VZCZCXRO6833
OO RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHMOS
DE RUEHDM #1926/01 1171521
ZNR UUUUU ZZH
O 271521Z APR 06
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8600
INFO RUEHEE/ARAB LEAGUE COLLECTIVE PRIORITY
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 0931
RHEHNSC/NSC WASHDC PRIORITY
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHAAA/WHITE HOUSE WASHDC PRIORITY
RUCNDT/USMISSION USUN NEW YORK PRIORITY 0094
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 DAMASCUS 001926 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA/ELA 
NSC FOR ABRAMS/DORAN/SINGH 
TREASURY FOR GLASER/LEBENSON 
EB/ESC/TFS FOR SALOOM 
 
E.O. 12958: N/A 
TAGS: ECON ETTC SY SANC
SUBJECT: SYRIA'S ECONOMY - FRAGILE STABILITY 
 
REF: A. DAMASCUS 6280 
     ¶B. DAMASCUS 641 
     ¶C. DAMASCUS 1393 
     ¶D. DAMASCUS 425 
     ¶E. DAMASCUS 716 
     ¶F. DAMASCUS 893 
     ¶G. DAMASCUS 1696 
     ¶H. DAMASCUS 1273 
     ¶I. DAMASCUS 6570 
     ¶J. 05 DAMASCUS 06439 
 
¶1. (U) Summary.  Syria,s economy is benefiting from the high 
price of oil and other positive trends, but faces two chronic 
economic problems that could become acute in the next two to 
three years: decreasing oil production and rising 
unemployment.  The economy is also hamstrung by a number of 
short-term vulnerabilities that have the potential to trigger 
economic instability.  End summary. 
 
¶2. (SBU) As one of its strategies for reassuring the Syrian 
public during its current confrontation with the 
international community, the SARG has tried to create a sense 
of economic progress in the country (ref A).  The two main 
refrains of the SARG,s economic cheerleading have been its 
claim that both foreign direct investment (FDI) and the GDP 
growth rate are increasing significantly.  In late 2005, 
Prime Minister Otri announced that the year,s GDP growth 
rate would reach 4.5 percent, more than doubling the previous 
year,s official rate.  Otri,s prediction has subsequently 
become the official SARG GDP growth rate for 2005 even though 
Syria,s Central Bureau of Statistics has yet to produce the 
basic macro-economic numbers to support the assertion. 
Independent economists and Syrian businessmen view both SARG 
claims as mostly hype, pointing to the lack of construction 
on any of the Gulf investment projects (ref B), and to 
Syrians' widely held belief that both their purchasing power 
and standard of living continue to erode. 
 
Positives 
--------- 
¶3. (U) Despite the SARG,s obvious exaggeration of FDI and 
GDP growth, Syria does have some economic strengths.  In the 
last few years, the SARG has succeeded in restructuring its 
foreign debt to a relatively low level, approximately 13 
percent of GDP.  During the same time period, the SARG has 
accumulated significant hard currency reserves that its 
officials claim approach USD 18 billion, enough for two and a 
half years of imports, if true.  As an oil exporting country, 
Syria,s economy is benefiting from the sustained high price 
of oil.  The second main pillar of the country,s economy, 
agriculture, benefited from better than average rainfall in 
2005, though 2006 totals may be modestly lower.  Ironically, 
its tourism sector benefited from the downturn in Gulf 
tourism to Lebanon last year (ref D), and the country also 
profits from being the shortest trans-shipment route for Iraq 
reconstruction goods coming from Europe or the US.  Also, 
Gulf investors are undoubtedly sympathetic to the SARG and 
willing to echo its upbeat self-assessment of Syria as a good 
place to invest (ref C).  Finally, the SARG has succeeded in, 
at least temporarily, stabilizing its currency after the 
Syrian Pound (SYP) devalued dramatically last fall (ref E). 
 
Medium Term-Challenges 
---------------------- 
¶4. (U) There is another side of the coin, however, that is 
more ominous.  In the medium-term, the SARG faces two 
significant economic challenges: crossing over from being a 
net oil exporting country to being a net oil importer, and a 
population growth rate that continues to outpace its GDP 
growth rate.  Each year an additional 200,000-plus young 
people enter the job market.  The official unemployment rate 
is currently 12 percent, though most informed observers have 
been putting it at over 20 percent for years.  The SARG has 
recently acknowledged the public sector,s inability to 
absorb any significant number of new entrants, though it 
continues to ignore the pressing need to restructure and 
downsize the public sector.  The SARG,s much-touted 10th 
Five Year Plan (ref J), has put the onus on the private 
sector and FDI to create the vast majority of the new jobs 
 
DAMASCUS 00001926  002 OF 003 
 
 
needed to reverse the trend of growing unemployment. 
Syria,s businessmen, however, continue to prefer to invest 
abroad and FDI has generated less than 200,000 jobs total 
since 1991, when the SARG enacted its first investment law 
designed to attract FDI. 
 
