The Economic Collapse of Syria

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Homs_Syria.jpg

The violent civil war in Syria that began with the uprising in March 2011 has already imposed tremendous costs on the Syrian population. More than 100,000 people have died and millions have become refugees in Jordan, Turkey, and Lebanon, in addition to the internally displaced in Syria itself.

 Naturally, the focus of the international community has been on the human suffering and costs that the war has caused. What has taken a back seat is the cost of the fighting on the economy. This may not be of immediate concern to outsiders, but it is something members of the international community, both those that favor the present regime of President Bashar al-Assad and those that do not, should keep in the back of their minds. The Syrian economy is in total disarray and will eventually have to be resurrected when the fighting is over. The Syrian government is in a state of denial and Prime Minister Wael al-Halqi is reported to have said that the economy is “strong and balanced,” a view that is at total variance with the facts. 

While very little is known about precisely what shape the Syrian economy is in, available indicators point to a virtually complete collapse of output, trade, and finance. Once the war ends the international community will have to deal with the consequences of the fighting that has destroyed a large portion of the country’s capital stock and productive capacity. Aside from the need to stabilize the economy, reconstruction will require substantial external financing as the costs of rebuilding the Syrian economy will be huge. 

Economic developments prior to the uprising

Syria’s macroeconomic indicators in the decade before the uprising were relatively sound. During 2000-2010, the country’s growth rate averaged 4.3 percent per year, about a percentage point below the average growth experienced by the MENA region. Inflation was kept in check at less than 5 percent and only once during those years did it hit double-digits. In 2008, the sharp rise in commodity and oil prices led to a spike in the inflation rate to 15.2 percent, but the following year the government had brought the rate down to 2.8 percent. Overall, inflation in Syria was considerably below the rates witnessed in the MENA countries group. To a large extent this good inflation performance was the outcome of a sensible fiscal policy that maintained a relatively low fiscal deficit of under 3 percent of GDP until 2009. While the fiscal deficit jumped to nearly 5 percent of GDP in 2010, over the entire period the Syrian fiscal deficit was about one half of the average fiscal deficits of MENA oil-importing countries. 

On the external front too, Syria’s performance, though not stellar, was nonetheless positive. The current account deficit, which averaged about $400 million a year (1.6 percent of GDP) during 2000-2007, started to rise steadily thereafter to reach $1.7 billion (2.9 percent of GDP) by 2010. However, capital inflows comprising mainly foreign direct investment (FDI) from other Arab countries and Europe, led to overall balance of payment surpluses and increases in the international reserves holdings of the Central Bank of Syria (CBS) that reached $18.2 billion at the end of 2010. The largely positive external picture was reflected in the relative stability of the exchange rate. The Syrian Pound (SYP) appreciated steadily against the US dollar at an average rate of 2 percent per year and at the end of 2010 reached SYP 47 to the US dollar. 

While the overall macroeconomic picture was generally positive, in the years leading up to 2010 real household expenditures steadily declined, unemployment and poverty rates rose, income inequalities increased, and regional disparities in development grew larger. The economic seeds for the uprising were clearly evident in Syria, and were essentially the same as those seen in other Arab transition countries.

Furthermore, prior to the start of the civil war, Syria was undertaking a number of structural reforms to liberalize the economy to make it more market-oriented. These reforms included unifying multiple exchange rates, allowing the opening of private banks and the Damascus Stock Exchange, eliminating controls on interest rates, and raising prices of some subsidized items. Nevertheless, in 2010 the economy was still tightly regulated both internally and externally and the process of reform was designed to be very gradual. 

Economic developments since the uprising

Following the uprising the economy started to deteriorate significantly, slowly in 2011 and much more rapidly in 2012. In 2011, official estimates show a decline of real GDP by 2.3 percent, although some observers question this number, arguing that the decline in the growth rate was much larger. The inflation rate stayed at about 5 percent for the year, although this was achieved by tightening price controls on basic food items and increasing subsidies to placate the population. The increase in military spending and subsidies, coupled with a decline in tax revenues, caused the fiscal deficit to nearly double to 9 percent of GDP. 

However, the external balances of the country worsened quite dramatically. The current account deficit shot up to nearly $8 billion (from $1.7 billion in the previous year) and was financed largely by running down international reserves, which fell to $14 billion by the end of 2011. Undoubtedly, the decline in international reserves would have been far larger had the CBS not imposed limits on the amount of foreign currency that could be bought to $1,300 per month. Syria also received financial assistance from Iran during the year. Through a mix of selling foreign currency in the market and controls on purchases by the public, the CBS was able to maintain the exchange rate at SYP 47, or close to what it was in December 2010. This was obviously an unsustainable policy as events in 2012 and early 2013 proved.

The full damage to the economy became evident in 2012. While there are only a few reliable economic indicators on recent developments in the Syrian economy, those that are available show an economy in a high state of distress. Inflation in 2012 jumped ten-fold to over 50 percent and international reserves fell to $2 billion at the end of 2012. The current account deficit did decline to $6 billion, but that was because of the dramatic drop in foreign trade. Exports fell by 60 percent to under $5 billion and imports to $10 billion from $18 billion in the previous year. 

