Syria - Role of the Government in the Economy

Budget

With the progressive transfer of economic power from private enterprise to the state, public finance became a major economic determinant. Even though the government's fiscal responsibilities increased during the early 1960s, budgetary practices changed little until 1967, when legislation established a single, consolidated, and centralized annual budget that covered all spending units of the public sector. This budget was closely geared to development plans and complemented a reorganization of the banking system. Under the law each budgeted outlay was to be matched by the funds required to finance it.

The budget legislation was accompanied by a reorganization of the Ministry of Finance and of auditing and statistical services. An annual foreign exchange budget was instituted to preview probable foreign exchange receipts and expenditures, thus allowing the Ministry of Finance and the planning organization to anticipate the government's needs in foreign and local currencies.

The new law required that budget accounts be closed 30 days after the end of the fiscal year. Unused funds were to be returned to the treasury, although those already committed were to be place in special, segregated accounts in the treasury. This stopped the previous practice whereby transactions continued to be recorded on budget accounts for several years after the end of a fiscal year.

Since 1970, when the state introduced the consolidated budget, all expenditures and receipts of the ministries, the central public sector administrative agencies, the public sector economic enterprises, and the local, municipal, and religious administrative units have been combined into one budget. Expenditures and receipts of the ministries and central government administrative units were included in the general budget in full; other units were represented by inclusion of the net total surplus or deficit of their respective budgets. Economic units financed almost none of their own expansion. Instead they turned any surplus (profit) back to the government and received funds via budget expenditures for investments.

Although budgetary practices improved and the budget became a more useful tool for officials, published budget data in the late 1980s remained a difficult source from which to interpret developments in the economy. Expenditures and receipts continued to be published as proposals only. Actual expenditures and receipts were not available, although fragmentary data gave indications of shortfalls; moreover, the proposed budgets were balanced, and such important balancing items as proposed domestic borrowing and anticipated foreign aid were not clearly designated. Thus it was impossible to determine how effective the government was in implementing programs, whether deficits were incurred and, if so, their size, and how dependent the government was on external assistance. The uncertainties may have been intentional for security reasons.

The budget gave few clues about the extent of Syria's economic malaise in the mid-1980s. For example, it did not reflect the rapid depreciation of the Syrian pound, the steep rise in prices, the shortages of basic commodities, nor the acute foreign exchange crisis which compelled the government to reduce imports. However, budget data during the mid-1980s clearly depicted the mood of austerity underlying economic policy as well as the government's commitment to reducing expenditures. The 1986 budget revealed a major decrease in expenditure in real terms for the third consecutive year, as inflation--estimated at between 20 to 30 percent--negated the 2 percent increase in spending.

Defense spending towered above all other budgetary allocations in the 1980s. The cost of Syria's military presence in Lebanon since 1976, coupled with the government's desire to reach strategic parity with Israel, accounted for the level of spending. Defense spending averaged over 50 percent of current expenditures in the mid-1980s, accounting for about 30 percent of total spending.

Agricultural development also benefited from high allocations in the mid-1980s designed to counteract the governmental neglect of the 1970s. In 1985 allocations rose 22 percent above 1984 figures, amounting to 20 percent of total spending. In 1986 figures indicated a 5 percent investment increase for the agricultural sector.

Allocations for the mining industry (including petroleum) increased substantially in the 1986 investment budget. The 1986 allocations rose 46 percent above 1985 levels as government officials targeted increased petroleum and phosphate production and export in the Sixth Five-Year Plan.

However, budget deficits continued in the 1980s because of the rapid increase in defense expenditures and falling revenues from exports. The government financed the deficit through domestic borrowing and foreign aid. However, in the mid 1980s, budgeted foreign aid grants greatly exceeded actual disbursements by donors because of depressed economic conditions in the Arab oil-exporting states. Although Syria budgeted LS1.96 billion in foreign aid grants in 1986, the country expected to receive only about one-fifth of this figure and to incur a substantial budget deficit. However, the country's internal and external public debt remained moderate and did not impose an oppressive annual repayment burden.

Expenditures

Proposed expenditures matched proposed revenues because budgets submitted for approval were balanced. However, actual expenditures usually fell considerably short of those planned, although the fragmentary data available in 1987 generally precluded measurement of the amount of difference. In the 1980s, budgets began including planned deficits, and investment spending repeatedly trailed allocations. Only 70 percent of Syria's 1984 investment budget of LS17.85 million was actually spent. Expenditures fell under two headings--the ordinary budget covering current (recurring) expenditures and the development (capital) budget. Beginning in the early 1960s, capital investments had become a much more important part of the budget. Development expenditures amounted to 42 percent of total expenditures in 1964, increased to 50 percent in 1970, and peaked at 64 percent in 1976. However, by 1980, development expenditures had fallen back to 50 percent and in 1985 fell to 45 percent of total expenditures. In the 1980s, normal proposed revenues (taxes, duties, fees, and surpluses of public sector enterprises) usually financed proposed current expenditures, with a small remainder to help with capital investments. Foreign aid and domestic borrowing financed the rest of the development budget.

