|Syria's economy requires broader reforms to reach and sustain higher growth
Banque Audi Saradar Group has issued a new report on the performance of the Syrian economy. The report says Syria's economy is witnessing an improvement in output performance, though still far below its potential. According to the International Monetary Fund (IMF), Syria's real GDP growth rate reached close to 3 percent in 2005 (4.5 percent according to the official Syrian estimate).
What follows is the conclusion of Audi's report on Syria.
Despite the relative improvement in Syria's economic conditions, the state-oriented economy requires deep and broad reform if higher levels of growth and better living standards are to be achieved. There is actually little debate among analysts that the Syrian economy is in need of reforms and that such reforms must take place as soon as possible. There are divergent views, however, on the type of reforms needed in Syria and the likelihood of such reforms taking place.
Below is what we believe are the key policy issues that need to be addressed in Syria nowadays.
At the level of macroeconomic policy, Syrian authorities seem fully aware of the challenges facing the economy, as clearly recognized by the aspirations of the country's five-year plan.
But specific policy initiatives and measures to address structural problematic issues and enable reforms to proceed remain relatively thin on the ground.
Attention should be given to efficiency improvement of public enterprises as a whole, with some view on the potential role of the private sector in terms of public/private partnership or privatization. The hurdles afflicting oil output, which seems to have dropped last year much more sharply than expected, should provide a serious incentive for accelerating such reforms.
A slowdown in structural reforms could possibly dissuade investors who have recently shown increasing interest in Syria's potential. The uncertainty surrounding the regional environment represents a considerable source of downside risk.
At the level of fiscal policy, despite some favorable developments mainly at the level of debt alleviation, serious challenges rise at the horizon.
Government policies should focus on maintaining fiscal sustainability by adopting a strong and credible fiscal consolidation strategy within a transparent fiscal policy framework aiming for a steady improvement in the non-oil budget balance. After a five-year period of double-digit spending growth, the pace of increase should ease, especially with growing concerns over weakening oil production and external political threats.
In parallel, reform in the prevailing tax policy, improvement in tax administration and greater effort in combating tax evasion is needed to reinforce overall resource mobilization to represent important pillars of the required fiscal adjustment in Syria.
At the level of monetary policy, a significant amelioration was registered in the overall monetary policy framework.
The overall liberalization trend observed in recent years is to expand in the forthcoming future. There have been some significant movements away from the pegged interest rates that have governed the monetary system for the past two decades, most recently to contain pressures on the foreign exchange market. In parallel, foreign currency rules have been relaxed to a certain extent.
The challenge of monetary policy from now on rests on a further liberalization requirement, the containment of inflation pressures through monetary tightening and the use of indirect instruments of monetary control to operate effectively in a financial system that will increasingly become market based.
At the level of exchange-rate policy, authorities have showed determination in addressing the rigidities of the foreign-exchange regime, but further drastic reforms need to be introduced.
The observed improvement in economic conditions offers a favorable environment for unifying the exchange rate and achieving current account convertibility. Exchange-rate unification means that all private and public demand and supply of foreign exchange emanating from current account transactions should meet in a single market, with the Central Bank acting to prevent erratic volatility and to ensure an adequately competitive market rate.
Managing the float would protect the export sector competitiveness and dampen the adverse effect of exchange rate volatility on inflation.
At the level of banking policy, the recent liberalization efforts started to bear fruit. Lending to the private sector expanded significantly in 2005 within the context of a noticeable improvement and diversification in banking activity at large.
Still, serious hurdles face banking activity, calling for the implementation of further reforms. These include, among others, the need to provide liquid placement vehicles for banks, the need to upgrade clearing and settlement procedures, the need for improved corporate transparency and disclosure, and the need to establish a Credit Bureau or, at an earlier stage, a Central Office for Credit Risk, in addition to the need to enhance the Central Bank institutional capacity to exercise effective banking supervision.
In the concluding statement of the recent IMF Article IV Consultation Mission released last August, the IMF foresees a positive outlook for 2006 but says that the improvement in outlook should not allow for any complacency in view of the significant medium-term challenges and which need to be addressed today without delay.
The Daily Star