2001 January

COUNTRY REPORT

Syria At a glance: 2001-02

OVERVIEW President Bashar al-Assad’s position is politically more secure, which has allowed him to launch a number of liberal political and economic initiatives. However, with his agenda of reform at odds with elements of the political/military elite, his position remains precarious. Policy initiatives, particularly at an economic level, will be slow to be implemented and subject to revision at the behest of the old guard, as they seek to preserve their interests. The EIU expects growth to rise marginally over the forecast period from 2.4% to 2.6%, while inflation is likely to be kept in check. Key changes from last month Political outlook • Mr Assad’s hard line on defence has entrenched him within the military establishment, but at the expense of higher regional tension. We expect tensions to remain high in southern Lebanon, representing a significant foreign-policy challenge for Mr Assad. • Calls from within Lebanon for an end to Syria’s dominance and a withdrawal of Syrian troops will continue to test Mr Assad’s abilities. Economic policy outlook • Political uncertainty will remain the leading factor determining the business climate. While a raft of proposals for economic reform have been announced, their implementation is likely to be slowed. • Ground-breaking plans have been proposed for financial sector liberalisation, including for the establishment of private banks, to create a local bourse, and to float the Syrian Pound. Economic forecast • Reduced government revenue as a result of a decline in oil prices may limit fiscal expenditure. • Growth will remain modest, held back by the prevailing political instability, while inflation is expected to rise slightly over the forecast period. • The total debt stock will fall in 2001, as the government takes advantage of the oil windfall in 2000 to repay non-disputed external debt. January 2001

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ISSN 0269-7211

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

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Syria 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2001-02 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

18 Economic policy

20 The domestic economy 20 Oil and gas 24 Agriculture 25 Infrastructure and Industry 26 Financial and other services

29 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 19 Official Syrian government finances 22 Crude oil production 27 Consolidated balance sheet of the specialised banks

List of figures

6 External trade 6 Oil production 12 Gross domestic product 12 Current-account balance/GDP 21 Oil prices, 2000

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

Syria 3

Summary

January 2001

Outlook for 2001-02 While the position of the president, Bashar Assad, is politically more secure, it remains precarious. His agenda of reform is at odds with a political/military elite he must continue to co-opt to carry out policy changes. While Mr Assad should be able to deliver on some of the promised political and economic reforms, the process will be slow, and remain at the behest of the old guard, who are keen to maintain their privileges. Given the continuing political uncertainty, the EIU expects growth of 2.4% in 2001, rising to 2.6% in 2002. A steady decline in oil prices will put pressure on fiscal expenditure. Increased government spending and growth in global non-oil commodity prices may fan inflation, although it is expected to remain below 2.5%.

The political scene Mr Assad has enhanced his position within the ruling elite, and used it to launch a number of liberal political initiatives. His hard line on defence has entrenched him within the military establishment, but at the expense of higher regional tension. Opposition in Lebanon has grown to Syria’s troop presence, and Mr Assad has sought to compromise. The veteran foreign minister, Farouq al-Sharaa, has used his new found autonomy to launch a series of foreign-policy initiatives, delicately improving relations with rival regional powers such as Iran and Iraq, and Turkey.

Economic policy Reforms have been launched to encourage private-sector investment, ranging from fiscal measures to plans for financial market liberalisation—including proposals for private banks, a stockmarket, and to float the currency. The draft budget has been prepared for 2001, one of the most timely for three decades, with a projected 16.9% increase in expenditure. Plans were announced to revitalise the industrial sector. A forum was held to encourage foreign investment, and there are plans to shake up the housing market.

The domestic economy A long disused oil pipeline to Iraq has been reopened, potentially offering Syria cheaper crude oil and boosting exports, but facing the potential of angering the US and UN because the move threatens to break sanctions on Iraq. An agreement has been signed for a US$1bn regional pipeline initiative. The operating contract for a global system for mobile communications (GSM) licence has been delayed further. Lebanese banks have begun doing business in the free zones.

Foreign trade and The government has rescheduled debts with Germany and Iran, with the Payments former opening up the prospect of better trade with the EU. There are more regional trade initiatives, but concerns are growing about tariffs with Lebanon.

Editors: Giles Allen (editor); Merli Baroudi (consulting editor) Editorial closing date: January 1st 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report January 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 Last elections: 1998 (legislative) and 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 Mustafa 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 Ridwan 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 Higher education Hassan Riyshah Housing & utilities Husam al-Safadi Industry Ahmed Hamu Information Adnan Omran Interior Mohammed Harba Irrigation Taha al-Atrash Oil & mineral resources Mohammed Maher Jamal Planning Issam Zaim Social affairs & labour Bariah al-Qudsi Supply & internal trade Osama al-Barid Tourism Qasim Miqdad Transport Makram Ubayd

Central Bank governor Bashar Kabbara

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 Syria 5

Economic structure

Annual indicators

1996 1997 1998 1999a 2000a GDP at market prices (S£ bn) 690.9 745.6 795.7 762.9 778.0 GDP (US$ bn) 16.1 16.8 17.2 16.5 16.8 Real GDP growth (%) 7.3 2.5 7.8 –1.5 1.5 Consumer price inflation (av; %) 8.3 2.3 –0.5 –2.7b 0.5 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 c 3,806.0b 4,658.6 Imports of goods fob (US$ m) 4,516.0 3,603.0 3,320.0 3,590.0b 3,572.6 Current-account balance (US$ m) 40.0 461.0 58.0 201.0b 1,383.7 Foreign-exchange reserves excl gold (US$ m) 2,100.0a 2,075.0a 2,050.0a 1,900.0 2,150.0 Total external debt (US$ bn) 21.4 20.9 22.4 22.6 22.0 Debt-service ratio, paid (%) 3.9 9.3 6.6 9.3 18.9 Exchange rated (av) S£:US$ 42.90 44.50 46.30 46.30 46.30

January 11th 2001 S£46.3:US$1d

Origins of gross domestic product 1997d % of total Components of gross domestic product 1998e % of total Agriculture 29.2 Private consumption 68.6 Mining, manufacturing, electricity & water 22.3 Government consumption 11.3 Wholesale & retail trade 19.2 Fixed investment 20.4 Transport & communications 11.9 Exports of goods & services 30.3 Government services 7.9 Imports of goods & services –30.7 Finance & insurance 3.7 GDP at market prices 100.0 Building & construction 3.7 GDP at market prices incl others 100.0

Principal exports 1998c US$ m Principal imports cif 1998 US$ m Crude oil 1,342 Manufactured goods 1,225 Fruit & vegetables 380 Machinery & transport equipment 916 Textiles 366 Food & livestock 617 Cotton 273 Chemicals & chemical products 501 Total incl others 3,135 Crude materials, except fuels 169 Mineral fuels, lubricants & related materials 156 Total incl others 3,895

Main destinations of exports 1999 % of total Main origins of imports 1999 % of total Germany 20.9 France 10.7 Italy 12.3 Italy 7.9 France 9.5 Germany 7.1 Saudi Arabia 8.9 Turkey 5.0 Turkey 7.7 China 4.4 a EIU estimates. b actual. c Principal exports figures derive from Central Bureau of Statistics, Statistical Abstract. Exports of goods and services are taken from the IMF’s International Financial Statistics. d “Neighbouring countries” rate. e Official estimates.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 6 Syria

Quarterly indicators

1998 1999 2000 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Prices Consumer prices (1995=100) 110.8 110.8 104.5 105.3 108.4 110.0 103.7 n/a % change, year on year 0.0 –2.7 –1.3 –1.6 –2.2 –0.7 –0.8 n/a 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) 282.0 276.5 275.6 287.0 313.3 298.7 306.5 n/a % change, year on year 10.5 11.6 11.5 7.2 11.1 8.0 11.2 n/a M2 (end-period; S£ bn) 417.6 388.8 392.9 406.9 473.7 462.8 475.1 n/a % change, year on year 10.5 12.0 13.7 9.8 13.4 19.0 20.9 n/a Sectoral trends Crude oil production (m barrels/day) 0.55 0.54 0.54 0.53 0.53 0.53 0.51 0.50 % change, year on year –1.8 –3.6 –3.6 –3.6 –3.6 –1.9 –5.6 –5.7 Foreign tradea (S£ m) Exports fob 8,660 7,730 9,140 11,040 10,980 47,350 56,800 n/a Imports cif –11,710 –8,310 –10,810 –8,780 –15,100 –44,870 –43,640 n/a Trade balance –3,050 –580 –1,670 2,260 –4,120 2,480 13,160 n/a a From IMF’s International Financial Statistics. However, we are awaiting clarification from the Central Bank regarding the sharp increase in export and import figures from 1 Qtr 2000. Speculatively, it may indicate a change in the exchange rate at which trade data is converted. Sources: International Energy Agency, Monthly Oil Market Report; quarterly figures; IMF, International Financial Statistics.

