June 29, 2011 / 4:26 PM / in 7 years

Political turmoil raises pressure on Syrian currency

AMMAN (Reuters) - Syria’s economy, reeling from three months of unrest, faces currency pressures that could deplete reserves and undermine President Bashar al-Assad’s chances of political survival, businessmen and diplomats said.

The reserves, which officially stand at $18 billion, have been falling at the rate of $70-80 million a week as the central bank pumps foreign currency to arrest falls in the Syrian pound exchange rate on the black market, the sources following the Syrian economy in Damascus and Beirut said.

The uprising, and Assad’s military crackdown on protests, have triggered withdrawals of deposits from Syria’s still small banking system and a spending spree by the state to maintain loyalties, which is costing billions of dollars and contributing to a sharp drop in the exchange rate, bankers said.

Those with knowledge of Syria’s economy and willing to speak to Reuters, whose correspondents were expelled after protests began, would do so only on condition of anonymity.

Syrian authorities have published little official data covering the months since the uprising broke out in March that could help reveal the extent of pressure on the pound.

The market exchange rate, however, fell 8 percent to 53 pounds to the dollar since a speech by Assad last week in which he asked Syrians to shore up the national currency. The official rate stands at 47.6 pounds.

Previous market rumors -- impossible to verify -- that a rich cousin of Assad had deposited $1 billion in the central bank did not stop the pound’s slide.

The tiny Damascus Stock Exchange, which has seen no foreign investment since it opened three years ago, has fallen almost 8 percent since the speech, its main index showed.

In his speech, Assad described “weakness or collapse of the Syrian economy” as a major threat, while blaming what he termed psychological factors for any loss in confidence.

He thanked citizens who supported the pound by putting money into the banking system. It remains dominated by state-owned banks, although privately owned banks were allowed nine years ago in an attempt to abandon decades of centralized control.

“One day, after we overcome the crisis, God willing, we should ask all those who have money about the role they played, how they contributed to this campaign,” Assad said.


The Syria Report economic newsletter said the speech may have indicated several things: that “the fiscal position... is much more strained than the official figures suggest; the government is not willing to use its foreign reserves to support the pound and cover import requirements; or foreign reserves are simply not as important as initially believed.”

The newsletter said in an editorial that pressures on the pound remained manageable in the short term because of the high declared reserves and a slowdown in economic activity reducing imports, but “by merely pronouncing the word ‘collapse’ the president indeed only reinforced that psychological factor.”

A Western diplomat who has been tracking the economy said a drying up of foreign investment and costly measures like restoring subsidies on gas oil, hiking state salaries and tax breaks, as well as spending on security and irregular forces loyal to Assad will only add to pressures on the pound.

As the sharp economic slowdown starts to hit business in the capital and in the merchant hub of Aleppo, close to Turkey, Assad could find one of his key support bases starting to erode.

“Business has slowed down massively,” a merchant in Aleppo, Syria’s second city, said. “Many factories in Aleppo, especially textiles, have been laying off workers, putting them on reduced pay or reduced hours. Hotels are empty, and the thousands of informal workers in the sector are now unemployed.”

Last month the Institute of International Finance, a global bank group, forecast the $52 billion Syrian economy shrink by 3 percent this year. That compared to an earlier, pre-protests forecast of 3 percent growth, similar to that achieved in 2010.

Political unrest has stymied three major investment projects by Gulf investors in Syria and has harmed efforts to attract capital needed to boost the economy after decades of Soviet-style controls, business figures said.

Tourism, a sector that has boomed in recent years, contributing up to 25 percent of foreign currency earnings, was also hard hit. A leading figure in the hotel trade told a local newspaper that average occupancy rates were a mere 15 percent in the high-season months of April and May.

“The regime is not thinking far ahead,” he said.

”They are thinking how to live through next Friday, which means Assad cannot reduce the subsidies or cut salaries because it will annoy more people. They think they can deal with economic collapse when it happens.

“For now they have no sense of economic strategy.”

An international banker working in Damascus said that the authorities were spurring demand for dollars by resorting to violence. He said monetary measures taken last month, including raising the interest rate on deposits by 2 percentage points and halving banks’ reserve requirements, were not enough to stop the pound from weakening.

“The central bank had indicated two months ago that it would not allow the exchange rate to exceed the equivalent of 50 pounds to dollar but that the ceiling had been breached,” said the banker in Damascus, who declined to be named.

“No intervention can compensate for the fundamental lack of a political solution.”

Editing by Dominic Evans and Alastair Macdonald

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