TITLE: SYRIA ECONOMIC POLICY AND TRADE PRACTICES DATE: FEBRUARY 1994 AUTHOR: U.S. DEPARTMENT OF STATE SYRIA Key Economic Indicators /1 (Millions of U.S. dollars unless otherwise noted) /2 1991 1992 /4 1993 est. Income Production and Employment Real GDP (1985 prices) 8,704 9,313 10,018 Real GDP Growth (pct.) 7.8 7.0 7.6 GDP (at current prices) 27,286 33,286 40,609 By sector: Agriculture 1,703 1,875 2,063 Energy and Water 2,242 2,417 2,580 Manufacturing 464 491 509 Construction 214 241 250 Rents n/a n/a n/a Financial Services 357 366 375 Other Services 2,554 2,786 3,036 Government, Health and Education 1,107 1,142 1,205 Net Exports of Goods and Services -836 n/a n/a Real Per Capita GDP ('85 BPS) 694 716 742 Labor Force (000's) 3,400 3,600 3,800 Unemployment Rate (pct.) 7.0 7.5 7.5 Money and Prices Money Supply (M2) (million SP) 183,540 187,211 198,443 Base Interest Rate (pct.) /3 9.0 9.0 9.0 Personal Saving Rate 4.8 4.8 4.8 Retail Inflation (pct.) 7.6 13.5 16.0 Wholesale Inflation (pct.) 15.0 17.0 20.0 Consumer Price Index 432 490 570 Exchange Rate (SP/$) Official 11.20 11.20 11.20 "Blended" 25.6 26.60 26.60 "Neighboring Country Rate" 40.00 42.00 42.00 Offshore market 42-47 46-52 47-53 Balance of Payments and Trade (millions of U.S. dollars) Total Exports (FOB) 3,432 3,080 3,400 Exports to U.S. 25 46 125 Total Imports (CIF) 2,768 3,545 4,100 Imports from U.S. 206 168 190 Aid from U.S. 0 0 0 Aid from Other Countries 2,000 1,753 1,358 External Public Debt 16,800 18,000 19,400 Debt Service Payments (paid) 719 1,399 n/a Foreign Exchange Reserves n/a n/a n/a Gold holdings (000's of troy ounces) 833 833 833 Trade Balance 664 -465 -700 Balance with U.S. -181 -122 -65 Notes: 1/ The Syrian government has not published its 1992 statistics as of the completion of this report. Further, the government's 1991 economic statistics remain estimates. All figures in the preceding tables are estimates based on the government's 1991 estimates, other sources in the public domain, and this Embassy's own calculations. 2/ Millions of U.S. dollars converted at the Official Rate of 11.2 Syrian pounds/U.S. dollar. (In contrast, the "Neighboring Country" free market rate is 42 Syrian pounds/U.S. dollar.) 3/ All banks in Syria are nationalized and interest rates are set by law, ranging from two percent for financing of the export and storage of barley to nine percent for certain private sector loans. Savings rates range from two percent on public sector "current accounts and sight deposits" to nine percent on "other investment bonds". Most rates have not changed in ten years. 4/ Revised Estimate. 1. General Policy Framework Until recently, the overriding barrier to U.S. exports to Syria has been a severe foreign exchange shortage, although various U.S. government foreign policy sanctions imposed against Syria pose additional constraints. Syria's participation in the Gulf coalition ended years of isolation from the Gulf states, and earned substantial financial rewards which have been allocated to rehabilitate the country's deteriorating infrastructure and to revitalize public sector enterprises, particularly in the electricity generation and telecommunications fields. These transfers amounted to over $1.7 billion in 1992 and over $1.3 billion in 1993. With this financing confirmed, Syrian government agencies issued a record number of tenders beginning in 1991. Prospects for Syrian private sector investment and imports continue to improve, spurred by economic reforms, including a new investment law. Recent liberalization actions of the Syrian government permit private exporters to retain some foreign exchange export earnings to finance permitted imports for manufacturing inputs, as well as other listed products. The rate of retention depends on the type of products exported, and is 75 percent for industrial products and 100 percent for agricultural products. Although retaining a monopoly on "strategic" imports, such as wheat and flour, the Government has widened the list of permitted imports, including items, such as sugar and rice, formerly reserved for public sector importing agencies. In addition, an active "unofficial market" exists, in which a wide variety of difficult to obtain goods can be purchased. Prices in this market are dependent on the offshore foreign exchange rate and therefore reflect world price levels. During 1993 the government attempted to interdict many of the goods imported for this market, succeeding briefly in reducing supplies, but ultimately discontinuing the activity because of inadequate resources and strong public demand for such goods. The United States imposed trade sanctions in 1979 as a response to Syria's involvement with terrorism. The U.S. government expanded sanctions against Syria in 1986, following Syria's implication in the attempted bombing of an Israeli airliner at London Heathrow Airport. Among the affected items are aircraft, aircraft parts, and computers of U.S. origin or containing U.S.