## _cr05356

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---

### Executive summary — recent developments and medium-term prospects
- Recovery and near-term outlook:
  - A mild recovery—driven by a surge in investment and an upturn in exports—seems to have started since early 2004.
  - The recovery is poised to continue in 2005, supported by further strengthening of private investment and exports.
  - Inflation remained subdued, while the external position weakened, reflecting a decline in oil exports and unidentified inflows.
  - Public and external debt remains manageable, and official foreign assets cover more than 2½ years of imports.
- Medium-term oil shock:
  - In the absence of new discoveries, Syria is likely to become a net oil importer within a few years and will exhaust its oil reserves in the late 2020s.
  - Government oil revenues would be halved to about 7½ percent of GDP by 2010.
  - Net foreign exchange receipts from oil would decline from 14 percent of GDP (US$3 billion) in 2003 to nearly zero by 2010.

### Overview and structural context
- Growth and structural drivers:
  - Real economic growth averaged only 1¼ percent a year in 1999–2003.
  - Oil presently contributes 20 percent of GDP, two-thirds of exports, and half of government revenues (about 15 percent of GDP).
- Fiscal outcomes and vulnerabilities:
  - Spending rose to an amount equivalent to 33 percent of GDP by 2003, leading to a widening of the non-oil budget deficit to 18 percent of GDP.
  - Rising international oil prices starting in mid-1999 helped maintain financial stability despite declining oil production; official foreign assets were built up to over 2¾ years of imports.
- Labor market pressures:
  - The labor force is projected to increase at 4 percent a year.
  - Unemployment could exceed 20 percent by the end of the decade under current trajectories.

### Recent economic developments and 2003–04 indicators
- Growth and activity:
  - Economy slowed in 2003; mild recovery in 2004.
  - Slowdown in 2003 was limited to "1¼ percent".
  - Economy recovered in 2004, "growing at 2½–3 percent."
  - Annual employment growth declined from "4.8 percent in the 1990s to about 2.9 percent a year since 2000".
  - Unemployment rose from "9½ percent in 2000 to 14 percent in 2004."
- Prices and inflation:
  - Inflation "below 4 percent year-on-year by September" 2004; year-end 2004 "running at 10 percent" after the consumption tax.
- Fiscal developments:
  - Non-oil budget deficit widened by "2½ percentage points of GDP to 18 percent" in 2003.
  - Consumption tax introduced in September/October 2004 is "estimated to yield some 0.7 percent of GDP on an annual basis."
  - Diesel prices raised by 450 percent (from about "20 percent of international prices in 2003" closer to international levels).
  - Overall budget deficit about "2¾ percent of GDP in 2003" and estimated "close to 5 percent of GDP" in 2004.
- Monetary and financial:
  - Interest rates cut by a cumulative "2 percentage points."
  - Credit to the private sector increased by "70 percent during 2003–04"; stock of credit at end-2004 "equivalent to only 12 percent of GDP."
  - Banks’ cash and deposits at the central bank now exceed the reserve requirement by "over 200 percent."
  - Three new private banks commenced operations in 2004; at end-2004 their financial assets amounted to "2 percent of total banking assets."
- External position and debt:
  - Official net foreign assets: "US$18 billion at end 2004 (equivalent to 3¾ years of imports and 75 percent of GDP)."
  - Syrian external debt: "US$6.5 billion (equivalent to about 25 percent of GDP)" after restructuring; total public debt "39 percent of GDP."
- Exchange rate and competitiveness:
  - Parallel market rate "hovering around SL47-54 per U.S. dollar since the early 1990s."
  - Real effective exchange rate in the parallel market back at its 1995 level.

### Medium-term outlook and oil-sector projections
- Timing and magnitudes:
  - Syria likely to become a net oil importer in "4–6 years" (from 2005) under baseline assumptions.
  - Syria will exhaust its oil reserves towards "the late 2020s."
  - Government oil revenues projected to fall from "15¼ percent of GDP in 2003 to 7½ percent by 2010, and to 3 percent by 2020."
  - Net foreign exchange receipts from oil projected to decline from "14 percent of GDP (US$3.0 billion) in 2003 to nearly zero in 2011."
  - Energy import bill could reach "8 percent of GDP in 2020."
- Production decline:
  - Oil production expected to decline at an average annual rate of "5½ percent" in the coming five years, exerting a contractionary impact on overall GDP of "about 1 percent."
- Natural gas prospects:
  - Natural gas: "4.8 billion of cubic meters in 2004."
  - Projected to "10.5 billion cubic meters by 2010 and to 11.8 billions by 2015."
  - If stabilized at that level, reserves will last another "10 to 15 years, depending on the level of reserves."
  - Target increase in share of natural gas in electricity generation to "75 percent by 2011."

### Fiscal and public enterprise (PE) positions — findings and key figures
- PEs and employment:
  - PEs account for about "30–35 percent of GDP."
  - PEs employed "296 thousand people in 2002" out of total estimated employment of "4.8 million people."
  - Civil servants numbered "873 thousands" and account for "18 percent of total employment."
- PEs’ fiscal impact:
  - PEs’ operational deficits covered by the budget; on-lending has seldom been repaid and often converted into government participation.
  - PEs’ on-lending has at times contributed as much as "35 percent of total non-oil budget deficits."
  - Contribution of PEs to non-oil budget deficit: 2000: 22.9; 2001: 33.8; 2002: 35.0; 2003: 26.7 (percent of non-oil deficit).
- Selected budgetary accounts (percent of GDP):
  - Revenue: 2000: 27.2; 2001: 32.1; 2002: 29.8; 2003: 30.4.
  - Of which Oil: 2000: 12.3; 2001: 18.6; 2002: 13.9; 2003: 15.2.
  - Expenditure: 2000: 28.7; 2001: 29.7; 2002: 31.4; 2003: 33.1.
  - Capital expenditure: 2000: 10.5; 2001: 11.6; 2002: 13.4; 2003: 14.4.
  - Overall balance: 2000: -1.4; 2001: 2.4; 2002: -1.6; 2003: -2.7.
  - Non-oil balance: 2000: -13.8; 2001: -16.1; 2002: -15.4; 2003: -17.9.
  - Government proper: 2000: -10.6; 2001: -10.7; 2002: -10.0; 2003: -13.2.
  - Public enterprises: 2000: -3.1; 2001: -5.4; 2002: -5.4; 2003: -4.8.

### Policy discussions — two inter-related medium-term challenges and recommended responses
- Challenge 1 — Maintain fiscal sustainability and financial stability:
  - Develop a credible fiscal consolidation strategy within a transparent medium-term fiscal framework (MTFF) targeting a steady improvement in the non-oil budget balance.
  - Comprehensive tax and expenditure reforms recommended:
    - Adopting a broad-based VAT.
    - Overhauling the price subsidy system.
    - Downsizing an overstaffed and ill-paid civil service.
    - Restructuring/privatizing public enterprises.
  - Financial stability measures recommended:
    - Strengthen the role of the central bank in formulating and implementing monetary and foreign exchange policies, with a primary focus on price stability.
    - Re-orient the activities of the Commercial Bank of Syria toward traditional commercial banking.
- Challenge 2 — Boost growth, diversify production and exports, and absorb labor-force entrants:
  - Accelerate structural reforms to enhance private-sector incentives and financial intermediation capacity.
  - Priority reforms include:
    - Further trade liberalization.
    - Foreign exchange unification and current account convertibility.
    - Nurturing an open, competitive and resilient financial sector.
    - Institutional reforms to strengthen competition, good governance, property rights, and the rule of law.

### Fiscal consolidation specifics and MTFF guidance
- Staff recommendation:
  - MTFF should target a steady improvement in the non-oil budget balance.
  - Additional yearly adjustments of about "1¼ percentage points of GDP of the non-oil budget deficit" be sustained over the next five years to contain public debt rise and assist external adjustment.
- Tax reform progress and actions:
  - Comprehensive review and simplification of "80 percent of tax legislation."
  - Far-reaching income-tax reform in 2003.
  - Introduction of a new consumption tax; preparatory steps for VAT launch within "2–3 years" (large taxpayer unit, single taxpayer identification number, self-assessment procedures).
  - Staff urges sustaining revamping of tax administration and removing tax exemptions.

### Public expenditure, PEs, and subsidy reforms
- Recommended focus:
  - Comprehensive review of public expenditure to identify durable savings while enhancing supply-side capacity.
  - Overhaul the subsidy system: explicit subsidies and implicit energy subsidies large (explicit subsidies about "4 percent of GDP in 2003"; implicit energy subsidies estimated at "5.8 percent in 2003").
  - Align civil service wages to market levels while expanding non-government employment opportunities.
  - Deepen PE reform, including privatizing selected enterprises and severing recurrent links between PEs and the budget once state-bank reform is underway.

### Monetary policy, financial sector, and exchange regime reforms
- Monetary and financial policy:
  - Maintain current monetary stance; encourage state banks to expand loans to private sector while strengthening risk management.
  - Launch a government securities market and use swap operations to replace old “treasuries” held by the central bank with marketable securities.
  - Introduce liquidity-management instruments and use reserve requirements actively.
- Exchange rate and trade liberalization:
  - Authorities committed to unifying the exchange rate system; staff urges swift move toward full unification and current account convertibility.
  - Recommended elimination of exchange restrictions under Article XIV, Section 2 and measures subject to approval under Article VIII as balance of payments permits.
  - Trade reforms: reduce maximum tariff rate (from 235 percent/230 percent cited to 50 percent), compress negative list, streamline customs procedures, and tackle non-tariff barriers.

### Financial sector development and institution-building
- Progress:
  - Entry of private banks (three licensed/started in 2004; three more licensed), opening of insurance market, Islamic banking permitted, regulations adopted on bank accounting/liquidity/internal audits.
- Remaining issues:
  - 98 percent of financial assets still held by state banks (earlier box); poor accounting standards impair supervision.
- Staff recommendations:
  - Develop comprehensive state-bank restructuring strategies and improve credit-risk assessment capacity.
  - Reconsider expanding Savings Bank lending given lack of commercial-banking expertise.

### Illustrative medium-term scenarios and trade-offs
- Scenario A — Target constant foreign assets:
  - GDP growth slows; inflation-cum-currency depreciation spiral emerges; government debt rises rapidly.
  - Selected macro outcomes (2005–2010): GDP growth: 3.8, 3.6, 3.2, 2.6, 2.6, 2.5; CPI inflation: 10.0, 10.8, 14.0, 18.5, 28.0, 36.5; Nominal exchange rate (LS/US$): 51.8, 57.5, 68.1, 82.2, 106.2, 144.3; Government debt (percent of GDP): 41.4, 45.2, 51.0, 57.4, 64.8, 73.1.
- Scenario B — Target stable nominal exchange rate:
  - GDP growth sustained at higher rates but foreign assets depleted; cumulative loss to 2010 could reach nearly US$10 billion; eventual inflation-cum-depreciation spiral once reserves exhausted.
  - Selected macro outcomes (2005–2010): GDP growth: 3.8, 4.0, 4.0, 4.0, 4.0, 4.0; CPI inflation: 10.0, 5.0, 5.0, 5.0, 5.0, 5.0; Nominal exchange rate (LS/US$): 51.8, 53.5, 55.0, 56.5, 58.0, 59.5; Net foreign assets (US$ billion): 18.1, 17.9, 17.2, 15.9, 14.2, 11.9; Government debt (percent of GDP): 41.4, 45.0, 48.6, 52.9, 57.8, 63.1.
- Scenario C — Accelerated structural reforms and fiscal consolidation:
  - Higher productivity and FDI, stronger non-oil exports, controlled borrowing needs, inflation kept at bay; allows imports expansion consistent with higher growth.

