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Yet it’s a brave government that cuts subsidies in this part of the world and the recent outcry which followed the easing of governmental price support in neighboring countries is sure to have given Damascus a pause. The imposition of gas rationing in Iran produced sporadic rioting and resulted in the sacking of the oil and planning ministers, along with the central bank governor. The mere suggesting of introducing a fresh round of fuel hikes in Jordan was enough to force the resignation of the country’s finance minister and Deputy Prime Minister Ziad Fariz. Being an election year, Jordan’s prime minister was forced to act, however the county now faces a $1 billion fiscal deficit, close to double the original target.
Fuel prices to double
In the wake of these events, Syrian policy makers are having a dollar each way: publicly committing themselves to the idea of subsidies but calling for reform of a system they openly admit no longer works. The government has launched a media campaign to push a plan to phase out fuel subsides over the next five years. If it goes ahead, the immediate impact will be to see fuel prices almost double, with a liter of fuel oil rising from 14 to 24 cents and a tank of gas increasing from $2.90 to $5 (the price of petrol is still to be released). The government is taking a measured approach to a plan it admits is unpopular, proposing to ease the blow of price increases by providing a $250 cash payment to every household in Syria (an amount it says will more than cover any rise in fuel cost). By the end of the program, these cash payments will have been restricted solely to low income households. “The government doesn’t want to make profit on fuels, but the object is to cover our costs in five years,” deputy prime minister for economic affairs and the country’s reform guru Abdullah al-Dardari said in a recent interview.
It all sounds good on paper. Whether the government risks raising the ire of the public by putting it into action, however, remains to be seen. “Given the country’s foreign reserves it can — technically — continue to cover its subsidies bill for a few years,” Jihad Yazigi, editor of Syria Report, said. “But in the mid- to long-term it is unsustainable. The government knows this, but it doesn’t know if it has the political capacity to handle the consequences of higher prices. It knows what it needs to do; it just doesn’t have the guts to do it.”
In a country already battling poverty and unemployment, any price rise in the daily necessities of life is not going to be popular. “Not only do you have an increase in the price of a specific and basic product, but this product will affect the price of everything because all goods are transported,” Yazigi said. “Theoretically, everything could go up in price and ordinary Syrians are not going to be happy about that.”
To smooth the way, the government is spending much time and newsprint to explain to a price sensitive public the need to readjust the present system. Highlighting the massive bleeding of government coffers through fuel smuggling has been central to the campaign. Significant price imbalances exist between Syria and her neighbors, particularly Lebanon, Turkey and Jordan, giving rise to a lucrative black market. The price of a liter of fuel oil in Syria is 14 cents, while it is 70 cents in Lebanon, 55 cents in Jordan and $1.55 in Turkey. A liter of petrol will set you back 60 cents in Damascus, but costs 80 cents in Lebanon, 90 cents in Jordan and $2.20 in Turkey. The government estimates fuel smuggling costs the state $800 million per year, with Lebanon accounting for $350 million alone. “Tightening border security will not solve the problem,” al-Dardari said. “We have to adopt a fundamental solution. Economic growth will become unsustainable if we continue with this subsidies regime.”
The ineffectiveness of the present subsidies program in targeting those who really need it — the poor — is also being highlighted. A recently published government study estimates that only 44% of the subsidies are reaching the truly needy. Reforming a system which no longer works, rather then cutting subsidies altogether, is the aim to the plan, says the government. “We are fully committed to the subsidy policy,” Syria’s prime minister, Naji al-Otri said at a press conference last month. “However, the imbalance that is created by the mis-distribution has prompted us to intervene in order to stop the economic drain and redistribute the subsidy equitably to those who deserve it, for the just treatment of the poor classes in the society.”
Declining oil production
The influx of Iraqis is also being used to justify the need to reduce price support. Syria has absorbed an estimated 1.5 million Iraqis since the American-led invasion of Iraq in 2003, swelling the country’s population by around 10%. The demand put on government resource by these “newcomers” is no doubt being felt at the Treasury.
At the heart of the issue, however, is Syria’s declining oil production, which has fallen from a peak of 590,000 barrels per day in 1996 to presently less than 400,000 bpd. At the same time, annual demand has increased by more than 10%, a situation which saw the government announce in March that it had become a net oil importer for the first time in two decades. Syria’s oil balance (crude oil exports minus petroleum product imports and royalties to foreign operating companies) has moved from a surplus of $2.4 billion in 2003 to a deficit of $157 million last year. This year, the deficit is expected to grow to a massive $1.3 billion. The International Monetary Fund’s preliminary conclusions for 2006 put Syria’s oil revenues at 4.5% of GDP, well down from the 14.7% of GDP they represented in 2003. Furthermore, oil revenues are expected to fall to 3.8% of GDP this year.
Complicating the picture is Syria’s limited refinery capacity. The country does not refine large amounts of diesel on which the country is heavily dependent for its transport, agricultural and heating needs. Last year, the country was forced to import diesel at 56.4 cents per liter, but sold it domestically for 13.7 cents per liter. “When you have an oil production capacity that is declining by around 11% a year, it’s not surprising that the present subsides regime covering fuel is unsustainable,” Syrian analyst Andrew Tabler said. “The bottom line is that the state can no longer afford this. Getting the state to understand that the issue is urgent, that is another thing altogether.”
The solution to date has been to simply run larger budget deficits. The annual deficit has increased from 1.7% of GDP in 2001 to 5% of GDP in 2005. Last year’s budget estimated a spending increase of 7.6% to $9.9 billion, but this amount is based on figures which only allocate $500 million for all subsidies, less than one-tenth of what the country is thought to have spent on fuel subsidies alone.
The rising fuel deficit is also highlighting the lack of progress Syria has made in exploiting its gas reserves, a situation not helped by America-led sanctions against the county. The last time any major effort was undertaken to harness the country’s gas reserves was during the brief flowering of Syrian-American relations following the first Gulf War when energy giant ConocoPhillips invested $500 million in a joint oil and gas project. The project allowed Syria to switch its electricity generation plants from oil to gas which freed up more of its crude oil for export. Given that much of the technology needed to develop the county’s gas reserves comes from Western countries, however, it may be some time yet before Syria can access the technology required to develop her gas fields.
Lifting fuel subsidies
The lifting of fuel subsidies is projected to save $1.2 billion in the first year and, according to government figures, keep the budget deficit stable at 5% of GDP in 2008-2009. All of this makes sound economic sense. But just how well a population which spends two-thirds of its income on the daily necessities of food and clothing reacts to a price rise in basic items remains to be seen. “The last time Syria had a fuel price rise was shortly before the Danish cartoon riots and there were questions over the spontaneity of those riots,” Tabler said. “Whatever the case, a frustrated population will eventually take out its frustrations, whether it takes out its grievances on the state or on foreign representation. States can use pressure release valves to let off steam and redirect internal frustrations to external parties and they are pretty good at doing that here.”
Whether the rise in subsides produces the dramatic scenes witnessed in Iran and Jordan remains to be seen. What is known, however, is that Syrians are eventually going to be paying more for their fuel and other basic items and nobody — Syrian or otherwise — likes that.
