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Viewing cable 07DAMASCUS111, SYRIA'S ECONOMY CONTINUES TO STRENGTHEN

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Reference ID Created Released Classification Origin
07DAMASCUS111 2007-02-01 16:03 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Damascus
VZCZCXRO5155
PP RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHDM #0111/01 0321603
ZNR UUUUU ZZH
P 011603Z FEB 07
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC PRIORITY 2909
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHTV/AMEMBASSY TEL AVIV 1551
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHEHAAA/WHITE HOUSE WASHDC
RUCNDT/USMISSION USUN NEW YORK 0220
UNCLAS SECTION 01 OF 02 DAMASCUS 000111 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA/ELA 
NSC FOR MARCHESE 
TREASURY FOR GLASER/LEBENSON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ENRG EPET ETRD PGOV SY
SUBJECT: SYRIA'S ECONOMY CONTINUES TO STRENGTHEN 
 
REF: A. 06 DAMASCUS 150 
     B. 06 DAMASCUS 716 
     C. DAMASCUS 87 
     D. 06 DAMASCUS 1696 
 
1.  (SBU) Summary.  Syria,s economy is starting 2007 much 
stronger than it began 2006.  Growth rates, which increased 
modestly the last two years, are generally expected to 
continue upwards if current trends continue.  Still, the SARG 
faces a number of economic challenges in 2007, including 
increasing budget and trade deficits, the fact that it is 
spending more on fuel subsidies than it gains from oil 
exports, and a drought - the severity of which it is still 
too early to discern.  Other variables that could darken 
Syria,s economic forecast are the increasing economic costs 
of Iraqi refugees, and threats from political instability in 
the region.  End summary. 
 
,07 - A Stronger Start 
---------------------- 
2.  (SBU) The Syrian business community is more optimistic 
about the prospects for the Syrian economy at the start of 
2007 than it was at this time last year when the Asad regime 
was still reeling from the withdrawal of its forces from 
Lebanon and the accusations of regime involvement in the 
killing of Rafiq Hariri leveled by then UNIIC chief Detliv 
Mehlis (ref A).  In January 2006, the loss of public 
confidence in President Asad and the course the regime was on 
had played out most publicly in the stability of the Syrian 
Pound (SYP), which had devalued by over 20 percent from 
September to December 2005.  The devaluation had caused 
capital flight, closing of factories, the scarcity of some 
products, and a profound feeling of unease in the Syrian 
public (ref B). 
 
3.  (SBU) By contrast, the SYP has been stable for the last 
twelve months.  Foreign direct investment (FDI), especially 
from Iran and the Gulf, is increasing, albeit from a very 
modest baseline.  The SARG claims GDP expanded by 5.7 percent 
in 2006, though most Syrian economists believe the IMF's 
estimation of 3.2 percent is closer to reality.  Ironically, 
Syria is also profiting economically from the political 
instability in neighboring Lebanon and Iraq.  Syria,s 
tourism sector is profiting from regional tourists that 
normally would visit Lebanon who are instead coming to Syria. 
 Syria,s ports are now officially operating over capacity as 
they process the increasing transshipments to Iraq, and 
Syria,s own exports to Iraq are increasing.  Furthermore, 
Syrian businessmen are optimistic that the recent warming of 
relations between the SARG and Iraq will translate into 
increasing business opportunities for them. 
 
Looming Challenges 
------------------ 
4.  (SBU) In spite of these positives, Syria continues to 
suffer from a number of chronic economic problems.  Though 
economic statistics in Syria are difficult to come by and 
notoriously inaccurate, inflation continues to be a 
significant concern.  The SARG officially places the current 
inflation rate at eight percent though independent economists 
believe it to be well above ten percent and Minister of Trade 
and Economy Amer Lutfi was quoted recently commenting that 
the spike in real estate prices could push it as high as 18 
percent.  Regardless of the exact figure, there is no doubt 
that rising prices are a major concern for Syria consumers 
and a regular front-page news item.  The SARG has resorted to 
regressionary policies in an attempt to contain prices, with 
predictable results.  When the price of lamb started to rise 
steeply in October, the SARG banned exports.  Prices did not 
come down but Syrian farmers did lose a USD 300 million 
dollar contract with the Gulf.  The Prime Minister also 
recently directed the Ministry of Economy and Trade to double 
the number of squads it had patrolling to ensure stores were 
abiding by price controls, causing some items to be scarce. 
 