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Outlook for 2001-02

Political outlook

Domestic politics The president, Bashar Assad, begins 2001 politically more secure than when he came to office after his father’s death six months ago. In that time he has reached an accommodation with the generals and intelligence chiefs who control the levers of power, and used this as a base from which to launch a programme of political and economic reform. Surrounded by like-minded technocrats, Mr Assad has tried to bring modest changes to improve the country’s predicament. He has released political prisoners, allowed limited press freedom, reformed investment laws, invited foreign banks to open branches and approved far-reaching financial sector reforms—including the establishment of private banks, plans to reform the exchange-rate regime and establish a stock exchange. The new president appears popular, even to an extent within the ruling elite, and is perceived as offering youth, vision, and the ability to take Syria forward. Yet his position—and therefore the sustain- ability of his political and economic reforms—still remains precarious. Mr Assad is surrounded by an ageing political elite, whose members he must co-opt to carry out even minor policy changes, and who will continue to offer their support only so long as he brings economic prosperity, without under- mining their networks of power and patronage. If they perceive his reforms as a threat, they may challenge his programme, and could seek to topple him. Meanwhile, the business community is expecting almost the opposite—an end to mismanagement, corruption, and isolation. Those in the fledgling political opposition are expecting wider participation, and an end to three decades of repression. Finally, the wider population believes Mr Assad will bring a sudden and sharp increase in wealth. Currently, the president is enjoying a political honeymoon. However, each group will only wait so long for their needs to be answered.

It is expected that a cabinet reshuffle will be carried out by the end of the first quarter. The outcome of these changes should give an indication of the extent to which Mr Assad has been able to consolidate his position. During the forecast period, the EIU believes Mr Assad will remain in office and be able to deliver some of the promised liberal political and economic reforms, encouraging a degree of pluralism, allowing a freer press and more private ownership. However, he will increasingly find himself caught between the contradictory aims of the various interest groups. Such unresolved tensions among the political/military elites, and over the direction of policy, will continue to threaten his position and ensure a climate of political uncertainty.

International relations Foreign-policy issues remain dominated by violence in the Occupied Territories and the situation in south Lebanon, where Syrian-sponsored Hizbullah guerrillas have taken a dangerous line, attacking the Israeli army in a disputed border area, assuming that Israel does not wish to open a second military front. Both conflicts have a direct bearing on Syria. Frustration is growing within the Northern Command of the Israeli army, and senior officers may be seeking an

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opportunity to recover the army’s prestige through a military offensive in Lebanon. The Israeli government has threatened military raids on Hizbullah, Lebanese infrastructure and Syrian military positions in Lebanon—and even Syria proper—if Hizbullah continues such border provocation. With an Israeli election due on February 6th and a campaign underway with the current prime minister, Ehud Barak, seeking re-election, we expect tension to remain high in southern Lebanon. Given the indications of recent polls—that right-wing leader Ariel Sharon may be elected—tensions may increase further. We believe it highly possible that Israel will at some point launch air raids against targets in Lebanon, although we expect no direct attacks on Syria. Nevertheless, the situation will represent a significant foreign-policy challenge for Mr Assad. Hizbullah is likely to continue to launch occasional cross-border attacks in the disputed Shebaa Farms area on the Israel-Lebanon-Syria border, inevitably leading to an Israeli response. However, ultimately neither Israel nor Syria is seeking a regional war, and we therefore believe any military action will be limited. Despite speculation in Washington that the stalled Syria-Israel peace talks might be on the agenda, we do not expect progress on this issue over the forecast period. Mr Assad is still not in a sufficiently strong domestic position to backtrack on the territorial red lines laid down by his father, demanding a full return of the Israeli-occupied Golan Heights.

In Lebanon itself, mostly-Christian opposition groups have increasingly demanded a withdrawal of Syrian troops from the country since the death of Hafez al-Assad. President Assad will continue to seek an accommodation over the continued presence of Syrian troops through a strategy of offering dialogue and appeasement. This will be supported by the Lebanese political elite, but rejected by opposition groups. Ultimately we expect Syria to retain its dominance over Lebanon throughout the forecast period, although there may be adjustments to the presence of Syrian troops and direct Syrian control. In the wider region, the new president is expected to continue to build support and strengthen ties. Following visits to Egypt and Saudi Arabia in October 2000, foreign-policy initiatives with Iran, Turkey, and Iraq will continue over the forecast period.

Economic policy outlook

Policy trends After more than three decades of centralised command economics, Mr Assad is seeking to put the country on the road to reform. Policymakers have ostensibly acknowledged that the quasi-Soviet system has not brought prosperity and growth. Nationalised industries produce poor quality expensive goods, the closed financial system has driven capital out of the country, hostility to the West has led to a reliance on outdated, inefficient technologies and living standards are stagnant, yet the population is growing sharply. Reforms began modestly in March 2000, and in the final quarter of the year, included the early passing of the 2001 fiscal budget, and a package of financial measures intended to legalise private banks, create an equity market and ultimately facilitate an inflow of investment capital. With Mr Assad expected to remain in power over the forecast period, and in the absence of a prolonged regional military conflict, we expect these reforms to continue. The long-awaited appointment

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of a new cabinet, largely chosen by Mr Assad, will hasten this process. Taken together, the first phase of reforms is intended to establish the infrastructure required for a market economy—new financial laws, banking reform, and currency harmonisation. Towards the end of the forecast period, the reform process may broaden, with an attempt to break up the monolith of state industries by launching a privatisation programme. At every stage, however, there will be opposition—from military generals in the ruling elite, right down to functionaries in the state bureaucracy—all seeking to protect their privileges. Yet, so long as Mr Assad remains in power, balancing reform with the co- optation of the elites, we believe the process will be allowed to continue.

Fiscal policy Syria’s new reformist elite has been fortunate that its arrival in power coincided with a period of high oil prices in 2000—resulting in increased government revenue. This windfall helped pay for initiatives, such as rising state salaries and the rescheduling of unserviced debt to Germany. With our oil-price forecast suggesting a decline in prices, the government enters 2001 without the luxury of rising revenue. This will put pressure on fiscal expenditure, possibly forcing a reduction in spending plans for 2001—which were forecast to increase by 16.9% in the budget—and certainly constraining future expenditure levels. Ultimately, this will act as a brake on Mr Assad’s proposed agenda of stimulating economic growth and raising living standards, and will slow the pace of change.

Monetary policy Government reforms will also extend to monetary policy, with plans announced to reform the exchange rate, allowing the value of the Syrian pound to be set by the market. The government has also pledged to reform the distorted system of interest rates and ease political control over monetary policy, but any such changes will take place slowly. However, Syria’s multi-tier exchange-rate regime is unlikely to be abolished over the forecast period. The official S£11.225:US$1 rate for favoured importers is likely to remain to complement the government’s plans to tackle the problems of the state sector. However, we do expect efforts to continue to be made towards converging the “neighbouring countries” and black-market rates by the end of the forecast period. In the meantime, the Syrian public will continue to show a lack of confidence in its banking system. Consequently, money supply over the forecast period is more likely to be affected by interest-rate movements in neighbouring Lebanon, along with government spending patterns, which are largely determined by oil prices.

EIU Country Report January 2001 © The Economist Intelligence Unit Limited 2001 10 Syria

Economic forecast

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 5.0 4.2 4.1 OECD 3.0 4.1 3.0 2.7 EU 2.4 3.3 3.0 2.6 Exchange rates (av) ¥:US$ 113.9 107.6 108.5 104.5 US$:€ 1.07 0.92 0.95 1.05 Financial indicators Euro 3-month interbank rate 2.97 4.50 5.00 4.70 US$ 3-month commercial paper rate 5.18 6.32 6.25 5.25 Commodity prices Oil (Brent; US$/b) 17.9 28.8 23.4 19.1 Cotton (US cents/lb) 53.1 59.0 69.3 77.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.0 10.6 14.1 Industrial raw materials (% change in US$ terms) –4.2 14.2 4.2 9.6

Note. Regional aggregate GDP growth rates weighted using purchasing power parity (PPP) exchange rates. International assumptions Syria is highly dependent on the international price of oil—with crude exports accounting for some 55-60% of all export revenue. Revenue from crude sales also provides the bulk of government earnings, making fiscal policy acutely sensitive to changes in oil prices. Although international prices were still close to US$25/barrel at the beginning of January, underlying world oil production already exceeds demand—the problem being a lack of refinery capacity to convert oil to those grades that are most needed (notably heating oil). Thus, assuming relative stability in the Middle East, we expect prices to fall quite significantly once most of the oil has been refined. The extent to which prices fall in 2001 may be restrained by OPEC production cuts. OPEC has been indicating that it will cut production in an effort to stop prices falling too severely. However, with the exception of Saudi Arabia, we are not optimistic that this will occur. Therefore, in 2001, the possibility of insufficient production cuts, combined with the gradual slowdown in the US economy, will dampen sentiment, putting prices under downward pressure late in the second quarter, as potentially still high output levels meet the seasonal weakening of energy demand. A gradual decline towards US$20/b will follow as supply outstrips demand over the forecast period. Given these assumptions, we forecast the average price for dated Brent blend in 2001 at US$23.36/b, falling to US$19.13/b in 2002.

