Would Partial Dolarization Be the Solution?

The Central Bank Falsifies Exchange Rates … Lira is Awaiting the Unknown

A man holding 1000 Syrian lira along with foreign currencies (AFP)

A man holding 1000 Syrian lira along with foreign currencies (AFP)



The governor of the Central Bank of Syria, Duraid Dergham, has promised that there will be surprises regarding lira and the improvement of the exchange rate despite the continued recession and the lack of economic movement. There are only media statements of economic officials in the regime’s government, who keep stating that the economy is improving and that foreign companies are investing in Syria after the improvement of its economy.

The promises came after the improvement in the exchange rate against the dollar last week. The Damascus Center for Research and Studies attributed the reasons of this improvement to the opening of the Damascus International Fair in its 59th edition, after six years of suspension. This led to higher occupancy rates in Damascus, as a result of reservations made by the participants, in addition to other reasons.

However, in an interview with Enab Baladi, the former finance minister in the interim Syrian government, Dr. Abdul Monem al-Halabi, denied that the fair was a reason for the exchange rate to improve.

Halabi attributed the improvement to the central bank undeclared intervention in the work of public and private commercial banks, putting pressure on them so they limit the restrictions imposed on their dollar supply and adopting the new 2000-lira bill, in addition to the decline of military operations and the people expecting a better and a more stable future. This affected their demand for the dollar and increased the margin of their holdings and their demand for the Syrian lira, along with the decline of the dollar last week.

Exchange rate stability is ” illusory”

According to the Central Bank governor, the Syrian lira settled, since a year, at 520 liras at a fluctuation of 5%, after years of deterioration and fluctuation until it reached 600 liras. On his Facebook page, the Central Bank governor rendered the reason of the stability to “field victories and awareness of citizens, as well as their support for their national currency and the fact that they are not dragged behind the propaganda campaigns, whose promoters failed to spread”. This is in addition to the fact that the “government directed all its available support to the process of production and industry, which improved the economy”.

Dr. Halabi considered that the stability of the exchange rate is “superficial,” and is not stable. It rather “fell to its lowest point at saturation point. This is based on the basic economic indicators of GDP level”. Moreover, the cash reserve is in its lowest possible level as a result of insuring credit facilities by Iran. Dr Halabi also pointed out that the real value of the Syrian lira fell by 20%, last year, as a result of inflation in the prices of goods and services in the Syrian market.

For his part, economic researcher Younis al-Karim said that the exchange rate is  illusory, and does not really reflect the market conditions because the balance of payments is unhealthy and  deficitary, as the exports are completely suspended and the regime is dependent on aids and debts.

Al-Karim rendered the stability of the exchange rate last year to two reasons. The first reason is when the regime government determined the ceiling and maintained the price, as the general budget for 2017 estimated the exchange rate to be around 500 liras. Thus, allowing more rise in the lira will harm the employees’ mass salaries in government institutions and pro-regime militias paid in Syrian lira. Moreover, more deterioration of the lira would lead to the entry of new players on the Syrian economy and the purchase of land and real estate, which is not approved by the regime. The second reason is an international decision to prevent the collapse of the Syrian economy, for fear of rising inflation and the inability to control it.

“Empty” promises to improve the lira

Dergham promised surprises in the improvement of the lira soon. However, al-Karim thinks he is unable to do so, because the central bank cannot intervene in the market to weaken its cash reserves, which is estimated at 700 million dollars in the treasury, in addition to the fact that industry is stalled and agriculture is shattered, as well as the oil wells that the regime is unable to operate directly, for the need of spare parts from countries imposing a blockade on Syria, such as European countries and the United States.

For his part, the former minister Abdul Monem al-Halabi, confirmed the inability of the regime to improve the exchange rate, unless it received external support or political benefits greater than the cost to be paid to raise the exchange rate of the lira. He believes that “the regime is misleading citizens, as it is not showing the real role of central bank in facing the rate of inflation and maintaining the real exchange rate. It is rather directing attention and information towards the exchange rate nominal market, for prices rose much more than the rise in the dollar, and this difference proves the fraud and failure of the Central Bank”.

The Minister blamed the regime for the deterioration of the lira, when it acted against the economic damage resulting from its security policy on the citizen, and burdened them with the repercussions of the Syrian economy, in the absence of opposition. It also imposed some kind of international control over the procedures and policies of the regime, with regard to its practices to secure illegal economic resources for his supporters.

He considered the exchange rate as one of the tools of destruction that the regime used against the Syrian people, as it worked to immunize its supporters with secret banking facilities and private and direct purchase advantages that were not put in auctions by the Central Bank, which did not play the real role required in the face of inflation regarding the tools that it owns, because of the impact of the depreciation of the lira on the standard of living of citizens.

This has served the regime’s policy of pushing many citizens to choose between emigrating or volunteering in their military militias, according to the former minister, in addition to the external remittances sent by the refugees to their families for their living and difficult living conditions. These remittances reach 4 million dollars daily.

Expectations of continued currency collapse

“Partial dollarization is the move to dollar trading for a short period, for the wholesalers and suppliers. This reflects the stability of the market and the decline in commodity prices, because dealing in lira raises the profits of brokers for fear of volatility and loss.

Since 2012, the specialized website, The Economist, has proposed a transition to partial dollarization, even at the half-wholesale level. In this way, risk factors in the exchange rate volatility are reduced to more than 66%, according to The Economist, which includes two-thirds: supplier, wholesaler and half-wholesalers”.

Expectations of Continued Collapse in Currency

Dergham’s promises have pushed the regime supporters to use social media websites to call for selling the dollar and buying the lira, expecting its improvement in the coming days. However, Halabi expects a new drop in the exchange rate if the doors of imports and exports are reopened because the external needs, which must be imported in the next stage, are greater than the productive capacities of the goods that can be exported. He believes that the improvement of the lira will temporarily affect for a certain period, noting that the big and long-term impact depends on external support in the issue of reconstruction and economic and development policies to be followed in the future.

In the same tandem,  researcher Yunus al-Karim, explained that reconstruction requires the import of goods from abroad, especially with the return of Syrian refugees which will increase the demand for goods and  consequently a demand for the dollar to import these goods.

Al-Karim predicted that the lira will continue to collapse and reach full dollarization due to the lack of interest of the regime and the opposition in economic or monetary affairs.

In order to improve the exchange rate in the next stage, the researcher named some necessary factors. First, there should be a conscious transitional government, whether pro-regime or opposition. This government should force the reconstruction companies to deal with the lira, in addition to controlling the issuance of the currency, the mass of salaries and running the factories, as well as reclaiming the lands, which would take at least five years, pointing out the need for partial dollarization during this stage, because the improvement of the lira during the foreseeable future is difficult.

Al-Karim said that the imposing of tension-easing areas as a result of the agreement between Russia and the US and its success, as well as the opposition reaching a bilateral government would lead to full dollarization, because the opposition has no idea of ​​partial dollarization due to the need of citizens to various consumer goods and reconstruction. Thus, commodities will not be priced back in Syrian lira which will take a long time to be re-imposed.

However, if the war continues and no political settlement is reached, the regime will still need the dollar, expecting the exchange rate to rise by between 590 and 650 liras per dollar.

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