VZCZCXRO8305
OO RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHMOS
DE RUEHDM #2164/01 1291237
ZNR UUUUU ZZH
O 091237Z MAY 06
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8869
INFO RUEHEE/ARAB LEAGUE COLLECTIVE IMMEDIATE
RUCNMEM/EU MEMBER STATES COLLECTIVE IMMEDIATE
RUEHTV/AMEMBASSY TEL AVIV IMMEDIATE 0965
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RHMFISS/HQ USCENTCOM MACDILL AFB FL IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE

UNCLAS SECTION 01 OF 03 DAMASCUS 002164 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA/ELA 
TREASURY FOR GLASER/SZUBIN/LEBENSON 
NSC FOR ABRAMS/DORAN/SINGH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EIND ELAB EAGR ENRG SY
SUBJECT: THE SARG'S NEW ECONOMIC SCORECARD 
 
REF: A. DMS 1926 
 
     ¶B. DMS 1696 
     ¶C. 05 DMS 6389 
     ¶D. DMS 0196 
 
¶1. (SBU) Summary:   The recently enacted 10th Five-Year Plan 
presents a number of quantifiable targets for reaching seven 
percent annual GDP growth and represents an agenda for reform 
against which the SARG's progress can be measured.  The plan 
assumes that broad-based reform will allow the SARG to meet 
its targets despite significant economic obstacles and 
resource constraints, but offers few specifics on how or when 
those reforms will be implemented.  The plan, therefore, has 
many detractors who are less than optimistic about its 
chances of success.  End summary. 
 
THE SARG'S ECONOMIC SCORECARD 
 
¶2. (SBU) President al-Asad signed into law the SARG's 10th 
Five-Year Plan on May 7, covering a period ostensibly from 
January 2006 through the end of 2010, after months of 
inaction and three days of Parliamentary debate.  The plan 
establishes as a goal the gradual transformation of Syria's 
economy from centrally-planned to market-based, obtaining 
annual growth rates in GDP of five to seven percent and a 
resulting eight percent reduction in poverty by the end of 
¶2010. Since Asad assumed power in 2000, the SARG has claimed 
a commitment to reform while offering few concrete 
obligations.  Contacts who have worked on this plan defend it 
by pointing to the specific economic and poverty reduction 
targets it establishes, and its emphasis on directing 
resources toward Syria's most impoverished regions in the 
South and Northeast.  Detractors point out that the SARG has 
yet to develop comprehensive benchmarks or the implementing 
details to reach the targets, and that the plan's success 
depends upon the SARG immediately instituting broad-based 
economic reforms that it so far has been unwilling to do. 
All agree, however, that the plan will become the SARG's 
scorecard on economic reform. 
 
BENCHMARKS FOR PRIVATE INVESTMENT 
 
¶3. (SBU) The plan's success in achieving high rates of annual 
GDP growth hinges on the SARG's ability to attract private 
sector investment.  The plan estimates that Syria needs $36 
billion in total investments by 2010 to reach its growth 
target, $17 billion from the public sector and $19 billion 
from the private.  The plan aims to limit SARG investment 
spending and support for existing or new State Owned 
Enterprises (SOEs) to an average 14 percent of GDP per year 
for five years, a relatively modest increase of two percent 
over the average level of government investment spending on 
SOEs during the previous five years.  The investment goal, 
according to contacts, is to gradually open the economy to 
greater competition by supporting the private sector and 
attracting foreign direct investment (FDI). 
 
¶4. (SBU) The SARG faces a number of obstacles toward 
achieving higher levels of private sector investment, 
however.  Investors are plagued by a lack of access to 
credit, since Syria's private banks still are unwilling to 
increase their loans-to-deposit ratio.  In addition, the SARG 
continues to crowd out private investment through its 
unwillingness to reduce public spending and support for SOEs- 
actually increasing its allocation for public sector 
investment by eight percent in the 2006 budget to $3.9 
billion, or 18 percent of GDP.  Further, most private 
investors are hesitant to increase their commitments or 
exposure to risk due to the poor investment climate, which is 
characterized by high corruption, poor contract enforcement, 
the lack of an independent judiciary, and the SARG's slow 
pace of reform.  Although the plan specifically mentions 
steps to address these obstacles, including providing small 
and medium enterprises (SMEs) with greater access to loans 
and credit facilities through both public and private banks, 
and allowing foreign investors to repatriate profits, the 
private sector remains largely skeptical of the SARG's 
ability to deliver on its promises. 
 
¶5. (SBU) New private investment is critical for the SARG to 
make headway on one of its most pressing economic challenges- 
burgeoning unemployment (ref A).  The plan calls for public 
 
DAMASCUS 00002164  002 OF 003 
 
 
and private investment to create 1.3 million new jobs by 2010 
and cut the official unemployment rate of 12 percent in half. 
 With the SARG budgeting for the creation of just over 58,000 
jobs in 2006, the private sector would have to create 
approximately 140,000 new jobs to meet the plan's first year 
employment goal- four times the rate in 2005. 
 
¶6. (SBU) Meeting these employment targets depends on the 
SARG's willingness to liberalize the economy.  The SARG 
continues to be the single largest employer, and its central 
role in the energy and power sectors, as well as agricultural 
supply chains, chokes off private sector job growth in these 
key sectors.  Although the tourism sector holds promise, most 
investors are moving forward cautiously with their projects 
as the political and economic climate remains unclear.  While 
the plan mentions SMEs, including those with fewer than nine 
employees, as a possible source for Q jobs, the SARG lacks 
basic information on their number and aQrbtive capacity 
since most operate in the informal sector. 
 
