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Cablegate: Budget Deficit Threatens Syria's Economic Growth

VZCZCXYZ0002
PP RUEHWEB

DE RUEHDM #0132/01 0551528
ZNR UUUUU ZZH
P 241528Z FEB 08
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC PRIORITY 4658
INFO RUEHAM/AMEMBASSY AMMAN PRIORITY 7229
RUEHAK/AMEMBASSY ANKARA PRIORITY 5468
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0768
RUEHLB/AMEMBASSY BEIRUT PRIORITY 4858
RUEHEG/AMEMBASSY CAIRO PRIORITY 3551
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 2096
RHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY

UNCLAS DAMASCUS 000132

SIPDIS

SIPDIS

STATE FOR NEA/ELA; COMMERCE FOR
4520/IEP/ANESA/ONE/NWIEGLER; TREASURY FOR ISM/SINGER

E.O. 12958: N/A
TAGS: ECON EFIN ENRG EPET PGOV SY
SUBJECT: BUDGET DEFICIT THREATENS SYRIA'S ECONOMIC GROWTH

-------
SUMMARY
-------

1. The 2008 Syrian budget typifies the lack of SARG
transparency by significantly underreporting petroleum
revenues, defense expenditures, and the cost of subsidies.
Even though the official numbers are suspect, local
economists agree that the SARG's acknowledgement of a
128-percent increase in the budget deficit is a significant
indicator of Syria's true economic health. Also likely to be
underestimated, the reported USD 3.85 billion deficit
represents nearly 10 percent of Syria's estimated 2008 GDP.
SARG officials attribute the increased deficit primarily to
petroleum-related circumstances. Syria's oil revenues are
projected to decline proportionately with decreased
production, while high oil prices mean that Syria will be
paying more for imported refined petroleum by-products, such
as diesel. Since publishing the budget, the SARG has
announced various measures under consideration to increase
revenues, such as re-writing corporate tax codes, issuing
Treasury bills, and implementing a VAT in 2009. Ultimately,
economists say, the SARG must also cut costs by lowering all
fuel subsidies or risk severe inflation and currency
devaluation. End summary.

---------------------------------------
BUDGET DEFICIT INCREASES BY 128 PERCENT
---------------------------------------

2. The 2008 SARG budget forecasts an unprecedented deficit of
USD 3.85 billion, a 128 percent increase from 2007. This
deficit represents 9.8 percent of the estimated Syrian GDP of
USD 39.1 billion. In keeping with past practices, the SARG
stated that it will cover USD 3.63 billion of the deficit by
drawing on Central Bank reserve funds and finance the
remaining USD 213 million through external loans and Treasury
bills. Syrian economists worry that such a large deficit
cannot be sustained without driving up inflation -- already
officially estimated at 8.9 percent -- and retarding Syria's
projected GDP growth of 4.5 percent in 2008.

---------------------------------------------
SUBSIDIES AND DECLINING OIL REVENUES TO BLAME
---------------------------------------------

3. Economic reformers point to government fuel subsidies as
the primary reason behind the ballooning deficit. As Syria
transitioned to become a net-importer of refined petroleum
products in 2006, the SARG faced not only higher market
prices for fuel but also significantly increased public
demand. While the 2008 budget allocates only USD 500 million
for all "price controls," the quasi-independent business
journal Al-Iqtisadiyah estimated the price of diesel
subsidies alone at USD 3.76 billion for 2008. Similarly, at
the end of 2007 Finance Minister Muhammad al-Hussein told
local media that the total cost of all subsidies would amount
to USD 7.14 billion in 2008, or roughly 18 percent of GDP.

4. The 2008 budget also projects that total revenues will
decrease by 19 percent from 2007 to USD 8.15 billion, with
oil export revenues of approximately USD 2 billion providing
24.6 percent of the total. Oil revenue calculations assume a
price of USD 42 per barrel for heavy crude and USD 51 per
barrel for light crude, so actual revenues are likely to be
doubled if the price of oil remains in the USD 90-100 range.
Additionally, the budget assumes Syrian oil production will
fall to just 360,000 barrels per day (bpd) in 2008, almost
evenly divided between heavy and light crude oil.

