Country Report

Syria

September 2010

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Syria

Executive summary 3 Highlights

Outlook for 2010-11 4 Political outlook 5 Economic policy outlook 6 Economic forecast

Monthly review: September 2010 9 The political scene 10 Economic policy 13 Economic performance

Data and charts 15 Annual data and forecast 16 Quarterly data 17 Monthly data 18 Annual trends charts 19 Monthly trends charts 20 Comparative economic indicators

Country snapshot 21 Basic data 22 Political structure

Editors: Rory Fyfe (editor); Robert Powell (consulting editor) Editorial closing date: August 26th 2010 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 2 Syria Al Malkiyah IRAQ k a Railway Main road International boundary Main airport Capital Major town Other town Territory occupied by Israel UN buffer zone established May 31st 1974 h c o i l K

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e h T The Economist Intelligence Unit Limited 2004 © The Economist Intelligence Unit Limited 2010

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 Syria 3

Executive summary Highlights

September 2010

Outlook for 2010-11 • The president, Bashar al-Assad, is expected to remain in power in 2010-11 and, despite some tensions within the regime, there is no significant threat to his rule. Some limited domestic political reform is expected. • Relations with the West and leading Arab states are expected to improve, albeit with some setbacks. Rapprochement will be overshadowed by ongoing tension between the US and Iran, Syria's closest ally. • It is unlikely that Israel's hardline government will seriously negotiate to return the occupied Golan Heights during the forecast period, but Israel and Syria may both have an interest in being seen to resume indirect talks. • As the global recession ends and gas production increases, Syrian real GDP growth will rise to 4% in 2010 and 4.6% in 2011. • Inflation will rise to an annual average of 6.3% in 2010-11 as global commodity prices increase and value-added tax (VAT) is introduced, although it will remain below its 2008 peak. • The current-account surplus will widen to an average of US$770m (1.2% of GDP) in 2010-11, as non-oil exports grow and booming tourism boosts the non-merchandise surplus.

Monthly review • Iran has been seeking to shore up its alliance with Syria. Syria has been courted by regional and international adversaries of Iran after it emerged that the Special Tribunal for Lebanon may not indict Syrian officials. • The government has passed a law allowing the establishment of investment banks, albeit with a high minimum capital requirement. EFG-Hermes, an Egyptian investment bank, claims to have already begun operations. • The cabinet has approved, in principle, a third mobile-phone licence, and the two incumbent mobile-phone firms, Syriatel and MTN, have reported healthy increases in turnover in the first half of 2010. • The EU has signed an agreement with the State Planning Commission for a €129m (US$168m) aid programme running from 2011 to 2013, including €20m to support an Association Agreement that is under negotiation. • Oil production rose in the first half of 2010 to 386,000 b/d, compared with 375,000 b/d in the first half of 2009, owing to rising production at new fields. This rise will probably be temporary, as the new fields are relatively small. • Natural gas consumption has increased sharply as higher domestic production and increased supplies from Egypt have allowed Syria to increase gas supplies to power stations and to reduce imports of fuel oil.

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 4 Syria

Outlook for 2010-11 Political outlook

Domestic politics The president, Bashar al-Assad, and his ruling Baath party are expected to retain their grip on the country, supported by key elements in the security services. The core of the elite is drawn largely from Mr Assad's Alawi sect, and any move against him would risk endangering its hold on power. Underlying resentment of Alawi rule and friction between reformers and conservatives mean that tensions within the regime are likely to persist. Only limited progress is expected on political reform in 2010-11. Although some promised measures may be implemented, it is hard to envisage any steps being taken that would significantly diminish the Baath party's hold on power. Mr Assad initially advocated political reform when he came to power in 2000, but he has acknowledged that the pace of reform has been slow since then. He has pledged to increase popular participation in the political process by introducing a political parties law, which will create a second chamber of parliament, the Majlis al-Shura—in addition to the existing lower chamber (the Majlis al-Shaab). He also pledged to devise a local administration law to bring about greater decentralisation. Although there have been few visible signs of progress with these reforms, a reduction in international pressure on Syria owing to improving relations will make it easier for at least a few cosmetic changes to be made domestically. However, the security and intelligence services, which are pervasive and effective, will continue to arrest activists demanding democratic reform and Syria faces numerous accusations of torture and unfair trial of political prisoners. The various opposition-in-exile groups and domestic critics are unlikely to pose a substantive threat to the government.

International relations After a period of diplomatic isolation in 2005-07, Syria has developed steadily better relations with many Western and regional states—notably France, Turkey, Saudi Arabia and Lebanon. One result is that the EU is now ready to sign its long-delayed Association Agreement with Syria, and talks to resolve some outstanding issues with the agreement are ongoing. The catalysts for the improvement in relations include perceptions that Syria is playing a more constructive role in Lebanon, and a desire by Western and other Arab countries to weaken Syria's alliance with Iran. Relations with the US have also improved and although US sanctions on Syria were renewed in May, the US has withdrawn its objections to Syria's accession to the World Trade Organisation. However, Syria's international rapprochement could be upset by a number of issues, in particular Syria's continued commitment to a strong relationship with Iran and its ongoing support for Hizbullah, a Lebanese militant group, and Hamas, a Palestinian group. An ongoing investigation by the International Atomic Energy Agency into allegations that Syria has a nuclear programme also poses a threat to relations. Improving relations could also be held back by opposition to closer ties with Syria within the US Congress—a group of Republican senators are intent on blocking US concessions to Syria, and a new

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US ambassador to Syria has been nominated after a hiatus of five years but has yet to be confirmed by the Senate. Despite this, recent events bode well for Syria's relations with Lebanon and, by extension, for its broader international profile. The prime minister of Lebanon, Saad Hariri, has made a series of friendly visits to Syria, despite earlier animosity. And there have been suggestions that Syrian officials may not be implicated in the UN inquiry into the killing of Rafiq Hariri (Saad's father), a former Lebanese prime minister. Syria has expressed its willingness to resume peace talks with Israel, but only on the understanding that peace would be based on Israel's full withdrawal from the Golan Heights (captured from Syria in 1967). However, there is little popular or parliamentary support in Israel for a withdrawal. Any peace agreement would probably require Syria to end its strategic alliance with Iran and its support for Hizbullah and militant Palestinian groups. This would be politically difficult, although not impossible, for Syria to deliver. Attention, over the next year at least, is also likely to be focused on the Israeli-Palestinian negotiations. A peace agreement is thus unlikely in 2010-11.

