221426 Country Profile 2008 Syria.Pdf

Country Profile 2008

Syria

This Country Profile provides an overview of the country's politics, resources and economy. It is revised and updated annually.

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The Economist Intelligence Unit Limited 2004 © The Economist Intelligence Unit Limited 2008

Comparative economic indicators, 2007

Gross domestic product Gross domestic product per head (US$ bn) (US$ '000) Saudi Arabia Qatar Iran United Arab Emirates United Arab Emirates Kuwait Israel Bahrain Algeria Israel Egypt Saudi Arabia Kuwait Oman Morocco Libya Qatar Lebanon Iraq Algeria Libya Iran Sudan Tunisia Syria Jordan Oman Morocco Tunisia Iraq Lebanon Syria Yemen Egypt Bahrain Sudan Jordan 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) Sudan Iraq Qatar Iran United Arab Emirates United Arab Emirates Egypt Qatar Bahrain Syria Tunisia Yemen Iran Egypt Jordan Sudan Iraq Libya Libya Oman Oman Kuwait Israel Jordan Kuwait Lebanon Algeria Saudi Arabia Syria Bahrain Lebanon Algeria Saudi Arabia Tunisia Yemen Morocco Morocco Israel 0.0 2.0 4.0 6.0 8.0 10.0 12.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Sources: Economist Intelligence Unit estimates; national sources. Sources: Economist Intelligence Unit estimates; national sources.

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Contents

Syria

2 Basic data

3 Highlights

4 Politics 4 Political background 4 Political forces and institutions 6 Recent political developments 7 International relations and defence

8 Demographics and resources 8 Population 9 Education 9 Natural resources 10 Infrastructure

12 The economy 12 Economic structure 12 Economic policy 15 Economic performance 20 Regional trends 20 The external sector

23 References

24 Appendix

Syria

Basic data

Land area 185,180 sq km

Population 18.7m (mid-2006 government 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, 0 mm average rainfall; wettest month, January, 43 mm average rainfall

Languages Arabic, some English, French

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

Measures Metric system

Currency Syrian pound (S£)=100 piastres. There is now, in effect, a unified exchange rate, which stood at S£45.5:US$1 in mid-2008

Time GMT plus two hours

Fiscal year January 1st-December 31st

Public holidays October 2nd (Eid al-Fitr); October 6th (October Liberation War); December 9th (Eid al-Adha); December 25th (Christmas Day); December 29th (Islamic New Year); January 1st 2009 (New Year); March 8th (Revolution Day); March 9th (Prophet!s Birthday); March 21st (Mother!s Day); April 12th (Easter); April 17th (Independence Day); April 20th (Orthodox Easter); May 1st (Labour Day); May 6th (Martyrs Day)

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Highlights

Politics • Syria has been governed by the Baath party since 1963 which, for most of that time has, in turn, been dominated by the Assad family and associated members of its Alawi sect. The Economist Intelligence Unit!s 2008 democracy index ranks Syria as 157th out of 167 countries because of the lack of elections, restrictions to civil liberties and limited options for political participation. • Syria!s relationship with fellow Arab states has been strained because of its alliance with Iran and involvement in Lebanon. The Lebanese peace agreement negotiated in Qatar in May 2008 should help to thaw these relations to some extent. • Relations with Israel are suddenly in flux following an Israeli missile strike on an alleged nuclear facility in September 2007 and the start of indirect peace talks mediated by Turkey in May 2008.

Demographics and resources • Syria!s population has doubled in 25 years and has been further swelled since 2003 by increasing numbers of Iraqi refugees, who now number around 1.5m, almost 8% of the population. • Syria!s infrastructure has been expanding rapidly, but remains poor by regional standards. The transport and energy sectors are antiquated and bureaucratic. The telecommunications and Internet sector is expanding rapidly, from a low base, following the easing of government restrictions.

The economy • Oil output"which still dominates the economy"has been declining in recent years, making Syria a net-importer in 2008 for the first time in decades. In contrast to the decline in oil production, projects are under way to double the natural gas production over the next three years. • Agriculture remains a significant component of the economy, but limited irrigation means that the sector is highly sensitive to variations in rainfall. • A programme of economic reform has been gathering pace, including relaxing controls on foreign investment, the exchange rate and the use of foreign currency. Corporate tax has been lowered to a maximum of 28% and the differential treatment of foreign, domestic and state-owned firms has been reduced. • The private financial services sector has been developing rapidly since 2004, following 40 years of state monopoly. Eight banks have started operations and have attracted almost all new deposits during that time. By late 2007 these accounted for 17% of all assets and liabilities, up from 7% at the end of 2005. • Inflation has been increasing significantly since 2005, driven initially by public-sector wage increases and a loosening of credit controls, and then compounded by increases in global commodity prices. • There is considerable uncertainty over Syria!s trade figures and hence its current-account balance. There are discrepancies both between government and IMF figures and between different IMF data series.

Politics

Syria is an authoritarian state with all the main levers of power vested in the presidency, a cluster of intelligence services and the Arab Socialist Baath Party. Bashar al-Assad became president upon the death of his father, Hafez, in 2000, and was re-elected, unopposed, to a second seven-year term in 2007. His father seized power in a coup in 1970.

Political background

Syria!s borders were defined after the first world war when Britain and France took charge of parts of the former Ottoman empire. Under the 1920 Treaty of San Remo, France was accorded a mandate over a territory known as Bilad al- Sham (the land of Syria), and proceeded to subdivide it into two states, Lebanon and Syria, a move that provoked strong opposition within Syria. France was finally forced to grant independence to Syria after the second world war in 1946. From independence until the Baath party seized power in 1963, Syria experienced chronic political instability, with a series of coups reflecting internal religious and ideological differences. From 1958 to 1961 the country was united with Egypt and was effectively under the leadership of the charismatic Egyptian president, Gamal Abdel-Nasser, as part of the United Arab Republic. In 1970, Lieutenant-General Hafez al-Assad came to power in a bloodless coup in which he supplanted a rival tendency within the Baath party. In the late 1970s domestic opposition began to develop in the conservative trading cities of Aleppo, Homs and Hama. Led by the Syrian Muslim Brotherhood, a mainly Sunni Muslim group, militants attacked government officials and buildings, culminating in a mass uprising in Hama. Hafez al-Assad sent his brother, Rifaat (who was later exiled for attempting a coup in 1983), to crush the revolt, and an estimated 10,000 people were killed. The current president, Bashar al-Assad, came to power in June 2000 following the death of his father. Despite some relaxation in areas such as economic policy and the media, the regime still relies heavily on the security services, which are dominated by Mr Assad!s minority Alawi sect, to maintain its grip on power. Mohammed Naji al-Otari has been prime minister since October 2003.

Political forces and institutions

The Baath party The Baath party was founded in the capital, Damascus, in the 1940s as a pan- Arab nationalist movement in response to colonial rule, and later developed elements of socialist ideology through co-operation with the Soviet Union. Outside of Syria, the party only established itself in any significant way in Iraq. Although Baath parties came to power in both countries during the 1960s, they were already separate entities and diverged even more as they were reshaped around the clans and allies of their respective strongman presidents, whose interests took precedence over the formal ideology. Tensions with Israel following the 1967 war enabled the then defence minister, Hafez al-Assad, to

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achieve supremacy within the Baath party in Syria. The constitution in 1973 formalised the Baath party as "the leading party in the state and society".

