Syrian state TV this morning broadcast images of a nervous-looking Bashar al-Assad as he prayed alongside Syria’s grand mufti to mark the start of Eid al-Fitr, the holiday that ends the holy month of Ramadan.
Though this is Assad’s third public appearance in just over a week as the regime tries to capitalise on recent gains against rebels fighting to oust him from power, the president’s eyes, darting back and forth, told a different story.
The reality is that Syria’s economy is deteriorating fast and there is little the regime can do to stop it.
As Anne Barnard, the New York Times’ Beirut bureau chief summarised:
Two years of war have quintupled unemployment, reduced the Syrian currency to one-sixth of its prewar value, cost the public sector $15 billion in losses and damage to public buildings, slashed personal savings, and shrunk the economy 35%.
And desperate times call for desperate measures. The government is now implementing measures to try to slow the rate of economic deterioration. It banned food exports, launched a crackdown on black market traders and measures to tighten state control of the economy.
Earlier this week, the government also forbid the use of foreign currencies for any type of commercial transaction or settlement. Anyone found violating the decree could face anywhere from three to 10 years in jail, with hard labour, depending on the level of the “crime”.
It’s no surprise that the regime is putting in place stricter measures to stem the volatility of the exchange rate. After all, the Syrian pound now changes hands at around 200 pounds to the dollar in the black market, from just 47 pounds before the conflict erupted in March 2011.
But there’s a more sinister impact of these harsh rules. Economists say the stiff penalties are a throw back to a more draconian era where economic courts handed out harsh sentences and loomed heavy over Syrian businesspeople.
Ironically this was phased out as Bashar al-Assad moved in favour of a more economically liberal approach.
But as the country now moves to rein in some of the modest economic liberalisation and support for private business that the president introduced early on in his tenure, the prospect of more state control and less economic freedom is real.
Still, despite the fact reserves are perceived to be close to zero, sanctions against the government, a depreciating currency and a growing black market, Syria has still managed to avoid hyperinflation by relying on credit from its allies (namely Iran and Russia).
For a country to experience hyperinflation, it has to have monthly inflation rates of 50% or more. Syria’s rates are more in the region of 10% to 14%, according to Steve H. Hanke, a professor of applied economics at Johns Hopkins University and one of the only economists investigating Syria’s economy.
Annual inflation is estimated to be running at about 200%, Prof. Hanke told Rebel Economy, with most food prices now tripled, but that still doesn’t mean total collapse:
My experience with situations like this, for example in the former Yugoslavia in 1991 [where Prof. Hanke was an advisor to the government], is that it really can take some time for an economy to collapse.
Even in the case of Yugoslavia it took quite a number of years before Milosevic’s regime actually collapsed. But then they had the third highest hyperinflation in history in January 1994, and in one month registered a rate of 313 million%.
It’s much, much higher than anything they’re experiencing in Syria.
But that’s not to downplay Syria’s economic situation.
This table, from Prof. Hanke’s “Troubled Currencies” project, shows the level that Syria’s annual inflation rate has reached compared to other countries with currency pressures:
As people’s purchasing power is eroded and the Syrian pound loses value, the economic impact of the civil war will become painfully clear.
Syrians, knowing the country is on the brink of hyperinflation, will be forced to depend on increasingly informal methods of payment, more akin to bartering than to a financial transaction.
Even though Iran announced a $3.6 billion credit line to the Syrian government earlier this month that could help with fuel and other products, there is no guarantee that this deal will materialise. The prospect of hyperinflation, and the subsequent additional trauma on civilians, is nearing.
No where in the Arab world are conditions as frightening as in Syria, where a conflict that broke out in March 2011 has left tens of thousands of people dead.
And there are few other countries in the Arab world struggling with the same economic pressures as Syria, which has been hit hard by US and EU sanctions.
Now, intense pressure is on the country’s domestic currency as rebels have take their battle closer to the centre of the capital and international powers have started talking about military intervention in the escalating civil war.
The Syrian pound is at crisis point.
It has hit 100 Syrian pounds to the US dollar on the black market, according to today’s reports from Al Watan, a Syrian daily newspaper. That means the pound has lost 50% of its value versus the US dollar compared to 2 years ago.
The currency had hit a record low of 105 to the dollar earlier this year before recovering slightly. Until about November, the central bank had mostly managed to keep the pound’s depreciation at a manageable rate, with its black market dollar value staying below 75 for most of the year.
Economists have said the country has averted a sharp currency decline because of the central bank’s intervention, flows of cash from Assad’s friends and enemies abroad, and the prospect of a wave of foreign investment if Assad were to fall.
But an unfortunate combination of higher demand for foreign currency, international sanctions and the choking of supply routes because of the conflict is driving prices of basic goods ever higher.
“Life in Syria is very, very expensive now,” said one Damascene who had spent 650 Syrian pounds ($9) the previous day on a cooked chicken that would have cost about 350 a few months ago, the FT reported earlier this month. “The value of the dollar is increasing very, very fast,” she said.
In Syria’s eastern town of Deir al-Zor, a rebel commander flush with cash was swapping his dollars for Syrian pounds to pay fighters battling President Bashar al-Assad’s forces.
Money changers said that influx of foreign currency earlier this month helped push the pound’s black market rate in the impoverished town up by at least 10 percent.
Hundreds of kilometres away in Damascus, panicked Syrians bracing for more violence sold pounds for dollars, driving the pound, which has lost half its value since the anti-Assad uprising erupted in March last year, the other way.
The influx of foreign currency is coming from Assad’s friends and foes alike.
According to the non-profit journalism site Pro Publica, 240 tonnes of banknotes were flown in to Syria this summer from Russia, which reportedly agreed to print Syrian money after previous printing arrangements were affected by sanctions.
What is clear now is that the central bank is running out of reserves to fight currency pressures.
Before the unrest broke out, Syria had about $17 billion in foreign currency reserves. Economists estimate the central bank now has about $6-8 billion in reserves, dwindling about $500 million a month for salaries and supplies to keep the government running.
At some point, the regime’s ability to contain two years of economic instability will waver and economists say the tipping point is coming.