VZCZCXYZ0002
PP RUEHWEB

DE RUEHDM #0132/01 0551528
ZNR UUUUU ZZH
P 241528Z FEB 08
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC PRIORITY 4658
INFO RUEHAM/AMEMBASSY AMMAN PRIORITY 7229
RUEHAK/AMEMBASSY ANKARA PRIORITY 5468
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0768
RUEHLB/AMEMBASSY BEIRUT PRIORITY 4858
RUEHEG/AMEMBASSY CAIRO PRIORITY 3551
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 2096
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY

UNCLAS DAMASCUS 000132 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR NEA/ELA; COMMERCE FOR 
4520/IEP/ANESA/ONE/NWIEGLER; TREASURY FOR ISM/SINGER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ENRG EPET PGOV SY
SUBJECT: BUDGET DEFICIT THREATENS SYRIA'S ECONOMIC GROWTH 
 
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SUMMARY 
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¶1. The 2008 Syrian budget typifies the lack of SARG 
transparency by significantly underreporting petroleum 
revenues, defense expenditures, and the cost of subsidies. 
Even though the official numbers are suspect, local 
economists agree that the SARG's acknowledgement of a 
128-percent increase in the budget deficit is a significant 
indicator of Syria's true economic health.  Also likely to be 
underestimated, the reported USD 3.85 billion deficit 
represents nearly 10 percent of Syria's estimated 2008 GDP. 
SARG officials attribute the increased deficit primarily to 
petroleum-related circumstances.  Syria's oil revenues are 
projected to decline proportionately with decreased 
production, while high oil prices mean that Syria will be 
paying more for imported refined petroleum by-products, such 
as diesel.  Since publishing the budget, the SARG has 
announced various measures under consideration to increase 
revenues, such as re-writing corporate tax codes, issuing 
Treasury bills, and implementing a VAT in 2009.  Ultimately, 
economists say, the SARG must also cut costs by lowering all 
fuel subsidies or risk severe inflation and currency 
devaluation.  End summary. 
 
--------------------------------------- 
BUDGET DEFICIT INCREASES BY 128 PERCENT 
--------------------------------------- 
 
¶2. The 2008 SARG budget forecasts an unprecedented deficit of 
USD 3.85 billion, a 128 percent increase from 2007.  This 
deficit represents 9.8 percent of the estimated Syrian GDP of 
USD 39.1 billion.  In keeping with past practices, the SARG 
stated that it will cover USD 3.63 billion of the deficit by 
drawing on Central Bank reserve funds and finance the 
remaining USD 213 million through external loans and Treasury 
bills.  Syrian economists worry that such a large deficit 
cannot be sustained without driving up inflation -- already 
officially estimated at 8.9 percent -- and retarding Syria's 
projected GDP growth of 4.5 percent in 2008. 
 
--------------------------------------------- 
SUBSIDIES AND DECLINING OIL REVENUES TO BLAME 
--------------------------------------------- 
 
¶3. Economic reformers point to government fuel subsidies as 
the primary reason behind the ballooning deficit.  As Syria 
transitioned to become a net-importer of refined petroleum 
products in 2006, the SARG faced not only higher market 
prices for fuel but also significantly increased public 
demand.  While the 2008 budget allocates only USD 500 million 
for all "price controls," the quasi-independent business 
journal Al-Iqtisadiyah estimated the price of diesel 
subsidies alone at USD 3.76 billion for 2008.  Similarly, at 
the end of 2007 Finance Minister Muhammad al-Hussein told 
local media that the total cost of all subsidies would amount 
to USD 7.14 billion in 2008, or roughly 18 percent of GDP. 
 
¶4. The 2008 budget also projects that total revenues will 
decrease by 19 percent from 2007 to USD 8.15 billion, with 
oil export revenues of approximately USD 2 billion providing 
24.6 percent of the total.  Oil revenue calculations assume a 
price of USD 42 per barrel for heavy crude and USD 51 per 
barrel for light crude, so actual revenues are likely to be 
doubled if the price of oil remains in the USD 90-100 range. 
Additionally, the budget assumes Syrian oil production will 
fall to just 360,000 barrels per day (bpd) in 2008, almost 
evenly divided between heavy and light crude oil. 
 
