Syria’s Currency Sags Under Weight of Unrest

By Suleiman Al-Khalidi

Black smoke is seen from Homs refinery (in the background) after a pipeline carrying oil from the east of the country to the refinery was blown up, in this December 8, 2011 file handout photograph released by Syria’s national news agency SANA. Long queues to get heating oil and petrol, along with bread shortages, even in areas of the country that have not witnessed months of protests are adding to the discomfort and misery, Syrians say. Picture taken December 8, 2011. REUTERS/SANA/Handout/ Files

AMMAN, Dec 14 (Reuters) – Syrian trader Ghaith Jawhar goes daily to the old Damascus market looking for illegal money dealers hiding in the alleyways. He sells them small amounts of Syrian pounds in exchange for hard currency that has become scarcer and more expensive in the last few weeks.

“My profits and savings are now threatened. I cannot find anyone who can give me enough dollars, and those who are offering me some are giving me prohibitive rates,” Jawhar, 62, said by telephone from his small clothing shop in the Salhia commercial district of the capital.

The Syrian pound’s depreciation has accelerated in the past week as the nine-month-old uprising against President Bashar al-Assad takes its toll on the economy, after months of relative stability when the central bank managed to support the exchange rate by supplying foreign currency.

The official rate has fallen from 47 pounds to the U.S. dollar, where it stood when pro-democracy protests began in March, to around 54 pounds as authorities lowered the rate to narrow the differential with the black market. The biggest single adjustment, from 50 pounds, occurred on Dec. 5.

On the black market, the pound has slipped even further, with the rate now hovering around 59 pounds. A low of 62 pounds was hit briefly just after the Arab League slapped economic sanctions on Syria last month.

The violence in Syria is shrinking the economy and disrupting exports. Syrians’ worries about their local currency savings are compounded by lack of confidence in a tightly regulated financial sector, where even depositors in the country’s 12 privately held banks can find it hard to withdraw foreign currency holdings without encountering hefty withdrawal fees and central bank limits on foreign exchange transactions.

“There are a lot of people that want dollars because they are panicking…There is speculation and there are a lot of people taking advantage of this, and exchange dealers who are quoting high margins which is creating additional deprecation,” said a senior commercial banker in Damascus, who asked not to be named because of the sensitivity of the issue.

Bankers in Damascus, Beirut and the Gulf say the flow of funds into dollars has accelerated in the last several weeks as a Syrian insurgency, with attacks on government facilities, has begun to overshadow street protests.

Tough controls reminiscent of Syria’s past as a Soviet-style command economy force companies to convert hard currency into Syrian pounds at the official rate. Such measures make it difficult for ordinary Syrians and traders to get enough dollars from banks.

The flight to safety has pushed wealthy Syrian businessmen, most of whose wealth was already abroad, to send their remaining dollar savings in cash across borders to neighbouring Lebanon and Jordan, banking sources in the two countries said.

Some bankers said concern about the stability of the economy and banks was moving the country slowly towards a cash-based economy, with more cash hoarded at home.

“People have not withdrawn their savings, but they now prefer to take everyday spending for the month in one go and keep it at home, rather than drawing their salaries over the course of the month,” said a banker in Aleppo.

He added that the closure of banks for several days in the city of Hama during widescale protests in July had rattled depositors and undermined confidence in the banking sector.

RESERVES

Syria’s foreign currency reserves were estimated at over $17 billion before the unrest began. Up-to-date official figures are not available, but bankers believe the reserves have have now declined by at least several billion dollars, putting the central bank in a dilemma.

Between March and September, the central bank supplied dollars relatively freely to keep the exchange rate largely stable; bankers estimated it spent an average $500 million every month.

But this depleted reserves, and if they fall too far — perhaps, judging by the experience of Egypt this year, to near three months’ worth of imports — the market may worry that the central bank is running out of money and increase the pressure on the currency. Syria’s monthly imports of goods and services this year are expected to average about $1.9 billion, according to the International Monetary Fund.

“There is a limit to the intervention of the central bank. You have reserves that you cannot sacrifice,” said a Damascus-based banker at the subsidiary of a foreign bank, who is in regular contact with central bank officials.

This month’s move to align the official exchange rate closer to the black market rate appears due to a recognition that reserves could no longer be run down so rapidly to defend the currency, bankers said.

“It’s the right policy to move the official rate closer to the black market because who is going to replenish our foreign reserves?” said one banking source familiar with current thinking within Syria’s central bank management.

“The central bank has now resigned itself to the fact that it was futile to keep running to maintain the rate at around 50 pounds, and they are letting go.”

Now there are expectations in the black market for the pound to slip even further around the end of this year, and for authorities to lower the official rate accordingly.

“If things get worse, most of us expect the dollar rate could reach the 70 pounds psychological barrier, especially since there is no light at the end of the tunnel,” said a prominent Syrian economist who declined to be named.

Other economists and bankers said they still expected the central bank to spend heavily to prevent such a level being reached, partly because massive depreciation could cause a big rise of inflation.

“They cannot afford to leave the market because the moment the currency collapses it will be a tipping point once and for all, and nothing will restore confidence in it,” said Ibrahim Saif, an economist with Carnegie Middle East, a U.S. think tank.

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