-origin components and technologies. The Syrians have sought alternate suppliers of these products. Under the 1986 sanctions, Syria is ineligible for the Export Enhancement Program (EEP) and the Commodity Credit Corporation (CCC) program in all agricultural products, rendering U.S. wheat uncompetitive in the Syrian market. The Syrian-U.S. bilateral aviation agreement expired in 1987 and has not been renewed. Finally, the Exim Bank and OPIC suspended their programs in Syria, further disadvantaging U.S. exporters in meeting competition from other suppliers. The Syrian government uses its annual budget as its principal tool for managing the economy. Through 1992, the Syrian government's ability to raise official prices on many consumer items (effectively reducing subsidies), improve tax collections, and increase transfers from state enterprises, while reducing commitments of Syrian resources to capital expenditures, enabled it to reduce budget deficits, leading to a balanced budget in 1992. However, the 1993 Budget saw a return to the government operating in the red, due to an anticipated decline in tax collections. In addition, Syria's maintenance of its large military establishment, both at home and in Lebanon, and its continued heavy subsidization of basic commodities and social services, place severe burdens on the economy. Given Syria's anachronistic financial system and inability to access international capital markets, monetary policy remains a passive tool used almost exclusively to cover fiscal deficits. All four of the country's commercial banks are nationalized. Interest rates are fixed by law. Most rates have not changed in the last several years, even though current real interest rates are negative, exerting additional inflationary pressures in the economy. 2. Exchange Rate Policies The Syrian government continues to maintain a multiple exchange rate system. The official exchange rate remains fixed at 11.20 Syrian pounds/$1.00 for government, certain public sector transactions, and valuations for customs purposes. A second exchange rate, 26.6 SP/$1.00, called the "Blended Rate", can be used by the U.N. and diplomatic missions. A third rate, 42 SP/$1.00, the "Neighboring Country" rate, applies to most state enterprise imports except certain basic commodities and military/security items. Outside Syria, a thriving offshore market for Syrian pounds operates in Lebanon, Jordan, and the Arab Gulf countries. During 1993, the value of the pound fluctuated between SP 46 and 53 to the U.S. dollar in these locations. After the government implemented its anti-smuggling measures and sold some of its dollars in Lebanon in May 1993, the value of the pound rose to 46 SP/$1.00, but as the anti-smuggling campaign faded away, it depreciated to hover around 50 SP/$1.00. Exchange controls are strict. Syrian currency may not be exported, although it may be imported physically. Almost all exchange transfers must be by letter of credit opened at the Commercial Bank of Syria. Outward private capital transfers are prohibited, unless approved by the Prime Minister or transacted under the new investment law noted below. Prior to 1987, Syrian law required private exporters to surrender 100% of foreign exchange earnings to the Central Bank at the official rate. Now, private exporters may retain 75 to 100 percent of their export earnings in foreign exchange to finance imports of inputs and other items designated on a short list of basic commodities, surrendering the balance to the Commercial Bank of Syria, in most cases, at the "Neighboring Country" rate. Since 1991, the Commercial Bank of Syria, may convert cash, travellers checks and personal remittances at the "Neighboring Country" rate. 3. Structural Policies By law, the Ministry of Supply controls prices on virtually all products imported or locally produced. The ministry also sets profit margin ceilings, generally up to 20 percent, on private sector imports. Local currency prices have been computed at the 42 SP/$1.00 rate for the past two years. In prior years, prices on many items were computed at the over-valued official 11.2 SP/$1.00 rate, thereby creating the foreign exchange shortages which constrained official imports. In the agricultural sector, production of strategic crops (cotton, wheat) is controlled through a system of procurement prices and subsidies for many inputs, including seeds, fuel, and fertilizers. Farmers may retain a portion of production, but the balance must be sold to the Government at official procurement prices. Since 1989, the Government has increased farm gate prices to encourage production and to enable state marketing boards to purchase larger quantities of locally produced commodities. By 1991, the local price of wheat was double the world price computed at the free market rate. Although private investment has picked up, Syria's