Syria's Sunshine Policy
Also published by United Press International (UPI)
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Written April 4, 2002
Updated March 7, 2005
Well into the 1980's, Syria - which could have
been the Switzerland of the Middle East - was derided as its North Korea.
Belligerent, steeped in paranoia and xenophobia, and socialist to boot - it
revolved around the personality cult of the current president's late father,
Hafiz al-Assad.
The Western media reported how Syria colonized Lebanon, suppressed the Sunni
majority at home, and aided and abetted unsavory terrorist organizations inside
the region and without. It is still on the USA's black list, though not a member
of the tripartite "axis of evil".
These perceptions are gradually changing. Under the leadership of the
soft-spoken, 40 years old ophthalmologist, Bashar al-Assad, Syria seems to be
bent on re-joining the international community. In his inaugural address, Bashar
encouraged "positive criticism" of the regime, suppressed a nascent personality
cult centered around him, and called for economic liberalization.
On March 29, 2002 the Syrian parliament rubber-stamped a law, tabled by the
Ministry of Economy and Foreign Trade. According to Sana, the state news agency,
the act established a Monetary and Credit Council. But its most daring departure
from past practices was to allow banking joint ventures between the government
and the private sector.
Applying firms must still be at least 51% owned by Syrians. A January 2002
cabinet decision to allow foreign owned banks to operate in Syria still awaits
the habitually-glacial presidential approval.
This ends four decades of ruinous government monopoly, the result of a
nationalization campaign by the triumphant Ba'ath party in 1963. Deputy Prime
Minister for Economic Affairs, Khaled Ra'ad, said that some 50 foreign banks are
interested to set up shop in Syria. This may be an exaggerated figure. One
hundred applications were reported following a late 2000 law opening the door to
private investment in the banking sector - yet not a single license was issued
in the first three years of its implementation.
Foreign, tax-exempt, banks have been allowed to operate in Syria's five free
zones since June 2000. But the conditions were so onerous that not many did.
Only "first rank" banks with $11 million in capital - in foreign exchange - were
supposed to be let in. They were permitted to transfer and receive foreign
exchange, usually on behalf of foreign clients. Yet, even these mundane
operations were hobbled by a mountain of restrictions and regulations.
A year later, the free zones became nests of money laundering. Six (now five)
obscure Lebanese banks provided services to less than 300 clients. Few others
followed. The Oxford Business Group quotes a senior Lebanese banker:
"...The CEO of Lebanon's Byblos Bank, Francois Bassil, which is one of the five
Lebanese banks established in Syria's free trade zones, told a London-based
newspaper that the banks saw almost no activity. He cited problems in Syria's
economic and financial environment, as well as the lack of a financial reform
law. In a positive step, Syrian media reported in mid-February that one of
France's largest commercial banks, Societe Generale was looking to set a up a
network in Syria through the bank in France and its Lebanese affiliate, Societe
Generale de Banque au Liban.
Despite this disheartening prelude, Syria has no choice but to liberalize its
moribund and ossified banking sector. In recognition of this inevitability,
Bashar al-Assad, the current president, has shuffled most of the economic
positions in his cabinet on December 2001.
He surrounded himself with reformers, some of them Western-educated, as he is.
Four of them are members of his "Syrian Computer Society", a hotbed of reform. A
notable appointment is Ghassan al-Rifai, the Minister of Economy and Foreign
Trade, who spent 30 years with the World Bank. Among his many achievements, he
was an active member of the team that launched MIGA - the Bank's Multilateral
Investment Guarantee Agency.
This " palace coup" did not go down well with old, Ba'athist, hands and with
entrenched economic interests - some of them criminal - in both Syria and
Lebanon. Resentment and dejection are mounting and may yet lead to open
confrontation. To placate them, the Syrian government has decided not to pursue
the privatization of state companies and their numerous sinecures.
