sectors and have decimated Syria’s already regulated the list of imported priority weakened export markets, further widening products (mainly food and medicine) that it the current account deficit. Moreover, permitted banks to finance.3 These products sanctions imposed since 2011 had large could be bought using the hard currency held effect on the deteriorating conditions in by the banks. Moreover, the economic crisis Syria, as they contributed to a decline in in Lebanon and the capital controls imposed economic growth, worsening health at the end of 2020 reduced the flow of outcomes, and limited food security.1 The remittances sent by Syrians living and latest sanctions – including the Caesar Act of working in Lebanon.4 In addition, the June 2020 – have also severely constrained Lebanese crisis is a negative demand shock efforts to rebuild while curtailing the oil for Syria, as external demand collapsed. trade, aggravating the humanitarian crisis. The COVID-19 pandemic, coupled with the Lebanon’s financial crisis has destroyed the fragility of the public health system, has domestic financial system. Syria is highly significantly decreased prospects for dependent on the Lebanese banking and economic growth as the secondary impact of financial sectors; an estimated $30 billion of preventative measures of lockdown take Syrian owned financial assets are tied and hold. Restrictions are also affecting domestic now frozen in Lebanese bank accounts.2 This demand and remittances as foreign workers has accelerated the devaluation of the Syrian cannot move and consequently have lost pound – as Syrians lost access to their foreign employment. This is a major contributing currency deposited in the Lebanese banking factor, as it is estimated that remittances system, this decreased the supply of foreign inflows were cut by as much as 50% due to exchange accessible to Syria, and froze COVID-19 precautionary measures affecting accounts of many Syrian traders who used Syrian’s working abroad.
1 UCL Global Governance Institute, An Inhumane Response The Humanitarian Consequences of Sanctions: A Case Study of Syria, January 2018
2 The Syrian Observer, Syrian Assets in Lebanon in Danger, October 2019.
3 Daher, J., Wartime and Post-Conflict in Syria, The Deep Roots of the Depreciation of the Syrian Pound, December 2019.
4 Middle East Journal, How is the crisis in Lebanon impacting Syria’s economy?, August 2020
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PART I: THE SYRIAN ECONOMY
FACTORS CONTRIBUTING economy’s deterioration. Sanctions included trade and financial restrictions, making it TO ECONOMIC COLLAPSE increasingly difficult to import agricultural, Syria’s economy has been battered by over a industrial, and energy-related inputs for decade of protracted conflict, capital and production and infrastructural maintenance. human flight. Widespread conflict has led to This has also severely impacted the the destruction of vital economic manufacturing and agricultural sectors and infrastructure, with current estimates aided the collapse of local productive valuing conflict-inflicted damage at capacity, further leading to a decline in (US)$117.7 billion and accumulated losses of exports. Since 2016, Syria’s trade deficit has $442.2 billion.5 The sheer number of people widened from $4 million in 2016 to $5.7 displaced by the conflict – 5.6 million billion in 2019.9 Moreover, ESCWA refugees and 6.1 million internally displaced estimates that Syria's economic losses from – has disrupted the productive capacity of the conflict exceeded $442 billion by the end the economy by forcing the abandonment of of 2019.10 livelihoods and physical capital, encouraging brain drain and halting human capital Several interrelated factors have also development, in addition to the obvious affected the money supply. Since 2011, a humanitarian cost.6 The country’s capacity number of revenue-generating industries for self-sufficiency is severely diminished, to that were a key source for stockpiling of the point where it is now heavily reliant on foreign reserves have either significantly imports to fulfil domestic demand for food contracted or evaporated altogether. and other essentials items.7,8 International Specifically, the oil, tourism and agriculture sanctions placed on Syria by the US and EU industries now operate at a fraction of their have also played a role in the Syrian pre-war output and, where profits are to be made (in the cases of oil and agriculture), are
5 Vision of Humanity, The economic cost of conflict in Syria, 2021
6 World Vision, From the Field Syrian refugee crisis: Facts, FAQs, and how to help, April 2021 [Updated regularly]
7 Carnegie Endowment for International Peace, Food Insecurity in Syria: From Decades of Self-Sufficiency to Food Dependence, June 2015
8 International Monetary Fund, Syria's Conflict Economy; IMF Working Paper N. 16/213, June 2016 & World Bank Policy Research Working Paper, Growth after War in Syria, August 2019.
9 The Syria Report, Syria’s Foreign Trade Volumes Stable in 2019, Deficit Remains Severe, April 2021 [registration needed].
10 UNESCWA, Losses exceeding $442 billion and millions in need of humanitarian assistance: the catastrophic repercussions of 8 years of war in Syria, September 2020.
