Part One

Agriculture in the Syrian Economy

CHAPTER 1
Agriculture in the Syrian Macroeconomic Context
by Alexander Sarris

1.1 Introduction

The purpose of this chapter is to place Syrian agriculture within the broad macroeconomic context and to illustrate the constraints imposed on Syrian agricultural policy by the macroeconomic developments.

In the past, agriculture was Syria's main industry. However, beginning in 1970's, trade followed by mining and to a lesser extent industry, started to grow at higher rates than agriculture. Nevertheless, agriculture continues to be the largest sector of the economy.

The major development paradigm governing Syrian development policy in general and agricultural development in particular since 1970, has been that of state-led import substituting industrialization. Socialism, which was the driving paradigm in the late 1950s and 1960s, was redefined in the 1970s to mean increasing industrial employment, an expansion of the role of the public sector, and at the same time an activation of the private sector via productive but non-exploitative investments. Economic development and self-reliance was the key to national strength, and development was understood to mean fast growth and modernization. Syria was to cease being an agricultural economy, and become mainly industrial. Lack of indigenous technical capabilities was to be compensated for by importing complete, turnkey projects, and financing was to be secured by means of increasing the exports of oil, foreign borrowing, and Arab aid.

The consequences of this overall development strategy for agricultural strategy were the following. First, a strategy of self-sufficiency in major food staples was adopted. Second, the state undertook a major role in production and trade, especially with respect to the major products and inputs. Third, foreign trade became almost completely a state monopoly. Fourth, several publicly owned industrial plants were established for food and other agro-processing activities.

During the late 1980s and 1990s, the government, in response to macro-economic crises, without explicitly abandoning the above strategy, modified it to what may be termed “state-led export promotion.” This shift was evident by a series of measures, such as some attempts at “structural adjustment,”” reduction of subsidies, trade liberalization, reduced expansion of public employment and the general role of the public sector.

Throughout the 1990's, the economy of Syria has been growing at a healthy pace, according to official statistics. In fact, during the period 1990-95 the per capita GDP grew by 4.6 percent annually. During the period 1995-98 the average annual per-capita GDP growth slowed to a respectable 2.5 percent. By international comparisons, these are very satisfactory numbers, and, if the benefits are widely distributed, suggest a continuous process of real income growth for the average Syrian during the period. During the last two years of the1990s, GDP per capita declined by 4.6 percent in 1999 and 2 percent in 2000. This has been the result mainly of a general drought which has had a very negative impact on agricultural production, but also a decline in the world oil price. Thus agricultural production is a significant determinant of overall growth.

If the oil sector, which is largely publicly controlled, is exempted, it can be said that the economy of Syria is primarily agricultural based, as apart from the basic agricultural production, the bulk of exports are agriculture based, the bulk of manufacturing is based on agro processing, a large share of trade and commerce is based on agriculture, and many services are also linked to agricultural production. Furthermore, a large share of employment is provided by agriculture. Therefore, one cannot separate the overall strategy for agricultural development from the overall economic situation and macroeconomy.

The links between agriculture and the macroeconomy can be summarized as follows. First, while agricultural production is almost totally privately based, and carried out by a large number of relatively small farm units, the bulk of marketing and processing for the main products as well as fertilizer distribution are publicly controlled. Via the process of public control of the upstream and downstream activities relevant to agriculture, the government can exercise considerable control on production and distribution of the agricultural products, especially those deemed as strategic.^[22] It can also generate considerable income through explicit and implicit taxation, as well as foreign exchange earnings through exports or import substitution. Furthermore, it can use its control of agriculture to conduct domestic welfare policy, especially as it concerns food subsidies. One could argue that in an economic system of open exchange, taxation or protection of agriculture could be effected by an indirect price based mechanism, but in Syria the economic system is not open. Foreign exchange through official channels has always been severely limited, and hence control of trade in strategic agricultural products implies that the government can capture much better the implicit tax involved in the overvaluation of the currency. It thus appears that a major factor in the orientation of agricultural sector strategy and policies in the past was the severe lack of foreign exchange, and the importance of agriculture in generating foreign exchange or saving foreign exchange via import substitution.

The economy of the Syrian Arab Republic (SAR) is currently under transition from one that has been largely centrally planned to one that is more liberal. The general objectives of policy have been and will remain the achievement of a sustainable level of economic abundance, social welfare, and equity. However, some of the past overall themes underlying planning and policy might change. These themes have included the following:

• The state assures full employment of the whole labour force;

• The state undertakes measures to adjust income distribution in favour of labourers and small farmers;

• Production of goods and services are supreme objectives of the society;

• Price stability has high priority;

• All major resources are state-owned;

• The state plays a major role in domestic production and trade, especially with respect to major consumed products and inputs;

• Prices are fixed by the state and strictly controlled;

• Foreign trade is almost completely a state monopoly; and

• The private sector plays a limited role in the economy, mostly in agriculture, services and domestic trade, under strictly controlled conditions.

While elements of the above themes are evident in most areas of public policy, there have been a series of changes that suggest a general shift of emphasis. These include the following:

• Foreign exchange reform since 1989;

• Law No. 10 of 1991 for the encouragement of investment;

• Granting a wide range of incentives for mixed private-public companies;

• Significant declines in state intervention in foreign trade and price controls for agricultural products;

• Decrees encouraging private sector participation in several sectors; and

• Ministerial Decrees granting the private sector the right to import agricultural inputs from retained proceeds of own private exports.