Opposition groups At its June 2005 congress, the Baath party endorsed the principle of amending the law on political parties to permit a degree of pluralism, but there has been little sign of any urgency in proceeding with such reforms. In any case, the proposals fall far short of the demands of Syria!s main opposition groups, including the banned Muslim Brotherhood, Kurdish nationalists and human rights activists. In October 2005 a number of individuals associated with these groups signed the Damascus Declaration, a document calling for the abolition of the 1963 emergency laws (allowing sweeping powers of arrest and detention) and for steps to be taken towards the establishment of a free multiparty system. Members of the Syria-based liberal opposition face constant harassment from the security services, and several prominent figures among them have been arrested over the past few years. Membership of the Muslim Brotherhood is punishable by lengthy jail sentences or even death. Main political figures

Bashar al-Assad Mr Assad became president in June 2000, following the death of his father, Hafez al-Assad. He came to power with the promise of greater openness, reform and modernisation of the economy. Advocates of political reform have been ruthlessly suppressed, but the Syrian economy has opened up to a degree under Mr Assad!s presidency; he was elected for a second seven-year term in 2007. Under his rule, Syria!s relations with Western powers have deteriorated, and he has also antagonised the leaders of Saudi Arabia and Egypt, the most powerful states in the Arab world. However, in 2008 he made some progress towards repairing these relationships. In December 2000 he married Asmaa, a daughter of Fawaz al-Akhras, a London-based doctor from a prominent Damascene family. Asmaa Assad projects a modern Westernised image. She has given birth to two sons and a daughter. Asif Shawkat As the head of military intelligence, Mr Shawkat is one of the most powerful figures in Syria. He married Bushra al-Assad, the eldest daughter of the late president, despite initial objections from the Assad family. Rami Makhlouf A first cousin of Mr Assad, Mr Makhlouf is one of the most powerful businessmen in Syria. His principal asset is Syriatel, one of two mobile-phone companies that have been operating in the country on the basis of build-operate-transfer contracts since 2001. Farouq al-Sharaa Having served as a straight-speaking foreign affairs minister since 1984, Mr Sharaa was appointed vice-president in February 2006, with Walid al-Muallim, who led Syria!s negotiations with Israel during the 1990s, succeeding him as foreign minister. Abdullah al-Dardari The appointment of Mr Dardari in June 2005 as deputy prime minister for economic affairs confirmed his status as the central figure in Syria!s economic reform programme. In his previous post as head of the state planning commission, Mr Dardari had been an outspoken advocate of enabling market mechanisms to drive the Syrian economy and stimulate the higher growth necessary to improve living standards and reduce unemployment.

The judiciary The Syrian judiciary is generally subservient to the requirements of the state, although the courts enjoy nominal independence, with a supreme constitutional court wielding ultimate judicial authority. Most cases with any

political connection are handled under the umbrella of emergency security laws that have been in force since 1963. In March 2008 a law was passed envisaging the creation of specialised commercial courts, as part of the government!s broader effort to modernise the economy.

The legislature The 250-member legislature (Majlis al-Shaab, or People!s Assembly) is elected every four years. A fiery debating chamber before the Assad era, it is now in effect a rubber stamp for decisions of the presidential elite. In the most recent parliamentary election of April 2007 the composition of the Assembly did not change meaningfully, with the ruling coalition, the National Progressive Front (a ten-party bloc, which is dominated by the Baath party), winning 170 seats. The remaining 80 seats were won by independents. Under the constitution, parliament is sovereign, with the Council of Ministers (cabinet) forming the executive. In reality, since 1970 ultimate power has rested with the president and senior members of the intelligence services and army units controlled primarily by the Alawi religious community"to which the Assad family belong.

Media services The Syrian media are largely controlled either by the state or the ruling Baath party. The state also retains a monopoly over broadcasting. Democracy index (for methodology, see Appendix)

The Economist Intelligence Unit!s 2008 democracy index ranks Syria 157th out of 167 countries and third-lowest among authoritarian regimes in the region (only slightly above Saudi Arabia and Libya). It also ranks among the lowest in the region in all but one of the categories that feed into the overall score, because there are few options for political participation, no meaningful elections and highly restricted civil liberties. Although its score in the political culture category is higher than most other countries in the region (on par with Tunisia and Morocco, and only exceeded by Israel and the Palestinian Territories), this is largely because the state is secular, whereas politics in most other states in the region is heavily influenced by the religious authorities.

Democracy index Overall Overall Electoral Government Political Political Civil score rank process functioning participation culture liberties Regime type Syria 2.18 157 0.00 2.14 1.67 5.63 1.47 Authoritarian Overall and component scores are on a scale of 0 to 10; overall rank is out of 167 countries. Recent political developments

• Mr Assad is re-elected as president. The re-election of Bashar al-Assad for a second seven-year term in May 2007 was stage-managed by the state to indicate that the president has a broad popular appeal. The official turnout (95.9%) and the margin of approval (97.6%) were higher than the last referendum on his presidency seven years ago. • There is a fresh clampdown on reformists. In late 2007 and early 2008 the authorities arrested several dozen opposition activists promoting the Damascus Declaration, a 2005 manifesto calling for political reform. The arrests

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came amid signs that this group was seeking to step up its activities through arranging meetings and electing a committee to advance the declaration!s aims. • The assassination of Imad Mughniyeh has upset the security elite. The chief of military operations for Hizbullah, an Iranian-backed Lebanese Shia group, was killed in Damascus on February 12th 2008, leading to a spate of rumours about conflicts within and between Syria!s multiple intelligence services. The attack was widely assumed to have been the work of Israeli agents, but it raised uncomfortable questions about the state of Syria!s internal security, particularly as it came only five months after Israel!s air raid on a building in Syria alleged by the US to house a covert nuclear facility. For an analysis of the latest political developments, see the Economist Intelligence Unit!s most recent Syria Country Report. Important recent events

July-August 2006 Hizbullah, Syria!s principal ally in Lebanon, withstands an Israeli onslaught on its military positions in southern Lebanon. Mr Assad describes the war as a vindication of his policy of "resistance" against US and Israeli attempts at domination the region. September 2007 Israeli jets bomb a building in northern Syria, which the US subsequently claimed to have been the location of a covert nuclear reactor, being developed with North Korean assistance. Mr Assad states that the target was an unused military building. March 2008 Syria hosts a summit conference of the League of Arab states in the capital, Damascus. Many heads of state decide not to attend, reflecting the poor relations between Syria and pro-Western Arab governments. May 2008 Mr Assad claims to have played a pivotal role in enabling rival Lebanese factions to forge a political agreement at a conference held in Qatar. After the long-delayed Lebanese presidential election goes ahead, France decides to resume high-level political contacts with Syria. At the same time, Syria and Israel announce that they have started indirect peace negotiations, hosted by Turkey. International relations and defence