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now controlled by alternative government’s ability to maintain its foreign administrations, particularly in northeast currency reserves.14 Syria. In addition, foreign direct investments have also gradually deteriorated, either These events led to dwindling reserves and because of sanctions imposed against the further capital flight, which resulted in a Damascus government or fear of political and sharp depreciation of the Syrian pound on financial market instability, capital flight and the black market in 2019. Between 2011 and corruption. An increase in imports as a result 2019 the pound’s depreciation was relatively of the collapse in domestic production has constant, declining from pre-conflict levels of caused a structural deficit in the current 47–50 SYP per USD to 400–580 SYP per USD. Then in November 2019 the black- account, where even if the economy were to produce at full capacity, imports would still market exchange rate took a major dive, and far outweigh exports, and in turn imposed continued to fall, reaching 2,500 SYP per high pressures on the Syrian pound (as supply USD by April 2020. Officially, the outweighs demand). government was no longer able to support the exchange rate, and had to devalue the A large fiscal deficit, where total expenditure currency, which it did initially in February is far greater than revenues, has added 2020 to 700 SYP per USD, and again in the further pressure.11 For some time, foreign second half of 2020 to around 1,000 SYP per assistance and remittances partially filled the USD. The depreciation continued on the deficit, injecting foreign currency into the black market and reached SYP 3,450 per economy and helping the Central Bank USD by March 2021. As a result, inflation is remain liquid and maintain a relatively stable soaring. The Syrian Central Bureau of value for the pound against the dollar. These Statistics estimated an average inflation rate inflows have since taken a hit – for a number of 200% in 2020. The effects of inflation has of reasons including the imposition of had a dramatic impact on the Syrian sanctions, a block on dollar transfers from population, who now struggle to buy even Lebanon,12 and an assumed drop in basic commodities (compounded by a lag in remittances due to the economic fallout of wage growth). Economic hardship is visible in COVID-19 pandemic13 – and reduced the the extremely large share of the population
11 IMF, Pamphlet Series - No. 49 -Guidelines for Fiscal Adjustment - Why May Fiscal Adjustment Be Needed?
12 Syria Report, Syrian Pound Falls to Historic Low Following Pressures on Lebanese Currency, September 2019
13 World Bank, COVID-19: Remittance Flows to Shrink 14% by 2021, October 2020
14 Daher, J., Wartime and Post-Conflict in Syria, The Deep Roots of the Depreciation of the Syrian Pound, December 2019.
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living below the poverty line – over 90%, years in an attempt to stabilize its according to recent studies.15 depreciation, it has been largely unsuccessful. MONETARY POLICY DURING THE CONFLICT 2011 - 2015 Initially, the first five years of the conflict witnessed an interventionist policy. The Syrian pound was relatively stable during In order to stabilize the falling pound, the the decade leading up to the Syrian conflict, Central Bank injected a major portion of trading at around 47 SYP per USD. The Syria’s estimated $17 billion foreign currency strong economic conditions at the time reserves into the Syrian economy.16 While allowed the pound to be stabilized via the use the use of foreign exchange to stabilize fixed of government revenues, foreign currency exchange systems is common, these were reserves from the exports of oil, raw occurring without any attempt to stabilize or materials, remittances, and other private restore the major structural issues causing sector activity. However, the conflict the pound’s depreciation. This futile policy destroyed Syria’s economy and with it, the saw the release of almost the entirety of sectors used to stabilize the Syrian pound. Syria’s foreign reserves. It is estimated that The majority of Syria’s oil now lies in the reserves decreased by $18-20 billion prior to control of the Self-Administration in the the conflict, to just $0.7 billion by the end of northeast, while capital destruction from a 2015.17 Between January 2011 and January decade-long conflict has significantly 2016, the pound depreciated from 47 to 225 hampered economic output and exports SYP per USD (-88%) leaving the government (specifically via its effects on the agriculture without foreign reserves and a significantly and manufacturing sectors), foreign direct devalued currency.18 19 investment has dried up and human and capital flight has been devastating. 2016 - 2019 The huge drop in reserves placed the Central Bank in an extremely limited The above had profound consequences on space for intervention, no longer holding the the stability of the Syrian pound. While the foreign reserves it needed to pay for imports Central Bank has intervened with various or to stabilize the falling pound. Instead of monetary policy platforms over the past ten