Syrian agricultural development strategy has been guided by international considerations that seem to have changed in the 1990s. Such considerations were the international alliances dictated by the cold war, the insecurities imposed by the Middle East developments, and the uncertainties inherent in the international trade system. The Syrian agricultural policies that have been in place since the 1960s,were developed with these considerations, and were implemented by a centrally planned system. The radical changes in all these political fronts over the last decade, the gradual world-wide realization that central planning has some inherent weakness, and the conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), which created new rules for the world trading system, have led the Syrian Government to change many aspects of its agricultural policies. However, in essence, the principles and underlying assumptions on the basis of which agricultural strategy and policies have been exercised have not undergone much change. Nevertheless, there is a growing awareness within Syrian policy circles that the old strategy has led to problems and a new agricultural development strategy is needed.

1.2 Structure and evolution of aggregate production, capital formation, and prices

In 1999, agriculture was the largest productive sector, accounting for 27.3 percent of official GDP, with wholesale and retail trade second at 21 percent of GDP, and mining and manufacturing third at 18.5 percent (Table 1.1). Mining, mainly oil and gas, accounted for 40 percent of the mining, manufacturing and utilities GDP, or 5.8 percent of total GDP. The growth rate of the various sectors has been quite uneven, with substantial growth during the last decade exhibited by the mining and manufacturing, the agricultural, the transport and communications sectors, the private services, and the finance and insurance sectors, while the other sectors have grown at much smaller or even negative rates.

Table 1.1 Structure and growth of real GDP (at 1995 market prices) for various sectors from 1985 to 1999

Source: Central Bureau of Statistics. Statistical Abstract 2000.

Table 1.2 exhibits the per capita real GDP figures, computed by dividing the aggregate figures by officially estimated population figures. These in turn were taken from the midyear projections of the population living in Syria in the 1999 Statistical Abstract. The table suggests that real per capita GDP in 1995 was lower than that of 1985 or 1980, but has improved substantially since 1995. For 1999, the table suggests that the real per capita GDP was 4.4 percent lower than in 1998. In 1999, real per capita GDP stood at lower levels than those of 1980, having fallen by 4.4 percent from the previous year. Table 1.3, which exhibits average annual growth rates, shows that the biggest decline was in the period 1985-90, while -considerable growth was achieved for the period 1990-95, which however slowed in the period 1995-99.

Noticeable from the table is the result that real per capita private consumption expenditures have exhibited stagnation since 1985, never having surpassed the level of that year during the last fifteen years. Assuming that income distribution has not changed much, this suggests an increased number of families with very low incomes. Compared to 1980, real per capita private consumption in 1999 was 12.7 percent lower, while it was 23.4 percent lower compared to the figure in 1980.

Table 1.2 Evolution of real per capita expenditures on GDP (SP at 1995 prices)

Source: Computed from Central Bureau of Statistics. Statistical Abstract 2000.

The figures of Table 1.3 also show that while real private investment exhibited considerable growth during 1990-95, most likely due to the passage of Law No.10 of 1991, its growth turned significantly negative during 1995-98, for a negative average annual growth rate for the decade of the 1990s. On the other hand, real per capita public consumption declined almost steadily in the 1990s, undoubtedly due to the efforts of the Syrian Government towards stabilization, while real per capita public investment has increased considerably.

It is somewhat surprising that with such strong increases in public investment expenditures, as well as significantly positive real per capita GDP growth, the growth of real per capita expenditures has not been larger. However, a major issue in Syria is the accuracy of the National Account (NA) figures. The IMF, in a recent review of the Syrian economy (IMF, 2000a), reviewed the state of macroeconomic statistics in Syria. They indicate that the GDP statistics suffer from undercoverage of the trade and private services sectors. This is because while the NA covers comprehensively the activities of the public sector and public productive enterprises, they do not cover adequately the activities of the private sector. Given that the private consumption expenditures figure in the GDP statistics is computed as a residual, and also includes inventory changes, the IMF indicates that there are likely significant errors in the estimates of this variable.

In order to probe this issue further, an indication of the relevant magnitudes can be had by comparing the per capita expenditure from the NA with the directly observable per capita expenditure derived from the most recent (1996-97) Household Budget Survey (HBS) of the Central Bureau of Statistics (CBS). The information in that survey indicates that the average yearly per capita total private consumption expenditure is equal to SP25 140 in 1996-97 prices (the average in urban areas is 26 688, while the average in rural areas is 23 616). It is not clear whether the HBS figures include the imputed expenditure on food from products grown on people’s own farms, and other imputed expenditures. Nevertheless, this figure is slightly below the average figure reported in Table 1.2, and suggests that the NA figures may not be too far from the truth.

Table 1.3 Average annual growth rates of real per capita expenditures on GDP

Source: Computed from the data of Table 1.2.

Table 1.4 exhibits the shares of the various types of expenditures on GDP from 1980 until 1999. It can be seen that the shares of both consumption as well as investment in GDP have declined considerably by about 14 and 13.7 percentage points respectively in the last 20 years, while the share of net external transactions has increased by an amount almost equal to the sum of the declines in consumption and investment. This has been achieved through both an increase in the share of exports, as well as a decline in the share of imports.

Table 1.4 Shares of expenditures on GDP (in percent)

Source: Computed from Central Bureau of Statistics. Statistical Abstract 2000.

Table 1.5 exhibits the allocation and growth rates of gross fixed capital formation by sector and component. The most noticeable pattern is the increase in the share of total investment allocated to mining and manufacturing, and the decline in the share of investment for dwellings. While the share of investment devoted to agriculture has increased only slightly in the past 15 years (after a major increase in the 1990-91 period), the fact that the overall share of investment in GDP has declined (re: Table 1.4) implies that the real investment in agriculture has not increased by much. In fact, the average annual growth rate of real investment in agriculture during the period 1990-99 has been the lowest of all sectors, and was negative for the period 1995-99. This is an important observation and has implications about the long-run growth performance of agriculture.

Table 1.5 Distribution and growth of real gross fixed capital formation by sector and component

Source: Computed from Central Bureau of Statistics. Statistical Abstract 2000.

