Analysis: How Does the Syrian Government Manage to Pay Salaries and Other Expenses?

While the Syrian government continues to boast of its success in covering basic expenses, including civil servants’ salaries, in practice it is mortgaging the country’s long-term economic prospects.

Imad Khamis, the Prime Minister, highlighted last week in a speech the capacity of the government to generate new revenues and meet its financial commitments. Despite a massive decline in its revenues and expenses since 2011, the government is, indeed, still capable of covering basic expenses and here are some of the reasons:

  • The government stopped almost entirely all investment expenditures only a few weeks after the beginning of the uprising. Given that these represented anywhere between a quarter and a third of actual budget expenses, the savings were significant. Since 2011, almost no infrastructure or other investment of any medium to large size started or was completed in Syria. The only exception to that is the completion of a power plant in the Deir Ali suburb of Damascus and the reason is believed to be that the project involved an important commission to be paid to powerful regime cronies, which required that the project be completed.
     
  • Towards the end of 2011, the government also instructed its administration to reduce as much as possible overhead expenses and took measures to make cuts of 25 percent in all expenses outside salaries such as in transport, stationery, office equipment, subscription to publications, staff bonuses, advertising, public relations and maintenance of equipment. Combined with the freeze in investment expenditure, therefore, the government brought down its expenses significantly starting as soon as only a few months after the beginning of the uprising.
     
  • The government drew on its relatively large foreign exchange reserves. The fact that the value of the Syrian pound depreciated significantly relative to the dollar between 2011 and 2017 – from 47 to 434 pounds per dollar - helped increase the nominal value of these reserves when measured in the Syrian currency. Estimated at around USD 20 billion at the end of 2010, foreign assets held by the government were estimated by the World Bank to have fallen to as low as USD 700 million by end-2015.
     
  • The costs of products and services provided by the government, including subsidized items, were in nominal terms significantly increased, including for water, electricity, telecommunications, petroleum products and bread. Many of these products and services are not subsidized any more. Even when the government says that it is still subsidizing some items, it refers to their selling price compared to their cost, which it measures based on world markets levels. However, many of these items that are subsidized from an accounting point of view, such as gas and electricity production, generate net cash inflows because production costs are low. Also, aid from United Nations agencies and other international aid organisations reduce the total volume of goods and services the government needs to deliver and subsidize.
     
  • The rates for taxes and fees have been increased and new ones were created. For instance, the income tax on salaries was increased from 5 to 10 percent in 2015, while a reconstruction tax was created in 2013 and its rate doubled in 2017. The Ministry of Finance also improved collection by clamping down on tax evasion, imposing travel bans and asset freezes on individuals defaulting. Passport fees were also increased significantly, making of the Syrian passport one of the most expensive in the world. This measure helped not only capitalize on the large number of Syrians now living abroad but also generate foreign currency receipts.
     
  • Public properties rented out to the private sector have been revalued, increasing revenues, again measured in nominal terms, very significantly. Properties include mostly commercial and office space in the country’s main cities. A prominent example was the retendering of the Qassioun Mall in Damascus. In a recent statement, the Syrian Prime Minister said that the revaluation of these rent contracts helped generate an additional SYP 25 billion (USD 57 million).
     
  • Public sector companies and other companies paying fees to the government continue to bring cash, albeit in much smaller amounts than previously. These companies include the General Organization for Tobacco, the Syrian Telecommunications Company, Syrianair, the Ports of Lattakia and Tartous, etc. The mobile phone operators, Syriatel and MTN-Syria also generate relatively important amounts through the annual license fee paid to the government. In 2017, for instance, they paid SYP 77 billion (USD 177 million) in license fees.
     
  • Aid from Iran and Russia also helps the government cover its expenses, including for the purchase of wheat and various industrial equipment. While aid by these two countries is provided in the form of concessionary loans and credit facilities, in practice the government is not paying back.
     
  • Finally, another aspect of Iranian aid, namely oil supplies, generates the largest part of current government revenues. Tehran is currently estimated to provide around 60,000 barrels of crude oil per day. In cash terms, this oil is not paid for by the government, which resells it in the market and keeps the cash. Up to USD 3 billion comes from this source of income.

While these various factors explain the government’s relative success, they should not hide the massive decline in revenues and expenses measured in real terms and their impact on both the population’s revenues and the economy’s long-term prospects.

For years, the government has not increased salaries, which today are only a fraction of what they were prior to the uprising, meaning that poverty rates have risen dramatically, while the purchasing power of the population fell no less seriously, hampering aggregate demand in the economy. Meanwhile, the lack of investments means that the capital needed to repair, maintain, and expand the country’s infrastructure and production capacity is not there.

By handing over its natural resources to Russia and Iran in exchange for financial, political, and military support, the government has already seriously mortgaged the country’s long-term revenue stream and political independence. In a similar fashion, by bringing down its expenses to the lowest level possible, it is buying time but also mortgaging the country’s economic future by cutting down on much needed investment and on key expenses, such as education and health, which are needed to maintain the skills and competitiveness of the country’s human capital.


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