How does Central Bank of Syria benefit from exchange rate manipulation?
Enab Baladi – Nour al-Deen Ramadan
On 1 December, the Central Bank of Syria (CBS) issued operating instructions for amendments to some of the articles of the military service presidential decree. According to the text of the decree published by the state-owned Syrian News Agency (SANA), the amendments are about setting the exemption fees, whether in US dollars or its equivalence in Syrian pounds, for Syrians living abroad and inside the country.This includes males serving in administrative positions.
On 1 December, the CBS introduced a new exchange rate for the fees paid by Syrian males to avoid mandatory military service; the new price (1 USD = 2,550 SYP) for the US dollar is twice the official rate (1 USD =1,256 SYP), arousing anger and resentment among the Syrian people.
The CBS set the exchange rate at 2,550 Syrian Pounds to 1 US dollar for paying military service exemption fees, more than double the CBS’s official rate, which amounts to 1,256 Syrian pounds per 1 US dollar since last June.
The pound’s value on the black market reached 2,500 to the US dollar, while it is officially trading at 1,250 to per US dollar.
Justifications and objections
Fouad Ali, head of banking operations at the CBS, argued that the official exchange rate of 2,550 to one US dollar was set as a part of the “military service exemption fee’s bulletin in Syria.”
Fouad Ali explained that the exchange rate of the military service fees reflects “the financial burdens of those who should perform compulsory military conscription [taxpayers], it has nothing to do with the rest of the exchange rates,” in an interview with the local Sham FM radio conduct on 1 December.
According to the banking official, “Military service exemption fee’s bulletin in Syria” is issued on a daily basis and varies in value; it is linked to three authorities: the Ministry of Defense, which abandoned taxpayer’s fees and had financial repayments, the Ministry of Finance that manages the state treasury, and the CBS, which determines the underlying value of the Syrian pound against the foreign currencies.
In his interview, Fouad Ali mentioned that the decree in which some articles of the Military Service Law were amended last November gave three options to those on a fixed service assignment; They can pay 3,000 US dollars or its equivalent in Syrian Pounds (7,650,000 SYP) according to the exchange rate of the CBS or join the compulsory military service.
According to the decree text, the amendments included the exemption fees that can be paid by those residing outside the country, in Arab or foreign countries.
The decree also introduced some amended articles related to the military service evaders, whether for residents inside or outside Syria. The compulsory military conscripts can also benefit from the new amended articles of the military service law, including those assigned to administrative duties rather than combat roles in the Syrian regime forces.
The objections to the doubled exemption fees were directed at what the CBS published on Facebook. The objections went viral on pro-government Facebook pages and accounts and on the local Sham FM radio page that interviewed the banking official.
Most of the objections were raised because the banking operations at the CBS are “illogical.” After all, the Syrian government has set two exchange rates with large differences. This shows that the government recognizes the black market exchange rate for one US dollar against the national currency.
Others also objected to what the ٍCBS announced, because it does not sell operating banks and licensed foreign exchange services US dollars and euros for paying the exemption fees.
How does the Syrian regime benefit from multiple exchange rates of SYP against USD?
The CBS’s decisions accompany the financial policy that the Syrian regime has recently adopted, which reflects its interest in supplementing its treasury with foreign currency.
The CBS has issued other decisions that aroused anger among Syrian citizens; the Syrian regime issued a decision last July that each Syrian national wishing to enter Syria must exchange 100 US dollars — or the equivalent in foreign currencies — into local currency, the rate set by the CBS. The Syrian regime also set the price of the COVID-19 PCR test in US dollars.
Meanwhile, the Syrian government warned against dealing with currencies other than the Syrian pound, stressing that it would act firmly in pursuing those who deal with foreign currencies and “manipulate their exchange rates.”
There are four official exchange rates in Syria: the exchange rate of military service exemption fees and money transfer fees, the official government exchange rate, the United Nations (UN) operational currency exchange rate, and the (unofficial) black market rate.
This raises questions about the benefit that the Syrian regime reaps from setting different US dollar value prices.
Karam Shaar, a Syrian economist, and researcher at the Middle East Institute in Washington, said that the Syrian regime knows that the real currency exchange rate is different from the announced one, and it is in dire need of foreign currencies. Hence, it resorts to setting different exchange rates.
In an interview with Enab Baladi, Karam Shaar ruled out that there will be a law prohibiting the pricing of transactions at different exchange rates.
As an example, he cited that the exchange rate set to determine the annual budget assessment was often different from the currency exchange rate applicable to suppliers of the government.
According to Shaar, the exchange rate is used as an instrument to intervene in the market. So, when the government wants to subsidize a particular commodity, it imports and sells it at a price lower than its cost.
Another government support method is selling US dollars to merchants to import certain materials at a subsidized price. For example, if the US dollar is equal to 2,500 SYP, the government sells it at a lower price that may reach half, or 1,250 SYP for one US dollar, to ensure that goods reach the market at an acceptable price.
The Syrian government has another tactic to benefit from setting different SYP exchange rates against the US dollars: the indirect tax that it collects from remittance flows into Syria. For example, the remittance sent from abroad to Syria is converted into Syrian pounds according to the CBS official rate set. The CBS benefits from the real difference between Syria’s exchange rates against USD; the lower the exchange rate was, the better because it reduces inflation.
Another process in which the Syrian regime obtains US dollars at a different and beneficial price is setting the exchange rate of military service exemption fees. The regime will have withdrawn an amount of the Syrian currency from the market, and thus reduce inflation.
He suggested that there is no other country that uses multiple pricing of foreign currencies like Syria.
The former minister in the Syrian government, Nour al-Din Muna, attacked the CBC’s decision to set a new exchange rate for the military exemption fees on Facebook. He argued that one US dollar paid by those who must perform military duties in the administrative positions becomes two US dollars and more according to the source of the military exemption fees’ payment. He highlighted that if the person who pays the military exemption fee is inside Syria, he has to pay around three thousand US dollars, at an exchange rate of 2,550 Syrian pounds per the US dollar, equivalent to 7.65 million SYP.
But suppose the exemption fees are going to be paid by a Syrian living abroad. In that case, he must pay double the amount of a Syrian male living inside the country. With the US dollar price equivalent to 1,256 SYP with the remittance exchange rate, the total amount paid is 6,210 US dollars. This process is seen as theft of the Syrians according to their whereabouts.
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