Enab Baladi – Reham al-Sawadi

The possibility of circulating old or small denomination banknotes in regime-controlled areas remains, even after the introduction of new banknotes and large denominations (2000 and 5000 Syrian pounds).

While most banks, telecommunications companies, and even grocery stores and transport vehicles refuse to deal with small denominations, either metal or paper, there have been rumors about the withdrawal of some denominations from circulation, which the Central Bank of Syria (CBS) has denied, noting that all denominations are usable in transactions and complaints can be filed if any denomination is not accepted.

No longer in circulation

Despite the Central Bank’s denial of their withdrawal, state institutions no longer deal with small denominations, such as the one hundred and two hundred pounds, in transactions and for stamps and the like.

Private banks refuse to accept old currency or amounts less than 2000 pounds, and some only accept the 5000-pound note, charging a commission for such deposits.

An employee at the private Bemo bank, whose name Enab Baladi withheld for security reasons, told Enab Baladi that banks do not accept small denominations.

The same applies to mobile payment machines used by telecommunications companies, where Syrians pay their bills after the government’s move towards electronic payment, which began to be implemented at the beginning of this year. These machines do not deal with small denominations of currency.

Manhal al-Othman, a lecturer in financial and banking sciences, told Enab Baladi that banks and money exchange shops in Syria refuse small denominations due to the storage costs.

He explained that the cost of storing currency denominations with low purchasing power is higher than their value, making them unprofitable for banks and prone to damage and loss.

In regime-controlled areas, there are two different versions of the 100 and 500 Syrian pound notes.

After printing the newer issue banknotes and issuing the 2000 and 5000 larger denominations in 2017 and 2021, the regime did not cancel the old currency’s circulation, resulting in an increase in the money supply without a decrease in the exchange rate of the pound against the dollar.

The exchange rate of the Syrian pound against the dollar in the black market reached 14,500 for sale and 14,300 for purchase, according to the S–P Today website.

What is the money supply?

Money supply (money in circulation) refers to the total issued banknotes and coins outside the treasury and banks, and the demand deposits at the central bank and specialized banks.

Adding time deposits, savings deposits, foreign currency deposits, and different funds in the money markets forms what is called the money supply.

A time deposit is a deposit in a financial institution with a specific maturity date and differs from demand deposits, such as savings accounts that can be withdrawn at any time without notice or penalty.

The International Monetary Fund terms the concept of money supply as “M1,” while the broader concept of the money supply is referred to as “M2.”

There is a close relationship between measures of money supply and important economic variables such as gross domestic product and price levels. The money supply determines the short-term economic trajectory and price levels and inflation determine the long-term trajectory.

The “M1” money supply in December 2011 amounted to one trillion and 69 billion and 826 million Syrian pounds, while the “M2” amounted to one trillion and 906 billion and 372 million Syrian pounds, according to the monetary survey by the Central Bureau of Statistics.

This is the latest official statistic announced by the Central Bank of Syria.

The 2010-2011 Monetary Survey (Central Bank of Syria)

The director of the Syrian program at the Observatory of Political and Economic Networks and economics doctor, Karam Shaar, estimates that the only printed money supply between 2012 and 2023 is about 17 billion US dollars, given the quantities released each year.

Shaar told Enab Baladi that, according to these figures, one-third of the regime’s government funding relies on printing currency, with the rest coming from taxes and other sources.

The regime continues printing

The Central Bank of Syria issued larger banknotes in two phases: the 2000-pound note, which started printing in 2015 and went into circulation in the second half of 2017, and the 5000-pound note, which began circulating with the other denominations in January 2021.

In December 2018, the Central Bank introduced a 50-pound coin.

The Central Bank justified the printing of larger denominations as facilitating monetary transactions, reducing their costs, and contributing to mitigating inflation effects over the past years. It also aimed to reduce the density of cash transactions due to price rises and to gradually eliminate damaged banknotes.

Increasing the money supply induces consumers to buy more goods and services, thus boosting economic activity if these goods and services are available and can be produced in the short term.

However, if the supply of these goods and services is limited, as in Syria, an increase in the money supply, with purchasing power, can lead to higher prices.

Kassioun Studies Center considered the funds with which the Central Bank of Syria financed government needs in 2015 as printed money, representing an addition to the existing monetary liquidity in the Syrian pound.

According to the center, the amount of Syrian pounds in circulation at the beginning of 2015 was approximately 5,900 billion pounds, marking an 8.3% increase from 2014.

By the end of 2016, the money supply had tripled compared to 2010, meaning that the amount of Syrian pounds in circulation in the market had increased by more than 280%.

With the increase in the money supply, the total domestic production activity declined by more than 60% by the end of 2016, according to Kassioun Center.

Shaar believes that the regime’s policy of printing money, along with other factors, is the primary reason for the “staggering” inflation in Syria and the high exchange rate.

Syria’s annual inflation rate is 105% per year, according to the Hanke‘s Inflation Index report, dated February 22, 2024.

Printing larger denominations without replacing them with smaller ones has a “negative impact” because the inferior currency always drives out the better one. The same happens with larger versus smaller currencies: people circulate the smaller ones to dispose of them and keep the larger denominations.

The disposal of small denominations will continue through circulation without any decision to eliminate their use, according to Shaar.

Political and economic motivations

Economists often refer to small denominations as “subsidiary currency” because they facilitate transactions in markets. However, when their value is equal to zero, the value of the metal coin becomes higher than its purchasing value, according to al-Othman.

But the cessation of their circulation does not happen immediately, because of the damage it would cause to people’s savings and loss of wealth. Instead, it occurs gradually through bank deposits until the money supply of these denominations is absorbed from the market and destroyed officially.

In the case of Syria, such a process is “difficult” due to the scattered areas of influence where the Syrian currency is circulated, in addition to the inefficiency of the banking system, which is why the regime opts for the “easy solution” of waiting for the currency to deteriorate to get rid of it.

Al-Othman believes there is a political, propagandistic dimension used by the regime to deny the hypothesis of the “collapse of the Syrian currency” and give the impression that it still retains its purchasing power.

Meanwhile, Shaar sees that although retaining the small denominations is considered a “wrong policy,” which leads to economic issues and trust problems among the trading parties, it is not a top priority for the regime, which currently lacks the cost of its abolishment.