VZCZCXYZ0000
PP RUEHWEB

DE RUEHDM #0587/01 2311426
ZNR UUUUU ZZH
P 181426Z AUG 08
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC PRIORITY 5290
INFO RUEHAM/AMEMBASSY AMMAN PRIORITY 7384
RUEHAK/AMEMBASSY ANKARA PRIORITY 5619
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0920
RUEHLB/AMEMBASSY BEIRUT PRIORITY 4981
RUEHEG/AMEMBASSY CAIRO PRIORITY 3711
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 2200
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS DAMASCUS 000587 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA 
TREASURY FOR CATHERINE REYNOLDS 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN ENRG EPET PGOV SY
SUBJECT: SYRIANS ADJUSTING TO "NEW NORMAL" OF INFLATION 
 
REF: A. DAMASCUS 234 
     ¶B. DAMASCUS 307 
     ¶C. DAMASCUS 311 
     ¶D. DAMASCUS 320 
     ¶E. DAMASCUS 518 
     ¶F. DAMASCUS 240 
 
------- 
Summary 
------- 
 
¶1. (SBU) Three months after the SARG cut fuel subsidies by 50 
percent, the consequent 350 percent increase in the price of 
diesel has been reflected across the spectrum of goods and 
services.  Official SARG statistics indicate inflation has 
increased by 15 percent since summer 2007, but many 
economists estimate the actual figure to be closer to 25 
percent.  Economic reformers praise the SARG's decision to 
reduce subsidies but note the decision was not accompanied by 
adjustments in SARG monetary policy that could have better 
mitigated the resulting inflation.  While reformers claim 
that short-term inflation is an inevitable side effect of the 
transition to a market economy, critics argue that decreased 
consumer purchasing power is evidence that reforms hurt 
Syria's majority poor.  Meanwhile, Syrian consumers are 
bracing for additional, seasonal price hikes with the onset 
of Ramadan in early September.  End summary. 
 
-------------------------- 
Inflation up by 25 Percent 
-------------------------- 
 
¶2. (SBU) Officials at the Ministry of Economy and Trade 
report that consumer prices have increased by 15 percent 
since summer 2007, but private economists estimate actual 
inflation is closer to 25 percent.  Post's internal price 
survey on a basket of 100 goods reflects a cumulative 
inflation rate of 24.55 percent since June 2007, and 29.97 
percent since June 2006.  The utilities sector has been 
hardest hit, with an 87 percent jump in the average cost of 
electricity, water, fuel and telephone rates.  Food, which 
accounts for 42-50 percent of the average Syrian's budget, 
has increased in price by almost 23 percent. 
 
---------------------------- 
Contributing Factors Persist 
---------------------------- 
 
¶3. (SBU) The major factors contributing to inflation persist, 
with no immediate relief in sight.  As stated in ref A, 
inflation in Syria is driven by a combination of 
international and local forces.  Internationally, higher oil 
prices and global food inflation have hit Syrians hard -- 
especially since Syria has transitioned to become a net 
importer of refined petroleum products in 2007.  Locally, 
three years of continuing drought contributed to record-low 
domestic agriculture production in 2008, exacerbating food 
inflation (refs C, E).  Furthermore, the SARG decision to 
reduce fuel subsidies by half in early May 2008 (ref B) 
resulted in an overnight jump of 357 percent in the price of 
diesel, which has been reflected in the prices of most goods 
and services.  Finally, Syria suffers from endemic 
corruption, and economists say that wealth obtained without 
contributing to GDP adds to inflation. 
 
-------------------------------- 
SARG Actions Attempt to Mitigate Inflation 
-------------------------------- 
 
¶4. (SBU) The SARG has taken several measures in 2008 to 
mitigate the impact of inflation.  Most significantly, an 
early May Presidential Decree mandated a 25 percent and five 
percent raise for public and private sector employees and 
pensioners, respectively (ref B).  In an effort to increase 
domestic agricultural supply, the Ministry of Economy and 
Trade banned the export of wheat, wheat flour, barley, 
lentils, chickpeas and animal feed.  To reassure farmers and 
discourage smuggling, the Ministry of Agriculture increased 
set prices for strategic crops from 11 to 17 SYP/kg for 
wheat, from 30 to 41 SYP/kg for cotton, and from 9 to 15 
SYP/kg for barley. 
 
