The regime is fighting a financial battle

[economic opinion]

Syria’s war economy

Bullets and bank accounts

The regime is fighting a financial battle

Aug 10th 2013 | BEIRUT |From the print edition_ The Economist

AS SYRIA’S 2011 uprising against President Bashar Assad turned into a civil war, business in Damascus and Aleppo, the country’s two biggest cities, plunged and inflation soared. Early this year, when rebels took over the northern city of Raqqa—and with it a good chunk of Syria’s oil and agricultural land, two main sources of government revenue fell into rebel hands. On the battlefield the regime has held its own; when it comes to financing the fighting the situation is less clear.
Unemployment has balooned to 60% and government coffers are empty; oil production is down to 20,000 barrels per day, from 380,000. Oil sanctions and sabotage have cost the government at least $13 billion by its own reckoning. Farming, trade and manufacturing are running at less than a third of pre-war levels. The Syrian pound has tumbled from 47 to the dollar when fighting broke out to around 250 today. In Beirut UN experts reckon that 19% of Syrians now live below the poverty line, compared with less than 1% before the war.

So far the government has managed to muddle through. In some areas the war has actually eased financial pressures. Jihad Yazigi, the author of a Beirut-based economic newsletter called Syria Report, says that although greater poverty means Syrians need more government services, closures of schools and hospitals, owing to fighting, have cut the demand for funding.
By freezing investment including in new roads, which accounted for almost half the pre-war budget—one of the highest ratios in the world—the government freed up money to pay the salaries of 2m government employees and prop up consumer spending. On June 22nd the regime attempted to raise morale by increasing pay for civil servants. But coming two days after a rise in fuel prices, few were celebrating.
Things are steadily getting worse. On August 4th Mr Assad banned the use of foreign currency. Soldiers sometimes demand to see electricity bills from the state-owned utility company at checkpoints in the capital, Damascus, to check they are paid. Mobile-phone companies have increased the cost of international calls to raise money.
Both sides are wielding economic weapons. By burning crop fields and shelling areas not under its control, the regime tries to stop economic activity in rebel-held areas. The rebels have attacked power grids and tankers bringing in fuel from Lebanon, hoping to starve the regime of supplies.
Might the pinch end the war? A former member of the government hopes that economic warfare could force the regime to the negotiating table. As agricultural and oil output have stalled since the rebel takeover of the east, Syria, once self-sufficient, has had to tender for imports—and find currency to pay for them. As winter approaches, demand for fuel and food will rise. “It will be a crucial test,” says Mr Yazigi.
Yet most analysts reckon the regime cannot be toppled by economic hardship alone.The declining value of Syria’s currency has been painful for the government but not fatal. Foreign reserves of $18 billion before the war are mostly gone, but enough for three months’ imports remains, says a former economic insider. Crucially, the regime is able to count on its allies, chiefly Iran and Russia, to help finance imports and fighting. Iran recently agreed to provide $3.6 billion in credit lines, oil and medicine. Even without such help, the regimes in Zimbabwe and Iraq survived squeezes as their citizens struggled to make ends meet.
In the meantime, Syrians are getting used to their war economy. Glassmakers do a roaring trade in mending blown-out windows. Mr Assad has licensed private security firms.
A new economic order, says Yezid Sayigh, of the Carnegie Middle East Centre, a Beirut think-tank, could entrench the misery. He expects to see “a return to localised and subsistence economies as well as new ways of making money”. The regime has started to deconstruct its assets, letting loyalists dominate industries and gangs loot. Some rebel warlords, especially those keener to earn cash than fight, are following a similar strategy.