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Cablegate: Syrians Adjusting to "New Normal" of Inflation

VZCZCXYZ0000
PP RUEHWEB

DE RUEHDM #0587/01 2311426
ZNR UUUUU ZZH
P 181426Z AUG 08
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC PRIORITY 5290
INFO RUEHAM/AMEMBASSY AMMAN PRIORITY 7384
RUEHAK/AMEMBASSY ANKARA PRIORITY 5619
RUEHGB/AMEMBASSY BAGHDAD PRIORITY 0920
RUEHLB/AMEMBASSY BEIRUT PRIORITY 4981
RUEHEG/AMEMBASSY CAIRO PRIORITY 3711
RUEHTV/AMEMBASSY TEL AVIV PRIORITY 2200
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

UNCLAS DAMASCUS 000587

SENSITIVE
SIPDIS

STATE FOR NEA/ELA
TREASURY FOR CATHERINE REYNOLDS

E.O. 12958: N/A
TAGS: EAGR EFIN ENRG EPET PGOV SY
SUBJECT: SYRIANS ADJUSTING TO "NEW NORMAL" OF INFLATION

REF: A. DAMASCUS 234
B. DAMASCUS 307
C. DAMASCUS 311
D. DAMASCUS 320
E. DAMASCUS 518
F. DAMASCUS 240

-------
Summary
-------

1. (SBU) Three months after the SARG cut fuel subsidies by 50
percent, the consequent 350 percent increase in the price of
diesel has been reflected across the spectrum of goods and
services. Official SARG statistics indicate inflation has
increased by 15 percent since summer 2007, but many
economists estimate the actual figure to be closer to 25
percent. Economic reformers praise the SARG's decision to
reduce subsidies but note the decision was not accompanied by
adjustments in SARG monetary policy that could have better
mitigated the resulting inflation. While reformers claim
that short-term inflation is an inevitable side effect of the
transition to a market economy, critics argue that decreased
consumer purchasing power is evidence that reforms hurt
Syria's majority poor. Meanwhile, Syrian consumers are
bracing for additional, seasonal price hikes with the onset
of Ramadan in early September. End summary.

--------------------------
Inflation up by 25 Percent
--------------------------

2. (SBU) Officials at the Ministry of Economy and Trade
report that consumer prices have increased by 15 percent
since summer 2007, but private economists estimate actual
inflation is closer to 25 percent. Post's internal price
survey on a basket of 100 goods reflects a cumulative
inflation rate of 24.55 percent since June 2007, and 29.97
percent since June 2006. The utilities sector has been
hardest hit, with an 87 percent jump in the average cost of
electricity, water, fuel and telephone rates. Food, which
accounts for 42-50 percent of the average Syrian's budget,
has increased in price by almost 23 percent.

----------------------------
Contributing Factors Persist
----------------------------

3. (SBU) The major factors contributing to inflation persist,
with no immediate relief in sight. As stated in ref A,
inflation in Syria is driven by a combination of
international and local forces. Internationally, higher oil
prices and global food inflation have hit Syrians hard --
especially since Syria has transitioned to become a net
importer of refined petroleum products in 2007. Locally,
three years of continuing drought contributed to record-low
domestic agriculture production in 2008, exacerbating food
inflation (refs C, E). Furthermore, the SARG decision to
reduce fuel subsidies by half in early May 2008 (ref B)
resulted in an overnight jump of 357 percent in the price of
diesel, which has been reflected in the prices of most goods
and services. Finally, Syria suffers from endemic
corruption, and economists say that wealth obtained without
contributing to GDP adds to inflation.