Meanwhile, we expect world trade to grow by 8.2% in 2001 and 7.2% in 2002, but Syria will ultimately gain little from this, because of its highly protective trade barriers and multitude of other restrictions. The forecast expansion in world food prices of 10.6% in 2001 and 14.1% in 2002 will aid agricultural exports, so long as winter rain levels are sufficient for a good harvest. However,

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with grain prices expected to expand by 22.8% over the forecast period, another season of drought will force import costs up significantly.

Economic growth The forecast contraction in oil prices, combined with Syria’s continued political risk, weighs heavily on our outlook for growth. While we expect private consumption growth—the principal component of GDP—to rise over the forecast period, the prevailing political uncertainty will continue to limit growth in this component. Positive factors, however, include an expansionary fiscal budget in 2000, coupled with the secondary effects of modest economic reforms witnessed so far. Additionally, the return to office of the business tycoon, Rafiq al-Hariri, as prime minister in neighbouring Lebanon—which is economically tied to Syria—is expected to boost spending levels significantly. We believe the “Hariri effect” will bring international investment interest to Syria and Lebanon as a collective economic unit—for example, the Egyptian gas deal agreed in December 2000. (See Oil and Gas)—and improve prospects for remittances from Lebanon—where an estimated 500,000 Syrian workers are employed. Investment spending is therefore likely to see some modest growth, as construction of a number of energy projects gathers pace. Assuming relatively good harvests, the agricultural sector, affected by drought for the past two years, should see growth. Collectively, taking these factors into account, we expect the economy to grow by 2.4% in 2001 rising marginally to 2.6% in 2002.

Forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth –1.5 1.5 2.4 2.6 Oil production ('000 b/d) 535.0b 512.1 493.5 490.0 Gross agricultural growth –7.5 1.0 3.0 3.0 Consumer price inflation (av) –2.7 c 0.5 1.7 2.3 Exports of goods fob (US$ bn) 3.8 c 4.7 4.1 3.7 Imports of goods fob (US$ bn) 3.6 c 3.6 3.8 3.9 Current-account balance (US$ bn) 0.2 c 1.4 0.7 0.1 % of GDP 1.2 8.2 4.3 0.8 External debt (year-end; US$ bn) 22.6 22.0 21.8 22.0 Exchange rates S£:US$d (av) 46.30 46.30 47.00 48.00 S£:¥100d (av) 40.65 43.05 43.32 45.93 S£:€d (year-end) 46.51 40.51 47.98 52.32

a EIU estimates. b EIU forecasts. c Actual. d “Neighbouring countries” rate.

Inflation The expansionary fiscal policy adopted in 2000 and a steady growth in global non-oil commodity prices will lead to a modest upward pressure on prices over the forecast period. Nevertheless, relatively weak Syrian growth and the low level of capacity utilisation in the economy will ensure inflationary pressures remain in check. We therefore expect inflation to rise to 1.7% in 2001—up from the forecast 0.5% in 2000—increasing further to 2.3% in 2002, as prices of imported industrial raw materials increase further and government spending feeds through to private consumption.

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Exchange rates We expect the unification of the neighbouring countries and black-market exchange rates to be a central element of the government’s plans for exchange rate reform. The black-market rate has been remarkably stable in recent years, remaining close to S£50:US$1 since the early 1990’s. This stability along with government recognition that unification would increase foreign exchange— allowing for greater flexibility—makes it an attractive proposition. We are therefore forecasting that the government will attempt to unify the rates at around S£48:US$1. Timing of the move is not yet clear—but is expected by the end of the forecast period provided relative political and economic stability prevail. However, the abolition of the multiple fixed exchange-rate regime is only likely to be addressed once the objectives of state sector reform are completed. The official S£11.225:US$1 rate for favoured importers will therefore be maintained over the forecast period to aid state sector development, whilst the S£23:US$1 customs rate is likely to be abolished.

External sector We estimate that export earnings for 2000 will have risen to US$4.66bn on higher oil revenue. However, as oil prices fall in 2001, export revenue will ease to US$4.15bn, falling further to US$3.75bn in 2002. Given the uncertainty surrounding the Iraqi-Syrian oil deal, we are not yet incorporating any projections into our forecasts for 2001-02—until the situation is further clarified. Given the current expansionary fiscal policy and reform programme, we expect import expenditure to increase leaving a visible trade surplus of US$393m in 2001—down from a surplus of US$1.09bn in 2000—slipping into a deficit of US$171m in 2002. It should be noted that a large amount of trade, mainly with Lebanon, but also with Turkey and Iraq, is unrecorded. The net outcome of that with Lebanon is thought to be strongly in Syria's favour. We expect Syria to record a current-account surplus of US$738m (4.3% of GDP) in 2001, falling to US$149m (0.8% of GDP) in 2002. Efforts to reschedule disputed debt have eased Syria’s debt-service position—though the total external debt stock will remain high. Support through fresh disbursements at con- cessional terms from Arab Gulf governments, will provide financing support should Syria require it, as oil prices soften.

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The political scene

President Assad pushes Less than six months into office, and President Bashar al-Assad’s more liberal through more reforms agenda of policies—combining efforts to undertake a thorough restructuring of economic activity alongside a new political openness—are slowly permeating Syrian life. In November and December of 2000 these political initiatives were directed largely towards improving Syria’s poor human rights record, and encouraging a greater degree of freedom of expression. An estimated 600 political prisoners, who had been opponents of the rule of Hafez al-Assad, were freed from the infamous Mezze prison, with plans announced to now turn the institution into a museum—symbolism which was not lost in Damascus. Those released included communists, members of the Muslim Brotherhood, and others from smaller leftist and Islamic parties outlawed in the 1980s. In December Syrian authorities also released some 54 Lebanese political prisoners—including four Palestinians—detained by Syrian forces during the Lebanese civil war (1975-90). This appeared to be a move aimed at placating certain elements in Lebanon calling for the redeployment of Syrian troops and an end to its influence in Lebanese affairs.

At the end of November, following a reshuffling of the heads of various state media outlets in July, the president lifted restrictions on which organisations can publish newspapers, a move expected to lead to a host of new publications. The decision, taken at a meeting of the Regional Command (RC) of the ruling Baath Party, will specifically allow for the seven parties in the NPF (National Progressive Front) coalition (nominal multiparty system created by Hafez al- Assad made up of the Baath Party and several small left-wing parties) to publish and distribute newspapers publicly. However, the law does not cover opposition organisations such as the Muslim Brotherhood and there were also limits to these latest press freedoms with, for example, the information minister, Adnan Omran, ruling out in the same month the possibility of any privately owned publications.

Party and government The president also began a process to try to reform the leadership of the all- face shake up encompassing Baath Party, which dominates the state. The programme began modestly, with a series of new appointments to the leadership of the party in Syria’s second city, Aleppo. Supporters of the president say these are a first step towards a root and branch reform of the whole party, to remove hardliners and bring in reformers. Plans were also announced in November to bring several smaller parties, such as the Syrian Socialist Progressive Party, into more in- fluential positions. However, Mr Assad is taking the party reform slowly, mindful not to overplay his hand and always aware that the military strongmen on which his leadership depends will resist any changes which could undermine their own positions.

Beyond such party issues, there have been fresh reports that a reshuffle of the government is imminent. Mr Assad is aware that any further success in his reform programme will require a replacement of ageing conservative ministers, who were largely appointed because of their loyal support for his father rather than their ability, with members of his own team who can be expected to bring

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stronger government support for political and economic reform. Reports have been circulating in Damascus for almost six months that a cabinet reshuffle is imminent. However, Mr Assad is trying to limit the influence of the regime’s military strongmen in choosing the next cabinet, and has therefore repeatedly delayed the reshuffle awaiting an opportune moment when his own views and supporters can fully prevail. It is widely expected that some of the ministers favoured by Mr Assad—notably the planning minister, Issam Zaim—will receive higher profiles, as the older generation, including the economy minister, Mohammed al-Imadi, and the finance minister, Khaled Mahayni, make way. Meanwhile, the round of biannual army and security promotions are due to take place in January. The results of which could provide an important indicator as to the strength of Mr Assad’s position and the direction that policy is likely to take.