15 Human Rights Watch, World Report 2021: Syria, March 2021.
16 Daher, J., Wartime and Post-Conflict in Syria, The Deep Roots of the Depreciation of the Syrian Pound, December 2019.
17 World Bank Syria's Economic Outlook- Spring 2016, April 2016
18 EU Publications, The deep roots of the depreciation of the Syrian pound, February 2020
19 Syrian Center for Policy Research, Food Security & Conflict in Syria, May 2019.
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intervening the Central Bank allowed has tried to issue certificates of deposits commercial banks to supply the market with (short term debt securities) and bonds to foreign exchange mainly to fund imports, as alleviate the depreciation of the Syrian opposed to select foreign exchange pound, via a contraction in the money supply companies which were used previously.20 and to increase liquidity (see Table 1). This This was allegedly due to two reasons, first, has been unsuccessful in affecting the to preserve the remaining currency reserves pound’s long term depreciation, however, left in the Bank’s coffers, and secondly to may have been successful in increasing break away from potentially corrupt government liquidity for budget exchange institutions (which carried out requirements and trade given the lack of clandestine activities including currency domestic revenue generation. This also speculation). 21 coincided with the contradictory introduction of a new currency denomination While there were some improvements over in February 2021, the 5,000 SYP bill. this period, during which the Syrian According to local sources, an estimated government also reclaimed much of the area value of more than SYP 100 billion of 5,000 it had lost during the conflict, structural SYP bills was introduced through ATM issues still remained. The Central Bank’s withdrawals and government employee limited foreign currency reserves were kept salaries, while there was no evidence to show for import financing of key agricultural that the government had removed the commodities, as opposed to funding the equivalent in lower bill denominations in stabilization of the pound as it had done in circulation to compensate for the new cash the first half of the decade. From January injection. This adds further evidence that the 2016 to January 2019 the black market value motivation behind debt security sales was to of the pound further depreciated from 400 generate accessible liquidity as opposed to SYP per USD to 535 SYP per USD (25%), a having any effect on the pound’s falling significant, however much lesser extent than exchange rate. was seen in the first five years of the conflict.22 The Syrian government has also intervened implementing a number of strict laws 2019 - 2021 The pound continued to devalue. preventing the trade of goods in US dollars, Over the past two years, the Central Bank the closure of exchange houses and strict
20 Daher, J., Wartime and Post-Conflict in Syria, The Deep Roots of the Depreciation of the Syrian Pound, December 2019.
21 The Syria Report, Dollar Gains 10pc in Syrian Forex Market and Rises to Above 530 Pounds, August 2016 [registration needed].
22 Daher, J., Wartime and Post-Conflict in Syria, The Deep Roots of the Depreciation of the Syrian Pound, December 2019.
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punishment and lengthy jail sentences for further depreciated from 535 SYP per USD those who violate regulations.23 Regardless to 3,450 per USD (84%), almost equal to that of these initiatives from the Central Bank and witnessed in the first five years of the the Syrian government, between January conflict. 2019 and March 2021 the Syrian pound
Syrian government sales of debt securities
Sale of Debt Securities
Date Type Purchase rate Banks involved
20 February 2019 Certificate of Deposit 100% 16/17
3 February 2020 Treasury Bond 99% 7/17
25 March 2020 Certificate of Deposit 88% 11/17
18 June 2020 Certificate of Deposit 73% 8/17
10 August 2020 Treasury Bond 100% 5/17
Table 1: Between February 2019 and August 2020, the Central Bank initiated a number of debt security sales in order to raise funds. The interest gained from these security deposits is far smaller than the level of inflation, consequently, leaving no incentive for private banks to purchase the debt securities.
23 Mercy Corps Humanitarian Access Team Syria, Government of Syria responses to the financial crisis. May 2020
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ECONOMIC OUTCOMES: away by the depreciation of the Syrian pound. Considering a conservative exchange THE DOUBLE DEFICIT rate of 2,850 SYP per USD, the 2021 budget Government revenues have fallen virtually to equates to $2.9 billion, about half of the $5.7 zero, leading to a budget being financed billion (converted at an exchange rate of 750 entirely by debt, while the trade imbalance SYP per USD) in 2020. The increased deficit has led to a major current account deficit, is not only reflected in the local currency leaving the Syrian government with only one (from SYP 1,455 to 3,484 billion), but also, at realistic policy option; money creation. This a share of GDP.24 has and will continue to have a compounding The current account has also taken a effect on inflation, which is happening in two significant hit, largely driven by a large ways. First, the limited budget has forced the contraction in remittances. Current government to remove much needed estimates suggest that remittance inflows subsidies on basic items such as food and fuel, dropped by as much as 50% in 2020.25 while secondly, expansive money creation Further, COVID-19 travel restrictions and has also fueled the depreciation of the Syrian border closures have heavily limited these pound, and consequently its purchasing direct cash remittances carried by travelers power. and channeled through relatives and local Government revenues collapsed between networks inside Syria, putting up yet another 2019 to 2020 to values close to zero, leading barrier, and evaporating one of the very few to a significant contraction of government veins of foreign exchange.26 spending which declined from 18.1% to The double deficit, depleted foreign 11.3% of GDP, entirely financed in deficit. exchange reserves, and inability to alleviate This reduction in expenditure builds on a long its causes has left only one policy option term decline in the size of government available, that of money creation. This can be spending, especially in per capita terms. For conducted in the form of loans from state- example, in monetary terms the 2020 budget owned banks or direct money printing, which, has increased from SYP 3,882 to 4,500 billion in this situation are one and the same. since 2019, and in 2021 the approved budget reached SYP 8,500 billion. However, this Due to the lack of availability of data or increase is misleading and is largely eaten transparency on Syria’s current monetary
24 Enab Baladi, Syria's 2021 budget heralds greater austerity for Syrian citizens, January 2021
25 Manhom news, Expectations of a decline in remittances to Syria to two million dollars per day, April 2020
26 Oxfam, Remittances COVID-19 Media Brief, June 2020
