AMMAN — Since the outbreak of the revolution in 2011, the value of the Syrian pound (SYP) has plummeted, weakening confidence in the country’s economy. The Syrian pound, which traded at 47 SYP to the dollar at the beginning of 2011 has now exceeded 700 SYP on the black market. 

The pound’s collapse has resulted in rising import costs for basic commodities, widespread currency speculation and hoarding of dollars, a foreign exchange crisis at the Syrian Central Bank, and most concerning, a deterioration in the living conditions for the country’s poorest sections of society.

At a parliamentary session in September, members of the Syrian People’s Assembly explicitly criticized the government for not doing enough to boost the economy, counter corruption and improve living conditions for Syria’s poorest. MP Bassim al-Naaemeh directed his criticism at Syrian Prime Minister, Imad Khamis, saying that the performance of the government has been weak and that economic confusion has led to an unstable exchange rate. Similarly, MP Muhammad Khair al-Akkam said the government was doing little to ensure proper tax collection in the country.

In contrast, the governor of the Central Bank of Syria, Hazem Qarfoul, described the fall in the value of the Syrian pound as part of a “systematic campaign to weaken the lira [pound] and the economy, undermine confidence in the Central Bank, and incite fear among citizens to abandon their national currency.” In a telephone conversation with the state-run Syrian News Channel, he regarded the recent depreciation of the Syrian pound as “illusory,” adding that it has “no economic rationale and basis on the ground.”

This justification, however, was roundly criticized by parliamentary members. Al-Naameh, for example, characterized the governor’s response as “inconsistent with reality.”

What’s behind the recent depreciation of the Syrian pound?

Although the value of the Syrian pound has undergone a steady decrease since 2011, the black market exchange rate plummeted this year in particular, such that government attempts to remedy the situation have largely failed.

According to David Butter, a political and economic analyst at London-based Chatham House institute, the recent depreciation in the Syria pound may have been triggered by “problems in meeting fuel imports earlier in the year,” which forced “government and private traders to look around for dollars.” 

In April 2019, fuel shortages in government areas paralyzed economic activity; donkeys and horse-drawn carriages roamed the streets of Damascus while people formed day-long lines outside gas stations. This prompted private and government importers to finance fuel imports through other methods, putting further pressure on the Syrian pound. 

The inability to meet fuel demand is intimately linked to Iran’s dwindling capacity to provide energy to Syria. Earlier this year, Iran stopped selling oil to the Syrian government on its “credit line” - a form of financial aid provided by Iran to Syria to purchase basic commodities - and the weight of US sanctions on Iranian oil exports has aggravated the situation. Moreover, following US pressure on countries delivering oil to Syria, importers have had to rely on more expensive smuggling routes. 

Another possible explanation behind the recent depreciation of the Syrian pound is the Turkish invasion of northeast Syria in October. Dubbed “Operation Peace Spring,” the Syrian National Army (SNA) with the support of Turkish forces moved into largely Kurdish-held areas in northeast Syria, east of the Euphrates. Though not as significant as fuel shortages, Butter added that the changes in the black market exchange rate “is some kind of indication that maybe the Turkish incursion is having an effect.” However, the US decision to retain Syrian oil fields - even as the Syrian government reasserts control in certain areas - has undercut hopes of generating hard currency from future oil sales. 

Another important reason for the rapid decline in the value of the Syrian pound may lie outside Syria’s borders. In neighboring Lebanon, a financial crisis is continuing to unfold, with drastic pressure mounting on the country’s currency peg with the US dollar. Following the outbreak of popular protests in mid-October in response to decades of corruption and financial plunder, Lebanese banks closed for almost two weeks with many fearing a potential run on the banks. 

After opening and then closing again for a week, banks reopened on November 19 to large lines of customers seeking withdrawals. However, to avoid capital flight, the Association of Banks in Lebanon (ABL) announced that cash withdrawals would be limited to $1,000 a week. 

