Syrian Debt Crisis

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With the start of commercial oil exploitation in Syria (1956) local economy boomed. Shukri al-Kuwatli’s left wing pan-arabist regime promoted and subsidized then a huge program of industrialization and public works. With such intervention of the state on economics it didn’t take much time until the public sector become growing fast. Corruption followed that growth.

Oil exploitation was supposed to finance this entire program but as exploitation wasn’t yet in full strength large sums of money were borrowed. Al-Kuwatli, as pan-arabist, preferred Christian Arab Lebanese bankers instead the usual European or North American ones. Development was being paid not by the oil was being produced but by the oil which was expected to be produced in near future, even so Lebanese bankers believed that Syrian debt was a safe investment.

Syria and Egypt unified in a confederation called the United Arab Republic in 1958. From now on Syria sided with Nasser’s active politics on Arab Unification, providing funds and even weapons to rebel movements across the entire Arab World. Also between 1960 and 1961 the United Arab Republic sided with the rebels in the Yemens War deploying thousands of troops. Being Egypt the economically weakest country of the confederation (this was one of the reasons of the unification) much of the financial war effort was taken by Syria.

In 1961 Syrian nationalists deposed al-Kuwatli and Syria withdrew from the United Arab Republic, thus ending the confederation. By this time Syrian debt was already too large compared to the profits generated by oil exploitation.

A friend from Iraaq

When debt started to be paid, in late 1961 and early 1962, the new nationalist Syrian military regime found itself with certain liquidity difficulties despite Syria was one of the most developed regional powers. Despite reasonably high oil prices since the Suez Crisis, which were financing economical booming in oil producing countries in general, and local industries the Syrian economic booming of the late 1950’s faded due to political turmoil, uninspired politicians and widespread corruption. Also much of the state budget was being absorbed by the large state apparatus and its earnings. To face this growing lack of liquidity taxes rose causing widespread discontent among the people.

This regime was finally toppled by a coup lead by several Nasserists making of Colonel Muhammad al-Sufi president in 1963. The new power being ideologically very close to General Abdul Karim Qassim’s regime from Iraaq started an approach to Baghdaad, by dropping the recognition of the Hashemite claims to Iraaqi throne. Conversations were held between al-Sufi and Qassim in order to Syria have help from its eastern neighbor. Al-Sufi described Qassim as ”a friend from Iraaq who was going to give Syria a hand when needed”.

By this time Qassim’s Iraaq was having an economic booming. Qassim accepted to buy the Lebanese bankers one third of the Syrian debt hoping further integration of Syria in a unification project. This third of the debt was being paid in Italian liras (traditionally a consequence of 19th century Lombard presence in Lebanon during early stages of the building of the Suez Canal) but was exchanged to iraaqi dinars in a time iraaqi currency valued about 500 gr of fine silver. Following the principles of Islamic banking no interest rate (the riba) was asked by iraaqi regime.

Between 1964 and 1965 Iraaq acquired almost the rest of Syrian debt to Lebanese banks always exchanging it into iraaqi dinars and giving new and longer periods for repayment. The al-Sufi regime borrowed then more money from Iraaq for investing in infrastructures and defense. Qassim never refused what al-Sufi asked and didn’t note Syria was fastly in a spiral of debts.

Galloping debt

During this period iraaqi economy was booming as oil exports granted constant financing to large development projects across the Middle East. In fact Iraaq was by then the strongest oil based economy of the Middle East as Saudi Arabia was also struggling to pay its own external debt. Beside strongly investing in national development Qassim’s regime also invested in acquiring large quantities of silver thus valuating dramatically national currency.

By early 1970’s the iraaqi currency reached its value peak, 1800 gr of fine silver per dinar. Despite no interest rates were ever asked to Syria the external debt had over tripled its value as the iraaqi dinar valued then over three times more than during early 1960’s. Syrian economy didn’t grow at same rhythm. Still political turmoil (al-Sufi was deposed) and corruption in Syria. Despite power shifts in Damascus not always aligned to Qassim’s regime good relations were usually maintained while Qassim’s intentions to unify both countries were delayed by political instability in Syria.

Beginning of the debt crisis

Iraaqi prosperity wouldn’t last forever. On the 17th October 1973 oil prices decreased 20% in a single day due to overproduction on which Iraaq was blamed and suspended from COPEN. Oil prices downfall spiral lasted eight months until prices stabilized after losing 60% of its value. For oil based economies was just like an earthquake while industrialized world’s economy started several years of prosperity and growth. Countries like Iraaq which owed much of their development to oil industry found themselves suddenly without revenues.

Iraaqi regime (so as others) faced then lack of liquidity and unilaterally shortened the schedules of Syrian repayment of its debt. Qassim forced then the Syrian president (now once again a pan-arabist, Hafiz al-Assad) to accept what was called as “iraaqi financial advisors”.