Prices are difficult to monitor in Syria, as there are few relevant published statistics. The retail price index published in the CBS annual Statistical Abstract is one published index, while the GDP deflators have to be inferred from the published figures for real and nominal magnitudes. The wholesale price index, also published in the Statistical Abstract, reflects mostly public enterprise prices, and is hence not representative of prices in all the economy. Table 1.6 indicates the evolution of retail food price indices, as well as the non-food price index (estimated from the published series of the Statistical Abstract, and the average weight of food in the overall index, which is 0,596), and the estimated GDP deflators for private consumption as well as total GDP. The last column exhibits the average annual growth rate of prices in various periods during the last decade.

Table 1.6 Retail price indices for food and non-food items, GDP deflators, and respective average annual percentage growth rates (1990=100)

Source: Computed from Central Bureau of Statistics. Statistical Abstract 2000.

It can be seen from the table that there are considerable discrepancies between the published retail price index, which has grown by an average annual rate of 7.01 percent during 1990-99, and the GDP deflator for private consumption, which has grown by an annual average of 10.6 percent during the same period. The inflation in food prices, at 5.5 percent annually during 1990-99, has been much lower than that of non-food items, which was near 9 percent annually during the same period. Inflation, which was substantial during the period 1990-95, appears to have slowed down considerably during the last few years, with the general retail price index growing at only 2 percent annually, and the food price index growing at only 1.1 percent annually during 1995-99. In 1999 in fact, the general retail price index fell by 2.1 percent, while the food price index fell by 4.1 percent. In 1999, average incomes must have dropped because of the major drought, as indicated above. If one considers the domestic supply demand situation for food, the decline in production should have led, if incomes were unchanged, to significant rises in domestic prices. The actual decline in the price index of food suggests that the income effect of the decline of per capita incomes on demand was stronger than the price effect, leading to overall price declines. Notice, also, that there are substantial variations in annual price changes among the different types of food items, and especially so in the more recent period indicated in the table.

The estimation of implicit price deflators for different sectors allows one to estimate the domestic terms of trade between agriculture and other sectors. Table 1.7 presents estimates of the domestic terms of trade between agriculture and the main sectors with private sector activity. These terms of trade are supposed to illustrate the relative incentives afforded to various domestic sectors by the policies followed. It can be seen that until 1995, agriculture was favoured by the evolution of the domestic terms of trade. However, from 1995 onwards, the domestic terms of trade have turned against agriculture relative to almost all sectors.

Table 1.7 Internal terms of trade between agriculture and other sectors (1995=1)

Source: Computed from data in Central Bureau of Statistics. Statistical Abstract 2000.

1.3 Population, labour force, employment and wages in the economy and agriculture

The estimate of the population actually living in Syria in 2000 was, according to the CBS Statistical Abstract, 16 320 thousand. However, according to civil registration records, the registered population of Syria at the start of 2000 was 17 938 thousand. This leaves an estimated 1.6 million Syrians living abroad in 1999, or 9 percent of the registered population, a very large share by international standards. Of the population living in Syria in 1999, 44.8 percent was estimated to be of age less than or equal to 14 years, and only 3 percent was older than 65 years. Of the total population 51.1 percent is female.

Labour force statistics in Syria have many definitions for similar concepts and several conflicting estimates of the same aggregates. In the sequel an attempt is made to paste together a picture based on available information.

The Statistical Abstract does not mention figures for the labour force, or employment but these can be inferred from the figures of the total governmental employment at the end of 1998 (833 981 persons), and the reported percentage of the labour force (which, in fact, must mean employment) that this accounts for in 1999, namely 26 percent. Hence, the implied labour force is 3 207 thousand. If we consider those above 15 years and less than 65, as potential members of the labour force, and this amounts to 9 202 thousand in 1999 from the figures in the Statistical Abstract, and if we add in this implied potential labour force the number of those aged less than 14 years and more than 65 years that are actually employed (and these can be estimated from the age specific activity rates and the respective population figures to be equal to 299 thousand), then the estimated potential labour force is equal to 9 500 thousand.

If we take the employment implied above and divide it by the estimated potential labour force, the implied labour force participation rate seems to be a very low 34.6 percent. The published statistics mention that the labour force participation rates (or activity rates as mentioned in the statistics) by different age classes are between 29.1 percent for those aged 15-19, rising to 59.1 percent for those aged 30-34, and then declining to 41.3 percent for those aged 60-64. This suggests an average activity rate (including the participation rates of those aged 10-14, and over 65) of about 39.1 percent, which is much higher than what is estimated in the previous paragraph. The estimates from the published statistics mentioned above would suggest a labour force of 4 702 thousand. This substantial discrepancy suggests either that the proportion of the government employees in the total labour force is overestimated, or that the published proportion includes also the employment of public enterprises.

Incidentally, the IMF in another report (IMF, 2000b) mentions that total Syrian employment is around 4.6 million, which is not far from the implied figure of the labour force from official sources of 4 702 thousand. They also mention that total public employment, including employment of public enterprises is 1 162 thousand, which is only 17.3 percent of the estimated above total employment of 4 702 thousand persons, and considerably higher than the figure of 834 000 for government employment reported officially. It is not clear whether the discrepancy is due to the different classification of public enterprise employment or to the inclusion or not of armed forces.

The relatively low labour force participation rate, by any measure, is accounted for by the very low labour force participation rate of females (3.8 percent), compared with the high male labour force participation rate of 49.4 percent. However, 1999 rates,are much lower than those reported for 1998 in the 1999 Statistical yearbook, which are 18.4 percent for females and 80.3 percent for males. If these latter figures are correct they suggest a substantial decline in employment in 1999, a major drought year, and highlight the importance of agriculture for employment in the economy.

