AMMAN (Reuters) - In a drab state-owned supermarket in the heart of the Damascus suburb of Midan, Nazeer Khatib's shopping trolley is packed with everything from Thai rice to a Chinese-made electric fruit mixer, all on sale at prices far lower than in shops nearby.
"I never used to go to the state consumer cooperative but now it really helps me get at least 30 percent less on essential items including my rations of rice and sugar," said Nazeer.
A father of six, Nazeer is now living on paltry savings since his small carpentry business was burnt down last month in Harasta, a suburb that has been rocked by violence almost daily since the outbreak of the uprising against President Bashar al-Assad's regime 15 months ago.
For many low-wage earners, who make up the majority of Syria's 20 million population, cheaper prices at state supermarkets, reminiscent of those in the Soviet Union, offer some reprieve from the economic fallout of the uprising, which has hammered key hard currency revenues from oil and tourism and sent the Syrian pound plunging.
A product of a 1960s nationalisation programme, state supermarkets had lost some of their appeal after modest economic liberalization began in 2005, which boosted the variety of goods available in private shops, spurring a consumer boom.
Now they are seeing a revival as the government is being forced to roll back moves to a more market-oriented economy as it tries to ease economic hardship for the poor and contain social unrest.
"Economic policy is now subordinate to political priorities and for the Assad regime this is retention of power," said one senior Syrian businessman who serves on the board of several quasi-government bodies.
The IMF forecast last September that the Syrian economy would contract by 2 percent in 2011 and that it would grow this year, but it has since excluded Syria from its Middle East/North Africa forecasts due to the uncertain political situation.
Independent economists say the economic contraction has deepened and large swathes of the country are now severed from major industrial centers of production due to the fighting between the Syrian army and rebel forces.
Plans to gradually remove government subsidies on items such as petrol and electricity, announced before the uprising began in a bid to ease pressure on government finances, are now being reversed.
"We have reduced prices in our outlets between 15 to 25 percent in line with our policy of supplying basic items especially foodstuffs," said Ahmad Ismail al-Kishek, manager of a state-owned supermarket in Reef al-Sham area, a rural area on the outskirts of the capital.
Subsidies will account for at least 30 percent of the record $27 billion the government plans to spend this year, according to its 2012 budget.
Economists and bankers say the government is drawing on its foreign reserves and printing money to finance a budget deficit, which is officially projected to rise sharply to around $6.7 billion this year, due to falling tax and customs revenues and the cost of subsidizing energy.
Inflation now stands at around 30 percent, economists say.
Since the unrest began in March 2011, the authorities have also stepped up a nationwide crackdown on unscrupulous traders who resell heavily subsidized cooking gas and diesel at three to four times the official price in a flourishing black market.
As well as capping consumer prices, the government has intervened through state banks to preserve scarce foreign currency, by limiting the financing of imports and intervening more aggressively to prop up the Syrian pound, which lost as much as 30 percent of its value since the uprising.
Economic liberalization had opened the country to foreign banks, external investment and tourism and encouraged Gulf investors to pour millions of dollars into real estate projects. Today the private sector is struggling.
"Private sector activity is down so they are trying to reduce the impact on the economy by spending more and increasingly will become more indebted," said one senior banker in Damascus, who requested anonymity.
Foreign exchange reserves reached a peak of around $18 billion before the crisis but have fallen sharply in the past year as the government has drawn on them to support the economy, according to bankers familiar with central bank thinking.
President Assad, in a speech to his newly appointed government last month, praised the role of the public sector and said the government's priority was to tackle real economic grievances.
"Especially in this current situation it has been proven that the public sector is necessary for Syria in all aspects," Assad said, adding that socially driven policies were crucial to end the uprising.
Many Syrians say economic liberalization enriched oligarchs close to the Assad family. But the government's retreat from reform is worrying businessmen, who have long blamed public sector inefficiency, bureaucracy and rampant corruption for stifling the private sector.
The appointment of veteran communist Qadril Jamil, who has a doctorate from Moscow state university, to the new post of deputy prime minister for economic affairs and minister of international trade and consumer protection, along with new finance minister, Mohammad al-Jleilati, who also studied in Russia during the Soviet era, are further cause for concern among reform-minded businessmen.
The government has already raised public sector wages substantially in the past year, adding to the budget deficit, and Jamil has stressed the need to raise minimum wages.
Sanctions imposed by Western governments against the central bank, the main state-owned commercial bank and companies owned by the Assad family have forced Syria to become more self sufficient in the past year. By default that has helped some local industries that had been hit by a flood of cheap Turkish goods under a free-trade deal introduced in 2007.
Many Syrian businesses however are hesitant to invest while the political and economic climate is so uncertain. The government says it wants to quickly push through an investment law that would reintroduce incentives and tax breaks repealed in 2007, in a bid to encourage investment.
Sanctions have also pushed Damascus to foster greater trade ties with Russia. Syrian officials say bilateral trade nearly doubled last year to $2 billion as Syria imported wheat, machinery and other goods from Russia that it used to buy from Western countries.
It has also secured barter deals with Iran to import diesel and other energy needs in exchange for Syrian goods such as textiles and foodstuffs.
"They are short-term fixes rather than a product of socialist economic strategies," said one Damascus-based banker, who did not wish to be named.
"The authorities realize that the economy's collapse could speed the regime's downfall so they are doing everything possible to prevent that - even at the cost of piling up a massive deficit, which no one really knows the size of except those in the close circle around the regime," he said.
Reporting by Suleiman Al-Khalidi; Editing by Susan Fenton