Iraaqi troops were sent to the border of the two countries while the so-called “advisors” pressured Damascus in order Syria make what was needed to repay what it owed to Iraaq. For the repressed Syrian opposition and common people in general the reason of Qassim’s friendship had just one purpose, it was “a plot of national domination by communist Qassim”

Under the pressure of Iraaq President al-Assad implemented austerity measures in order to repay the debt but people and some sectors of the military reacted by rebelling. Two major rebel parties arose. In urban areas a more cult middle class defended the end of al-Hafiz dictatorship to replace it by a democratic regime. In rural areas local clerics refused both representative democracy and al-Hafiz regime. For them Koran was the answer, in a context of growing radical Islam growth across the Middle East.

When rebellion was out of control Al-Assad, in an act of despair, invited then Iraaq to form a union between both countries hoping iraaqi troops would help his regime to defeat the rebells. But it was too late. Even before Qassim made any move al-Assad was deposed by pro-democracy militaries, on August 1974, while the new power in Damascus declared default.

Coming out the crisis

Afraid of an iraaqi invasion Syrian people rallied around their new provisional government, made of pro-democracy and radical Islamite. Mass demonstrations of support were held in the major cities. Qassim understood their message. Instead of invading Syria in a costy and unpredictable war accepted the renegotiation of the debt.

After several meetings between the Ministers of Finance of both countries under the supervision of the Arab Community Iraaq accepted Syria to delay its debt repayment while Syria accepted Iraaq to charge Syrian loans with an interest rate. Such caused some criticism from Islamite opposition so as from Islamic bankers worldwide. Also Syria accepted Iraaq to build pipe lines to the Mediterranean in order to be in advantage against its oil exporter competitors of the Gulf area. Such was much important as Iraaq was by then a pariah among the COPEN members and countries such as Saudi Arabia or Persia often blockaded in the Hormuz Strait oil tankers coming from Iraaq.

New powers in Syria understood they had to make reforms in order to be possible future repayment of the debt so as to return to lost economic prosperity. The Provisional Government was able to get rid of the Islamite in a series of political schemes causing a feeling of betrayal among some of the ex-rebels. It was a period on which democracy was still far from instituted.

The State privatized much of its companies and allowed foreign investors to make business in the country. Safety was a priority and law was strongly enforced both for create a good environment for business so as to control radical Islamite and purge the corrupts. Also taking advantage from cultural heritage, coastline and traditional Levantine tolerance promoted tourism.

As oil remained one of the major exports Syrian government made a quite aggressive prices policy against its competitors selling oil at a lower price than COPEN member countries.

Industry was once again promoted to reduce economic dependency from oil extraction but salaries were kept low. Instead the state to subsidize industries was created appellative conditions for foreign investment. Companies were allowed not to rise salaries as long they wouldn’t give profits. To avoid people’s unrest taxes for workers were kept low. Taking advantage from European economic growth then was given special attention to exporting industries as local people often didn’t earn enough to be large consumers.

Progressively economy improved and little by little the debt was started to be repaid. Even so many considered that Syria was still far away from prosperity. Average people started to feel tired from promises of a better future while present-day poverty was still a harsh reality. Efforts from the population seemed to be too high for paying the mistakes of past non-elected governments. There was a growing movement to declare Syrian external debt as an odious debt. Unrest grown and repression either.

End of the crisis

On September 1980 Iraaq invaded Persia. Such was the way Iraaq found to end the oil crisis which was lasting since 1973. By causing a war against another major oil producer prices were expected to rise once again. Iraaq was able to gather around the sympathy of most of the Arab World, even from those who disliked the new theocratic power in Baghdaad lead by Saddaam Hussayn. After all it was a war between fellow Muslim Arabs against Zoroastrian Persians. The plan worked out and prices reached historical maximums. In time such successful plan would cause one million dead.

As oil prices rose fast oil producing countries in general saw their economies to improve after seven years of recession. Syria wasn’t an exception and used oil to counterbalance the diminishing of the manufactured goods exports to Europe which was now coming to certain economic slowdown caused by surprising oil prices rise.

Despite being a tolerant country Syria sided with theocratic Iraaq (a concession to radical Islamite opposition) and nearly all iraaqi imports and exports were now crossing Syrian territory as the Persian Gulf was now a battlefield. With the war effort iraaqi economy didn’t take advantage from higher oil prices and counterfeit iraaqi dinars which by mid-1980 have flooded the market eroded the currency’s value.

It was the chance Syria had to finally repay the remain of its debt. With iraaqi dinar progressively valuing less the value of the debt also decreased in practical terms. Even the interest rates weren’t able to recover the debt value. By mid-1990’s the Syrian debt was declared totally repaid in a time the country had become a regional economic power and a stable democratic regime.