The average activity rates (which must mean participation rates) in 1999 seem to be higher in rural areas (42.1 percent) compared to 24.5 percent in the urban areas (in 1998 the rates were 53.1 percent and 48.3 percent respectively). It is interesting that a very high 51.1 percent of the female active labour force in 1998 was occupied in agriculture and forestry, while the corresponding proportion of the male labour force was only 23.2 percent. If we take these percentages, and combine them with our estimates of the labour force, then it can be inferred that the total labour force employed in agriculture in 1999 was equal to 828 thousand people (114 thousand female and 704 thousand male). This amounts to 17.6 percent of the estimated above active labour force, and compares with official figures for employment in agriculture and food of 1 081 thousand in 1998 and 918 thousand people in 1991, or 28.2 percent of the total employment in 1991. The above figures are not strictly comparable as it is not clear that they measure the same thing or refer to the same sectors.

Nevertheless, the apparent significant decline of agricultural employment in 1999 compared to 1998 by 23.5 percent, which was mostly accounted for by declines in female agricultural employment, is interesting. Women in Syria account for a large share of seasonal agricultural workers, who in turn largely come from low-income households. The large decline in that type of employment suggests that the drought must have affected considerably those poor households that depend of agricultural wages for part of their income. Incidentally, the IMF (IMF, 2000b) estimated the employment in agriculture in 1998 at 1 233 thousand (1 200 thousand private and 33 thousand public), which is about 14 percent higher than what is estimated above, and accounts for 29 percent of the total employment.

The conflicting numbers on agricultural employment perhaps are an indication of the fact that agriculture is not always a permanent source of employment but in many cases a source of part-time employment. They may also signify that agricultural employment is highly variable depending on supply conditions in agriculture, and demand conditions in other parts of the economy.

The published statistics do not allow a classification of the labour force or population by rural and urban areas. Earlier studies (Sarris, 1995) estimated the proportion of the population living in rural areas at 49.1 percent in 1993, down from 53 percent in 1981, with annual growth rates in urban and rural areas of 4 percent and 2.7 percent respectively for the period 1981-93. Nevertheless, it is estimated that with the growing population, there are about 150 000 to 200 000 new entrants to the active labour force each year, and absorption of these is becoming an increasing problem with the slowdown of the economy.

The above statistics are only a rough indication of the actual employment situation. Many public employees have more than one job. Many more people working in agriculture are unpaid and uncounted family members. In addition, there is seasonal migration of workers depending on the harvests, and of agricultural workers seeking casual work in the towns during the off-peak seasons. There has also been a substantial migration of people to neighbouring oil-rich Arab countries. In the mid-1990s, it was estimated that the number of Syrian nationals living abroad was about 2 million. This is higher than the 1 600 thousand Syrians estimated here to be living abroad in 1999, and may have to do with the decline in economic activity in the oil rich Arab countries during the post 1995 period. This must have had significant implications for the size of private transfers from abroad.

Private wages are related to the public sector wages. These in turn are legally mandated to increase every two years by 9 percent, and in addition, ad hoc further increases are given. In 1994 there was a 30 percent such increase, and in 2001 another 25 percent. In real terms [namely deflated by the retail price index, which in Syria is the definition of the Consumer Price Index (CPI)], average real wages of civil servants have fallen between 1992 and 1999 by 21 percent (IMF, 2000b, Table 33), at the same time that total civilian employment has risen by 13.9 percent (to an estimated 834 thousand persons in 2000). This must have led to increasing pressures on civil servants to seek additional income-earning activities.

1.4 The productive sectors

a) Agriculture

Agriculture is the largest productive sector, as seen above, and its direct and indirect impact on the economy is considerable. Syria has achieved self-sufficiency for the main agricultural products, and the Government sets procurement prices for the strategic products at prices that are deemed to be attractive to farmers. Exporters of agricultural products are allowed to retain 100 percent of their export proceeds, unlike other exporters. There was an agricultural production tax, applied to agricultural products at the processing stage at rates that ranged from 10 to 12 percent. Over the past decade a number of exemptions were introduced and the tax was finally abolished for all products in 2001. Commercial credit and inputs are provided to farmers through the Agricultural Co-operative Bank (ACB), and the state plays a significant role in setting the cropping patterns through the planning mechanism. While these policies have been successful at diversifying the production structure, and increasing production, in recent years of declining international prices they have been putting an increasing strain on the budget. Of particular importance from a macroeconomic perspective is the high level of stocks (cotton, sugar beet, and wheat), that may be placing a high cost on the budget.

b) Industry

The industrial sector (comprising mining, manufacturing, and utilities) is dominated by mining, which accounts for about 60 percent of the sector’s value added. Manufacturing accounts for 35 percent, and utilities for the remaining. The petroleum sector boomed in the past fifteen years with oil production more than doubling between 1988 to 1993, due to discovery and production of light crude oil. In 1995, oil output was at its highest at 617,000 b/d but has been declining ever since. Syria became a net oil exporter in the late 1980s, but due to increasing domestic consumption and stagnant production, is facing the prospect of becoming a net oil importer by 2010.

Considerable recent natural gas finds have led to expanding production, and the construction of several plants to manufacture gas-using products, such as cement and nitrogenous fertilizer. All gas is consumed locally, with two thirds used by gas-fired power stations, and the rest as fuel in industrial plants and for fertilizer production.

In manufacturing, the main activities are based on food processing, cotton, textiles, sugar, and fertilizers. Hence agriculture is an important provider of raw materials for this sector. Manufacturing provides 15 percent of total employment (about 605 thousand jobs in 1998), and 81 percent of this is in the private sector.

c) Other sectors

Construction activity boomed between 1991-1995, and slowed markedly since then. This is the result of overconstruction in the preceding years, particularly high-income housing, as a result of remittances and other foreign capital inflows, in expectation of future demand and incomes that did not materialize. As a result many buildings are vacant or unfinished in many parts of Syria. A contributor to this slowdown is the rental law, which renders it unprofitable for landlords to rent their properties, and results in many houses being empty rather than rented.

