Sat 31 Oct 2020

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Loans to citizens in Syria do more harm than good

 Syrian pound banknotes  (expressive photo)

 Syrian pound banknotes  (expressive photo)

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Enab Baladi – Zeinab Masri

After a suspension of three months, the Central Bank of Syria (CBS) has issued a decision to allow local banks to resume loans and credit facilities to their clients under a variety of conditions and controls.

This decision is one of the steps that the Syrian citizen has been waiting for, after the economic crisis and deteriorating living conditions tied off his neck within his country’s borders. In the past few months, the economic crisis has intensified; the citizen is fighting to provide for his family and secure his daily bread.

 However, analysts interviewed by Enab Baladi explained the impact of the decision on the Syrian citizen, in addition to the adverse effects of this decision on the Syrian economy.

Loans target specific sectors

According to a circular issued on 9 September, the CBS limited the granting of credit facilities to the agricultural sector, the real estate sector,  small and medium enterprises, and low-income persons.

The CBS also obligated the local banks not to grant any revolving credits (such as revolving accounts, discount bonds) until subsequent instructions are issued in this regard.

It stipulated that the credit facility granted to the agricultural sector, small and medium enterprises, and low-income people must not exceed 500 million Syrian pounds (SYP- 1 USD equals 2,280 SYP), and 400 million SYP in case the credit facility granted is a mortgage.

The CBS  also stipulated not to grant any form of credit facilities to delinquent clients, according to the Resolution of the Monetary and Credit Council No. 4 of 2019. Besides, all legal measures must be taken to collect unpaid bank debts.

Banks are replete with cash

Central banks direct the overall economy indirectly through banks. By controlling the volume of credit or credit facilities granted to any sector, they can develop the various sectors in countries and revitalize them because they form the backbone of life.

The CBS  resumed granting credit facilities after stopping them last June, due to the political and economic conditions and fear of currency speculation at the time, because the banks operating in Syria have the funds, and they need to use and reinvest them to obtain revenues that cover their costs.

It is a decision to prove that life is returning to normal in Syria, and economic life must return to its previous stable state and that banks have returned to give loans, according to Economic researcher Dr. Firas Shaabo.

Shaabo told Enab Baladi that the CBS and State and private banks are “filled” with local currency.

These banks have vaults full of cash, which must be used due to the inflation incurred in Syria due to the ill-considered printing of the currency and money injection into the markets.

However, the CBS has directed local banks to activate credit facilities for the agricultural sector and small and medium enterprises, because it is impossible to talk about granting loans to factories and giant companies or import-export companies.

Shaabo believes that the infrastructure, food, and small businesses on which citizens can subsist are essential for economic growth. Plus, the channeling of loans to large industrial projects is “not feasible,” neither to the Syrians nor to the government as a result of inflation, “and no sane person is investing in Syria under these circumstances.”

The researcher added that only one percent of the Syrian people will benefit from these loans due to tightening lending standards and designed control measures on loan obtaining. Not to mention that the Syrian citizen, on the best conditions, such as the employee whose income does not exceed 40 USD, does not have “financial solvency.” In other words, he does not have the capital to pay off his debts, which means that 70 or 80 percent of the Syrian people will not get these loans.

Situation may get worse and worse

Even though credit facilities include interest rates, their goal is not to make profits. The purpose of credit facilities is to spur economic growth. The situation in Syria does not allow the economy to develop through a specific procedure like the last loan decision, because the economic situation requires a new economic structure, rebuilding the Syrian economy.

Researcher Firas Shaabo believes that it is “certain” that the resumption of loans will not restore economic life to normal. Rather, things could worsen, and the exchange rate could deteriorate due to the currency injection into the market.

Shaabo thinks that the value of the currency is determined by supply and demand. As the supply of a currency increases in the market, the currency becomes less valuable. Thus, if there is an increase in granting loans, there will be an increase in market currency. In other words, there will be an increase in supply and, thus, a decrease in its value, and this is a “big problem.” And after a while, most likely, the exchange rate will deteriorate again.

He also believes that the economic problem in Syria is not a problem of one sector at the expense of another, but rather lies in the structure of the system as a whole, and the absence of a sound economic vision, plans, or economic support given by the Syrian regime.