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policy or money supply, it is largely assumed assessed businesses raised prices in that this has already translated into a sharp accordance with currency depreciation, as depreciation of the Syrian pound, with a large most goods across Syria are imported and pass through to prices in 2020 and the purchased in foreign currency. However, beginning of 2021, coinciding with the employers infrequently increased wages, and introduction of a new 5,000 SYP bill into did so at a rate significantly less than the rate circulation. Consequently, if this policy of inflation due to volatility concerns and the framework continues, and the current desire to preserve profit margins to economic climate is unchanged, the drastic compensate for revenue losses caused by levels of inflation and depreciation of the lower overall demand. Syrian pound will continue. Households have adopted various coping EXCHANGE RATE TRENDS strategies to confront their diminished AND INFLATION purchasing power and access to food. The most common food coping strategies The value of the Syrian pound, in relation to reported by REACH’s Humanitarian the US dollar and other relatively stable Situation of Syria (HSOS) assessment was currencies, has decreased dramatically since borrowing money and purchasing items on October 2019. Specifically, the Syrian pound credit, and reducing meal size; further, HAT’s depreciated relative to the US dollar by 86% investigation reported similar strategies, from October 2019 to March 2021. The rapid such as skipping meals, buying lower-quality depreciation of the Syrian pound has crippled items, and eliminating meat from their diet. consumer purchasing power as price inflation Income coping strategies reported in the has responded rapidly to the level of HSOS assessment included using money depreciation compared to levels of wage normally used to buy other items (for growth. In a recently-published report,27 example cigarettes), borrowing money, HAT calculated that the average Syrian buying on credit, and selling household unskilled worker must work 35% more hours assets. Alarmingly, a relatively large to purchase the same basket of basic goods, proportion of KIs responding to the HSOS compared to the 13 months prior to the onset assessment reported early or forced of the current economic crisis. HAT marriages and sending children to work or triangulated these findings with business beg as income coping strategies. owners and workers, finding that most
27 Mercy Corps Humanitarian Access Team, From bad to worse; The impact of rapid currency depreciation on household economies across Syria, January 2021
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QUANTITATIVE ANALYSIS this analysis, changes in the exchange rate are multiplied by a factor of ten for DATA relatability to the current economic situation of Syria, meaning the previously mentioned Data for the price analysis was obtained from coefficient is interpreted as a 10% increase in the World Food Programme (WFP), who has the exchange rate producing a 1.6% increase collected monthly price data for 76 products in wages. (food, fuel and wages) in 76 markets located Several statistical considerations were in all 14 governorates of Syria since 2011. included in the baseline regression model to This data is matched with average monthly control for confounding factors. The price of exchange rates from March 2015 to the item (ie, fuel, wages, food) the previous December 2020. The sample is limited to month was added as an independent variable markets with at least 36 observations (3 to control for recent price variation and years of data), which represents about 60% unobserved market-specific and product- of the original sample. This sample covers 31 specific factors that could affect prices are products across 39 markets, predominantly also controlled for. Seasonal price located in Syrian government (56%) and Self- fluctuations were controlled for by Administration (9%) areas. acknowledging the month the price was METHODOLOGY measured. Regressions were weighted by the total population within a 10 km radius from The price analysis is centered on a baseline the market, meaning larger markets have regression model that measures the pass- more influence on the pass-through effect through effect (PTE); specifically, the estimates than smaller ones. incremental effect that changes in the exchange rate have on wages and the price of The baseline model was augmented to food items and fuel. include exchange rates for the previous two months, which allows the computation of the Notated by the coefficient Δer in the results cumulative pass-through effect from exchange tables found in the Appendix, the pass- rates to prices over a three-month period, through effect is interpreted as the average which is calculated by summing the three percent change in prices in response to a 1% pass-through effects (Δer coefficients) increase in the exchange rate. For example, produced for each month. an estimated wage coefficient of 0.16 indicates that a 1% increase in the exchange The baseline regression results are found in rate produces a 0.16% increase in wages. In Table 1 of the Appendix. The essential finding
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is that a sizable proportion of the change in pound relative to the US dollar for three the exchange rate is transmitted to food consecutive months, was a 7% increase in prices and wages within the month. food prices and 3% increase in wages; in Specifically, a 10% monthly depreciation of other words, prices and wages increase by the Syrian pound relative to the US dollar about 70% and 30% of the depreciation rate produces about a 4% increase in food prices over a three-month period. This result also and 2% increase in wages; in other words, highlights the persistent discrepancy prices and wages immediately increase by between price and wage growth in the wake about 40% and 20% of the depreciation rate. of significant currency depreciation. However, no statistically significant change Given the sharp currency depreciation in in fuel prices was observed. Fuel did not respond to changes in the exchange rate due recent months, it is worth considering to fuel subsidies in Syrian government and whether the sensitivity of prices to the Self-Administration-held areas. The gap exchange rate differed in periods of large between the wage and price pass-through depreciation and the earlier period of effects highlight the fact that employers raise relative fiscal stability (Appendix Table 3). wages in response to inflation, but not The key finding is that the sensitivity of food enough to compensate for food price prices to the exchange rate is much higher inflation, which leaves Syrians worse off in (more than 3 times) during months of sharp real terms after an episode of currency depreciation than in months with relatively depreciation. low depreciation. Further, wages only seem to respond to the exchange rate in periods of Table 2 of the Appendix shows the results of high depreciation, though the increase is an augmented regression model measuring about half that as much as food prices.28 the cumulative pass-through effect, which quantifies the persistent effect of exchange PASS-THROUGH EFFECT rates on prices. The cumulative pass-through effect is significantly larger than that during a A 10% depreciation of the Syrian single month, with the exception of fuel, pound is passed on as; which remains statistically insignificant. The a 4% increase in food prices, cumulative pass-through effect over a 3- month period, in our case a ten-percent compensated for with a 2% increase in the depreciation of the Syrian increase in wages.