Throughout the 1970s and 1980s, defense spending dominated current expenditures. Some observers maintained that in the 1970s defense spending accounted for approximately three-fifths of current expenditures, although such amounts were not reflected in official statistics. Offically, defense spending rose from LS675 million in 1970 to LS4.6 billion in 1978, increasing at an average rate of 27 percent a year during this period. In the 1985 budget, defense spending again accounted for the greatest portion of current expenditures. However, the LS13 billion 1985 defense budget reflected only a 9 percent rate of growth, slower than that in previous years. However, a related item, internal security expenditures, accounted for a further LS672 million in the 1985 budget. Most of the remainder of current expenditures covered operating expenses of ministries and agencies--largely personnel costs.

Identifiable payments on the public debt amounted to LS135 million in 1976 and 1977, less than 1 percent of total expenditures. The 1984 budget allocated LS1.8 billion to the public debt, equal to 7.6 percent of current expenditures.

Identifiable price subsidies amounted to LS600 million in 1977 and LS1.4 billion in 1985, accounting for 9 percent and 6 percent of current expenditures. Subsidies rose rapidly in the mid-1970s as a result of higher rates of internal and international inflation. The government attempted to keep meat, bread, coffee, sugar, diesel fuel (for irrigation pumps), and other essential items within reach of the poor; the subsidized prices for sugar and diesel fuel, for example, were about onequarter of the regular market price in the 1980s.

In the 1970s, the government demonstrated its commitment to economic development through sizable increases in the development budget by increasing investment expenditures an average of 26 percent a year. Although they increased substantially from LS1.4 billion in 1970 to LS14 billion in 1980, growth of investment expenditures slowed to just 6 percent a year in the 1980s.

Role of the government in the economy

During the rapid economic development preceding and following independence, government played a minor role. Expansion resulted primarily from private sector investment in agriculture and industry. Although the economy grew rapidly, benefits were not shared equally. Many people's incomes were very low, and most of the rural population lacked amenities; electricity, education, health care, and an adequate diet were available almost exclusively in cities and in a few towns. In the 1950s, disparities of income and social inequality contributed to the rise of political leaders favoring a much stronger economic role for the government, including some leaders who demanded state ownership of the means of production. Economic conditions, primarily the need for large investments in roads, ports, and irrigation, also required more active government participation.

Between 1958, after the union with Egypt, and 1965, a series of laws were enacted that resulted in progressive socialization of the economy. By 1961 the state had acquired control of the development of natural resources, and land reform measures had been introduced, although not effectively implemented. Also, a new economic plan that emphasized large public sector investments had been formulated and the banking system had been moved toward nationalization through what Syrians called "Arabization." In 1961, while Syria was still the junior partner with Egypt in the United Arab Republic, widespread nationalization was decreed, but Syria withdrew from the republic before completion of the nationalization measures. Not until March 1963 did the socialist transformation make headway.

Between 1963 and 1965, a socialist economy was erected, although some laws enacted later extended and refined the public sector. In 1963 agrarian reform stripped large landowners of their estates and much of their political power, provided some land to landless farmers, and improved conditions for farm tenants and sharecroppers. In 1963 commercial banking and insurance were completely nationalized, and in 1965 most large businesses were nationalized wholly or partially. By 1966 the public sector included development of natural resources, electric power, and water; the bulk of industrial plants, banking, and insurance; part of transportation; and most international commerce and domestic wholesale trade. In addition, the government was responsible for the bulk of investments, the flow of credit, and pricing for many commodities and services, including a substantial part of wages.

By 1986 the situation remained essentially unchanged. As a result of these earlier measures, the government dominated the economy--accounting for three-fifths of GDP--and exerted considerable influence over the private sector. However, President Hafiz al Assad had liberalized the structure somewhat to encourage more private sector activity and investment. For example, the government relaxed exchange controls and permitted private traders to import more goods, although over 100 of the most important foreign commodities were still exclusively imported by state trading organizations. In addition, the government established six free trade zones where local traders and manufacturers could import, process, and reexport commodities freely. Also, private investment (domestic and foreign) in portions of manufacturing and tourist facilities was encouraged through such measures as tax exemptions and cheap credit. The post-1970 measures were more a rationalization of the economy to promote greater private sector development than a dismantling of government controls and ownership. As a result of these measures, the private sector dominated agriculture and retail trade and was important in light industry--particularly fabrics and clothing-- and construction, transportation, and tourist facilities.