### Debt dynamics and stress tests — selected indicators
- Public sector debt (percent of GDP): 2004: 31.8; 2005: 41.4; 2006: 45.0; 2007: 48.6; 2008: 52.9; 2009: 57.8; 2010: 63.1.
- Primary deficit projected rising to "7.3 percent" of GDP by 2010 (projected).
- Gross financing need rising to "27.6 percent of GDP by 2010."
- Sensitivity analysis: assuming oil prices US$10 lower, net foreign assets and government debt evolve (selected entries): Net foreign assets (US$ billion): 18.1, 17.6, 16.6, 15.2, 13.3, 10.9; Government debt (percent of GDP): 41.4, 46.0, 49.9, 54.2, 58.9, 63.8.

### Subsidies, fiscal cost, and recommendations
- Fiscal cost of subsidies and energy pricing:
  - Explicit subsidies: about "4 percent of GDP in 2003."
  - Implicit energy subsidies estimated at "5.8 percent in 2003."
  - Net subsidies estimated at "3.7 percent of GDP in 2004."
  - Oil price subsidies projected to decline from "6½ percent of GDP in 2005 to 1¾ percent in 2010 and to less than ½ percent in 2015" under staff assumptions.
  - Staff recommends subsidy overhaul as part of fiscal consolidation.

### Data, statistics, and technical assistance needs
- Data shortcomings:
  - Serious deficiencies in quality, coverage, and timeliness of NIA, prices, fiscal data, monetary statistics, and BOP.
  - BOP compiled annually by CBS with about an eight-month lag; trade data reported quarterly with a six-month lag.
  - BOP presented in BPM5 format, but compilation not entirely consistent with BPM5 methodology.
- Recommended actions and TA:
  - Expand CPI coverage to 3,000 items; launch a new survey of economic activity; subscribe to GDDS and nominate a national coordinator.
  - Technical assistance listed/planned (examples): STA: Price statistics — October 2005 (planned); MFD: Long-term advisor on securities market — September 2005 (planned); METAC: National income accounts — Ongoing; FAD: Value-added tax — July 2004; MFD/LEG: AML/CFT — Feb/March 2005.

### Staff appraisal — risks and priorities
- Progress achieved:
  - Liberalization of prices, trade, and foreign exchange; streamlining of tax system; broadened private-sector activity including banking and insurance.
- Remaining challenges and risks:
  - Pace and scope of reforms insufficient relative to medium-term challenge of shrinking oil sector.
  - Risk: oil reserves may be exhausted before reforms generate new growth, potentially leading to fiscal deterioration, low growth, rising unemployment, and social unrest.
- Core recommendations:
  - Implement a strong and credible fiscal consolidation strategy within a transparent MTFF targeting steady improvement in the non-oil budget balance.
  - Accelerate structural reforms: tax-administration revamp, subsidy overhaul, PE restructuring/privatization, exchange-rate unification and current account convertibility, financial sector restructuring, and launch of government securities market.

*Source: _cr05356 - 2003/2004–05 IMF staff report (Article IV consultation and annexes).*

### 2003. These weaknesses continue to hamper the staff’s ability to conduct economic

### _cr05356 - 2003. These weaknesses continue to hamper the staff’s ability to conduct economic

### Executive Summary — Recent developments and medium-term prospects
- Recovery and near-term outlook
  - A mild recovery—driven by a surge in investment and an upturn in exports—seems to have started since early 2004.
  - The recovery is poised to continue in 2005, supported by further strengthening of private investment and exports.
  - Inflation remained subdued, while the external position weakened, reflecting a decline in oil exports and unidentified inflows.
  - Public and external debt remains manageable, and official foreign assets cover more than 2½ years of imports.
- Medium-term oil shock
  - In the absence of new discoveries, Syria is likely to become a net oil importer within a few years and will exhaust its oil reserves in the late 2020s.
  - Government oil revenues would be halved to about 7½ percent of GDP by 2010.
  - Net foreign exchange receipts from oil would decline from 14 percent of GDP (US$3 billion) in 2003 to nearly zero by 2010.

### I. Overview and key issues — Performance and structural context
- Growth and structural drivers
  - Real economic growth averaged only 1¼ percent a year in 1999–2003, lagging population growth and leading to a decline in living standards and an increase in unemployment.
  - Oil presently contributes 20 percent of GDP, two-thirds of exports, and half of government revenues (about 15 percent of GDP).
- Fiscal outcomes and vulnerabilities
  - Spending rose to an amount equivalent to 33 percent of GDP by 2003, leading to a widening of the non-oil budget deficit to 18 percent of GDP.
  - Rising international oil prices starting in mid-1999 helped maintain financial stability despite declining oil production; official foreign assets were built up to over 2¾ years of imports.
- Labor market pressures
  - The labor force is projected to increase at 4 percent a year.
  - Unemployment could exceed 20 percent by the end of the decade under current trajectories.

### Policy discussions — Two inter-related medium-term challenges and recommended policy responses
- Challenge 1 — Maintain fiscal sustainability and financial stability
  - Staff welcomed recent tax and expenditure measures, but recommended developing these into a credible fiscal consolidation strategy within a transparent medium-term fiscal framework targeting a steady improvement in the non-oil budget balance.
  - Comprehensive tax and expenditure reforms recommended include:
    - Adopting a broad-based VAT.
    - Overhauling the price subsidy system.
    - Downsizing an overstuffed and ill-paid civil service.
    - Restructuring/privatizing public enterprises (PEs).
  - Financial stability measures recommended:
    - Strengthening the role of the central bank in formulating and implementing monetary and foreign exchange policies, with a primary focus on price stability.
    - Re-orienting the activities of the commercial bank of Syria toward traditional commercial banking.
- Challenge 2 — Boost growth, diversify production and exports, and absorb labor-force entrants
  - Accelerate structural reforms to enhance private sector incentives and financial intermediation capacity.
  - Priority reforms include:
    - Further trade liberalization.
    - Foreign exchange unification and current account convertibility.
    - Nurturing an open, competitive and resilient financial sector.
    - Institutional reforms to strengthen competition, good governance, property rights, and the rule of law.

### Boxes and institutional findings
- Box 1 — Fund policy recommendations and implementation (summary)
  - Policy recommendations supportive of transition to a market economy, improving price signals, promoting private sector activity, and strengthening the medium-term fiscal outlook.
  - Progress achieved in price, trade, and foreign exchange liberalization (reduction in number of official exchange rates; surrender requirement phased out; implicit price subsidies largely eliminated) but Syria has yet to unify its exchange rate market and adopt current account convertibility.
  - Financial sector: comprehensive banking regulatory framework and supervision capacity built; 98 percent of financial assets are still held by state banks; government has yet to launch a T-bill market.
  - Tax field: income tax simplified and marginal rates lowered; ad valorum consumption tax introduced; tax regime remains complex with widespread exemptions.
  - Public administration and PEs: limited progress; overstuffed and ill-paid civil service and PEs operating under soft budget constraints continue to hinder reform implementation.
- Box 2 — Size and fiscal contribution of PEs
  - PEs account for about 30–35 percent of GDP.
  - PEs employed 296 thousand people in 2002 out of a total estimated employment of 4.8 million people.
  - The 873 thousands civil servants account for another 18 percent of total employment.
  - PEs’ operational deficits are covered by the budget and most investment needs met by on-lending by the budget; on-lending has seldom been repaid and often converted into government participation.
  - PEs’ on-lending has at times contributed as much as 35 percent of total non-oil budget deficits.
- Budgetary accounts (selected rows, in percent of GDP)
  - Revenue: 2000: 27.2; 2001: 32.1; 2002: 29.8; 2003: 30.4
  - Of which Oil: 2000: 12.3; 2001: 18.6; 2002: 13.9; 2003: 15.2
  - PEs' surplus: 2000: 4.6; 2001: 3.4; 2002: 4.0; 2003: 3.5
  - Taxes and other revenues: 2000: 10.3; 2001: 10.2; 2002: 12.0; 2003: 11.7
  - Expenditure: 2000: 28.7; 2001: 29.7; 2002: 31.4; 2003: 33.1
  - Current expenditure: 2000: 18.2; 2001: 18.1; 2002: 18.0; 2003: 18.7
    - Transfers to public enterprises (of current): 2000: 1.6; 2001: 1.5; 2002: 1.5; 2003: 1.2
  - Capital expenditure: 2000: 10.5; 2001: 11.6; 2002: 13.4; 2003: 14.4
    - On-lending to public enterprises (of capital): 2000: 6.2; 2001: 7.4; 2002: 7.9; 2003: 7.1
  - Overall balance: 2000: -1.4; 2001: 2.4; 2002: -1.6; 2003: -2.7
  - Non-oil balance: 2000: -13.8; 2001: -16.1; 2002: -15.4; 2003: -17.9
  - Government proper: 2000: -10.6; 2001: -10.7; 2002: -10.0; 2003: -13.2
  - Public enterprises: 2000: -3.1; 2001: -5.4; 2002: -5.4; 2003: -4.8
  - Contribution of PEs to non-oil budget deficit: 2000: 22.9; 2001: 33.8; 2002: 35.0; 2003: 26.7

### Key risks and medium-term outlook elements
- Major fiscal and balance of payment shock from the decline in oil production and dwindling of oil reserves.
- Without new discoveries, net oil exports and government oil revenues are projected to fall sharply by 2010, substantially widening the policy and adjustment requirements to preserve fiscal and external sustainability.

*Source: _cr05356 - 2003 (IMF staff report).*

### 4.5 percent a year would

### 4.5 percent a year would

### Context and political backdrop
- Article IV consultation discussions took place against difficult political circumstances following economic sanctions imposed by the U.S. in May 2004 and a U.N. Security Council resolution calling for the withdrawal of Syrian troops from Lebanon.
- The Ba’ath Party Congress held in June 2005 renewed commitment to reforms and called on the government to establish a timetable to push reforms forward.
- "4.5 percent a year would need to be sustained over the next 10 years to reverse this trend—a daunting challenge."