• Lebanon will remain a major pre-occupation. Syria has indicated that it is ready to consider establishing normal diplomatic relations with Lebanon, thereby confirming its formal recognition of Lebanese sovereignty. Syria deployed troops in 1976 during Lebanon!s civil war and was in almost complete control of the country by the end of the war in 1990. The last Syrian troops were withdrawn in 2005 in the aftermath of the assassination of a former Lebanese prime minister, Rafiq al-Hariri, which was widely blamed on Syria. • Peace talks with Israel have resumed. During the 1990s Syria and Israel made a number of abortive efforts to conclude a peace settlement based on Israel!s withdrawal from the Golan Heights, which it occupied in 1967. The most

advanced round of negotiations, held in 2000 with the involvement of the then US president, Bill Clinton, collapsed after Syria rejected Israel!s proposal to retain a small strip of land on the eastern shore of the Sea of Galilee. In May 2008 Syria and Israel announced that they had started indirect peace negotiations under the auspices of Turkey. • Iran has remained an important ally. Syria has maintained a strategic alliance with Iran since the early 1980s, and ties between the two countries have strengthened in recent years as the region has become increasingly polarised between supporters and opponents of the US. This alliance has placed Syria in a potentially hazardous position should the dispute over Iran!s nuclear programme escalate into military confrontation. • Relations with fellow Arab states are strained. The alliance with Iran and Syria!s policies towards Lebanon have aggravated tensions in Mr Assad!s relationship with his fellow Arab leaders. Despite the frostiness of relations with Saudi Arabia, Mr Assad attended an Arab summit in the Saudi capital, Riyadh, in March 2007. However, relations soured again and the leaders of Saudi Arabia, Egypt and Jordan were conspicuous by their absence from the next Arab summit, held in Damascus in March 2008. The Lebanese political agreement forged in Qatar in May 2008 has provided some impetus to improve Syria!s ties with fellow Arab states, as well as with Europe and, ultimately, the US. • Military forces are among the largest in the region. Syria!s armed forces have long played an important role in the country!s political scene, including in the coup d!état in 1970 that established the al-Assad dynasty. The capabilities of the armed forces are currently being upgraded with modern equipment supplied by Russia, including advanced fighter jets and air defence systems. Additional equipment is being procured from Iran.

Demographics and resources

Population

Population 2003 2004 2005 2006 2007 Total (m; mid-year) 17.89 18.39 18.89 19.41 19.94 % change, year on year 2.76 2.79 2.72 2.75 2.75

Source: Economist Intelligence Unit.

• Population growth remains high. Syria!s population has doubled in 25 years, and the growth rate has averaged 2.7% a year over the past five years, placing continuous pressure on the country!s infrastructure and resources. Some 75% of the population is under the age of 35, with around 40% under the age of 15. By religious grouping, Syria!s population is more than 70% Sunni Muslim, 14% Alawi Muslim, and 12% Christian, with a small Druze minority. Most of the population are Arab, but about 5% of the population are Kurdish, living mainly in the north-east, and there are smaller numbers of Turkomans, Assyrians and Armenians. Syria is also host to around 440,000 Palestinian refugees. The

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population has been further swelled by the influx of refugees from Iraq since the 2003 US-led invasion. According to unofficial UN estimates, these number some 1.5m. • The population is mostly urban. Around 75% of Syria!s total population live in the largest six cities. The main urban centres are the capital, Damascus and the northern city of Aleppo, which each have populations of about 4m. Other important urban areas are the industrial cities of Homs and Hama and the port cities of Latakia and Tartous. Around 30% of the workforce is employed in agriculture, 27% in secondary industries and construction, and 15% in trade, hotels and restaurants. • Unemployment has been rising. According to official data, the unemployment rate is around 8%, although most unofficial estimates put it at closer to 20%; moreover, if underemployment is included, the figure rises to well above 25%.

Education

For a low-income country with a rapidly growing population, Syria has a fairly good basic education system. Literacy rates are higher than in many of its regional rivals and have improved significantly in recent years. Adult literacy (age 15 and over) grew from 65% in 1990 to 80.8% in 2005, compared with 52.3% in Morocco. Youth literacy in 2004 stood at 92.5%, suggesting that the upward trend in overall literacy rates is likely to continue. Most education is conducted by the state, but private schools and colleges have been permitted since 2001. Government figures indicate that resources for education have risen in absolute terms over the past decade, but it has still proved difficult to match the high rate of population growth. Primary-school enrolment for both boys and girls is 95%, according to the UN, but classes at this level, and at the intermediate and secondary levels, are large, and facilities often poor. Also, enrolment drops sharply, to 62%, for secondary education. Syria has five state-run universities, with some 250,000 students. (The first private university, Al Kalamoun in Deir Atiaa, was established in 2004 and has around 6,000 students.) The government guarantees places in higher education to all secondary-school graduates, but has not matched this commitment with adequate funding, with the result that the quality of courses at state universities in generally acknowledged to be poor. An additional drag on quality is the strong ideological supervision of courses.

Natural resources

Syria has diverse climatic zones ranging from the Mediterranean coastal region to the arid central plains. The areas east of Aleppo and along the border with southern Turkey receive winter rains from the Turkish highlands and produce much of Syria!s wheat. Elsewhere there is less rainfall and relatively poor levels of irrigation, meaning that only about one-third of the land is cultivated. The Euphrates river provides some water, although Turkish exploitation upstream has reduced the flow rate, as does the smaller Orontes river which rises in Lebanon

and flows north through Hama on to Turkey. Syria has around 2.5bn barrels of recoverable oil, mostly in the central Deir al-Zour region, as well as an estimated 10trn cu ft of natural gas, mostly in the Palmyra area. In addition, it has exploitable quantities of phosphates (around 1bn tonnes), salt and marble.

Infrastructure

Syria!s transport and communication networks have expanded rapidly over the past decade to keep pace with the fast-growing population and to support economic growth.

Transport statistics 2002 2003 2004 2005 2006 Roads Length of roads (km) 46,697 47,414 48,767 49,977 n/a Railways Total length (km) 2,798 2,803 2,833 2,833 n/a Goods transported ('000 tonnes) 5,927 6,414 7,232 8,187 n/a Air Passengers handled at domestic airports (m) 2.6 2.3 2.8 3.1 3.5 Ports Goods handled (m tonnes) 13 12.8 15.8 19.7 20.9

Source: Central Bureau of Statistics, Statistical Abstract.

Railways The number of passengers using the rail network more than doubled between 2000 and 2005, reaching 2m. Over the same period the quantity of freight moved on Syria!s railways increased by one-third to 8.2m tonnes. A consortium including Systra of France and Khatib & Alami of Lebanon was selected in 2007 to prepare engineering designs for a metro system in Damascus.

Roads The road network has increased by more than 10% in the past five years, although around 20% remains unasphalted. The number of vehicles has also grown, but from a low base, with official data suggesting that by end-2005 there were only 278,866 registered automobiles (one for every 65 citizens). The government decision to reduce import tariffs on cars from 145-225% to 40-60% (depending on the size), is stimulating growth in the vehicle market, with 2006 car sales up by more than 230% on 2004. Another factor that will spur growth is the establishment of the first assembly line in Syria in 2007 which has started to produce about 10,000 models of the Iranian Samand car a year. The assembled Samands are much cheaper than imported cars because the import duty on car components is only 5%, compared with the still hefty tariffs on complete cars.