For Syrian importers, this spells disaster. Beirut continues to be the main dollar market for Syrian importers who use the Lebanese banking system. As Lebanon’s financial health deteriorates and confronts a nation-wide dollar shortage, Syrian importers are finding it increasingly more expensive to buy dollars to finance their imports. As Butter noted, “the fact that you have foreign currency shortages in Lebanon is likely to have a knock-on effect in Syrian markets.” 

He went on to suggest that “because Lebanon is so important to the operations of the Syrian parallel market, if there is a shortage of foreign currency, it’s going to make things much more difficult” for importers, adding further pressure on the value of the Syrian pound. 

Structural imbalances in the Syrian economy

While the Lebanese crisis, increased demand in Syria for fuel imports, and the Turkish invasion might have precipitated the pound’s recent decline, the fact that the government has been unable to improve the situation points to larger structural problems in the Syrian economy.

According to the World Bank, between 2010 and 2016, Syria’s GDP fell from $60.2 billion to $12.4 billion, while national currency reserves fell from $20 billion in 2010 to $0.7 billion in 2015. National debt ballooned, fiscal revenues decreased, and the government relied increasingly on the Central Bank to cover its expenditures. 

Even before 2011, Syria had witnessed a decline in the productivity of vital sectors of the economy, such as manufacturing, mining, oil and agriculture—a trend that was further exacerbated during the war. In Aleppo, considered to be the heart of Syrian manufacturing, only 10% of its pre-war factories remained opened in 2016, according to data from the Ministry of Industry. 

Speaking on these issues, Joseph Daher, a scholar of political economy at Lausanne University, noted that “the liberalization of the economy and the rise of trade and services sectors has come at the expense of manufacturing and agriculture.” 

These trends predate the conflict in Syria, he said. Since the liberalization policies of the 1990s under Hafez al-Assad, a new class of rentier capitalists emerged. According to Daher’s new book, “Syria After the Uprisings,” the country witnessed increasing socio-economic inequality, with poverty reaching 14% in 1997. Moreover, profits and rents as a share of national revenue dramatically increased in comparison to wages and by 2000, the upper 5% of the country was estimated to control 50% of the national income. 

During the conflict, “these [trends] have exploded, with massive destruction of manufacturing and capital flight, ” Daher told Syria Direct. With the country’s manufacturing capacity having been dealt a significant blow, its changing economic structure has benefitted traders, smugglers, and speculators instead. 

In addition to a fundamentally broken productive economic base, Syria’s participation in the international economy has come under duress due to inadequate foreign currencies, primarily US dollars. Sectors that generated foreign currency reserves, such as tourism and oil production, have witnessed a significant decline. 

At the same time, “we have seen a continuation and exacerbation of reliance on imports, fewer exports, and an explosion in smuggling,” Daher added. As a result, it has become increasingly more difficult to acquire dollars, maintain adequate foreign currency reserve, and curb inflation—all of which have placed immense downward pressure on the value of the Syrian pound. 

The weight of international sanctions

Structural imbalances in the Syrian economy have been compounded by international sanctions against the Syrian government and its allies. Specifically, US and European economic sanctions against Damascus, Tehran and Russia have played a key role in the pound’s depreciation.

These sanctions have largely prevented Iranian oil exports from reaching government-controlled areas in Syria. This has forced the government to rely on imported oil through Lebanon in limited quantities, further depleting foreign exchange reserves, depreciating the pound, importing inflation, and ultimately curtailing economic activity.

According to Syrian economist, Younis al-Karim, the sanctions have also targeted the Syrian banking sector, which means that “traders can no longer make purchases smoothly, without intermediaries.” The rise of these intermediaries has led to an “increase in the price of raw materials with limited quantities,” further placing inflationary pressure on the Syrian economy, he noted.

In response, the Syrian government has attempted to “evade sanctions by creating new institutions and companies and relying on individuals to carry out economic transactions on the international market,” Hassan al-Shaghel, a professor of international economic relations, told Syria Direct

Such intermediaries included the wealthy Syrian businessman Samer Foz, “who played a major role in the economic activities of the regime, especially in concluding trade agreements with several international companies,” al-Shaghel added. Foz was sanctioned by the US government in June 2019.