---------------------------------------
SEEKING TO INCREASE REVENUES, CUT COSTS
---------------------------------------

5. While the internal debate over cutting diesel subsidies
continues, the SARG had already enacted some measures to
reduce costs and increase revenues by late 2007. On
September 1, the government raised the price of electricity
by a scaled-average of 34 percent. In November, the SARG
also increased the prices of gasoline and water, by 20
percent and 37 percent, respectively. Over the same period,
President Asad issued a decree to issue Treasury Bills in
2008 to partially finance the deficit. Consultants say that
additional steps under consideration are aimed at increasing
tax collection. They argue that the Syrian private sector is
responsible for 67 percent of GDP, but contributes a
disproportionately low percentage of tax revenues. In
addition to modifying the corporate tax laws to better
capture lost revenues, the government also plans to implement
a Value-Added Tax (VAT) in 2009.

----------------------
THE "OFFICIAL" NUMBERS
----------------------

6. According to the published budget, the SARG allocation by
ministry is as follows:

Ministry Millions USD Percentage

Defense 1,445 12
Interior 289 2.4
Foreign Affairs 103 0.9
Information 80 0.7
Immigration 1.2 0.0
Higher Education 464 3.9
Education 801 6.7
Culture 37 0.3
Labor/Social Affairs 22 0.2
Health 140 1.2
Economy 11 0.1
Finance 2,444 20.4
Agriculture 383 3.2
Irrigation 129 1.1
Petroleum 314 2.6
Industry 153 1.3
Electricity 541 4.5
Water 151 1.2
Building 18 0.1
Tourism 25 0.2
Trade 31 0.2
Telecommunications 185 1.5
Transportation 272 2.3
Grain Storage 70 0.5
Presidency 32 0.3
Parliament 10 0.1
Prime Ministry 151 1.3
Justice 38 0.3
Housing 103 0.1
Local Admin/Envinronment 1,284 10.7
Governorates 593 4.9
Waqf 7.6 0.0

Investment Capital /
for Private Sector 20 0.2
Price Stabilization
(subsidies) 500 4.0
Reserve Credits for
Investment Projects 940 8.0

7. 2007-2008 BUDGET COMPARISONS (Millions of USD)

2007 2008 Percent Chg
Revenues:
Taxes and duties 4,052 4,385 8.2
Fees and royalties (oil) 942 932 -1

Contributions of State enterprises
(Surplus and depreciation) 4,795 1,986 -58.6
Other income 284 852 200
Total 10,073 8,155 -19

Expenditures:
Total 11,760 12,000 2
-Current 6,600 7,400 12
-Capital 5,160 4,600 -11
External grants and loans
tied to projects
-Under capital expenditure 1,686 3,844 128
"Financing Gap" 359 213 -41
External "Arab" financing 0 0 0
Central Bank borrowing 1,327 3,631 173

8. FUNCTIONAL BREAKDOWN OF EXPENSES (Millions of USD)

2007 2008 Percent Chg

Current 6,600 7,400 12
Chapter I - Salaries 2,013 2,283 13
Chapter II - Admin 470 528 12
Chapter IV - Transfers 675 719 6
Chapter V - Pensions 1,535 1,882 22
Defense 1,369 1,445 5.5
Presidency/parliament 37 42 14
Chapter III - Capital 5,160 4,600 -11
Total 11,760 12,000 2

9. BREAKDOWN OF INCOME SOURCES (Millions of USD)

2007 2008 Percent Chg

Direct Taxes 3,365 3,525 5
- Businesses 2,500 2,390 -4.4
- Salaries 126 140 11
Indirect Taxes 687 856 24
- Electricity Consumption 36.4 42 15
- Customs 320 460 44
- Stamps 174 192 10
- Fees 34 42 23
Total taxes and duties 4,052 4,385 8

Services and royalties 942 932 -1.0
- Oil royalties 882 849 -3.7
Contribution of state
enterprises (surplus) 4,795 1,986 -58.6
- Extraction industries 2,639 21.6 -99
- Banks and finance 451 715.5 58
- Converting industries 304 186 -39
- Transportation and
Communications 779 809 4
- Electricity, gas, water 249 2 -99
Other income 284 852 200
Total revenues 10,073 8,155 -19

Revenue deficit 1,686 3,844 128
Financed by:
External loans / grants 359 213 -41
Central Bank borrowing 1,327 3,631 173
CORBIN

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