Ports Tartous is the largest port, accounting for about 61% of import volumes in 2006. Another port, Banias, is dedicated to the oil industry, and activity has declined in recent years as Syria!s oil output has fallen. The ports are state-run and insufficiently funded, rendering the facilities often inadequate. Turnaround time is slow, customs processing and regulations cumbersome, and corruption rife. The EU is supporting a programme to upgrade operations at Syria!s ports, and the government awarded a build-own-operate contract in 2006 to International

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Container Terminal Services (ICTS) of the Philippines to modernise facilities at Tartous and run the port for ten years.

Air transport The three main airports"Damascus, Aleppo and Latakia"together handled around 3.5m passengers in 2006, although the majority passed through Damascus. The government is planning to increase capacity at the airport to 10m passengers/year in three phases, ending in 2020. The national carrier, Syrian Air, currently has only six aircraft in service, all Airbus A320s. A private airline, Pearl, was launched in early 2008.

Energy Oil output has been declining over recent years, and in 2008 Syria became a net oil importer, consuming about 10,000 barrels/day more than it produced. Prospects for natural gas are more promising and a number of projects are set to almost double gas production over the next three years. Power station construction has proceeded rapidly in recent years, largely financed by loans from Arab development agencies, the EU and Japan. The Ministry of Electricity had a generating capacity of 7,057 mw in 2005"three times its level a decade earlier. 1,000 mw was added in 2005 and 2006 and contracts have been signed to build a further 1,500 mw of capacity. However, demand has also increased strongly, by almost 10% per year on average since 2003 (partly because of the influx of Iraqi refugees), and in 2007 a number of Syrian cities were subjected to prolonged blackouts. Antiquated supply grids and substations contribute to high transmission losses of around 28%. In early 2001, Syria signed a power- sharing deal with Egypt and Jordan to link the three countries! electricity networks.

Energy statistics (crude oil production figures include condensates & natural gas liquids) 2003 2004 2005 2006 2007 Electricity consumption (bn kwh) 28 32.1 34.8 36.7 40.4 Crude oil production ('000 b/d) 527 495 450 421 394 Natural gas production (bn cu metres) 5.2 5.3 5.4 5.5 5.3

Sources: Ministry of Electricity; BP, Statistical Review of World Energy.

Telecommunications In spite of some recent progress, Syria!s telecommunications sector lags behind most of the countries of the region. There were 3.1m fixed phones lines at the end of 2007, according to the International Telecommunication Union, and 6.7m mobile subscribers (about 33% penetration) to two local networks. Syriatel!s network is headed by Rami Makhlouf, a prominent local business- man, and the other is now operated by MTN of South Africa, after it acquired a Lebanese firm, Investcom, in 2006. The exclusivity terms in those contracts expire in 2009, potentially opening the way for a third operator. Syria is also slowly opening up to the Internet following the launch of the first commercial Internet service provider in 2006, after almost a decade of restrictive and expensive government monopoly. It currently has one of the lowest Internet penetration rates in the region, with only about 2.1m subscribers. However, the proliferation of Internet cafés since 2005 means the actual number of users will be considerably higher.

The economy

Economic structure

Real gross domestic product by sector (% share of GDP) 2003 2004 2005 2006 2007 Agriculture 25.0 22.7 23.4 24.5 24.0 Industry 28.3 30.2 29.1 28.1 27.9 Services 46.7 47.1 47.5 47.3 48.2

Source: Economist Intelligence Unit.

Syria!s large mining and manufacturing sector reflects the importance of the oil and gas industry and phosphate mining. The oil sector is mainly concentrated in the Deir al-Zour region, and around the refineries at Aleppo and Banias, where some related heavy industries have developed. The largest agricultural export earner is cotton and industrial crops account for around 11% of the total harvest. The main trading centres are the capital, Damascus, and Aleppo, and to a lesser extent Latakia, Tartous, Deir al-Zour and Homs. Damascus and Aleppo are also home to light industry, such as textiles and ceramics. Although all sectors have been theoretically opened to private-sector participation over the last decade, there have only been a handful of major investment projects so far. The largest is a cement factory being built by a joint venture of Lafarge, a French firm, and the local MAS Group. Most large industrial concerns are owned by the government, run inefficiently and have been subject to long-term underinvestment.

Nominal gross domestic product by expenditure (% share of GDP) 2003 2004 2005 2006 2007 Private consumption 60.3 64.1 66.6 66.0 65.1 Government consumption 13.5 15.7 13.9 12.8 12.1 Gross fixed investment 23.3 23.8 24.1 21.4 21.1 Exports of goods & services 32.4 40.6 41.5 40.1 36.5 Imports of goods & services 29.5 37.8 39.5 36.4 32.5

Source: Economist Intelligence Unit.

Economic policy

Syria!s challenge is to modernise and transform the inefficient centralised economy and support the private sector, which, despite repressive controls on its operating environment, has remained vibrant and could become the main engine of growth, given an enabling climate. Early reforms to encourage foreign investment after an economic crisis in 1989 soon lost momentum, but have gradually picked up since 2000 under the presidency of Bashar al-Assad. The creation of private banks has been permitted, tax rates have been successively reduced and the exchange rate system has been partly liberalised. Abdullah al-Dardari has emerged as the leading advocate of market-orientated economic reform, first as head of the State Planning Commission and, since 2005, as

Country Profile 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008 Syria 13

deputy prime minister for economic affairs. In early 2006 the cabinet approved a five-year plan drawn up by Mr Dardari to accelerate economic growth to 7% through structural reforms of the financial sector, business environment and trade system. The plan also called for far-reaching reforms to the tax system, including the introduction of value-added tax (VAT) and phasing out the extensive system of price subsidies. These policies met some resistance within the Baath party, but the government eventually implemented cuts to fuel subsidies in 2008, and has confirmed that VAT will be introduced in 2009. A new investment law (No. 8) passed in October 2006 applies a level tax structure to all foreign and domestic companies (including public-sector enterprises). The highest tax rate is 28% on profits exceeding S£3m (US$65,000), but companies that offer at least 50% of their share capital for public subscription only pay 14% and are also exempt from local taxes. There is also a reduced 22% rate for companies set up under investment incentive legislation (Existing firms that have benefited from tax holidays are presumably liable after these have elapsed, and new firms will not be granted tax holidays.) Tax rates on the sale and rental of real estate have been reduced. Hotels and restaurants pay a 2.5% turnover tax and a 0.5% salary tax in lieu of tax on their profits. A new finance law, also passed in late 2006, separates the operations of the public enterprises from the national budget. It was supposed to take effect from 2008, but has been put back by at least a year. It will give state-owned firms autonomy from the Ministry of Finance and entitle them to retain some profits for reinvestment, rather than relying on the budget for their investment needs. Another important element in the law gives the finance ministry complete control over the drafting and operation of the budget, enabling it to be managed on an accrual rather than a cash basis, and arranging the budget categories by economic activity rather than by government department. Since 2001 the exchange-rate system has been gradually simplified and rendered more flexible, largely eliminating the difference between the over- valued official rate and the rates available in neighbouring countries, although still managed lightly by the Central Bank of Syria. Since early 2005 banks have been able to issue letters of credit in foreign currency to finance imports and more recently banks have been authorised to lend in foreign currencies to finance investment projects. In August 2007, the Central Bank shifted the reference point for the exchange rate to the SDR from the US dollar, and it has also removed many of the restrictions on the use of foreign exchange. The government is also working on the creation of a capital market. In 2005 enabling legislation was passed and the Syrian Commission on Financial Markets and Securities was formed. However, the launch of the Damascus Stock Exchange has been repeatedly delayed due to problems with establishing systems and training staff. Another law has paved the way for issuing Treasury bills, which will be eligible to be listed on the stockmarket. The government has managed to keep its fiscal deficit under control in recent years, despite the steady fall in oil export revenue, thanks mainly to increased revenue from state-owned enterprises (in particular the telecommunications company and banks) and to below-budget spending on capital investment. In

