Enab Baladi – Jana al-Issa

At the end of last August, the former dean of the Faculty of Economics in the southern Syrian governorate of Quneitra, Rasha Seroub, said that Syria’s inflation will peak in the coming winter on the basis of several data, adding that food and energy will push it towards an “unbridled” hyperinflation.

Seroub based her forecasts on general inflation levels that were affected by the spread of the coronavirus (Covid-19) since the beginning of 2021 and the Russian invasion of Ukraine last February, which affected energy and food supplies in particular.

Climate change will also have the effect of making global food production more volatile, which, according to Seroub, would drive up prices.

In this report, Enab Baladi discusses the prospects of Syria actually reaching the level of hyperinflation and the reasons for this if it happens, with reference to current inflation rates and forecasts of its levels in the near future.

Syria is in an extreme state of stagflation

Based on the soaring commodity prices in Syria today, the current type of inflation is an extreme case of stagflation (recession-inflation), one of the worst economic conditions a country can reach, according to economic researcher Zaki Mahshi.

What is stagflation? It is a term that describes a dysfunctional economy, where prices continue to rise while economic growth falls, and the rate of increased production of goods and services rises.

The researcher explained to Enab Baladi that, in the case of stagflation, there is a significant increase in the nominal value of goods, accompanied by a major decrease in domestic production, or a consequential decrease in economic growth rates, while there is a huge rise in unemployment rates.

From an economic point of view, one of the main causes of stagflation or inflation in Syria is the lack of commodity supply and the scarcity of certain commodities, leading to higher prices in local currency. As a result of the collapse of domestic production and the reliance mainly on imports in foreign exchange, this will inevitably raise the nominal value of goods.

Since Syria’s stagflation is accompanied by a significant decline in economic growth rates and a major rise in unemployment rates, economic researcher Zaki Mahshi says that we could agree to call this type of inflation “an extreme case of stagflation.”

Could Syria reach hyperinflation?

Hyperinflation is a type of inflation resulting from an increase in the supply of cash in the market, resulting in a decrease in its purchasing value.

Economists define it as a situation where the rate of price hikes is above 50 percent per month, which is generally a very high rate of increase in the prices of goods and services. Therefore, hyperinflation is a case of sharp inflation in which annual price hikes of about 1300 percent or more would occur.

In cases of acute hyperinflation, prices increase so insanely that money becomes virtually worthless, in one of the harshest and most dangerous types of inflation.

Although hyperinflation is a rare event for developed countries, it has occurred several times in history in countries such as China, Germany, Russia, Hungary, and Argentina.

Hyperinflation can occur in times of war and the event of economic turmoil in the basic production economy in conjunction with the central bank printing excessive amounts of money.

Economic researcher Zaki Mahshi explained that, despite Syria’s soaring inflation levels (as an initial estimate, prices rose four-fold between the beginning of 2021 and the beginning of the current year), the situation has not yet reached hyperinflation levels.

Researcher Zaki Mahshi rules out the possibility of hyperinflation in Syria and the prospects for its early occurrence considering the existing institutional conditions in Syria, especially the security intervention to control prices and the central bank’s intervention to withdraw liquidity and other financial and monetary instruments, such as forcing banks to buy treasury bonds.

Reaching hyperinflation reflects the collapse of state institutions and their inability to control the economy, which is currently the case in Venezuela, for instance, according to the researcher.

Mahshi stressed that hyperinflation means that commodity prices rise annually at a rate of about 1500 percent. Meanwhile, Syria’s annual rise rates are currently around 300 – 400 percent.

In addition to the instruments of the regime’s governments, accompanying factors currently appear to contribute to the failure to reach these levels, such as direct support from some Arab Gulf countries despite its “simple” value and remittances sent to Syrians in Syria by their relatives abroad that support the local currency and positively affect the exchange rate, and thus, the inflation rates in Syria.

Can the regime’s government prevent hyperinflation?

According to researcher Zaki Mahshi, the government of the Syrian regime still has some instruments that enable it to reduce the likelihood of hyperinflation in Syria through multi-level work, including financial and monetary instruments that government agencies such as the central bank are trying to use, namely raising the interest rate and controlling free cash liquidity in markets by offering treasury bonds.

In December 2021, the Syrian Ministry of Finance announced its intention to organize four auctions on treasury bonds for 2022 worth 600 billion Syrian pounds in different terms and values.

In mid-April, the Monetary and Credit Council (MCC) issued a decision to annually increase the interest rates paid by banks operating on deposits, credit current accounts, and investment certificate accounts in Syrian pounds, setting their value at 0 percent on current credit accounts and demand deposits, and 11 percent for each month-term deposits and investment certificates.

The decision also included considering the interest rate (11 percent) as the minimum deposit on deposits for the rest of the terms, amidst justifications that its objective was to attract savings and direct facilities towards development-supporting productive activities in order to “protect” exchange rate stability, as well as the inadequacy of banks’ interest rates on deposits in Syrian pounds to economic realities, and to restructure banks’ liquidity.

However, these instruments alone are insufficient, so the regime uses market security control as the main instrument. Owing to the lack of trust between traders and government agencies, no one would buy a bankrupt state’s treasury bonds, so the security agencies exert numerous pressures on banks or capital owners to buy them from the state, researcher Zaki Mahshi said.

The security services are also working to control the exchange rate, which in turn affects inflation rates.

Consequently, the instruments owned by the regime’s government today are “limited” to monetary and security instruments, but they enable it to “temporarily” control or curb inflation.

Who benefits from inflation?

The transformation of inflation into a “terrifying nightmare” that threatens the livelihood of many does not mean that the same is true for other groups in Syria, whose incomes increase with each wave of inflation that hits the country, or at least the incomes of some of them were momentarily in line with the inflation index, according to a report by the Syrian journalist specializing in economic affairs, Ziad Ghosn, that was published in the Lebanese newspaper al-Akhbar last March.

According to the report, groups benefiting from high inflation in Syria currently include regulators, farm owners, contractors, industrialists, brokers, entrepreneurs, and business owners, drawing on a study prepared by Syrian economic researcher Shamil Badran who justified classifying these categories as beneficiaries of inflation by the fact that “most of them have flexible income and rapid response to changes in the overall price level.”

In turn, economic researcher Zaki Mahshi emphasized the existence of a broad spectrum of beneficiaries of high inflation rates in Syria. Among them are small traders who work to hide their merchandise from the market and put it back up when its price rises, in addition to regime-associated major traders who store their goods in huge quantities, and currency speculators who contribute to the depreciation of the Syrian pound, which in turn increases inflation levels as a result of distrust of the local currency.

Syria’s inflation forecast

Syria’s inflation will continue to rise, despite the existence of the regime’s monetary and security instruments, as long as the causes of its occurrence continue to exist, such as low growth rates, low domestic production, and high unemployment rates, resulting in higher nominal value of goods as confirmed by researcher Zaki Mahshi.

The researcher added that Syria’s inflation can be curbed in only one case, a drastic change at the political and economic level that in turn leads to the gradual return of domestic production, the attraction of foreign investment projects, the establishment of investment projects, and the overall stimulation of the economy.

According to econometric models, Syria’s inflation rate is expected to increase by 12 percent this year and 9.80 percent in 2023.