Debate over Syrian economy reveals its problems

DAMASCUS (Reuters) - A forthright discussion this week between businessmen and top officials revealed the extent of the problems facing Syria's economy and government thinking on liberalization after decades of state control.

Syria is a key political player in the Middle East and its drive to draw investment is central to its efforts to lessen western isolation and renew talks on an economic agreement with the European Union which have been frozen for some two years.

Flanked by senior economic officials, Prime Minister Naji al-Otari met scions of business families who mostly flourished under Baath Party rule to discuss how their enterprises could be converted into shareholding companies that declare their true income and stop avoiding punitive taxation.

The deal would involve scrapping high taxes from the central planning era that forced a large part of the economy underground and new laws to value companies and encourage them to list on the Damascus bourse, which is expected to resume trading by August after a break of five decades.

Faced with a $2.7 billion gas oil import bill for 2007, U.S. sanctions and a 12-20 percent unemployment rate, the government has been expanding reforms started by President Bashar al-Assad in 2000 when he succeeded his late father, Hafez al-Assad.

Otari emphasized the government would continue to make laws more favorable to business without fundamental changes to the huge public sector and the subsidies that consume a large proportion of the gross public product.

"We have adopted a social market economy program and we believe we are on the right road. There is caution that will take a while to go away," Otari said, during the meeting which was attended by Reuters.

"Some say go for a savage market economy. We won't but there will be no retreat either. The incremental approach is aimed at avoiding a backlash," he said.

The economy underwent heavy nationalization when the Baath Party took power in a coup in 1963. In line with his methodical style, Assad slowly opened banking, insurance, and other sectors to private investment, and reduced tariffs and bans on imports.

The 41-year-old president, whose life has been shaped by his father's struggle with Israel, has kept a firm control on the political system.

OLD GUARD

The still influential old guard of the ruling Baath Party believe that Syria's very isolation from the world economy has made it somewhat less vulnerable to economic pressure.

They point to what they call solid economic growth as proof of a successful Syrian model. The economy, according to official data, is expected to grow 5.5 percent this year, compared to 5.2 percent in 2006 and 4.5 percent in 2005.

Otari said the government wanted the private sector to become more competitive and described how Prime Minister Tayyip Erdogan called him recently from Ankara to lobby for a Turkish company bidding on an irrigation project in Syria.

"I wondered when will the day be when I would be calling my counterparts to back Syrian companies," he said.

Businessmen, however, said it was the government's reluctance to accelerate reform that left them behind in regional competition.

They pointed how a 40 million euro loan by the European Investment Bank to help small and medium businesses expand has gone largely unspent because international accounting standards are almost unheard of in Syria.

Najib Assaf, an independent businessman with interests ranging from banking to commodities, said a piecemeal approach to reforms would not work and the whole legal system needed overhauling.

"The government allowed private banks, but until now there is no arbitration mechanism recognized by law to solve disputes between partners, which discourages lending," he said.

Khalil Tazbazi, an industrialist from the ancient trading city of Aleppo, said lowering taxes further would encourage thousands of factories and workshops that operate underground to register with the state.

"You should see the so-called industrial city where our factory is located. There is no electricity, no sewage system, nothing," said Ghassan al-Kassam, who owns a legal air conditioning factory.

"Paying taxes is one thing," he said. "Receiving services in return is another."

Private investment has been flowing into Syria in limited amounts, mainly from Syrian expatriates and Gulf investors, despite U.S. economic sanctions imposed on Damascus in 2004, mainly for its support of the Hezbollah and Hamas movements.