### Recent economic developments (2003–04)
- Growth and activity
  - The economy slowed in 2003 and a mild recovery seems to have started in 2004.
  - The slowdown in 2003 reflected declining oil production, a poor harvest, and the impact of the conflict in Iraq on exports and investment.
  - The slowdown in 2003 was limited to "1¼ percent".
  - The economy recovered somewhat in 2004, "growing at 2½–3 percent."
  - A boost in public sector wages and a recovery of agriculture contributed to the upturn.
  - Annual employment growth declined from "4.8 percent in the 1990s to about 2.9 percent a year since 2000", while unemployment rose from "9½ percent in 2000 to 14 percent in 2004."
- Prices and inflation
  - Inflation picked up in 2003 due to a nominal effective depreciation of the Syrian pound (driven by the appreciation of the euro) and the drought.
  - Inflation decelerated in early 2004 and was "below 4 percent year-on-year by September".
  - The introduction of the consumption tax in October 2004 contributed to a rise in prices in Q4 2004, with inflation at year-end "running at 10 percent."
- Fiscal developments
  - Fiscal policies remained expansionary in 2003 and 2004.
  - The non-oil budget deficit widened by "2½ percentage points of GDP to 18 percent" in 2003.
  - The wage bill increase reflected carry forward from the "20 percent wage increase in mid-2002" and additional hiring.
  - The consumption tax introduced in September 2004 is "estimated to yield some 0.7 percent of GDP on an annual basis."
  - Diesel prices were raised closer to international levels (diesel prices, which were about "20 percent of international prices in 2003, were raised by 450 percent").
  - The overall budget deficit was about "2¾ percent of GDP in 2003" and is estimated at "close to 5 percent of GDP" in 2004 due to decline in oil revenues.
- Government employment and wages (Box 3)
  - Wage bill increased from "3½ percent of GDP in 1997 to 5.6 percent in 2003."
  - Salaries remain "40 to 45 percent lower than those in the private sector."
  - Government employment is "close to 20 percent of total employment."
- Monetary and financial developments
  - Credit policy was eased in 2003–04: interest rates were cut by a cumulative "2 percentage points."
  - Credit to the private sector increased by "70 percent during 2003–04", but the stock of credit to the private sector at end-2004 was "equivalent to only 12 percent of GDP."
  - The expansion of credit was facilitated by monetization of part of government debt held by state banks, contributing to a surge in high powered money.
  - Banks’ cash and deposits at the central bank now exceed the reserve requirement by "over 200 percent."
  - Three new private banks commenced operations in 2004; at end-2004 their financial assets amounted to "2 percent of total banking assets."
  - Agricultural bank restructuring due to collection difficulties involved loans "equivalent to about 2 percent of GDP."
- External position and debt
  - The external position weakened in 2003–04 as the oil balance and unidentified inflows declined.
  - The stock of official net foreign assets stood at "US$18 billion at end 2004 (equivalent to 3¾ years of imports and 75 percent of GDP)."
  - BIS data suggest Syrian banking system’s assets may be higher ("US$24 billion"); inconsistency to be pursued.
  - Following restructuring of old Soviet-era debt in late 2004 and early 2005, Syria’s external debt stands at "US$6.5 billion (equivalent to about 25 percent of GDP)," while total public debt stands at "39 percent of GDP."
- Exchange rate and competitiveness
  - The Syrian pound remained stable relative to the U.S. dollar in the parallel market since the early 1990s; parallel market rate has been "hovering around SL47-54 per U.S. dollar since the early 1990s."
  - Real effective exchange rate in the parallel market is back at its 1995 level.
  - Price competitiveness improved vis-à-vis Turkey, Lebanon, and Jordan; deteriorated vis-à-vis Egypt and Tunisia; unchanged vis-à-vis Morocco.

### Prospects for 2005
- Growth and external
  - Moderate growth likely to continue in 2005 despite a troubled international environment.
  - Surge in 2004 investment approvals and strong tourist arrivals indicate further strengthening of private investment and exports.
  - Preliminary first-quarter data show a "25 percent increase in arrivals over the same period of 2004."
  - Current account would weaken further reflecting decline in volume of oil exports, partly offset by buoyant tourism.
- Inflation and fiscal policy
  - Staff projects inflation of "4 percent (December on December)" for 2005.
  - Staff also projects an average inflation of "10 percent in 2005", reflecting carry forward from one-off tax-induced adjustment in late 20004 (the text contains both projections; both figures are reported as presented).
  - Fiscal policies are expected to be somewhat tighter in 2005: with 2004 tax measures and planned tightening of investment spending, the 2005 budget aims to lower the budget deficit significantly.
  - Staff projects a "1 percentage point improvement in the non-oil budget deficit to 17 percent of GDP" in 2005.
  - Improvement in the overall budget balance is limited to "some ½ percentage point of GDP" because of further decline in oil revenues.

### Medium-term outlook and risks
- Oil sector prospects
  - Under WEO-based oil export price assumptions and available information on proven energy reserves and authorities’ extraction profile, staff projects that in the absence of new discoveries:
    - Syria is likely to become a net oil importer in "4–6 years."
    - Syria will exhaust its oil reserves towards "the late 2020s."
  - Oil-related fiscal and external impacts:
    - Government oil revenues would fall from "15¼ percent of GDP in 2003 to 7½ percent by 2010, and to 3 percent by 2020."
    - Net foreign exchange receipts from the oil sector would decline from "14 percent of GDP (US$3.0 billion) in 2003 to nearly zero in 2011."
    - The energy import bill could reach "8 percent of GDP in 2020."
  - In the coming five years oil production is expected to decline at an average annual rate of "5½ percent", exerting a contractionary impact on overall GDP of "about 1 percent."
- Policy implications
  - The outlook underscores the need to accelerate structural reforms to create new sources of growth and foreign exchange earnings and to implement a medium-term fiscal consolidation strategy to preserve fiscal solvency.
  - Without stepped up structural and fiscal reforms:
    - Growth is unlikely to exceed "4–4½ percent" — short of what is needed to contain the trend increase in unemployment.
    - Financial stability could only be maintained for few more years by drawing down international reserves.
  - Staff presented illustrative scenarios highlighting risks and critical trade-offs (referenced as Annex IV).

### Report on the discussions (policy focus)
- Authorities’ stance
  - Authorities agreed that the key challenges are low growth and adverse prospects for the energy sector.
  - Authorities stressed commitment to continuing the reform agenda while maintaining financial stability and emphasized measures to modernize the economy and increase integration with the rest of the world.
- Policies to maintain financial stability — Fiscal consolidation
  - Staff supported recent tax and expenditure measures but recommended these be part of a comprehensive fiscal consolidation strategy within a medium-term fiscal framework (MTFF).
  - Staff suggested the MTFF should target a steady improvement in the non-oil balance.
  - Building on the adjustment during 2005, staff recommended "additional yearly adjustments of about 1¼ percentage points of GDP of the non-oil budget deficit" be sustained over the next five years to:
    - Contain the rise in public debt,
    - Contribute to external accounts’ adjustment,
    - Strengthen the long-term fiscal outlook.
  - Authorities agreed on the need for further fiscal consolidation but did not commit to a specific pace, magnitude, or composition.
- Box 4: MTFF objective discussion
  - Two possible objectives for MTFF: (i) maintaining a budget balance (existing framework), or (ii) achieving a steady improvement in the non-oil budget balance.
  - If oil revenues decline smoothly, both rules give similar outcomes.
  - If oil revenues level off before declining abruptly, a balanced budget rule is inferior because it postpones adjustment; targeting steady improvement in the non-oil balance would save some oil revenues as a buffer.
  - Given uncertainty about extraction profiles and international oil prices, staff argues "a steady improvement in the non-oil budget balance as the objective of the medium-term fiscal framework" would counter time-inconsistent and short-sighted policies and prevent oil price volatility from contributing to output volatility.

*IMF staff report: Article IV consultation discussions and economic analysis as presented in the supplied content.*

### 19.      In this context, the

### _cr05356 - 19.      In this context, the

### Fiscal consolidation and tax reform
- Efforts should remain focused on tax reform as a main pillar of fiscal consolidation.
- Progress reported:
  - Comprehensive review and simplification of 80 percent of tax legislation.
  - Far-reaching income-tax reform undertaken in 2003.
  - Introduction of a new consumption tax and recent broadening of its base.
  - Recent measure to reduce stamp duties on financial transactions.
- Preparatory measures underway:
  - Create a large taxpayer unit.
  - Implement a system of a single taxpayer identification number.
  - Establish procedures for self-assessment in preparation for launching the VAT within 2–3 years.
- Staff recommendations:
  - Sustain revamping of tax administration to prepare for the VAT.
  - Further simplify tax provisions and remove tax exemptions to increase efficiency and lower compliance costs.

### Public expenditure and public enterprise (PE) reform
- Recent budgetary-procedure strengthening to improve efficiency of investment spending.
- Next step: comprehensive review of public expenditure to identify durable savings while enhancing supply-side capacity; review could focus on:
  - Overhauling the existing subsidy system (excessive costs suggest potential for large efficiency gains and fiscal savings).
  - Reforming the civil service to address overstaffing, low pay, lack of skills and performance.
- Authorities’ stance:
  - Pace of reform should avoid disruption; maintain an appropriate level of social protection.
  - Concerned about layoffs before private sector activity improves labor market prospects.
- Public enterprise reforms:
  - New PE law passed in late 2004 granting PEs greater autonomy (including freedom to borrow, contract private management teams, and engage in joint ventures with the private sector).
  - Authorities aim to restructure enterprises that can be restructured and develop case-by-case solutions, including liquidation for others, while avoiding added labor-market pressure.
- Staff encouragement:
  - Deepen PE reform, including privatizing selected enterprises.
  - Allow PEs full flexibility in employment decisions, and in wage and pricing policies.
  - Sever links between PEs and the budget once state-bank reform is firmly underway.

### Monetary policy and monetary framework
- Credit policy:
  - Current stance of monetary policy to be maintained; state banks encouraged to expand loans to the private sector.
  - Staff view: present level of interest rates seems appropriate; inflation remains subdued and there are no indication of weakening private savings.
  - Given low level of private sector credit, continuation of current pace of credit expansion would not carry significant inflationary risks.
  - Caution urged: strengthen risk management capacity at state banks to avoid accumulation of bad debts from rapid credit expansion and politically-motivated loans.
- Monetary framework issues and reforms:
  - Commercial Bank of Syria (CboS) acting de facto as banker and fiscal agent complicates policy coordination.
  - Plans: reorient CBoS activities towards commercial banking, make the CB act as fiscal agent, improve coordination of liquidity and public debt management, and move the bulk of foreign assets of the CBoS to the CB.
  - Staff recommendations:
    - Swiftly launch a government securities market to support financial sector development and market-determined interest rates.
    - Use swap operation to replace old “treasuries” held by the central bank with marketable securities, enabling the central bank to buy the bulk of the CboS’s net foreign assets.
    - Introduce new liquidity-management instruments such as short-term certificates of deposits or deposit facilities.
    - Enforce and use reserve requirements more actively.
    - Staff offered technical assistance.

### Structural reforms to boost private investment
- Diagnosis:
  - Sharp decline in private investment identified as most immediate cause for low growth.
  - Abundance of domestic savings (significant current account surpluses and large reported holdings of Syrian private assets abroad) suggests the main constraint is not investible funds but weaknesses in:
    - Regulatory environment.
    - Tax, trade and exchange regimes.
    - Financial sector.
    - Public administration.
    - Government monopolies and poor governance.
- Policy focus:
  - Strengthen incentives for private (domestic and foreign) investment.
  - Move further on trade and foreign exchange liberalization and strengthen market institutions.
  - Enhance financial sector intermediation.

### Foreign exchange and trade liberalization
- Exchange rate unification:
  - Authorities committed to unifying the exchange rate system.
  - Important step: banks allowed to finance private sector imports of raw materials and intermediate goods.
  - CBoS stopped quoting the “private sector rate” and started quoting a band within which newly allowed transactions will take place.
  - Starting in January 2005, use of the most appreciated official rate limited to debt service payments under certain bilateral payments agreements; remaining most appreciated rate adjusted to within 3–4 percent of the parallel market rate.
  - Staff welcomed steps and encouraged swift move toward full unification and current account convertibility; given narrow spread, attendant risks appear limited.
  - Authorities plan to adopt a managed float after unification; flexibility within a relatively narrow band desirable initially to allow exchange rate to serve as nominal anchor.
  - Staff suggested the CB define and clarify modalities of intervention in the foreign exchange market.
- Trade liberalization progress:
  - Further reduction of tariff rates, compression of the negative list, and streamlining customs procedures (thirteen separate documents merged into a single declaration form).
  - Breakthrough: initialization of the Syria/EU Association Agreement in September 2004.
  - Free-trade agreement signed with Turkey.
  - Greater Arab Free Trade Area provisions fully phased in as scheduled in early 2005.
  - New Customs Law and tariff structure envisaged: reduction of maximum tariff rate from 230 percent to 50 percent and the number of tariff bands from 10 to 5.
  - Staff caution: tariff reduction may have limited growth benefits unless accompanied by measures to reduce widespread non-tariff barriers (NTBs).