The services sector accounts for 45 percent of GDP. Thirty-eight percent of service GDP is accounted for by public sector activities, including government administration. The private services are dominated by wholesale and retail trade, as well as transport and communications.

1.5 Public finance

The public sector of Syria consists of central, regional and municipal governments, a number of non-financial public enterprises, and financial institutions. The budgetary accounts consolidate the gross financial transactions of the central government with the net transactions of the regional and municipal governments, as well as the operating surpluses of some public enterprises. Military expenditures are included in the budget as current expenditures for military and security. Some significant public sector operations are not included in the budget. These include (a) the consumer subsidies effected through the Price Stabilization Fund (PSF); (b) some operations of the Public Debt Fund (PDF); and (c) borrowing by the public sector enterprises. To a large extent borrowing from the banking system finances losses of public enterprises.

Table 1.8 summarizes the fiscal operations of the Syrian Government. The following major observations can be made. First, the oil related revenues make up about 45 percent of total revenues. Second, the biggest contributor to the overall fiscal negative balance is the deficit of the PSF. Third, the bulk of the financing of the overall deficit has come from the external sector, largely through borrowing to finance development projects.

On the revenue side, of the non-oil tax revenues, taxes on business (mostly public which make up 70 percent of these taxes) make up about 32 percent of the total, taxes on wages and salaries only 6.6 percent (again these represent mostly taxes on public sector employees), and taxes on imports 16.2 percent. Export taxes are small, making up only 1.3 percent of total non-oil tax revenues. Temporary exemptions, renewed on annual basis, were introduced for fruits and, more recently, for raw and processed cotton. In 2001 the export taxes were cancelled for all agricultural products. Of the remainder, the majority comes from non-petroleum surcharges on natural gas, tobacco and construction materials, and stamp fees. The non-tax revenues consist mostly of public enterprise surpluses. Taxes related to agriculture include the unimproved land tax, the livestock tax, and the tax on agricultural products (applied at the processing stage and ranging from 10 to 12 percent). This tax has been cancelled in 2001. All these taxes accounted in 1998 for only 3.5 percent of all non-oil related tax revenues, or only 1.4 percent of all revenues.

Table 1.8 Syria. Summary of fiscal operations 1994-99

Source: IMF, 2000b.

The share of import taxes in total taxes has been declining since 1994, basically because the valuation of imports is still done at highly overvalued exchange rates. In spite of a weighted average nominal tariff rate of 35 percent, the import duties accounted for only 2.1 percent of GDP in 1998. This is low, given that imports amounted in 1998 to about 30 percent of GDP. This suggests that there are considerable exemptions from the tariffs or that there is some tariff avoidance.

Concerning public expenditures, about 67 percent of current expenditures are for wages and salaries, of which more than half is for defense and security. Subsidies, mostly transfers to the PSF, rose from 1.5 percent of GDP in 1994 to about 3 percent of GDP in 1999. In 1997 and 1998 a large amount (about 0.6 percent of GDP) was transferred to the General Organization for Cereals Production and Trade (GOCPT) for exports of surplus wheat at world prices, which were much below prices paid to producers. Concerning development expenditures, agriculture has been receiving amounts ranging from 1.86 percent of GDP (in 1994) to 2.29 percent of GDP in 1995, and is the third-largest recipient of development funds after utilities (2.5-4.5 percent of GDP), and the social sector (2.6-2.95 percent of GDP).

The management of public finances has been conservative, and this, along with the availability of external financing, has allowed the government to reduce its domestic debt since 1994. Steady sources of financing for the government include the sale of investment certificates to the public, the build-up of household savings through deposits to the Post Office Savings Fund (POSF), and the obligation of commercial and specialized banks to invest in government paper an equivalent of 7.5 percent of their deposits.

1.6 The monetary sector and developments

The financial sector of Syria consists of the central bank (CeBS), one commercial bank [the Commercial Bank of Syria (CoBS)], four specialized banks [the Agricultural Co-operative Bank (ACB), the Popular Credit Bank (PCB), the Real Estate Bank (REB) and the Industrial Development Bank (IDB)], and the POSF. All financial institutions are state-owned. The ACB finances all agricultural production activities, deals directly with farmers, and organizes the distribution of inputs to farmers according to detailed plans drawn by the Ministry of Agriculture and Agrarian Reform (MAAR).

Monetary policy is conducted mainly through an annual credit plan formulated by a ministerial committee, that establishes credit ceilings for the central government, the public enterprises and the private sector. The plan is implemented flexibly to allow for unforeseen developments. Instruments such as discount rates and reserve requirements have not been used in recent years. All interest rates are set administratively and have not changed for many years.

Foreign assets make up a substantial part of total monetary assets of the banking system. Claims on public enterprises are the second largest item, accounting for about 70 percent of outstanding loans. The money supply [consisting of money, (currency outside banks and demand deposits) and quasi-money)] has grown between 1994 and 1999 at an average annual rate of 9.4 percent, with the currency outside banks growing at 6.2 percent annually. This may account partly for the inflation observed between 1995-98 (see Table 1.6).