The Baath Party

The Arab Baath Party was founded in Damascus in 1941, as a vehicle to unite the Arab peoples of the Middle East into a single Arab nation, recreating a mythical lost unity, with the term “Baath” meaning “renaissance”. The party espoused socialism, non- alignment and opposition to imperialism and colonialism. The Baathists took power in Syria in 1963 on a platform of “unity, freedom, and socialism”; beginning a programme of nationalisation, and outlawing most other parties, to turn Syria into an effective one- party state. Hafez al-Assad led a pragmatist “nationalist group” within the party, less doctrinaire about socialism, favouring a militant posture on the Arab union, and hostility toward Israel. Despite constant manoeuvring, the nationalist faction worked alongside a more ideological faction in an uneasy coalition until 1970, when Mr Assad came to power in a coup. In 1972 in the first of many ‘purges’ he created a nominal multiparty system, forming the National Progressive Front (NPF) made up of the Baath Party and several small left-wing parties including the Syrian Arab Socialist Union, and the Socialist Union Movement. For three decades, Hafez al-Assad governed through the Baath Party Regional Command, a committee of less than two dozen members, with the party no more than a rubberstamp for his rule, its creaking leadership of old men resembling the communist parties in the Soviet Union and China. With power in the Baath Party a reflection of loyalty to the old president, and given its indirect but all pervasive control of much of the economy and business, reform of the party is seen as essential if the new president’s national reforms are to be a success. However, ultimately, reform is unlikely to be enough. Meanwhile, it has been reported that the Baath party election—set for the 26th January 2001—is expected to be less arranged around the “principle of appointment” than in previous elections.

Opposition coalesces A fledgling opposition grouping has been formed around a prominent member around rebel MP of parliament, who has long been one of the few within Syria permitted to offer any political criticism. Riad Seif, an MP and businessman who runs a footwear manufacturing company, was long seen as one of the few Syrian figures with a “licence” to criticise the regime—although only modestly. Even during the days of Hafez al-Assad, Mr Seif was able to meet members of the foreign media, and challenge specific government policies—although he could never go beyond this to challenge the institutions of state, or the president. In September 2000 a new momentum was given to this fledgling opposition

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when some 100 writers, artists, and intellectuals—including Mr Seif—published an appeal for more democracy and freedom of expression, in overseas Arabic newspapers. With the winds of change now blowing through the country, Mr Seif has become a focal point around which an opposition is beginning to coalesce. He has begun to host discussion forums at his Damascus home several times a month dubbed “Friends of the Civil Society”, where others who have long been silenced come to debate issues, ever mindful the meetings are attended by informers for the regime. Syrian authorities have allowed such activities to take place and in fact have sanctioned debate on matters such as economic reform in the Syrian press. However, while giving critics of the regime the opportunity to voice their criticisms openly and publicly, at the same time, this limited expression allows the state to monitor their activities more effectively.

Rural conflict in Suwayda In November 2000 rural conflict over land rights flared up in the southern claims more than 20 lives region of Suwayda, leaving more than 20 dead and scores injured by December. The violence was centred between members of the region’s majority Druze population and local bedouin—both settled and nomadic—who are Sunni. It is reported that the dispute started in the village of Rahi, near Suwayda as a result of trespassing nomadic bedouin. When the dispute turned violent, it spread to include neighbouring areas and continued as elements of the Druze population sought reprisals against Sunni villagers suspected of collaborating with the trespassing nomads. Elements of the Druze population were even able to take their grievances to Damascus—demonstrating in front of the Interior ministry. The authorities response was ineffective. Army Units initially sent to quell the violence were unable to contain it. Ultimately it took a further deployment of some 5,000 men to put an end to the disturbances. While speculation surrounding the authorities’ slow response inevitably drew comparisons with the government’s disquiet with Lebanese Druze—calling for an end to Syria’s presence in Lebanon—conflicts over land rights with trespassing bedouin are commonplace and do not come as a surprise.

However, the length of time it took to quell the violence does not augur well for stability, given the fact that Syria is renowned for its internal security organisations and their ability to deal with domestic disturbances effectively. Improving living standards and providing economic prosperity for Syrians are a paramount part of Mr Assad’s platform. He has been fortunate in that his accession to power has coincided with a period of high oil prices. However, Mr Assad’s reform-minded government risks raising expectations, then not being able to meet them. If he is unable to fulfil these promises, then in a climate of improving—albeit extremely limited—political expression, people may be encouraged to air their grievances more openly. The authorities will have to be able to both approach this carefully and deal with it effectively.

Mr Assad takes a hard line While Mr Assad may be pursuing a liberal domestic agenda, on the issue of on external security defence and the peace process, he is taking a much harder line. His position stems from his longstanding admiration for Lebanon's Hizbullah guerrilla movement, which is widely seen in the Arab world as the only army to ever “defeat” Israel, when the Israeli army was forced to withdraw its troops from

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southern Lebanon in May 2000. Outlining his foreign-policy thoughts at an Arab summit, Mr Assad said the best option for the Arabs is “peace with force, that is the peace of the strong”. He continued to say that he believed that Hizbollah’s so-called defeat of Israel—forcing them to withdraw from south Lebanon in May 2000—will act as a deterrent against possible future Israeli attacks.

Mr Assad’s reliance on Syria’s ageing military elite to stay in power has also added another rationale to this new, more forceful, policy towards Israel. His emphasis on hardline rhetoric—true to Syria’s perceived regional role under his father—will serve to appease military generals. But, even they are under no illusions; Syria is in no position to go to war with Israel—nor would it be seeking to. However, coming at a time when there is increased tension in the Middle East because of the ongoing confrontation between Israel and the Palestinians, coupled with Hizbullah’s continued belligerence in south Lebanon, Mr Assad's new policy risks raising regional tension.

Fears raised of conflict Syria has long provided support to Hizbullah in its long running battle with with Israel Israel. But after Israel's withdrawal from Lebanon, the guerrilla army lost its raison d’être. Flirting briefly with the idea of concentrating attention on mainstream Lebanese politics, it reverted in early October to type, relaunching low intensity hostilities with Israel, ostensibly to recover a disputed area of farmland on the border known as Shebaa Farms. Given what he sees as the Arab world’s debt to Hizbullah, Mr Assad has supported the group’s new military initiative. However in Israel, Hizbullah’s actions are being seen by many as evidence that withdrawal from Lebanon has not brought peace to northern Israel, and that ultimately, the Israeli army will have to return to the battlefield. Israeli politicians and military leaders have repeatedly threatened to attack Syrian targets in Lebanon, and even in Syria itself, if Damascus continues to support Hizbullah. Combining such factors with upcoming elections in Israel in the first quarter of 2001, it is clear Hizbullah has the potential to drag both Israel and Syria into a wider conflict which would be in neither states’ interest. While Syria’s military elite sees Mr Assad’s rhetoric as a useful tool, the generals are not in a position to go to war with Israel. In Israel the response is less benign, with the military preparing contingency plans for a direct conflict between the states.

Peace with Israel still When Hafez al-Assad died in June, the prospects for a peace deal with Israel seems distant dimmed, because the new president was considered not to have the moral or military authority within the regime to make the kind of tough concessions over land and security that would be required to sign a peace with Israel. If he had agreed to a deal with Israel and gone back on his father’s pledge to recover “every atom” of the Golan Heights, it is likely he would have been ousted immediately in a coup. The rebirth of the Palestinian intifada in October has polarised Arab-Israeli relations further, making any peace deal between Israel and Syria seem even less likely. The upcoming prime ministerial election in Israel has also made the situation more volatile.

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Bush may urge Israel to The victory of George W. Bush in the US presidential election, and the arrival look for peace with Syria of his new team may cast a glimmer of light on prospects for peace—despite the new administration’s need to prioritise domestic economic matters. Even before his inauguration, an interview with one of Mr Bush’s senoir Middle East policy advisors, Edward Djerejian, published by the Washington Post in December, suggested the new administration may advise Israel to abandon hopes of an immediate peace deal with the Palestinians, and instead urge it to sign a peace with Syria. The logic of such a strategy is inescapable. An Israeli- Syrian deal would require a relatively simple exchange of land for security— Israel would return land on the Golan Heights seized in the 1967 war, Syria would offer peace and normalisation of relations. The deal would therefore be much simpler to achieve than trying to find a resolution to the intractable Palestinian-Israeli issues of, for example, sovereignty over Jerusalem, and the return of refugees. However, a Syria-Israel deal remains highly unlikely— Mr Assad is still not in a strong enough position domestically and is extremely unlikely to enter into talks with Israel until the Palestinian question has been addressed.