public sector remains the primary purchaser of imported capital goods. Contracts are awarded through the official tender system. These are open to international competition with no restrictions, other than language pertaining to the Arab boycott of Israel and the requirement to post a bid bond. Syria's tariff system is highly escalated, reaching 200 percent for passenger cars. Income taxes are highly progressive. In 1991, marginal rates in upper brackets were reduced from 92 to 64 percent, effective January 1992. Salaried employees also pay a graduated wage tax, reaching 17 percent. Understandably, tax evasion is widespread. The structure described above is that delineated by Syrian law and regulations. As already noted, a substantial parallel economy exists outside the official structure (i.e. most useful private sector economic activities). Goods ranging from luxuries to steel reinforcing bars for use in concrete construction flow across the border from Lebanon. In this market, US exports compete on the basis of price and quality alone. Pricing is based on the free market rate for Syrian pounds. The Government has been unwilling or unable to exert effective control over this parallel economy, although there are periodic anti-corruption and anti-black market campaigns. 4. Debt Management Policies Syrian authorities have been unwilling to provide data on non-civilian debt, as well as accumulated obligations under bilateral clearing arrangements. Guaranteed civilian debt is officially estimated at approximately $3.4 billion. A commercial publication placed Syria's total external public debt at $16.8 billion in 1991. Very little Syrian commercial debt is held by US companies. In 1992, the government established various committees to negotiate settlements of supplier credit claims against public sector importing agencies. However, progress has been slow. Debt to the former Soviet Union and Iran (both clearing account arrangements) is estimated to be at least $10 billion. The government continues to manage its bilateral and multilateral debt by indefinite deferment. Syria suspended payments to the Russian Republic in 1992. The government remains badly in arrears on payments to official export credit agencies and bilateral donors, including USAID. Syria has been in violation of the Brooke Amendment since 1985. In March 1988, because of nonpayment of debt, the World Bank halted disbursements and cancelled projects. While Syria resumed payments to the World Bank in 1992, it once again suspended payments in 1993 because of the electricity crisis. Other creditor nations and institutions have also not received debt service payments. 5. Significant Barriers to U.S. Exports Any product legally imported into Syria requires an import license, which is issued by the Ministry of Economy and Foreign Trade according to a policy aimed at conserving foreign exchange and promoting local production. Strict standards on labeling and product specifications are non-discriminatory and fairly enforced. Customs procedures are cumbersome and tedious because of complex regulations. In addition, duty rates are extremely high. These disincentives are mitigated by the application of the official rate of exchange to customs valuation of imports. Government procurement procedures pose special problems. Although foreign exchange constraints have eased, many public sector companies continue to favor barter arrangements not attractive to US suppliers. In addition, problems remain in the prompt return of performance bonds. Formerly, bids on government tenders were considered to be indefinitely valid regardless of the expiration date. This practice is no longer permitted under regulations issued in 1987. Current bid bond forms stipulate that the guarantee becomes null and void if the tender is not awarded upon its expiration date, without need for any other procedure. Some government tenders include a clause allowing the bidder to cancel his bid at six-month intervals, provided a written notice is received within a stipulated time frame. If such a clause is not included in the tender, it can often be negotiated. Tenders for wheat and flour stipulate that bids are invalidated after one month if no contract is signed. Syria participates in the Arab League boycott of Israel. Many Syrian government tenders contain language unacceptable under US anti-boycott law. In many cases, public sector agencies accept positive certification from U.S. companies in response to tender application questions. Once interested parties obtain tender documents, they would be well advised to obtain competent advice regarding U.S. anti-boycott regulations before proceeding. One source of such advice is the U.S. Department of Commerce Office of Anti-boycott Compliance (telephone advice line (202) 482-2381). Given the centralized structure of the economy, specific "buy national" laws do not exist. Strategic goods, military