### Financial sector development
- Private sector entry and regulatory changes:
  - Three private banks started operations in 2004 and plan further expansion.
  - Three additional private banks licensed to start operations before the end of this year.
  - Law passed opening insurance industry to the private sector; first private insurance company since 1960 has started operations.
  - Decrees allow Islamic banking and greater flexibility in state-bank operations.
  - Regulations adopted on bank accounting, liquidity management, and internal audits; CB’s supervision capacity strengthened.
  - Persistent problem: poor accounting standards for banks impair supervision.
- Staff recommendations:
  - Develop a comprehensive state-bank restructuring strategy.
  - Individual strategies to improve each state bank’s structure, operations, and performance and strengthen credit-risk assessment capacity.
  - Reconsider plans encouraging the Savings Bank to step up lending activities given its traditional focus on deposit mobilization and lack of commercial-banking expertise.

### Institutional and legal reforms
- Broader agenda components:
  - Strengthen competition, good governance, property rights, and the rule of law.
  - Judiciary reform to strengthen independence and improve handling of business-related penal cases.
  - Laws being prepared on trade, corporate code, commercial arbitration, protection of commercial and industrial ownership rights, competition and anti-monopoly, and foreign direct investment.
  - The 10th congress of the Ba’ath party gave particular prominence to a resolution to fight corruption.
- AML/CFT:
  - Passage of amended AML/CFT law noted.
  - Staff encouraged review of the LEG/MFD technical assistance report “Measures to Combat Money Laundering and the Financing of Terrorism” (April 2005).

### Statistical improvements
- Progress acknowledged but serious deficiencies remain in quality, coverage, and timeliness of NIA, prices, and fiscal data.
- Authorities plan:
  - Expand coverage of the CPI to 3,000 items.
  - Launch a new survey of economic activity to improve NIA statistics.
  - Staff encouraged subscription to the Generalized Data Dissemination System (GDDS) and nomination of a national coordinator to develop metadata.
- Fund technical assistance provided through METAC and other channels.

### Staff appraisal: risks and priorities
- Progress achieved:
  - Liberalization of prices, trade, and foreign exchange; streamlining of tax system; broadened private-sector activity including banking and insurance.
- Remaining challenges:
  - Pace and scope of reforms insufficient given medium-term challenges; shrinking oil sector has contracted growth potential.
  - Risk: oil reserves may be exhausted before reforms generate new growth; potential lock-in to financial volatility, fiscal deterioration, low growth, rising unemployment, and social unrest.
- Recommended comprehensive program:
  - Fiscal consolidation and accelerated structural reforms urgently needed.
  - Strong and credible fiscal consolidation strategy within a transparent MTFF to maintain financial stability and fiscal solvency.
  - MTFF should target steady improvement in the non-oil budget balance with government’s inter-temporal budget constraint in perspective.
  - Shift macroeconomic policy paradigm from redistributing oil rent to using instruments for short-term macroeconomic stabilization and financial stability.
- Specific priorities:
  - Develop a comprehensive fiscal reform package including sustained tax-administration revamp and subsidy overhaul.
  - Align civil service wages to market levels while expanding non-government employment opportunities.
  - Implement a comprehensive PE strategy including anti-trust legislation, removal of monopolies, equal access to goods markets and government contracts, and consideration of privatizing/liquidating selected PEs.
  - Monitor credit developments and watch for inflationary risks from rapid credit expansion given weak state-bank risk-management capacity and lack of national credit-scoring tools.
  - Implement decision to move bulk of CBoS foreign assets to the CB and provide CBoS with remunerated financial instruments in return.
  - Coordinate CB and ministry of finance on liquidity and public debt management.
  - Launch government securities market to provide an efficient yield curve and a risk-free rate essential for proper pricing of financial assets.

*Source: _cr05356 - 19.      In this context, the (PDF chapter/section).*

### 41.      The steady progress toward exchange rate unification is welcome. However,

### _cr05356 - 41.      The steady progress toward exchange rate unification is welcome. However,

### Exchange rate unification and convertibility
- Finding: "The steady progress toward exchange rate unification is welcome."
- Recommendation: "Syria should move more quickly to adopt current account convertibility and full unification."
- Rationale and expected benefits:
  - "Full unification would simplify the exchange regime significantly, bring to the official channels a large share of financial transactions, reduce transaction costs for the private sector, and send a strong signal to the markets."
- Urgent policy push: Eliminate exchange restrictions under Article XIV, Section 2 and exchange measures subject to approval under Article VIII as balance of payments permits.
- Staff position: "Absent specific measures to eliminate these exchange restrictions and multiple currency practices in a timely manner, the staff does not recommend that the Executive Board grant approval of their retention. The staff urges the authorities to eliminate these restrictions and multiple currency practices without delay."

### Trade policy, tariffs, and import regime
- Finding: "Despite significant steps taken recently, the trade system remains complex and quite restrictive."
- Recommendations:
  - "Introduce promptly the new tariff structure, which envisages a reduction of the maximum tariff rate from 235 percent to 50 percent and the number of tariff lines from 10 to 5–6."
  - "Compress the negative list of importable goods, and tackle trade-related barriers, which hamper the competitiveness of Syrian exports."

### Financial sector reforms and banking
- Positive developments welcomed:
  - "Staff welcomes the recent measures to promote an open and competitive financial sector capable of meeting the growing needs of a market economy."
  - "Opening the insurance sector for private initiative is an important sign of the commitment of the authorities to promoting the role of the private sector in the economy."
  - "Cuts in taxes on financial intermediation will provide a useful boost to this nascent sector."
  - "The introduction of Islamic banking will meet a need among large segments of the population and would bring back to the formal channels a significant share of financial intermediation, which had been diverted into informal, inefficient, and potential unsafe cash credit market."
- Recommendations / priorities:
  - "Give top priority to restructuring state-owned banks to stem losses and promote competition."
  - "Continue to work on strengthening bank regulation and supervision and banks’ accounting standards and carefully screen entry of new banks."

### Institutional reforms, governance, and AML/CFT
- Findings and recommendations:
  - "Staff welcomes the broader agenda of institutional reforms."
  - "The recent resolution of the governing party to fight corruption and strengthen governance is welcome and should be followed up actively."
  - "Work on strengthening the legal framework for a market economy should be stepped up."
  - "The authorities are also encouraged to continue their efforts to refine and upgrade their legislative and regulatory framework for AML/CFT to bring it in line with international standards."

### Data coverage and statistical shortcomings
- Finding: "There are still important shortcomings in the coverage, timeliness, and consistency of economic data in most sectors, including financial soundness indicators, which hinder monitoring of economic developments, in-depth economic analysis, and the staff’s ability to conduct effective surveillance."
- Development: "Staff is encouraged by the greater willingness of the authorities to share available data on a regular basis."
- Recommendation: "Encourages the authorities to participate in the GDDS and to continue to work on addressing the remaining serious data deficiencies."

### Article IV consultation cycle
- Proposal: "It is proposed that the next Article IV consultation take place on the standard 12-month cycle."

### Key statistics and selected economic indicators (2000–06) — national accounts, public finances, external sector, and money (values preserved exactly as presented)
- National income and prices (levels and changes):
  - Nominal GDP (LS billions): 903.9 952.0 1,014.4 1,059.3 1,191.2 1,355.7 1,466.6
  - Nominal GDP ($ billions): 19.0 19.8 20.7 21.4 23.7 26.2 27.4
  - Real GDP (growth rates): 0.6 3.6 4.1 1.3 3.1 3.8 4.0
  - Real nonoil GDP (growth rates): 1.6 7.6 7.5 3.6 8.1 6.5 5.5
  - GDP deflator: 9.7 1.7 2.4 3.1 9.1 9.6 4.0
  - CPI period average: -3.9 5.6 -2.3 5.9 4.6 10.0 5.0
  - Population (midyear estimate, millions): 16.6 17.0 17.4 17.8 18.2 18.7 19.1
  - Unemployment rate (in percent): 9.0 10.3 11.7 12.1 .........
- Oil sector:
  - Crude oil production ('000 barrels/day): 540 527 525 500 460 414 394
  - Oil exports ('000 barrels/day): 364 470 495 406 276 211 183
  - Oil export price ($ per barrel): 26.1 22.2 23.1 26.6 34.6 46.7 48.8
- Public finances (percent of GDP) 1/:
  - Revenue and grants: 27.2 32.1 29.8 30.4 27.9 28.2 27.4
    - Oil-related revenue: 12.3 18.6 13.9 15.2 12.7 12.0 11.2
    - Nonoil revenue: 14.9 13.5 15.9 15.2 15.2 16.1 16.1
  - Expenditure: 28.7 29.7 31.4 33.1 33.2 33.0 33.2
    - Current expenditure: 18.2 18.1 18.0 18.7 19.1 20.0 20.2
    - Development expenditure: 10.5 11.6 13.4 14.4 14.1 13.0 13.0
  - Overall balance: -1.4 2.4 -1.6 -2.7 -5.3 -4.8 -5.9
  - Nonoil fiscal balance: -13.8 -16.1 -15.4 -17.9 -18.0 -16.9 -17.1
  - Gross debt 2/: 23.3 26.1 29.8 30.6 31.8 41.4 45.0
    - Domestic: 2.6 7.4 11.0 11.3 11.0 15.4 20.6
    - External 2/: 20.6 18.6 18.8 19.3 20.7 26.0 24.3
- Money and quasi-money (change in percent of beginning period money stock): 19.0 23.5 18.5 7.7 10.3 11.4 9.4
  - Net foreign assets 3/: 29.1 21.0 12.2 3.1 5.4 -0.8 -0.9
  - Net domestic assets 3/: -10.2 2.6 6.3 4.6 4.9 12.2 10.3
  - Credit to government: -5.7 6.6 4.4 0.5 4.2 7.0 7.5
  - Credit to public enterprises: 1.6 0.7 -4.2 1.9 0.1 0.9 0.9
  - Credit to private sector (levels change): 0.3 0.4 0.7 3.1 3.8 4.3 1.9
  - Credit to private sector (change in percent): 1.7 2.8 6.6 30.3 31.1 29.5 11.4
  - Reserve money (change in percent): 15.2 16.9 12.0 10.2 25.2 11.4 9.4
- Balance of payments:
  - Balance of goods and services: 0.3 0.4 1.0 0.1 -0.9 -1.2 -1.6
    - Oil balance 4/: 2.4 3.0 3.6 3.0 2.2 1.8 1.5
      - (in percent of GDP): 12.8 15.4 17.4 14.4 9.1 6.8 5.5
    - Non-oil exports of goods and services: 2.9 3.0 3.6 3.2 4.2 4.9 5.1
      - (change in percent): -8.3 5.6 17.9 -10.2 32.6 16.4 3.5
    - Non-oil imports of goods and services: 5.0 5.7 6.2 6.1 7.2 8.0 8.2
      - (change in percent): 24.0 13.3 8.8 -1.3 19.3 9.9 3.3
  - Current account (including official transfers): 1.0 1.2 1.8 1.3 0.5 0.0 -0.3
    - (in percent of GDP): 5.4 6.1 8.9 6.0 1.9 0.2 -1.1
  - Overall balance: 2.4 3.0 2.4 0.8 0.4 0.0 -0.2
- Net foreign assets:
  - Central bank NFA in convertible currencies: 2.4 3.1 3.9 4.2 4.4 4.4 4.3
    - (in months of imports of GNFS): 7.6 8.2 9.3 10.2 8.6 8.1 7.5
  - Official net foreign assets of the banking system: 11.4 14.3 16.8 17.6 18.1 18.1 17.9
- Debt:
  - External debt (percent of GDP) 2/: 20.6 18.6 18.8 19.3 20.7 26.0 24.3
  - Debt service-to-exports ratio: 20.9 19.5 16.3 15.5 13.4 16.9 14.5
- Exchange rates LS/$ (period average):
  - Official transaction rate 5/: 46.5 46.5 46.5 46.5 48.7 50.0 ...
  - Parallel market rate (Beirut/Amman): 49.4 50.4 52.4 52.4 52.8 52.3 ......
  - Weighted average nominal exchange rate 6/: 47.7 48.1 49.1 49.4 50.2 ......