Economic policy outlook

Policy trends The gradual liberalisation of Syria's centrally planned economy is expected to continue under the leadership of the deputy prime minister for economic affairs, Abdullah al-Dardari. However, there remain influential officials who oppose this process, and these conflicting interests will inhibit policy formulation and implementation. There are also powerful members of the business elite who benefit from the status quo and might resist changes that would threaten their advantages. The removal of Tayseer al-Reddawi as head of the State Planning Commission in January 2010, apparently over public criticisms he made about policy implementation, indicates that the economic debate remains highly charged. The overriding policy challenge will be to offset the impact of the decline in oil production by developing other sectors of the economy, particularly those that can boost export earnings in the medium term, such as tourism. This will require making established state-owned and family businesses more dynamic and encouraging entrepreneurship and investment. Moves intended to increase domestic and foreign investment include offering infrastructure investment opportunities to private investors, expanding the Damascus Securities Exchange, relaxing foreign-currency restrictions and boosting bank lending. There are also plans to cut government subsidies, which are burdensome and inefficient, particularly fuel subsidies.

Fiscal policy The fiscal deficit widened to 9% of GDP in 2009, mainly because of a substantial increase in capital expenditure that year. The deficit is expected to narrow to an average of 2.9% of GDP in 2010-11 as average oil prices and thus revenue increase and tax receipts rise. Fuel subsidies have been substantially reduced, but they remain a fiscal burden, as Syria imports a high proportion of the refined products it consumes. After much delay, a value-added tax (VAT) is likely to be introduced in 2011—probably at a rate of around 10%—boosting

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government revenue. The government may also receive considerable windfall revenue from converting existing mobile-phone contracts into licences and awarding a licence for a third operator. The cabinet approved this licensing process in August 2010, and the Economist Intelligence Unit has therefore revised up its forecast for revenue in 2011. Plans to reform public enterprises— most of which are unprofitable—by transforming them into autonomous companies with their own budgets, should also have a net positive impact on the public finances, and some privatisations are possible, particularly if the Damascus Securities Exchange displays more vibrancy. Expanding revenue should enable the government to maintain relatively high investment spending while reducing the budget deficit.

Monetary policy The Central Bank of Syria is expected to continue to implement monetary reform and gradually gain greater autonomy. It has experimented with issuing Treasury bills but only uses them sporadically to finance specific development projects, although it plans to issue them on a regular basis by the end of 2010. There are also plans to launch a local bond market, increasing the number and sophistication of monetary tools and paving the way for the issue of corporate bonds. The Central Bank is likely to continue to reduce the restrictions on foreign-currency transactions, a process that it started in early 2008, in order to facilitate investment. These measures should also help to develop and modernise the banking sector, in which privatised banks (which can now be 60% foreign owned) are playing an increasing role.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2008 2009 2010 2011 Real GDP growth World 2.7 -0.8 4.5 3.6 OECD 0.4 -3.4 2.5 1.6 EU27 0.6 -4.2 1.4 1.1 Exchange rates ¥:US$ 103.4 93.7 89.5 89.5 US$:€ 1.470 1.393 1.293 1.235 SDR:US$ 0.629 0.646 0.661 0.672 Financial indicators € 3-month interbank rate 4.65 1.23 0.82 0.93 US$ 3-month commercial paper rate 2.18 0.26 0.22 0.35 Commodity prices Oil (Brent; US$/b) 97.7 61.9 80.0 78.5 Cotton (US cents/lb) 72.1 62.7 84.9 81.5 Food, feedstuffs & beverages (% change in US$ terms) 28.3 -20.4 0.4 0.8 Industrial raw materials (% change in US$ terms) -5.1 -25.6 32.9 3.4 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. We forecast that world real GDP growth (at purchasing power parity exchange rates) will be 4.5% in 2010, declining to 3.6% in 2011 as the effect of government stimulus packages fades. Growth in the euro area, the main market for Syrian

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exports is only forecast to average 1.1%. The benchmark dated Brent Blend is forecast to rise to US$80/barrel in 2010 but to fall back to US$78.5/b in 2011.

Economic growth Preliminary Central Bank data have put real GDP growth at 5.9% in 2009. However, our growth estimate, at 5%, is lower than Central Bank's because no explanation for the surprisingly strong growth has been given and previous growth figures have been revised down. The data suggest that the effect of the global recession was mitigated by strong government spending. We forecast that growth will average 4.3% in 2010-11. This will be driven by rising foreign investment into Syria as the economy is opened up and international relations improve, which will also support fixed investment, although the latter will be held back in the short term by the ongoing global squeeze on credit. Government consumption growth will slow in 2010-11 as the fiscal stimulus is withdrawn. Private consumption growth will pick up as the private sector expands and as an expected recovery in the agricultural sector in 2011 boosts incomes. However, if there is a significant improvement in security in Iraq (not our core scenario) once the new government is formed, a sizeable number of the 1m or so Iraqi refugees in Syria may return home, thereby depressing consumption. Growth in imports and exports will resume in 2010-11. We have slightly revised up our forecast for real GDP growth in 2011 to reflect the boost to investment that will be provided by the award of a third telecoms licence. On the sectoral side, a poor harvest in 2010 is likely to lead to little growth in agriculture, although there may be some recovery in 2011, and water shortages will remain a risk. Industry will be boosted by investment in the oil and gas sector, which will help to limit declining output in mature fields and boost production in new fields, as well as in the transport sector and electricity generation. Services will continue to grow, driven largely by a strong increase in tourist arrivals. Construction will expand, although securing financing for some projects may be difficult and concerns will grow about the real estate market overheating.