Challenge to Syria’s control One of the focuses of the Syrian elite towards the end of 2000 was the niggling in Lebanon continues question of relations with Lebanon. Syria has dominated its smaller neighbour since the end of the civil war there a decade ago, and today there are some 25,000 Syrian troops stationed in Lebanon. Mr Assad’s government maintains its control for both ideological and pragmatic reasons. Syria has never recog- nised Lebanon's creation as a sovereign state, created by France in 1920, and equally finds it useful to control the country to counter balance any potential for Israeli influence. The death of Hafez al-Assad in June encouraged Lebanon's opposition Christian groups and others to begin to challenge Syria’s position. In recent months a rising chorus of political statements in Beirut—even from those considered longtime friends of Syria such as the Druze leader, Walid Jumblatt—has forced Syria to react. Initially Syria, and its proxy leaders in Lebanon, sought to suppress the opposition movement. In early November, for example, Mr Jumblatt was in effect banned from Syria for refusing to withdraw criticism. But more recently, Mr Assad has tried to engage the Lebanese opposition movement, for example, releasing Lebanese political prisoners held in Syria, withdrawing some troops from Beirut and holding out the prospect of dialogue if the demonstrations cease. This strategy of appeasement has, however, appeared to embolden critics in Lebanon as they continue to seek an end to Syrian interference in Lebanese affairs. Elements of the opposition are unlikely to stop until Syria agrees to a full troop withdrawal.

Improved regional ties While Mr Assad has had his hands tied with Lebanon, the foreign minister, are sought Farouq al-Sharaa, has used his role under the young president to launch a foreign-policy initiative to boost Syria’s ties with neighbours, regional, and world powers. Using careful diplomacy, he has improved relations with both Iran and Iraq, and warmed relations with Turkey—even though the latter has a military pact with Israel. He has also launched initiatives with longtime allies such as Russia, while not losing sight of the US and Europe. Such designs can be interpreted as a part of a strategy designed to strengthen Syria’s overall position, both regionally and internationally. By seeking to build multiple

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alliances and relationships—particularly with Turkey and Iraq, countries with which it has had well-documented differences—Syria will reduce its depend- ency on any one country so as to offer it greater flexibility to meet with different challenges.

Following a modest opening to Iraq two years ago, Mr Sharaa has now accelerated the rapprochement with the government in Baghdad. High-level delegations have travelled between the countries, including trips by the Iraqi deputy prime minister, Tariq Aziz, to see Mr Assad. As well as co-operating over oil (See Oil and Gas), an agreement has finally been signed over the exact location of the common border, with reports that civilian traffic is now being allowed to travel freely across the frontier for the first time in decades. The Damascus administration clearly wants to see improved relations with Iraq, both for security and economic reasons. But it has also tempered its desire not to upset the West, or Iraq’s bitter rivals Iran and Kuwait. In November ties were expanded with Iran, through a series of high-profile ministerial visits. Relations with Turkey, which soured in the 1990s over Syria’s support for the Kurdish movement, and the Turkish government’s growing military ties with Israel, have also improved. A host of Syrian and Turkish officials travelled between the countries promising to co-operate on issues such as security, organised crime and drug smuggling. The Syrian vice-president, Abdel-Halim Khaddam, recently visited Turkey in preparation for a trip Mr Assad is expected to make to Ankara in early 2001 to cement the new dialogue.

Economic policy

Government presents At the beginning of December the government presented a draft 2001 budget timely 2001 budget to parliament. The move was unprecedented, marking one of the first times in almost three decades that a budget for the fiscal year January-December was presented before the start of that budget year. The 1999 budget, for example, was offered to parliament at the end of December 1999. The 2000 budget was passed in May 2000—in itself considered exceptional. Such delays have long been used to put downward pressure on spending, with ministries forced to stick to the limits of the previous year’s budget until the new one is passed. However, the government of the prime minister, Mohammed Mustapha Miro, came to office in March 2000 committed to fiscal reform, and the early 2001 budget can be seen in the light of this policy. Yet, though timely, the new budget was still characterised by many of the opaque and enigmatic fiscal practices which became popular under the tenure of Hafez al-Assad. The budget was officially balanced, although it included a component of foreign borrowing within the revenue accounts, implying the existence of a deficit. Also, within the revenue figures, there was no reliable measure of government earnings from oil exports—the largest single revenue earner. On the expenditure side, no reliable figure was given for the defence budget, and many other spending figures were considered highly suspect—largely because substantial areas of spending are thought to be undertaken entirely off-budget. Never- theless, though flawed, many aspects of the budget suggested that under Mr Assad’s new regime fiscal management is improving.

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Expenditure forecast to The budget forecast expenditure of S£322bn (US$7bn at the “neighbouring increase sharply countries” exchange rate). Revenue was also forecast at S£322bn, but included within it a figure of S£28.52bn for “foreign resources” which are assumed to be foreign loans, suggesting the existence of a deficit. No similar figure was given for domestic loans, making it impossible to gauge the size of that deficit. On the expenditure side, the forecast figure of S£322bn represents a S£46.6bn or 16.9% increase over spending in the 2000 budget. Much of this increase was earmarked to pay for a 25% across-the-board rise in state-sector salaries, a 20% increase in state pensions and measures to tackle unemployment which were introduced in mid-2000. Taking into account these changes, the average civil service salary is believed to have risen from US$90 to US$110 a month. With a total of 1.4m public-sector workers in Syria, this would signify a cost to the government of around S£15.6bn, or US$336m, representing about one-third of the forecast increase in government spending. A figure of S£37.32bn was allocated to debt servicing, export and price subsidies. While detailed spending plans are not made available, the finance minister, Khaled Mahayni, specified that the government would continue with its programme of economic reforms and efforts to boost the private sector, targeting investment in new infrastructure, with special allocations to finance projects in electricity, irrigation, agriculture and the oil sector.

Official Syrian government financesa (S£bn unless otherwise indicated) 1999 2000 2001 Expenditure 255.30 275.40 322.00 % increase, year on year n/a 7.87 16.92 Current spending n/a 108.40 123.68 Extractive Industries 8.64 10.28 11.45 Investment spending n/a 132.00 161.00 Debt servicing & export price subsidies n/a 35.00 37.32 Revenue 255.30 275.40 322.00 % increase, year on year n/a 7.87 16.92 Taxes & duties 82.69 85.91 115.93 Exceptional financing 65.50 67.50 68.63 of which: foreign loans n/a n/a 28.52 domestic loans n/a n/a n/a Budget deficitb n/a n/a n/a

a The Syrian budget is characterised by opaqueness and a lack of transparency. b Revenue figure is thought to include any deficit, giving the appearance that the budget is always balanced. Sources: Ministry of Finance statements; press reports; MEES.

Job creation plan More details were announced in November 2000 regarding government plans is outlined to tackle unemployment. After initially suggesting a package totalling S£80bn, the cabinet adopted a S£50bn plan towards the end of the year to create 440,000 jobs, targeting those aged between 18 and 24 years. The package was said to include a range of vocational training programmes as well as soft loans to help start small businesses. Syria has one of the world's highest population growth rates—at more than three percent per year—and according to analysts, needs to create 200,000 jobs annually to absorb those entering the labour

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market. The state newspaper Tishreen quoted the planning minister, Issam Zaim, as saying in November that 72% of those considered unemployed are aged between 15 and 24, explaining the emphasis on youth unemployment.

Financial sector reforms At the beginning of December Syria’s most powerful body, the Regional are approved Command of the Baath Party, approved a series of groundbreaking reforms to recreate a financial services industry, and herald the end of the state’s monopoly over the sector. Plans were approved for the establishment of private banks, to create a local bourse, and to float the Syrian Pound (see financial and other services). However, while these reforms can be regarded as the most significant step to date in the president’s economic reform program, their progress is likely to be marked by conflict and complications which will serve to slow their implementation.

Forum held to encourage An international forum was held in November in an effort to encourage foreign investment foreign investment, and raise overseas awareness of the government’s reform plans. Some 300 bankers, investors, and policymakers from more than a dozen countries and international bodies—though mostly from Syria and Lebanon— heard government representatives outline the principles of Syria’s reform program—in effect to establish a legal and governmental framework to draw in investment and revive the private sector. Opening the forum, Mr Miro said it was intended to allow Syrian policymakers to “get acquainted” with the needs and requests of potential investors to help guide the direction of future reforms. But on the sidelines, many foreign representatives attending said the government had to take more drastic measures to win investor confidence.

Industry is to At a meeting of the leadership of the ruling Baath party in December, it was be revitalised announced that it had been agreed to put forward a package to reform both private and state industries. Reforms are expected to offer incentives in the form of tax breaks and reduced customs duties on imported raw materials (see foreign trade and payments). However, they are not expected to include any plans for privatisation. In November the minister of state for planning, Islam Aim, told Reuters that Syria was not planning to privatise its public sector, but wanted to make it more competitive. The loss-making industrial sector has been an enormous burden to the state and it is believed that the strategy of planned reforms will be to focus on strengthening successful industries, while eradicating loss-making ones. According to one Syrian analyst, the reforms are expected to give state companies more flexibility to form independent holding companies and to decide on suitable policies relating to employment, investment, sales and wages.

