Under pressure from Russia to repay a war debt of $3 billion, the Assad regime has resorted to an unconventional debt repayment method: pressuring regime-friendly business figures, who had profiteered from their relationship with the regime, to pay up represented in extorting his crony capitalists.
Under the pretext of fighting corruption, the regime has put pressure on capitalists, including Assad’s cousin Rami Makhlouf, and senior officials, forcing them to pay large amounts of money for unpaid loans and taxes, and to support the Syrian currency. As an example, the Syrian government recently froze the assets of the former minister of education, who served between 2012 and 2018, under the pretext of fighting corruption.
Assad and his government are unable to meet the debt repayment demands themselves because the country’s economy has shrunk to one-third of its pre-war size. With the large increase in military expenditures, including by Russia – reports estimate that the daily cost of Russia sorties in Syria hovered around $4 million – the debt became unsustainable.
As of 2017, the Syrian government had a national public debt of 94.8 per cent of its GDP, equalling $14.2 billion, which had increased by three per cent from the previous year. The increase of the national public debt and the inability of the Ministry of Finance and the central bank to weather the US and EU economic sanctions have brought the two institutions on the verge of bankruptcy. The reserves of foreign exchange and gold of the central bank hovered around $407 million as of January 2018, in contrast to its 2010 level, which reached $20.6 billion.
Failure of conventional methods
Conventionally, governments finance their budget deficit through either increasing taxes, issuing bonds, reducing public expenditure or monetizing the debt. None were available answers for the Syrian regime.
The tax base has shrunk in Syria as a result of the war. As of October, more than 5.6 million people have become refugees in neighbouring countries. Furthermore, as early as 2014, three million Syrians residing inside the country had lost their source of income and the unemployment rate jumped to 57%, a rate that has presumably increased as the intensity of armed clashes has mounted in the following years. Additionally, the Syrian economy has been suffering from a porous tax system with a tax evasion reaching $3.6 billion in 2017.
Moreover, as the inflation rate reached 792 per cent in 2018, government bonds became unviable. The government could not issue bonds with a satisfactory rate of return for investors, and in the extremely uncertain environment of Syria, they are not going to be an attractive prospect for investors in the near future. What’s more, even those investors who might decide to take the plunge would fine an extremely shallow secondary market: it hosts only 26 companies and the number of investors as of 2012 was only 713.
Given ongoing military operations, the scope for reducing government expenditure is narrow. And with the central bank on the verge of bankruptcy, monetization is not an option either.
The only way out of this impasse is linked to the Syrian government’s ability to recapture its oil fields, which are currently controlled by the Syrian Democratic Forces. The recapturing of the oil fields would at least reduce the import of petroleum and its derivatives, and consequently, the pressure on the government’s budget and reserve of foreign exchange. Furthermore, if the EU and the US economic sanctions were lifted, the Syrian regime may even export its oil products, increasing its income and reserve of foreign exchange permitting the government to meet its debt repayments.
In the meantime, those who had been enjoying profits siphoned out of the Syrian budget and wider economy should expect to keep paying back.