Syrian Central Bank improvises to keep the economy afloat

AMMAN — Earlier last month, the Syrian Central Bank (SCB) announced its decision to expand the use of its intermediary rate of 700 Syrian pounds (SYP) to the dollar for import financing, remittances, and the selling of US dollars to the SCB. While the official rate of the Syrian pound to the US dollar remains at SYP 435 and the black market rate stands at SY) 1075, the Central Bank announced the new, intermediary rate of SYP 700 to help protect the economy from further currency devaluation and inflation. 

The SCB announced this rate on January 20, first allowing Syrians to sell their US dollars without having to provide documentation in a bid to shore up foreign currency reserves and encourage Syrians to use official channels.

More recently, on February 6, the SCB permitted money changers to exchange remittances to Syria at the rate of SYP 700 per dollar, even though many Syrians continue to use unofficial channels to receive a higher exchange rate. 

Widening the mandate for rationed goods 

Most significantly, on February 1, the government introduced new commodities—rice, sugar, and tea—to the “smart card” system, allowing Syrians to purchase rationed quantities of these goods at subsidized prices. 

However, following commodity shortages and persistent complaints by Syrians, the government has been attempting to make up for these shortages by increasing import financing at both the official rate of SYP 435 and the intermediary rate of SYP 700. 

On February 6, the SCB announced that state-authorized entities, such as the Syrian Trading Establishment (STE)—the primary organization responsible for selling subsidized goods—will be able to import 11 key commodities (including rice, sugar, and tea) at the official rate of SYP 435. 

Even though the quantities of foreign currency reserves in the SCB remain opaque, the government is using its resources to secure sufficient basic commodities, while also staving-off further currency depreciation and inflation. However, data from Syria Report, a specialist economic publication, indicates that inflation in Syria’s economy is a deeper problem that predates the recent collapse in the value of the Syrian pound.

In addition to the import financing of 11 key commodities, the SCB also allowed for the import financing of 41 commodities by public and private banks at a rate of SYP 700. These goods include spare parts for industrial equipment, wheat, infant baby milk, and animal fodder, among others.

It is worth noting that the expanding list of imports to be financed by banks is in fact a return to the situation that prevailed last year. Prior to September 2019—before the start of the rapid collapse of the SYP—the SCB allowed banks to finance the imports of 40 key commodities with their foreign currency reserves. 

A return to multiple exchange rates?

The new intermediary rate of SYP 700 for specific economic activities is not unprecedented in Syria’s economic history. “The rate is reminiscent of the multiple exchange rate system that Syria had in the past,” David Butter, a political and economic analyst at the London-based Chatham House institute, told Syria Direct.

During the 1960s, the Ba’athist government was determined to support the local industry by implementing an import-substitution industrialization program. As part of the program, it set up a system of multiple exchange rates in order to segment the market and protect certain industries from the influx of cheap imports. 

The situation in 2020, however, is markedly different. Rather than function primarily as a form of national economic stimulus, the multiple exchange rate system appears to be a stop-gap measure to alleviate excess pressure on foreign currency reserves, control foreign currency transactions, and keep a lid on inflation. 

In a system of multiple exchange rates, foreign currencies enter a centralized pool at the Central Bank which are then allocated for certain transactions at different exchange rates, depending on their priority. As such, the 11 most essential commodities are being financed at a favorable rate of SYP 435, while the other 41 commodities are financed at SYP 700.

“The bottom line is that it’s a way of rationing scarce resources and providing incentives to return import financing back to the banking system and squeeze out the black market,” Butter added.

But multiple exchange rates can also serve specific political purposes. By segmenting the market and controlling the rationing of dollars, the government and the SCB gain considerable power in benefitting certain industries—and certain business networks—at the expense of others. Because it has the power to distribute dollars, it can prioritize certain goods rather than others and can issue import licenses to reward political supporters rather than those it deems less favorable. 

Narrowing unofficial channels

Although Syrians can hypothetically receive a higher rate of Syrian pounds on the black market than through official channels, the government has made it increasingly risky to trade on the black market. 

In early January, Bashar al-Assad issued two presidential decrees further criminalizing the use of foreign currencies and unofficial rates. Since then, the state news agency and pro-government publications have been regularly publicizing arrests of people dealing in foreign currencies and the closing down of exchange companies engaging in “illicit behavior.”

For example, on February 12, the Ministry of Interior announced that the Criminal Security apparatus in Homs raided and closed down a mobile phone shop for dealing in foreign currencies. The shop owners allegedly carried $10,000 and SYP 103,000, which was later confiscated and handed to the SCB. 

On the Ministry of Interior’s Facebook page, pictures were posted of the shop owners with their backs turned, along with pictures of the US dollars in their possession. The post itself garnered almost 2,000 likes, in addition to numerous comments and shares praising the government’s actions. 

Commenting on the recent spate of arrests, Joseph Daher, a scholar of political economy at Lausanne University, previously told Syria Direct that, “the government is taking action to show that it is doing something.” However, he remained skeptical that these arrests will be effective in cracking down on currency speculation and in stabilizing the value of the Syrian pound.

Butter was also pessimistic about the new intermediary rate preventing black market activity. “Since there’s room for corruption, traders and investors will probably get hold of foreign currency directly through parallel markets if it’s less hassle,” he said. 

Reassuring the business community

Despite the official announcement of this intermediary rate, the fear that certain importers will be punished for using foreign currencies has led many to seek reassurances from the SCB that they will not be subject to punitive laws. 

Hazem Qarfoul, the governor of the SCB, held a meeting with the Federation of Syrian Chambers of Commerce, announcing that he was ready to discuss procedures and measures with traders and merchants who held licenses to deal in foreign currency, as long as they were conducted “within the official channels only.” This includes import financing from banks, money changers, the SCB itself, and from their own personal resources. 

Qarfoul also stated that these measures would be coordinated with the Ministry of Interior and the Anti-Money Laundering and Counter-Terrorist Financing Authority, especially in light of the two presidential decrees issued in January. 

In response, the representatives of the Federation of Syrian Chambers of Commerce stressed the importance of making sure that transactions take place within official channels by cooperating with the SCB, publishing explanations on the necessary procedures, holding workshops and seminars on the implementation of the decrees, and supporting the national currency. 

“The government wants to revitalize the commercial and industrial scene in Aleppo,” Butter said. After government forces retook parts of the Aleppo countryside last month, the government “is trying to get business groups to come back from Turkey, Egypt, Dubai, and Europe, as Aleppo gets going again with industry and trade.”

Even in Syria’s free zones, importers and exporters were reassured that they would not be subject to punishment as long as they used official channels. After speaking with Qarfoul, Fahd Darwish, the Chairman of the Higher Committee for Investors in Free Zones, told Al-Watan that importers can import materials not directly funded by the SCB by seeking financing from licensed exchange companies. Darwish also said that he received confirmation from Qarfoul that foreign currency dealings are permitted in the zones since the two decrees do not apply to free zones or foreign companies, even if the main investors are Syrians. 

According to Al-Watan, Qarfoul promised investors that he would reopen bank branches and help establish exchange companies in the free zones to help ease the financing of imports, especially industrial inputs. Prior to 2012, seven banks were operating in the free zones, but only one remains today.

Until now, it is still unclear how many businesses and investors will return to Syria from abroad. Whether the business community has confidence in Syria’s economy is also an open question. However, with the government continuing to suffer from foreign exchange shortages and low-levels of investment, reconstruction remains more an elusive idea than a concrete reality.