The domestic economy

Oil and gas

Oil revenue gains The government and foreign companies operating joint ventures in the oil feed through sector, continued to benefit from high international oil prices in the fourth

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quarter of 2000 despite growing volatility and a slump in December. Extra revenue from export sales has boosted government income, and improved funding for exploration. In the continued absence of official government figures, one analyst estimated the state would earn more than US$3bn from oil sales in 2000, some 60% higher than estimates for 1999. With reserves only expected to last a further ten years, the government is seeking to offset the steady fall in production by allowing foreign oil companies to try and squeeze more output from existing fields. The government’s decision earlier in the year to start offering contracts to foreign companies to manage and develop fields currently run by state companies has roused fresh international interest in the oil market. The government is also said to be preparing tenders for new exploration contracts in the Northeast, worth several hundred million dollars.

Jump in December oil According to the International Energy Agency (IEA), in its monthly Oil Market exports fuels suspicions Report, forecasts for Syria’s oil output in 2000 and 2001 have been revised down. The IEA forecasts output in the fourth quarter of 2000 falling below 500,000 barrels/day to 490,000 b/d, with an average for the year of 510,000 b/d. For 2001 it forecasts a decline to an average of 480,000 b/d. The EIU forecasts a slower decline in output. We expect output to fall to 495,000 b/d in the fourth quarter of 2000—averaging 512,000 b/d for 2000, falling to 494,000 b/d in 2001 as the Syrian government makes attempts to slow the rate of decline in production and maximise output—particularly while oil prices remain high.

Given the steady domestic demand for oil, it had been expected that the decline in output in late 2000 would be mirrored in exports. However, in December international buyers noted a sharp increase in exports of light crude, a rise estimated by some analysts at around 65,000 b/d, or more than 20% of Syria’s total oil exports. Exports of heavy crude are also reported to have risen by as much as 60,000 b/d. This unexpected increase in oil exports coincided with the completion of work repairing a pipeline to carry light crude from northern Iraq across Syria to the Mediterranean coast, leading to speculation that Syria was buying Iraqi oil for domestic consumption in order to export more of its own.

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Crude oil production (’000 b/d av) 1999 2000 1995 1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output 610 588 570 550 540 540 530 530 535 530 510 500 490a a International Energy Agency (IEA) forecast. Source: IEA, Monthly Oil Market Report.

Syria may break UN The pipeline, which connects Iraq’s northern Kirkuk oil fields with the Syrian sanctions on Iraq Mediterranean port of Banias, was closed in 1982 after Syria sided with the government in Tehran in the Iran-Iraq war. With relations between Syria and Iraq improving, the two governments agreed to reopen the pipeline in 1998, and repair work began to restore its capacity to some 1.1m b/d. Since the Gulf War, Iraq has been under UN sanctions which require that revenue from any Iraqi oil sales is channelled through the UN oil-for-food committee, and used for humanitarian aid purchases. Neither Syria nor Iraq has approached the UN sanctions committee seeking approval to use the restored pipeline. There were widespread reports from the end of October 2000 suggesting that Iraq was prepared to offer Syria up to 200,000 b/d of oil through the pipeline at heavily subsidised prices, with Syria using this for domestic consumption, and exporting more of its own supplies. The reported increases in export volumes of Syrian light crude in December has increased speculation that Iraq has indeed begun exporting crude to Syria. Taking into account these reported increases in exports, such a move could bring the Syrian government up to US$3m in daily revenue. On this basis, the net gain, if indeed Syria is to buy oil from Iraq—which would be purchased at a discount (thought to be around 75% of Brent blend)—could amount to around US$440,000 daily or as much as US$160m on a yearly basis.

However, buying oil on such a large scale from Iraq would place Syria on a collision course with the UN Security Council, and the new US administration. The new Secretary of State, Colin Powell—who is due to take up his position from January 20th—has said that enforcing the Iraq sanctions is at the top of his foreign-policy agenda—although they are expected to be repackaged to rebuild their legitimacy. Syria has repeatedly assured the UN and the US administration it does not intend to break sanctions, but oil analysts can find no other explanation for the sharp rise in output.

Syrian-Lebanese oil Lebanon, under its business tycoon prime minister, Rafiq al-Hariri, is also pipeline is to be restored trying to take advantage both of Syria’s own gas reserves, and the newly repaired Iraqi oil pipeline, with plans under discussion in late 2000 for both gas and oil pipelines to supply Lebanon's power stations. It has been proposed under an agreement between Syria and Lebanon to begin the restoration of an oil pipeline damaged during the civil war in Lebanon, which would allow Lebanon to receive crude oil from Iraq. The rehabilitation work is expected to cost between US$2m-3m. According to the Lebanese English language newspaper, the Daily Star, a Syrian-Lebanese technical committee hopes to complete work on restoring the pipeline by the end of January 2001 in order to carry out a first trial supply of oil from the Syrian city of Homs to Tripoli in Lebanon. However, Tripoli’s refinery is expected to need 4-6 months of repair to be restored to former capacity—less than 20,000 b/d.

The Lebanese Energy, Water Resources and Oil Minister, Mohammed Abdul Hamid Beidun, also announced that a contract has been signed with the Syrian government on supplies of its gas to the Lebanese power plant Deir Ammar, for which a new gas pipeline is to be built. The pipeline, which will run from Telkah in Syria to Deir Ammar in north Lebanon is to be built at a cost of US$12m-15m. According to Mr Beidun, by 2002 Syria is expected to supply Lebanon with 6-7m cu metres/day of gas through the new pipeline.

US$1bn regional gas In December the governments of Egypt, Lebanon and Syria signed an pipeline project proposed agreement to build a US$1bn regional gas pipeline to market Egyptian and Syrian gas. The agreement stipulated the establishment of two companies to build and operate the pipeline which would start near Arish in northern Egypt, run under the Mediterranean to Lebanon and then on to Syria with hopes to

transport gas onto Turkey and Jordan. Al-Sharq (Orient) company will build and operate a 250 mile undersea pipeline at a cost of US$800m, running outside Israeli territorial waters, and market Egyptian gas. Israel has long been seeking such an agreement with Egypt, and Lebanon took advantage of current tension between Egypt and Israel over the Palestinian uprising to clinch the deal. The second firm, The Arab company, will build and operate a 250 mile land pipeline at a cost of US$200m and market Syrian and Egyptian gas. The proposed project which could start in six months is expected to take four years to complete. Funding for the project is yet to be clearly spelt out. Egyptian oil minister, Sameh Fahmy, said financing was to be discussed by the three countries, with borrowing “within reasonable limits” an option.

It has been suggested that Lebanon will import a total of 12m cu metres/day of gas through the pipeline. After the initial Lebanon-only stage of the venture— Lebanon is expected to consume 6m cu metres/day with the remaining gas to be shipped across to Syria, giving the country a lucrative new role as a regional transhipment hub to Turkey and Jordan.

Agriculture

Low early rains raise crop A poor start to the rainy season—which begins in September, but is most concerns plentiful between November and March—raised concerns that the country was heading for another drought year, with the implication that crop production and economic growth would be affected. Two years previously, a drought decimated production of major crops such as barley and wheat, tipping the country into recession and leading to widespread rural hardship. However by late-December precipitation levels had improved, and the central city of Aleppo had received 74mm—only some 17% below average for the period. The level of rainfall is critical for the arable sector because according to 1998 figures from the UN Food and Agriculture Organisation (FAO), only 1.2m ha of land is irrigated representing just 19% of the total cultivated area.

Wheat output recovers, but Credible figures for arable production are rarely released by the Syrian barley falls further government, with the most authoritative information instead coming from the FAO. After the 2000 harvest season, the FAO forecast that Syria’s wheat production for the year would be 3.2m tonnes, a sharp rise of 19% on its measure of wheat output the previous year. However, wheat was one of the crops badly affected by the 1998/99 drought, making the 1999 harvest a bad benchmark. Looking at other crops, the FAO noted a continued fall in barley production, forecasting 400,000 tonnes in 2000, less than one-half the equivalent figure for 1998 of 926,000 tonnes. Barley planting areas are the least irrigated, and analysts say producers are still recovering from the 1998/99 drought.

Cotton production is According to Mohammed Suhad Jubara, head of the state-run cotton authority, forecast to rise raw cotton production for 2000 is expected to have increased by 22%. By the end of November 1.033m tonnes of raw cotton had already been purchased by the cotton authority from farmers. Figures issued by the government show expectations that Syria’s cotton fields are forecast to yield a total crop of 1.1m tonnes by the end of 2000 as compared with 900,000 tonnes for the previous

year. This is expected to translate into 375,000 tonnes of ginned cotton, of which some 267,000 tonnes are expected to be exported. The increase in production can be attributed to a combination of an expansion in the final seeded area with appropriate climatic conditions during April and May 2000, and improved cultivation methods—boosting yield per hectare levels. Cotton production is predominantly irrigation fed and therefore is not as dependent on the rains as other agricultural products.

