AMMAN - On February 16, governmental decision no. 5 went into effect, requiring that all car and real estate transactions be conducted through Syrian bank accounts rather than in cash or through other non-official channels. 

Before the decision went into effect, the Central Bank of Syria (CBS) published instructions for its implementation: for every transaction to be recorded and legally authorized, owners must provide documentation issued by a working bank showing the price of the sale.

The decision comes in response to an extremely weak Syrian pound (SYP) and a rise in inflation. By formalizing the economy and reducing cash-based transactions, the government hopes to alleviate the economic situation and strengthen its control over the wider economy.

Finding financial alternatives to Lebanon

As the government tries to confront Syria’s severe economic problems, it has placed the CBS in the driver’s seat. In addition to establishing preferential exchange rates, issuing certificates of deposits (CDs), and closing down illicit exchange companies, the CBS has also sought to formalize the economy by strengthening the role of the domestic banking sector.

Historically, Syrian businesses would conduct transactions through Lebanese banks due to their laissez-faire nature, easy access to dollars, and a way to evade international sanctions. Syrian business elites would even keep their wealth in Lebanon rather than in Syria out of fear of expropriation. According to some estimates, $45 billion worth of bank deposits in Lebanon belong to Syrians—roughly a quarter of the total deposits in Lebanon. 

But following popular protests and the escalating financial crisis in Lebanon, Syrians—like most ordinary Lebanese citizens—have largely been shut out from the Lebanese banking sector. With customers struggling to withdraw even $200 a week, the crumbling Lebanese financial system has placed further pressure on the Syrian government to seek alternative solutions. As a result, the Syrian government is attempting to prop up its domestic banking sector.

For example, even though the CBS has taken a relatively non-interventionist approach to Syrian money markets—namely not devaluing the official rate of SYP 434 to the dollar—it has opened up a new intermediary rate of SYP 700 for a range of activities, such as remittance transfers and the purchasing of US dollars from Syrian citizens.

Most importantly, it is encouraging domestic banks to partake in import financing. The CBS requires that 41 key imports—such as industrial equipment, wheat, baby formula, and animal fodder—be financed at this preferential rate by Syrian banks. 

Hazem Qarfoul, the governor of the CBS, also assured that transactions in foreign currencies would be permitted as long they were conducted “within the official channels only,” referring mainly to Syrian banks and licensed money exchangers. 

Cash no longer king

The expanding role of Syria’s banking system is also tied to government attempts to move away from cash transactions in order to curb rapid inflation and stave-off further devaluation of the national currency. 

On February 1, the government introduced rice, tea, and sugar to the “smart card” system, offering the three key commodities at subsidized prices in rationed quantities. By regulating and centrally distributing basic commodities, the expansion of the “smart card” system aims to limit the circulation of cash, and therefore, reduce foreign currency transactions and price manipulation. 

Similarly, on 21 January, Muhammad Hamra, the deputy governor of the CBS, appeared on al-Sooriya TV, urging citizens to “open bank accounts to create the appropriate environment for launching the electronic payment project this year, which cannot succeed without citizens [having] bank accounts.” He also demanded that the process of opening bank accounts be made easier.

Increasing tax collection and bank deposits

Another possible motivation for the new decision is the need to ensure effective tax collection and increase total bank deposits. Not only does this decision signal the expanding reach of the banking system over Syria’s economy, but it is also supposed to increase the liquidity of the banking system, encourage lending and bring more money into the state’s coffers. 

“It’s part of a whole process to try to collect more tax revenues through the system. If this takes place through official channels, they [the government] can collect fees and stamp duties,” David Butter, a political and economic analyst at the London-based Chatham House institute, told Syria Direct.

Although Hamra assured customers that the opening of bank accounts has “no effect on tax policy,” the registration of cars and real estate transactions undoubtedly affects tax collection.

“The decisions target two important sectors [automobiles and real estate] in terms of the value of cash circulating,” said Ali al-Agha, a Syrian economic journalist. Not only would the measure help the government acquire more precise information on the Syrian economy, but it would also “reduce tax evasion.”

Similarly, by increasing deposits in Syrian banks, the government and the CBS hope that domestic banks will lend more easily in a bid to stimulate economic activity. For example, the CBS approved a proposal to increase the ceiling for borrowing for real estate purchases from SYP 5 million to SYP 15 million, and for home restoration from SYP 2 million to SYP 4 million.

Opening the door for further corruption

Although decision no. 5 and other measures are aimed at formalizing the economy, ensuring a more robust tax base and strengthening the role of the banks, plenty of room for discretion remains—both on the part of the government and businesses.

According to decision no. 5, documentation from banks does not automatically constitute proof of ownership. The government has to authenticate the transaction and then issue ownership documents. While it is too early to tell whether Syrians have experienced significant problems throughout the authorization process, the government’s history of enforcing property rights in an arbitrary fashion as a tool to punish opposition-affiliated families may inform the new decision. 

As Syria Direct previously reported, the government has used property laws, such as Decree No. 66 and Law No. 10, to expropriate property from areas that deemed disloyal or from opposition-affiliated members and families. According to Joseph Daher, a scholar of political economy at Lausanne University, this was both an economic opportunity for certain social groups and classes, and a political opportunity to exclude “socially dangerous classes and socially rebellious groups.” By streamlining the registration of property toward the central government, the state has further discretion to refuse certain transactions, or worse, expropriate property outright.

The new decision also does not require the full amount of the transaction to be conducted through banks. Instead, it states that “a part of the payment” can be considered sufficient for the transaction to be recorded and authorized. This opens up room for people to carry out a small portion of the transaction through official channels, while the rest can be carried out through cash exchange, potentially providing a legal veneer for tax evasion. 

Moreover, that only a partial amount is required for registration suggests that the government is more concerned with controlling property rights than it is with increasing bank liquidity. 

For those unable to open bank accounts or afford to purchase cars and real estate, the new arrangement may incentivize a private leasing system. For example, wealthy Syrians who have enough capital to acquire these goods may do so through legal means and then lease them out for profit to Syrians who cannot afford to purchase these goods themselves. 

Not only would this further exacerbate economic conditions for ordinary Syrians, but it would also provide legal cover for rent-seeking activity.