Does Syria mean business?

By GARETH SMYTH ALEPPO

In the souks of Aleppo, Syria's second largest city with a population of over 3 million, business is still conducted much as it has been for centuries. Porters wait with their donkeys, carpet sellers sigh, nut merchants weigh pistachios and fishmongers chase away the flies. From Roman times until the 19th century, Aleppo was a prosperous town on the Silk Road linking the Mediterranean with Persia and further east. The souks, which locals say contain 1,600 shops, are supposedly the largest in the world.
But the bulk of the Syrian economy is outside the souks. "The public sector used to be around 60 percent of the economy," says Nabil Sukkar, a leading economist. "Since the reforms of 1986-91, it has changed, but the state still accounts for around 40 percent."
The Ba'ath party has ruled Syria for 39 years. In a country where civilization is at least 4,000 years old, that is not long. Yet, so far at least, the Ba'ath's centralized, state-dominated political and economic system endures. It is 18 months since Bashar al-Assad succeeded his father, the late Hafez al-Assad, as president, and sketched a program of reform centered on reviving the private sector and encouraging "modern thinking." Since then, expectations of change have ebbed.
"It's difficult to pay the bills," said a man in his early 30s driving a taxi in Aleppo as a second job. "But they say things will improve in 2002, or 2003 or maybe 2004." Unemployment is currently at least nine percent: 54 percent of Syrians are under 20, meaning that 240,000 young people enter the workforce each year. With per capita gross domestic product at $1,000-1,200 a year, economic growth struggles to keep pace with population growth of around 2.5 percent.
Syria has expressed a desire to join the World Trade Organization and for several years has been in talks with the European Union (EU) about joining the Euro-Mediterranean agreement, which would expose it to greater competition from the EU. But Syria is ill placed to increase exports. "Even where the potential is high," says Alf Monaghan, a consultant advising the Syrian private sector through an EU scheme, "the goods are often poorly labelled and of variable quality."
Years of supplying mainly agricultural products to the Soviet Union were no preparation for today's competitive world market. "We sent them olive oil in tins," points out one businessman. "The international consumer of 2002 won't buy that." Syria has been fortunate in that a trade surplus has resulted from the growing importance of oil exports, which have risen to at least 60 percent of export earnings.
The new cabinet. In his inauguration speech in 2001, President Assad stressed the importance of activating the private sector as the motor of economic growth. The new cabinet appointed in December included Ghassan al-Rifai, a World Bank official for nearly 30 years, as the minister of economy and trade, and three of four ministers in the key economics portfolios are, significantly, not members of the Ba'ath party.
But many observers question whether reformist ministers will have the leeway they need. It is more than 18 months since Mustafa Miro, the prime minister, announced the government's intention to end the four-decade-old state monopoly on banking - but not one private bank has yet appeared.
"It was a mistake to introduce the law for private banks before amending the central bank legislation to create a new supervisory and regulatory system," says Nabil Sukkar, who nevertheless remains optimistic. "Under the new rules, foreign banks need local partners. So they are looking for partners with good names, those who have been reputable is business. Now, I hope to see the first private banks by the autumn."
For the economy as a whole, a private banking system may be a first step to increasing overseas investment from a paltry $100 million. For Syrian citizens, it is a means to retail services. Aside from a couple of machines recently opened by the Real Estate Bank, Syria has no ATMs. Those with accounts abroad have been able to use credit cards - including Diners Card, Visa and Mastercard - for four years, but a scheme for Syrian credit cards - issued by the Savings Bank, Real Estate Bank and Commercial Bank of Syria - remains "in preparation."
Progress on simplifying exchange rates has also been hesitant, and there are still four main rates. Three apply to customs duties, levied at 11.25, 23, and 45 Syrian pounds to the dollar depending on whether the goods are deemed essential, semi-essential or non-essential. "They are gradually moving more and more goods into the 45 category," says Sukkar, "but, of course, this is inflationary."
Importers must seek permission to use any dollars they hold abroad, or they must go through the Commercial Bank, which operates a supply-and-demand scheme, trading dollars and Syrian pounds between importers and exporters. "The rate is around 50-60 pounds to the dollar, above the market rate," Sukkar says. "But it is attractive for exporters because it gives them access to dollars legally."
In early 2001, the government for the first time allowed citizens to sell (but not buy, unless for education or medical purposes) dollars at virtually the black market rate of over five pounds to the dollar. "This was important in dollarizing people's minds," notes a Western diplomat. While it remains illegal for shops to trade or deal in dollars, holding dollars is now legal and penalties for trading have been reduced. Similar ambiguities exist in manufacturing. In pharmaceuticals, for example, Panadol, GlaxoSmithKline and Upjohn products are all manufactured under license by the Nahas Group, but the government still sets the prices.
Within the government, there is a strong desire to keep the country's options open. This is partly a matter of vested interests. But there is also a strong, traditional Syrian sense of self-reliance, a residual socialism and concern that a simple model of privatization and globalization does not benefit developing countries. The example of Argentina is not an attractive one.
"We believe that the state will lead development," says Issam al-Zaiim, recently appointed as minister of industry and a key ally of President Assad. "We have decided, as a general rule, not to privatize. What are we going to do instead? Answering that question is my main task as minister."
Seeing red. Many in the Syrian ruling party are attracted to China as a positive example, and Zaiim, who is not a Ba'athist, visited the People's Republic twice last year as minister of economic planning. "No example can be copied, and every country is unique," he says. "China has a comparable political system, and they have 20 years experience [of economic reform]. There is great change in China's southern and eastern regions, in the new economic zones, where the increases in the standard of living are remarkable. China has a national identity and solidarity that is many thousands of years old. It has a tradition of collective discipline and loyalty that is very important in its stability."
Zaiim believes in a mixture of public-sector reform - ultimately, he says, with "autonomous" units required to be profitable - higher investment, improved training and education and a more dynamic private sector. This, he insists, can produce economic growth of three percent over the next three years, increasing after that. Hence the government is increasing investment, with capital spending scheduled in 2002 to be $3.7 billion, comfortably above current spending of $2.6 billion.
The intertwining of politics and economics is evident in the improving relations with Iraq, which has become an increasingly important market. Since trade between Iraq and Syria resumed in 1997, Syrian exports jumped from a total of $500 million in 1997-2000 to $1 billion in 2001. According to Mohammed Mehdi Saleh, the Iraqi economy and trade minister, this will rise to $2 billion this year. "We expect trade with Iraq to increase," says Issam al-Zaiim. "We are a neighboring country and we want to do business."
Oil analysts say that Iraq has been exporting oil to Syria through the pipeline that fell into disuse in the early 1980s during the Iran-Iraq War. One economist estimates that Syria pumps 125,000 barrels per day (b/pd) for domestic consumption, helping it export some 340,000 b/pd of its own production, which now constitutes around 60 percent of Syrian export earnings.
Zaiim has repeated Syrian denials that it is pumping any Iraqi oil, other than a small amount necessary for maintenance, since this would contravene United Nations sanctions against Iraq. "We are waiting for an agreement with the UN to authorize repairs," he says.
"Iraq has become a tremendous outlet for our industry," says Nabil Sukkar. "But this isn't really a long-term solution. Iraq is fulfiling the same function as the Soviet Union in the 1980s. Indeed, the Iraqis have complained about some of the goods being sent to them. The real challenge for Syria is to make a full commitment to the market economy. This doesn't mean abandoning the role of the state, and no one in Syria is arguing for wide-scale privatization. But big investments will not come if the door is at once half-open and half-closed."