Angry mobs rioting, stoning security forces and setting ablaze petrol stations have followed the lifting of government subsidies across the Middle East. Domestic unrest has bubbled over in Jordan, Iran and Yemen in recent years as the unbearable financial burden imposed by continued subsidisation has forced governments into unwelcome subsidy restrictions.
It is not therefore surprising that uncertainty hangs over Syria as the government seeks to decrease the weight of its huge subsidy bill, predicted to stand at a colossal SYP 350bn (USD 7bn) in 2008, equal to 20 percent of GDP.
Striking a blow at the heart of the subsidisation regime, the government announced in recent weeks that over the next five years it will phase out energy subsidies, beginning with an initial price increase of mazut (diesel fuel) from the current SYP 7 (USD 0.14) per litre to SYP 12 (USD 0.24).
While subsidies have been decreasing for several years, energy represents the single largest component of total subsidies (approximately 60 percent) and the step marks a significant break with 40 years of state subsidy policy. At the same time, as a key transport input, diesel plays a central role across the economy and the impact of the change could be acute.
The step has prompted a vicious debate between those who argue that subsidy reform is an urgent economic necessity and opponents who claim the government is abandoning its important social welfare role.
“They are increasing the price of mazut by 70 percent,” Jihad Yazigi, a Syrian economist, said.
According to many, Syria is in a fiscal crisis. “You cannot sustain these expenses,” says Yazigi. “The government could go bankrupt, so obviously it’s extremely dangerous.” The economic team led by Deputy Prime Minister for Economic Affairs Abdullah Dardari that is instigating the change in policy argues that the USD 7bn cost of subsidies is no longer bearable in light of Syria’s decreasing crude oil revenues and ever-greater reliance on refined oil imports.
Syrian oil production peaked in 1996 at 590,000 barrels per day (bpd) but now stands at 400,000 bpd, falling at a rate of 11 percent per annum. Syrian crude oil exports have taken a dramatic shift for the worse, falling from 14.7 percent of GDP in 2003 to 4.5 percent in 2006. At the same time, because Syria lacks suitable oil refining capacities, it imports diesel to meet domestic demand, which is increasing by 10 percent per annum. It is estimated that the influx of more than 1.5m Iraqi refugees has increased demand for energy by USD 1bn.
The result is that Syria has become a net oil importer and with world oil prices high the cost is considerable – especially when it is then resold on the domestic market at a huge mark down.
Diesel imports cost the Syrian government USD 0.56 per litre but are subsidised at USD 0.14 per litre which, according to the International Monetary Fund, consequently costs the Syrian government USD 15m per day (USD 5.4bn per year).
“There is no way out, subsidies have to be rationalised and kept down and the reason is that our oil revenues are falling drastically,” Nabil Sukkar, a former World Bank economist and head of the Syrian Consulting Bureau, said. He argues that a large budget deficit will provoke dangerous inflation and a fall in the value of the currency.
The situation has worsened due to significant smuggling to neighbouring Lebanon and Turkey where diesel prices are higher (USD 1.54 per litre in Turkey). According to Syrian Prime Minister Mohammad Naji Otri, Lebanon alone smuggles 500m litres of subsidised diesel per year from Syria.
“This means that we have offered about USD 300m subsidies for diesel to our brothers in Lebanon,” he said. “What about other neighbouring countries?”
Beyond the fiscal pressure, there is a growing recognition that the free distribution of subsidies allows for gross misuse as the wealthy exploit the cheap products despite the fiscal pressures it imposes upon the state.
“Subsidies go to rich people, middle-class people and poor people. One man may use 20 litres of diesel in one day heating his swimming pool, while another will use 10 litres in a whole year,” said Adnan Dakhakheni, a Member of Parliament and head of a consumer protection NGO. “Rich people pay taxes with the left hand and take subsides with the right hand, so they pay nothing.”
Accordingly, the government has made much of the fact that the change in policy is not an end to subsidisation, but rather a shift in the means of delivery to the neediest. The new policy envisages giving needy families SYP 12,000 (USD 240) a year to offset the price increase.
The new subsidies will be “distributed effectively among citizens, affirming the government’s commitment to delivering support to deserving groups,” Dardari said.
“Any new aid system will be gradual to eliminate economic and social shocks and achieve tangible improvement in living standards for the majority of Syrians,” he said recently as part of the government’s public relations offensive.
Critics, however, are not satisfied. If to some the economic arguments in favour of reform are compelling, to others the social, political and economic ramifications of this policy are equally frightening, despite government assurances.
“The moment is not suitable to shift subsidies as it will create social tensions as happened in Yemen and Jordan. And Syria doesn’t want these problems at this time because of foreign pressures,” said Kadri Jamil, a Communist Party official and professor of economics. “It might turn to chaos if people can’t afford food and basic needs,” he added, alluding to the fear that an increase in transportation costs will lead to widespread price increases.
“A price increase in mazut would lead to price increases in all items because everything needs to be transported – fruit, vegetables, meat – so here is the key issue,” Yazigi said. “The government says they expect inflation to increase 5 percent, but I think it’s very much below what we can expect. People are frightened, they are very aware prices are going to go up and incomes are already very low.”
Opponents argue that this dynamic will leave the poor increasingly vulnerable. In a country with an estimated 11 percent level of unemployment, poverty is widespread and it is feared that they will suffer disproportionately. “The subsidies play a key role for low-income citizens,” said Jamil. “In Syria, wages do not equal the minimum cost of living and so subsidies bridge part of the gap.”
Little faith is placed in the concept of compensating families through other means.
“Everything’s getting so expensive and we just can’t afford it any longer,” complained one Syrian when asked about her fears on the price rises to come. “Rent, food and now they want to increase the price of mazut, it’s impossible.”
Those in favour of subsidy reform believe market forces will alleviate these pressures. “It’s a painful measure we have to take and then let the market adjust,” Sukkar said. “In my mind, the market and business community will eventually become more efficient. Yes, at the beginning there will be pressure of higher prices, but then they will work on it and they will start cutting corners here and there to make up for this increase.”
Proponents of subsidy reform also argue that the government is not touching the price of bread, the other key subsidised good, and that education and health will remain free.
For others however, there is a simpler solution: seeking extra revenues from the pockets of the wealthy, principally the growing Syrian business elite that has done so well from the move towards a market economy over the last few years.
“The government really needs a source of income but they are not looking to get it from the rich people’s pockets but from the poor people’s pockets. A better way would be to work on tax evasion,” complained Jamil, reflecting the fact that tax receipts in 2006 stood at only USD 1.57bn.
Political opposition to the policy shift has succeeded in delaying the implementation of the price increases. However, the government is still planning to implement the new regime by the end of the year.
And then the battle will begin again. “I think what is really frightening the government is not only that they have to raise [prices] but that the bill is so huge and they know they’re going to have to do it again next year. It’s not just one crisis they are facing. Every year they’re going to face a crisis,” Yazigi said.
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