Syrian economy faces implosion

Syria Sanctions: A raft of new sanctions from the Arab League, the EU and the US on Syria endanger a wave of growth and trade liberalisation that has propelled the country's economy over the past decade.

The Syrian economy could survive unrest and sanctions into next year but experts warn of a sharp deterioration afterwards. Joseph Eid / AFP

Sanctions on Syria from the Arab League, the EU and the US threaten to cripple a domestic economy Bashar Al Assad's government had ushered into growth over the past six years as the country positioned itself as increasingly open to foreign investment.

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Activity in sectors including finance, energy, tourism and construction has ground to a virtual halt since unrest erupted in March. Analysts say the path of liberalisation and open trade Syria pursued has only made its US$59 billion (Dh216.71bn) economy more vulnerable to sanctions.

"Syria can absorb a certain amount of economic sanctions, for a limited period," said Ghanem Nuseibeh, a partner at Cornerstone Global Associates and a senior analyst with Political Capital.

"The problem with Syria is that over the past few years it has been increasingly skewing its economy towards liberalisation, free-market and attracting foreign investment. What the sanctions will do is bring all those plans to an abrupt end."

Syria's economy grew by about 5 per cent per year between 2004 and 2009, according to IMF figures. Growth slowed to 3.2 per cent last year, partly as a result of lingering global financial turmoil. But this year the IMF expects contraction of 2 per cent, reflecting the deleterious effects of a civil conflict the UN estimates has claimed more than 4,000 lives.

Foreign investment that Syria took pains to encourage has also been cut off in the aftermath of tumult and sanctions. Foreign direct investment rose from about $100 million a year in the early 2000s to more than $2.5bn in 2009, according to World Bank figures.

No estimates exist for this year, but scores of companies that once regarded Syria as a land of opportunity have put plans on hold until the political situation stabilises.

Gulf Finance House, a Bahraini investment company, had long been pursuing a licence to open an Islamic bank in Syria, aiming to tap its economic rise. That deal is on the back burner.

"The plan for Syria Finance Bank was submitted to [the] Syrian Central Bank for final approvals," said Hisham Al Rayes, Gulf Finance House's chief investment officer.

"We believe that Syria has got good potential generally and we are looking forward to resuming our proposal and activity once the political issues are resolved."

Syria's trading routes and $10bn in exports are also expected to come under threat as a result of sanctions, dealing yet another blow to its domestic economy.

The role of Syria in intra-regional trade is of particular concern. Exports from Turkey to Iraq and the Gulf typically go across land through Syria, a crucial route that the new Arab League restrictions will disrupt.

When the sanctions were approved on Saturday in Doha, the Arab League ordered a study of an "alternative line of maritime transit" for goods flowing from Turkey to Jordan and the Gulf. Trade links with Lebanon will also be affected by the sanctions.

"Syria's location makes it a vital trading route and its stability is of particular economic importance to its neighbours," Mr Nuseibeh said.

"Those countries, particularly Jordan and Lebanon, would want to ensure that the impact of the sanctions on their economies remain contained.

"This may be difficult to guarantee without some sort of compensation for those countries, which has not been part of the measures so far," he said.

The Syrian sanctions are part of growing international pressure on Syria's government to end its violent crackdown on civil unrest. In addition to the Arab League sanctions, which imposed trade restrictions and banned 19 officials from travelling to or from Arab countries, the US and EU have toughened measures against the ruling regime in recent weeks.

The EU on Friday blocked trading in Syria's government bonds in a move aimed at curtailing its access to foreign funds. Syrian banks were barred from opening new branches in the EU or establishing joint ventures with EU counterparts.

US sanctions have also become stricter, targeting Syria's military and key members of Mr Al Assad's regime.

The domestic success of sanctions against Syria may be determined in part by the response in big cities such as Damascus and Aleppo, Mr Nuseibeh said.

Those cities have so far been relatively quiet, but they are also more reliant than less-populated areas on the trade ties that sanctions target.

"The impact of the sanctions may trigger unrest in those key cities, and hence hasten political change," Mr Nuseibeh said, adding they must be "quick, targeted and effective" while avoiding any direct impact on the Syrian population and its neighbours.

"This will not be easy to achieve," he said.