Public enterprises receive more than two thirds of total bank credit. During 1994-99, ninety percent of credit to the public sector was allocated to the two largest public companies, which are both agriculture related, namely the General Organization of Cotton Ginning and Marketing (GOCGM), and the General Organization for Cereals Trade and Processing (GOCTP). In 1999 the GOCGM accounted for 40.9 percent of the total outstanding credit to public enterprises, 23 percentage points more than its share in 1995. The GOCTP, whose share of total credit to public enterprises declined by more than 20 percentage points over 1995-99, still had over 50 percent of the outstanding credit to the public sector. By contrast, total credit to the agricultural sector in 1999, the bulk of which is ACB loans to farmers, amounted to only 16 percent of the total credit to these two organizations. This situation implies that the marketing and price policies towards cereals and cotton, which include three of the seven strategic crops, and the corresponding marketing organizations have significant monetary implications for the economy, as well as implications about the availability of credit to the rest of the economy. Diminished requirements for credit to these two sectors will most likely release considerable amounts of credit for use by other public and especially private sectors.

The share of currency outside banks in total broad money stock has been on a declining trend since 1994, but still accounts for more than 40 percent of the total, indicating a low degree of financial intermediation, and that cash is the principal means of payment in Syria’s payment system, as the bulk of deposits is by public enterprises. This is characteristic of financially repressed economies. The computed per capita currency outside banks declined in real terms (deflated by the retail price index) between 1994 and 1997 by 12 percent, but then recovered during 1997-99. Still in 1999 the real per capita currency outside banks was 3 percent below its peak (between 1994-99) in 1994. As this indicator is a proxy for domestic economic activity, and should increase when economic activity is growing, its decline in real terms suggests that the Syrian economy has been in stagnation since 1995.

The other major feature of the banking system is the meagre incentives it offers for private formal savings. As real interest rates have been negative for much of the last two decades, the private individuals have found other ways to utilize their savings. These include investments in gold, investments in land, investments in agricultural operations (by the so-called “entrepreneurs,” which will be analyzed in another chapter), deposits abroad, etc. This tends to deprive the economy of much needed formal capital for domestic investments. It is clear that formal private savings mobilization has still a long way to go, and substantial room to grow in Syria.

1.7 The external sector

Syria’s external position has improved substantially in the last few years, with both the current and capital accounts exhibiting surpluses in 1998 and 1999. The major factor in this development was the increase in oil related exports, while private exports have remained steady. While the trade balance has been positive in the last few years, the service account has been negative for a long time, and is largely counterbalanced by workers remittances. The capital account has been positive all throughout the period 1994-99, largely because of substantial receipts of short term and long term loans. Foreign direct investment (excluding the large natural gas related project in 1999) has averaged about US$ 80 million a year since 1996.

a) Exports

On the export side, crude oil accounted for 63 percent of total exports, with fruit and vegetables second at 10.7 percent of exports, and raw cotton third at 4.5 percent of exports. Other primary agricultural products (mainly lentils, raw hides and skins, wool, and tobacco) accounted for another 3.3 percent of exports. Thus, about 82 percent of total exports are accounted for by primary products, a very high ratio by world standards. Among non-primary products 7.2 percent of exports are textiles, and these in turn are based on cotton. Thus the bulk of non-oil exports is agricultural raw materials or based on agricultural inputs. Non-oil public sector exports (mainly raw cotton and miscellaneous manufactures) comprised 31 percent of total exports during 1997-99. However, in 1999 the private sector share of non-oil exports reached 80 percent.

A number of incentives to stimulate private sector exports were introduced during 1996-99, such as the permission to import a larger number of inputs used in export production, the depreciation of the neighbouring countries exchange rate used to value the surrendered portion of the non-agricultural export proceeds, and the removal of the tax on exports of many agricultural products. However, these incentives have not been sufficient to generate significant growth of exports, because exporters are still constrained by cumbersome administrative procedures, the absence of a duty drawback scheme for imports used in export production, the inability to import goods that are produced domestically at higher cost (such as cotton yarn), and the 25 percent foreign exchange surrender requirement. These restrictions have led to substantial increases of “suitcase exports”, which are personal exports allowed without restriction since 1997, and consist mostly of textile and artisan products. These have been estimated (IMF, 2000b) at around US$ 300 million annually, equivalent to about 20 percent of non-oil exports.

The European Union (EU) is Syria’s main export market, accounting for more than half of total exports, consisting mostly of oil and non-agricultural products. Agricultural exports are directed mainly to Arab countries. There seems also to be considerable border trade with Lebanon and other neighbouring countries that is unrecorded.

b) Imports

Imports have gradually been liberalized, and this along with the increased availability of foreign exchange due to workers remittances and loans, has led to a surge in imports, especially private ones, that amount to 62 percent of the total. Foodstuffs accounted in 1999 for 19 percent of all imports. The main source of imports (30 percent) is the EU. The other major sources of imports were the former CMEA countries, China and Yugoslavia (17 percent). However, these shares do not consider the large volume of informal trade with Lebanon.

Syria’s exchange rate policy is likely to be the single most important macroeconomic policy affecting the development of the country’s agricultural sector. In fact, it has the potential to counteract or overcompensate for the effects of various sector-specific policies. Therefore, an assessment of the exchange regime and the effects of various exchange rate policies are imperative.

The exchange rate system has undergone considerable changes in the last decade. Generally, Syria has implemented a system of multiple fixed exchange rates. For agriculture, separate exchange rates were specified for the imports of agricultural inputs, for the imports, and for the exports of agricultural commodities. However, in many cases these were accounting rates only. For instance, imports of agricultural food staples had to be made at the market exchange rate while the total value of imports in Syrian pounds (SP) was recorded at the designated exchange rate for agricultural imports. Furthermore, the use of foreign currency has been restricted by controls (see below). During the most recent period Syria has made substantial progress in reducing the exchange rate distortions. The respective policies consisted of a unification of the various exchange rates, and secondly, a devaluation of all exchanges rates, thereby, bringing them closer to the prevailing market exchange rate.

As of late 2002 the multiple exchange rate system has been substantially unified, and Syrians are allowed to retain foreign currency that can be sold to the Commercial Bank of Syria, at a rate that is closely adjusting to the market rate prevailing in Lebanon.