¶5. (SBU) In June, President Asad also issued the Consumer 
Protection Law as a follow-up to April's Competition and 
Protection from Monopoly Law, which are designed to deter 
merchants from price-gouging consumers with punishment up to 
life imprisonment.  To monitor price controls and prevent 
hoarding, the Ministry of Economy and Trade increased the 
number of "supply squads" patrolling local markets around the 
clock.  Finally, the Ministry of Social Affairs and Labor 
announced the establishment of a Social Assistance Fund and a 
National Program for Combating Poverty and Empowering Women 
-- although specific details of who may access the programs 
and how they will be funded have not yet been released. 
 
 
-------------------------------- 
SARG Monetary Policy Exacerbates the Problem 
-------------------------------- 
 
¶6. (SBU) Economists privately contend that the SARG has not 
taken an essential step to control inflation -- adjusting 
monetary policy.  They point out that the Central Bank of 
Syria has kept interest rates around six percent, well below 
even the official estimate of 13 percent inflation.  Not 
surprisingly, they say, the supply of money has expanded by 
some 13 percent at a time when a politically-independent 
Central Bank should be trying to shrink it.  Rather than 
"losing money" in savings accounts as inflation outpaces 
interest rates, Syrians are borrowing "cheap" money to 
speculate on currencies, commodities, wheat and real estate. 
Such speculation, they explain, contributes additional 
pressure on markets and exacerbates the problem of inflation. 
 
----------------------------- 
Inflation's Impact on Society 
----------------------------- 
 
¶7. (SBU) With some estimating that 20 percent of Syria's 
population lives on just one U.S. dollar per day, 25 percent 
inflation could have a life-altering impact on over 3.7 
million people.  Syrian consumer purchasing power has dropped 
considerably in 2007-2008, as inflation outpaced SARG efforts 
to mitigate it.  Public transportation and taxi fares, for 
example, have doubled since the nation-wide pay raise was 
announced in May.  Furthermore, government-mandated pay 
raises have proven of little consequence to the estimated 40 
percent of the Syrian workforce that is employed by the 
"informal" sector (cash-based, non-contractual, no benefits). 
 Anecdotal information suggests that most of these employees 
received a bonus to cover increased transportation costs, but 
little else. 
 
¶8. (SBU) Inflation's impact on Syria's majority poor is 
evident in Damascus.  Sidewalk vendors in lower-class 
shopping districts openly trade diesel ration cards on the 
black market (ref F).  This phenomenon indicates that 
thousands of Syrians decided to sell the cards, issued by the 
SARG in April, to meet immediate cash-flow needs and worry 
about higher priced heating fuel when winter arrives.  Rarely 
seen a year ago, child-beggars from rural areas are now a 
regular fixture near the entrances of western hotels and 
upscale shopping districts.  Finally, economic crimes such as 
vehicle break-ins have noticeably increased in recent months. 
 
 
------- 
Comment 
------- 
 
¶9. (SBU) For much of this decade, SARG oil revenues and 
economic isolation somewhat insulated Syrians from regional 
inflation.  Consequently, Syrians are just now waking up to 
the "new normal" of market-based prices in an era of 
high-priced oil.  While Baathists try to earn political 
points by blaming tough times on economic "reforms," reform 
advocates blame the SARG for waiting to reduce fuel subsidies 
until global oil prices precipitated an economic crisis. 
Until the Syrian economy adjusts to the eventual elimination 
of all fuel subsidies -- projected by 2010 -- we anticipate 
inflation to continue.  Even if conditions worsen, however, 
experts doubt that Baathist opposition could reverse recent 
economic reforms.  As Ramadan approaches, the regime seems 
confident that, for now, the Syrian public's economic pain 
tolerance and desire for stability will see them through a 
peaceful, if more modest, holiday season. 
CONNELLY