Syria lets pound float to save foreign reserves

* Analysts say reserves may have fallen to $4 bln from $18 bln

* Central bank chief governor says figure is higher

* Syrian pound now largely being left to trade freely

* Authorities hope to bring dollar supply, demand into balance

* Financial aid to government, rebels may reduce pressure

By Suleiman Al-Khalidi

AMMAN, April 24 (Reuters) - Syria’s central bank has largely abandoned efforts to support the value of its currency in order to protect its remaining foreign exchange reserves, which have been slashed by the country’s civil war, bankers and analysts say.

For the first two years after the uprising against President Bashar al-Assad began in early 2011, the government forced private banks to sell their supplies of foreign currency at exchange rates which it determined.

This allowed authorities to slow the depreciation of the Syrian pound. But to meet demand for U.S. dollars at its artificial rates, the central bank was forced to run down its reserves.

This month, the central bank has begun allowing commercial banks and licensed foreign exchange dealers to sell dollars at rates of their choice - a risky move which will reduce the drain on Syria’s reserves, but could expose its currency to fresh downward pressure.

Samir Seifan, a prominent Syrian economist who now lives abroad but worked before the uprising for state-linked think tanks in Syria, said authorities had previously been engineering a deliberate depreciation of the pound, but were now being forced to sit back as it fell.

“With the economy shrinking more than 50 percent and the state left without resources, how can they defend the pound?” he said.


Before the uprising began, the Syrian pound traded at roughly 46 to the dollar. International sanctions against the Syrian government, damage to the country’s industry from the fighting, and panicked Syrians sending their money abroad have pushed the currency down sharply.

It hit a record low of 126 last month and has traded in a range of around 115-120 this month.

Before the uprising began the Syrian central bank’s foreign reserves, which are a closely guarded official secret, were estimated by the International Monetary Fund at about $18 billion.

Central bank governor Adeeb Mayaleh, in an interview with Reuters this week, said estimates by some private analysts that reserves had dropped as low as $4 billion were incorrect.

“We have big reserves behind this economy, through which we are providing the necessary commodities which are all still present and available in the country at reasonable and acceptable prices,” Mayaleh said at the central bank’s Damascus headquarters, which were damaged by an April 8 car bombing.

But Mayaleh declined to give a specific figure, and a senior executive who runs a subsidiary of a foreign bank in Syria said protecting the reserves had become a priority for the central bank.

“The governor is effectively saying I cannot any longer intervene and will resign myself to market forces and won’t resist,” the executive said of the new currency policy.

He, like other bankers interviewed for this article, declined to be named because of the political and commercial sensitivities surrounding the issue.

The central bank still provides dollars for the import of 21 essential goods into Syria at a preferential rate at least 20 percent lower than the market rate, but otherwise it is largely letting market forces operate, bankers said.

Another banker, who attended a meeting with Mayaleh this month where the issue was discussed, said the country had essentially moved to a “managed float” of its currency, in which the central bank would sell or buy dollars to limit sharp fluctuations but would not try to determine the pound’s underlying value.


Foreign exchange dealers in Damascus said they believed the central bank was gambling that letting the pound trade freely would eventually stabilise it. It may ultimately find a level at which supply and demand for dollars comes into balance, reducing the incentive for people to speculate against the Syrian currency in the unlicensed black market.

“The price now is more real, and this curbs speculation,” a dealer at a large currency exchange company in Damascus told Reuters by telephone.

The central bank may have been encouraged to let the pound float by two factors. One is that Syria has now arranged a web of barter deals with Iran, Iraq and other countries to obtain many imports; this has reduced its need to keep its exchange rate artificially strong.

In addition, as international financial aid to the Syrian rebels continues, large flows of dollars are entering rebel-held areas and then finding their way across porous front lines into government-held territory. These flows may mean the currency market is not far from balance.

The government’s confidence may also have been boosted by aid from diplomatic allies. Mayaleh told Reuters that Iran had previously granted a $1 billion credit line to Syria, and that Damascus was close to agreement with Russia and Iran to obtain fresh funds.

“We are expecting much more support from friendly countries...yes, financial support from Iran and Russia and it could also be from other friendly countries. Discussions are going on. We are in the process of putting the final touches on it,” he said.

Nevertheless, the central bank is taking a risk with its new currency policy, because another renewed slide of the pound could push up inflation, which was estimated by independent analysts at around 50 percent last year.

“What a daring move,” said a senior Damascus banker. “If the pound crumbles, Mayaleh’s policy has failed. If the exchange rate stabilises, then it means he has succeeded.”