2008 the government limited the increase in overall spending to 2% in nominal terms in the original budget, with current spending rising by 10.8% and development spending cut by 4.8%, compared with the allocations for the previous year. However, the actual budget is likely to show a significant variance owing to the government!s decision in May to award a 25% increase in state salaries in order to compensate for cuts in fuel subsidies. The budget projects a 19.2% drop in revenue, which would push up the deficit to 15% of GDP. The government does not publish budget outturns, but the data it provides to the IMF gives an indirect means to assess the fiscal situation. The IMF stated in its most recent Article IV report (published in August 2007) that the overall fiscal deficit in 2006 was equivalent to 5.7% of GDP, compared with 4.4% in 2005. The non-oil fiscal deficit narrowed from 17.3% of GDP in 2003 to 10.2% in 2006, according to the IMF, mainly because of larger surpluses from some public-sector companies and rising revenue from mobile-phone use. The contribution of oil earnings to total fiscal revenue fell from 60% in 2001 to 30% in 2005.

Official budget forecasts (S£ m unless otherwise indicated) 2006 2007 2008 Total revenue 436,125 504,000 407,000 % change 22.5 15.6 -19.2 Total expenditure 495,000 588,000 600,000 % change 7.6 18.8 2.0 Capital 195,000 258,000 286,000 Current 300,000 330,000 314,000 Budget balance (excl loans) -58,875 -84,000 -193,000 % of GDP 4.4 5.6 15.0

Source: Syrian Official Gazette.

Interest rates had been fixed for many years without reference to inflation or liquidity conditions, with different rates for separate categories of borrowers, according to politically driven priorities. In May 2003 the Central Bank cut the deposit and lending rates"the first such adjustment for 22 years. A further reduction followed in December 2003, on the eve of the start of operations by privately owned banks. There have been a few subsequent changes, but expectations of movement towards a more active management of monetary and liquidity conditions have proven misplaced.

Interest rates (%; period averages) 2003 2004 2005 2006 2007 Lending interest rate 8.0 8.0 8.0 7.5 7.5 Deposit interest rate 3.0 3.0 3.5 4.0 4.0

Source: Central Bank of Syria.

The monetary stance loosened in 2005, marked by a 45% year-on-year increase in credit to the private sector, of which 70% was supplied by three state-owned banks. In its subsequent 2007 Article IV report, the IMF noted that monetary policy and banking supervision had been tightened in 2006, with the result that the growth in credit to the private sector fell to 18.5%. Consumer loans

represented a large part of the increase, because private-sector companies still face difficulties in borrowing from state-owned banks. The private sector has traditionally had to rely on credit from (mostly Lebanese) offshore banks at high rates of interest and with additional currency risk. This credit constraint has hampered the development of the private sector, but the situation has started to ease following the start-up of domestic private banks.

Money supply (S£ m unless otherwise indicated; end-period) 2003 2004 2005 2006 2007 Money (M1) incl others 628,279 602,131 688,276 660,804 745,387 % change, year on year 27.0 -4.2 14.3 -4.0 12.8 Quasi-money 261,080 383,003 408,474 515,739 555,967 Money (M2) 889,359 985,134 1,096,750 1,176,543 1,301,354 % change, year on year 7.8 10.8 11.3 7.3 10.6

Source: IMF, International Financial Statistics.

For an analysis of the latest economic policy developments, see the Economist Intelligence Unit!s most recent Syria Country Report.

Economic performance

Main economic indicators 2003 2004 2005 2006 2007 Real GDP growth (%) 1.1 6.7 4.5 5.1 4.3 Consumer price inflation (av; %) 5.8 4.4 7.2 10.0 12.2 Current-account balance (US$ m) 728 587 297 890 1,493 Exchange rate (av; :US$) 46.3 48.6 53.4 52.0 50.0 Population (m) 17.9 18.4 18.9 19.4 19.9 External debt (year-end; US$ m) 19,266 18,981 6,571 6,539 6,465

Source: Economist Intelligence Unit, CountryData.

In the past, Syria!s economic growth was largely driven by the oil sector and agriculture. Since 2004, growth has been relatively buoyant because of higher oil prices and the gradual opening up of the economy to private investment, in spite of some poor harvests. However, with oil production now in long-term decline, other sectors, such as financial services, telecoms and trade, have started to assume increasing importance, and non-oil real GDP growth has averaged 6% a year during this period. The most recent figures issued by the government point to a stronger rate of real growth, reaching 6.6% in 2007. However, the move from a centrally planned to a market-driven economy has put an enormous strain on the government!s ability to produce reliable statistics, as the IMF has observed, and the macroeconomic data from official sources are erratic and prone to constant revision. Our estimate is lower, at 4.3%.

Agriculture Agriculture has also traditionally played an important role, providing employment for some 30% of the labour force and reducing the need for expensive food imports. Depending on climatic conditions, agricultural output can generate almost one-third of national income. About 5m ha (28% of Syria!s land area) is cultivated, but only one-quarter of this is irrigated, making the

sector highly dependent on rain-fall. There has been significant state intervention in the sector, including pricing, subsidies and marketing controls. However, land is largely privately owned and this has been one of the main factors behind the sector!s success. Products that are designated "strategic" (such as wheat, barley and sugarbeet) have to be sold to the state marketing boards at fixed prices, which have often been above world prices (to support farmers), causing a significant drain on the state budget. In early 2008, the government increased purchase prices significantly in response to the sharp rise in international food prices. The most widely grown arable crop is wheat and the most important cash crop is cotton, which was the largest source of export earnings before the development of the oil sector. Cotton and textiles exports accounted for around 40% of total exports in the 1980s, but this has declined to 10-15%, because cotton production has fallen about 20% since 2001 and other sectors have increased in importance. The most recent Syrian data show that the results of the 2007 harvest were generally disappointing, with falls in both output and yields of wheat and barley.

