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French Version

IMF expects strong Syrian economic growth in 2007

Report

Editors note: The International Monetary Fund recently issued its final report for 2007 on the economic and financial performance in Syria. The report noticed some growth in 2006 and expected this trend to continue in 2007 as well. The following is an excerpt of the IMF's staff appraisal.

STAFF APPRAISAL

1. Syria's overall economic performance continued to be strong in 2006, and the outlook for 2007 is positive. Notwithstanding an unsettled regional environment and the impact of a sharp decline in oil proceeds, the economic recovery that started in 2004 remains on track. Non-oil GDP grew at a brisk pace in 2006, benefiting from sizeable inflows from the Iraqi refugees and abundant liquidity in the Gulf region. Strong gains in non-oil exports and a pick up of private investment contributed to growth.

The economy's supply responsiveness, a tighter credit policy, and fiscal discipline helped contain inflationary pressures, despite the large demand shock from the Iraqi influx. Also, the boom in investment approvals bodes well for the country's medium-term growth prospects.

2. Looking forward, steadfast implementation of the ambitious 10th Five Year Development Plan is essential to consolidate these gains. Rebalancing growth toward investment and achieving durable gains in external markets require maintaining financial stability and deepening structural reforms. More competition in product markets, a friendlier and more transparent business environment, greater exposure to international competition, and further financial liberalization are necessary to close the reform-gap with other countries in the region and position Syria to take advantage of regional and global integration

3. The size and quality of the fiscal adjustment achieved in the past three years is commendable and has contributed to a significant strengthening of Syria's medium-term fiscal prospects. However, given the prospective further decline in oil revenue, and the possible need to accommodate significant costs of bank restructuring, an additional strong fiscal effort is needed over the medium term. Concerns about social equity would be best addressed by excises on luxury goods and well-targeted spending programs, or by enhancing the progressively of income taxes. A restrained wage policy is also essential to support the needed fiscal adjustment and protect competitiveness. In addition, the pace of tax administration reforms needs to be accelerated to support the introduction of the VAT.

4. Deepening Public Expenditures (PE) reform could go a long way in improving efficiency and stopping the drain on the public finances. The provision in the new public finance law to sever the links between PEs and the budget is a step in the right direction. However, for this reform to bear fruit, it is essential that PEs be subjected to the discipline of the market to avoid shifting their losses from the budget to the state banks and that all quasi-fiscal activities be reflected transparently in the budget. The authorities are also encouraged to restructure the public enterprises that are deemed viable, select those to be privatized, and develop case-by-case solutions, including liquidation, to deal with the rest. Allowing restructured PEs further flexibility in employment decisions, and in wage and pricing policies, will be essential for their future viability.

5. Progress toward exchange-rate unification and current account convertibility are important and welcome steps. The enactment of a new foreign-exchange law would send a strong signal about the irreversibility of these reforms and the authorities' commitment to re-entry into the global economy. The new legislation should abrogate the existing complex set of foreign exchange laws and regulations and enshrine full current account convertibility, a unified exchange rate, and repatriation of profits from Foreign Direct Investment (FDI). In the current context, the Central Bank is encouraged to ensure a consistent implementation of a managed float within a tight trading range. Such a regime strikes the right balance between the need to continue to use the exchange rate as the main nominal anchor while allowing some flexibility. In the future, greater flexibility will facilitate adjustment to the likely changes in the equilibrium real exchange rate arising from the ongoing depletion of oil reserves, trade liberalization, and the transition to a market economy.

6. To maintain external stability over the medium term, Syria needs to continue with strong fiscal adjustment, accelerate structural reforms, and allow greater exchange rate flexibility. Although it is difficult to come to a definitive conclusion in the absence of adequate data, there are no indications that the exchange rate is significantly misaligned. This seems to be confirmed by the strong performance of non-oil exports, and the lack of protracted loss of international reserves or unsustainable official or quasi-official borrowing. Nonetheless, the staff believes that the impact of the recent real appreciation on external competitiveness should continue to be monitored carefully, particularly in light of the depletion of oil reserves, and the large uncertainties about the level of the current account deficit and the sources of its financing. Looking ahead, priority should be given to improving the statistics to

provide a basis for developing indicators to assess exchange rate misalignment.

7. The new monetary/exchange rate policy framework needs to be supported by the prompt introduction of market-based instruments of monetary control. This is important to enhance monetary management, facilitate interest rate liberalization, alleviate the costs on banks of managing Syrian pound liquidity, and pave the way toward greater exchange rate flexibility in the medium term. The authorities are encouraged to move swiftly on the much delayed agenda of launching a government securities market and improving public debt management.

8. The rapid take-off of private banking, although promising, illustrates potential pitfalls in the sequencing of reforms. In this regard, it is essential that the strengthening of the regulatory and supervisory capacity keeps pace with financial liberalization. Vigorous action is required to restructure the state banks to stem the accumulation of additional nonperforming loans and encourage greater competition.

Moreover, quick progress in developing market-based instruments of monetary control is also needed to reduce excessive risk taking and discourage dollarization. The central bank should also play a catalytic role in setting up a credit registry.

Marseille,09 04 2007
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