Previous Page Table of Contents Next Page

3.3 The macroeconomic environment for investment

a) The planning system

During the 1960s and 1970s, Syria became a centrally planned economy. While certain private companies, established much before, remained in operation, most key aspects of the economy were firmly in the hands of the State. The main sector that remained private was farming, but even micro-economic farming decisions, in a wide variety of “strategic” crops, were dependent on the local implementation of national production plans. Farmers were assigned short-term credit in cash and kind, enabling them to plant specified amounts of land with specified crops, and the product was to be sold to specific state companies for processing and marketing. Most of these regulations have been gradually relaxed since the economic crisis of the early 1980s, and especially during the 1990s, but some still remain in place.

All investment projects that look for the benefits granted under Law No.10 must be authorized by the concerned Ministries, certifying that they are in agreement with the National Development Plan. This is often a formality, but in some cases authorization has been delayed or denied because the new project somehow was perceived as unwanted competition for state-owned companies.

The most important and relevant impact of the planning system on private investment is the fact that a large portion of the economic activity has been for many years under strict planning and reserved to the state sector, thus in effect precluding any private investment. Many such restricted sectors still exist at the moment, including purchasing, processing and marketing strategic crops, which directly affects agribusiness. For instance, a cereal milling company can only operate as an outsource for the state company that has a monopoly of milling operations.

Another very important impact is that most prices are based on compulsory or indicative official prices set by the public sector. Even the indicative prices are in effect almost compulsory because many traders, farmers or other agents take them as their base price and do not alter them easily or very often. Apart from being fixed and sometimes involving an implicit tax or subsidy, the official prices are usually the same for all varieties and qualities of the product, and thus do not permit the development of finer grading of the products or the establishment of much-needed standards of quality. Insofar as the rigid price system is in place, little can be done to develop in Syria a more adequate system of quality standards and thus help introduce Syrian products in world markets. Under the present system, such improvements are to be introduced by the companies themselves on a one-by-one basis, and they often cannot obtain raw materials of the required quality because the price system is not discriminative enough to reward higher quality with a higher price.

Also, even for prices that are theoretically free, authorization must be sought from the government to change the price of the product (either to raise it or to lower it). The license to adjust prices is presently granted easily, but it could in theory be denied. Many companies resort to “special promotion” or “special discount” schemes to sidestep the requirement of governmental authorization for price decisions.

b) The monetary and banking systems

The banking system in Syria is still characterised by features fairly different from those generally found in market economies. Its most salient characteristic is its public ownership. Despite the recent introduction of legislation to allow for private banks, until the time of writing the entire banking system is state-owned. The present condition of the state-owned banks is unsuitable to serve as a conduit of private business. Much is to be done to improve the efficiency of the public-sector banks, if they are to have any participation in fulfilling the financial needs of the private sector.

Besides, much of banking credit is taken by the public sector. The share of private borrowers on total credit has been increasing, but still now more than two-thirds of the available funds are allocated to the public sector. Most public corporations borrow from the Commercial Bank of Syria. More than 90 percent of credit to the public sector, and nearly two-thirds of total credit, goes to the state-owned organizations in charge of purchasing and marketing cereals and cotton. Thus, in effect, the intervention of the public sector to control and subsidize strategic crops creates a crowding-out effect in the entire financial system.

Interest rates are administratively set by the Government and have remained unchanged for years, in spite of changing levels of inflation. In fact, the decline in inflation and the period of deflation in recent times meant that real interest rates have gone up. The lending rates for private sector borrowing are 7.5 percent to 9 percent, which, for instance, in 1999 implied a real rate of 9.6 percent to 11.1 percent, given a deflation rate of 2.1 percent (consumer prices).

Spreads between active and passive rates are small, about 1 percent, meaning that banks cannot adequately cover their operation costs, which are difficult to assess precisely but should be higher than that small spread. This is a further factor reducing the banks' ability to improve their administrative efficiency. Apart from detracting from the banks' profitability and requiring support from the public budget to keep the banks functioning, much of the real consequences of this deficit in covering administrative costs is borne by customers in the form of delays and difficulties in banking operations, and acts as a drag in the overall efficiency of the economic system.

Besides the authorization for private banks to operate, other reforms are pending regarding monetary policy and foreign exchange. The most significant one is an adequate and updated legislation about Central Bank functions and autonomy, and most crucially about bank oversight and regulation. More adequate and transparent norms and practices to conduct monetary policy are also still absent.

c) The foreign exchange system

Foreign exchange has been tightly regulated for decades. Holding or exchanging foreign currency has been considered a crime punishable with prison. Liberalization of the foreign exchange market has also been gradually taking place, but it still remains partial and the procedures cumbersome. Holding foreign currency is no longer a crime, but dealing in foreign currency is still punishable with prison. In particular, private companies have no legal access to foreign currency unless they bring it from abroad or buy it at the export proceedings market. This has been a problem for companies that cater to the domestic market, especially when the export proceedings market had a rate of exchange below the rate applicable for imports (this problem have been recently made less relevant as the gap between the two rates narrowed). In 2001 the Commercial Bank of Syria was authorized to buy and sell foreign currency at market rates for personal (mostly tourism and remittance) purposes, but not yet for business purposes.

Thus the overall economic environment in which private investors operate has been changing in the direction of a more liberal system during the last ten years or more. But many features of the old centrally planned, state-led system remain in place. A decision to create a stock market was taken nine years ago, but it has not yet been implemented. Procedures related to business and trade remain complicated and uncertain, which creates many delays and difficulties, and creates incentives to proceed through informal channels when possible. The general picture is of a very rigid system on its way to gradually becoming friendlier to private investment. However, the process of liberalization has not proceeded at a constant pace. The liberalization process that started in 1991 with the investment law and other measures, has not advanced at a steady pace. Measures have been adopted piecemeal, with advances in one area checked by failure to advance in others. After a decade, several key pieces of economic reform are still pending. As a result, private investment has been largely dependent on the short-term incentives given by the Investment Law, and not on long-term growth expectations based on a stable set of rules of the game.

Previous Page Top of Page Next Page