Inflation Consumer price inflation is expected to rise in 2010-11, as global commodity prices recover slightly, government subsidies on fuel are reduced and VAT is finally introduced—although food, a major component of the consumer price index, may be exempted. We forecast that annual average inflation will be 6.3% in 2010-11, up from just 2.6% in 2009, but well below the peak of 15.7% in 2008. Rental prices are already falling as Iraqi nationals return home. The rate of return could accelerate, which would curb inflation, but this would require a significant improvement in security conditions in Iraq. We have slightly revised up our forecast for inflation owing to rising international food prices.

Exchange rates The pound has been pegged to a basket of currencies based on the IMF's special drawing rights (SDR) since October 2007, and although this regime is less rigid than the previous peg to the dollar, the authorities are unlikely to let the pound float freely, because they place a high priority on exchange-rate stability. Owing to our expectation that the euro will weaken in 2010-11 and the rough peg to the SDR will be maintained, the Syrian pound is projected to depreciate slightly against the US dollar to an average of S£46.9:US$1. The

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depreciation will be checked by Syria's narrowing current-account deficit. The dominant position of the state-owned banks and the Central Bank's control over foreign-currency transactions (even as some laws are relaxed) mean that the regime is well placed to control the value of the currency. The Central Bank's foreign-exchange reserves are healthy, at US$17.4bn (about 13.5 months of import cover) at end-2009—new IMF data show that foreign-exchange reserves have increased more than threefold now that reserves from the Commercial Bank of Syria, which were transferred to the Central Bank, have been included.

External sector We expect export earnings to recover in 2010-11 to an average of US$13.3bn, although this is still below the oil-price-related peak of 2008. In recent years, drought has seriously constrained production and therefore exports of cotton and textiles. The drought has now eased, but the 2010 wheat crop is expected to be disappointing. Oil production is increasing at a number of small fields but declining at the larger, mature fields, with the net effect that output may pick up in the short term to an average of 382,000 barrels/day in 2010-11. The net impact of changes in oil prices on the trade balance is limited, because Syria's imports of refined products are about equal in value to its exports of crude oil. A domestic factor affecting the trade figures is the relaxation of foreign- exchange controls, which has led to more non-oil exports moving out of the black economy and being officially recorded. Overall, the trade deficit will narrow slightly to an average of US$633m in 2010-11, and as a proportion of GDP it wi ll fall to an average o f 1%. We have revise d down ou r fo re casts fo r the deficit in the light of new data for 2008 showing that fuel imports were much lower than expected. After falling in 2009, most of the components of the non-merchandise account, both credits and debits, will rise again in 2010-11. In particular, tourism receipts will grow strongly as a result of improving international relations and a developing tourism infrastructure. The non-merchandise surplus is expected to widen over the forecast period, causing the current-account surplus to grow slightly, to an average of US$770m (1.2% of GDP).

Forecast summary (% unless otherwise indicated) 2008 a 2009 b 2010c 2011c Real GDP growth 4.3 5.0 4.0 4.6 Oil production ('000 b/d) 386.6 375.0 a 377.1 386.2 Gross agricultural production growth -8.7 12.0 -1.0 2.5 Consumer price inflation (av) 15.7 2.6 a 5.9 6.8 Government balance (% of GDP) -2.5 -9.5 a -5.7 -0.3 Exports of goods fob (US$ bn) 15.3 11.8 13.0 13.7 Imports of goods fob (US$ bn) 16.1 12.6 13.6 14.2 Current-account balance (US$ bn) 0.1 0.4 0.7 0.9 Current-account balance (% of GDP) 0.1 0.7 1.2 1.3 External debt (year-end; US$ bn) 7.1 b 7.5 7.9 7.9 Exchange rate S£:US$ (av) 46.6 46.7 a 46.7 47.0 Exchange rate S£:¥100 (av) 45.1 49.8 a 52.2 52.6 Exchange rate S£:€ (av) 68.5 65.1 a 60.4 58.1 Exchange rate S£:SDR (end-period) 69.9 72.1 a 71.3 68.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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Monthly review: September 2010 The political scene