--------------------------------
SARG Actions Attempt to Mitigate Inflation
--------------------------------

4. (SBU) The SARG has taken several measures in 2008 to
mitigate the impact of inflation. Most significantly, an
early May Presidential Decree mandated a 25 percent and five
percent raise for public and private sector employees and
pensioners, respectively (ref B). In an effort to increase
domestic agricultural supply, the Ministry of Economy and
Trade banned the export of wheat, wheat flour, barley,
lentils, chickpeas and animal feed. To reassure farmers and
discourage smuggling, the Ministry of Agriculture increased
set prices for strategic crops from 11 to 17 SYP/kg for
wheat, from 30 to 41 SYP/kg for cotton, and from 9 to 15
SYP/kg for barley.

5. (SBU) In June, President Asad also issued the Consumer
Protection Law as a follow-up to April's Competition and
Protection from Monopoly Law, which are designed to deter
merchants from price-gouging consumers with punishment up to
life imprisonment. To monitor price controls and prevent
hoarding, the Ministry of Economy and Trade increased the
number of "supply squads" patrolling local markets around the
clock. Finally, the Ministry of Social Affairs and Labor
announced the establishment of a Social Assistance Fund and a
National Program for Combating Poverty and Empowering Women
-- although specific details of who may access the programs
and how they will be funded have not yet been released.


--------------------------------
SARG Monetary Policy Exacerbates the Problem
--------------------------------

6. (SBU) Economists privately contend that the SARG has not
taken an essential step to control inflation -- adjusting
monetary policy. They point out that the Central Bank of
Syria has kept interest rates around six percent, well below
even the official estimate of 13 percent inflation. Not
surprisingly, they say, the supply of money has expanded by
some 13 percent at a time when a politically-independent
Central Bank should be trying to shrink it. Rather than
"losing money" in savings accounts as inflation outpaces
interest rates, Syrians are borrowing "cheap" money to
speculate on currencies, commodities, wheat and real estate.
Such speculation, they explain, contributes additional
pressure on markets and exacerbates the problem of inflation.

-----------------------------
Inflation's Impact on Society
-----------------------------

7. (SBU) With some estimating that 20 percent of Syria's
population lives on just one U.S. dollar per day, 25 percent
inflation could have a life-altering impact on over 3.7
million people. Syrian consumer purchasing power has dropped
considerably in 2007-2008, as inflation outpaced SARG efforts
to mitigate it. Public transportation and taxi fares, for
example, have doubled since the nation-wide pay raise was
announced in May. Furthermore, government-mandated pay
raises have proven of little consequence to the estimated 40
percent of the Syrian workforce that is employed by the
"informal" sector (cash-based, non-contractual, no benefits).
Anecdotal information suggests that most of these employees
received a bonus to cover increased transportation costs, but
little else.

8. (SBU) Inflation's impact on Syria's majority poor is
evident in Damascus. Sidewalk vendors in lower-class
shopping districts openly trade diesel ration cards on the
black market (ref F). This phenomenon indicates that
thousands of Syrians decided to sell the cards, issued by the
SARG in April, to meet immediate cash-flow needs and worry
about higher priced heating fuel when winter arrives. Rarely
seen a year ago, child-beggars from rural areas are now a
regular fixture near the entrances of western hotels and
upscale shopping districts. Finally, economic crimes such as
vehicle break-ins have noticeably increased in recent months.


-------
Comment
-------

9. (SBU) For much of this decade, SARG oil revenues and
economic isolation somewhat insulated Syrians from regional
inflation. Consequently, Syrians are just now waking up to
the "new normal" of market-based prices in an era of
high-priced oil. While Baathists try to earn political
points by blaming tough times on economic "reforms," reform
advocates blame the SARG for waiting to reduce fuel subsidies
until global oil prices precipitated an economic crisis.
Until the Syrian economy adjusts to the eventual elimination
of all fuel subsidies -- projected by 2010 -- we anticipate
inflation to continue. Even if conditions worsen, however,
experts doubt that Baathist opposition could reverse recent
economic reforms. As Ramadan approaches, the regime seems
confident that, for now, the Syrian public's economic pain
tolerance and desire for stability will see them through a
peaceful, if more modest, holiday season.
CONNELLY

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