5.  (U) 2007 will be the first official year that the SARG 
spends more on subsidies of fuel than the income it receives 
from oil exports.  Even though this fact is not acknowledged 
in the SARG,s official budget, SARG officials are starting 
to admit it publicly.  Since oil revenue has been primarily 
 
DAMASCUS 00000111  002 OF 002 
 
 
responsible for the accumulation of SARG hard currency 
reserves, the crossover is expected to put additional 
pressure on the SYP.  It will also rob the SARG of one of its 
key tools to balance its books ) understate the selling 
price of oil in order to increase its discretionary and 
unaccounted-for spending (ref C).  The added budgetary 
pressure is also more difficult for the SARG this year given 
that its admitted deficit, which is always smaller than the 
actual deficit, is set to increase by 43 percent over the 
2006 budget. 
 
6.  (SBU) Syria is also facing a potentially serious drought 
this year.  The agricultural sector still accounts for around 
23 percent of Syria,s GDP with a significant portion of the 
sector dependent on annual rainfall.  Though no official 
amounts have yet been released, informal estimates have 
rainfall this season as much as 30 percent below normal.  If 
current trends continue, Syria,s two most important crops, 
wheat and barley, could be devastated.  It may already be too 
late for barley, but February, March, and April are, in 
general, the most important months for rainfall for Syria,s 
agricultural sector. 
 
Largest Variables 
----------------- 
7.  (SBU) The most determinative factor for Syria,s economic 
fortunes in 2007 could be political stability.  As long as 
the SARG is able to keep out of the negative international 
spotlight, FDI can be expected to continue to come from the 
Gulf, regional tourism will continue to increase and the 
Europeans will slowly start returning.  Given its believed 
hard currency reserves (USD 12 billion or more), the SARG 
also has the means to continue to defend the SYP at its 
current value.  Nearly all Syrian businessmen we talked to 
are nervous about regional events but are moving forward with 
expansion plans in 2007 as long as no new crisis occurs. 
 
8.  (SBU) Another large variable is the increasing number of 
Iraqi refugees, the costs of which are only starting to 
become apparent to the SARG.  The exact number of Iraqis in 
Syria is uncertain, but over a million and increasing is 
becoming the most often quoted and the number used by 
President Asad and FM Muallem in their conversations with 
Codels in December.  The Iraqis are most often blamed for the 
price and real estate inflation Syria is increasingly 
suffering from.  They also are contributing to the 
increasingly serious budgetary strains of SARG subsidies, 
especially diesel and electricity (ref D).  This week the 
SARG has reportedly put into place a number of new measures 
to restrict the ability of Iraqis to remain indefinitely in 
Syria without publicly announcing what they are, but it is 
too early to say whether the SARG will implement its measures 
or how effective they will be at addressing the economic 
costs of hosting the Iraqis. 
 
9.  (SBU) Comment.  Prophets of doom have been quick to seize 
on the fact that Syria,s oil exports can no longer support 
the increasing cost of subsidies in order to predict a 
short-term economic crisis.  Most local economists have been 
more sanguine, however, and estimate the hard currency 
reserves the SARG has accumulated over the last four years 
and its lack of foreign debt will allow it to delay any 
crisis into the medium term.  That buys the SARG time to 
reduce subsidies and attract the needed FDI to fund further 
growth.  As far as subsidies are concerned, little dramatic 
change is expected, however, until after the elections ) 
parliamentary, presidential, and local - the last of which 
occur in August.  Both continued FDI and subsidies also 
require the SARG to avoid the negative international 
spotlight that staggered its economy in the fall of 2005. 
CORBIN