Mon 09 Dec 2019

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Exchange Rate: Battle Line That Syrian Central Bank Cannot Defend

Syrian Central Bank employee arranging 500-Pound money bills - (AFP)

Syrian Central Bank employee arranging 500-Pound money bills - (AFP)

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The exchange rate of the Syrian pound has become a battle line alongside the battles that the Syrian regime is fighting, and which have been ongoing for eight years, but in a direction different from what it faces on the ground.

While the Syrian regime is achieving in the field what it considers a “victory,” his government is losing control over the value of the Syrian Pound. The Syrian currency has fallen to record levels in recent days, and then slightly improved, amid expectations of continued decline, under the US and European sanctions and the central bank’s inability to intervene.

The problem that the Central Bank of Syria is facing, and driving it not to intervene to adjust the exchange rate, is that it does not have sufficient liquidity to pump large amounts of hard currency into the market. Even if this liquidity is available, the market, under the war condition, will soon swallow it and demand another.

In contrast, the limited liquidity injected by the Bank does not contribute to fulfilling the needs of the commercial or non-commercial market. Therefore, the intervention or non-intervention of the Central Bank is equal in terms of results and their impact on the situation of the Pound in the market. This is because the effect of weekly and monthly intervention sessions will soon end at the first “shake-up” the Pound may face either on the black market, such as the increase of demand for foreign currency or by military battles and political news related to the Syrian conflict.

With the exchange rate of the Syrian Pound reaching the 691 mark against the Dollar last week and the accompanying rise in the prices of all commodities in the market in an unprecedented manner, the Central Bank stood still. In reality, the official exchange rate of the dollar has not exceeded 435 Pounds, the number adopted for the exchange of remittances received for citizens from abroad, making the loss of remittances reach up to 30 percent of its original value of 195 Pounds per Dollar.

 

At the hands of market traders

The slight improvement the Syrian Pound has witnessed came after the Economic Committee of the Presidency of the Council of Ministers held an extraordinary meeting to take measures to provide goods and basic needs at discounted prices to citizens.

The meeting came to control market variables, combat monopoly and take legal measures to control the illegal dealing in foreign currencies and tighten control “on the manipulators and not to tolerate them,” reported the official Syrian news agency SANA, on September 9.

According to SANA, the meeting identified the role of governors and local councils in supporting efforts to control markets through intensive field trips to prevent monopolies, ensure the availability of goods, intensify supply patrols, tighten market controls and impose severe penalties on violators.

“The government bodies concerned with the follow-up of exchange rate fluctuations have taken immediate action, which started to give results, and have been following up all the variables around the clock, in addition to taking measures to achieve stability in the exchange rate and holding all manipulators accountable,” stressed the Economic Committee.

Economic researcher Dr. Firas Shaabo considers that the Central Bank is currently unable to control the Syrian Pound, because it is a matter of currency traders, market controllers and influencers. This is in addition to the psychological state and severe panic among citizens, which leads to the acceptance of other leaps, even if they are “fake.”

Shaabo said to Enab Baladi that with the Pound exchange rate falling against the Dollar, the Central Bank has remained ineffective and offered no solution or offer. The governor of the Bank, Hazem Karfoul, considered that the record decline in the exchange rate is a “bubble” and speculation. Therefore, he implicitly hinted that he would not intervene.

 

Import gets foreign currency out

The decline of the Syrian Pound is a series that the currency has witnessed during the last eight years. From time to time, the exchange rate deteriorates then stabilizes, and so on. According to the economic researcher, the problem is due to political, economic and psychological reasons, such as the economic sanctions imposed by the European Union and the US on Syria, in addition to the loss of the financial reservoir of crops, tourism and oil, in the sense that the country has lost all of its economic pillars.

Shaabo explained that Syria relies mainly on imports, which drive foreign exchange out of the country. This process, in addition to the absence of export, investment environment and infrastructure, disrupts the trade balance.

Funding imports require foreign exchange, which the country is missing due to the lack of exports; thus, affecting the local currency exchange rate.

Shaabo highlighted that the Syrian regime’s handing over of economy joints to Russia and Iran is made evident through the signed agreements and the leasing of ports, oil and phosphate sources. As a result, the Syrian economic sector has become fully sold.

According to the analyst, the government of the Syrian regime is suffering an internal crisis affecting the exchange rate. He added that all of the above mentioned has affected it and is still effective until today.

During the unprecedented fall of the Syrian Pound, the electronic economic news website “Syria Report” published a report listing the factors leading to the depreciation of the pound recently, accentuating the impact of the high demand for the Dollar in Lebanon, as “Beirut represents a major market for the Dollar for Syrian importers who use Lebanese banking system to conduct their commercial operations.”

The website highlighted that “rumors may have played a negative role during the past days in relation to the tensions between Syrian President Bashar al-Assad and his relative, businessman Rami Makhlouf, one of the most influential investors in the country.”

It has also pointed out a deficit in the balance of payments, in addition to the bad condition of the balance of trade “for the capacity of domestic production is devastated, and the need for imports is increasing in order to meet domestic demand.”

 

Speculative operations

Western sanctions and the decline in investments in Syria slowed down the money flow to the government of the regime. This has been coupled with the declining revenues of exports, customs, taxes and fees. All of this exerted pressure on the size of the public budget, both spending and investment, and paved the way for a decline in the purchasing power of the Pound due to high demand for foreign currencies.

Currently, citizens fear the return of the exchange rate appreciation, especially amid the absence of any mechanism adopted by the Central Bank of Syria to control the value of the Pound in the black market, in terms of decline and sudden improvement.

Firas Shaabo explained that the psychological causes contribute to influencing the exchange rate, especially as the Syrian citizen is “dissatisfied” and is considering another decline.

The researcher clarified also that the Central Bank is crippled, due to the loss of its capability to intervene in the market, whether at the level of fiscal policies or cash. The Bank gave up in favor of big dealers and warlords, who are carrying out speculative operations that damage the Syrian Pound and make them earn huge profits.

Shaabo expected the Syrian Pound to decline again in a short notice, “because the Central Bank has lost all its tools, and has less than 700 million Dollars in its reserve, a figure considered internationally nothing.”

The economic analyst referred to the report issued by the World Bank, in April 2016, suggesting that the Syrian Central Bank has been wasting 17 billion Syrian Pounds in treasury reserves for 2011, to reach 700 million Dollars nowadays. The Central Bank of Syria denied these claims saying there is a break with the World Bank. Therefore, they shared no data with the international institution.

“The Syrian Pound has been suffering an ambiguous and unpredictable fate,” said the researcher, who expected the Central Bank to curtail the pace of exchange rate, but only for a limited period of time. He pointed out that Syria is going through an economic and financial crisis that has not been resolved yet, for no economic solution can be implemented without prior political solution.

Shaabo insisted that “the political solution precedes the economic solution, and anything other than this is absurd. Currently, no solution can be found for the Syrian economy, which is collapsing at different levels.”

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