--------------------------------------- 
SEEKING TO INCREASE REVENUES, CUT COSTS 
--------------------------------------- 
 
¶5. While the internal debate over cutting diesel subsidies 
continues, the SARG had already enacted some measures to 
reduce costs and increase revenues by late 2007.  On 
September 1, the government raised the price of electricity 
by a scaled-average of 34 percent.  In November, the SARG 
also increased the prices of gasoline and water, by 20 
percent and 37 percent, respectively.  Over the same period, 
President Asad issued a decree to issue Treasury Bills in 
2008 to partially finance the deficit.  Consultants say that 
additional steps under consideration are aimed at increasing 
tax collection.  They argue that the Syrian private sector is 
responsible for 67 percent of GDP, but contributes a 
disproportionately low percentage of tax revenues.  In 
addition to modifying the corporate tax laws to better 
capture lost revenues, the government also plans to implement 
a Value-Added Tax (VAT) in 2009. 
 
---------------------- 
THE "OFFICIAL" NUMBERS 
---------------------- 
 
¶6. According to the published budget, the SARG allocation by 
ministry is as follows: 
 
Ministry                   Millions USD         Percentage 
 
Defense                     1,445                12 
Interior                     289                2.4 
Foreign Affairs              103                0.9 
Information                   80                0.7 
Immigration                  1.2                0.0 
Higher Education             464                3.9 
Education                    801                6.7 
Culture                       37                0.3 
Labor/Social Affairs          22                0.2 
Health                       140                1.2 
Economy                       11                0.1 
Finance                    2,444               20.4 
Agriculture                  383                3.2 
Irrigation                   129                1.1 
Petroleum                    314                2.6 
Industry                     153                1.3 
Electricity                  541                4.5 
Water                        151                1.2 
Building                      18                0.1 
Tourism                       25                0.2 
Trade                         31                0.2 
Telecommunications           185                1.5 
Transportation               272                2.3 
Grain Storage                 70                0.5 
Presidency                    32                0.3 
Parliament                    10                0.1 
Prime Ministry               151                1.3 
Justice                       38                0.3 
Housing                      103                0.1 
Local Admin/Envinronment   1,284               10.7 
Governorates                 593                4.9 
Waqf                         7.6                0.0 
 
Investment Capital / 
  for Private Sector          20                0.2 
Price Stabilization 
  (subsidies)                500                4.0 
Reserve Credits for 
  Investment Projects        940                8.0 
 
¶7. 2007-2008 BUDGET COMPARISONS (Millions of USD) 
 
                            2007     2008       Percent Chg 
Revenues: 
Taxes and duties            4,052    4,385        8.2 
Fees and royalties (oil)      942      932       -1 
 
Contributions of State enterprises 
(Surplus and depreciation)  4,795    1,986       -58.6 
Other income                  284      852        200 
Total                      10,073    8,155       -19 
 
Expenditures: 
Total                      11,760   12,000        2 
-Current                    6,600    7,400       12 
-Capital                    5,160    4,600      -11 
External grants and loans 
tied to projects 
-Under capital expenditure  1,686    3,844      128 
"Financing Gap"               359      213      -41 
External "Arab" financing       0        0        0 
Central Bank borrowing      1,327    3,631      173 
 
¶8. FUNCTIONAL BREAKDOWN OF EXPENSES (Millions of USD) 
 
                            2007     2008       Percent Chg 
 
Current                    6,600    7,400        12 
Chapter I - Salaries       2,013    2,283        13 
Chapter II - Admin           470      528        12 
Chapter IV - Transfers       675      719         6 
Chapter V - Pensions       1,535    1,882        22 
Defense                    1,369    1,445       5.5 
Presidency/parliament         37       42        14 
Chapter III - Capital      5,160    4,600       -11 
Total                     11,760   12,000         2 
 
¶9. BREAKDOWN OF INCOME SOURCES (Millions of USD) 
 
                            2007     2008        Percent Chg 
 
Direct Taxes               3,365    3,525         5 
- Businesses               2,500    2,390      -4.4 
- Salaries                   126      140        11 
Indirect Taxes               687      856        24 
- Electricity Consumption   36.4       42        15 
- Customs                    320      460        44 
- Stamps                     174      192        10 
- Fees                        34       42        23 
Total taxes and duties     4,052    4,385         8 
 
Services and royalties       942      932       -1.0 
- Oil royalties              882      849       -3.7 
Contribution of state 
enterprises (surplus)      4,795    1,986       -58.6 
- Extraction industries    2,639      21.6      -99 
- Banks and finance          451     715.5       58 
- Converting industries      304      186       -39 
- Transportation and 
  Communications             779      809         4 
- Electricity, gas, water    249        2       -99 
Other income                 284      852       200 
Total revenues            10,073    8,155       -19 
 
Revenue deficit            1,686    3,844       128 
Financed by: 
External loans / grants      359      213       -41 
Central Bank borrowing     1,327    3,631       173 
CORBIN