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Syria BANKING AND MONETARY POLICY
When first issued in 1920, the Syrian pound was linked to the
French franc. At independence French-and British-owned banks
dominated banking activity. The largest bank, the French-owned
Bank of Syria and Lebanon, became the bank of currency issue and
assumed other central-bank functions, in addition to its
commercial operations. In 1947 Syria joined the International
Monetary Fund (IMF) and established a par value of LS2.19
equivalent to US$1. In 1949 Syria broke the link to the franc.
The primary legislation establishing a central bank and
control of the banking system was passed in 1953, but the Central
Bank was not formed until 1956. Its functions included issuing
notes, controlling the money supply, acting as fiscal agent for
the government, and controlling credit and commercial banks. It
was also to act as the country's development bank until
specialized banks were established for various sectors. The
Central Bank had considerable discretionary powers over the
banking system but was itself responsible to and under the
control of the Council on Money and Credit, a policy group of
high-ranking officials.
The banking system has exhibited resilience in the wake of
widespread political change since independence. Before
independence, Syria was the junior partner in terms of banking
facilities in a customs union with Lebanon. Dissolution of that
relationship in 1950 stimulated the establishment of foreign
banks, especially Arab, and expansion of some already operating
there. After the 1956 Suez War, French and British banking
interests were sequestered as enemy assets. In 1958 and after the
union with Egypt, the state began to Arabize the commercial
banking system and in 1961 implemented a policy of limited
nationalization.
In 1966 the state achieved complete ownership of commercial
banking by merging all existing commercial banks into a single
consolidated Commercial Bank of Syria. In addition, the
government created specialized banks to promote economic
development. It extended the charter of the Agricultural
Cooperative Bank from the preindependence period and established
the Industrial Bank in 1959, the Real Estate Bank in April 1966,
and the Popular Credit Bank in July 1966.
In 1986 the banking system consisted of those five banks in
addition to the Central Bank. Legislation in 1966 largely limited
each bank's lending to the sector in its title. All five banks
could extend short- to long-term credit and accept deposits. The
Commercial Bank was by far the largest and most active.
The total assets of the specialized banks reached LS44.9
billion at the end of 1984, and total deposits amounted to LS28
billion. The Commercial Bank of Syria, the largest of the five
specialized banks, had assets of LS33.7 billion in over 40
branches in 1984. Deposits totaled LS19.3 billion in 1985. The
specialized banks extended credits of LS26.1 billion in 1984.
Banking authorities allocated credit primarily to commerce (51
percent), industry (27 percent), and construction (15 percent).
The public sector received 75 percent of the credit.
The Council on Money and Credit established monetary policy
and supervised banking, subject to review by a ministerial
committee responsible for the whole economy. The general
philosophy was that the banking system should be an agent of
government economic policy. Direct controls were used more often
than indirect ones; credit, for example, was regulated by setting
limits for each sector and each bank.
Although the money supply increased rapidly, it consisted
primarily of money in circulation. In the 1960s, demand deposits
generally were less than one-third of the money supply and by the
late 1960s about one-fifth. Banking activity increased in the
1970s, and currency in circulation slowly decreased from 77
percent of the money supply in 1970 to 61 percent in 1980 and 56
percent in 1984.
Bank accounts were predominantly demand deposits; use of time
and savings accounts grew slowly. For example, in 1984 time and
saving deposits were only 40 percent the size of demand deposits.
In fact, banking played a rather limited role in the economy.
There were several possible reasons for the limited use of banks,
including distrust of or unfamiliarity with banks, low incomes
and limited savings, low interest on saving accounts, lack of
more convenient branches, and, especially, the increased resort
to the black market for currency transactions and imported goods
in the mid-1970s.
Bank lending was mainly for short-term commercial
transactions. Bank financing of trade was 53 percent of total
lending in 1964, 67 percent in 1970, 79 percent in 1976, 46
percent in 1980, and 50 percent in 1984. The value of loans to
the commercial sector nearly tripled from 1975 to 1984. Loans to
other sectors of the economy, especially to industry and
construction, diverted bank lending from commerce in the late
1970s. The value of loans to the industrial sector increased more
than twenty-fold from 1975 to 1984, to become 27 percent of total
lending. The value of construction loans grew seventeen-fold and
agricultural loans tripled.
The sources of bank funds, largely borrowing from the Central
Bank and demand deposits, contributed to the short-term nature of
most lending. In general, the banks were undercapitalized. In the
1970s and 1980s, more medium-term loans and a few long-term loans
(in agriculture and housing) were made. Long-term loans
constituted 15 percent of agricultural loans and 71 percent of
housing loans. Short-term commercial credits, however, increased
faster. The Industrial Bank appeared to invest equity capital in
both public and private plants instead of making long-term loans.
Public sector enterprises received most bank lending, but the
percentage fell from 84 percent in 1976 to 75 percent in 1984.