Iran seeks to shore up alliance Iran made intensive efforts during August to bolster its strategic alliance with with Syria Syria, following indications that the Syrian president, Bashar al-Assad, could be considering a shift in policy that might be harmful to the regional interests of the Islamic Republic. Iranian suspicions have been aroused by reports that the Special Tribunal for Lebanon (STL) is likely to indict members of Hizbullah, a Lebanese political and military movement that swears allegiance to the Islamic Republic's supreme leader, for involvement in the assassination in 2005 of Rafiq Hariri, a former Lebanese prime minister, and by the joint visit to Beirut, the Lebanese capital, at the end of July by Mr Assad and the Saudi king, Abdullah bin Abdel-Aziz al-Saud (August 2010, The political scene). The UN International Independent Investigation Commission, which was the precursor of the STL, devoted much of its initial efforts to examining the hypothesis that Syria was responsible. Syrian intelligence services had been the dominant force in Lebanese security over the previous three decades, and relations between Syria and the late Mr Hariri had become increasingly tense in the months leading up to the assassination. However, as the investigation dragged on, doubts began to surface as to whether there was sufficient evidence to indict Syrian officials. Earlier this year it emerged that the STL had requested interviews with a number of members of Hizbullah. This has led the leader of Hizbullah, Hassan Nasrallah, to accuse the West of seeking to use the STL against Hizbullah and its principal backer, Iran. He has also insinuated that the West has decided to exonerate Syria as part of a wider diplomatic game, whereby the West would reward Mr Assad for breaking his alliance with Iran by endorsing the restoration of Syrian hegemony over Lebanon. Mr Nasrallah gave a televised presentation on August 9th in which he suggested that there were sufficient grounds for the STL to investigate the possibility that Israel had been responsible for the assassination, and that Israel had manipulated mobile-phone intercepts to implicate Hizbullah. Hizbullah has passed documents on to the STL that it claims provide evidence for its allegations against Israel. Following Mr Nasrallah's presentation, Iran dispatched two senior officials to Beirut and Damascus, the Syrian capital: first the vice-president, Ali Akbar Velayati, and then the foreign minister, Manouchehr Mottaki. Mr Velayati said that the main purpose of his visit was to express appreciation for Syria's role in supporting the resistance against Israel, referring to Hizbullah and a number of Syria-based Palestinian factions that continue to affirm their commitment to armed struggle. Mr Mottaki was similarly fulsome in his praise of Syrian diplomacy, and he even suggested that Syria should be added to the group of countries negotiating with Iran about its nuclear programme (the so-called P5+1, comprising the five permanent members of the UN Security Council and Germany). On August 14th the official Syrian Arab News Agency reported that

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Mr Assad had conferred on the telephone with the Iranian president, Mahmoud Ahmadinejad. Mr Assad has reason to be satisfied with being courted by both Iran and its regional and international adversaries, and he is unlikely to embark on any dramatic shift in policy. The apparent switch in focus of the STL to Hizbullah from Syria has been beneficial for Mr Assad, but he will have to weigh carefully the risk that an actual indictment could provoke instability in Lebanon. Syria is acutely aware of security in Lebanon and should the situation there revert to civil war there is a possibility that Syria might feel forced to intervene as it did in the 1970s, with international backing. However, Mr Assad has given no indication that he wishes to revert to Syria's previous role in the country, and any such intervention could entail a potentially bruising conflict with Hizbullah. Mr Assad is more likely to focus instead on heading off any crisis over the STL through sustained pressure on the Lebanese prime minister, Saad Hariri (a son of Rafiq), to withdraw his support for the tribunal in the interest of safeguarding stability. Such a task will be made easier by the waning support from Saudi Arabia and the West for the STL.

Economic policy

Capital bar set high for The government has passed a law allowing the establishment of investment

investment banks banks in Syria for the first time. The move complements the strategy of promoting the private sector, but the minimum capital requirement could deter prospective applicants. Mr Assad issued a legislative decree (No. 56) at the end of July enabling the establishment of investment banks, within the framework of Law 28 of 2001, which paved the way for the creation of a private commercial banking sector in the country. The measure follows the launch of the Damascus Securities Exchange last year, and seems to be a response to the interest shown by a number of regional investment banks and private-equity firms in taking advantage of Syria's growth potential. The government has announced the outlines of a five-year plan to go into effect from 2011, which envisages the private sector contributing 60% of total investment of US$130bn. Perhaps mindful of the risks associated with investment banking in the wake of the global financial crisis in 2008, the government has set stringent conditions for the formation of such institutions in Syria. The minimum capital requirement has been set at S£20bn (US$426m), and the law states that an investment bank may not start operations until this has been paid in full. This threshold is rather high by emerging-market standards. The law also includes the provision that the funds raised from loans, bonds and investment certificates must not be more than ten times paid-up capital. The law does not directly specify the level of foreign ownership allowed, but it does state that a foreign bank's equity stake in a financial institution is normally 25%, although this can be raised to 49%, subject to the approval of the cabinet. Another clause states that the cabinet has the discretion to allow the non-Syrian share to increase in line with the provisions of Law 28 and its amendments—the law was changed at the start of 2010 to allow foreign investors to own up to 60% of local commercial banks, above the previous

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threshold of 49%. No individual (including direct relatives) may own more than 5% of an investment bank. Investment banks will operate under the supervision of the Central Bank of Syria and the affiliated Credit and Monetary Council. The list of activities that the investment banks will be authorised to conduct include: • financial, administrative, legal and economic advisory services to both public- sector and private-sector clients; • consultancy for developing banking services; mergers and acquisitions advice; project finance, including build-operate-transfer (BOT) schemes and public- private partnerships; • trading in securities; • investing up to 15% of paid-up capital in other companies or funds; • issuing guarantees; • opening investment accounts for pension funds; and • setting up affiliates to carry out activities such as brokerage and asset management, which are licensed by the Syrian Commission on Financial Markets and Securities (SCFMS). The SCFMS was set up according to the 2005 capital market law to oversee non- bank financial intermediaries. It has the authority to license seven activities, each with their own minimum capital requirements, ranging from S£20m (US$426,000) for advisory services to S£350m (US$7.4m) for initial public offering (IPO) management.

