Syrian Arab Republic -- 2008 Article IV Consultation, Concluding Statement
IMF News, November 26, 2008
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- Published: November 26, 2008
I. Introduction
- Mission expressed gratitude for the Syrian authorities' excellent cooperation and noted benefits from interactions with government officials and representatives of the public and private sectors.
II. Recent Economic developments
- Macroeconomic performance in 2007:
- Non-oil GDP growth estimated at about 6 percent.
- Overall growth registered about 4 percent due to declining oil production.
- Inflation reported at just below 5 percent.
- Fiscal developments:
- Overall fiscal deficit increased to about 3 percent of GDP in 2007.
- Non-oil deficit remained stable.
- Expenditures dropped by about one percent of GDP as both current and capital outlays declined.
- Oil revenue decreased by about 2 percent of GDP as the net external oil trade surplus virtually disappeared.
- Non-oil receipts declined partly reflecting the reduction in customs tariffs.
- External sector and reserves:
- External current account deficit widened to an estimated 3.3 percent of GDP in 2007 (from 2.8 percent in 2006).
- Net oil surplus (after subtracting the share of foreign partners) was eliminated due to decline in output and increase in domestic consumption.
- Non-oil exports, tourism, and transfers were buoyant partly due to strong regional demand and relaxation of foreign exchange controls.
- Net foreign assets of the Central Bank of Syria (CBS) and the Commercial Bank of Syria (CBoS) stood at about $17 billion.
III. Near- and Medium-Term Outlook
- Near-term projections and risks:
- Non-oil growth projected at about 6 percent in 2008.
- Decline in oil output likely to continue.
- Inflation accelerated in 2008, driven mostly by higher food and fuel prices; expected to register on average about 15 percent for the year.
- External current account deficit projected to widen to about 4 percent of GDP in 2008.
- Broad money projected to grow by about 20 percent.
- Growth of credit to public enterprise projected to remain high (37 percent).
- Credit to the private sector expected to accelerate to about 25 percent.
- Level of financial intermediation remains low, including by regional standards.
- Fiscal outlook:
- Fiscal deficit projected to remain at about 3 percent of GDP in 2008.
- Budget provides for a 10 percent expenditure growth over the 2007 outcome: 4 percent increase in current expenditures and 18 percent increase in capital outlays.
- In absence of new fiscal measures, non-oil revenues and current expenditures projected to grow in line with GDP.
- Medium-term scenario (conditional on fiscal and structural reforms):
- Fiscal deficit could remain at about 3 percent and public debt below 35 percent of GDP.
- Current account deficit expected to remain at around 4 percent of GDP.
- Non-oil growth would likely pick up to about 6.5 percent.
- Inflation would decelerate to mid-single digits.
- Considerable downside risk if reform efforts weaken or regional slowdown deepens or remains prolonged.
- Specific policy actions taken:
- Authorities launched program to phase out petroleum subsidies in May 2008; gasoline and diesel prices increased by 33 and 240 percent, respectively.
- Coupons issued to allow purchase of diesel at 9 SYP/liter, covering about 4.4 million tons (roughly amount of local production of diesel).
- Cost of explicit oil subsidy increased due to sharp rise in international prices during first eight months of 2008.
IV. Policy Discussions
Major focus areas: (i) fiscal policies and reforms to compensate for decline in oil revenue; (ii) monetary and exchange rate policy; and (iii) structural reforms to enhance medium-term growth, with emphasis on the financial sector.
A. Fiscal Policy and Reforms
- Mission recommendations and observations:
- Encourage authorities to reduce the non-oil fiscal deficit by about 1 percent of GDP in 2009 through expenditure restraint, reducing oil subsidies, and strengthening tax administration.
- Welcome decision to raise fuel oil prices by 33 percent effective December 1, 2008.
- Importance of limiting other current expenditures to budget allocations to maintain progress in reducing the non-oil fiscal deficit.
- Rationalize capital outlays; priority to completing projects under construction.
- Strengthen procurement procedures and evaluation of viability of investment proposals.
- Continue to encourage private sector participation, including through private-public partnership agreements with adequate safeguards.
- Urgent need to enhance public expenditure management:
- Improve monitoring of expenditures at the regional level.
- Establish a single treasury account to improve expenditure control.