Infrastructure and Industry

More delays to GSM The Syrian Telecommunications Establishment (STE), the state telecoms prov- contracts ider, has further extended a deadline for tenders to build and operate two cellular networks. The original tender, which had a closing date of early September, was extended twice because of a poor response from international companies, who have expressed concern over the regulatory framework, among other factors. Industry analysts say three regional companies met the original deadline: Orascom of Egypt, Investcom of Lebanon, and Telsim of Turkey. In addition, it is understood that three bidders joined the tender by the extended deadline of 31st October. These included a joint Lebanese, Syrian and Kuwaiti consortium—including NMTC (National Mobile Telecommunications Company) of Kuwait; Al-Awael of Saudi Arabia and Cylotel. A decision is expected to be made in the first quarter of 2001, with a contract to be signed in March or April. Meanwhile, there are suggestions that STE is holding out for a bid from one of the global market leaders, rather than accept an offer from a regional company.

The tender is to operate one of two rival networks, each with a capacity of 850,000 users, for 15 years, at an estimated investment cost of US$500m. Much of the reluctance of bidders has also been attributed to the limited success of a pilot venture, launched in February 2000 by Investcom and Ericsson of Sweden, which attracted only 15,000 subscribers, though this was blamed on the high access costs, with subscription charges of S£60,000 (US$1,300) for a line. (See Country Reports, July 2000/October 2000) The pilot scheme was due to end in February 2001 and be replaced by the new networks, but analysts say the continued delay to the tender deadline has made this date no longer realistic.

Large venture starts under Work has started on a large tyre factory in Deraa, close to the southern border new investment laws with Jordan. The project is significant because it is being constructed by a newly formed venture, founded under Investment Law Number 10. The law was passed back in 1991 to encourage foreign investment with a series of tax breaks, but proved unworkable because even with its special provisions, inward investors still faced a mountain of red tape and Soviet-style barriers to investment, for example preventing any repatriation of earnings or profit. Law 10 was eventually revised in early 2000 (See Country Report, July 2000; p.20) easing investment restrictions, with this the first major project launched under the new rules. The Syrian Tyre Company is 82.5% owned by a US-based Syrian expatriate, Frederick Sudan, with Chinese industrial investors holding a further 15%, and the remaining 2.5% taken up by a Damascus businessman, Bashir

Hejazi. When production begins in early 2002 the plant is expected to employ 900 workers, and have an initial capacity of 1.1m tyres a year, intended to supply the local and regional market. Under the revised Law 10, the company will be exempt from profit or earnings tax for seven years.

Bids open for Highway Commercial bids have opened for a contract to build a 100-km four-lane dual- project carriageway from Latakia to Ariha. Industry sources say bids from eight companies have been received. Syria’s Mount Kassioun Company has emerged as the early front runner with the lowest bid at US$171.7m, followed by Kuwait’s Mohamed Abdulmohsin Kharafi & sons (US$206.5m) and Al- Khodary Group of Saudi Arabia (US$243.5m). The awarding of the contract will specifically consider the technical quality of the bids which according to sources will account for 40% of the points awarded in the final evaluation. The project is to be financed by two Kuwaiti based organisations, the Arab Fund for Economic and Social Development (AFESD) and the Kuwait Fund for Arab Economic Development (KFAED).

Efforts to shake-up The government announced it was studying ways to increase the number of housing market apartments available for rent, specifically in Damascus, by introducing a new rent law. A study by the housing ministry completed in 2000 found that the number of empty apartments had doubled since the 1970s, to an estimated 16% of the housing stock. It said that in 1994 there were 2.46m housing units in the country, but just 84% of these occupied. The rise in vacant apartments and a stagnation in real estate activity was attributed in the report to a 1952 rental law, which protects the right of the tenants to such an extent that owners prefer to leave an apartment empty, rather than risk letting. As well as planning to revise this law, the government announced in September a scheme to build 10,000 small 80 square metre apartments, to be sold at S£400,000 (US$8,700) each, with credit facilities offered allowing instalments over 15 years with an interest rate of 4.5% interest.

Financial and other services

Banking sector reform is At the beginning of December, the Regional Command of the Baath Party seen as critical approved a series of groundbreaking reforms for the financial sector (see Economic policy). It was announced that private banks would be legalised, a stockmarket would be created, and the Syrian Pound would have its exchange rate set by the market. Of these developments, the most significant is the decision to reform the banking sector and to allow the establishment of private banks. Privately owned banks, along with many companies, were nationalised back in 1963, when the Baathists first came to power. Faced with time- consuming bureaucracy and poor service, companies and individuals requiring the most basic financial transactions bypassed the institutions to conduct most business for cash, using private banks in neighbouring Lebanon and Jordan to deposit money or take loans. As an example, Lebanese banks are reported to have issued some US$1bn of loans in the past two years to finance trade between Lebanon and Syria alone. As a result, the entire state banking sector is currently thought to have deposits of not much more than US$5bn (at the “neighbouring countries” exchange rate, S£46:US$1).

Consolidated balance sheet of the specialised banksa (S£ ‘000m) Total assets/ Claims on liabilities Deposits economic sectors 1992 218,015 111,014 124,079 1993 390,487 149,733 204,500 1994 376,672 166,364 172,936 1995 432,379 184,952 204,029 1996 490,111 199,856 213,730 1997 546,826 229,128 237,801 1998 570,253 238,095 232,867 1999 (1st half) 569,472 250,036 233,150

a Commercial Bank of Syria, Industrial Bank, Agricultural Co-operative Bank, Real Estate Bank, Popular Credit Bank. Source: Middle East Economic Digest, MEED.

With Mr Assad’s avowed intention to allow the private sector to bring to life the Syrian economy, the re-establishment of private banks has been seen as the first step to establishing a secure environment for investment and crucial to stimulating domestic economic growth. The government has said specialised economic and monetary committees are now preparing draft laws, but the details so far released on the regulatory framework continue to have the government holding a large stake in all banks, and have foreign ownership restrictions maintained. No date has been given for the start of operations, although the expectation is that the first institutions will be running by June 2001.

Regulatory framework

• The government has said a detailed regulatory framework is still being drawn up for private banks, but has outlined basic principles:

• Each bank must have capital of at least S£1.5bn (US$30m), with the government owning at least 25%, and Syrian nationals or institutions owning at least 51%—although no one individual can own more than 5%.

• Up to 49% of a bank may be owned by foreign nationals or foreign institutions— with the express approval of the prime minister. (Although there are some indications that preference will be given—even limited to—Arab nationals and institutions.)

• Banks can issue shares, and be listed on the planned Damascus stock exchange.

• The Central Bank of Syria will supervise bank activities, and approve all board members of the private banks.

Lebanese banks begin The decision to allow private banks came just months after the government doing business in free zones decided as an interim measure to allow several Lebanese commercial banks to open operations in Syria’s seven free-zones, with their activities restricted to companies doing business within the zones. (See Country Report, October 2000) Four Lebanese banks have now received licences, and started operations.

Societe General Libano Européenne de Banque (SGLEB), for example, has opened a branch in the Damascus free zone, and started taking deposits and issuing loans. Several other Lebanese institutions, including Banque Audi and Byblos Bank, are said to be preparing to make a similar move. Because of the strong business links between Syria and Lebanon, Syrian authorities have said they expect Lebanese banks will also be among the first to receive full banking licences.

Government suggests plan Although there were fresh announcements in December that a stockmarket to float currency would be established, no new details of the project have been revealed (See Country Report, October 2000; p.24). Similarly regarding plans to float the Syrian pound, few details were offered beyond a general principle to end the current system of multiple exchange rates, instead having the price of the currency established by the market. Currently Syria has three official exchange rates, the “neighbouring countries” rate of S£46.5:US$1, which covers nearly 85% of the country's transactions, the official rate of S£11.225:US$1, and the customs rate of S£23:US$1. The black-market rate at the beginning of January was some S£48.5:US$1.

New state banks are The move towards banking liberalisation has not taken place unopposed. In to be established September, after the first Lebanese banks began to receive licences, some MPs opposed the plans for private banks and a securities market, expressing fears that opening up to foreign banks would compromise Syria’s financial inde- pendence. These MP’s were able to prevail upon the government and a move was subsequently announced to convert some existing financial institutions into new state banks as a challenge to the liberalisation plans. The state National Savings Fund was converted into a new institution; the Savings Bank, and two similar ventures are planned. The Savings Bank said it would begin to grant loans to industry and tourism projects, and that it had been mandated by the government to oversee the introduction of credit cards. It has subsequently offered a S£200m (US$4.35m) tender for a turnkey project to begin to introduce the cards, with a launch date set at June 2001. Some analysts have suggested that opposition to the private banking initiative, coupled with the efforts to revitalise the state banking sector, was seen as a veiled challenge to the president’s plans, and led to the decisive legislation passed by the Regional Command in December.

