Syrian pound plummets to new low as policies fail to stop freefall

AMMAN — On Monday, the value of the Syrian pound (SYP) plummeted to historic lows, surpassing SYP 3,000 to the US dollar. before recovering some value and settling around SYP 2,800 on Tuesday. 

The last year has seen the currency lose almost 80 percent of its value, as the perfect storm of sanctions, COVID-19, the Lebanese financial crisis and internal strife within the ranks of Damascus’s ruling elite has pushed what was once a gradual decline of the currency into a full tailspin. 

As the pound reached its new low, Bashar al-Assad faces a compounding economic crisis and eroding support amongst his supporters, something he himself hinted at in a May speech about the government’s response to COVID-19. 

Damascus has taken several steps to combat the worsening economic conditions and restore some semblance of control in the face of growing public discontent, including the replacement of five governors in one night—the largest of such shake ups in recent history. 

So far, these measures have proven to be ineffective, especially as the country’s elite braces itself for the newest round of sanctions as the Caesar Act comes into effect in two weeks.

Why did the Syrian pound start to fall? 

Much of the Syrian pound’s most recent rapid deprecation has its roots in the events of fall 2019. 

The initial decline in the currency’s value occurred between November 2019 and January 2020, when the Syrian pound lost almost half of its value, dropping from SYP 670 to 1,230 per dollar. The sharp drop was mainly due to the beginning of Lebanon’s financial meltdown and the passage of the US Caesar Act, which allowed US President Donald Trump to impose fresh sanctions on the Assad regime and all those who assisted it.  

Beirut has historically been a financial hub for Syria, and was used by Syrian business people to make deals and finance imports. Lebanon has also served as a large market for Syria’s exports, buying some $132 million worth of Syrian goods in 2018, though this figure does not account for the significant smuggling between the two countries. 

In addition, as much as 80% of Syrians reportedly have money stored in Lebanon. When Lebanese banks started imposing withdrawal limits and the Lebanese pound started to plummet, those deposits lost much of their value. 

The sudden halt of money from Lebanon cut off a vital financial artery to Damascus, and was only compounded by the news that Washington was imposing fresh sanctions on Syria.

Following January, the pound seemed to hold relatively steady against the dollar. Then, like everywhere else in the world, COVID-19 ground Syria’s economy down to a halt.

Like many other governments in the region, Damascus imposed a curfew and an economic lockdown that put much of the territory under its control out of business in mid-March. However, besides a small dip in its value in mid-March when Damsacus announced its first case of COVID-19, the Syrian pound did not seem to suffer too much.

It was not until Rami Makhlouf—Syria’s richest businessman and cousin of Bashar al-Assad— released a video in early May that the latest decline in the value of the pound began.

What followed was a highly-publicized spat between Makhlouf and Bashar al-Assad, prompting speculation that Assad’s core base of power might abandon him. Ultimately, the conflict ended with the government ordering the seizure of all of Makhlouf’s goods.

The feud, delayed economic effects of COVID-driven lockdowns and fear over the activation of the Caesar Act sanctions, have all pushed the pound to continue to shed value.

Mild reforms fail to restore purchasing power

On Sunday, an official in Damascus’s Chamber of Commerce told pro-government newspaper al-Watan that he and other traders were choosing to store their goods rather than sell them on the market and were not buying any products unless absolutely necessary, given the abysmal purchasing power of by the pound.

The Commerce official’s comments was an acknowledgment of one of the key concerns of Syrians, as they see their salaries decrease. At the same time, the price of basic goods increases as the loss in purchasing power has hamstrung the ability of importers and the government to bring goods into Syria.

To help slow the decline of the pound and help blunt the worst effects of its freefall, the government has adopted a dual strategy.

It is simultaneously attempting to stimulate local industry while also trying to address its foreign exchange shortage by following a carrot-and-stick approach of offering more attractive exchange rates for various transactions at the same that it chokes off avenues for illegal money transfers and exchanges. 

Most recently, the government announced that it was expanding its Import-Substitution Program (ISP) in order to reduce its reliance on imported goods. Damascus expanded the ISP, first created in 2018, to 67 different types of products encompassing over 80 percent of goods currently imported by the private sector, according to the specialist economic publication, Syria Report. 

As part of the program, the government is offering priority plots in industrial cities to producers of these 67 goods, as well as removing taxes and tariffs on some production inputs, while banning or placing tariffs on competing imports, according to the Syria Report. In addition, companies that export select goods will receive subsidized loans. 

