FROM THE ECONOMIST INTELLIGENCE UNIT
25 Sep 2007 (T12:19), COUNTRY VIEW<\/p>\n
OVERVIEW: The president, Bashar al-Assad, is expected to remain in power in 2008-09. However, he will continue to rely on the strength and ruthlessness of the loyal security services, which will keep opposition forces weak and ineffective. Mr Assad has devoted considerable effort to ending Syria's political isolation, but with only limited returns. Numerous issues of contention remain in Syria's relations with the EU, the US and the leading Arab states. Economic policy in 2008-09 will focus on the need to diversify the economy and on encouraging investment, but structural fiscal reform will be constrained by the fear of alienating public opinion. Declining oil output will curb economic growth and inflation will stay relatively high, at an annual average of 6.7% in 2008-09. The current account will record deficits over the outlook period, as strong growth in non-oil exports and workers' remittances fails to offset the expected decline in the volume of oil exports and relatively strong import growth.<\/p>\n
Domestic politics: Power remains firmly in the hands of the president, who is supported by key elements in the security services and by the Baath party. In May a referendum was held to give the public the opportunity to endorse parliament's selection of Mr Assad as the sole candidate in this year's presidential election. In the event, the choice of Mr Assad was supported by 97.62% of those who voted (or 11.2m people), with turnout reported at 95.86% of the 11.7m eligible voters (up from a turnout of just 8.7m in the 2000 referendum). The higher turnout this time lends support to the argument put forward by government officials that conditions in Syria have improved during Mr Assad's first term.<\/p>\n
International relations: Mr Assad may have secured his domestic position, but he faces a number of challenges in the international arena (which will have a profound bearing on his popularity at home). In recent months both Israeli and Syrian officials have sent out mixed signals about their desire for a resumption of bilateral peace talks, but at the same time there have been mutterings about their readiness for war. A reported air strike by Israel on Syria in early September has added to the confusion about the two countries' intentions, but on balance appears to have strengthened the Israeli hand. Syria's lack of a military response perhaps highlights its military weakness relative to Israel, but, perhaps more noteworthy was the absence of any significant objections from other Arab governments, most notably Saudi Arabia. This underscores the relative isolation of the Syrian government within the Arab world and would undermine its credibility in negotiations. Shortly after the raid, the Israeli prime minister, Ehud Olmert, declared his willingness to open peace talks with Syria, but the Israeli strike will make it more difficult for Mr Assad to engage openly in talks for fear of appearing weak in the eyes of his domestic audience. The air strike may also have been designed to strengthen Israel's deterrence in the region more generally, perhaps using Syria as a (weaker) proxy for a show of force against Iran.<\/p>\n
Policy trends: The soaring cost of the fuel subsidy bill, which is placing an unsustainable burden on the fiscal accounts, has led to heated economic debate between the government's more reformist, technocratic elements, led by the deputy prime minister for economic affairs, Abdullah al-Dardari, and the more conservative Baath party members. Mr Dardari has been pushing for structural reform of the fiscal accounts, including cuts in fuel subsidies and the introduction of a value-added tax (VAT). In recent years there has been some reform on the tax front with the introduction of lower tax rates for business and individuals (in a bid to raise compliance), a simplification of the tax collection system and cuts in import tariffs, but the next step in the reform process is less politically palatable. At a time when Syria appears to be largely ostracised by its Arab neighbours, with the ever-present threat of conflict with Israel and\/or more severe international sanctions, the establishment appears increasingly reluctant to foist painful economic reform upon the population. The proposed introduction of VAT has now been delayed until 2009 at the earliest, and there is currently a suggestion that some form of fuel rationing might be more acceptable with the public than an outright price increase. The Economist intelligence Unit's economic forecasts assume that there will be no cut in fuel subsidies during the outlook period and that even if VAT is introduced in 2009, it will be at a low rate, on a limited number of goods and will not have a noticeable positive impact on the fiscal accounts.<\/p>\n
International assumptions: We forecast that world GDP growth will average 4.8% in 2007-08 (at purchasing power parity exchange rates), down from 5.1% in 2006, but still relatively strong by historical standards. International oil prices (based on the benchmark dated Brent Blend) are expected to remain high at US$69\/barrel in 2008, before easing slightly to US$63.3\/b in 2009 as increased oil supply, particularly from Saudi Arabia, brings the market closer to balance.<\/p>\n