New air carrier planned as Traffic through Syria’s main international airport at Damascus increased airport traffic increases sharply in the summer, reflecting a better-than-expected tourist season. Sel- ective figures released by the civil aviation authority to the local press indicated that 167,195 passengers passed through the airport in June 2000, 13% higher than for the same month in 1999. The volume of cargo handled increased by 1.4% over the same period. In the wake of these figures, it was announced that a new airline for internal and regional flights was to be established, breaking the monopoly of Syrian Airlines over domestic air travel. The new carrier, which is yet to be named, will be 25% owned by Syrian Airlines with private sector investors taking up the remainder. The airline is expected to start with two aircraft, growing to ten, and serving Syria’s major cities as well as some in neighbouring Lebanon. Tickets will be priced at the same level as Syrian

Airlines. Meanwhile, according to the Syrian official news agency (SANA), Syria has ordered three civilian radar systems worth a total of US$29m from the Anglo-Italian company AleniaMarconi Systems to be installed at Damascus, Aleppo and Latakia airports. Installations of which should be completed by mid-2002.

Internet web crawler

President Bashar Assad’s pet project is to improve Internet use in Syria. While in the shadow of his father, he devoted energies to the Syrian Computer Society, obtaining permission for select institutions to have Internet access, despite the concerns of those in power. A government ISP (Internet Service Provider)—under the state telephone company—was established in 1997, but subscription limited to state institutions, companies, and the offices of selected professionals. Costs were prohibitive, with an installation fee of S£5,000 (US$108), a monthly subscription of S£2,000 (US$44), and an hourly access fee of S£120 (US$2.60). Consequently, Syria has one of the lowest Internet penetration rates in the region, with less than 8,000 subscribers out of a population of 16.6m. In July 2000—after Mr Assad succeeded his father—monthly rental fees were cut by one-half, and the government committed itself to increase access to 200,000 subscribers by the end of 2001 as a handful of Internet cafes opened. However, security chiefs have set limits to the Internet access. The state telephone company remains the only ISP, ensuring the regime can monitor and intercept all communication, and bar access to Israeli as well as some US sites. Syrians cannot obtain access at home, and institutions with multiple users are required to keep meticulous records. The small number of Syrians who try and get round the rules by dialling ISPs in neighbouring Lebanon face heavy fines if caught. There are reports one European mission had its telephone lines cut earlier in the year for making regular overseas calls to obtain Internet access.

Foreign trade and payments

High oil prices push visible High prices for crude oil for most of 2000 have continued to feed through to trade into surplus Syria’s foreign accounts, having a strong impact because oil typically accounts for between 55-60% of all export revenue. According to the government newspaper, Tishreen, the country recorded a trade surplus for the first quarter of 2000 of S£2.5bn—equivalent to US$54.5m at the “neighbouring countries” exchange rate. Tishreen attributed the surplus to higher government revenue from international oil sales, saying that earnings from crude exports in the first quarter stood at S£35bn (US$761m)—a figure in line with EIU estimates that total oil revenue for 2000 will reach around US$3bn. Tishreen said the first quarter oil earnings were 50% higher than for the same period in 1999. It offered two other export revenue figures for the first quarter, noting that textile exports stood at S£5.2bn (US$113m), while agricultural exports stood at S£2.1bn (US$46m).

Pressure is put on In November neighbouring Lebanon began to sharply cut its import tariffs, in tariff barriers an effort to revive economic growth. Tariffs on raw materials imported by

industrialists were cut to zero. Given the porous nature of the Syrian-Lebanese border, many in Syria’s business community grew concerned that their own markets would be under threat, because most raw materials imported into Syria face at least a 15% customs duty. These fears were given high-profile coverage in a front-page article in Tishreen. The government responded at the end of December, announcing that it would begin to cut customs duties, specifically on imported raw materials, but denying a link with the Lebanese move. The issue was a timely indication of the growing interdependence of the two neighbouring economies. Under a 1998 agreement, customs duties on industrial goods traded between Lebanon and Syria are due to be reduced by 25% a year bringing them to zero by 2002 and creating a virtual customs union between the states. Many in Syria fear the deal will expose the uncompetitiveness of domestic production methods. Meanwhile members of the Lebanese business community complain Syria is not fully adhering to the agreement. Citing, as an example, illegal “customs” tariffs charged on all goods passing from Lebanon into Syria—Lebanese exporters are forced to pay a bribe of up to US$100 for every truck entering Syria across the main Masnaa crossing, even for goods in transit.

Towards an Association Agreement with the EU

Reaching a deal on German debt was the last important hurdle for Syria to improve its relations with the EU, having settled similar debt problems with France in 1996, and Italy in May 1990. In late December 2000, the planning minister, Issam Zaim, travelled to Brussels for the fifth round of talks on signing an Association Agreement—part of the EU’s initiative to strengthen ties with Mediterranean states. To make progress, Syria must commit to reducing trade barriers over 12 years, improve its human rights record, respect intellectual property rights, as well as adhere to other fiscal, economic and social standards. The December talks were principally to discuss the second round of funding (MEDA II), to consider progress and structural adjustments to shift from a command to a market economy. Under MEDA I, which ran from 1996 to 2000, the government was granted €105m, but of that only €35m of projects were even planned. At the end of December, following the German debt settlement, an agreement was signed between the EU and Syria to provide funding to train experts on archaeological restoration for a three year period. The 2m grant will help to preserve Syria’s cultural heritage and promote excavation activities, in turn helping to develop Syria’s tourism industry and providing a boost to the economy. However, despite the recent announcements concerning reforms, EU officials continue to remain doubtful that Syria will make the progress required in order to join the proposed free-trade area by 2010.

Relations with Germany Taking further advantage of strong oil revenue, the government made fresh improve over debt moves in the fourth quarter of 2000 to tackle the debt legacy of the past three decades. Syria owes some US$22bn in foreign debt, much of which—the product of Cold War loans from the former Soviet Union and East Germany— has been disputed by Syria, claiming that these states no longer exist. In October, after extensive negotiations, an agreement was reached with Germany over debts of some US$800m—most of which was owed to what was then East Germany. Syria stopped debt servicing after German reunification in 1989. Under the terms of the new agreement, DM1,300m (US$572m) of debts will be

repaid over 20 years ending in 2020, with a five-year grace period. Germany also agreed to exempt Syria from a further US$170m of mostly interest payments. The agreement led to an immediate thaw in relations between the two countries, with the German Chancellor Gerhard Schroeder paying a state visit and offering a US$27m loan to co-finance water projects. There were also hopes in Damascus of an improvement in export credit facilities.

Electricity network The European Investment Bank (EIB), the EU’s long-term financing institution, receives loan for upgrading has resumed lending to Syria. Following the settlement of the German debt issue, Mr Schroeder announced that his country was lifting its reservations regarding financing by the EIB. The end to German opposition has paved the way for much needed economic assistance for Syria. A loan for €75m was signed on December 14th 2000 during an EIB delegation visit to Syria headed by the EIB vice-president, Francis Mayer. The loan is to be used for electricity substation and distribution projects as part of a US$238m project—to provide for the construction and expansion of 21 substations, and the laying of 733 km of overhead powerlines and 40 km of underground cables—aimed at improving the local electricity network. It is to be financed over 20 years with a five- year grace period and a subsidised rate of interest.

Debt with Iran is settled In another move to take advantage of strong oil revenue, the government settled a long running debt with Iran, which dated from the 1980s, when Iran sold oil to Syria on easy credit terms in return for diplomatic backing in Iran's eight-year war with Iraq. In 1998 Iran agreed to write off interest arrears, which represented close to one-half of the US$1.02bn debt, in exchange for Syria agreeing to repay US$500m over 10 years. Iranian finance authorities said Syria has now chosen to settle the rescheduled debt in full. The agreement reached is reported to involve Syria paying its debt by “financing” Iranian investment in Syria—the money repaid to Iran would be used to finance Iranian projects in the country. Syrian ministerial sources said the move was taken to improve political and trade relations, and pointed to planned Iranian involvement in a number of industrial projects, including a US$200m cement plant in Homs.

Addressing external debt Syria’s large and unresolved external debts and poor repayment record have issues is vital long hampered its access to international capital markets. Insiders say the government of Mohammed Mustapha Miro has taken the decision to settle major debts on the promise that the door will then open to bilateral, multi- lateral and ultimately private-sector financing. The decision to take advantage of the export revenue windfall while oil prices remain high to address external financing issues was of paramount importance. If the oil markets become less favourable to Syria, it will need to be on good terms with potential creditors to seek financing deals that would allow the president, Bashar al-Assad, to continue his reform program.

The government also pushed forward in the fourth quarter of 2000 with efforts to improve regional and international trading relations. At the regional level, trade agreements were signed with Egypt and Bahrain, while on a wider level, an agreement was signed with China to improve trade relations, with China expressing an interest in buying Syrian crude.