Is the Syrian regime printing more banknotes to finance its fiscal deficit?

A person counting Syrian 2,000 pounds banknotes (Yekiti Media)

A person counting Syrian 2,000 pounds banknotes (Yekiti Media)


Enab Baladi – Zeinab al-Masri 

Economic analysts are discussing the Syrian government’s intention to print new Syrian currencies as the only solution to finance its fiscal deficit. The Central Bank of Syria (CBS) announced the results of the subscription to the certificates of deposit (CD) in Syrian Pounds (SYP) for the third issue of 2020. This came a few weeks after the Syrian government’s announcement of the general budget deficit’s amount for the next year. 

The talk about releasing a new 5,000 SYP banknote has been renewed after it took place earlier in 2018, following a draft law in the People’s Council of Syria (PCS) at that time. The law stipulated the amendment of Article 16 of the law to allow the CBS to issue financial notes from 1,000 to 5,000 SYP. 

In 2018, the CBS called on citizens to replace damaged banknotes of 50, 100, or 200 denominations in order to obtain cash in good condition. This occurred after the finalization of the SYP printing contracts and the replacement of the damaged denomination banknotes with new ones. 

Deficit financing

Despite the absence of official government statements, economists expected that the Syrian government will resort to deficit financing. The CBS issued the last CDs because it wanted to determine the market’s need for securities by decreasing the money supply.

On 15 November, the CBS announced the subscription results for CDs issued through the standardized price auction. The traditional operating banks have the right to participate in the auction with a nominal value of 100 million SYP (1 USD equals 2,280 SYP) for one certificate and for six months. The certificates are due on 17 May. 

Eight of the 17 traditional banks that were eligible for subscription took part in the auction by submitting 17 bids, with a total of 102 billion and 500 million SYP.

The total value of the final version of the auction was set at the level of 101 billion and 600 million SYP, with a coverage rate of about  87.21 percent of the targeted volume of the excess liquidity available at the banks. One bank’s bid was rejected because it was placed out of the auction time, as published by the CBS.

During the current year, the CBS offered three issuances for subscription to CDs in SYP via the unified price auction for the traditional banks operating in Syria. This offer has only been made once before in the history of the CBS.

A step that fails to achieve its goals

Shortly after announcing the launch of CDs, the Jusoor Center for Studies and Development expected that the CBS will not achieve its goals of controlling cash liquidity and reducing the currency supply in the markets, thus curbing inflation and slowing the rise in prices.

In addition, the CBS will not be able to create a yield curve that helps banks to more freely estimate their resources and revitalize the banking sector. It will not secure safe sources of income or establish a banking product that can be traded for two main reasons.

The Jusoor Center for Studies and Development said that the quantities withdrawn from banks are surplus amounts that do not exceed 10 percent of the cash reserve owned by the banks that are expected to subscribe. Moreover, these banks face weak demand for borrowing operations.

Also, the annual interest rate on CDs is far below the inflation rates prevailing in the markets, so the goal of stimulating banking sector profits will not be feasible. Banks purchasing this type of bond will suffer a loss that will be reflected in their annual revenues.

Increase banknotes printing frequency 

Karam Shaar, a Syrian economist, and researcher at the Middle East Institute in Washington anticipated that the relative pace of government borrowing (CDs, treasury bonds, and the like) will decrease and that the CBS will print more money next year. This is due to the reluctance of many to lend to the government due to the accelerating economic deterioration since the end of 2019. 

Shaar told Enab Baladi that, over the last ten years, the Syrian regime has relied on printing more money rather than borrowing, which has led to a steady rise in prices.

The budget deficit—which occurs when the government’s expenditures exceeded its revenues— does not in itself necessarily lead to inflationary effects. Prices can be affected adversely by the mechanism of financing this deficit. For example, if the deficit is financed through borrowing from banks or individuals, then inflation remains fairly stable.

On the other hand, if the deficit is financed by printing more money, then the inflationary effects begin to appear, according to Shaar.

Runaway inflation 

After the Prime Ministry approved the state draft general budget for the fiscal year 2021 last October, which stands at about 8,500 billion Syrian pounds, the government estimated the deficit for the same fiscal year at about three trillion and 484 billion SYP.

The pro-government local newspaper Al-Watan reported that the Syrian government ran a deficit of 1,455 billion SYP in the fiscal year 2020, expecting that the deficit for the fiscal year 2021 will be about 3,484 billion SYP. This means that the deficit will increase by an estimated 71 percent.

Prime Minister Hussein Arnous called for holding the line on spending and directing social funds to their beneficiaries in an optimal manner, stressing the necessity to develop export industries. 

Runaway inflation (hyperinflation) is caused by a government that prints more money than its nation’s gross domestic product (GDP). In other words, a general budget deficit—a budget deficit that occurs when a government’s expenditure is greater than its revenue— leads to “runaway” inflation.

The state’s reserves of gold, silver, hard foreign currency, oil, or other high-value resources, goods, and services determine the amount of cash allowed to be printed. The printed money has no value if the state prints more money than it has in reserves.

Runaway inflation or hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.

Hyperinflation occurs when there is an increase in the money supply in the market, which causes the local currency’s real value to shrink in worrying rates, and a decrease in its purchasing power. The government faces difficulties in limiting or addressing it.

Runaway inflation pushes individuals to withdraw their savings from banks, resort to the black market to convert the SYP currency into US dollars to get rid of them, which causes a more significant rise in the US dollar’s value and a greater deterioration in the value of the local currency.

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