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Lebanon’s cash problem is affecting the Syrian economy

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Nearly 20 percent of bank deposits in Lebanon belong to Syrian citizens, both residents and non-residents, and branches of Lebanese banks in Syria have most of their foreign currency deposited in Lebanon, according to a banking source.

27/11/2019
The Syrian pound (SYP) is plunging to record lows. On Sunday, Nov. 24 it traded at 750 SYP to the dollar on the black market compared to 633 SYP to the dollar on Oct. 1 and 535 SYP to the dollar on Jan. 1 this year. The official exchange rate remains 434 SYP to the dollar. Before the Syrian crisis began in March 2011, it was 47 SYP to the dollar.

Because of inflation, reaching 20 to 30 percent for commodities, Syrian authorities decided to increase salaries and pensions of public sector workers last week. The Syrian Central Bank also stopped providing foreign exchange funds needed to finance imports. The bank did not issue a memorandum, but instead verbally notified traders, according to a report from the website The Syria Report, which focuses on economics.


Imports to Syria through Lebanon

The most recent drop for the Syrian pound is connected to the current dollar crisis in Lebanon and restrictive measures put in place by Lebanon banks that have considerably limited the supply of dollars in Syria, according to Center for Research and Studies of Damascus, known by its Arabic acronym Madad, which is considered to be close to the Syrian government.

In a memo issued last week by Madad, Vice President of the Damascus Stock Exchange and former Syrian Central Bank official Kinan Yaghi pointed to Lebanon’s new Central Bank guidelines limiting cash transport across the country’s borders (including the airport, ports and land borders) by money changers as the source of the most recent drop in the Syrian pound’s exchange rate. The guidelines made it impossible for foreign currency to enter Syria. "This transport of funds played a central role in providing the Syrian central bank with the necessary foreign currency liquidity,” Yaghi wrote.

Before the new guideline, money changers just had to declare the amount of currency they were transporting to Lebanese Customs. Now, they need to get prior authorization from the Lebanese Central Bank or the movement of funds has to be carried up by a company approved by the Central Bank.

In September, Lebanese banks began putting in place restrictive measures to limit withdrawals due to increased demand on the dollar. These measures have intensified since the beginning of protests in mid October and have had a serious impact on economic activity, including imports to Syria. "Syrian depositors who have foreign accounts with banks in Lebanon, which amount to several tens of billions of dollars, no longer have free access to their accounts,” said Yaghi.

Twenty percent of deposits in Lebanon belong to Syrian citizens, residents or non-residents, according to a Lebanese banker familiar with the Syrian banking sector. Branches of Lebanese banks in Syria also have most of their foreign currency deposits in Lebanon, the banker said.

The fact that Lebanese banks set a ceiling on dollar withdrawals at $1,000 per week and reduced bank facilities mean that major Syrian importers and entrepreneurs no longer have free access to their cash in dollars; "especially since most of their imports to the Syrian market were made through Lebanon,” the banker added.


Increase in trafficking

The restrictions, according to Madad, have led to a demand for dollars on the Syrian black market to cover needs in Lebanon. It’s a surprising phenomenon, but seems plausible, according to the banker. "This is not at all impossible because in Lebanon we are witnessing an important phenomenon of hoarding dollars, which is not being witnessed in Syria [and] means that dollars are still available on the black market,” the banker said.

The recent fall of the Syrian pound has predictably led to higher prices in Syria, causing some shops to close down. It also seems that, for some consumer products, the price increase has been aggravated by an increase in trafficking from Syria to Lebanon. "This is particularly the case for fuel, which is heavily subsidized in Syria and which is more expensive in Lebanon. Fuel smuggling has always existed but it has been accentuated since the beginning of the liquidity crisis in Lebanon and the difficulties faced by Lebanese fuels importers, which raised concern for a potential shortage,” a researcher specializing in the Syrian economy explained to L’Orient-Le Jour (OLJ).

Damascus is also expected to face difficulties importing wheat, and local production is no longer sufficient to meet the country’s demand. According to The Syria Report, the banking restrictions in Lebanon didn’t help a call for tenders launched by the Syrian government to address the wheat shortage. The company that usually imports wheat to Syria is registered as an offshore company in Lebanon and is owned by businessman Samer Foz, a close ally to Bashar al-Assad. Foz is currently the target of sanctions imposed by the US Treasury.

There are many issues affecting the Syrian economy, according to the economic researcher. The main ones are due to structural issues with the liquidity crisis in Lebanon having a lesser effect. "The price of the Syrian pound has gradually fallen on the black market since the start of the war in 2011, and the productive sectors have been destroyed,” the researcher said.

“There is almost no local production, and trafficking has hit the roof. Syria has not deeply benefited from the resumption of trade with Iraq and Jordan because the trade balance with these countries remains deficient. The foreign currency reserves of the Syrian Central Bank have been close to zero since 2015,” he continued.

"The continuous drop of the Syrian pound is mainly due to the lack of economic policy by the government. The initiative launched by the Federation of Chambers of Commerce and the Syrian Central Bank to allow importers to carry out their transactions at the official exchange rate did not work,” the researcher concluded, adding that the sources close to Damascus have always sought to link the country's economic problems to external causes.


(This article was originally published in French in L'Orient-Le Jour ont he 25th of November)


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