ISPs seek to promote local production over imported goods via a mix of tariffs on imports and subsidies of local industries. Many Arab regimes, including Syria, implemented these programs between the 1960s and 1980s as they attempted to build an industrial base and achieve economic independence. 

Syria’s sudden enthusiasm for local production likely does not come from a sense of national pride; rather, desperation in the face of economic ruin. Given its inability to secure imports, Damascus has no other choice but to supply its own goods. 

Still, the timeline for an ISP is long-term, as a productive base takes years to build, especially in a war-torn country like Syria. Syria, however, does not have the luxury of time, as the problems facing it—shortages of basic goods and food—can not wait. 

Moreover, even without time constraints, the ISP is likely to fail due to systemic factors.

“Syria is unlikely to produce the substituted commodities efficiently due to the lack of experience, the small scale of production and the sanctions on the importation of machinery and equipment,” Dr. Karaam Shaar, a non-resident scholar at the Middle East Institute and economist in the New Zealand public sector, told Syria Direct.

“Therefore, the policy is likely to have two outcomes. First, lower quality and higher prices for the substituted products. Second, increased smuggling to meet the domestic demand for better products, resulting in lower public revenue from import tariffs,” Shaar added. 

In addition to the ISP, the government has doubled down on its efforts to crack down on illegal money exchanges and remittances in an effort to recover foreign exchange. 

On May 21, the government announced more favorable exchange rates for those buying dollars and receiving money from abroad. Officially set at SYP 700, local exchanges are now selling dollars for SYP 1,450 and cashing in wires at SYP 1,260 per dollar, according to the Syria Report.

Soon after on June 2, the Central Bank of Syria announced that it was suspending the work of five large remittance companies. The combination of the closures and the establishment of more favorable exchange rates is meant to entice Syrians to use official channels to exchange money and receive remittances, with the threat of punishment if they do otherwise. 

Many Syrians use unofficial money changers and remittance offices—referred to as hawalas—to avoid the official exchange rate. Even though they have instituted strict punishments for using unofficial channels, Damascus has thus far failed to stop the widespread use of these shops. 

However, if the new policies actually did succeed in capturing a significant amount of the remittance flow which usually goes through unofficial channels, it could be a crucial source of foreign exchange for the government. Remittances are estimated to make up 15 percent of Syria’s nominal GDP. 

Consolidating control and rotating the cast

Absent significant economic changes, Bashar al-Assad has decided to swap out the current cast of governors, replacing the governors in Homs, Daraa, Quneitra, Suwayda and Hasakah Province on Saturday. 

The appointment of the five new governors came with little fanfare nor elucidation in pro-government media. Little is known about the new governors, except that the two appointed to Daraa and Hasakah provinces come from military backgrounds, while the remaining three occupied cabinet positions.

Marwan Ibrahim Sharbak—the new governor of Daraa—is the former head of the signals division of the Syrian Republican Guard (SRG), and is considered to be one of the closest SRG officers to Bashar al-Assad. While Ghassan Halim Khalil—the new governor of Hasakah—is the former head of the Information Branch of the State Security Agency and previously oversaw Bashar al-Assad’s personal security. A 2011 Human Rights Watch report named him as a key official involved in crimes against humanity and the killing of protestors. He is currently under EU sanctions. 

The appointment of the former military officers to oversee Daraa and Hasakah province seems to be a fairly straightforward move to consolidate Damascus’s control over these areas. In Daraa province, the regime is grappling with an intensifying insurgency. 

In Hasakah, the regime is conducting negotiations with the Kurdish-led Syrian Democratic Forces (SDF) to incorporate the force into the SAA and retake control of the areas of northeast Syria under its control. 

Why Bashar al-Assad appointed the remaining three governors remains less clear. One possibility could be that he is calling in some new faces to show the public that he is taking action to solve the economic crisis. This would follow his public strategy so far, as he has blamed rising prices on corrupt businessmen and scapegoated ministers for supposed bad performance. 

On May 11, he fired the Minister for Internal Trade and Consumer Protection, Atef Naddaf and replaced him with the former governor of Homs, Talal al-Barazi.

Thus far, Barazi has made several moves to show the government is cracking down on corrupt businessmen, including conducting inspections of warehouses in person and revoking business licenses of two companies according to the Syria Report. 

Still, while perhaps good for public consumption, it’s unlikely that any of these new appointments will help solve the problems underpinning Syria’s economic crisis. Extractive institutions and an economy dominated by patronage networks provide little hope for a way out of the current economic tailspin. 

This article reflects minor changes made on 09/06/202 at 4:31 pm to reflect the new exchange rate.