Total assets of private commercial banks (S£ bn; end period) 500

400

300

200

100

0 2004 05 06 07 08 09 10(Apr) Source: Central Bank of Syria. In focus

EFG-Hermes looks to be a pioneer investment bank The absence of legislation covering investment banking was highlighted earlier this year when Egypt's EFG-Hermes, one of the region's leading players in this field, announced the opening of its office in Damascus, the Syrian capital, and the launch of a private-equity fund. It said at the time that it would own 70% of the venture, with the remaining 30% to be held by Firas Tlas, a prominent Syrian businessman,

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and that it would offer its "full range of world-class investment banking, private- equity, brokerage and asset management services". The announcement prompted the Syrian Commission on Financial Markets and Securities (SCFMS) to issue a statement that it had not received any applications from EFG-Hermes to conduct capital market activity. In June a statement was issued in the name of EFG Hermes Syria, announcing the closure of the venture's first transaction. This involved the acquisition of a 50% stake in Syria's Palmyra Real Estate Development Company by Egypt's Sixth of October Development & Investment Company for US$40.5m. EFG-Hermes acted as the sole buy-side adviser. Palmyra, which is a subsidiary of Mr Tlas's MAS Economic Group, owns about 2.6m sq metres of "prime real estate" in Damascus, Aleppo and Latakia, according to the announcement, which cited Hazem Badran, the chief executive of EFG-Hermes Syria. EFG-Hermes has made it clear that it sees great potential in the Syrian economy, whose development has been held back for decades by financing constraints. However, it is not yet clear whether the Egyptian firm, or indeed any other investment bank, is prepared to commit the level of paid-up capital specified in the new law—according to its most recent annual statement, EFG-Hermes's own paid-up capital is E£1.9bn (US$340m), somewhat short of the Syrian requirement. There also appear to be questions to answer over the shareholding structure.

Mobile-phone firms deliver Syria's two mobile-phone operators have reported healthy increases in their

increased revenue to the state turnover in the first half of 2010, which has translated into similar growth in revenue streams to the state, by virtue of the BOT contracts that govern their activities. According to unaudited earnings presented by The Syria Report, a local economic periodical, year-on-year revenue earned by Syriatel, the larger of the two operators, rose by 11.2% to S£25.4bn, while the turnover of the other operator, the local affiliate of South Africa's MTN, rose by 12.2% to S£20.7bn. The 15-year BOT contracts, which came into force in 2001, stipulate that 50% of gross revenue is paid to the state-owned Syrian Telecommunications Establishment (STE), most of whose profits are appropriated by the state. The total amount handed over by the operators to the STE in the half-year period was S£22bn. This arrangement is likely to change next year when the regulator, which is being established according to the recently passed telecommunications law (July 2010, Economic policy), starts its operations. In late August the cabinet approved, in principle, the process of introducing a third licence through pre- qualification, technical qualification and an auction. The existing contracts would also be converted to licences and there would no longer be a requirement to pass on revenue to the STE. This step has been long-expected, but the cabinet approval should see real progress on awarding the third licence in the coming months.

Mobile-phone use, 2009 Users per 100 people CAGR, 2003-08 (%) UAE 232.1 23.7 Bahrain 199.4 19.4 Qatar 175.4 38.2 Saudi Arabia 174.4 37.4 Oman 139.5 37.6 Israel 125.8 4.6

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Mobile-phone use, 2009 Users per 100 people CAGR, 2003-08 (%) Kuwait 99.6 9.8 Jordan 95.2 29.9 Tunisia 94.9 21.2 Algeria 93.8 46.3 Turkey 83.9 12.6 Morocco 79.1 22.1 Libya 77.9 58.5 Iran 70.8 59.6 Egypt 66.7 48.6 Iraq 64.2 103.0 Syria 44.3 32.8 Sudan 36.3 71.0 Lebanon 36.1 11.5 Palestinian Territories 28.6 4.7 Yemen 16.3 21.0 a Compound annual growth rate. Source: International Telecommunication Union.

EU provides more aid for The EU has reaffirmed its commitment to supporting economic reforms in

reforms Syria, despite delays in signing an Association Agreement. In early August the State Planning Commission signed an agreement with the EU for the fourth phase of a National Indicative Programme (NIP), which will run from 2011 to 2013. The EU will provide €129m (US$168m) in aid during this phase, including €20m to support implementation of the Association Agreement. The remaining funds will be used to support administrative reforms, to foster the development of entrepreneurship, for education and for development in deprived rural areas. Syria initialled an Association Agreement in 2004, but the formal signing was delayed by the deterioration in political relations with the EU. In October 2009 the EU indicated that it was ready to sign the agreement, but the Syrian government said that it needed more time to study the document. The agreement, which is part of the Barcelona process launched in 1995, includes provisions for the phased elimination of tariffs over a 12-year period (November 2009, The political scene).

Economic performance

Oil production rises thanks to Crude oil production increased modestly year on year in the first half of 2010

output from new fields as output from newly developed fields outweighed the continued decline in output from fields operated by an affiliate of Royal Dutch Shell (UK/Netherlands) in the Euphrates Basin. According to figures released by the Ministry of Petroleum, total output of crude oil and condensates was 386,000 barrels/day (b/d) in January-June 2010, compared with 375,000 b/d in the corresponding period of 2009. The Syria Report provided a breakdown of production by company, which showed that most of the extra output came from the state-owned Syrian Petroleum Company (SPC), Dijla Petroleum Company, Hayan Petroleum Company as well as through increased output of condensates.

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 14 Syria

Crude oil production (b/d unless otherwise indicated) 2009 2010 Market share Company Jan-Jun Jan-Jun % change (%) Syrian Petroleum Company 189,760 192,106 1.2 49.7 Al Furat Petroleum Company 106,337 101,713 -4.3 26.3 Deir Ezzor Petroleum Company 28,365 27,168 -4.2 7.0 Oudeh Petroleum Company 20,473 17,554 -14.2 4.5 Dijla Petroleum Company 9,986 16,824 68.5 4.4 Kawkab Petroleum Company 12,669 13,869 9.4 3.6 Hayan Petroleum Company 1,867 6,646 255.9 1.7 Ebla Petroleum Company 0 1,280 – 0.3 Abu Kamal Petroleum Company 0 225 – 0.1 Condensate 5,061 8,883 75.5 2.3 Total 375,282 386,268 2.9 100.0

Sources: Ministry of Petroleum; The Syria Report.