The local currency is depreciating, the infrastructure is destroyed, and the citizen who forms the economy’s backbone does not have the ability to consume. Therefore, the economy’s fundamentals are somewhat non-existent; the recent economic decisions of the system will not change much in the economy.

Do banks benefit from loans?

Regarding the benefits on the banking sector from resuming the granting of credit facilities, the head of the auditing and accounting department in “al-Diwan” company, economist Abdul Rahman Raslan, told Enab Baladi that a large part of the banking sector in Syria is governmental, in addition to private banks.

The majority of government banks are “losing,” even before the eruption of the revolution in 2011, due to the economic structure’s weakness in general in the country, so interest in the banking sector is limited because it is basically a “losing” sector.

Even before the 2011 revolution, government banks are mostly “losing” banks, owing to the country’s general weak economic structure. So, the banking sector’s benefits are limited because it is essentially a “losing” sector.

Raslan believes that banks will not benefit greatly from this decision (Resumption of granting credit facilities and loans) due to the absence of depositors, because the mechanism of banks ’work depends on operating deposits to benefit from the interest difference between deposit and lending. This matter currently in Syria does not exist, especially since the local currency has significantly lost its value.

Also, many of the loans granted and a lot of the money became bad debts on the banks, and they were unable to collect their value.

Raslan elaborated to Enab Baladi that the Syrian government may benefit from the loans granted to reactive the banking sector, whose effectiveness was limited during the Syrian revolution.

Raslan pointed out that the decision targets the agricultural sector and small and medium enterprises, and it can be said that the agricultural sector has been adversely affected in the last period. The agricultural sector is semi-destroyed in the regime-held areas due to fluctuations in exchange rates, the high cost of raw materials, especially fuel, and the weakness in selling agricultural products in the markets.

The decision may contribute to supporting the agricultural sector slightly because direct credit facilities are dedicated to the agricultural sector, through which it is possible to open documentary credits, open accounts, or lend within limits specified by the decision. Yet, the agricultural sector problems are too big to be solved in lending issues at this level.

As for small and medium enterprises, their support may be good in the event of stability and the willingness to open projects, but now the purchasing power of citizens is almost non-existent. Thus, the impact is limited, especially in “a structural deformation of the Syrian economy,” as Raslan described.

A “sound decision”…but

On 11 June, the CBS had instructed all public and private banks that a hold be put on granting credit facilities and loans in all their forms and formats, as directed by the Syrian Prime Minister, Hussein Arnous.

 The Director-General of the Loan Risk Guarantee Corporation, Mamoun Katibeh, said at the time that the decision is temporary, pending the CBS’s study of specific controls to determine priorities for granting loans. 

This decision was issued days after the Syrian pound fell sharply to its lowest exchange rate against the US dollar in history on 8 June, about 3,175 per 1 USD, according to the website of Syrian Pound Today (a Syrian Pound tracking website.)

Economic researcher Dr. Firas Shaabo believes that the decision to stop granting loans was a “sound” economic decision to dampen currency speculation. Thus, the re-offering of loans brings the wheel of speculation back again and dramatically changes exchange rates.

The researcher said that speculation is an endless process that cannot be stopped because, despite the Syrian regime’s tight security controls, the use of the US dollar and currency speculation still exist, and loans will enter into speculation, but the question is who is doing the speculation?

He pointed out that CBS’s determination of loan amounts for small and medium-sized enterprises and agricultural projects that do not need much money was an attempt to reduce speculation as much as possible.

In his opinion, a citizen who borrows two or three million SYP cannot engage in currency speculation, and the speculator is the one who borrows hundreds of millions.

The former Minister of Economy in the Syrian government, Lamia Assi, commented on the decision, saying, “Stopping access to loans completely is like destroying a house because there is one cracked house.” She posted on her Facebook page that “Stopping loans and credit facilities may contribute to reducing currency speculation, “and that it may be necessary, but” resorting to transferring loans to credit lines is the best and can last for a long time. “

Economist Abdul Rahman Raslan pointed out that nothing has changed in economic conditions, from last June to now. Now borrowers can convert SYP into USD and conduct speculative operations instead of investing them in the agricultural sector or small projects, as determined by the CBS.

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