The use of foreign currency revenues on both the import and the export side has been controlled in the 1990s. Foreign currency earning from exports, for instance, could be used either for the imports of products which are not on the list of products prohibited to be imported, or could be sold to other dealers or the Commercial Bank of Syria, or it could be saved in a foreign currency account and used later on. At the same time, an exporter was obliged to exchange 25 percent of foreign currency earnings at the official exchange rate which at SP11.25/US$ was far below the respective black-market or neighbouring country rate during most of the 1990s and therefore constituted a clear discrimination of exporters.

On the import side, each importer had to prove that the foreign currency needed for imports was earned from exports. Another peculiarity was applied to imports of important food staples such as wheat, sugar, rice etc. While the exchange rate at which the foreign currency had to be bought was the market exchange rate (about SP50/US$), the calculation of import tariffs was based on the exchange rate for agricultural imports which was equivalent to the official exchange rate (SP11.25/US$ between 1990 and 1999). Hence, the product-specific tariffs were calculated on a much lower import value (in SP). This effectively reduced the level of import tariffs and thereby effectively subsidized agricultural imports. Such exchange rate and currency regulations reduced the transparency of the trade regime. While it has to be acknowledged that the exchange rate unification and realignment that has been implemented since 1999 (the import exchanged rate at which tariff are computed was unified with the official exchange rate in late 2002) has reduced the respective distortions there are still several regulatory constraints, which need to be abolished.

The unification of the exchange rates, which are relevant for agricultural trade, started in the early 1990s. In 1992, the exchange rate at which pesticides had to be imported was increased from SP11.25 to 40/US$. In 1994, an adjustment of similar magnitude followed with respect to the exchange rate at which fertilizers were imported. Finally, in the year 2000, all remaining exchange rates were adjusted from the previous value of SP11.25 to 46.5/US$. Hence, it is obvious that the unification of exchange rates has also resulted in a significant (nominal) devaluation of the Syrian Pound in relation to the US$ and other western currencies.

The unification of exchange rates was mostly done by one major first adjustment, which was followed by gradual steps of further devaluation. By doing so, the gap that still exists with respect to the market exchange rate and the neighbouring countries’ exchange rates has been further reduced. If one considers the trade weighted official nominal exchange rates, then a substantial nominal devaluation seems to have occurred in the period 1995-2000 (see Table 1.9). Because of relatively moderate inflation rates the substantial nominal devaluation which has been implemented during the last years appears to have resulted also in a real devaluation of the exchange rate. However, the various official nominal exchange rates do not reflect the underlying fundamentals in the foreign exchange market. One rate that is considered as more representative of the market situation is the Beirut exchange rate, which is the same as the Damascus black market rate. This rate has remained largely constant since 1994. Given the differences between the inflation rates in Syria and EU or other trade partner countries, the IMF has estimated that this open market exchange rate has appreciated between 1994 and 1999 by something like 9 percent (see Table 1.9), and this gives an opposite picture than the one suggested by analysis of the real nominal effective exchange rate.

Table 1.9 Exchange rate developments in Syria (all rates in SP per US$, except where indicated)

Source: Wehrheim, 2001, and IMF, 2000b.

One interesting puzzle is why, given the inflation rate differentials between Syria and most of its (officially) trading partners, such as the EU and the Arab countries, the open market exchange rate has stayed nominally constant, and in real terms appreciated. If the parallel market reflects unobserved supply and demand forces for foreign exchange, then the parallel rate should, under balanced supply and demand for foreign exchange, have depreciated. The fact that it has not, is attributed by IMF to the balance of demand and supply of foreign exchange in the parallel market, but this is not sufficient, under differences in inflation rates. An explanation may be that while most calculations of real and effective exchange rates consider as trade weights those indicated by official trade statistics, the existence of a large parallel market may suggest trade weights that are markedly different than those recorded officially. Given that Lebanon may be the largest unofficial trade partner of Syria, and given that the exchange rate in Lebanon has been overvalued, as estimated by the IMF, then the Beirut rate may, in fact, reflect an exchange rate between two overvalued currencies, and hence may not reflect the true fundamentals. Hence real effective exchange rates computed on the basis of the Beirut “free market” rate may not, in fact, reflect the real free market. This is, nevertheless, a hypothesis that needs further investigation.

It is of great importance for agricultural growth strategy purposes to know whether the agricultural policies protect or discriminate against agriculture. In that context the role of the exchange rate is paramount. To highlight this, table 1.10 indicates the evolution of aggregate market price support^[23] (MPS) to Syrian agriculture as a percentage of total current value of gross agricultural output (GAO) at producer prices, and computed with different exchange rates.

Table 1.10 Aggregate market price support to Syrian agriculture computed with different exchange rates

Source: Computed from data in Wehrheim,2001.

The major result of the table is that while the official exchange rates as well as the trade weighted exchange rates indicate that agriculture has been protected all throughout the decade of the 1990s, (at relatively constant rates when the official rate is used but at declining rates when the trade weighted exchange rate is used), the neighbouring market rate indicates a very different story. It suggests that until the mid-1990s, and apart from some years like 1993 and 1994, namely when the official exchange rate was heavily overvalued, the Syrian agriculture was effectively taxed. It is only in the last few years, namely since 1997, with the devaluation of the exchange rates that Syrian agriculture has been effectively subsidized. In 1999 the rate of support reached an average of 7 percent of the gross value of agricultural output, which is quite large, and implies a heavy load on the budget. The other interesting observation is that the trend in the aggregate MPS using the trade-weighted exchange rate and the neighbouring country rate are opposite. The former indicates a decline in overall MPS to agriculture, while the latter indicates an increase.