In the table above, Dijla is the operating arm of UK-listed Gulfsands Petroleum and has newly developed fields in its Block 26 concession in the north-east. Hayan Petroleum Company is an affiliate of INA-Naftaplin of Croatia, and Al Furat Petroleum Company is operated by Shell. The oil from new fields and from enhanced production projects has enabled Syria to arrest the sharp decline in output since production from Al Furat's fields peaked in the late 1990s. However, most of the new discoveries have been relatively modest, and it is likely that Syria's crude oil output will begin to fall once more in the next few years.

Natural gas consumption The ministry has also published some figures for natural gas production and

increases sharply consumption in the first half of 2010. The most significant change has been a big increase in natural gas supplied to power stations, from 2.2bn cu metres in January-June 2009 to 3.3bn cu metres in the first half of 2010, which enabled the government to reduce its imports of fuel oil by 900,000 tonnes. The additional gas has become available thanks to a combination of increased domestic production and imports from Egypt. The ministry did not provide details of production of treated gas during the period. According to the BP Statistical Review of World Energy, in 2009 Syria's natural gas production increased by 6.2% year on year to 5.2bn cu metres, and supply was augmented by the import of 910m cu metres from Egypt. The government is considering importing gas from other sources, including Azerbaijan and Iran. The Iraqi government in August announced that it had no objection to the construction of a pipeline from Iran to Syria through Iraqi territory.

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Data and charts Annual data and forecast

Plea se see g raphic bel ow 2005a 2006a 2007a 2008a 2009 b 2010c 2011c GDP Nominal GDP (US$ m) 28,210 32,786 40,376 49,192 53,801 a 59,506 66,102 Nominal GDP (S£ bn) 1,506 1,705 2,018 2,292 2,513 a 2,779 3,110 Real GDP growth (%) 6.2 5.0 5.7 4.3 5.0 4.0 4.6 Expenditure on GDP (% real change) Private consumption 13.3 3.0 1.0 2.3 4.3 4.5 5.1 Government consumption 1.9 1.5 23.6 -0.5 8.0 5.1 3.7 Gross fixed investment 12.7 7.1 -8.3 -5.9 1.1 4.5 6.0 Exports of goods & services -1.5 20.6 1.4 -2.3 -1.4 2.0 2.6 Imports of goods & services 26.0 -12.7 11.3 2.5 -3.8 2.6 3.1 Origin of GDP (% real change) Agriculture 7.8 10.2 -13.5 -8.7 12.0 -1.0 2.5 Industry -3.0 0.6 3.8 5.5 0.1 6.0 5.2 Services 13.3 3.4 16.6 8.3 4.9 4.8 4.9 Population and income Population (m) 19.1 19.8 20.5 21.2 21.9 a 22.5 23.2 GDP per head (US$ at PPP) 3,999b 4,191b 4,398b 4,524b 4,656 4,765 4,913 Recorded unemployment (av; %) 8.0 8.3 9.2 10.9 8.5 a 8.3 8.1 Fiscal indicators (% of GDP) Central government revenue 23.7 25.5 22.7 21.4 17.7 a 20.3 24.6 Central government expenditure 28.6 29.0 25.8 23.9 27.3 a 26.1 24.9 Central government balance -5.0 -3.5 -3.1 -2.5 -9.5 a -5.7 -0.3 Net public debt 32.4b 33.9b 28.3b 23.2b 30.5 33.1 29.8 Prices and financial indicators Exchange rate S£:US$ (end-period) 54.85 51.10 48.10 46.45 45.70 a 47.66 46.53 Consumer prices (av; % change) 7.2 10.0 3.9 15.7 2.6 a 5.9 6.8 Stock of money M1 (% change) 14.4 -4.0 10.7 12.9 10.5 a 10.0 8.0 Stock of money M2 (% change) 21.0 7.8 14.7 12.4 9.3 a 7.0 5.6 Lending interest rate (av; %) 8.0 8.0 10.0 10.0 10.0 a 10.0 9.0 Current account (US$ m) Trade balance -140 886 -521 -773 -860 -694 -572 Goods: exports fob 8,602 10,245 11,756 15,334 11,758 12,954 13,663 Goods: imports fob -8,742 -9,359 -12,277 -16,107 -12,618 -13,648 -14,235 Services balance 551 404 849 838 1,129 1,251 1,304 Income balance -863 -935 -689 -1,149 -913 -959 -1,016 Current transfers balance 747 535 820 1,150 1,038 1,090 1,137 Current-account balance 295 890 459 66 394 688 853 External debt (US$ m) Debt stock 6,508 6,502 6,808b 7,120b 7,516 7,947 7,924 Debt service paid 205 187 182b 176b 178 179 181 Principal repayments 144 130 126b 119b 119 119 118 Interest 61 57 56b 57b 59 59 63 International reserves (US$ m) Total international reserves 17,376 16,496 17,052 17,100 17,436 a 17,958 18,676 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: Central Bank of Syria; IMF, International Financial Statistics; World Bank, Global Development Finance.