Mining Syria started producing modest amounts of oil and gas in the 1950s and new discoveries in the Euphrates Basin helped to push up production in the 1990s, leaving Syria with a significant surplus for export. However, output in these fields has been declining steadily over the past few years, and in 2008 Syria became a net oil importer, with production of about 370,000 barrels/day (b/d), compared with consumption of 380,000 b/d. There is little oil exploration going on at present, but prospects for natural gas are more promising. Gas production has been steady at about 5bn cu metres/year for several years, but new gasfields are now being developed in the central region, around Palmyra. Stroytransgaz of Russia is working on two such projects, the first of which will deliver some 2bn cu metres/y of gas towards the end of 2008 and the second about 1.2bn cu metres/y in late 2009. Petrofac, a UK-based engineering firm, won two gasfield developments contracts in early 2008 worth a total of about US$1bn for ventures operated, respectively, by Petro-Canada and INA-Naftaplin of Croatia. Together these should deliver another 2.4bn cu metres/y of gas by 2011. Phosphate is the other major mineral exploited in Syria. Output has fluctuated with world prices, but has steadily increased in recent years to 2.9m tonnes in 2005, almost triple the level of a decade before. Syria also produces marble, gypsum, stone, salt, gravel and sands, but little is exported.

Industry Although Syria!s industrial sector was largely state-dominated until the 1990s, it is relatively well diversified and has been benefiting from the gradual economic reforms allowing greater private-sector involvement and facilitating foreign investment. However, the limited availability of funding for the private sector remains a constraint on industrial development. The state-owned Industrial Bank is supposed to provide funding for industrial development, but it is undercapitalised and, like the other state-owned banks, is directed more towards lending to public-sector concerns. The newly established private banks have the potential to rectify this, but have so far been constrained by restrictions on their operations and by the scarcity of long-term savings instruments. The establishment of a stockmarket will increase the options in raising finance.

In March 2007 the Syrian automotive industry"hitherto restricted to the loss- making production of tractors"took a step forward with the start-up of a car- assembly plant run by Syrian-Iranian Automotive Manufacturing Company (Siamco), a joint venture with a carmaker, Iran Khodro. The plant is producing about 10,000 cars a year, assembled from kits of Iran Khodro!s Samand, a version of the Peugeot 405.

Index of industrial production in the public sector (2000=100) 2001 2002 2003 2004 2005 Mining & quarrying 106 113 109 85 78 Manufacturing 97 101 88 99 99 Foodstuffs & beverages 103 114 106 119 131 Textiles & yarn 109 116 120 138 138 Wood & furniture 124 92 108 91 80 Paper, printing & binding 89 64 51 51 54 Chemicals 106 129 107 113 108 Water & electricity 106 111 117 127 143 Mineral products 230 163 120 185 164 General index 103 109 102 92 89

Source: Central Bureau of Statistics, Statistical Abstract.

Construction Land prices are not controlled by the state, and so real estate is viewed as one of the few domestic investments which can offer a realistic and relatively safe return. Activity in the construction sector has tended to mirror changes in the wider economy. In recent years the pace of expansion has since quickened, with Gulf investors, Iraqi refugees and Syrian expatriates carrying out a stream of new residential and commercial developments, mainly focused on Damascus and Aleppo. In mid-2007 the government passed a law setting up a special regulatory agency for the real estate sector, with the aim of stimulating orderly investment. Plans have also been announced for the passage of a mortgage law. The supply of raw materials is a major preoccupation. Cement production, at about 5m tonnes/year (t/y), has long lagged behind demand (currently about 7m t/y)"a structural deficit that has been brought into focus by hopes of a pick- up in construction activity funded by Gulf investors. A chaotic distribution market compounds the problem. The authorities established a public body called Amran in 2002 to organise distribution. However it often assigns insufficient material to complete construction work, and so a black market has grown up. The European Investment Bank has expressed interest in financing cement investment. The first major new cement plant to get under way is being built in Aleppo by Lafarge, a French firm, (which acquired the project from Orascom Construction Industries of Egypt) in a joint venture with the MAS Economic Group, a local firm headed by Firas Tlas (son of the former defence minister). This plant will have the capacity to produce 2m t/y by 2009, with the option of increasing this to 3m t/y at a later date.

Services The start-up of private banks in 2004, after 40 years of poor state-run banking, has changed the financial landscape, although the new institutions have had difficulty in making an impact on the market. There are currently eight private- sector banks in operation, including two Islamic banks. All of the banks are joint ventures between Syrian shareholders and Arab banks, with a foreign ownership ceiling of 49% (expected to be raised to 60%). As of end-September 2007, private banks accounted for 17% of total assets and liabilities in the Syrian banking system"S£249bn (US$5bn) out of S£1.5trn (US$33bn)"compared with 13% at end-2006 and 7% at end-2005. Over the same period, the consolidated balance sheet of public-sector banks grew by only 1%, whereas the total assets of private banks increased by 162%"albeit from a low base. The consolidated figures demonstrate the difficulties being faced by the private-sector banks in finding attractive lending opportunities"in contrast to the great success that these banks have had in drawing in deposits. At end-September 2007 the private banks! loan/deposit ratio was a relatively low 29%; their consolidated loan portfolio, of S£55.3bn, amounted to 22% of their total assets, whereas their deposits were 77% of total liabilities. Besides loans to the private sector, the largest categories of private-sector bank assets are balances with foreign banks (S£104bn at end-September) and deposits with the Central Bank (S£53bn). In June 2006 the first of a cluster of private insurance companies licensed under a law passed the previous year started its operations, followed by three more firms over the following year. The insurance sector has considerable scope for expansion because total written premiums account for only 0.6% of GDP. The government has indicated that it plans to oblige Syrian companies to arrange their insurance policies with local firms. As with the development of private banking, most of the new insurance firms involve institutions from Lebanon, Jordan or the Gulf states. Syria has many tourist attractions, including Roman and Byzantine ruins, Islamic shrines and a Mediterranean coastline. The total number of visitors has fluctuated somewhat and stood at 6m in 2006, although that figure included all foreign visitors, not just tourists. The majority of visitors are from Arab countries, mainly Lebanon, Jordan and Iraq. Much of the increase in the period of 2004 to 2006 has been accounted for by visitors from Iraq"in effect refugees from the violence that has erupted since the US-led invasion. Visitors from the Gulf Arab states averaged about 600,000 a year in 2005 and 2006, while tourists from Europe and the US averaged about 275,000 a year.

Employment trends Official data suggest that nearly 70% of the workforce earns less than US$100 a month, with some 40% of public-sector employees taking second jobs to boost their income. Low public-sector salaries also perpetuate corruption. In an effort to reduce the incentive for corruption"and reverse the potentially destabilising downturn in living standards"the government has approved several increases in public-sector salaries, including a 20% rise in 2004 and a 25% increase in 2008 (although this is latterly motivated more by the reduction in fuel subsidies).

Employment 2003 2004 2005 2006 2007 Employment (m) 4.58 4.34 4.69 5.32 5.46 Unemployment rate (%) 10.8 12.3 8.0 8.5 9.0

Source: Economist Intelligence Unit.

The rate of unemployment trended upward significantly in the second half of the 1990s, as the economy failed to generate sufficient job opportunities to meet the needs of Syria!s rapidly-growing, young population. Although the pace of increase seems to have slowed since 2000, the economy is still not growing fast enough to provide jobs for the 200,000 Syrians who enter the job market every year. The government maintains that the robust rates of growth in the non-oil sector resulted in a fall in unemployment to about 8% in 2005. However, this figure is likely to disguise high levels of underemployment.

