Analyzing Syria’s crisis economy: meltdown or resilience?

In the midst of such emotionally-charged rhetoric regarding Syrian affairs due to the ruthless murders taking place and an ever-growing death count, it is quite rare to come across an objective analysis of Syria’s economic situation.

On one hand, news agencies such as China’s Xinhua official media outlet state that Syria’s economy is “still acceptable” after two years of crisis[1]. On the other, you read on FOX News that Syria’s vital oil industry is collapsing after rebels allegedly took over major oil fields[2]. But as vital as the Syrian economy is to understanding the repercussions and future trajectory of the Syrian conflict, what is to be made of these and other inconsistent accounts?

In offering a brief snapshot of where the Syrian economy is today, it is worth dwelling on the following issues: Syria’s main economic sectors and indicators, how they have been affected by social unrest, the government’s policy response to crisis, the country’s main economic lifelines and the economic prospects of prolonged conflict.

Syria has mainly a service-oriented economy with large dependence on wholesale and retail trade, tourism receipts and government services and to a lesser extent manufacturing,  hydrocarbons and agriculture. In addition, Syria boasts a large informal sector constituting around 34% of total employment in 2009. Prior to the crisis, Syria enjoyed some degree of macroeconomic stability with a $1 billion balance of payments surplus, a government budget deficit of around 2% of GDP, public debt at less than 30% of GDP and a stock of foreign reserve assets that could cover around 18 months of imports.

Despite these positive pre-crisis factors, from a structural perspective, Syria’s economy was hiding more challenges than opportunities; with the breakout of civil unrest in the country these challenges are catching up to policy makers.

With a rapid growth of imports, a reduction in oil exports, and a largely non-competitive business environment, the country’s balance of payments was unsustainable. Low inflation rates were mainly maintained due to large government fuel subsidies, and the low level of government budget deficit concealed the declining contribution of the public sector to GDP growth. Relatively low unemployment rates were accompanied by a growing number of people dropping out of the labor force and a huge informal sector.

It is very difficult to obtain real-time government figures regarding the performance of the Syrian economy today but a recent conservative report by the Syrian Center for Policy Research estimated total economic loss in the last two years at around $50 billion in a country with a 2010 GDP of $59 billion. The report also stated that in the last two years GDP has contracted by 50% and 43% of the country’s capital stock has been damaged. As a result, serious losses have been realized in all of Syria’s major economic sectors including most notably wholesale and retail trade, transportation, manufacturing and mining.

How has the government responded to serious economic contraction? Being one of the largest players in the Syrian economy, the government is leveraging the role of the public sector to keep the Syrian economy afloat. Government services have contributed 25% to GDP growth in the decade before the crisis in Syria. In the past two years the decline in government services has been minimal compared to other economic sectors due to a large increase in public expenditure.

But how is this increased expenditure being financed in an  economy headed in a downward spiral, increasing international sanctions, and reductions in oil and tax revenues? That is an anomaly indeed and three main explanations can be extended.

First, the Syrian government has opted to reduce public investment expenditure in favor of current expenditure. Public investment decreased from 8.8% of GDP in 2010 to 3.5% of GDP in 2012. As a result, the government budget deficit surged from 3.8% in 2010 to 10.1% in 2012, while total public debt rose from 23% of GDP in 2010 to 40% of GDP in 2012.

Second, another source of financing is obviously the printing press. The government has been increasing its stock of money in order to keep government expenditure at its current levels. As a result the Syrian pound has lost 50% of its value since the beginning of the conflict and prices of almost all commodities and food stuff have either doubled or tripled.

Third, direct foreign aid and cash transfers have also helped maintain some level of government expenditure.

In addition, Syria’s informal sector has proved to be a major backbone of economic resilience. As ordinary Syrians are trying to make a living, small and micro businesses have kept moving products and services below the radar of sanctions and counterproductive macroeconomic management. Syria’s private sector has lost 50% of its labor force due to closures and/or reduced production and sales. With a government struggling to maintain levels of public employment, the informal sector has remained a major employer in Syria. In this respect, it can be said that informality in Syria has enabled the country to withstand total economic collapse. To the disadvantage of the Syrian citizen, however, this sector lacks any form of standards for social protection.

Returning to the original question of whether Syria’s economy is resilient or whether it is headed towards complete meltdown, it becomes evident that this question is no longer accurate in describing the situation in Syria.

The Syrian economy has proven to be a versatile creature and is constantly adapting to the many serious economic challenges it is facing. However, this adaptation is not at all to be attributed to the regime’s macroeconomic management but rather to the inherent structure of the Syrian economy and the resilience of the Syrian people to continue working. This adaptation has also come at a large cost. If the conflict continues, the country will hand down a large burden of public debt and prolonged macroeconomic instability to future generations. In essence, all of the adaptation policies are not sustainable in the medium to long run without catastrophic effects on Syrian debt and currency levels.

Therefore, beyond the question of when and how Syria’s economy will collapse, the larger issue is how Syria’s prolonged economic hardship will transform the nature of the country’s social fabric in the medium to long term. The Syrian middle class is being crushed. Refugees are in the hundreds of thousands across the borders. Young educated professionals are immigrating in the tens of thousands. Hundred-year industries are closing down.

The post-war economy that Syrians will inherit will largely determine what social system they will have – one that promotes more extremism in the absence of a viable middle class? It is not only Syria’s economy that is at stake but the future of Syria’s social structure and cultural heritage. Look at Lebanon after 15 years of civil war and it becomes very evident where the country may be headed. As the various parties to the tragic ongoing conflict set their goals, assess their options and define the pros and cons of a possible negotiated solution – however farfetched it may now seem – they should all consider also the economic dimension as a complicating factor in the aftermath of a prolonged civil war.