The price of military achievements

In recent years, the Syrian government has been determined to re-establish control over much of Syrian territory. Russian military intervention beginning in September 2015, combined with an Iranian military presence, played a pivotal role in facilitating Damascus’ control over large swathes of Syria. Yet even as the government recaptures devastated areas and assumes responsibility for an increasing number of Syrians, it faces additional burdens as its state capacity dwindles. 

Although Russia hastened a political solution in Syria by controlling opposition-held areas, Al-Karim said, they did not give the Syrian government adequate time to negotiate the terms of control. As a result, humanitarian funding and aid development projects sponsored by the UN and international organizations were halted. While in theory this aid money could have replenished the Central Bank’s foreign currency reserves, the reality was that the Syrian government bore the brunt of providing services to many more Syrians while losing a critical source of funding.

Furthermore, conflict between the regime’s allies over sovereign institutions and reconstruction projects in Syria has engendered fear among investors that there is a little guarantee for future investments. Each side struggles to influence the others’ projects, as evidenced by the transfer of control over “sovereign institutions, more than once, from an Iranian investor to a Russian investor, and vice versa,” al-Karim explained. As a result, the regime “has no political or sovereign power to grant and establish projects, which has stopped the return of Syrian and Arab investors.”

The struggles over control of the Syrian economy also reveals conflicts between different elements of the regime. According to al-Karim, there are three main wings among the regime: one associated with Iran, another with Russia, and the third with the government itself which “sees the Russians and Iranians only as allies who should not overstep their role and control sovereign institutions.” 

As detailed in a previous report by Syria Direct, the Russians have adopted a ‘Mafioso approach’ by acquiring already-established projects and placing the burden of operations on the Syrian state. The Port of Tartus, for example, is now subject to a 49-year investment contract by the private Russian company Stroytransgaz, which already has a 50-year contract to extract and invest in phosphate production in Palmyra. 

Monetary and economic confusion

Government institutions have also been thrown into confusion by the revolution, stoking further economic instability and weakening economic confidence. 

In the span of eight years, there have been three different governors of the Central Bank of Syria: Adib Mayaleh, Duraid Dergham, and Hazem Qarfoul, each enacting different policies and pursuing diverging strategies. Mayaleh and Dergham, for example, tried to “make the bank a speculator in the [currency] market, and the main driver of it,” al-Karim said. 

Qarfoul on the other hand, appointed in September 2018, “took a silent approach and neither interfered in the market nor broadcasted assurances to the public.” In turn, this led to “instability in the Syrian market, leaving traders and [other] individuals to intervene and manipulate the exchange rate based on their [personal] interests,” he added.

The government institutions’ ad-hoc decisions to target certain Syrian businessmen have also weakened investor confidence in Syria, putting further pressure on the Syrian pound. On October 7, the Central Bank issued a circular letter freezing the assets of eight prominent businessmen, including Tarif al-Akhras—the uncle of Asma al-Assad. 

Yet three days later, the Central Bank reversed its decision, permitting these businessmen to use their accounts. Initially the Central Bank sought to crack down on importers who used dollars from the Central Bank under the pretext of financing imports but actually used them for other purposes. The subsequent annulment of the decision sent signals of uncertainty and weakness to the business community.    

In addition to the Central Bank, the Syrian Ministry of Finance played a role in unsettling economic stability. According to al-Karim, their decisions have been based on “directives from the security services, influential figures, and major traders.” Furthermore, a series of arbitrary decisions were issued by the Minister of Finance and the Prime Minister to authorize the importation of certain commodities but the suspension of others, indicating that “Syria’s fiscal policy is biased, with no clear objective,” al-Karim said.

Efforts to support the Syrian pound

In response to the rapid depreciation of the Syrian pound, the government has carried out some initiatives to halt the decline and prevent a total collapse of the currency. 