### Growth composition and sectoral details (selected entries, changes preserved exactly)
- Components of GDP (levels or contribution changes as presented):
  - Consumption: 0.2 -3.3 3.9 5.1 9.6 5.5 5.4
    - Public: 19.1 2.0 4.9 12.0 10.3 -2.7 2.1
    - Private: -2.9 -4.4 3.7 3.7 9.5 7.5 6.1
  - Gross capital formation: -2.3 25.9 0.0 13.7 10.6 3.5 6.3
    - Public: 4.4 16.6 4.5 21.5 3.1 -3.7 3.5
    - Private: -12.2 42.2 -6.5 1.3 25.0 15.0 10.0
  - Domestic expenditure: -0.3 2.1 3.0 7.1 9.9 5.1 5.6
  - Net exports of oil: -8.9 35.6 9.5 -22.5 -39.8 -30.2 -16.6
  - Exports of non-oil goods and services: 15.0 -8.5 9.3 -19.1 19.5 21.1 2.4
    - Tourism: 31.9 -9.1 -23.5 -9.3 32.7 24.9 6.4
    - Others: 7.1 -8.2 28.2 -22.5 14.3 19.4 0.4
  - Import of non-oil goods and services: -0.6 10.5 7.6 -10.1 6.4 5.1 3.4
    - Public: -11.1 -0.1 41.3 -29.8 -14.3 2.7 0.5
    - Private: 2.2 13.0 0.5 -5.5 11.0 5.5 3.9
  - GDP (market prices) growth: 0.6 3.6 4.1 1.3 3.1 3.8 4.0
    - Oil GDP: -1.8 -6.9 -6.3 -6.6 -16.4 -9.6 -4.5
    - Non-oil GDP: 1.6 7.6 7.5 3.6 8.1 6.5 5.5
      - Agriculture: 9.2 8.1 7.9 -2.8 6.5 6.0 6.0

*Source: Data provided by the Syrian authorities; and staff estimates and projections.*

### 5.   GDP (market prices)  (3+4)0.63.64.11.33.13.84.0

### _cr05356 - 5.   GDP (market prices)  (3+4)0.63.64.11.33.13.84.0

### Aggregate demand and GDP components (Table 2)
- National savings (levels across period): 22.7, 26.9, 29.2, 29.0, 26.1, 24.1, 23.5
  - Public: 9.1, 14.0, 11.8, 11.7, 8.8, 8.2, 7.1
  - Private: 13.6, 12.9, 17.4, 17.3, 17.3, 15.9, 16.4
- Domestic investment (levels): 17.3, 20.8, 20.4, 23.0, 24.1, 23.9, 24.6
  - Public: 11.0, 12.3, 12.3, 15.1, 14.8, 13.6, 13.6
  - Private: 6.3, 8.5, 8.0, 7.9, 9.3, 10.3, 10.9
- Savings/investment balance (in percent of GDP): 5.4, 6.1, 8.9, 6.0, 1.9, 0.2, -1.1

### Fiscal operations and budget aggregates (Tables 3 and 4)
- Revenue (levels): 246.3, 306.0, 302.4, 321.7, 307.5, 332.4, 357.9, 381.7, 401.1
  - Oil-related proceeds: 111.5, 176.7, 140.6, 161.1, 120.9, 150.9, 122.5, 163.3, 164.7
    - Profit tax on Syrian Petroleum Corp.: 50.5, 94.8, 73.3, 84.6, 54.0, 67.4, 31.1, 41.5, 41.8
    - Royalties: 26.8, 31.1, 27.7, 31.3, 25.4, 31.7, 23.6, 31.5, 31.7
    - Petroleum products surcharges: 3.1, 6.1, 2.3, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
    - Surplus from SPC: 31.1, 44.7, 37.3, 45.2, 41.5, 51.8, 67.8, 90.4, 91.2
  - Non-oil tax revenue: 88.8, 92.1, 116.0, 117.6, 125.2, 133.2, 155.8, 162.3, 174.7
    - Income and profits: 43.9, 34.3, 42.1, 38.7, 63.0, 43.0, 90.0, 50.2, 56.8
    - Excises: 12.6, 14.4, 17.4, 13.4, 13.6, 14.9, 8.5, 17.2, 18.9
    - International trade: 14.7, 20.4, 25.3, 28.8, 22.6, 34.5, 22.9, 38.5, 36.9
    - Other: 17.6, 22.8, 31.1, 36.7, 26.0, 40.8, 34.5, 56.5, 62.1
  - Non-oil non-tax revenue: 45.3, 36.5, 45.0, 42.2, 59.9, 46.9, 77.8, 54.3, 59.8
  - Public enterprise surpluses: 41.9, 32.3, 40.5, 36.9, 50.7, 40.9, 67.4, 47.4, ...
  - PSF revenue: 0.7, 0.7, 0.7, 0.7, 1.5, 1.5, 1.8, 1.8, 1.9
- Expenditure (levels): 259.2, 282.7, 318.4, 350.6, 441.3, 395.9, 453.8, 447.5, 487.4
  - Current expenditure (levels): 164.3, 172.7, 182.7, 197.7, 224.3, 227.9, 273.8, 271.1, 296.6
    - Defense: 49.9, 47.6, 47.9, 59.0, 62.0, 63.0, 65.6, 65.6, 71.0
      - Wages and salaries: 35.3, 45.0, 52.7, 59.2, 63.0, 75.4, 74.3, 81.9, 88.6
      - Goods and services: 15.5, 16.8, 17.6, 19.0, 17.9, 19.9, 19.9, 21.9, 22.1
      - Interest payments: 5.9, 6.3, 6.8, 7.5, 11.0, 11.0, 18.2, 18.1, 23.6
      - Subsidies: 37.1, 34.8, 33.3, 29.6, 32.8, 31.8, 50.0, 50.0, 55.1
        - PSF expenditure: 34.3, 32.1, 31.2, 27.9, 27.0, 27.0, 29.6, 29.6, 32.6
        - Other subsidies: 2.8, 2.8, 2.0, 1.7, 5.8, 4.8, 20.4, 20.4, 22.5
      - Transfers: 20.5, 22.2, 24.3, 23.4, 37.4, 26.8, 45.8, 33.6, 36.3
    - Pensions and social assistance: 6.1, 8.0, 8.8, 11.2, 14.4, 12.7, 17.4, 17.4, 18.8
    - Transfers to public enterprises: 14.3, 14.1, 15.6, 12.2, 23.0, 14.0, 28.4, 16.1, 17.5
  - Development expenditure (levels): 94.9, 110.1, 135.7, 152.9, 217.0, 168.1, 180.0, 176.4, 190.8
- Overall balance (levels): -12.9, 23.3, -16.0, -28.9, -133.8, -63.5, -95.9, -65.7, -86.2
  - Non-oil balance (levels): -124.4, -153.5, -156.7, -190.0, -254.7, -214.4, -218.4, -229.0, -251.0
- Identified financing (levels): -24.2, 31.5, 27.7, 0.7, 10.1, 38.6, 5.2, 65.7, 86.2
  - External: -7.3, -4.0, -6.1, 0.1, 10.1, -9.4, 5.2, -13.1, -7.1
  - Domestic bank financing: -26.8, 37.4, 30.7, 4.3, ... , 37.6, ... , 68.8, 81.5
  - Non-bank financing (investment certificates held by non-banks): 10.0, -1.9, 3.1, -3.7, ... , 10.4, ... , 10.0, 11.8
  - Unidentified financing: 37.1, -54.8, -11.7, 28.2, 123.7, 24.9, 90.7, 0.0, 0.0
- Memorandum: Government debt (levels): 200.1, 226.6, 273.8, 288.1, ... , 378.4, ... , 561.4, 659.7
  - Domestic: 13.5, 49.1, 82.9, 83.5, ... , 131.6, ... , 209.4, 302.8
  - External: 186.6, 177.5, 190.9, 204.6, ... , 246.7, ... , 352.0, 356.9
- Fiscal ratios (percent of GDP, selected):
  - Revenue: 27.2, 32.2, 29.8, 30.4, 25.8, 27.9, 26.4, 28.2, 27.4
  - Expenditure: 28.7, 29.7, 31.4, 33.1, 37.0, 33.2, 33.5, 33.0, 33.2
  - Overall balance: -1.4, 2.4, -1.6, -2.7, -11.2, -5.3, -7.1, -4.8, -5.9
  - Non-oil balance: -13.8, -16.1, -15.4, -17.9, -21.4, -18.0, -16.1, -16.9, -17.1
  - Primary expenditure: 28.0, 29.0, 30.7, 32.4, 36.1, 32.3, 32.2, 31.7, 31.6
  - Government debt (percent of GDP): 22.1, 23.8, 27.0, 27.2, ... , 31.8, ... , 41.4, 45.0
  - Non-oil balance (percent of non-oil GDP): -19.0, -20.2, -19.1, -22.2, -26.8, -22.6, ... , -20.8, -20.7

### Monetary aggregates and banking sector (Tables 5 and 6)
- Money and quasi-money (M2, end-period, in SL billions): 563, 696, 825, 889, 980, 1,092, 1,194
  - Money (M1): 369, 420, 495, 541, 597, 673, 751
    - Currency outside banks: 204, 229, 258, 285, 333, 375, 419
    - Demand deposits: 165, 191, 236, 256, 264, 298, 332
      - of which: public enterprises: 114, 132, 169, 183, .........
  - Quasi-money: 195, 276, 330, 347, 383, 418, 443
- Foreign assets (net): 473, 592, 677, 702, 750, 937, 959
  - Central bank: 799, 310, 612, 413, 628, 0, 285
  - Commercial banks: 394, 498, 571, 578, 614, 656, 674
- Domestic assets (net): 90, 104, 148, 186, 230, 155, 235
  - Domestic credit: 247, 290, 297, 342, 415, 535, 647
    - Claims on public sector: 170, 211, 213, 233, 271, 349, 440
      - Claims on central government (net): -17, 20, 51, 55, 93, 316, 224, 3
      - Claims on public enterprises: 187, 191, 162, 178, 178, 187, 197
    - Claims on private sector: 77, 98, 84, 109, 143, 186, 207
  - Other items (net): -157, -186, -148, -156, -185, -380, -412
    - Import and restricted deposits: -28, -41, -50, -73, -99, -99, -99
    - Capital accounts: -97, -104, -109, -109, -131, -131, -131
    - Valuation adjustment (net): -68, -67, -47, -47, -57, -252, 284
    - Other: 362, 659, 741, 1,021, 1,021, 1,02, 102
- Annual growth rates (percent): Money and quasi-money: 19.0, 23.5, 18.5, 7.7, 10.3, 11.4, 9.4
  - Money (M1): 17.7, 13.9, 17.8, 9.4, 10.2, 12.8, 11.5
  - Quasi-money: 21.5, 41.8, 19.6, 5.2, 10.3, 9.2, 6.0
- Broad money (M2) (in percent of GDP): 62.3, 73.1, 81.3, 83.9, 82.3, 80.5, 81.4
- Credit to private sector (in percent of GDP): 8.5, 8.3, 8.3, 10.3, 12.0, 13.7, 14.1
- Credit to public sector (in percent of GDP): 20.7, 20.1, 15.9, 16.8, 15.0, 13.8, 13.4

