Syria's Sunshine Policy

By: Sam Vaknin, Ph.D.

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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