Syria Analysis: What Will Happen to the Economy in 2016?

PHOTO: Jobar in northeast Damascus, December 2015

With the Assad regime trying to sustain Syria’s crippled economy, Aron Lund of the Carnegie Endowment for International Peace introduces projections by four analysts of what will happen in 2016:

As 2015 draws to a close and Syria prepares to enter its sixth year of conflict, the economic conditions and transformations brought by the war are taking center stage.

The country has shattered into zones under the control of rival politico-military factions, but the economy remains curiously cohesive, connecting the Syrian population through a web of trade links, transportation, service and aid distribution channels, and decaying national systems for the provision of water, gas, and electricity. The Syrian central state economy is deteriorating at a faster pace since 2014—with food subsidies now being slashed, wages left unpaid, an ever more erratic electricity grid, failing trade and fuel distribution, a rapidly depreciating currency, as well as growing discontent in government-controlled areas—which has sent shockwaves throughout the country. Meanwhile, foreign nations penetrate ever deeper into the Syrian economy. Despite the war, or perhaps because of it, the Syrian north is growing more integrated with the Turkish economy, while Iran is emerging as a major financial stakeholder in the Syrian government….

For a comprehensive update on the state of the Syrian economy, I recommend this report by the editor in chief of the al-Iqtisadi economic journal, Hamoud al-Mahmoud, which was recently published by the Carnegie Middle East Center in Beirut. Just a few lines from Mahmoud’s work shows how far the destruction of the Syrian economy has progressed:

At the end of 2014, 82% of Syrian people lived in poverty, while 2.96 million people had lost their jobs because of the war. Unemployment surged to 58%, according to the [Syrian Center for Policy Research] SCPR. Separately, the SCPR’s 2013 report “estimated that sanctions contributed to an increase of the poor in Syria by 877 thousand persons” and a rise in the prices of oil derivatives by around 200%….

Vegetable production in Hama has dropped by 60% because of the conflict, while olive oil production in Daraa has plummeted by 40%. Likewise, nationwide wheat production plunged from 4 million tons a year to around 2 million tons in 2013.

….To get a sense of how Syria’s economy has been affected by the war and how it might evolve in 2016, I have been in touch with four eminent experts on different aspects of Syria’s financial life: Samer Abboud, who has researched the role of Syrian business elites in politics; David C. Butter, an expert on Syrian oil and gas affairs; José Ciro Martínez, who studies the role of food in the conflict; and Jihad Yazigi, who will give us a sense of where the Syrian economy is headed more generally.

Abboud: The Business Elite

The composition of the Syrian economic elite has changed dramatically since the conflict began. In the early phases, many of the elite adopted a wait and see approach and remained in the country even though economic conditions slowly deteriorated. However, as the situation became more militarized and sanctions initiated a contraction of the economy, many businesspeople, include those considered part of the elite, started to divest of their assets and leave the country to re-establish themselves in places like Turkey, Egypt, and Lebanon.

The elite who stayed were those linked to the regime through social, familial, or political ties and had staked their fortunes to the survival of the regime. Sanctions also forced the regime to increasingly cultivate a new elite who are politically dependent on the regime and have an economic stake in the continuation of conflict as they have been enriched by it.

For those elite who left the country, their political alignments are less clear. Many business people in Turkey and Lebanon continue to publicly support the regime, while others attempt to adopt a neutral position vis-à-vis the regime and various opposition groups. This neutrality is often cosmetic as most business people privately support certain factions in the conflict. Others have openly and enthusiastically supported opposition groups and, in the case of Southern Turkey-based business people at least, have benefited from continued commercial exchanges with different armed groups inside of Syria.

There are also a number of Syrian elite expatriates who were mostly based in the Gulf who have participated in formal opposition politics and assumed key decisionmaking positions within opposition structures. With the exception of those elites embedded within the regime or the opposition, the political alignments of the majority are malleable and subject to change based on the ebb and flow of the conflict.

Butter: The Energy Situation

Syria’s energy supply has been greatly affected by the war. The country suffers from a lack of electricity and frequent blackouts. Most of the population still relies on the pre-war power grid although in many areas, particularly those outside regime or Islamic State control, Syrians have to resort to diesel generators for electricity supplies. Control over interlinked power stations and oil and gas fields has become divided between the government and various insurgent groups. In many places, otherwise hostile factions therefore quietly cooperate across the battle lines to keep the system running or for economic gain.

In late 2015, Syria’s power stations generated between 1,500 MW and 1,800 MW, according to a statement in parliament in early December by Imad Khamis, the electricity minister. This represents less than 20% of the country’s installed capacity of almost 10,000 MW in 2011.

It was not clear whether Khamis’s total included hydroelectric power stations on the Euphrates that are being run under the control of the Islamic State. Those plants, at the Tabqa, al-Baath and Tishreen dams, have notional capacity to produce about 1,000 MW, but their actual output depends on water levels and the state of the turbines.