Central Bank balance sheet highlights (Table 6)
- Net foreign assets (SL billions): 799, 310, 612, 413, 628, 0, 285
  - [in million of U.S. dollars]: 2,875, 3,622, 4,510, 5,182, 5,399, 5,418, 5,329
- Net domestic assets (levels): 173, 202, 237, 254, 337, 246, 282
  - Net domestic credit: 81, 84, 79, 89, 129, 193, 238
    - Credit to the government: 275, 301, 322, 306, 310, 394, 454
    - Government deposits: 356, 374, 392, 392, 325, 362, 390
    - Credit to banks: 162, 157, 149, 175, 144, 161, 173
- Reserve money (levels): 253, 295, 343, 378, 473, 527, 567
  - Currency issued: 211, 237, 267, 294, 344, 383, 413
- Growth rates (percent of beginning period reserve money stock): Reserve money: 15.2, 16.9, 16.0, 10.2, 25.2, 11.4, 7.6
- Memorandum: Implicit exchange rate: 24.0, 23.3, 21.9, 22.7, 23.2, 51.8, 53.5

### External sector and balance of payments (Table 7)
- Current account balance (levels): 1,024, 1,199, 1,834, 1,287, 461, 49, -292
  - (in percent of GDP): 5.4, 6.1, 8.9, 6.0, 1.9, 0.2, -1.1
- Oil balance (levels): 2,425, 3,042, 3,600, 3,020, 2,152, 1,792, 1,518
  - (in percent of GDP): 12.8, 15.4, 17.4, 14.1, 9.1, 6.8, 5.5
  - Exports, f.o.b. (oil-related): 3,543, 4,050, 4,558, 4,111, 3,250, 3,084, 2,717
  - Imports, f.o.b. (oil-related): -186, -171, -143, -167, -167, -180, -188
  - Repatriation of profits of oil and gas companies: -932, -837, -815, -924, -931, -1,113, -1,012
- Non-oil goods and services balance (levels): -2,133, -2,635, -2,594, -2,874, -3,005, -3,029, -3,119
  - (in percent of GDP): -11.3, -13.3, -12.5, -13.4, -12.7, -11.6, -11.4
  - Trade balance (levels): -2,165, -2,722, -2,270, -2,612, -3,166, -3,276, -3,399
    - Exports, f.o.b. (total): 1,157, 1,236, 1,998, 1,651, 2,110, 2,574, 2,638
      - Public: 348, 342, 451, 455, 733, 784, 802
      - Private: 809, 894, 1,547, 1,196, 1,377, 1,790, 1,836
    - Imports, f.o.b. (total): -3,322, -3,958, -4,268, -4,263, -5,276, -5,850, -6,037
      - Public: -668, -716, -1,113, -871, -855, -936, -936
      - Private: -2,654, -3,242, -3,155, -3,392, -4,421, -4,914, -5,101
- Balance of services: 328, 7, -324, -262, 161, 247, 280
  - Receipts: 1,699, 1,781, 1,559, 1,544, 2,125, 2,357, 2,466
    - Travel and tourism receipts: 1,082, 1,150, 970, 986, 1,380, 1,650, 1,739
  - Payments: -1,667, -1,694, -1,883, -1,806, -1,964, -2,110, -2,186
- Income (net): 971, 592, 494, 965, 635, 0, 249, 2
  - Credit: 360, 454, 574, 671, 705, 723, 724
    - Investment earnings: 165, 209, 115, 136, 220, 220, 220
  - Debit: -263, -295, -325, -175, -142, -221, -233
- Transfers (net): 636, 633, 579, 645, 751, 784, 818
  - Credit (levels): 675, 682, 634, 700, 802, 837, 873
    - Workers' remittances: 476, 483, 475, 530, 647, 679, 713
  - Debit: -39, -49, -55, -55, -51, -53, -55
- Capital and financial account balance (levels): -76, -26, -230, -118, 6, -101, 13
  - (in percent of GDP): -0.4, -0.1, -1.1, -0.6, 0.0, 0.0, 0.4
  - Direct investment: 270, 110, 115, 160, 275, 224, 224
  - Long-term debt (net): -154, -83, -125, 2, -187, -254, -133
    - Receipts: 261, 257, 195, 224, 215, 386, 400
    - Payments: -415, -340, -320, -222, -402, -640, -533
  - Short-term loans (net): -255, -70, -240, -300, -100, 0, 0
- Errors and omissions: 1,413, 1,816, 838, -332, -190, 0, 0
  - (in percent of GDP): 7.5, 9.2, 4.1, -1.5, -0.1, 0.0, 0.0
- Overall balance (levels): 2,361, 2,989, 2,441, 837, 447, 39, -179
  - (in percent of GDP): 12.5, 15.1, 11.8, 3.9, 1.9, 0.1, -0.7
- Financing: net change in reserves (increase = -): -2,361, -2,989, -2,441, -837, -447, -39, 179
  - Convertible: -2,319, -2,943, -2,334, -496, -449, -39, 179
    - Central bank: -531, -701, -781, -331, -219, -198, 9
    - Commercial bank: -1,788, -2,242, -1,553, -165, -230, -198, 9
  - Nonconvertible (Central bank): -42, -46, -107, -341, 200
- Memorandum items:
  - Non-oil exports of GNFS (percent of GDP): 15.1, 15.2, 17.2, 14.9, 17.8, 18.8, 18.6
  - Non-oil imports of GNFS (percent of GDP): 26.3, 28.5, 29.8, 28.3, 30.5, 30.4, 30.0
  - Oil export price ($ per barrel): 26.6, 22.2, 23.1, 26.6, 34.6, 46.7, 48.8
  - Volume of oil exports ('000 barrels/day): 364, 470, 495, 406, 276, 211, 183
  - Central bank reserves (levels): 2,776, 3,462, 4,221, 4,559, 4,934, 4,953, 4,864
    - (in months of imports of GNFS): 6.4, 7.1, 8.0, 8.8, 8.0, 7.3, 6.9
  - NFA of the banking system (levels): 11,350, 14,339, 16,780, 17,617, 18,065, 18,104, 17,925
    - (in months of imports of GNFS): 26.3, 29.5, 32.0, 33.9, 29.3, 26.7, 25.6
  - External debt (levels): 3,912, 3,692, 3,890, 4,137, 4,918, 6,803, 6,670
    - (in percent of GDP): 20.6, 18.6, 18.8, 19.3, 20.7, 26.0, 24.3
  - Debt service (percent of exports of non-oil G&S): 20.9, 19.5, 16.3, 15.5, 13.4, 16.9, 14.5
  - Weighted average nominal exchange rate (LS/$): 47.7, 48.1, 49.1, 49.4, 50.2, 51.8, 53.5
  - GDP ($ billion) 2/: 19.0, 19.8, 20.7, 21.4, 23.7, 26.2, 27.4

### Reforms since the last Board meeting (ANNEX I)
- Fiscal measures:
  - New consumption tax introduced (replacing the 1987 consumption tax) broadening base and changing rate structure; Decree 61 of October, 2004; base further broadened May 2005 (Decree 41).
  - Domestic diesel domestic price increased by 450 percent (to LS 6,000 per ton (about $115), October 2004).
  - Stamp duties reduced in some cases by up to 75 percent; duty on promissory notes lowered to 1.5 per thousand (Decree No. 44, May, 2005).
  - Environmental protection tax on vehicles introduced in May 2005 (Decree No. 42).
- Monetary and financial measures:
  - Licenses issued for three private banks: Bank Audi, Lebanon; the Arab Bank, Jordan; Byblos Bank.
  - Insurance market opened to private sector (Decree 43, May 2005); prior private insurance license in Damascus free trade zone.
  - Creation of the Securities and Financial Markets Authorities to launch a stock exchange (Law No 22 of June 19, 2005).
  - Laws (May 2005) granting greater managerial autonomy to four state banks (Decree No 29, Savings bank; Decree No 30, Agricultural Bank; Decree No 31, Real Estate Bank; Decree No 32, Popular Bank).
  - Law promulgated in May 2005 allowing Islamic banking.
  - Required reserves reduced to 5 percent of total deposits on time and savings deposits (Decree No 72, September 2004).
  - Credit and Monetary Council (CMC) limits to lending to reduce concentration of credit risks (Decree No 101, January 2005).
  - Alteration of term-structure of deposit interest rates to lengthen deposits (Decree No. 119).
  - AML/CFT legislation amended in May 2005 (Decree No. 33).
- Exchange rate and trade measures:
  - Private sector imports of raw material and intermediate goods given access to official foreign exchange market (Decree No 865, March, 2005).
  - Use of most appreciated official exchange rate restricted to debt service payments under certain bilateral agreements (Decree No. 25, June 2004); public sector official rate depreciated from SL 48.5 per U.S. dollars to SL 50 per U.S. dollar starting January 1, 2005.
  - Starting May 2005, CBoS stopped quoting a rate for the official private sector rate and began quoting a band.
  - Single Customs Administrative Form introduced October 2004 (4 signatures replacing 13 documents and 35 signatures).
  - Tariff reductions including cars (from 255 to 60 for large cars; from 145 percent to 40 percent for small ones) (Decree 197 of May, 2005).
  - Syria/EU Association Agreement initialed (October, 2004); free trade agreement signed with Turkey.
- Reforms “in the pipeline”:
  - Further tariff schedule revision (reduce maximum rates from 230 to 50 percent and number of bands from 10 to 5–6).
  - Further banking regulatory framework strengthening (capital adequacy and foreign exchange open position regulations).
  - Ongoing work on new Customs law, commercial and corporate code.
  - Preparation to launch a treasury bills market and a stock exchange.

### Exchange rate system summary (ANNEX II)
- From January 2005: public sector transactions rate set at LS/$50; private sector transactions rate historically around LS/$51.50-51.65; parallel market rate around LS/$54.85 as of 4-18-2005.
- Official rates used for specified public sector transactions (e.g., public sector exports of crude oil and petroleum; exports of public sector enterprises; public sector remittances abroad; earnings of UN and diplomatic missions staff; domestic expenses of foreign oil companies; external loans and grants).
- Decree No. 865 (March 2005) extended official-rate transactions to private imports of raw materials and intermediate goods (to be implemented).
- Parallel market used for private unrecorded exports and private capital inflows; average of daily rates for the Syrian pound in Amman and Beirut.

### Medium- to long-term energy sector prospects (ANNEX III)
- Proven reserves (latest information):
  - Oil reserves: between 2.3–2.5 billion barrels.
  - Natural gas reserves: between 240 to 500 billion cubic meters.
- Oil production history and projection:
  - Production reached 600 thousands barrel per day in 1996; declined to about 460 thousands barrel per day in 2004.
  - Ministry of petroleum and mineral resources projection: oil production expected to continue to decline until 2016 at an average annual rate of 5 percent as mature fields reach exhaustion.
  - From 2012 on, oil production would level off at about 275 thousands per day until exhaustion around 2025.
- Policy implication explicitly stated: Given high uncertainty, policies should be based on the level of proven reserves, treating new discoveries as an upside risk.