Economic growth: Real GDP growth is expected to remain relatively weak in 2008-09, at an annual average of 3.3%, largely owing to falling oil production, which will lead to a sustained contraction of exports in real terms and limit the government's ability to increase spending. Furthermore, the hostile regional political environment is also likely to affect investor confidence, undermining efforts to draw urgently needed foreign finance into the oil and gas sector, although Russia, Iran and some of the Gulf Arab countries will remain sources of capital. Our growth forecast is underpinned, however, by the expected recovery in the agricultural sector (after growth was depressed in 2007 by drought conditions in parts of the country). The service sector is expected to record relatively strong growth in the outlook period as a result of increased demand for goods and services from the large Iraqi refugee population. Inflation: According to the Central Bank of Syria, the official inflation rate stood at 9.2% year on year in September 2006, having risen steadily over the year, and we estimate that the full-year average was 10%.<\/p>\n
Inflation is expected to fall modestly over the outlook period to an annual average of just under 7%, partly as a result of the abandonment of the pound's peg to the dollar, which will help to contain imported inflationary pressure. Non-oil commodity prices are also expected to ease in 2008-09. Furthermore, there were clear signs in 2006 of an ongoing slowdown in the growth of credit–according to the IMF's Article IV report, published in May 2007, domestic credit to the private sector expanded by 4.6% in 2006, down from 8.9% in 2005. (This can perhaps be attributed in part to Central Bank measures to tighten the limits on credit extension.) However, if the government were to enact phased cuts in fuel price subsidies in 2008-09, this would lead to a significant upward revision to our inflation forecast. It is worth noting, however, that anecdotal evidence suggests that inflation is running at higher levels than indicated by the official data; there has been much grumbling about the influx of Iraqi nationals, who are blamed for generating demand-pull inflation, especially in the housing market.<\/p>\n
Exchange rates: It is unclear at present whether the proposed changes to the exchange-rate regime have been fully implemented, but the Central Bank's intention is to move to a managed float of the pound, replacing a multi-exchange-rate regime. Furthermore, the peg to the dollar is to be abandoned in favour of a peg to a basket of currencies based on the IMF's special drawing rights (SDR). In 2005-06 the composition of the country's foreign-exchange reserves was gradually altered, so that by the beginning of 2007 half of the stock of reserves was denominated in the euro. From 2007 all transactions in the public and mixed sectors will be euro-denominated. (The latter step is partly to avoid the negative impact of the US embargo.) In May the Credit and Monetary Council awarded its first operating licences to moneychangers–the companies are permitted to have multiple branches and to transfer sums abroad. Despite these initiatives, the currency will not be allowed to float freely, with the government continuing to prioritise stability. The regime is well placed to protect the value of the pound, because of the dominant position of the state-owned banks and the control that the Central Bank retains over foreign-currency transactions, even as some laws are relaxed. Consequently, we forecast a relatively stable pound in 2008 (partly as a result of dollar weakness), before a modest depreciation in 2009 owing to concerns about the competitiveness of Syria's non-oil exports (and some strengthening of the dollar against the euro).<\/p>\n
External sector: We estimate that the value of merchandise exports will have risen in 2007 as strong growth in non-oil exports more than offsets the decline in the value of oil exports. The estimated fall in oil export revenue is the result of lower Syrian oil production, as international prices are expected to remain high. Non-oil exports are continuing to benefit from the relaxation of foreign-exchange controls, which has led to more exports being officially recorded. Regional demand has also been strong, and Syria has been benefiting from its membership of the Greater Arab Free Trade Area. Although non-oil export revenue is expected to continue to rise robustly next year, we forecast that export earnings will increase by under 3% because of the projected fall in crude oil production (and thus export volumes). Import spending growth will remain strong in 2008-09, partly as a result of the ongoing process of tariff liberalisation. As a result of these trends, the trade deficit is expected to widen from an estimated US$2.2bn in 2007 to US$3.1bn in 2009. -0- Sep\/27\/2007 22:17 GMT<\/p>\n
27 Sep 2007 (T16:45) COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT<\/p>\n
The Syrian government is considering taking to a leaf from Iran's book on economic policy through scrapping a plan to cut fuel price subsidies and replacing it with a system of rationing administered by smart cards. According to Champress, a news website, the government is studying a rationing proposal, drawn up by the telecoms minister, Amr Salem, as a possible alternative to proceeding with a programme of fuel price increases,
mitigated by cash handouts, which has been put together by Abdullah al-Dardari, the deputy prime minister for economic affairs and endorsed by the IMF. <\/p>\n
The apparent backtracking on fuel subsidies, which, according to the IMF, amounted to more than 10% of GDP in 2006, follows a delay in the schedule for introducing value-added tax (VAT), another central element of the government's fiscal reforms. Mr Dardari had earlier indicated that VAT would be introduced at the start of 2008. However, that schedule has now been put back by at least one year. These reverses raise questions over