Most of Syria’s thermal power stations depend on supplies of natural gas or fuel oil. The main plants around Damascus—Deir Ali, Nasiriya and Tishreen—are linked to gas fields between Homs and Palmyra that are under regime control and still producing at reasonable levels. The Jandar plant, south of Homs, is linked to the Conoco associated gas plant in the Deir Ezzor governorate, which is under Islamic State control. The plant’s output has recently been affected by air raids by the U.S.-led coalition on nearby oil fields such as Jafra, Omar, Tanak and al-Ward, which are the source of the associated gas processed at the plant. Gas from the Islamic State-controlled Twinan plant south of Raqqa is pumped to the Aleppo power station.

As a backup to natural gas for power generation, the government uses fuel oil, mainly produced at the Banias refinery from crude oil supplied by Iran. Most of the gasoline and diesel distributed in regime areas comes from the refinery or from tanker supplies to the Banias port. Consumers in rebel-controlled and Islamic State-controlled areas depend on fuel originating from Islamic State fields. The northern Hasakah region, largely controlled by Kurdish groups, processes oil from fields in this area to meet local needs.

Martinez: The Cost of Bread

Throughout the Syrian conflict, various groups have provided subsidized bread and other public services to populations under their control. Both the opposition and the Assad regime have attempted to engender support, foster compliance, and consolidate their control through such efforts.

Prominent regime representatives continue to refer to the bread subsidy as a red line. In large swaths of territory under regime control, subsidized bread remains widely available. This is hardly a coincidence: Assad’s wartime government has consistently imported large quantities of wheat from Ukraine and Russia and paid local farmers, even in areas outside its control, above market prices for their harvest. But a more than threefold increase in spending on the bread subsidy coupled with wartime developments has stretched the government’s resources. In October 2015, the Ministry of Internal Trade and Consumer Protection increased the official price of subsidized bread for the third time since 2013. It now stands at SYP 50/bundle (1.55 kilograms), more than three times its pre-war price of 15 SYP.

In contrast to previous years, 2015 saw a marked increase in successful efforts by international donors to guarantee the bread supply in opposition-controlled areas. Qatar, Saudi Arabia, and the United States are all funding projects through implementing partners who purchase sizable outlays of wheat in Turkey and Jordan before sending it into Syria as humanitarian aid. Although many militias continue to sell these donations at war-inflated prices, reports and interviews with residents of the Daraa and Idlib governorates indicate a noticeable decrease in the cost of bread. However, as a consequence, many opposition-controlled areas are now almost wholly dependent on external donations to ensure the local food supply.

While bread provision helped the Islamic State gain a foothold in towns and villages previously held by other rebel groups, the American and Russian aerial campaigns have undermined the organization’s revenue streams and its welfare infrastructure in Syria. In early 2015, the Islamic State raised the price of bread to more than three times its cost prior to its takeover of Raqqa, from 4 SYP for a single loaf to 12.5 SYP. The group’s failures in public service have triggered a growing reliance on force to maintain control over local communities.

In 2016, food provision will remain a politicized landscape. While the distribution of subsistence goods may initially appear to be a minor component of the Syrian conflict, it has proven critical to its development. Subsidized bread stands at the forefront of these concerns. If the geopolitical stalemate continues, the importance of subsidies for subsistence goods will only increase.

Yazigi: “Poorer” and “More Miserable” in 2016

The continuing deterioration of the Syrian economy witnessed in the past four and a half years will accelerate in 2016.

Fundamentally, the Syrian economy suffers from several curses: the destruction of the country’s physical infrastructure and productive capacity; the outflow of financial and human capital; the fragmentation of the territory and the disruption of trade and other business networks; the collapse of state institutions and services in areas outside regime control; and Western sanctions.

Provided the war goes on, these factors will continue to weigh on the economic situation.

Business sectors that had survived relatively well until now, such as agricultural production, had a dismal year. The fragmentation of the country has increased transport costs to such an extent that importing wheat from the Black Sea is now cheaper than buying it from Hasakah and carrying it to Damascus.

The value of the dollar, one of the most closely followed indicators, almost doubled from 215 pounds at the beginning of 2015 to 390 by early December. The supply of foreign currencies in the market remains structurally well below demand and there are no obvious limits as to how low the Syrian currency can fall in the coming months.

One positive aspect for the government has been its capacity, despite low fiscal revenues, to pay salaries and maintain the functioning of basic services. This was due to the implementation of new taxes, the reduction of subsidies on essential goods such as heating oil and bread, and aid from its allies.

This has been, however, at the expense of the population, an overwhelming number of which now live under the poverty line. The attacks by the international coalition on Islamic State-controlled oil fields are already making matters worse: electricity blackouts and shortages of oil products in the market have increased, which will only push inflation higher in the coming weeks.

2016 will see Syrians poorer, living a more miserable life, and emigrating in higher numbers.