Syria - Some positive signs amidst daunting challenges (page 2 of 2)

The central bank base rate was increased for the first time in decades and there has been some movement away from the fixed interest rates that have characterised policy for the last 25 years. Furthermore, certificates of deposits have been launched for the first time and initial steps have been taken to establish an interbank market. However, despite these developments, the central bank still lacks the flexibility and tools to manage monetary policy.

On the exchange rate front, banks are now allowed to set their exchange rate within a narrow band around the fixed central bank rate. Going forward, further exchange rate reforms are expected, including the abolition of the remaining secondary exchange rates and further liberalisation of the foreign currency law.

Despite these positive developments, deep challenges remain. While real GDP growth has accelerated over the last two years, the growth rate was still relatively weak, especially given the performance of other regional oil (and non-oil) exporting countries and the domestic needs of the economy. A stronger growth rate is required for increasing job opportunities. Moreover, given the state of the Syrian economy, deeper and broader reforms are required if higher levels of growth are to be achieved and sustained. The need for reform is accelerated by the fact that oil reserves are falling and the oil import bill is increasing - Syria is set to become a net oil importer in 2010. The loss of oil income will add serious challenges to the fiscal and current accounts, let alone maintaining living standards. Negatively, the reform program will likely remain slower than required as the authorities continue to face capacity constraints and the absence of social safety nets to mitigate the impact of the reform measures.

Furthermore, political uncertainties and outside pressure add to the complexities of the challenges. Domestically, power is being increasingly concentrated in the hands of a few surrounding Assad, while opposition groups jockey for power. Meanwhile, the president has been weakened by the UN investigation into Hariri's assassination.

On the international front, Syria has become more internationally and regionally isolated following Hezbollah's conflict with Israel in Lebanon. Although Hezbollah's performance emboldened Syria (and Iran), Damascus has been isolated by many powerful neighbours, including Saudi Arabia.
Furthermore, the threat of sanctions (related to the assassination of Hariri) still remain a distinct possibility. Although the latest report by UN investigators (published at end-September) indicated Syria's co-operation with the inquiry has been "generally satisfactory", the US ambassador to the UN John Bolton has indicated the latest report did not mean Syria was in the clear. Furthermore, US Secretary of State Condoleeza Rice has indicated Washington is hoping to gain support for new sanction in response to Syria's alleged role in destabilising Lebanon and supporting Hamas. Indeed, the US continues to place pressure on Damascus. In March, the US Administration's banned American banks from dealing with the Commercial Bank of Syria and its subsidiary, saying they had been used by terrorists to move their money. Although Syria is currently benefiting from stronger FDI inflows from regional countries, increased global isolation will continue to deter global investment and trade, which is vital for upgrading the economy and obtaining a higher growth potential.