*Sources: Syrian authorities; Central Bank of Syria; Ministry of Finance; and Fund staff estimates, projections, and annexes contained in the original document.*

### 4.8 billion of cubic meters in 2004. This level is projected to continue to rise to some

### _cr05356 - 4.8 billion of cubic meters in 2004. This level is projected to continue to rise to some

### Key statistic
- 4.8 billion of cubic meters in 2004.

### Projection fragment
- "This level is projected to continue to rise to some"

*Source: _cr05356 - 4.8 billion of cubic meters in 2004. This level is projected to continue to rise to some*

### 10.5 billion cubic meters by 2010 and to 11.8 billions by 2015. If it were to stabilize at that

### _cr05356 - 10.5 billion cubic meters by 2010 and to 11.8 billions by 2015. If it were to stabilize at that

### Energy reserves, production, and substitution to natural gas
- Proven and projected natural gas reserves and production:
  - Projection to "10.5 billion cubic meters by 2010 and to 11.8 billions by 2015."
  - "If it were to stabilize at that level, reserves will last another 10 to 15 years, depending on the level of reserves."
- Substitution strategy:
  - One strategy to face rapidly declining oil reserves: substitute natural gas for oil.
  - Greatest potential in electricity generation; some exploitation in public transportation.
  - In electricity generation, the share of natural gas increased from 40 percent in 2002 to 55 percent now.
  - Target: increase natural gas share in electricity generation to 75 percent by 2011.
- Baseline assumptions for projections:
  - Income elasticity of energy demand = 1.2.
  - Average growth rate of non-oil GDP (proxy for incomes) = 5 percent.
  - Rate of extraction of natural gas = growth rate of domestic demand (for final use and for electricity generation), since prospects for natural gas exports are still uncertain.

### Implications for balance of payments
- Oil export trajectory and external position:
  - Net exports of oil (including profit repatriation) decline from US$3 billions in 2003 (equivalent to 14 percent of GDP) to zero by 2011.
  - Syria would become a net oil importer by 2011.
  - By 2020, imports would need to cover 35 percent of domestic consumption.
  - The corresponding energy bill would amount to about 3.5 percent of GDP.
- Data note:
  - EIA compiled data as of November 2004; EIA reports "90 percent probability that additional oil reserves, amounting to about ½ billion barrels, could be discovered in the near future."

### Implications for government revenues and price subsidies
- Revenue dynamics:
  - Government revenues from oil are a function of domestic and international sales and their prices.
  - Up until 1999, domestic sales prices of petroleum products were on average higher than international prices; net revenues equaled revenues if all production sold at international prices, plus net taxes.
  - Starting in 2000, surge in international oil prices not fully passed through to domestic prices → domestic consumption increasingly subsidized.
  - Net subsidies estimated at 3.7 percent of GDP in 2004.
- Staff projections (assuming constant domestic prices in real terms, a constant real exchange rate, and WEO international oil price assumptions):
  - Oil price subsidies projected to decline from a projected 6½ percent of GDP in 2005 to 1¾ percent in 2010 and to less than ½ percent in 2015.
  - Net government revenues from oil projected to fall from an estimated 15 percent of GDP in 2003 to 8 percent by 2010 and to less than 5 percent by 2020.
- Natural gas pricing and opportunity cost:
  - Government has not derived revenues from natural gas resources to date.
  - Gas sold to final consumers and power plants at cost ≈ US$65 per metric ton.
  - Limited export infrastructure; export-weighted average price of European, Japanese and U.S. natural gas in the WEO currently equal to US$170 per metric ton (provided as an order of magnitude).

### Illustrative medium-term scenarios and policy trade-offs
- Policy scenarios depend on pace/depth of reforms and reserve use; three broad outcomes described:

  - Scenario A — Target constant foreign assets:
    - Decline in oil exports constrains volume of imports and growth; pressures on real exchange rate.
    - Decline in budgetary oil revenues forces greater monetary financing of widening budget deficit.
    - Combined effect: inflation-cum-currency depreciation spiral in a low-growth environment.
    - Government debt would rise rapidly due to widening budget deficit and real depreciation effects.

  - Scenario B — Target stable nominal exchange rate:
    - Demand for imports increases to support overall GDP growth of 4-4½ percent.
    - Decline in oil exports widens current account deficit and accelerates foreign asset losses.
    - By 2010, cumulative loss could reach nearly US$10 billion; all foreign assets could be exhausted within another 3–4 years.
    - Once foreign assets are depleted, an inflation-cum-depreciation spiral would become the only option.

  - Scenario C — Accelerated structural reforms and fiscal consolidation:
    - Improved investment prospects lead to capital accumulation and productivity gains.
    - Higher productivity boosts non-oil exports; enhanced business climate attracts foreign direct investment.
    - Combined with international reserves cushion, allows expansion of imports needed for higher growth.
    - Fiscal consolidation keeps borrowing needs within limits, preventing undue pressure on interest rates and keeping inflation at bay.

- Sensitivity and debt dynamics:
  - Sensitivity analysis (Table 8) shows relatively small sensitivity of debt dynamics to international oil prices because more than 65 percent of oil production is now consumed domestically.

### Medium-term quantitative projections (selected figures from Table 8 and related tables)
- Crude oil production (in thousands of barrels per day), 2005–2010 under baseline:
  - 2005: 414
  - 2006: 394
  - 2007: 372
  - 2008: 355
  - 2009: 338
  - 2010: 326
- Export price of crude oil (in U.S. dollar per barrel), 2005–2010:
  - 2005: 46.7
  - 2006: 48.8
  - 2007: 47.7
  - 2008: 46.3
  - 2009: 47.6
  - 2010: 47.1
- Selected macro outcomes under "Targeting foreign assets" (2005–2010):
  - GDP growth: 3.8, 3.6, 3.2, 2.6, 2.6, 2.5
  - CPI inflation: 10.0, 10.8, 14.0, 18.5, 28.0, 36.5
  - Nominal exchange rate (Syrian pound/U.S. dollar): 51.8, 57.5, 68.1, 82.2, 106.2, 144.3
  - Net foreign assets (in billion of U.S. dollar): 18.1 (constant)
  - Non-oil primary balance: -15.6, -15.5, -15.1, -14.8, -14.2, -13.6
  - Government debt (in percent of GDP): 41.4, 45.2, 51.0, 57.4, 64.8, 73.1
- Selected macro outcomes under "Targeting the nominal exchange rate" (2005–2010):
  - GDP growth: 3.8, 4.0, 4.0, 4.0, 4.0, 4.0
  - CPI inflation: 10.0, 5.0, 5.0, 5.0, 5.0, 5.0
  - Nominal exchange rate (Syrian pound/U.S. dollar): 51.8, 53.5, 55.0, 56.5, 58.0, 59.5
  - Net foreign assets (in billion of US$): 18.1, 17.9, 17.2, 15.9, 14.2, 11.9
  - Non-oil primary balance: -15.6, -15.4, -15.1, -14.9, -14.7, -14.5
  - Government debt (in percent of GDP): 41.4, 45.0, 48.6, 52.9, 57.8, 63.1
- Memo: Assuming oil prices are US$10 lower, net foreign assets and government debt evolve differently (selected entries):
  - Net foreign assets (in billions of U.S. dollars): 18.1, 17.6, 16.6, 15.2, 13.3, 10.9
  - Government debt (in percent of GDP): 41.4, 46.0, 49.9, 54.2, 58.9, 63.8

### Fiscal cost of price subsidies (summary and key figures)
- Structure and components:
  - Price subsidy system includes explicit subsidies on cereals, electricity, water, cotton, rice and sugar; implicit subsidies on energy products; and additional implicit subsidies for cereals and cotton.
  - Exchange-rate related implicit subsidies largely phased out.
- Aggregate costs (selected year-level figures and shares):
  - Cost of explicit subsidies amounted to 4 percent of GDP in 2003 (one-fifth of the current budget).
  - Cost of implicit subsidies on energy products estimated at 5.8 percent in 2003.
  - In 2003, implicit subsidies on diesel and gas oil estimated at 2.8 percent of GDP (including implicit subsidy for electricity generation); domestic prices equal to 20 and 75 percent of international prices respectively.
  - Implicit subsidy on natural gas estimated at 3 percent of GDP (including implicit subsidy for electricity generation); domestic sales prices equal to some 40 percent of average international prices.
  - Recent diesel price increase brought diesel to close to 90 percent of international price in 2004; projected widening wedge between international and domestic prices for gas oil from 25 percent in 2003 to 60 percent in 2005 if no further adjustment.
  - Subsidies on gas and diesel oil could reach 5 percent of GDP in 2005 absent further domestic price adjustment.
- Cost allocation and institutional impact:
  - Price subsidy for cereals supports consumers, producers, and exports.
  - Subsidies on electricity, sugar, and rice are subsidies to consumers.
  - Bulk of water subsidy is for irrigation, an indirect consumer subsidy via cheap food prices.
  - Price subsidy on cotton (small) covers subsidy to exports of surplus production; producer price support cost largely borne by local consumers and garment exports through higher domestic cotton cost.
  - Budgetary costs also cover redundant labor in public enterprises producing and marketing these commodities.
  - Additional implicit subsidies for cotton and cereals are borne by state banks; public institutions market these commodities and borrow from state banks to cover losses not covered by budgetary transfers.
- Tabulated fiscal quantities (selected aggregate totals from Annex):
  - Total Price Subsidy (in billion of Syrian Pounds): 152.6, 95.2, 65.5, 122.8, 174.8 (year series shown).
  - Total Price Subsidy (in percent of GDP): 16.9, 10.0, 6.5, 11.6, 14.7 (corresponding percent series).
  - Implicit Energy Subsidies (in percent of GDP): 10.5, 5.1, 4.2, 5.8, 10.8.
  - Explicit Subsidies (in percent of GDP): 5.7, 5.1, 4.8, 3.9, 3.8.
- Memorandum items — banks' claims on principal marketing organizations (in billion of Syrian Pounds):
  - General organization for cereal trade and production: 90.5, 78.5, 57.7, 69.5, 75.1 (series shown).
  - General organization for cotton ginning and marketing: 79.4, 89.0, 83.7, 91.5, 86.6.
  - CBoS: 77.0, 60.1, 41.5, 31.2, 32.5.
  - Agricultural Bank: 2.3, 28.9, 42.2, 60.3, 54.1.

### Debt dynamics, external sustainability, and stress tests (selected highlights)
- Public sector debt dynamics (selected indicators, Table 9):
  - Public sector debt (percent of GDP): 2004: 31.8; 2005: 41.4; 2006: 45.0; 2007: 48.6; 2008: 52.9; 2009: 57.8; 2010: 63.1.
  - Change in public sector debt (2005–2010 annual increments): 9.7, 3.6, 3.6, 4.3, 4.9, 5.2 (2005–2010).
  - Primary deficit (percent of GDP) projected rising to 7.3 percent by 2010.
  - Public sector debt-to-revenue ratio rising from 147.1 in 2005 to 256.4 in 2010 (selected series).
  - Gross financing need (in percent of GDP) rising to 27.6 by 2010; in billions of U.S. dollars rising to 5.1, 6.5, 8.0, 9.4 (selected entries).
- External debt sustainability (Table 10 selected):
  - External debt (percent of GDP): 2004: 20.7; 2005: 26.0; 2006: 24.3; 2007: 22.7; 2008: 21.0; 2009: 19.6; 2010: 18.5.
  - Identified external debt-creating flows and current account deficits show increasing reliance on external financing as oil export balances deteriorate.
  - Gross external financing need (in billions of US dollars) grows to 2.9 by 2010; in percent of GDP corresponding increases shown.
- Stress tests and alternative scenarios:
  - Alternative and bound-test scenarios evaluated, including historical-average shocks, no policy change, country-specific shocks, adverse movements in real interest rates, GDP growth, primary balance, and combinations including one-time 30 percent real depreciation and 10 percent of GDP increases in other debt-creating flows.
  - These scenarios produce substantial increases in public debt and external vulnerabilities under adverse shocks.