Prices and earnings Prices and earnings (% change, year on year) 2003 2004 2005 2006 2007 Consumer prices (av) 5.8 4.4 7.2 10.0 12.2

Source: IMF, Article IV report; Economist Intelligence Unit.

Data on consumer price trends can be misleading, largely because of the heavy weighting given to subsidised goods (such as bread and fuel) and price- controlled items (notably rents) within the price basket. After a long period of relatively modest inflation (and occasional deflation), prices began increasing in 2005 (to 7.2%) owing to a public-sector wage increase, looser credit controls, a weaker exchange rate and large inflows of funds from the Gulf. These trends continued into 2006, with inflation rising to 10%. The provisional government figure for 2007 of 4.5% would appear to indicate that tighter monetary controls succeeded in curbing inflation. However, following global price increases towards the end of the year, that figure is expected to be revised up significantly"the current Economist Intelligence Unit estimate is 12.2%"and an even higher rate is expected for 2008 following cuts in fuel subsidies.

Comparative economic indicators, 2007 Syria Jordan Egypt Israel Lebanon GDP (US$ bn) 41.2 15.9 129.8 161.8 22.5 GDP per head (US$) 2,067 2,700 1,709 22,546 5,482 GDP per head (US$ at PPP) 4,318 4,793 5,318 25,890 9,255 Consumer price inflation (av; %) 12.2 5.4 9.5 0.5 4.2 Current-account balance (US$ bn) 1.5 -2.8 0.5 5.0 -2.6 Current-account balance (% of GDP) 3.6 -17.4 0.3 3.1 -11.8 Exports of goods fob (US$ bn) 11.7 5.7 24.5 50.2 3.4 Imports of goods fob (US$ bn) -10.5 -12.0 -44.9 -55.8 -10.7 External debt (US$ bn) 6.5 8.2 29.4 89.9 31.5 Debt-service ratio, paid (%) 2.2 5.7 4.9 11.5 17.2

Source: Economist Intelligence Unit, CountryData.

For an analysis of the latest economic performance data, see the Economist Intelligence Unit!s most recent Syria Country Report.

Regional trends

Power is in effect centralised in the capital, where funds are raised and allocated to the 14 provinces (muhafaza), which then allocate them to city councils. The quasi-socialist nature of the system encourages significant political influence and patronage within the official local government structures. The country!s six key cities"Damascus, Aleppo, Latakia, Homs, Hama and Tartous"have each developed a degree of autonomy, generating local funds for local development. The trading cities of Damascus, Homs and Aleppo have in recent years benefited most from inward investment, with an increase in the number of light manufacturing and industrial concerns. Food-processing facilities have also been developed in Aleppo and Homs, which are close to Syria!s agricultural heartland. The coastal region around Latakia and Tartous has become the focus of international trade, with Banias to the north benefiting from the oil export sector. To the east, the communities are smaller and less developed. Nevertheless, agricultural development around Hassakah has attracted internal migrants from the east, and investment in the oil and gas fields around Deir al-Zour and, more recently, Palmyra has led to sharp growth in those formerly underdeveloped areas.

The external sector

The current account Main composition of trade (US$ m; fob-cif) 2003 2004 2005 2006 2007 Exports fob Crude petroleum 3,578.8 2,861.8 3,338.8 3,260.9 4,255.4 Textiles 372.0 307.9 335.6 1,507.1 1,537.2 Fruit & vegetables 190.9 189.3 172.8 627.7 652.8 Cotton 138.8 160.2 152.7 164.1 167.4 Total exports incl others 5,762.0 7,220.0 8,602.0 10,245.0 11,719.9 Imports cif Fuels 186.1 1,184.5 2,309.9 2,772.0 3,049.2 Metals & metal products 757.4 1,128.1 1,189.6 1,255.5 1,318.3 Machines & equipment 883.4 1,123.4 1,144.7 1,217.5 1,254.0 Foodstuffs 686.1 749.6 839.6 867.7 928.5 Total imports incl others 4,430.0 7,532.9 9,490.7 10,332.3 11,570.6

Sources: Central Bank of Syria, IMF.

Before 1990 Syria was primarily an agricultural exporter with strong links to the former Warsaw Pact countries. However, the collapse of the Soviet Union and the expansion of the oil sector transformed the composition and value of its trade account. The dominance of oil exports has left the country heavily exposed to the volatile international oil market, and to the risk of over- dependence on a single, fast-depleting source of revenue. This has been mitigated to some extent recently by increasing non-oil exports. However, the decline in Syria!s oil production has led to a rise in petroleum imports, and the lifting of foreign-exchange controls on the private sector has unleashed pent-up demand for other imports. The government has adjusted its trade, current- account and balance-of-payments figures several times over the past two years,

reflecting inherent weaknesses in the state!s statistical agencies. The biggest changes have occurred in the trade account, with successive upward revisions to both exports and imports. The Central Bureau of Statistics! figures show a trade deficit of US$520m for 2006, compared with a deficit of US$1.5bn the previous year, mainly owing to a US$1.55bn rise in exports. However, the IMF, in its Article IV report, published in August 2007, estimates that the trade deficit for 2006 was substantially higher, at US$1.85bn. The IMF put exports at US$10.2bn (including US$4bn in oil exports) and imports at US$12.1bn (including US$2.9bn in oil imports). Over the past four years the value of oil exports has remained fairly stable, as the decline in volumes has been offset by higher prices. However, the oil trade surplus narrowed sharply, from US$3.4bn in 2003 to US$1.2bn in 2006, as a result of the increased bill for petroleum imports. We estimate that oil continued to dominate Syria!s trade in 2007 because of higher international prices, and accounted for 36% of exports and 26% of imports. Food and textiles accounted for one-fifth of exports. The IMF!s Direction of Trade Statistics (DOTS) shows that the pattern of Syria!s imports has changed in recent years, with European dominance being challenged by Asian and Middle Eastern countries. In 2006, China was the largest supplier of non-oil goods and Egypt was the third-largest. It should be noted that the DOTS data show far greater trade deficits (for example, US$6.7bn in 2005) than the IMF!s Article IV reports or the current International Financial Statistics (IFS). This internal discrepancy between IMF sources is a reminder of the poor quality of Syrian trade data.

Main trading partners (% of total) 2003 2004 2005 2006 2007 Exports fob to: Iraq 0.0 9.0 26.3 27.4 29.6 Germany 21.6 0.5 9.9 12.1 9.5 Lebanon 6.5 3.5 9.1 9.5 9.4 Italy 13.0 22.7 10.0 6.6 7.9 Imports cif from: Saudi Arabia 2.0 5.2 11.7 12.3 11.7 China 6.2 7.8 6.2 7.9 9.2 Italy 6.8 4.3 5.8 4.8 6.3 Egypt 1.0 3.1 6.0 6.2 6.2

Source: IMF, Direction of Trade Statistics.