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 16 Syria

Quarterly data

Plea se see g raphic bel ow 2008 2009 2010 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices (2000=100) 131.4 134.4 137.4 134.8 133.8 135.9 138.4 140.3 Consumer prices (% change, year on year) 18.6 18.2 16.7 6.9 1.8 1.1 0.7 4.1 Financial indicators Exchange rate S£:US$ (av) 46.0 46.1 46.7 47.3 47.4 46.3 45.7 45.8 M1 (end-period; S£ bn) 792.0 842.4 825.9 823.9 843.4 926.3 912.3 949.6 M1 (% change, year on year) 9.1 13.8 12.9 9.0 6.5 10.0 10.5 15.3 M2 (end-period; S£ bn) 1,586 1,655 1,656 1,669 1,682 1,783 1,808 1,856 M2 (% change, year on year) 24.0 26.5 25.2 10.5 6.0 7.7 9.2 11.2 Sectoral trends Crude oil production (m barrels/day) 0.38 0.39 0.41 0.38 0.37 0.37 0.37 0.37 Crude oil production (% change, year on year) 0.0 2.6 12.0 3.7 -1.8 -4.4 -8.8 -2.5 Foreign trade (US$ m)a Exports fob 4,834 4,571 3,512 2,214 3,071 3,085 2,896 3,055 Imports cif 7,312 7,478 6,746 4,722 5,428 5,763 6,250 5,331 Trade balance -2,478 -2,908 -3,234 -2,509 -2,357 -2,679 -3,354 -2,276 a IMF, Direction of Trade Statistics estimates. Sources: Central Bank of Syria; International Energy Agency, Oil Market Report; IMF, International Financial Statistics, Direction of Trade Statistics.

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 Syria 17

Monthly data

Plea se see g raphic bel ow Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Exchange rate S£:US$ (av) 2008 48.1 47.9 46.6 46.0 45.9 46.1 45.9 46.2 46.3 46.4 46.9 46.7 2009 46.9 47.4 47.6 47.8 47.5 47.1 46.8 46.3 46.0 45.9 45.7 45.6 2010 45.7 46.0 45.9 46.0 46.8 47.0 46.7 n/a n/a n/a n/a n/a M1 (% change, year on year) 2008 10.6 10.6 10.1 9.5 10.6 9.6 12.1 13.4 14.2 12.3 8.8 13.1 2009 10.0 11.1 8.4 7.6 7.1 6.4 8.7 8.1 9.6 6.0 13.5 10.3 2010 12.3 13.9 15.5 n/a n/a n/a n/a n/a n/a n/a n/a n/a M2 (% change, year on year) 2008 23.7 24.2 24.2 22.8 23.4 24.0 24.7 26.6 26.5 24.8 22.1 25.2 2009 10.4 10.5 10.2 10.1 8.9 6.0 7.7 5.9 7.7 7.2 12.4 9.2 2010 11.0 11.1 11.2 n/a n/a n/a n/a n/a n/a n/a n/a n/a Consumer prices (av; % change, year on year) 2008 7.0 9.3 12.4 15.2 20.0 20.8 17.9 17.5 19.1 19.2 16.3 15.5 2009 10.6 6.2 4.9 3.1 1.7 1.6 2.2 1.9 0.2 -0.7 1.3 1.7 2010 2.2 5.4 4.7 n/a n/a n/a n/a n/a n/a n/a n/a n/a Deposit rate (av; %) 2008 8.0 8.0 8.0 8.0 8.0 8.0 7.0 7.0 7.0 7.0 7.0 7.0 2009 7.0 6.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0 6.0 2010 7.0 7.0 7.0 n/a n/a n/a n/a n/a n/a n/a n/a n/a Lending rate (av; %) 2008 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 2009 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 2010 10.0 10.0 10.0 n/a n/a n/a n/a n/a n/a n/a n/a n/a Total exports fob (US$ m) 2008 1,228 994 1,262 1,550 1,914 1,370 1,594 1,277 1,700 1,393 1,173 947 2009 790 629 794 847 1,316 909 1,072 971 1,041 1,033 955 908 2010 1,138 864 1,053 n/a n/a n/a n/a n/a n/a n/a n/a n/a Total imports cif (US$ m) 2008 1,732 1,839 2,330 2,427 2,440 2,445 2,362 2,518 2,598 2,368 2,077 2,301 2009 1,419 1,412 1,891 1,814 1,737 1,877 1,862 1,887 2,015 2,010 2,012 2,228 2010 1,617 1,646 2,068 n/a n/a n/a n/a n/a n/a n/a n/a n/a Trade balance fob-cif (US$ m) 2008 -503.9 -844.2 -1,068.5 -876.2 -526.6 -1,074.9 -768.4 -1,241.6 -897.7 -974.9 -904.5 -1,354.2 2009 -628.8 -783.1 -1,096.8 -967.1 -420.8 -968.7 -789.5 -916.0 -973.3 -976.9 -1,056.7 -1,320.0 2010 -478.4 -782.7 -1,014.6 n/a n/a n/a n/a n/a n/a n/a n/a n/a

Sources: Central Bank of Syria; IMF, International Financial Statistics, Direction of Trade Statistics; Haver Analytics.

Country Report September 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010 18 Syria

Annual trends charts

Plea se see g raphic bel ow Annual trends charts

Real GDP growth Consumer price inflation (% change) (av; %)

Syria Middle East and North Africa World Syria Middle East and North Africa World 7.0 18.0 6.0 16.0 5.0 14.0 4.0 12.0 3.0 10.0 2.0 8.0 1.0 0.0 6.0 -1.0 4.0 -2.0 2.0 -3.0 0.0 2005 06 07 08 09 10 11 2005 06 07 08 09 10 11

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Budget balance Current-account balance (% of GDP) (% of GDP)

Syria Middle East and North Africa Syria Middle East and North Africa 16.0 18.0 16.0 12.0 14.0 8.0 12.0 4.0 10.0 0.0 8.0 6.0 -4.0 4.0 -8.0 2.0 -12.0 0.0 2005 06 07 08 09 10 11 2005 06 07 08 09 10 11