28 Table 3 in the Appendix reports the results of the baseline regression model, with the exchange rate variable split between months when the monthly variation in the exchange rate is above and below 5%.
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PART II: THE EFFECT OF CURRENCY DEPRECIATION ON INFLATION
To understand the immediate effect of The descriptive data analysis across all currency depreciation on consumer markets and products, shown in Figure 1, purchasing power in Syria, HAT estimated highlights a very strong positive correlation the precise marginal effect that a change in between the exchange rate and food prices – the exchange rate has on food and fuel prices prices increase as the Syrian pound and wages. This measurement, the average depreciates relative to the US dollar. change in domestic prices in response to changes in the exchange rate, is formally This intensified in mid-2019 when the known as the pass-through effect, and is used currency began to rapidly depreciate, with to develop our macroeconomic projections. the exception of fuel, which is heavily subsidized in Syrian government and Self-
Official and black-market exchange rates, and food prices.
Figure 1: Official and black market SYP/USD exchange rates and median food prices. All trendlines are highly correlated (Pearson’s r > 0.88), but black-market/ prices are nearly identical (Pearson’s r = 0.97).
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Administration-held areas; therefore, fuel opposition-controlled areas where the prices are largely disconnected from Turkish lira was widely adopted in June 2020; exchange rate fluctuations and food price however, as we will later show, wages react inflation (Figure 2). Wages have also noticeably less intensely to changes in the positively reacted to currency depreciation, exchange rate than prices. especially in Turkish-controlled and
Food and fuel prices and wage rates across Syria
Figure 2: Food and fuel prices and unskilled labor wage rates across Syrian zones of control. The graphs represent indexed price changes using October 2019 as a base time period (indicated by the central black marker). The results can be interpreted for example as food items are 3.3 times higher in Syrian government areas than they were in October 2019, while wages have only increased 2.15 times.
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PRODUCT AND MARKET- scenario. Alternatively, the Economist LEVEL ANALYSIS Intelligence Unit projection is slightly more optimistic, with the budget deficit expected The main takeaways from the product- and to be 8.3% of GDP, compared to 11.3% in market-level analysis of prices in Syria over 2020. This is consistent with the 2021 budget the past six years are that: proposed by the Syrian government in September 2020, which is about 27% smaller Food prices are significantly affected than the year before (measured in real US by changes in the exchange rate; dollars).29 to a lesser degree so are wages; A downside scenario occurs if the current the pass-through is significantly economic and political situation worsens. For higher in periods when the Syrian instance, remittance inflows could further pound significantly depreciates (at decline if COVID-19 travel restrictions least 5% in a month). remain in place for the entire year and the These estimates are used to create a set of associated economic impact of the pandemic food price inflation scenarios for 2021 in neighboring countries reduces wages and (Figure 3), depending on the extent of the job opportunities for Syrian workers expected depreciation, which stood at 14% in abroad.30 In this pessimistic scenario, we 2018, 43% in 2019 and 68% in 2020. project a 22.5% decline in remittances, half of the estimated decline that occurred in 2020. FUTURE SCENARIOS Moreover, the government budget deficit The 2021 current account deficit is projected could widen if currency depreciation and to be approximately the same as it was in inflation accelerate more than expected and 2020, and the budget deficit is projected to force the government to increase current comprise a GDP share comparable to that of spending to protect and finance social 2020. Lacking international reserves and support programs, such as fuel subsidies and other sources of external financing, a the public employee wages. In the downside reasonable assumption is to expect the scenario we assume a deficit at 14.1% of government to rely on money printing to a GDP, the historical average between 2016 similar extent as in 2020. This is our baseline and 2019.
29Atlantic Council, 2021 budget reveals the depth of Syria’s economic woes, December 2020. 30 Scarce information exists about the periodicity and enforcement of COVID-19 lockdowns across Syria; however, industrial production has remained online during the course of the pandemic. Further, local sources have stated that only 15% of the publicly announced monetary support (100,000 SYP per person) from the Syrian Ministry of Social Affairs was delivered to selected beneficiaries.
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Pass-through effect by food item
Figure 3: Pass-through effect by food item. The chart reports an item-level pass through from the exchange rate to food prices in the same month and cumulated over a three-month period. The contemporaneous pass-through is estimated from the baseline regression, and the three-month pass- through is estimated by the augmented model. All pass-throughs are significant at the 5% level of confidence. The sample includes markets under Syrian government control from February 2015 to December 2020. Note, lines not highlighted are not statistically significant.
