Syria is struggling to reform unsustainable and inequitable subsidies, despite warnings from leading economists that delays increase the likelihood of drastic economic shocks and possible social unrest.
The question is how to do so without provoking sharp price increases in a country where the average state wage remains little over US$120 a month.
“The long-term solution to the government’s budgetary shortage is to reduce spending by cutting subsidies and increase tax revenues from the private sector,” said Nabil Sukkar, managing director of the Syrian Consulting Bureau.
Sukkar believes price increases are inevitable. “Subsidy cuts are bound to result in price increases across the board. However, if subsidies are left unchanged, public debt will grow, with the resulting inflationary pressures forcing prices upwards.”
Crunching the numbers
Subsidised diesel in Syria costs SYP 7 (US$0.14) per litre.
The average cost of importing diesel in 2006 was SYP 25 ($0.56) per litre, the difference being the cost to the government.
Total state expenditure on diesel subsidies over the past five years has averaged between $1 billion and $1.5 billion per year.
Diesel consumption has also risen from 5.5 million tonnes in 2002 to a forecast 7.8 million tonnes in 2007 encouraged by population growth.)
The hugely subsidised fuel price also encourages smugglers, who can sell a litre of diesel in Lebanon, for example, at around $0.63, while in Turkey motorists generally pay up to $1.50.
Prime Minister Naji Otri recently estimated that 25 per cent of the annual 4.5 million tonnes of domestically produced subsidised diesel was being smuggled out of the country.
“This means that we offer about US$300 million in subsidised diesel to our brothers in Lebanon,” he said.
The price of fruit and vegetables has risen sharply over the past three years.
For example, in 2004, a kilo of zucchinis cost SYP 10 ($0.20), while a kilo of potatoes cost SYP 25 ($0.50).
Today, the price of zucchinis has trebled, to SYP 30 (US$0.60) a kilo, while potatoes have risen to SYP 40 ($0.80)
Real estate prices have risen by up to 300 percent in the past three years making the cost of living all the higher
According to Samir Seifan, director of the Arab Development Centre, an economics consultancy, the current subsidy system is “unsustainable but the cancellation of subsidies would result in price increases and social trouble. Some form of subsidies must be continued.”
Syria’s 40-year-old policy of subsidising everything from electricity to fuel and food is reaching breaking point. The rising costs of oil, increased fuel smuggling to neighbouring countries and declining state revenues have left the government struggling to pay its bills.
Next year’s subsidies will cost the government about US$7 billion, according to Deputy Prime Minister Economic Affairs, Abdullah Dardari, a situation he described as “no longer bearable”.
However, the Syrian government remains undecided on how to reform one of the central tenants of its socialist state-run economy.
“In the current political and social situation, the elimination of subsidies is difficult and there is a risk of uncontrolled and spontaneous protests,” said Nabil Mazook, an economist and chief architect of Syria’s 10th five-year plan, the blueprint for economic policy to 2010.
A possible compromise solution has been suggested by telecommunications minister Amr Salem: a smartcard-controlled rationing scheme that will provide quotas of subsidised fuel for each family. Once quotas are exceeded, fuel will have to be bought at market prices.
“The system will reduce the government’s subsidy bill while also ensuring the price stability of basic commodities for poorer sections of society and helping to avert a social crisis,” said Seifan.
Some economists argue the schemes do not go far enough, however. “The smartcard system may be enough to prevent social trouble but it is only one of a number of measures that are required to rectify economic inefficiencies,” said Mazook.
Mtanios Habib, professor of economics at Damascus University, believes extra money should be made available to cushion the blow for the poorest in society.
“We have very low salaries in Syria. Subsidy reform should include the creation of a fund to support labourers; the labour force cannot live without subsidies and there is a risk of social trouble,” said Habib. “Also, the smartcard scheme will not stop the smuggling and corruption which is a part of our history in Syria.”