Slowly but surely breaking the oil habit

An official at the Central Bank of Syria counts money in Damascus. Syrian President Bashar al-Assad has endorsed the setting up stock exchange market in Syria for the first time.

DAMASCUS // Syria, long a custodian of the Arab world's glorious past, is now a model for its future - at least when it comes to post-petroleum economics. Not convinced? Just ask the IMF. Since 2004, according to an October report by the fund, Syria's non-oil GDP has grown by 36.4 per cent while oil-related sales have declined steadily. In 2007 alone, the country's non-oil economy expanded by 6 per cent compared with overall growth of 5.2 per cent, due in part to currency reforms that stimulated tourism and exports of manufactured goods. Private-sector bank lending is expected to accelerate in the next few years and output from rising demand should help offset dwindling oil revenues. Once disparaged by officials of both the IMF and World Bank for its glacial, scattergun approach to reform, Syria has transformed its economy at an astonishing rate. In the past four years, it has lowered trade barriers and lifted foreign exchange controls, liberalised the Syrian pound and dismantled farm subsidies. Once burdened by a financial sector dominated by inefficient, state-run lenders, the country now boasts 12 private banks with assets valued at US$7 billion (Dh25.71bn). Many of them are joint ventures controlled by foreign partners. A stock exchange is expected to open this year and the government is revamping its tax laws to encourage companies to seek listings. Damascus also has signed oil extraction agreements with France's Total and Royal Dutch Shell. In defiance of a US embargo imposed since 2004, it is negotiating with Chinese, Iranian, Venezuelan and Malaysian companies to expand its refinery capacity. Syria, which expects to become a net oil importer in the next few years, needs additional refiners to wean itself off a debilitating reliance on imported crude oil derivatives. "What the government has done is laudable," says Bassil Hamwi, the deputy chairman of the Stock Exchange of Syria and general manager of Bank Audi Syria, a joint venture with the Beirut-based Bank Audi. "There has been amazing progress in a short period of time, though, of course, we are hoping for even speedier reform." That said, Syria has a long way to go. No longer sealed off from the caprices of international commerce, the country has something to lose in an unstable global economy. It is still poor, with 40 per cent of the population living below the poverty line, according to the UN. Electricity and water are rationed in some parts of the country and inflation is thought to be as high as 25 per cent, compared with the government's single-digit estimates. Corruption is rife and efforts to lure "black market" commerce into the open where it can be taxed and regulated have received a lukewarm response, say economists. "Most businesses in Syria are run out of apartments, unregistered," says Jihad Yazigi, the publisher of The Syria Report, a business newsletter. "The government wants to flush this to the surface with incentives but no one is signing up." However daunting the challenges Syria faces, however, they are nothing compared with the abyss it stared into several years ago, when Damascus could no longer ignore the reality of falling oil revenue. The country was producing 460,000 barrels of oil per day then, down from its peak of 610,000 barrels a decade earlier. The removal of Saddam Hussein and the end of Iraq's UN-administered oil for food programme denied Syria a major trading partner and a key source of discounted imported petroleum. The budget, which had been managing dwindling rates of surplus, was headed for sustained deficits. The economy, meanwhile, was struggling to absorb between 250,000 and 300,000 new job seekers each year, an annual growth rate of 5 per cent, one of the fastest in the world. An in-house report written for Damascus by the World Bank concluded that the country was at a turning point. To stay alive, the government would have to create more jobs. To do that, it needs to open the economy. About that time, the president, Bashar al Assad - who had come to power in 2000 with the death of his father, Hafez - had all but consolidated his authority. In late 2003, he had reshuffled his Cabinet and named Mohammed Hussein as his finance minister, an appointment that was greeted with yawns. As the head of economic affairs at the ruling Baath Party, Mr Hussein was thought to be an ultra-cautious, if powerful figure who had studied economics in Soviet-era Romania. The reshuffle, the EU ambassador observed at the time, reflected a "very timid" attempt at "reform with zero chance of blunder". As it turned out, Mr Hussein used the ruling party's political muscle and the authority of Mr Assad to impose controversial reforms on Syria's hidebound bureaucracy. He quickly spearheaded what would evolve as Damascus's version of neo-liberal economics in tandem with similar changes taking place in Egypt, Saudi Arabia and elsewhere in the Arab world. Within a year, he was besieged by criticism from conservatives who associated privatisation and free trade with ruinous unemployment. "Eventually," Mr Hussein said in a March 2005 interview, "they will see the results of reform and they will understand that a capitalist system is to their benefit." Since Mr Hussein assumed his post, the Syrian parliament has streamlined the economy with a torrent of new laws. Import duties and income taxes have been slashed but revenue growth has nearly doubled since 2000, he told The National recently, a critical counterweight to declining crude exports. The budget posted a deficit of 2.5 per cent in 2007, which the IMF considers serviceable assuming "perseverance in advancing fiscal and structural reforms". "We are making progress every year," said Mr Hussein, who helps the government compile two budgets, one that includes oil revenue and one that does not. "The decision was made to pursue market-economic reforms and I am proud to be at the front of it." To sustain its economic revival, however, Syria must now reduce consumption of fossil fuels, particularly its dependence on imported heating oil. Refinery constraints oblige Syria to import half its heating oil, and when petroleum prices were at record highs last year the government heavily subsidised the local price. To make matters worse, said Mr Hussein, Syrian smugglers were hoarding stocks of the fuel and selling it to neighbouring Turkey, where heating oil fetches much higher market prices. Such a state of affairs, he said, was "a huge and dangerous burden". It is not only heating oil that is in short supply. Lower trade tariffs have led to a proliferation of cars and the number of electrical appliances per household has doubled in the past 15 years. As consumer spending grows, so too has demand for electricity from the country's predominately gas and petroleum-fired energy grids. "We should have begun conservation efforts a generation ago," says Ziad Ayoub-Arbahe, an energy consultant. "As energy output declines, it hurts transport and industry." The government is offering discounted loans to promote the development of renewable energies such as solar power, wind energy grids and the pumping of natural gas. It is committed to cutting subsidies on petrol, which will encourage Syrians to buy more fuel-efficient cars. But Mr Ayoub-Arbahe and other energy experts say more aggressive conservation is needed to keep the economy from falling victim to its own success. "When you open your economy, you need electricity," he says. " We lost time because we started so late." [e-mail]