Institute for War and Peace Reporting | Giving Voice, Driving Change

Syria to Seek Financial Sector Investment

(06-Feb-09)
By IWPR
Economic experts have welcomed a statement by Syria’s central bank chief that the government is considering giving foreign investors a chance to buy controlling stakes in financial-sector companies.



“Syria will consider allowing foreign investors to own majority shares in local companies, including banks,” said Adib Mayaleh, governor of Syria’s Central Bank.



“There is a plan for this,” Mayaleh told reporters in mid-January on the sidelines of an Arab economic summit in Kuwait. He did not set out any timeframe for the change.



Economists have interpreted Mayaleh’s comments as a sign that the government is serious about pulling in more foreign investment, especially from Gulf states.



In recent press interviews, Mayaleh has said an inflow of investment from Gulf states into private banks and insurance companies would benefit the Syrian economy as a whole by funding industry, tourism, real estate and other sectors.



Foreign shareholders are already permitted to own more than 49 per cent of the stock in certain Syrian companies in the industrial sector, but not in the financial sector.



Of the 18 banks in Syria, six are state-owned, ten are branches of Lebanese and Jordan banks, and two are Islamic banks founded on mainly Saudi capital. Insurance companies, meanwhile, remain largely state controlled, although a few private ventures have emerged recently.



All that could be about to change.



Abdullah al-Dardari, deputy prime minister for economic affairs, told Reuters on February 3 that his country was eager to attract more foreign investment – particularly from its main trading partners in Europe and from Arab states.



Dardari said Syria was worried about the effect of the global financial crunch on its economy, which relies heavily on international trade. About 70 per cent of gross domestic product, GDP, is attributable to exported goods, and this leaves the economy highly vulnerable to external factors, he said.



“We have therefore been considering what impact this [will] have on investment. Is the money drying up in the Gulf to the point that they will not be interested in Syria?” he asked.



Ali Kanaan, professor of economics at Damascus University, noted that investors have been reluctant to inject funds into the country because of government-imposed restrictions on business. For example, private banks continue to face a large degree of state control and state interference in how they run their affairs.



The authorities have made a number of concessions to foreign investors in recent years, as government economic policy has swung away from the state-heavy socialist model towards one driven by market forces, with the aim of making the economy more competitive on the international market.



In 2001, the government opened the door for the establishment of private financial companies, allowing non-Syrians to act as co-founders and partners in banks, provided they do not own a majority share.



Then in 2007, following recommendations from the World Bank, the government introduced a more liberal investment law allowing non-nations to own the property they use for investment projects, and granting them some tax incentives. Investors were also given the right to transfer all their profits outside Syria as well as to withdraw their assets six months after investing in the country if they encountered certain difficulties.



To reassure investors, the government also set up specialised bodies to resolve legal disputes linked to investment projects.



Haitham Haitham, an assistant professor of economics at Damascus University, said that the new flexible measures had certainly encouraged investors, but the overall scale of foreign investments remained small, in part because of the conflicts in the region.



Foreign direct investment, FDI, in 2007 stood at 885 million US dollars, according to a World Bank report last year. That figure was a massive increase of nearly 50 per cent on 2006, but still well under a third of Lebanon’s FDI inflows for 2007.



Around three per cent of GDP is created by FDI, according to a report issued this year by the Syrian Investment Board, a government agency. This investment mainly comes from Qatar and Turkey, and is concentrated in the metal and petrochemicals industries, with some going into real estate, tourism and banking.



The investment board recently issued a report arguing the case for Syria as an attractive investment environment. Foreign debt is on a limited scale, and the national currency is not pegged to the US dollar and has been stable for many years.



The report conceded that certain factors had slowed the pace of FDI, such as political instability and security problems in neighbouring countries, as well as economic sanctions imposed by the West.



But according to Akram al-Buni, a Damascus-based economist, the core problems that hinder the flow of investment are excessive bureaucracy and outdated laws and regulations.



“The Syrian economy is not facing minor obstacles, but is rather suffering from a chronic crisis,” said Buni. “The crisis will continue until there’s a real basis for greater investment and true competition.”



Wadah Saeb, manager of a private company in Damascus, agreed.



“It is true that the government has given some incentives to investors, but is cutting taxes really important when a project is delayed and its capital frozen because of red tape and an obsolete administration?” he asked.



Some economists say liberalising the economy is not going to lure investors unless the government guarantees greater political freedom and ensures the rule of law.



“The issue is more political than economic,” said an economist at the University of Damascus, who asked to remain anonymous. “Investors are not going to be enthusiastic about spending their money… as long as they lack confidence in the political climate and the laws of the land.”



(Syria News Briefing, a weekly news analysis service, draws on information and opinion from a network of IWPR-trained Syrian journalists based in the country.)