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Destination of exports, 2009 Origin of imports, 2009 (share of total) (share of total)

Others Iraq Others China 41.8% 29.9% 66.5% 10.0%

Saudi Arabia 9.9%

Turkey 7.0%

Lebanon 12.4%

Egypt Germany Egypt 6.9% 9.0% 6.5%

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Monthly trends charts

Plea se see g raphic bel ow Monthly trends charts

Exchange rate Consumer price inflation (S£:US$; av) (% change, year on year)

52.0 25.0

51.0 20.0 50.0 15.0 49.0 10.0 48.0 5.0 47.0

46.0 0.0

45.0 -5.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 2007 08 09 10 2007 08 09 10

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Foreign trade Oil: Brent crude price (US$ m; goods only) (US$/b; av)

Exports Imports Balance 140 3,000 2,500 120 2,000 1,500 100 1,000 500 80 0 60 -500 -1,000 40 -1,500 -2,000 20 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2007 08 09 10 2007 08 09 10

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Comparative economic indicators

Plea se see g raphic bel ow Comparative economic indicators, 2009

Gross domestic product Gross domestic product per head (US$ bn; market exchange rates) (US$ '000; market exchange rates)

Saudi Arabia Qatar Iran United Arab Emirates United Arab Emirates Kuwait Israel Israel Egypt Bahrain Algeria Oman Kuwait Saudi Arabia Qatar Libya Morocco Lebanon Iraq Iran Libya Algeria Sudan Tunisia Syria Jordan Oman Morocco Tunisia Syria Lebanon Iraq Yemen Egypt Jordan Sudan Bahrain Yemen 0 50 100 150 200 250 300 350 400 0.0 10.0 20.0 30.0 40.0 50.0 60.0

Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product Consumer prices (% change, year on year) (% change, year on year)

Qatar Iran Lebanon Egypt Syria Sudan Morocco Algeria Egypt Yemen Iraq Saudi Arabia Sudan Kuwait Yemen Tunisia Bahrain Oman Tunisia Israel Jordan Bahrain Algeria Syria Oman Libya Israel United Arab Emirates Iran Lebanon Saudi Arabia Morocco Libya Jordan United Arab Emirates Iraq Kuwait Qatar -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -8.0 -4.0 0.0 4.0 8.0 12.0 16.0

Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

Country snapshot Basic data

Land area 185,180 sq km

Population 20.5m (mid-2008 estimate)

Main provinces Population in millions, 2006 Damascus (capital) area 4.01 Aleppo 4.23 Homs 1.59 Hama 1.44 Hassakah 1.33 Idlib 1.31

Climate Subtropical on coast, arid in the centre, cold winters in the highlands

Weather in Damascus Hottest month, August, 18-37°C (average daily minimum and maximum); coldest month, January, 2-12°C; driest month, August, zero average rainfall; wettest month, January, 43 mm average rainfall

Languages Arabic, French, some English

Religion Sunni Muslim (72%); Alawi Muslim (14%); Christian (12%); Shia Muslim and Druze minorities

Measures Metric system

Currency Syrian pound (S£) = 100 piastres

Time GMT plus two hours

Fiscal year January 1st-December 31st

Public holidays The dates of Islamic holidays are based on the lunar calendar and are therefore approximate. Mawlid al-Nabi (the birthday of the Prophet, February 26th 2010); Eid al-Fitr (September 11th); Eid al-Adha (Feast of the Sacrifice, November 17th); Islamic New Year (December 7th) New Year's Day (January 1st 2010); Revolution Day (March 8th); Mother's Day (March 21st); Easter (April 4th); Orthodox Easter (April 5th); Independence Day (April 17th); Labour Day (May 1st); Martyrs' Day (May 6th); October Liberation War (October 6th); Christmas Day (December 25th)

Political structure

Official name Syrian Arab Republic

Form of state 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 Next legislative and presidential elections due in 2011 and 2014 respectively

Head of state President, elected for a seven-year term. The president appoints the vice-presidents, the prime minister and the Council of Ministers. Bashar al-Assad, the current president, is also the commander-in-chief of the armed forces and the secretary-general of the Baath party

Executive The prime minister heads the Council of Ministers, a large number of whom are drawn from the ruling Baath party and its partners

Main political parties The ruling National Progressive Front includes the Arab Socialist Baath Party; Arab Socialist Party; Arab Socialist Unionist Party; Communist parties; Syrian Arab Socialist Union Party; Unionist Socialist Democratic Party; Union Socialist Party

Prime minister Mohammed Naji al-Otari Deputy prime minister for economic affairs Abdullah al-Dardari

Key ministers Agriculture & agrarian reform Adel Saffar Awqaf (Islamic endowments) Mohammed Abdel-Sattar al-Sayed Communications & technology Imad Abdel-Ghani Sabbouni Defence Ali Habib Economy & foreign trade Lamiya Assi Education Ali Saad Electricity Ahmed Qusay Kayyali Environment (minister of state) Kawkab al-Sabah al-Dayeh Expatriate affairs Joseph Sweid Finance Mohammed al-Hussein Foreign affairs Walid al-Muallim Health Rida Said Higher education Ghiath Abdel-Wahab Barakat Housing & construction Omar Ghalanji Industry Fouad Issa Jony Information Mohsen Bilal Interior Said Sammour Irrigation Nader al-Buni Justice Ahmed Hamoud Younis Labour & social affairs Diyala al-Hajj Aref Local government Tamer al-Hijjeh Petroleum & mineral resources Sufyan Allaw Presidential affairs Mansour Azzam To u r i s m Saadallah Agha al-Qalah Transport Yarob Suleiman Badr

Central Bank governor Adib al-Mayaleh

State Planning Commission Amer Lutfi