equipment, wheat, sugar, not produced locally or in sufficient quantities are procured by public sector importing agencies from the international market, provided foreign exchange is allocated by the Supreme Economic Council. The government requires its approval for all foreign investments and continues to encourage joint-ventures with itself. Concessions and services must be explicitly negotiated. The number and position of foreign employees in a company are usually negotiated when the contract or agreement is signed. Land ownership laws are complex. In principle only Syrians may own land. The right to repatriation of capital is legally recognized. The new investment law provides for tax holidays and exemptions on duties, as well as guarantees for the remission of profits. However, the law requires that repatriated foreign exchange be generated from export company operations. Despite the new legislation, poor infrastructure, lack of financial services, and complex foreign exchange regulations (including Law No. 24, which criminalizes unauthorized foreign exchange transactions) continue to pose serious barriers. Government monopolies in banking, insurance, telecommunications, and other public sector service industries preclude foreign investment. Motion pictures are distributed by a government agency and are subject to censorship. Petroleum exploration and oil service companies operating in Syria are required to convert their local currency expenditures at the over-valued official exchange rate. Despite cost recovery schemes, this requirement has inflated company operating costs, exposing them to greater risk. Many foreign firms operating in Syria have bad experiences with the Government of Syria which has a poor understanding of free market economics and conducting economic relations on a mutually beneficial basis. 6. Export Subsidy Policies Export financing and subsidies are not available to either the public or private sectors. Recent government decisions allowing private firms to transact exports and imports at the "Neighboring Country" rate, instead of the unfavorable official rate, have encouraged private trade through official channels. Similar concessions to public sector companies to complete export transactions have enhanced the foreign exchange position of these companies. In the past, the system of multiple exchange rates has channeled exports to the black market. Exporters resort to unofficial channels when official exchange rates do not offer adequate incentives. However, this system is grossly inefficient and has prevented the development of Syrian export industries. Syria has in the past exported to the former Soviet Union under special bilateral agreements, but this subsidized trade has been suspended. 7. Protection of U.S. Intellectual Property Syria's legal system recognizes and facilitates the transfer of property rights, including intellectual property rights. Syria is a member of the Paris Union for the International Protection of Industrial Property and the Madrid Agreement on Deceptive Indications of Source. Prior registration of intellectual property is required to bring infringement suits. Due to the unsophisticated industrial structure and existing limits on private industry, there are few major infringement problems. Local courts would likely give plaintiffs fair hearings, but any financial awards would be in Syrian pounds. Requests for payment in foreign exchange would probably be delayed indefinitely. Most books printed in Syria are in Arabic and by Arab authors. The publishing industry is not well developed. Despite the lack of legal protection, major commercial infringements do not appear to be a problem. There are, however, individual entrepreneurs who copy records, cassettes, and videos, and sell them. These operations are not sanctioned by the Syrian government. The amount of revenue lost by U.S. firms in 1992 is estimated at $5 million. In any event, enforcement and the associated litigation would be, if not impossible, extremely costly compared to any positive benefits which might result. The U.S. motion picture industry estimates the home video market in Syria is 100 percent pirated, and is also concerned with unauthorized hotel video performances, which are said to be common. However, only a few hotels have internal video systems. Taking its responsibilities in this field seriously, the government raided shops selling computer programs early in 1993, confiscating all illegally reproduced programs. 