- Large amount of extra-budgetary and quasi-fiscal operations conducted by public enterprises and financed by the banking system should be brought on budget.
- Limit expansion of credit to the public sector; consolidated budget deficit should be primarily financed by treasury bills with market-determined interest.
- VAT preparation:
- Good progress in preparatory work for the VAT; mission encourages adherence to new target date of 2010.
- Implement integrated information technology systems and enact a tax procedure code.
- Ensure Large Taxpayer Offices (LTO) and five envisaged Medium Taxpayer Offices (MTO) report directly to the integrated Tax Commission.
- Adopt a single rate with few exemptions in line with best practices.
B. Monetary and Exchange Rate Policy
- Mission recommendations and observations:
- Welcome CBS' commitment to maintaining a prudent monetary policy stance.
- Public banks should be instructed to strictly limit directed lending to help reduce money growth and contain inflationary pressures.
- Important to develop indirect monetary policy instruments:
- If plans to launch treasury bills falter, CBS encouraged to issue its own certificate of deposits.
- Consider establishing standing facilities at the CBS.
- Urge authorities to work toward granting the CBS full independence to formulate and implement monetary policy.
- CBS needs to gain full control over foreign exchange reserves; ongoing transfer of official foreign exchange reserves held by the CBoS to the CBS is encouraging.
- Exchange rate developments:
- Significant progress toward exchange rate unification made on January 1, 2007 with abolition of official "budget" rate.
- Authorities switched the reference currency from the U.S. dollar to the SDR in August 2007.
- Since then, the pound has appreciated against the dollar by about 10 percent.
- In real effective terms, the pound appreciated somewhat more by end-June 2008.
- Preliminary econometric estimates (not reliable due to data and methodological shortcomings) suggest the real exchange rate of the pound may be moderately overvalued relative to its medium term equilibrium level.
- Mission recommends maintaining current level of the nominal exchange rate in present context as it appears in line with market forces and consistent with CBS' policy of containing inflation.
- For the medium term, prepare for a gradual move toward greater exchange rate flexibility to maintain external stability given prospective depletion of oil reserves and to facilitate gradual increase in monetary policy independence.
- Banking sector and supervision:
- Private banks overall capital adequacy ratio was at 13 percent at mid-2008 (above CBS and Basel Committee minimum requirements of 12 percent and 8 percent, respectively).
- Ratios not calculated for public banks; public banks granting loans to some loss-making public enterprises.
- Credit to public enterprises grew by nearly 40 percent in 2007 and by more than 60 percent in the first half of 2008; such rapid credit growth could have adverse consequences and create large quasi-fiscal liabilities.
- Encourage follow-up on Financial Sector Assessment Program recommendations:
- CBS addressing deficiencies in Basle Core Principles assessment including improving supervision of state banks and preparing issuance of treasury bills.
- Important for CBS to accelerate reforms and enhance supervisory capacity.
- Priority to restructuring state banks and ensuring commercial operation.
- Any necessary subsidies to strategic sectors or vulnerable groups should be provided directly from the budget in a targeted and transparent fashion, rather than through public banks.
- Enforce compliance with prudential regulations by public banks; avoid subjecting public banks to less stringent supervision than private banks.
- All banks should be subject to annual audits by independent firms and produce reliable financial soundness indicators.
C. Structural Reforms and Other Issues
- Structural reform priorities and recommendations:
- Continuation of strong economic growth contingent on advancing wide-ranging structural reform agenda to increase private investment.
- Welcome progress in opening up sectors including telecommunication; reductions in import tariffs and shortening of import negative list; crucial to sustain reform momentum.
- Staff encourages authorities to accept obligations of Article VIII of the IMF's Articles of Agreement:
- Remove any remaining foreign exchange restrictions and multiple currency practices.
- Make further progress in liberalizing the foreign exchange market and refrain from introducing regulations to tighten control to help strengthen confidence and eliminate the parallel market.
- Welcome ongoing efforts to enhance anti-money laundering and combating financing of terrorism framework; encourage continued work with regional groups and international institutions.
- Urge authorities to improve data quality and provision to facilitate surveillance and inform economic policy; current data quality and provision are significantly below what has been achieved by countries at a similar stage of development.
Concluding Statement — Mission visit dated October 29, 2008; document posted November 26, 2008.