Clearly the economy in 2012 was in freefall. As direct estimates of real GDP are unavailable, other indicators are needed to proxy the growth rate during 2012. These estimates indicate that real GDP fell by between 50-80 percent, depending on whether the fall in trade or the fall in the broad money supply are used as the indicator. By any token, this was a massive decline in the country’s output. While more than a halving of real GDP in one year is highly unusual, it is not unknown in wartime situations. For example, non-oil real GDP of Libya fell by 52 percent in 2011 when it was engaged in its civil war. As a matter of fact, Libyan total real GDP, that is including the oil sector, fell by 62 percent in that year. 

The unholy combination of spiraling inflation and a rapidly shrinking economy showed up in the behavior of the exchange rate during 2012 and into the first half of 2013. In December 2012, the currency fell to SYP 60 to the US dollar, a decline in value of some 50 percent from the previous year.  In early 2013, however, it fell off the cliff. At the beginning of June 2013 the currency had fallen to SYP 170 to the US dollar, and when the United States announced that it was going to supply arms to the rebels, it really tanked. On June 17, the currency reached a low of SYP 220 to the US dollar as Syrians tried desperately to get out of the Syrian Pound and into foreign currencies. It had now become a full-fledged run on the currency and the government did not have the foreign exchange reserves to counter it. 

Some foreign exchange was provided to the market by the CBS utilizing a $1 billion credit line with Iran, but this effort only slowed down the run and did not reverse it. Even Governor Adib Mayaleh of the CBS recognized that the “normal” rate for the currency was now around SYP 170 to the US dollar and that “speculation” had pushed the rate way beyond that level. The central bank would intervene to achieve the normal rate using the financing that had been provided by Iran. However, having lost $15 billion in reserves in trying to defend the rate, it is difficult to see anything but a temporary pause in the drop of the Syrian Pound by activating the Iran credit line. Furthermore, absent sustained support from Iran, a highly unlikely prospect given Iran’s own financial constraints, it is completely rational for Syrians to move out of the local currency as fast as they can. 

Syria now has all the characteristics of collapsed economy with falling economic activity and trade, inflation that is likely to move into hyper-inflation as the government finances its spending through printing money, and a currency that is depreciating at a breakneck pace. 

What happens next?

While the timing and outcome of the civil war in Syria is for politicians, diplomats, and political scientists to predict, there is the big question of what will need to be done to salvage the economy when it is all over. At this stage, virtually no one can say with any degree of certainty as to when and how the conflict will ultimately end. Irrespective of who emerges victorious—the rebel Syrian forces, Bashar al-Assad, or some type of national unity government—they will face the monumental task of fixing the broken economy. So what will they need to do? 

In the short run, the government will have to stabilize the economy and reverse the direction in which it is currently headed. This means bringing inflation down, arresting the continuing falling output, improving the external balances, and managing the exchange rate. This is not by any means going to be an easy task, but it will need to be done. Fortunately, the recipe to stabilize an economy is well known—appropriate monetary, fiscal, and exchange rate policies have brought many countries back from the brink. External financing will, of course, be needed but, if the government is willing, approaching the IMF for a program is the typical choice for many countries emerging from conflict. In the Middle East, Iraq is one example of a post-conflict country going into an IMF program in 2004 to stabilize the economy. 

Over the longer term, there will need to be a major emphasis on reconstruction. This is more difficult than stabilizing the economy because it will require large-scale financing to undertake the rebuilding of the capital stock and infrastructure destroyed in the war. Cost estimates of reconstruction are obviously uncertain as the war continues. However, the UN has estimated that were to be peace today, the country would need at least $80 billion to put the economy back to what it was prior to the uprising. The examples of Iraq and Libya would argue for a much higher level, possibly running into hundreds of billions of US dollars.

Unfortunately, Syria is in a worse situation than Iraq and Libya because these two countries could count on future oil revenues to support reconstruction. Syria, on the other hand, will be almost entirely dependent on the international community to assist in what will be a massive reconstruction effort involving roads, telecommunications, electricity, factories, etc. Will the international community be ready to provide such financing? Unfortunately, there is probably little or no chance it will, and particularly if Bashar al-Assad prevails and remains in Syria. There is a degree of hope if the rebel Syrian forces prevail or a national unity solution emerges. In that event, it is possible that the wealthy Gulf countries—notably Qatar, Saudi Arabia, and the United Arab Emirates—could provide a large share of the needed financing. 

At present, naturally the focus of the world is on the fighting and the humanitarian catastrophe in Syria. Eventually, however, the international community will have to face up to the question of how to deal with Syria on the economic front. There should be some type of contingency plan to assist Syria irrespective of who wins in the end. An economically failed state would struggle to secure it own territory and population, deepen the suffering of the Syrian population, and pose a geopolitical threat to its immediate neighbors and beyond. 

Mohsin Khan
 is a senior fellow in the Rafik Hariri Center for the Middle East focusing on the economic dimensions of transition in the Middle East and North Africa.

Faysal Itani
 is a fellow with the Rafik Hariri Center for the Middle East whose focus is political economy and transition in the Arab world, with an emphasis on the Levant. 

Photo: 
Freedom House