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In the baseline scenario, we assume that the depreciation (Pearson’s r = 0.96), and the depreciation of the Syrian pound remains in much larger depreciation against the US line with the 2020 rate (68%, corresponding dollar in 2020 compared to money printing, to a 210% appreciation of the US dollar we assume a one-to-one relationship relative to the Syrian pound). This scenario between money creation and the SYP/USD already seems likely because the Syrian exchange rate. pound depreciated in relation to the dollar by about 40% in the first two months of 2021. In Table 2 summarizes the results of this the upside scenario, the lower budget deficit exercise. The estimated pass-through effect translates to an approximately SYP 2.5 billion from the exchange rate depreciation is set at 66% for food items and at 30% for wages, reduction in financing needs, reducing baseline appreciation against the dollar by based on 3-month pass-through estimates about 33%. By contrast, a reduction in (see Appendix). However, a more realistic remittances and the larger deficit in the scenario uses only the pass-through downside scenario will require an additional coefficients for 2020, which correspond to SYP 3.5 billion, producing an estimated 35% and 20% pass-through for food and 31 additional 4% depreciation against the dollar wages respectively. in the baseline depreciation scenario. In the baseline scenario, food inflation is Money creation, which involves the Syrian estimated to increase by 74%, and is only partially compensated by wage growth, Central Bank buying the limited number of bonds held by the private sector or directly causing purchasing power to decline by 32%, from the Treasury, will consume about 33% between a loss of 29% in the upside scenario of the additional financing needs; therefore, and a loss of 38% in the downside scenario. SYP 211 million will need to be printed in the However, without any external support, the upside scenario, and an additional SYP 197 current baseline scenario could worsen and million will need to be printed in the the downside one could become the baseline. downside scenario. Further, total financing In fact, if prices increase more than expected needs (funded by money printing) will be 20% and there are no foreign currency inflows, the higher in the downside scenario and 6.3% government will be tempted to revert to lower in the upside scenario. Given the money printing in an attempt to partially strong positive historical correlation insulate households from the higher inflation. between money printing and exchange rate Naturally, this would increase the cost of
31 These results are not shown for reasons of space, but they correspond to the analysis of Table 2, augmented with the two lags of Δerm,t, interacted with the annual time dummies.
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living and exacerbate existing negative domestic production which would economic dynamics, such as high undermine financial stability and prolong the unemployment, low wages, and depressed crisis.
2021 Scenario analysis
2016 2017 2018 2019 2020 2021 scenario
Baseline Upside Down- side
Current -2,077 -2,047 -1,980 -2,041 -2,614 -2,545 -2,545 -3,021 account (millions USD)
Budget deficit -16.7% -13.4% -14% -12.1% -11.3% -11.3% -8.3% -14.1% (%GDP)
Exchange rate 24% -16% 14% 43% 68% 68% 66% 72% Depreciation
Food price -35% 16% -32% 85% 122% 74% 69% 88% inflation
Wage inflation 17% 37% 16% 21% 102% 42% 39% 50%
Change in 52% 21% 48% -64% -20% -32% -29% -38% purchasing power
Table 2: Scenario analysis, Data sources for the Syrian budget and current account were taken from the Economist intelligence Unit, data on food price and exchange rates were taken from WFP food price data: WFP food prices
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PART III: POLICY SCENARIOS
Given the above there are limited policy and prices will continue to soar. International options available for the Syrian government reserves have been depleted in previous and Central Bank. Consequently, it is years and there is no room for any expected that the current climate of contraction of fiscal policy to limit the depreciation and inflation will continue current cycle. There is no policy space to throughout 2021. counteract these trends. Consequently, the three scenarios outline policy More than 90% of Syrians are facing implementation either by the Syrian increasing hardship, with the majority of the government or the international community population now employing negative coping in order to stabilize the current situation. strategies centered around food The below responses are not to be viewed as consumption and income generation, Mercy Corps’ recommendations, rather, including buying less and lower quality foods, what options the Syrian government may and spending money usually used for other have or may not have available to curtail the 32 items on food among others. As these continued economic decline. trends continue, families are reducing food intake and cutting out basic necessities in RESPONSE 1 order to deal with their diminished purchasing power. Even before the COVID- Monetary contraction to curb 19 crisis, 80% of the Syrian population was inflation living below the poverty line, now 6.2 million of the country’s children are going without The Central Bank may adopt a monetary food.33 As a result, the current standard of policy contraction, traditionally an living will decrease further and poverty will instrument used by central banks to curb become even more severe and widespread as inflation. However, Syria is in a situation of these economic conditions continue. stagflation; high unemployment, low economic growth and high inflation. Any Under the current economic conditions, the monetary contraction to curb inflation will exchange rate will continue to depreciate only add to the dramatic increase in
32 See, among others: Wheat and fuel shortages overwhelm Syria | Financial Times (ft.com); 'After war we now have this': Syrians grapple with poverty and coronavirus | World news | The Guardian; Syria's economic crisis worsens as bread lines grow - The Washington Post.