BENCHMARKS FOR REDUCED SPENDING & INCREASED REVENUE 
 
¶7. (SBU) In seeming contradiction to its job creation goals, 
the plan also establishes targets for a less expansionary 
fiscal policy and low inflation.  The plan specifies that the 
SARG shoQ maintain budget deficits equal to approximately 
three percent of GDP, down from a budgeted 9.5 percent in 
2005, and sets an inflation target of five percent.  In 
addition, the plan calls for the SARG to reduce its "current 
expenditures," which covers all non-investment spending 
including salaries and subsidies, to approximately 20 percent 
by 2010.  Further, the plan calls for a 75 percent reduction 
in subsidy costs over the five-year period. 
 
¶8. (SBU) The SARG again faces a number of obstacles related 
to meeting its spending targets.  To meet its growth goals 
listed above, the SARG must be committed to increase spending 
to create the 58,000 new public sector jobs in 2006. 
Additionally, declining oil revenues will make it difficult 
for the SARG to maintain its deficit targets without major 
fiscal reform, specifically a reduction in subsidies and 
price supports (ref B).  The size of the obstacle also is 
much larger than the SARG's official numbers admit.  Last 
year, the SARG budgeted $500 million for subsidies through 
its price stabilization fund, but spent approximately $4 
billion on subsidies for oil products alone.  This year the 
discrepency is expected to grow even larger. 
 
¶9. (SBU) The plan assumes that the SARG can control deficits 
from the revenue side by introducing a Value Added Tax (VAT) 
on consumption to dramatically increase its tax receipts from 
a baseline of 8.7 percent of GDP in 2005 to 16 percent in 
¶2010. Qeloping the tax base and other reliable sources of 
income is a critical fiscal issue in the face of steadily 
declining Q revenues.  The biggest obstacle to achieving 
this goal is the SARG's inefficient tax system, which 
contacts say the government must completely modernize.  In 
addition, it has to update its commercial registry and 
provide incentives, such as a reduction in income tax rates, 
to bring more SMEs into the formal sector.  Finally, the SARG 
woulQave to engage in an extensive public education 
campaign about proper accounting practices to raise 
compliance rates  and stop the practice in which SMEs hide 
profits from the tax department by keeping multiple sets of 
books. 
 
BENCHMARKS FOR OIL AND GAS 
 
¶10. (SBU) In addition to its focus on establishing 
alternative revenue sources, the plan seeks to direct 
investment toward stabilizing the rate of oil production. 
According to the plan, Syria must flatline its production at 
350,000 barrels per day (bpd) through 2010 to achieve and 
sustain high growth.  The SARG's ability to reach its target 
is predicated on its ability to bring thousands of barrels of 
new production on line and offset the rate of decline in its 
aging fields estimated to be 15 percent annually (ref C). 
Without new production, Syria's oil output will approach 
350,000 bpd already by the end of this year. 
 
¶11. (SBU) The plan also assumes that Syria will be able to 
increase its gas production from the current level of 22 
 
DAMASCUS 00002164  003 OF 003 
 
 
million cubic meters (mcm) of gas per day, to 32 mcm/day by 
¶2010.  According to the plan, Syria will substitute natural 
gas for oil in industry and energy production domestically, 
thereby freeing up more oil for export.  While Syria has 
modest proven gas reserves, approximately 13.1 trillion cubic 
feet (tcf), the sector needs to attract significant foreign 
investment to tap its reserves, increase processing capacity 
and convert its industrial and power generation 
infrastructure to run on gas at a time when established 
Western companies like Conoco Phillips are divesting their 
Syrian assets (ref D). 
 
BENCHMARKS FOR TRADE 
 
¶12. (SBU) The plan calls for increased private sector 
involvement in exports to help reduce the balance of payments 
deficit to 6.6 percent of GDP by 2010.  The plan sets a 
target of increasing the value of exports to cover 80 percent 
of imports, based primarily on a 15 percent annual increase 
in private sector exports each year.  According to the SARG's 
most recent trade statistics, exports covered approximately 
half of imports during the first half of 2005.  The trade 
deficit in the private sector grew by approximately 45 
percent in 2004, the last time the SARG published figures on 
the subject, and has shown signs of accelerating since GAFTA 
went into effect last year. 
 
¶13. (SBU) In order to reverse this trend, the SARG would have 
to increase the efficiency and competitiveness of its export 
sector, and begin to provide incentives to promote export 
growth.  For instance, the SARG would have to drop price 
supports for agricultural raw materials like cotton that 
drive up the prices of textiles, which already face stiff 
competition abroad, and reduce tariffs and taxes that are 
levied on exports to non-Arab countries.  In addition, the 
SARG would have to change its policy of currency support, 
which currently has overvalued the Syrian pound at the 
expense of exports, to provide long term currency stability. 
Finally, ceasing its support for inefficient SOEs also would 
help the export sector grow, where overemployment, waste, 
corruption, and near monopoly control over the supply chains 
make locally-produced goods for export uncompetitive in 
quality or price. 
 
¶14. (SBU) Comment: The optimists among our contacts view the 
10th Five-Year Plan as Syria's first step, despite its 
imperfections, toward a market economy.  Most interlocutors, 
however, claim that unrealistic assumptions, formidable 
obstacles, and lack of specific details for implementation 
will keep it from being the reform agenda that Syria needs. 
Everyone agrees, however, that the plan is hugely ambitious 
and would require significant effort and political will to 
have any chance of implementation.  The SARG's efforts in 
this regard are not off to a very auspicious start, 
squandering the first five months of the plan to get it 
ratified and signed, which is arguably the easist part. 
SECHE