Barbara Walters chats with Forward Syria
Swaying between art and seduction
Discussing monetary policy with the man in charge
Where the earth screams in horror
01/17/2011 - Issue 47
Discussing monetary policy with the man in charge
Deputy Prime Minister Abdullah Dardariby Hamoud Almahmoud
In this conversation, Abdullah Dardari shares with us insights on the Syrian economy and the way the government handles and perceives many key issues pertaining to it.
One of the key challenges highlighted by the 10th Five-Year Plan in the financial sector is the incompatibility of the monetary and developmental policies. Was this challenge overcome?
We must admit that the Five-Year Plan aimed to found a monetary policy in Syria, because until 2004 we did not have one, nor did we have clear monetary institutions. And even though the private banks law was issued in 2002, it didn’t take shape because we built its components but we didn’t use them to run policies. Accordingly, the biggest challenge facing the 10th Five-Year Plan was establishing a monetary policy in Syria associated with the Central Bank.
The Central Bank would retain some independence, be linked to the overall economic and social policies of the country, have the ability to create monetary policies, and develop direct monetary control means (exchange and interest rates), and indirect means - after reaching an advanced state - such as discount value and treasury bonds.
The second priority after building monetary and financial systems was to build their components and tools - which are the banks - and be able to supervise, administer, and organize them as a sector.
Following this, we’d connect the monetary and financial policies to the overall policy of the country and arrive at a robust coordination between the monetary and financial policies, spending and tax-wise.
We spent the first five years building the banking system. It is not ready to be evaluated yet.
What was achieved with this new monetary approach?
Now we have a Central Bank possessing the minimal required capacity to analyze and form monetary policies, the minimal required amount of independence and balance with the overall economic policy, and the minimal required ability to supervise the financial system and its products. That is a big achievement in a short time, especially considering where we started five years ago.
We had 11 dollar exchange rates, and the Central Bank’s main duty was exclusive in printing currency. We had an 18-year-old fixed interest policy, with the monetary authorities controlling the exchange rates, yet at the same time we used to rely on neighboring countries for foreign currency exchange rates.
Plus, we used to finance development via the budget deficit and inflation-inducing tools, with zero control over inflation in general.
Comparatively, nowadays we have a minimal accepted level of coordination between monetary and financial policies which will start issuing treasury bonds and permits, to use the full monetary volume available at the Central Bank and Syrian banks to fund government projects. And that was demonstrated lately when the government borrowed money from public and private banks to fund purchasing during the harvest season.
That is considered to be a significant leap in any international financial system as we were able to switch funding public debt to internal borrowing, and that has saved the country a 37 billion SP budget deficit this year, when in the past we used to have to print new currency to fund it.
You mean the printing solution that used to cause inflation?
That is correct, with the evidence being in the decrease of the inflation indicator between June 2009 and June 2010 by half a point, showing that we are starting to see the results.
This verifies that in this experience we moved on to a new, different level, where after borrowing from local private banks to fund the harvest season, we became obliged to look for more means of funding in forthcoming years after paying back the debt.
During the past 40 years we had to print currency and issue untradeable bonds stored in the Central Bank, i.e. funding by budget deficit.
What role has monetary policy performed in Syria in the past five years?
In the past five years it was required to set the accepted average levels of prices in the country to avoid the effects of inflation, taking into consideration that inflation in developing countries such as Syria is not a monetary phenomenon exclusively. There are many different factors contributing to it, such as inflation expectations, rumors, absence of real competition, and monopolies, which are all being tackled at the moment.
If we were to evaluate monetary policy in Syria in the past few years we’d notice that inflation was curbed. Excluding 2005, which was an unusual year in global economics, we’d find that inflation in Syria was within the set limits.
The second purpose of the monetary policy was to improve the competitiveness of Syrian exports, and if we study their numbers we’ll find that non-monetary exports in the past five years surpassed the set limits of the 10th Five-Year Plan.
The third goal was to decrease the percentage of imported inflation, which was accepted until the global crises started in 2007, starting with the food crisis, oil crisis, then the global economic crisis, which affected even the most advanced countries.
The fourth goal was to keep foreign currency reserves and improve them, and even though the role of oil within this scope decreased, the reserves still remained at the same levels. Additionally, despite our decision to finance imports from the reserves and cancel the ban on foreign currency exports, we still find the amount of reserves the same.
Finally, we reached the fifth goal using the previous four, which is achieving full employment and reducing unemployment to the internationally accepted rate of 4%. On studying the unemployment numbers in Syria we find that we have reached 8.1% in 2009, which is close enough to the set target of 8%.
