Over the course of the past two weeks, there have been a number of extraordinary developments in the Syrian economy. And those developments have led to a sharp and surprising decline in the value of the Syrian lira. In recent months, the exchange rate had been stable at 75 lira to the U.S. dollar. Now, the currency has been devalued to such a degree that the exchange rate has reached 100 lira to the dollar. 

Yet, despite the fact that over the past year the Syrian lira has lost approximately half of its value, what is even more striking is the relatively large decline it has suffered over the short term (specifically, in the last three weeks). This raised a number of questions about the economy’s ability to persevere as turmoil continues on the ground. One wonders whether the central bank has lost its ability to defend the lira and maintain a supply of hard currency in the local market. 

Ibrahim Saif
Saif is an economist specializing in the political economy of the Middle East. His research focuses on international trade and structural adjustment programs in developing countries, with emphasis on Jordan and the Middle East.
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From an economic standpoint, the past year is widely considered to have been the worst that Syria has faced in decades. It is experiencing an unprecedented decline in GDP as the tourism industry, as well as those economic activities indirectly related to it, records massive losses in excess of $1 billion. Foreign investment inflows to Syria have also dried up, especially those coming from the Gulf states, which had supported a number of sectors within the Syrian economy. Moreover, foreign trade conducted with neighboring states and transit trade to and from Syria—particularly that coming from Lebanon and Turkey—has ceased completely. 

This suggests that sanctions, along with the drop in investment and trade, have effectively cut off the sources of hard currency that used to be readily available to the state. Even oil exports have been hit, with the sanctions extending to that sector as well. And the countries that have until now supported the Syrian regime—such as Iran, Russia, and China—are not prepared to provide financial support to subsidize its most basic operations. Russia and China seek to use Damascus as a bargaining chip, while Iran, given the nature of its own economic problems, cannot be expected to contribute a sufficient amount of financial support to offset Syria’s losses and dwindling hard currency reserves. 

To add to this harsh reality, pessimistic expectations for Syria pervade the market, and a great deal of uncertainty hangs heavy over all sectors of the Syrian economy. Because of the large risks involved, banks have ceased lending to the country. Moreover, the restrictions placed upon the exchange of Syrian lira into foreign currencies have forced many Syrians to increase their consumption in an effort to rid themselves of any liquidity they possess. 

The Syrian currency’s loss of half of its value means that the domestic inflation rate stands at nearly 50 percent. Inflation has not, however, been accompanied by an increase in wages in either the public or private sector. This has added to the pressure already being felt by the average citizen. 

Many consumer items are in short supply—a decline in trade has resulted in a decline in goods. And due to the pressures to which the Syrian currency is currently exposed, rising demand for a number of commodities has led to a drastic increase in their prices. Thus, with every new punitive measure levied on Syria, both the country’s economy and its currency are subject to greater pressure, which in turn decreases confidence in the lira. 

Despite the significant devaluation of the lira, until now, on a superficial level, the economy has shown itself to be resilient. This is in large part because the Syrian economy relies heavily on domestic production, which is not terribly sensitive to the devaluation and deterioration of the lira. That said, ongoing pressure will open up new fissures, affecting the central government’s ability to maintain control over the mechanisms that drive the economy. 

The precipitous decline in economic activity has been accompanied by a siphoning off of a great many resources to meet the needs of the army and other security forces. This is being done at the expense of other segments of society that are already enduring a twofold hardship: first, a reduction in the real income as a result of the inflationary pressure, and second, a decline in state-provided subsidies for a number of commodities. 

The effect has been a veritable explosion of long-buried social tensions, manifested in the form of competition over the limited supply of available resources. The situation has become unbearable for some, as evinced by the influx of Syrian immigrants into neighboring countries such as Lebanon and Turkey. Moreover, the tense and ambiguous situation has driven many Iraqi and Palestinian refugees previously residing in Syria to begin searching for other, more secure sanctuaries. 

Given that no discernible political solutions have appeared on the horizon, it is clear that Syria’s economic suffering will only increase. It is possible that the heavily sanctioned Syrian central bank has finally begun to comprehend the fact that its reserves of foreign currency, estimated by some sources in the middle of last year to be approximately $17 billion, are disappearing at a rate of half a billion dollars each month. This reserve was originally thought to be large enough to protect the lira for about a year, and as a result, financial institutions were initially prepared to pump hard currency into the market in order to safeguard the lira and avoid “dollarization,” or the transference of lira into U.S. dollars. 

Yet the continuation of the crisis at hand, along with the increase in demand for foreign currency and the demonstrable effects of sanctions, has diminished the value of this reserve. This may explain why Syria’s central bank has, in recent weeks, abandoned its policy of maintaining a fixed price for the lira. It seems that the central bank is now resorting to a new tactic of devaluing the national currency and allowing prices to rise. 

It would also seem that the Syrian authorities are seeking to reduce subsidies, aiming instead to utilize revenue from foreign currency in order to maintain the stability of the regime—which has produced the inflation seen throughout all strata of society. An alternate approach would be to provide foreign funds to those segments of society that remain loyal to the regime, thereby sparing these groups from the inflation resulting from the devaluation of the lira. However, that policy comes with its own set of risks. It is not clear how the rest of society would react to such action, and the move might only serve to deepen the lack of confidence in Syria’s currency. Once lost, that confidence is difficult to recover. 

The current situation on the ground has intensified the jolts and shocks afflicting the Syrian economy, and there is no indication that the wheels of production will once again begin to spin or that activity will return to normal. It is therefore probable that the situation will continue to degrade ever more rapidly, spurred by economic events that testify to the depth of the crisis currently embroiling Syria. 

The first victim of this continual decline is the currency. And the ramifications of devaluation will eventually result in a complete loss of control over the economy due to the loss of the primary mechanisms that allow for this control—namely monetary policy (which regulates currency) and financial policy (which allocates subsidies and manages public spending). On both of these fronts, it is clear that the Syrian government is already losing its grip. 

This article originally appeared in Arabic in Al-Hayat.