Monetary expansion in the 1960s largely resulted from
financing government budget deficits. The growth of the economy,
extension of the use of money, and government price controls
minimized the impact of deficit financing on prices. Monetary
expansion accelerated in the 1970s, particularly after 1972. The
large inflows of foreign funds, plus the sharp increase in
Syria's own oil revenues, facilitated rapid growth of government
expenditures while building up government deposits with the
banking system. A high rate of credit expansion, primarily to
public sector enterprises, followed, and private sector borrowing
also increased substantially. After 1976, the expansion of the
money supply continued in tandem with the need to finance chronic
budget deficits. The money supply grew 21.3 percent during the
1970s and 22.8 percent a year during the early 1980s, a rate much
higher than the growth of GDP.
Monetary expansion, along with shortages of goods and labor,
caused a period of high inflation. Inflation was also fueled by
steep rises in world prices of imported commodities. The
wholesale price index increased an average of 18.2 percent a year
between 1972 and 1976; from 1977 to 1984, wholesale prices more
than doubled. This period was Syria's miniboom--a smaller version
of the high level of investment and construction activity,
rapidly rising prices, shortages of goods and labor, and
overtaxed storage and transportation facilities that
characterized the nearby Arab and Iranian oil economies.
In addition to setting a great number of prices directly, the
government controlled many more. Limited markups (generally
between 5 and 10 percent) were applied to a wide range of
commodities produced or imported by the private sector. Essential
commodities were supplied at low, subsidized prices. When the
price discrepancy of an item became too great, encouraging
smuggling, the government rationed the amount that could be
bought at subsidized prices. Rationed commodities included rice,
sugar, and cottonseed oil. A person wanting more than the ration
could buy as much as he wanted at the much higher open-market
price.
The government's rationing policy directly contributed to
black market growth in the early 1970s. The black market
flourished during Syria's miniboom of the mid-1970s and
substantially increased as the Syrian presence in Lebanon
facilitated the transfer of consumer goods, raw materials, and
industrial spare parts across the border. Frustrated by
bureaucratic delays in obtaining import permits and letters of
credit, the private sector increasingly turned to the underground
economy to acquire essential imports. The public sector, also
suffering from strict government control over imports and from
shortages of foreign exchange, resorted to similar means to
import spare parts for state-run factories. Observers estimated
black-market trade at about US$1 billion per year in the mid-
1980s, almost one-quarter the size of officially recorded
imports.
The black market in foreign exchange also played a more
active role in the economy, as Syrians working abroad sought
higher exchange rates for their currency. In mid-1986 Syrian
pounds traded for about 30 to the dollar in contrast to official
exchange rates of LS3.9 to the dollar.
Government responses to increased resort to the black market
for imported goods and currency exchange varied. In 1984 and
1985, as part of its efforts to alleviate the foreign exchange
crisis, the state launched a campaign against black-market money
changing and currency smuggling. Syria decreed heavy sentences
for black marketeering, including up to twenty-five years'
imprisonment for currency smuggling and one-to five-year
sentences for Syrians who failed to repatriate funds earned
overseas from business inside Syria. Widespread but brief arrests
of money changers signaled the government's intention to limit
the black market, rather than eradicate it; in the late 1980s,
the official economy still remained heavily dependent on
underground transactions for foreign exchange. In addition, the
government issued new regulations severely limiting the amount of
foreign exchange allowed out of the country and requiring
tourists to change US$100 upon entry.
In 1986 the Commercial Bank issued a new regulation to
facilitate private sector imports through official channels and
reduce black market activity. The regulation permitted any
importer with an official import license and source of foreign
currency to pay the Commercial Bank 105 percent of the total
amount required in the letter of credit and receive a letter of
credit immediately. The regulation was designed to reduce the
waiting period for letters of credit, which had reached up to two
years for some private sector firms in the mid-1980s. However,
private businessmen initially reacted cautiously to the reform
measure, fearing retribution from state tax collectors or the
police by admitting they held large amounts of foreign currency
outside the system.
In the 1980s, the government also revised exchange rates in
an attempt to attract workers' remittances to official channels,
make government rates more competitive with the black market, and
stop the depreciation of the pound. In 1981 Syria reverted to a
multitier exchange rate, in which the government established a
"parallel" rate for private sector imports that floated against
major international currencies. In 1986 the parallel rate was
LS5.4 to US$1. The "official" rate of LS3.9 to US$1 remained in
use for public sector imports. In 1982 the government established
a "tourist" rate for Syrians working abroad; this rate was LS9.75
to US$1 in 1986. By 1986 many commercial activities were
calculated at the "tourist" rate to encourage a return to
official banking channels. In addition, government regulations
instituted in 1984 permitted Syrians working abroad and
foreigners doing business in Syria to maintain hard currency
accounts of up to 75 percent of the value of agricultural and
industrial imports. After September 1985, the government
permitted resident Syrians to open hard currency, interest-
bearing accounts at the Commercial Bank of Syria specifically to
finance imports.
Data as of April 1987
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