*Source: IMF staff report annexes and projections contained in the provided content.*

### 1. The Fund takes this decision relating to the Syrian Arab Republic’s exchange

### 1. The Fund takes this decision relating to the Syrian Arab Republic’s exchange

### Decision and IMF conclusions
- The Fund takes this decision relating to the Syrian Arab Republic’s exchange measures subject to Article VIII, Section 2(a) and 3, and in concluding the 2004 Article XIV consultation with the Syrian Arab Republic, in the light of the 2004 Article IV consultations with the Syrian Arab Republic concluded under Decision No. 5392- (77/63) adopted on April 29, 1977, as amended (surveillance over Exchange Rate Policies).
- The Syrian Arab Republic maintains restrictions on the making of payments and transfers for current international transactions in accordance with Article XIV, Section 2.
- The Syrian Arab Republic maintains measures subject to approval under Article VIII.
- The Fund encourages the authorities to:
  - eliminate the restrictions maintained under Article XIV, Section 2 as soon as its balance of payments permits; and
  - eliminate the measures that are subject to approval under Article VIII as soon as possible.

### Technical assistance (Appendix I)
- STA: Price statistics — October 2005 (planned)
- MFD: Long-term advisor on securities market — September 2005 (planned)
- MFD: Transfer of foreign assets from CboS to CB — August 2005 (planned)
- METAC: National income accounts — Ongoing
- METAC: Band regulation and supervision — Ongoing
- MFD: Re-organization of the central bank of Syria — May 2005
- FAD: Revenue Administration — March 2005
- MFD/LEG: AML/CFT — Feb/March 2005
- STA: Multi-sector statistics (national accounts, fiscal, monetary, and balance of payments) — June 2004
- FAD: Value-added tax — July 2004
- MAE: Two long-term advisors on bank regulation and bank supervision — 2002–2004
- MAE: Two-day workshop on on-site banking supervision — July 2002
- MAE: Workshop on off-site banking supervision — March 2002

### Relations with the World Bank Group (Appendix II)
- June 2002: Syria settled overdue service payments to IBRD and IDA, which had risen to the equivalent of $526 million as of mid-1997; all loans and credits were restored to accrual status. Consequently, the country’s eligibility for disbursements was reinstated as of July 1, 2002.
- Post-1997: World Bank provided non-lending services via grants from the Institutional Development Fund and supported accounting, external debt management, Year 2000 remediation, the Global Environment Fund biodiversity project, and reviews of trade, health, roads, urban water and sanitation, and agricultural irrigation sectors.
- Recent analytical work and non-lending support:
  - Trade policy report “Harnessing Trade for Growth” — submitted December 2004.
  - Trade Logistics study — completed 2003; discussed in December 2003 workshop.
  - Investment Climate Assessment survey — carried out in 2003 and 2004; results finalized in a report dated June, 2005.
  - Grant activity (from April 2005) in collaboration with the Fund and the UNDP to establish a National Statistical Capacity Strategy.
- World Bank program over the next 3 years will focus on:
  - Pillar (i): economic reform and transition — analytical advice and technical assistance to support a strategy of economic growth and transition to a private sector-led economy, integrating trade and investment with fiscal, monetary, financial sector, and public enterprise reforms.
  - Pillar (ii): human development and social protection — assist authorities in (i) developing a comprehensive education sector strategy as agreed with the Minster of Education; (ii) understanding the labor market and designing appropriate policies and programs; and (iii) assessing social assistance programs and policies and recommending reforms.
- IFC activity since 1999:
  - First investment: $1 million equity stake in a manufacturer of drip irrigation systems.
  - Other investments include an equity position in the first private sector bank in Syria and a loan to a chemicals company.
  - Total held portfolio: $20.2 million.
  - IFC has conducted technical assistance work, including studies of aspects of the financial sector.

### Statistical issues and recommendations (Appendix III)
- Overall assessment:
  - Significant weaknesses exist in Syria’s statistical base in terms of coverage, consistency, periodicity, and timeliness, hampering analysis and surveillance.
  - Efforts to address weaknesses should cover national accounts, government finance, monetary accounts, and balance of payments.
  - Syria’s participation in the General Data Dissemination System (GDDS) is strongly recommended.
  - Four compilers and a manager participated in the GDDS Workshop in Abu Dhabi (February 27–March 9, 2005); brief metadata for all macroeconomic sectors were prepared.
  - To become a GDDS participant the authorities will need to appoint a GDDS coordinator, express their commitment to the GDDS framework, and finalize GDDS metadata.

- Real sector (key weaknesses)
  - GDP estimates by the production approach suffer from under-coverage of activities, particularly in trade and private services. The base year has been updated to 2000.
  - Syria has a multiple exchange rate system; no adjustments are made for implicit indirect taxes and subsidies that affect GDP and other national accounts aggregates.
  - Estimates of final expenditures on GDP are incomplete: household final consumption expenditures are calculated as a residual and include changes in inventories (since inventories are not estimated separately). Authorities have begun to collect data on inventory changes in the public sector.
  - Consumption of fixed capital is estimated as a constant ratio of output.
  - Net income flows between residents and nonresidents derived from the balance of payments are unsatisfactory, rendering estimates of saving, investment, and net borrowing from abroad unreliable.
  - National accounts figures for 2001 show investment increasing by 25 percent in real terms, entirely due to a doubling in private investment in the agricultural sector; this remains puzzling.
  - Consumer price index calculations: prices for each month are compared to the same month of the base year; there are four weighing schemes, one for each quarter. Consequently, no month-on-month inflation can be derived, and the annual average inflation is not equal to the sum of the monthly indices.
  - Wholesale price index is compiled and reported annually but is not representative, as most prices are those of public sector enterprises.
  - As of June 2005, the latest national accounts figures reported in the International Finance Statistics (IFS) were for 2002, although the Central Bureau of Statistics published provisional 2003 accounts in its 2004 Statistical Abstract.

- Government finance (key weaknesses and remedial actions)
  - Fiscal accounts suffer from major deficiencies in definitions, coverage, classification, methodology, accuracy, reliability, and timeliness, generating severe inconsistencies with monetary and balance of payments statistics.
  - The multisector mission of June 2004 found GFS compilation by the MOF is adversely affected by cumbersome institutional arrangements, inadequate resources, and unresolved methodological problems.
  - Investment expenditure of public enterprises is included in government capital expenditure; compilation methodology does not follow GFSM 2001 or GFSM 1986.
  - Budget data are available with very long lags (two years for final budget accounts); financing data are not available.
  - No dissemination of GFS data; access to key data sources by GFS compilers within the MOF is problematic (e.g., breakdown of debt service into interest and amortization).
  - Largest discrepancies are between budget financing requirements (MoF) and government financing (CBS) due to lack of a common and regularly updated government sector coverage, misclassification of public enterprises investment expenditure, timing, and valuation issues.
  - Other discrepancies arise from unorthodox CBS treatments, such as parallel rise of government deposits and claims on government in the CBS balance sheet, likely due to government withdrawals counted as credit and never netted out against deposits, and profits transferred to government treated as permanent claim on the government.
  - June 2005 TA mission actions:
    - Developed a preliminary bridge table mapping budgetary source data codes to GFSM 2001 classification codes.
    - Conducted a seminar clarifying GFSM 2001 methodology to MOF officials.
    - Provided an updated institutional table showing current coverage of government and public enterprises to assist the Directorate of Planning and Statistics (DPS).
    - Formulated a detailed work plan centered on providing adequate resources and training for the DPS to compile annual GFS data according to GFSM 2001, resume data reporting to STA for publication in GFSY and IFS, and improve reporting to the IMF’s Middle East and Central Asia Department (MCD).
    - Recommended improvements in timeliness of annual data, including data on financing, and a start on compilation of sub-annual data.
  - Syria stopped reporting annual fiscal data for publication in the Government Finance Statistics Yearbook; latest data reported are for 1999. Reported data are partial, too aggregated, in part misclassified, and do not include extra-budgetary and social security accounts. No data on financing and debt are provided.

- Monetary accounts (key weaknesses and recommendations)
  - Monetary statistics suffer from major deficiencies that hamper meaningful analysis:
    - Institutional coverage of monetary statistics is incomplete.
    - Source data deficiencies arise from: (i) use of different exchange rates at the CBS and at other banks for valuing foreign positions; (ii) financial positions not valued at market prices or market-price equivalents; (iii) accounting procedures for maintenance of public sector accounts cause distortions in measurement of gross positions; and (iv) disparities between institutional coverage of public sector in monetary statistics and government finance statistics.
  - June 2004 STA mission recommendations to address source data deficiencies:
    - Use a market exchange rate for valuing all foreign currency denominated positions at all banks, including the CB; or as an intermediate step, use a single rate closest to the market rate for valuing all foreign currency positions at the CB and at the other banks.
    - Valuation of financial positions based on market prices or market price equivalents.
    - Full adoption of the residency principle based on the center of economic interest.
    - Revise accounting procedures for public administrative sector’s current accounts and classification of the CBS’ profit advances to government to an outstanding stock basis (for example, ensure deposit accounts are debited for checks presented instead of treating check amounts as advances credited to a claim on the check issuer).
    - Update institutional lists for public administrative and economic sectors for consistency with recommendations for government finance statistics and use these lists as the basis for collecting data and compiling monetary accounts.
  - Monthly monetary data for the IFS are reported with a variable lag, which currently (end-June 2005) stands at 14 months.

- Balance of payments
  - (Content on balance of payments issues begins in the source but is not included in the supplied excerpt.)

*IMF staff report excerpt: “The Fund takes this decision relating to the Syrian Arab Republic’s exchange” (selected appendices and sections).*

### 7.      The balance of payments (BOP) is compiled annually by the CBS on a provisional basis

### _cr05356 - 7.      The balance of payments (BOP) is compiled annually by the CBS on a provisional basis

### BOP compilation and timeliness
- The balance of payments (BOP) is compiled annually by the CBS on a provisional basis with about an eight-month lag.
- As of June 2005, the latest BOP figures reported in the IFS refer to 2003.
- Trade data are compiled monthly by the Customs Department and reported quarterly by the Central Bureau of Statistics in LS with a six-month lag.
- The BOP is presented in BPM5 format, but its compilation method is not entirely consistent with the BPM5 methodology.

### Identified weaknesses in BOP and related statistics (June 2004 STA mission)
- Private transfers do not fully reflect remittances by Syrians working abroad.
- The statistics in the BOP for official transfers differ significantly from figures provided from other sources, such as donors.
- Data on long-term official capital inflows and amortization are not consistent with the data provided by the MoF on the external financing of the budget deficit.
- Data on private capital movements are incomplete.
- Data on external debt continue to be incomplete, and external debt service obligations and arrears are not recorded in the BOP.
- Military imports are excluded from BOP and external debt data.
- There is a large discrepancy between reserve flows reported in the BOP and the reserve flows implied by the MS. In particular, the Net Foreign Assets (NFA) of the banking system are much higher in the monetary survey (MS) than in the international liquidity table derived from the balance of payments.

### Mission recommendations and proposed actions
- Adopt a new foreign exchange form (developed by the mission) to improve source data for BOP compilation.
- Establish an enterprise register to estimate foreign direct investment for the balance of payments statistics.
- Disseminate international reserves and external debt data—neither of which is currently disseminated for reasons of confidentiality.

### Policy-relevant context and key numeric facts from the source text
- Trade and BOP reporting lags: BOP compiled annually with about an eight-month lag; trade data reported quarterly with a six-month lag.
- Presentation standard: BOP presented in BPM5 format, but compilation not entirely consistent with BPM5 methodology.
- Oil sector importance: oil presently contributes "20 percent of GDP," "two-thirds of exports (about 14 percent of GDP)," and "half of government revenues (about 15 percent of GDP)."

*Source: IMF staff report excerpt (June 2005) contained in _cr05356.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05356.pdf_