¶5. (SBU) Added to the burgeoning unemployment, Syria,s oil 
production is decreasing annually at a rate of approximately 
15 percent.  According to the SARG,s own statistics, the oil 
sector still accounts for 20 percent of GDP, 70 percent of 
exports, and 40 percent of government revenues.  At the same 
time, consumption rates for oil derivatives are booming: 
gasoline consumption increased by 13 percent last year, while 
diesel consumption increased by approximately ten percent. 
Conventional wisdom holds that within two to three years 
Syria will cross over from being a net exporter of oil to 
being a net importer, but if last year's consumption trend 
continues, the crossover could happen even sooner.  Local 
economists subsequently view managing the crossover as the 
country,s largest economic challenge.  When added to the 
fact that each year Syria witnesses a significant increase in 
the number of unemployed young people, local economists worry 
that the country faces potential economic instability in the 
medium-term, if current trends are not reversed. 
 
Short-Term Vulnerabilities 
-------------------------- 
¶6. (SBU) In addition to its medium-term economic problems, 
the SARG has three major short-term liabilities: rising 
prices, the potential return of a highly volatile exchange 
rate, and increasingly unsustainable expenditures for 
subsidies.  Subsidies are expected to cost the SARG an 
estimated USD 5.5 billion in unbudgeted expenditures this 
year (ref F).  Added to the SARG,s official 2006 budget 
deficit of USD 1.2 billion, this year's deficit could 
approach as high as 30 percent of GDP, if the SARG does not 
lower subsidies.  (Note.  The SARG,s revenues are also not 
fully accounted for in the budget, which further complicates 
accurately projecting the potential size of the SARG deficit. 
 End note.)  Though the SARG has a plan for gradually lifting 
subsidies, the regime has recently backed away from 
implementing scheduled price increases of basic commodities 
out of fear of potential social unrest (ref G), and concern 
over feeding the SARG,s second economic liability ) rising 
prices. 
 
¶7. (U) Importers and local manufacturers started raising 
prices last fall when the Syrian Pound (SYP) devalued by over 
ten percent.  For the last three months, the increase in 
prices of basic commodities and the adverse impact they are 
having on the average Syrian has become a persistent news 
story in the state-controlled press.  In addition to delaying 
the lifting of subsidies, the SARG has responded to rising 
prices by blaming unscrupulous businessmen for the increase 
and has redoubled its efforts to enforce price controls (ref 
H).  The fact that prices have continued to rise even after 
the SARG successfully intervened to reverse the precipitous 
fall in the SYP,s value highlights the link between rising 
inflation and the SARG,s third economic problem ) an 
unsustainably high exchange rate. 
 
¶8. (SBU) The SARG continues to spend an unspecified portion 
of its hard currency reserves in the black market to drive 
down the exchange rate for the US dollar.  Before the SARG 
began its intervention on December 8, 2005, the SYP had 
devalued from 53.10SP to over 60SP per USD (ref E).  As of 
today, the official rate is 51.95 while the black market rate 
is 52.20 per USD and both rates are continuing downward. 
Local economists often choose 55SP per USD as a potentially 
sustainable rate of exchange for the SYP and are at a loss to 
explain, from an economic perspective, why the SARG continues 
to intervene to artificially overvalue its currency.  They 
point to the apparent contradiction of the SARG,s stated 
priority of encouraging exports to diversify its export base 
from oil with its ongoing drive to overvalue its currency, 
which makes its exports more expensive and less competitive. 
Most Syrians explain the SARG,s action as an attempt to 
teach a lesson to those who bought dollars last fall when the 
SYP was seemingly in free-fall, and to discourage them from 
 
DAMASCUS 00001926  003 OF 003 
 
 
doing so again should the SYP show similar volatility. 
 
Predicting the Future 
--------------------- 
¶9. (SBU) Complicating the SARG,s ability to successfully 
maintain its intervention is the fact that a huge portion of 
Syria,s economy remains in the informal sector (ref I). 
Both the SYP,s devaluation and its continuing revaluation 
have been driven by the black market.  The UNDP estimates 
that 35 percent of the country,s work force is in the 
informal sector.  All Syrian businesses keep multiple sets of 
books, which ensures the government has no accurate 
assessment of current business activity in the country. 
Smuggling is rife, so the SARG's trade numbers are equally 
off base.  The expatriate work force is huge and repatriates 
its earnings primarily through the informal sector.  All of 
this means that even if the SARG,s economic numbers were not 
slow and manufactured, they would still risk being seriously 
inaccurate. 
 
¶10. (SBU) Comment.  The SARG is not sufficiently competent to 
actively manage its economy, but still shows prowess at 
stifling new business activity through its inefficient public 
sector and its promotion of corruption.  The high price of 
oil and current lack of international pressure, however, have 
lightened the consequences of its economic mismanagement and 
malfeasance on the Syrian public.  Still, the SARG is taking 
no serious action to avoid the economic shoals ahead, which 
only increases its economy's vulnerability to a drop in the 
price of oil or renewed international pressure.  With its 
economic liabilities continuing to grow, it seems to be only 
a matter of time before its current fragile stability is 
threatened. 
SECHE