Economic Studies
Syrian Arab Republic

Syrian Arab Republic

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Country risk assessment
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Synthesis

STRENGTHS

  • Strategic geographic position
  • Energy transit country

WEAKNESSES

  • Islamic State controlling part of the country
  • Civil war since 2011
  • Critical economic and financial situation
  • Declining oil production

RISK ASSESSMENT

Stalemate in the conflict

The Syrian situation seems inextricable at present and it crystallises local, regional and international issues. From a clash between the regime and the Syrian rebels in 2010, there are now a significant number of actors and an increasing number of front lines. The Syrian opposition remains divided despite attempts for reunification, as during the Riyadh conference on 9 December 2015. While part of the Free Syrian Army has become radicalised by joining Islamist groups such as Ahrar al-Sham or jihadists such as the group Al Nosra, a subsidiary of al-Qaeda, it must simultaneously cope with forces from the Assad regime and the reinforcements of Islamic State’s positions in Syria. Several regional and international actors are also involved in the conflict. Russia and Iran continue to provide their support to the Bashar al-Assad regime, militarily as well as in the UN Security Council. The international coalition formed by France, the United States, Turkey and a number of Arab countries that targeted Islamic State’s positons in Iraq has also decided to extend its strikes to Syria. The main divergence within the international community is around the survival of the Assad regime. While many saw the end of the regime as the solution to the Syrian crisis, replacing the Assad clan as the leaders of Syria could be called into question given the advancement of Islamic State.

The Syrian crisis is also stirring up regional tensions, as for the deterioration in the relations between Russia and Turkey after the Turkish army shot down a Russian aircraft, or the sovereignty dispute between Iraq and Turkey around the presence of the Turkish army in Iraq.

 

Unravelling of the economic fabric

With no political solution on the horizon, the erosion of the Syrian economic fabric continues. Because of the lack of data, it is difficult to assess the economic impact of the conflict. The country remains divided up between different areas of power and persistent combats continues to result in destruction of infrastructures and population displacement. According to a World Bank estimate, Syrian GDP contracted by more than 15.4% per year on average between 2011 and 2014 and this decline could reach 16% in 2016. The decline in GDP is mainly attributable to the fall in oil production. In 2010, Syria produced the equivalent of 360,000 barrels per day versus 45,000 in 2015. Moreover, the ongoing clashes and the increasing number of air strikes have considerably damaged public as well as private infrastructures, annihilating a significant number of sectors such as transport, construction and trade. In a report established in July 2015, the World Bank reported total damages recorded in the country’s main cities (Alep, Homs, Lattakia and Idlib) and estimated the cost of the destruction at $4 billion. Alep, which is one of the rebels’ bastions, is the city most affected and Lattakia, which is under regime control, is the city with the least amount of destruction. The number of persons displaced inside and outside Syrian borders is also worrying. In 2014, the United Nations recorded 7.6 million displaced within Syria and more recently, in September 2015, the High Commissioner for Refugees reported more than 4 million Syrian refugees outside the borders, a majority of whom are in the neighbouring countries (Lebanon, Jordan, Turkey and Iraq). The humanitarian situation is also critical, in the war zones as well as in the in the zones controlled by the rebels or by the regime. The number of persons needing humanitarian assistance is estimated at 12 million. The civilians are facing water shortages, power cuts and a deteriorating health situation, especially in the besieged cities. The supply problems linked to problems in the transport of goods have led to an exponential increase in inflation. Estimated at 90% in 2013 by the World Bank, it is likely to be 14% in 2014 and 30% in 2015. Inflation is all the higher as it is accompanied by a steep depreciation of the Syrian pound.

 

Increase in the twin deficits

The Bashar al-Assad regime’s public finances have deteriorated steadily since the intensification of the conflict. The fiscal deficit is estimated at 14% from 2011 to 2014 and should reach 22% in 2015. The fall in oil revenues and mandatory contributions has led to a contraction in government revenues, which accounted for less than 6% of GDP in 2015. Furthermore, government spending has grown significantly under the weight of the increase in military spending. The disappearance of public services in combat zones and their decline in the zones controlled by the regime have caused a reduction in current spending, without this slowing down the surge in government spending.

It also seems that the current account balance is substantial. Oil revenues have collapsed from $4.7 billion in 2011 to $0.14 billion in 2015. Foreign exchange reserves have reportedly been drained since 2010, from $20 billion to less than $1 billion end-2015. The exchange rate is likely to continue its downward trajectory, from 47 pounds per dollar in 2010 to 305 pounds per dollar in 2015, paving the way for a large black foreign exchange market.

 

Last update: January 2016

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