8. Worker Rights a. Right of Association The 1973 Constitution provides for the right of the "popular sectors" of society to form trade unions. Although the General Federation of Trade Unions (GFTU) is purportedly an independent popular organization, in practice the government uses it as a framework for controlling nearly all aspects of union activity. According to GFTU officials, the secretaries general of the eight professional unions, some of whom are not Ba'th Party members, are also each elected by their respective union's membership. In July 1993, the International Labor Organization's (ILO) experts committee expressed its regret that there were no intentions to move away from the single trade union system. While the Syrian government contends that trade union pluralism exists, in fact, workers are not free to form labor unions independent of the government-prescribed structure. The ILO committee of experts' 1993 report noted that legislation was pending before the Syrian Council of Ministers to amend certain labor laws, including the granting of the right of any trade union to be governed by its own by-laws without those rules having to correspond to those of the GFTU. As these changes are still pending, the Syrian government has not made sufficient changes regarding workers' rights to prompt a reconsideration of the U.S. Trade Representative's 1992 suspension of GSP privileges. b. Right to Organize and Bargain Collectively In the public sector, unions do not normally bargain collectively on wage issues, but there is some evidence that union representatives participate with the representatives of the respective employer and ministry in establishing sectoral minimum wages. The government has cited ten specific examples of such sectoral collective bargaining agreements. In a country in which major industries are publicly held, workers make up the majority of each board of directors and union representatives are always included on those boards. They also monitor and enforce compliance with the labor law. Private sector unions are active in monitoring compliance with the laws and ensuring workers' health and safety. The unions, under the law, can undertake negotiations for collective contracts with employers, but there is no information available on whether such contracts envision that unions can also sue and be represented in court. c. Prohibition of Forced or Compulsory Labor There is no Syrian law banning forced or compulsory labor, but such practices may be imposed in punishment, usually in connection with prison sentences for criminal offenses, under the economic penal code, the penal code, the agricultural labor code, and the press act. Resignations of public employees from their jobs are not automatically accepted but require an administrative and occasionally even a judicial process. d. Minimum Age for Employment of Children The minimum employment age in the predominant public sector is 14; in some public sector the minimum age is higher. The minimum age varies more widely in the private sector; the absolute minimum age is 12, while parental permission is required for children under age 16 to work. Children are forbidden from working at night. The Ministry of Social Affairs and Labor is responsible for enforcing minimum age requirements, but the number of labor investigators is small, and violation of the law may be extensive. e. Acceptable Conditions of Work As mandated in the constitution, the government legislatively establishes minimum and maximum wage limits in the public sector and sets limits on maximum allowable overtime for public sector employees. The minimum wage does not enable a worker and his family to survive, so many workers take additional jobs, open businesses, or rely on extended families for support. According to the 1959 Labor Act, minimum wage levels in the private sector are set by the Minister of Social Affairs and Labor. His decision is based on recommendations from a committee including government officials, employer representatives, and employee representatives. Syrian labor law extensively regulates conditions of work. This includes rules and regulations which severely limit the ability of an employer to fire an employee without due cause. One exception to the heavily regulated labor field relates to day laborers. They are not subject to minimum wage regulations and receive compensation only for job related injuries. They are commonly employed in small private firms and businesses in order to avoid the costs of permanent employees who are well protected, even against firing. f. Rights in Sectors with U.S. Investment There is no direct US investment, other than oil exploration and development, in Syria. US firms are required to comply with Syrian labor law. Extent of U.S. Investment in Selected Industries U.S. Direct Investment Position Abroad on an Historical Cost Basis - 1992 (millions of U.S. dollars) Category Amount Petroleum D Total Manufacturing 0 Food & Kindred Products 0 Chemicals and Allied Products 0 Metals, Primary & Fabricated 0 Machinery, except Electrical 0 Electric & Electronic Equipment 0 Transportation Equipment 0 Other Manufacturing 0 Wholesale Trade 0 Banking 0 Finance and Insurance 0 Services 0 Other Industries 5 TOTAL ALL INDUSTRIES D (D) -Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis. (###)