political future of Mr Dardari, a non-Baathist in a government dominated by the ruling party, which has it roots in a combination of socialism and Arab nationalism.<\/p>\n
Assad's silence<\/strong><\/p>\n The debate over fuel subsidies has intensified in the past few weeks, amid speculation over what changes the president, Bashar al-Assad, plans to make to his government following the start of his second seven-year term in July. It now appears that the retention of Mr Dardari and like-minded ministers—including the oil minister, Sufyan Allaw, who was recently obliged to issue a statement denying rumours that he had been dismissed ”would send a signal of Mr Assad's support for the squeeze on subsidies. To do so would require Mr Assad to stand up to vested interests in the status quo, in particular those making large profits through smuggling subsidised fuel to neighbouring markets, where prices are up to ten times higher. The delay in appointing a new government and the lack of any mention of fuel subsidies by Mr Assad himself suggest that the question is the subject of fierce debate at the core of the regime, which is dominated by intelligence agency chiefs and the inner circle of the Assad family.<\/p>\n Mr Dardari has sought to draw attention to the alarming consequences of failing to act, given Syria's increasing dependence on imports to meet its rapidly growing demand for petroleum products. Syria imports about 4m tonnes\/year of gas oil, the most heavily subsidised product, which accounts for over 50% of total fuel consumption. Gas oil is sold in Syria at a price of Sy£7 (US$0.14) per litre, which is roughly one-quarter of the import price. The state distribution agency, Mahrukat, also pays international prices for the 3.5m t\/y of gas oil that it buys from domestic refineries. The subsidy on gas oil alone amounts to more than US$3bn\/year. With Syria's oil export revenues dwindling ”the country is set to become a net oil import this year, if royalty payments to foreign operating companies are factored in, according to the IMF ”maintaining petroleum price subsidies at current levels would pump up Syria's fiscal and current-account deficits to unsustainable levels, Mr Dardari maintains.<\/p>\n According to plans announced earlier this year, the government proposes to phase out petroleum price subsidies over the next five years, starting in 2008. In the initial phase, the gas oil price would be increased to £12\/litre, gasoline would go up by one-third to Sy£40\/litre, and liquefied petroleum gas would be sold at Sy£250 per canister, compared with Sy£145 at present. The price of industrial fuel oil was increased in 2004, and would rise by a further 25% to Sy£7,500 per tonne. The government has proposed to compensate each of Syria's 3.5m families through providing an annual cash benefit of Sy£12,000.<\/p>\n As the deadline for introducing the new price structure has approached, there has been a crescendo of criticism of the plan in sections of the media, which includes state and Baath party newspapers, as well as internet news services such as Champress and Syria-News, which are controlled by business interests close to the centre of power. It was notable that the comments submitted by readers of the Champress article included several harsh denunciations of Mr Dardari, accusing him of trying to force discredited IMF and World Bank prescriptions down Syrians' throats.<\/p>\n Three more items of interest:<\/strong><\/p>\n Report: Bush predicted success in Iraq<\/a>: Sept. 28, 2007 <\/p>\n LONDON, Sept. 28 (UPI) — U.S. President George W. Bush in 2003 predicted the war in Iraq would be won without destruction, Britain's Financial Times reported Friday.<\/p>\n Bush made the prediction one month before the March 2003 invasion, according to leaked transcripts of talks between Bush and former Spanish Prime Minister Jose Maria Aznar.<\/p>\n “I think there is a good basis for a better future. Iraq has a good bureaucracy and a relatively robust civil society,” Bush told Aznar at a meeting at Bush's ranch in Texas, the Financial Times reported.<\/p>\n Bush also threatened to deny U.S. aid to Angola and block a trade deal with Chile if the two countries failed to support a U.N. resolution to invade Iraq, the Times reported. The White House eventually abandoned its bid for the resolution.<\/p>\n Bush also told Aznar he had rejected an offer by Iraqi leader Saddam Hussein to go into exile in return for $1 billion, the Financial Times reported.<\/p>\n The White House Thursday declined to comment on the transcript but didn't challenge the report.<\/p>\n<\/blockquote>\n Jeffery Lewis, the "arms control wonk", analyses what Syria's uranium extraction plant is all about<\/a>. <\/p>\n Extracting Uranium from Phosphates The expert, who spoke on the condition of anonymity to avoid compromising his sources, said the target of the attack appears to have been a northern Syrian facility that was labeled an agricultural research center on the Euphrates River, close to the Turkish border. Israel has kept a close eye on the facility, believing that Syria was using it to extract uranium from phosphates.<\/p>\n<\/blockquote>\n I mentioned earlier this week that, as a justification for an airstrike, this is ludicrous…..<\/p>\n<\/blockquote>\n\n
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So, the early reports on this Israeli airstrike in Syria emphasized the prospect that Syria was extracting uranium from phosphates:<\/p>\n\n