33 Save the Children [via Reliefweb], Anywhere but Syria: How 10 years of conflict left Syria’s displaced children without a sense of home, March 2021
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unemployment and poverty rates. Monetary local output would be a key sector for this policy can generally try to reduce inflation by policy initiative. This would decrease the implementing higher interest rates or by reliance on imports, as well as decreasing increasing economic growth by cutting levels of inflation. Prior to the conflict, interest rates, it cannot solve both inflation agriculture contributed to more than one and recession/depression simultaneously. fifth of the overall national GDP as the government invested heavily to become a Consequently, stagflation is an incredibly self-sufficient agricultural producer of key difficult economic problem to solve from a staples and to avoid reliance on external policy lens. This is even more complicated, markets.34 Prior to the war, agricultural when in the case of Syria, the majority of the associations such as the farmers union factors causing the current levels of implemented specific supply-side policies stagflation are influenced or implemented by including the provision of sterilized seeds at foreign parties or policies (the Lebanese zero cost, in return for similar quantities of crisis, international sanctions and the these seeds when the crops are harvested.35 economic fallout of COVID-19). The only real policy response to stop stagflation is to However, there are two limitations which try to increase economic productivity and prevent the Syrian government from output, however, as the below scenario employing this as a policy instrument. First, outlines, in the current climate, this would the budget deficit has already led to the take significant time to implement, and have government to pull back on its social unlikely returns. expenditure and other programs. Food subsidies, and agriculture programs have RESPONSE 2 already been significantly restricted. Government programs which included the Import substitution boosting distribution of machinery, fertilizers and local economic growth and seeds have been increasingly removed over productivity the past years. While simultaneously, the depreciation of the pound has led to a drastic In order to boost local activity, the relative increase in the process for importing government could aim for import production inputs such as fertilizers and substitution. Significantly investing in local machinery. This has led agricultural workers agriculture to boost employment and also to either completely stop production or
34 Chatham House, The importance of the agricultural sector for Syria’s stability, August 2018
35 Enab Baladi, Homs: Agriculture suffers consequences of unfulfilled government promises, January 2021
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heavily reduce their outputs, often producing rebuilding and redevelopment to bring it with significant levels of inefficiency. As back to any form of pre-war capacity. budgetary constraints took control the Syrian government began cutting back on its RESPONSE 3 distributions and provisions to the sector. In 2019, agricultural associations only Removal of sanctions, increased distributed a quarter of the fertilizers humanitarian aid and financial allocated to farmers, while fuel and assistance machinery were cut down by a third.36 As government provisions and subsidies were The removal of sanctions met with significant gradually removed, by 2020 a fertilizer crisis financial support may curtail the current had taken hold where high price and low economic crisis, however, this is extremely quality fertilizer was virtually the only unlikely. Due to the large number of war available goods on the market, many were crimes committed by the Syrian government, forced to purchase production inputs on the allegations of money laundering from the black market and three to four times the Central Bank and as well as the accusations original price.37 of harboring terrorism which have stemmed from sanctions imposed in the 1970s, there is Any form of import substitution would little likelihood for the US or EU budging from consequently need a significant level of their current policy stance with respect to funding for such a policy to take formation. sanctions. However, this is unlikely to occur. As the government itself is broke, this would rely on However, a response from the international foreign donations, which are largely community to remove sanctions or at least restricted under the current sanctions some of those imposed, coupled with imposed on the Syrian government. While increased foreign financial assistance may lay allegations of clandestine payments by the foundations to stabilize the economy and Syrian allies have been made, and may ease the current economic and humanitarian 38 continue, it is unlikely even with ample crisis. The removal of sanctions alone will funding that enough support would be not be enough due to the significant available to turn around this issue in the budgetary gap. Consequently, increased short-term, the industry requires years of external assistance can provide a minimum
36 Ibid
37 Ibid
38 UN News, UN rights expert urges United States to remove sanctions hindering rebuilding in Syria, December 2020
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level of economic stability, following which, role in inflation rates. Hence, responses more standard economic policies could be should take into account the specificity of put in place. It must be noted that there are each market. Price monitoring and controls other geo-political issues which may arise are the first line of response that the from this, given interests from Russia, China, government could put in place to try to the UAE and Iran to invest in Syria for contain inflation. personal economic gain.39,40 Following this, to protect consumers’ Separate from economic growth, there is also purchasing power, authorities could a need for price stability which could be subsidize prices or sustain wage and salaries. achieved via the implementation of price However, these measures imply a significant ceilings or a similar policy. The evidence financial cost, their efficacy will depend on discussed above shows different pass- the availability of dedicated resources to through prices across areas under Syrian fund any subsidy. Additionally, if financial government and opposition-held areas: Even foreign assistance is not given, the measures within government controlled areas there would undoubtedly need to be financed by are large differences in the pass-through money printing, which risks triggering coefficients across markets and products, another wave of inflation. which suggest that market structure plays a
