Aug 15 2012
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Syria: Economy of violence
"Beyond the obvious and immediate material damage caused by fighting and international sanctions, there are many, often times overlooked long-term consequences: disruption of the agricultural and educational sectors, significant capital flight, depletion of foreign currency reserves and the state's looming insolvency," notes the International Crisis Group.
But while the economy is ruined, a different kind of boom has emerged in the country, as both sides have accumulated new resources.
ICG reports on pro-regime businessmen supposedly lending a hand, bankrolling the shabbiha - or security officers. "Some have turned to forms of profiteering, benefiting from new smuggling opportunities or, more simply, the predicament of fellow businessmen."
Meanwhile, the rebels - no angels among them - have also benefited thanks to donations from local businesses and the country's expatriate population.
"Armed opposition groups have acquired a level of financial autonomy by tapping into their benefactors' deep pockets, by their own admission predominantly Islamists and foreign-based," notes ICG. "By and large, with some exceptions noted above, they have refrained from predatory activity for fear of alienating their social base; that said, some have engaged in for-profit criminal behaviour, including looting or kidnapping regime sympathisers for ransom."
The Institute of International Finance believes that the Syrian economy will contract 14% this year, following on the 6% decline last year.
Growth evaporated last year primarily due to falling exports and investments, especially as the European Union and American sanctions went into effect in November. That was partially offset by high oil prices which cushioned the blow even though production fell during the year.
"Partial data from trading partners show that Syrian exports of crude oil (which account for 60% of total exports) have increased by 25% in nominal terms for 2011, mainly due to higher oil prices. In volume terms, oil exports, mainly to the EU, may have declined by 10%," said the IIF.
Non-oil exports fell by 15%, further exacerbated by sanctions by the Arab League nations and Turkey at the end of last year.
OFF THE GRID
But the IIF data may not give a full picture of the true decline in the economy. The Syrian economy is not integrated into the international financial system and the sanctions may not inflict the pain on President Bashar Al Assad's finances as the international community would have hoped.
Syria's oil production has fallen from 330,000 barrels per day in 2011 to 160,000 bpd on average this year, and it is set to decline further to 140,000 bpd by 2013, according to the International Energy Agency's latest estimates.
OPEC estimates are slightly more optimistic.
"Syria's oil supply is projected to average 0.21 mb/d in 2013, steady from this year, the group said in a July report. "This assumes that a partial return of the shut-down production will begin in the second half of next year. However, the risk to ... Syria's forecasts remains high, given the ongoing political situation, as well as limited data."
Chatham House believes that as Syrian oil exports are small in scale, cutting them off is unlikely to have had a big impact.
"Given the stalemate in the UNSC [United Nations Security Council], it is also unlikely that the UN will be able to agree on the imposition of more far-reaching sanctions," noted the House in a report based on a panel discussion with experts on Syria. "Even if it does, it was argued that they would not be a 'game changer' given the regime's relative lack of dependence on the international banking system."
But other sectors of the economy have taken a serious hit, which has eroded confidence in the Syrian pound and wiped out foreign reserves.
Syria operates a cash-based economy, heavily dependent on black and grey markets, notes Chatham House. "Although there is a paucity of economic data, one participant noted it seemed likely that cash was coming through the borders from Iran and Iraq. If this were not so, the Syrian pound would have been expected to suffer a more severe collapse than it has."
FDI and tourism receipts declined considerably, along with workers' remittance which fell from USD21-billion in 2010 to USD16-billion last year.
According to IIF, an estimated USD5-billion left the country contributed to the decline in reserves from USD19.5-billion in 2010 to USD10.8-billion as 2011.
With the humanitarian disaster spreading across the country, the economic situation is expected to get far worse, especially as foreign players find ways to restrict Mr. Assad's access to resources.
"The flight of Aleppo's business community has rapidly affected what was previously a relatively protected local economy," notes Chatham House. "Scaling up the international support given to refugees and securing borders might also encourage the leakage of support from the Assad regime as well as hesitant Syrians if they knew they had somewhere safe to go. There may also be other ways of disrupting supply lines to the regime and its access to resources."
It is going to get far uglier before it gets any better. With the international community unable to agree on a course of action, the Free Syrian Army and the Syrian regime is likely to fight more bloody battles before we are anywhere near the end game.
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