1. 1 Syria at a Turning Point Trends in the Syrian Economy University of Reading 23 rd February 2005 Dr Ken Charman

2. 2 Syrian Economy Closed Economy Under performed for many years Dependent on oil reserves for foreign exchange and macro-economic stability Economy in need of diversification

3. 3 Factors in Syrias Favour Geographic position – between Europe and Middle East Transit country for oil and consumer goods Strong agricultural base Established industrial base in heavy and light industry Private sector accounts for 60% GDP

4. 4 Issues Facing Syria Rapid population growth 2.6% per annum 40% population under the age of 14 Growing Demands on education and health 70% population earn less than 120 Euros per month Growth rates in employment not sufficient to absorb growing labour force

5. 5 Policy Requirements To achieve faster growth Create employment Maintain stability (inflation, exchange rates)

6. 6 Oil Sector Dominates Oil producing country – but not a major producer 2.5 billion barrels of exploitable oil reserves (10 years supply) 2.5 billion cubic metres gas (50 years supply) Up till 1990 Syria cotton and textiles 40% total export earnings Oil exports now dominate (60-75% total exports, 40-45% total government revenues) during 1980s and 1990s

7. 7 Agricultural Sector 26% GDP Employs 30% workforce Considerable state support – impact on government budget Wheat, barley and cotton sold to state marketing boards at fixed prices Market prices signals do not reach farm gate State support has not led to investment (e.g. cotton requires irrigation)

8. 8 Industrial Base Mining and quarrying - 14% GDP Manufacturing - 14% GDP Industry sectors: Oil sector, chemicals, water and electricity, wood and furniture, food beverages, textiles and yarn Low value textiles (yarn) exported Protection for local industry has led to low productivity and investment

9. 9 Industrial Policy to Date Investment financed by oil revenues Investment largely unproductive At a time when Syria should have been emerging from an agricultural producer to a producer with a diversified industrial base, oil revenues and protectionism have led to un-competitiveness Private Sector Development has favoured Free Economic Zones – favoured tax status, and better facilities – these do not spill over to rest of economy

10. 10 Policy Reform too slow Investment Law No. 10 was important step (lower restrictions to capital inflows, and tax concessions), but was not accompanied by structural reforms Reforms needed in Liberalisation of trade / protectionism Undeveloped financial sector Incentives facing the private sector

11. 11 Apparent Stability? GDP growth 1.4% in 2003, (1.9% 2004?) Inflation 1% - 3% since 2000 Trade balance 6.8% GDP 2003 Fiscal deficit 4.1% GDP Foreign exchange reserves high (12.5 billion at end 2002 = 6 months import cover) But: GDP growth, foreign exchange and government revenues are dependent on oil – non-oil sector contribution is declining

12. 12 Policy Challenges Efficient taxation system that captures the private sector incomes Monetary policy (interest rate policy) that addresses inflation and exchange rate (interest rates fixed at 7-9% since 1981) Liberalisation (reduction in protectionism) that encourages competition Financial sector developed - to lend to private sector

13. 13 Recent Policy Changes Good Private banks allowed to operate since 2003 – but restricted to Free Industrial Zones Monetary Policy now with Monetary and Credit Council - Central Bank to follow more flexible interest rate policy Exchange rate liberalisations encouraging – but traders still need access to finance Reserves high enough to allow pegged exchange rate

14. 14 Institutional Policy Required Excessive customs regulations / bureaucracy Inefficient banking system / lack of access to finance Regulation system poor (especially for utilities), ministries to be policy makers, not controllers Lack of competition laws + agencies to oversee implementation of laws – reduce barriers to entry and restrict abuse of monopoly power Independent bodies required to implement policies transparent and efficient and accountable

15. 15 Trade is a Priority GAFTA + EU-Syria Association Agreement provide framework for liberalisation Short term trade impact negative (increase in imports) Long term ability of private sector to respond to liberalised market.

16. 16 Thank you