1.8 Macroeconomic and growth policies

After a period of protectionist and inward-oriented economic policies in the 1970s and 1980s, the Syrian Government started changing these policies towards the late 1980s and early 1990s. The most important elements of the reforms were the provision of fiscal incentives to private investors via Law No. 10 of 1991, exchange rate depreciation and simplification, price and foreign trade liberalization, increases in administered prices including those for agricultural products, and opening up several areas of hitherto public monopoly to private activity. Between 1990 and 1995, these reform policies along with a high level of oil output, elicited a strong supply response, evidenced by a high rate of economic growth, increases in private sector exports and imports, large increases in agricultural production, and substantial increases in private sector activity. Output growth, however, slowed down in the second half of the 1990s, primarily because of recurring droughts, the levelling off of oil output, a decline in private sector investment, and the absence of a well articulated growth-oriented development strategy. The economy is still characterized by a large but stagnant public sector, and a resilient but constrained private sector, a cumbersome regulatory regime, continuation of many state controls, and a complicated trade and exchange rate system.

In response the new government implemented a set of measures to encourage private and foreign investment and reform the currency laws. These measures include the extension of the tax exemption period for investments to a total of 13 years, allowing non-Syrian to own land and buildings, and allowing businesses to exchange foreign currency at the free market exchange rate and retain all foreign exchange proceeds. In addition, in an effort to stimulate economic activity that had suffered because of the drought, and after a period of tight demand management policies and favourable oil prices, the government pursued an expansionary fiscal policy in Year 2000, with a large projected increases in public investments, and the public sector deficit. It is not clear, however, whether the fiscal stimulus can substitute for structural reforms in encouraging private sector activity.

The current government growth strategy is to develop private initiative while maintaining a strong public sector. The strategy is to maintain a gradual pace of reforms consistent with Syria’s social and political systems. Of particular importance is private export growth, driven by exports of agriculture, a sector where the government considers that Syria has comparative advantage.

In the exchange regime, the possession of foreign exchange was legalized in 2000, but penalties were maintained for unofficial (outside the banking system) foreign currency trading. Currently the private sector has received the right to import agricultural inputs and all other agricultural commodities from the proceeds of own private exports. The trade regulations which remain cumbersome, are to be simplified. All sectors of economic activity are now open to private sector initiative, with the most recent decision being to allow the operation of private banks. Many amendments to law 10 have been instituted, with the purpose to provide a more attractive private sector investment environment.

Consistent with the above macro growth strategy, as of 2001 a new export strategy by the Ministry of Economy and Foreign Trade (MEFT) aspires to increase exports, employment in export-oriented sectors, and a better integration of Syria into the global trading system. To meet these objectives various activities are been pursued.

First, there have been several negotiations of regional trade agreements. The Arab Free Trade Agreement which 14 Arab countries, including Syria was formally established in 1997 and tariff reductions were supposed to start as of January 1, 1998. A bilateral agreement with the EU is being negotiated, similar to that of other non-EU Mediterranean countries (e.g. Morocco, Tunisia, etc.). The agreement tries to ensure better market access for Syrian products to the EU, particularly agro-food products and textiles, through bilateral export quotas.

The export strategy of the MEFT proposes several changes in the non-tariff import constraints. These include the following:

• Currently a positive list indicates which products are allowed to be imported by private traders. This list should be replaced by a negative list which specifies only those products, which for public health or safety reasons, are not supposed to be imported by private traders.

• Elimination of the obligation to have the foreign currency in advance.

• Elimination of the public monopoly on imports of strategic crops.

Furthermore, the following exchange rate reforms which, when implemented, would be very important measures in liberalizing Syria’s trade regime, are being proposed:

• Allowing private exporters to keep 100 percent of their export earnings.

• Allowing private exporters to exchange 100 percent of export earnings at the prevailing market exchange rate.

• Unify the various exchange rates.

Furthermore, various institutional reforms were proposed to improve the efficiency of trade operations. These include the adoption of the international trade classification system of the WTO, facilitating custom clearance, computerizing the customs department work, enhancing financial support services for export operations by government agencies or institutions, enhancing the transport infrastructure particularly with respect to exports to Gulf countries and to the EU, and creating a Syrian export promotion centre which provides information on foreign marketing opportunities, export facilities, export insurance, and quality standards of importing countries as well as training and technical assistance on export operations.

It is worth noting that the export strategy of the MEFT does not propose the use of export subsidies as a means of stimulating exports of agricultural commodities. It should be clear that any export subsidies which would be paid by the Syrian Government to agricultural exporters constitute effectively a subsidy of foreign consumers by Syrian taxpayers. Furthermore, the practice of agricultural export subsidies of major western exporters in the industrialized countries is under significant pressure within the WTO and is likely to be further restricted by the on-going round of the WTO’s trade negotiations. Generally the same is true for insurance schemes for agricultural exports.

1.9 Conclusions and assessment of macroeconomic constraints on agricultural development

The above brief assessment leads to the following conclusions about the macroeconomic environment and constraints on Syrian agriculture. First, the greater part of the Syrian economy is directly or indirectly agriculture based. Agriculture is a very important sector from a macro perspective. Its production variations influence considerably the overall economic activity and GDP, hence its growth is intimately tied with the growth of the Syrian economy. Second, the foreign trade of Syria depends to a very large extent on primary commodities. This implies that the economy is vulnerable to international price variations, as well as domestic production variations. Third, the economy is financially repressed. The financial system is dominated by public enterprises and serves primarily the public sector. Hence, one of the key requirements for private sector growth, namely the existence of financial services for the private sector, is largely missing in Syria.

The current government strategy is favourable to the private sector, and to export promotion, but with the continued presence of a strong public sector. The current government growth strategy considers agriculture as a leading sector. This, however, is not obvious from the public investment figures, which (as Table 1.5 indicated) show that agriculture in the more recent period has received a declining share of public investment funds, that in real terms have grown much slower than the economy, or the sector itself.