US dollar slowly replacing Syrian pound

Since the civil war began, the Syrian pound has lost about four-fifths of its value against the US dollar, which is being used more and more in opposition-controlled areas.

al-monitor A money changer counts Syrian currency notes inside his shop in Maaret al-Naaman town in Idlib province, Feb. 2, 2015. Photo by REUTERS/Khalil Ashawi.

Topics covered

us dollar, turkey, syria, ghouta, economic crisis, damascus, civil war, central bank

Feb 17, 2015

The state of the Syrian pound is worrying Syrians all over the country as it affects their daily lives. The relative stability of the pound’s value before the revolution was somewhat dependent on the performance of the Central Bank of Syria, which sought to use revenues from oil and raw materials exports, tourism revenues, private sector exports and remittances from expatriates, to pay for imports — whether paid for by the public or private sectors.

According to Central Bank figures, the Central Bank had succeeded, since 2004, in increasing its foreign currency reserves to nearly $5 billion in 2010, one year before the revolution started. But since the popular protests started, the Central Bank and the Syrian pound have been under constant pressure, disrupting the balance and degrading the bank’s role. The state’s foreign currency income kept falling at an accelerating pace due to a halt in oil and tourism revenues, a big drop in Syrian exports and capital flight. Hundreds of businessmen and private banks have taken their money out of Syria. Meanwhile, the regime needs huge amounts of money to pay for arms, fuel and salaries to continue the operations of its army and militias.

Despite Iranian financial support (direct and in-kind), the Central Bank may have been forced to cover the deficit using its foreign reserves and the funds pumped by international organizations and opposition institutions. As foreign reserves kept dropping, the bank lost one of its most important tools and has become unable to stop the gradual slide of the Syrian pound. At the beginning of 2015, it took 230 Syrian pounds to buy a US dollar, up from 48 at the end of 2010.

The Syrian currency’s slide will continue as long as the Central Bank’s foreign currency income remains low, especially in the absence of a political or military solution to the conflict on the horizon.

The Central Bank’s maneuvers and its intervention to buy Syrian currency from the market and inject foreign currency in its place are no more than temporary fixes.

The deterioration of the Syrian pound has weakened the regime and has harmed thousands of employees whose salaries have remained unchanged. The pound’s purchasing power has collapsed. Those whose savings were in the Syrian pound have lost a big portion of their savings. Of course, the drop in the Syrian pound is something minor compared with the degree of violence used by the regime. That violence has displaced millions of civilians and destroyed big portions of Syrian cities, towns and villages. The economy and infrastructure have collapsed. And many have decided to boycott the Syrian pound by asking, “How can we use the currency of the regime that is killing us, and thus support its economy?”

In this regard, it can be said that part of the foreign currency coming from foreign aid to the opposition still ends up in the Syrian Central Bank. Funds sent to areas besieged by the regime or that fall under its control are converted to Syrian pounds to buy goods from the local market. This means that these funds enter the market and thus, part of them end up supporting the regime’s economy. The effect of this process is limited by the amount of funds transferred, and it decreases because of the regime’s massive shortfall in foreign currency and the fact that local populations in besieged areas, such as Ghouta, have created local self-sufficiency projects whereby the currency remains mostly inside the besieged area.

The liberated areas in the north have been trading with Turkey and the world. Trading with the world has reduced trade with regime-controlled areas and subsequently reduced foreign currency flow to regime areas. Even middle-class merchants are dealing in dollars instead of the Syrian pound. This has weakened the pound’s role.

The dollarization of the economy in the liberated north is ongoing. If this area becomes stable and production becomes possible and starts competing with what is produced in the regime areas, then foreign currency could start flowing from the regime areas to the liberated areas.

The other crisis experienced by the Central Bank is its inability to print Syrian pounds — which used to be printed in Austria — due to EU sanctions. This led to the emergence of a new 500-pound note in 2014. The new note looks different from the old one. The new note was most probably printed in Russia. It has no real value because of the collapse of the Syrian economy. It is unlikely that the regime is backing the new note with foreign currency bonds or gold.

It seems that pumping the pound’s “Russian version” into the market is one of the factors that accelerated the pound’s deterioration. But since the new note can be distinguished from the “Austrian version,” the opposition forces have starting warning against its use. The Central Bank’s decision to continue injecting the “Russian version” may lead to two put prices for the exchange: a price for the Austrian version and a price for the Russian version.

In the end, it seems that a partial dollarization of the economy and a gradual reduction of trading in the pound are the only options left for the Syrians living in the liberated areas. Sadly, the people’s suffering will continue until there is an international will to find a solution to the Syrian tragedy. When that happens, a new currency could be printed so that the Syrian pound bearing Bashar al-Assad’s image becomes a thing of the past.

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