Global Investment House – Syria Economic & Strategic Outlook I – Monetary Policy and Inflation

The monetary policy in Syria, which was characterized by a multiple fixed exchange rate system, rigid interest rates and a direct government control over the banking system, has witnessed some changes lately which aims at moving towards more flexibility and responsiveness to market conditions. Currently, the Syrian currency is pegged to the US Dollar and it has two exchange rates, one fixed rate for public sector operations, and a flexible rate for private sector operations. The regulatory authority controls the money supply in the system and makes amendments to economic tools, guidelines, etc. Towards this end, the Syrian monetary authorities have very recently announced measures to bolster the Syrian pound, hit by international pressure on the country, and to slightly ease exchange controls in effect for decades. To encourage saving in the national currency, certificates of deposit had been created for the first time at a rate of 9%. As for exchange controls in effect since the 1950s, authorities recently gave the green light to Syrians to open bank accounts in foreign currencies and to trade in them. Now, banks will be able to set exchange rates within a band set by the Central bank. At the same time, local banks will now also be allowed to issue letters of credit for the export and import of some 950 different items - a list accounting for about a quarter of Syria's total trade. As a financial package, the moves announced by the government are clearly designed to bolster the pound and bring more dollars into the country and into its banks, boosting hard currency reserves.

In the system, over the five year period, 2000-2004, M1 has grown at a CAGR of 13% while M2 (broad money supply) has grown at a faster CAGR of 16%. In 2004, M1 (narrow money supply) grew by 11% to SP601.7bn which was backed by 16.7% growth in currency in circulation to SP332.6bn and 5% growth registered in demand deposits to SP269.07bn. In quasi money, time & savings deposits grew by 4.8% to SP322.7bn, deposits in foreign currencies registered a growth of 61.9% to SP60.3bn and import deposits grew at 51.8% to reach SP74.6bn at the end of 2004. The major component of quasi money, time and saving deposits witnessed a decline in its growth rate at 4.8% in 2004 whereas in 2003 the growth rate was at 14.5%. This could be attributed to the preference of investors to keep their funds in liquid assets. The quasi money grew by 16.1% to SP457.6bn in 2004 from SP394.3bn in 2003. At the end of 2004, M2 was at SP1,059.3bn, recorded a yearly growth of 13.2%. Overall, M1 represents a large chunk of about 57% of money supply in the economy.

The monetary system in Syria is characterized by the non existence of financial markets such as money as well as capital markets, that could also be the major reason for M1 accounting for such a high percentage of overall money supply. There should be a market for government bonds and private securities providing an investment vehicle to the investors and also to the banks to park their liquid funds. This also restricts the fund raising to finance developmental projects in the country.

Money Supply

Source :Central Bureau of Statistics, Syrian Statistical Abstract – 2005; IMF reports

Inflation

Syria is witnessing a steep inflationary trend over the last few years. In recent years, the year 2003 and 2004 were exceptional years in terms of rise in consumer prices. The Consumer Price Index (CPI) rose steeply by 4.8% and 4.6% in the year 2003 and 2004 respectively. This is despite the existence of subsidies and price controls which restrict the rise in consumer prices to some extent. Apart from the existence of high level of currency in circulation, it also seems that consumer spending on necessities, such as on education & culture, rent, treatment & medicines, transport & communication, fuel, lighting & water, etc. have gone up dramatically.

Over the period 2001-2004, the price indices of education & culture and rent have witnessed a steep rise. The price index for education & culture shot up the most at 13% CAGR, from 101 in 2001 to 144 at the end of 2004. This segment is mainly driven by the education & training as culture & welfare index has actually gone down from 102 in 2001 to 101 in 2004. The other major component is rent, which also witnessed a sharp rise of 10% (CAGR) during 2001-2004. Its price index has gone up from 101 in 2001 to 134 in 2004. Rents in Syria have started rising dramatically, since the fall of Saddam Hussain, as Iraqis have been fleeing the violence and kidnappings for the safety and conveniences of nearby Damascus and Amman. And with their influx to Syria's and Jordan's capitals, the high demand for housing has sent rents skyrocketing and caused a real estate boom.

Going forward, we expect that the government to adopt proactive monetary policy which will help to suck the excess money out of the system. Factors such as growing domestic demand due to strong consumption and dearer imports to some extent will keep the rate of inflation rising in 2005. It is likely to slowdown in 2006 as the US dollar may stabilize to some extent and will have its effect on the local-currency prices of imported goods to cool down to some extent.

Consumer Price Index (2000=100)

Source :Central Bureau of Statistics, Syrian Statistical Abstract – 2005 and Global Research