CONCLUSIONS
This report’s findings outlined the factors As the analysis has outlined, the value of the contributing to the current economic crisis of Syrian pound will continue to deteriorate in high inflation and a rapidly depreciating 2021. Our baseline estimate is an additional Syrian pound. The economic collapse is 68% depreciation rate, with a best case having a profound impact on the scenario of 66% depreciation, and a worst- humanitarian situation, rapidly diminishing case scenario of 72%. With food insecurity the purchasing power of the average Syrian afflicting about 90% of Syrians, the family, as well as contributing to shortages of continued depreciation of the Syrian pound available goods. signals an alarming downward trajectory of the humanitarian situation in 2021 (and likely
39 European University Institute, WPCS, The Dynamics and Evolution of UAE—Syria Relations: Between Expectations and Obstacles, October 2019
40 Carnegie Endowment for International Peace, Russia’s Eye on Syrian Reconstruction, January 2019
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in 2022), meaning food assistance and agricultural subsidies, food or fuel subsidies, livelihood support and development should the Syrian government’s current budget be prioritized by the humanitarian deficit seems impossible to turn around and community. consequently, further fiscal contractions are most likely. The budget deficit coupled with Despite there being significant aid donations a growing current account deficit, points to a in the recent Brussels conference, this still likely scenario that Syria will engage in falls short of the estimated $10 billion expanding the money supply in order to needed in humanitarian assistance. If the cover the financial gap, which will current dynamics continue without external consequently spur on further depreciation assistance, the government will have to rely and devaluation already being witnessed. on monetary financing to (at least) partially protect household purchasing power, if it is There is unfortunately no remedy for Syria’s to limit the humanitarian impact. However, current economic decline. Any expectations currently, this is something which the Syrian that 2021 will witness a turnaround in the government shows no sign of pursuing. current trend needs to be immediately Government subsidies are gradually being corrected. withdrawn, whether in the form of
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APPENDIX
Baseline regression models
Fuel Wage Food
Δer 0.0639 0.1955*** 0.3939***
(0.042) (0.044) (0.040)
Δp (lagged) -0.0443 -0.1976* 0.0017
(0.028) (0.114) (0.028)
Observations 4,701 2,408 49,048
R-squared 0.016 0.071 0.037
Market FE Yes Yes Yes
Product FE Yes No Yes
Month FE Yes Yes Yes
***p<0.01. **p<0.05, *p<0.1. Robust standard errors in parentheses.
Table 1: Baseline regression model results measuring the immediate pass-through effect. Regressions are weighted by market population. Standard errors are clustered at the market level. The pass-through effect is represented by the Δer coefficient. A 10% increase in depreciation produces a 2% pass-through to wages, and a 4% pass-through to food prices.
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Cumulative pass-through effect
Fuel Wage Food
Δer 0.0804* 0.1906*** 0.3466***
(0.046) (0.045) (0.034)
Δer (lagged 1 month) -0.0418 -0.0050 0.1651***
(0.111) (0.062) (0.053)
Δer (lagged 2 months) -0.0847** 0.1079** 0.1632***
(0.038) (0.050) (0.014)
Δp (lagged 1 month) -0.0423 -0.1981* -0.0128
(0.028) (0.107) (0.030)
Observations 4,623 2,369 48,115
R-squared 0.017 0.077 0.049
Market FE Yes Yes Yes
Product FE Yes No Yes
Month FE Yes Yes Yes
***p<0.01. **p<0.05, *p<0.1. Robust standard errors in parentheses.
Table 2: Augmented regression model results measuring the cumulative pass-through effect. Regressions are weighted by market population. Standard errors are clustered at the market level. The cumulative pass-through effect is the sum of the Δer coefficients. A depreciation rate of 10% in the same month and previous two months produced a 3% cumulative pass-through effect to wages, and a 7% cumulative pass- through to food items.
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Pass-through effect in high and low currency depreciation
Fuel Wage Food
er < 5% Δ 0.4836*** 0.0301 0.1347**
(0.129) (0.065) (0.062)
er > 5% Δ -0.0169 0.2268*** 0.4395***
(0.044) (0.048) (0.045)
p (lagged) Δ -0.0479* -0.1999* -0.0017
(0.028) (0.113) (0.028)
Observations 4,701 2,408 49,048
R-squared 0.019 0.073 0.038
Market FE Yes Yes Yes
Product FE Yes No Yes
Month FE Yes Yes Yes
***p<0.01. **p<0.05, *p<0.1. Robust standard errors in parentheses.
Table 3. Pass-through effect during periods of high and low currency depreciation. Regressions are weighted by market population. Standard errors are clustered at the market level. Exchange rates are split between two regimes based on whether the monthly variation in the exchange rate was above or below 5%.
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CONTACT
Nicholas Bodanac
Humanitarian Access Team
The Humanitarian Access Team (HAT) was established in Beirut in March 2015 in response to the collective challenges facing the remote humanitarian response in Syria. Successful humanitarian and development interventions require a nuanced and objective understanding of the human ecosystems in which these interventions occur. To this end, the HAT’s most important function is to collect, triangulate, synthesize, analyze and operationalize disparate data and information. Since 2015, HAT analysis has provided a forward-looking template for international interventions in Syria, and facilitated an increasingly nimble, adaptive, integrated, and ultimately impactful international response to the Syrian conflict.
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