Based on the IFS data series, Syria!s current-account balance has seen some sharp fluctuations since the 1980s, largely mirroring changes in the trade balance. After a period of deficits, the current-account balance soared to a surplus of nearly US$1.8bn in 1990, but then plummeted into a deficit of nearly US$800m in 1994. It then moved back into surplus, climbing steadily to a peak of US$1.4bn (6.7% of GDP) in 2002"the year in which illicit supplies of Iraqi crude were at their peak. Since then, the surplus has narrowed, but there is conflicting information about the extent of this decline. As well as the inconsistencies in IMF data, major discrepancies have emerged between balance-of-payments figures issued by the government and those published by the IMF. For example, the IMF!s 2007 Article IV report gave a deficit of US$1.1bn

in 2005, compared with a surplus of US$302m recorded by the Central Bank of Syria. However, in November the Fund revised its 2005 figure to a surplus of US$297m, mainly owing to an increase in non-oil exports. It also revised up its estimate for the 2006 balance from a US$2.1bn deficit to an US$890m surplus, also in line with the Central Bank!s number. Income credits have traditionally been modest, averaging around US$350m over the past decade. Given that the Commercial Bank of Syria alone controls foreign assets worth more than US$10bn, the figure is surprisingly low, although it may be that only those earnings that are brought onshore are captured in the official data. Earnings that are capitalised and kept abroad remain outside the accounts. Income debits are more substantial, and have averaged around US$1.2bn in recent years. The largest share of these comprises earnings from foreign firms active in Syria, particularly oil companies, whose profits have increased as oil prices have risen, despite falling oil output. There has also been an increase in debt-service payments as the government has resolved its outstanding cold war era debt disputes, although the rise was initially relatively modest. More substantial increases occurred after the conclusion of a debt-forgiveness and rescheduling deal with Russia in 2005 over claims dating back to the Soviet era. Syrian expatriates living and working overseas, especially in Lebanon and the Arab Gulf countries, provide a steady inflow of hard currency into Syria, mostly in the form of direct transfers to family members.

The capital account In the Article IV report, the IMF introduced a new category into the capital account, showing "inflows related to Iraqi immigrants". These inflows have risen steadily from US$457m in 2004 to US$803m in 2005 and US$1.3bn in 2006, as the violence in Iraq has worsened, according to the IMF. One possible explanation for the discrepancy in the current-account figures is that the Central Bank has recorded these inflows in the current account"although this is not made explicit. Another factor is the higher IMF estimates for imports. The IMF!s figure for services payments is also significantly higher than the government!s. No figures for official foreign reserves are published by the Syrian authorities, but we estimate that they are sufficient to cover about five months of imports. The fact that the authorities do not publish data on reserves is a major problem for potential lenders and investors, as well as ratings agencies attempting to assess creditworthiness and exchange-rate risk. This problem is offset to some extent by Syria!s large positive foreign asset position, details of which are published. According to the IMF, Syria!s net foreign assets amounted to S£765bn (US$16.6bn) at the end of November 2007. The bulk of these were held by Syria!s commercial banks. Nevertheless, there is a good deal of mystery surrounding the status of commercial bank foreign assets. Syria has historically received little foreign direct investment owing to its closed and socialist economy model. Moderate liberalisation in recent years has stim- ulated a small flow of US$500m in 2005 and US$600m in 2006, according to the IMF. Some of this comes from Gulf investors, but much flows from Iran and Russia, motivated more by political alliances than by purely economic reasons.

Balance of payments, IMF series (US$ m) 2002 2003 2004 2005 2006 Merchandise exports fob 6,668 5,762 7,220 8,602 10,245 Merchandise imports fob -4,458 -4,430 -6,957 -8,742 -9,359 Trade balance 2,210 1,332 263 -140 886 Invisible inflows 2,308 2,356 3,688 4,068 4,122 Invisible outflows -3,078 -2,960 -3,364 -3,631 -4,118 Invisibles balance -770 -604 324 437 4 Current-account balance 1,440 728 587 297 890 Foreign investment 115 160 275 500 600 Other investment assets 1,180 1,210 -237 -524 -733 Other investment liabilities -1,545 -1,806 -135 -138 -919 Financial balance -254 -440 -101 -166 -1,056 Capital account nie credit 20 20 20 20 20 Capital account balance 20 20 18 18 18 Net errors & omissions -160 383 -256 -137 -588 Overall balance 1,050 695 251 14 -732 Change in reserves (- indicates increase) -759 -338 -375 -400 -350

Source: IMF, International Financial Statistics.

References

National statistical sources Syrian official statistics are extremely slow to appear. Data in the annual Statistical Abstract published by the Central Bureau of Statistics are usually at least one year late. Even then, data for the final year are generally provisional and are revised the following year. Data from the Central Bureau of Statistics and the Central Bank of Syria often contradict each other. Central Bank of Syria, Quarterly Bulletin Central Bureau of Statistics, Statistical Abstract (annual)

International statistical sources Bank for International Settlements, International Banking and Financial Market Developments (quarterly) IMF, Direction of Trade Statistics (quarterly; annual); International Financial Statistics (monthly; annual); Article IV reports OECD Development Assistance Committee, Geographical Distribution of Financial Flows to Aid Recipients (annual) World Bank, Global Development Finance (annual); Social Indicators of Development (annual); World Tables (annual)

Select bibliography and Moshe Maoz, Syria and Israel: From War to Peacekeeping, Clarendon Press, 1995

websites Volkr Perthers, Syria Under Bashar Al-Asad -- Modernisation and the Limits of Change, Routledge, 2006 Eyal Zisser, Commanding Syria: Bashar al-Asad and the First Years in Power, I. B. Tauris, 2006 Central Bank of Syria, www.banquecentrale.gov.sy The Syria Report, www.syria-report.com

Appendix

Index methodology Measuring democracy

There is no consensus on how to measure democracy. A key difference in measures is between "thin" or minimalist, and "thick" or wider concepts of democracy. The Economist Intelligence Unit!s democracy index is a thick measure. In addition to measuring political freedoms and civil liberties (the essential components of any definition), other features also need to be assessed in order to determine how substantive democracy is. Our index is based on five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The index provides a snapshot of the current state of democracy worldwide for 167 independent states and two territories (this covers almost the entire population of the world and the vast majority of the world!s independent states).

The overall index of democracy, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in the five categories. The overall index is the simple average of the five category indexes. We use a three-point scoring system for the 60 indicators. A dichotomous 1-0 scoring system (1 for a yes and 0 for a no answer) is used for most indicators. For some indicators, a 0.5 score is possible, where a simple yes (1) or no (0) is problematic. The category indexes are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries do not score a 1 in the following critical areas for democracy: • whether national elections are free and fair; • the security of voters; • the influence of foreign powers on government; and • the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes: 1. Full democracies"scores of 8 to 10. 2. Flawed democracies"scores of 6 to 7.9. 3. Hybrid regimes"scores of 4 to 5.9. 4. Authoritarian regimes"scores below 4.

A differentiating aspect of the index is that in addition to experts! assessments we use, where available, public opinion surveys. Indicators based on the surveys predominate heavily in the political participation and political culture categories, and a few are used in the civil liberties and functioning of government categories.

To view the full methodology and the complete questionnaire, visit eiu.com.

Editors: Justin Alexander (editor); Mohammed Shakeel (consulting editor) Editorial closing date: June 24th 2008 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]