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Syria - Economy (Notes)

ECONOMY Syria is a middle-income, developing country with an economy based on agriculture, oil, industry, and tourism. However, Syria's economy faces serious challenges and impediments to growth, including: a large and poorly performing public sector; declining rates of oil production; widening non-oil deficit; wide scale corruption; weak financial and capital markets; and high rates of unemployment tied to a high population growth rate. In addition, Syria currently is the subject of U.S. economic sanctions under the Syria Accountability Act, which prohibits the export and re-export of most U.S. products to Syria. As a result of an inefficient and corrupt centrally planned economy, Syria has low rates of investment, and low levels of industrial and agricultural productivity. Its GDP growth rate was approximately 2.9% in 2005, according to IMF statistics. The two main pillars of the Syrian economy have been agriculture and oil. Agriculture, for instance, accounts for 25% of GDP and employs 42% of the total labor force. The government hopes to attract new investment in the tourism, natural gas, and service sectors to diversify its economy and reduce its dependence on oil and agriculture. The government has begun to institute economic reforms aimed at liberalizing most markets, but reform thus far has been slow and ad hoc. For ideological reasons, privatization of government enterprises is explicitly rejected. Therefore major sectors of the economy including refining, ports operation, air transportation, power generation, and water distribution, remain firmly controlled by the government. The Bashar al-Asad government started its reform efforts by changing the regulatory environment in the financial sector. In 2001, Syria legalized private banking and the sector, while still nascent, has been growing quickly in the last four years. Controls on foreign exchange continue to be one of the biggest impediments to the growth of the banking sector, although Syria has taken gradual steps to loosen those controls. In 2003, the government canceled a law that criminalized private sector use of foreign currencies, and in 2005 it issued legislation that allows licensed private banks to sell specific amounts of foreign currency to Syrian citizens under certain circumstances and to the private sector to finance imports. Syria's exchange rate is fixed, and the government maintains two official rates -- one rate on which the budget and the value of imports, customs, and other official transactions are based, and a second set by the Central Bank on a daily basis that covers all other financial transactions. There is, however, still an active black market for foreign currency. Given the policies adopted from the 1960s through the late 1980s, which included nationalization of companies and private assets, Syria failed to join an increasingly interconnected global economy. Syria withdrew from the General Agreement on Tariffs and Trade (GATT) in 1951 because of Israel's accession. It is not a member of the World Trade Organization (WTO), although it submitted a request to begin the accession process in 2001. Syria is developing regional free trade agreements. As of January 1, 2005, the Greater Arab Free Trade Agreement (GAFTA) came into effect and customs duties were eliminated between Syria and all other members of GAFTA. In addition, Syria has signed a free trade agreement with Turkey, which came into force in January 2007, and initialed an Association Agreement with the EU, which has yet to be signed. Although Syria claims a recent boom in non-oil exports, its trade numbers are notoriously inaccurate and out-of-date. Syria's main exports include crude oil, refined products, raw cotton, clothing, fruits, and grains. The bulk of Syrian imports are raw materials essential for industry, vehicles, agricultural equipment, and heavy machinery. Earnings from oil exports as well as remittances from Syrian workers are the government's most important sources of foreign exchange. Syria has produced heavy-grade oil from fields located in the northeast since the late 1960s. In the early 1980s, light-grade, low-sulphur oil was discovered near Dayr al-Zur in eastern Syria. Syria's rate of oil production has been decreasing steadily, from a peak close to 600,000 barrels per day (bpd) in 1995 down to approximately 425,000 bpd in 2005. Experts generally agree that Syria will become a net importer of petroleum not later than 2012. Syria exported roughly 200,000 bpd in 2005, and oil still accounts for a majority of the country's export income. Syria also produces 22 million cubic meters of gas per day, with estimated reserves around 8.5 trillion cubic feet. While the government has begun to work with international energy companies in the hopes of eventually becoming a gas exporter, all gas currently produced is consumed domestically. Some basic commodities, such as diesel, continue to be heavily subsidized, and social services are provided for nominal charges. The subsidies are becoming harder to sustain as the gap between consumption and production continues to increase. Syria has a population of approximately 19 million people, and Syrian Government figures place the population growth rate at 2.45%, with 75% of the population under the age of 35 and more than 40% under the age of 15. Approximately 200,000 people enter the labor market every year. According to Syrian Government statistics, the unemployment rate is 7.5%, however, more accurate independent sources place it closer to 20%. Government and public sector employees constitute over one quarter of the total labor force and are paid very low salaries and wages. Government officials acknowledge that the economy is not growing at a pace sufficient to create enough new jobs annually to match population growth. The UNDP announced in 2005 that 30% of the Syrian population lives in poverty and 11.4% live below the subsistence level. Syria has made progress in easing its heavy foreign debt burden through bilateral rescheduling deals with its key creditors in Europe, most importantly Russia, Germany, and France. Syria has also settled its debt with Iran and the World Bank. In December 2004, Syria and Poland reached an agreement by which Syria would pay $27 million out of the total $261.7 million debt. In January 2005, Russia forgave 80% of Syria's $13 billion long-outstanding debt, and later that year Syria reached an agreement with Slovakia, and the Czech Republic to settle debt estimated at $1.6 billion. Again Syria was forgiven the bulk of its debt, in exchange for a one time payment of $150 million.