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Nov. 17 (Bloomberg) -- President Bashar al-Assad is paying Syrians, via subsidies and higher government salaries, to stay loyal to his government as it clamps down on an eight-month uprising. He may not be able to afford that policy for long.
A month after the unrest began, Assad dismissed a Cabinet that had been tasked with curbing government outlays, raising taxes and making the economy more competitive. The new administration increased subsidies on energy and other products. Civil service pay was raised by 30 percent. Syria has spent $3 billion from a $5 billion rainy-day fund defending the pound this year, central bank Governor Adib Mayaleh says.
Opening the purse-strings hasn’t stopped the protests, and their suppression by security forces, at a cost of thousands of lives, has left Syria increasingly isolated. The Arab League has suspended Syria amid calls for Assad to step down, and Turkey -- a neighbor and key trade partner -- is threatening commercial sanctions to add to those already imposed by the U.S. and European Union. In that environment, Assad’s bid to buy support may backfire as the money runs out and the economy shrinks, alienating supporters among Syria’s business community.
“They’re spending more money and getting less income,” said Chris Phillips, an analyst at the Economist Intelligence Unit in London. “All of this is exacerbated by sanctions, and allies like the Persian Gulf countries are not providing any financial assistance, as they would have in the past. This position is economically unsustainable.”
Syria’s $60 billion economy, which expanded 5.5 percent in 2010, may shrink 2 percent this year, according to the International Monetary Fund, or at least 5 percent according to the Institute of International Finance. The government expects growth of 1 percent, Finance Minister Mohammad Al-Jleilati said in September.
The Damascus Securities Exchange Index has slumped 52 percent in dollar terms this year, compared with drops of 20 percent and 15 percent on the benchmarks of neighboring Lebanon and Jordan. The pound has slid 6 percent to about 50 per dollar.
Assad’s government plans to spend 1.33 trillion Syrian pounds ($27 billion) in 2012, an increase of 59 percent, according to the official Syrian Arab News Agency. The budget includes 386 billion pounds for energy and other subsidies and for financing social and agricultural aid funds, SANA said.
Syria is already running a deficit of 6.7 percent of GDP this year, almost double the 2010 figure, according to the IIF.
‘Pressure on Pound’
A wider gap will “increase inflationary pressures and the pressure on the pound,” said Nabil Sukkar, a former World Bank official who now runs the independent Syrian Consulting Bureau for Development and Investment in Damascus. The government should “effect across-the-board cuts in current expenditures while increasing investment spending to boost the economy.”
That’s similar to the strategy Assad was pursuing before the start of the revolt, inspired by uprisings in Tunisia and Egypt. Syria was seeking external investment too.
Then-deputy premier Abdallah Dardari, visiting France in September last year, said he was seeking bids to build power plants and a new terminal at Damascus airport. A planned auction for a mobile phone license was abandoned this year after unrest spread and companies including Abu Dhabi-based Etisalat Telecommunications Corp. and Turkey’s Turkcell Iletisim Hizmetleri AS pulled out.
Turkey, which has turned against former ally Assad, may cut power supplies to Syria after its embassies and consulates were attacked by government supporters this week, Energy Minister Taner Yildiz said Nov. 15. Further trade sanctions from Turkey could tighten the squeeze on Syria. The northern neighbor bought about 16 percent of Syria’s $2.8 billion of exports last year and supplied 14 percent of its imports, according to data from Sukkar and Turkey’s official statistics agency.
Syria’s economy was strengthened by Assad’s moves toward liberalization before this year, and it’s “not about to collapse,” Sukkar said. Those measures also won support for Assad from business leaders among the Sunni Muslim community, who haven’t abandoned him yet, he said. Assad’s family and many key security officials come from the minority Alawite faith, affiliated to Shiite Islam, while Sunnis make up about two- thirds of the population.
Still, there’s a risk those Sunni elites could turn against Assad if the economy deteriorates, Sukkar and Phillips said. While such groups probably wouldn’t join street protests, they may “consider moves against the regime behind the scenes,” Phillips said.
At the central bank, Mayaleh said that the pound is stable and he hasn’t depleted the country’s $18 billion of foreign currency reserves. Instead, Mayaleh said in an interview last month, he spent money from a fund set aside for a “black day.” Contingencies included a potential yearlong war with Israel in 2012, one person familiar with the fund’s planning said on condition of anonymity.
The government’s worsening finances, with the increase in subsidies and salaries coupled with a 40 percent drop in tax revenue, will make it hard to maintain the stability of the pound, according to two Syrian bankers, who spoke on condition of anonymity out of fear of reprisal.
That would amount to a vicious circle for Assad, said Joshua Landis, a Syria specialist who heads the Center for Middle East Studies at the University of Oklahoma in Norman.
“The failure of the Assad regime to provide for its people was a major spark for this revolution to begin with,” he said. “Now it’s only going to become worse.”
--With assistance from Zahra Hankir in Dubai and Donna Abu- Nasr in Manama. Editors: Ben Holland, Louis Meixler.
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