Xenophobia and sentiments against liberalization and deregulation are not
limited to Ba'athist interest groups. In "Emerging Syria 2002", published by the
Oxford Business Group, IFC Senior Investment Officer, Bassel Hamwi is quoted as
saying:
"While on a business trip to Syria in 1998 in the wake of the far eastern
economic collapse, a Syrian official boasted to me that the Asian Tigers had
become vegetarian. Surprisingly, the same antagonism towards liberalization was
echoed by many of the private sector businessmen I met as well.
Up to that point, Syrians had chosen to insulate themselves not only from the
risks inherent in the global economy, but also from its potential rewards. Two
years later, however, it was a very different picture with the government making
a concerted effort to open up to the financial world by allowing private banks
to be established for the first time in some 40 years. The international
community quickly took notice, and considered Damascus' efforts as a welcome
signal that further liberalization was ahead.
The local community, however, was more divided. Indeed, Syrian businessmen were
happy at the prospects of not having to travel abroad to service their banking
needs. But one question that seemed to be on the minds of many was: 'Would
liberalization bring about a financial crisis similar to that experienced in
East Asia?'"
Syria's tottering economy can be salvaged only by the introduction of a
functioning, competitive, well-capitalized, and foreign-managed banks. The EU
made this abundantly clear to President al-Assad in his talks about an EU
association agreement in March 2002 with Pascal Lamy, the EU's trade
commissioner. The same message was trumpeted by an EIB (European Investment
Bank) visiting delegation.
Close to 60% of Syria's exports - c. $1.5 billion - are received by the EU.
Syria also imported $2.9 billion from the EU last year.
The Heritage Foundation Index of Economic Freedom ranked Syrian banks as 5 -
very high level of restrictions. It expounded thus:
"The banking system is completely controlled by the government, which owns all
of the country's major banks, and most banks lend only to the public sector.
According to the Economist Intelligence Unit, "Syria's financial services are
poor, unsophisticated and a serious obstacle to economic development.
There are five banks working alongside the Central Bank of Syria, all of them
state-run and state-owned... CBS (Syrian Central Bank) discount rates to the
private sector have been fixed at 9% since 1981 (7% for the public sector)
irrespective of the rate of inflation. As a result, real interest rates have
often been negative in times of high inflation."
Though state-owned, Syrian banks are woefully under-capitalized. The only retail
network in the country, the "Commercial Bank of Syria" had less than $25 million
in foreign currency reserves in 2000, according to government figures. There are
$9 billion on deposit in state banks.
The Central Bank of Syria supervises the Commercial Bank of Syria, Industrial
Bank, Agricultural Cooperative Bank, Loan and Savings Bank, Real Estate Bank,
the General Syrian Insurance Agency and the General Postal Savings
Establishment. These provide the entire range of banking services - but in a
cumbersome, costly, and maddeningly inefficient manner.
The banks are subject to intense political meddling. Interest rates are
purposefully negative. Public and mixed-sector enterprises crowd out private
sector lending. Additionally, Syria has no capital or foreign exchange financial
markets to speak of. Surprisingly, non-residents often fare better than locals:
they can obtain (Syrian currency) loans based on bank guarantees.
Laws and regulations are often contradictory. Law number 24 prohibits Syrians
from holding foreign exchange. Law number 10 permits Syrian investors to deal in
foreign currency. This is merely one of a myriad examples.
Corruption is rife. In a typical case, the general director of "Commercial
Bank", Nadim Mithqal, was arrested three years ago. According to "Tishreen", an
official daily, he diverted loan re-payments to an unidentified, but "marginal",
foreign bank. The damage is estimated to be a sorely-needed $5 million. The Miro
government seized on this opportunity to re-iterate its demand to limit the term
of bank directors to four years.
Syria's banks were treated by the late al-Assad as Ba'ath fiefdoms and venues of
patronage. In 1995 he appointed a lackluster but well-connected presidential
advisor with no previous banking experience, Mohammed Bashar Kabbara, as
governor of Syria's oft-idle Central Bank. Syrian bankers complained bitterly -
though anonymously - about this appointment to the Middle East Economic Digest.
The latest developments may have made them happier - though, probably, in the
Syrian tradition, only incrementally so.
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