In late September, the governor of the Syrian Central Bank met with Syrian businessmen at the Sheraton Hotel in Damascus to launch an initiative to support the currency. At the meeting, Samer Foz announced he would deposit $10 million, advising other businessmen to provide $5 to $10 million each. 

The initiative required businessmen to deposit their money in foreign currency in a special account, with which they could recover the equivalent value of their deposits in Syrian pounds at the exchange rate set by the Central Bank a month later. According to Hassan Azqoul, a member of the Damascus Chamber of Commerce, the initiative successfully accrued $1 billion. 

Following this announcement, the value of the Syrian pound witnessed a slight improvement, falling from 660 SYP per dollar to 623 SYP per dollar. However, by the end of the first week of November, the exchange rate steadily crept back up to 689 SYP per dollar. 

In addition, the $1 billion figure, according to David Butter, does not seem realistic. “My impression is that the amounts have not actually been that sizeable and there’s the risk that people with funds outside the country are not inclined to put their money back into the country.” 

Similarly, Joseph Daher expressed skepticism towards the effectiveness of the initiative. “A one billion dollar campaign will not help the main issue at stake: that Syria needs to import commodities every month and pay for it with foreign currencies,” he explained. He added that “we don’t even know how much foreign currency is in the Central Bank.”

In addition to acquiring dollars from Syrian businessmen, the Central Bank has tried to establish a new exchange rate between the official rate of 438 SYP to the dollar and the unstable black market rate in order to ease some of the monetary pressure. According to Butter, the government is trying “to provide foreign currency for importers.” However, in spite of other instruments such as price controls and rationing of imports, “the [exchange] rate has continued to weaken,” he noted. 

A remaining policy tool that the government has not utilized is changing the official exchange rate. “Because the Central Bank is in a weak position, there’s a risk that they’ll begin a vicious cycle [toward a downward spiral in the depreciation of the pound],” Butter said. Rather, the government is trying to “hold the line and await political and military developments,” especially in northeast Syria, he added. 

Furthermore, if the UN-sponsored political process continues, they may be able to acquire “more aid and development funds,” which could relieve pressure on the Syrian pound. Butter told Syria Direct that “holding the [exchange] rate where it is could make sense over the medium to long term” for the Syrian government, “in the hopes of capital inflows.”

Fighting corruption?

To deflect responsibility for the deteriorating economic situation, the government has largely resorted to anti-corruption rhetoric. It has blamed smugglers, currency speculators, and foreign elements for Syria’s economic ills. 

In late August, rumors spread that the Syrian government was targeting the country’s most wealthy businessman, Rami Makhlouf—the cousin of Bashar al-Assad—as part of its anti-corruption drive. Most notably, these rumours suggested that some of Makhlouf’s assets in the Syriatel Telecommunication Company and al-Bustan Foundation were seized. 

In September, Prime Minister Imad Khamis amplified his anti-corruption rhetoric, noting that several people would be held to account in the next few weeks as a result of major investigations into corruption. “No one is above the law,” he added.

This anti-corruption rhetoric is by no means new, however. Daher explained that this tactic has been employed throughout Syria’s history for “the regime to show that it is listening to its loyal constituents.” But when it comes to issues such as trade monopolies or smuggling, in which a new class of regime-linked businessmen is involved, the government “has done nothing,” noted Daher.   

For example, when Fares al-Shehabi, a famous industrialist from the city of Aleppo, criticized the power of smugglers and trade intermediaries, specifically Abu Ali Khedder, on state-run al-Ikhbaria News Channel, government authorities removed the interview. Commenting on the incident, Daher told Syria Direct that “there are real contradictions among the different fractions of the bourgeoisie.”

It appears that these anti-corruption efforts are having the opposite of their intended effect. Failing to restore investor confidence in the Syrian economy, the Syrian pound continues to plummet. With no end in sight to the current free fall, it will be the Syrian society that will shoulder the costs. As Butter put it bluntly, “The economy is in awful shape and no one is secure.”