Cotton, the country's most important export before 1974, provided an extreme example of government involvement in the economy. Areas put into cotton cultivation were controlled by government licensing of individual farmers. A government bank supplied the credit, most of which went to cotton farmers; much of the credit was in kind, with the bank purchasing, storing, and distributing the approved seeds, fertilizers, and other items. Government organizations purchased and graded the cotton, operated the gins and spinning mills, and marketed the products internally and abroad. The government established the price for cotton at all stages and subsidized prices for such inputs as credits, seeds, fertilizers, and fuel to run the irrigation pumps.

The effect on Syria's economy of the socialist measures of the 1960s was significant. First, there was a substantial exodus of trained personnel and capital from the private sector, a trend that continued in the 1970s, although the exodus was of a smaller magnitude and occurred for different reasons. The other major consequence was a rapid expansion of government responsibilities, even though the government had few trained people, limited funds, and inadequate organization and procedures. The political instability of the 1960s and the small number of trained people in the country further hampered development of effective organizations. Government services, including defense, became the main growth sector of the economy in the 1960s as people were added to the payroll, but effective expansion was slow.

In the mid-1980s, observers characterized the government and its activities as inefficient and excessively bureaucratic. Much of the criticism was caused by the continuing shortage of trained and competent officials. Part of the criticism reflected continuing deficiencies in organizations and practices. Government organizations were still trying to catch up with the huge additional responsibilities that had been imposed on inexperienced government personnel. By 1986, budgetary procedures and financial controls had steadily improved, but they were not as good as the situation required or as officials desired. Proposals for evaluations and implementation of projects were deficient, but progress had been made, and the government sought advice and help from outside experts for more improvements.

When the socialist transformation was taking place in the 1960s, the rationale was to promote economic development for the benefit of all. Although some direct redistribution of income occurred, redistribution was effected largely by way of pricing, subsidies, and tenancy legislation rather than by taxation, although in 1986 data were insufficient for a conclusive opinion. Although growth afforded job opportunities at higher incomes, it had the negative effect of attracting even more workers to already crowded urban areas. However, economic development did provide gradual improvement of living standards; considerable investments were made in roads, ports, schools, irrigation, and the Euphrates (Tabaqah) Dam that would facilitate future growth. Nonetheless, the economic wrenching of the 1980s restrained development; incomes of most Syrians remained low by world standards, and substantial income gaps between various groups persisted.

Revenues

The growth rate of proposed government revenues (in current prices) averaged 14.3 percent a year between 1964 and 1970, 26 percent a year in the 1970s, and 8.3 percent a year from 1980 to 1985. Growth in government revenues in the 1970s reflected higher levels of foreign aid because of Syria's key role in inter-Arab politics and increased internal borrowing for development. Government receipts included part of expected foreign financial assistance as well as anticipated domestic borrowing. Actual receipts for various revenue headings were not available, but many economists believed that actual receipts were substantially less than those shown in proposed budgets. Proposed government revenues increased from LS1.2 billion in 1964 to LS2.8 billion in 1970, LS10.4 billion in 1975, LS1.2 billion in 1978 and LS43 billion in 1985.

Syrian revenues were a much higher ratio of GDP than in most countries of the world because budget receipts incorporated the funds, including foreign aid and internal borrowing, used for the bulk of the country's investments. In fact, Syrian revenue structure differed from that of most countries in a number of ways. Personal income taxes have traditionally been low, amounting to only LS550 million, or 1.3 percent of total revenues, in 1985. Reluctance to tax income stemmed from generally low incomes combined with high tax-collection costs. Furthermore, tax rates were low, with numerous exemptions for special interests, despite a 1982 law enacted to close loopholes for certain public sector ventures. Tax evasion also was common among all social classes. Business income taxes were relatively small as well, amounting to 10 percent (LS4.3 billion) of total revenues in 1985. Even so, this amount was a significant increase over the LS510 million (3 percent of total revenues) collected in 1977.

In addition, taxes on capital, real estate, and inheritance yielded small sums. In 1985, taxes on capital brought in LS50 million, real estate taxes produced LS400 million, and inheritance taxes LS40 million, equivalent to about 1 percent of the total. Direct taxes and duties totaled LS6.24 billion in 1985.

Because they were easy to collect, levies on production and consumption (including taxes on imports) were the primary form of taxation. Like many other developing countries, Syria relied on indirect taxes, which in 1985 amounted to LS4.16 billion, 10 percent of total revenues, equal to two-thirds the amount of direct taxes and duties. Customs duties and other fees on foreign trade, including duties on cotton exports, amounted to LS2 billion in 1985. Excise taxes on several commodities (e.g., cement, fuel, livestock, sugar, and salt) made up the remainder of indirect taxes.

Transfer of surpluses (after taxes and profits) from public sector enterprises served as the main source of domestic revenue. The share of these transfers (excluding foreign aid and internal credits) reached 32 percent in 1970, 50 percent in 1976, and 31 percent in 1985 (LS13.1 billion). In the 1960s, banking-financial and industrial public sector businesses together provided the bulk of the surpluses. In the 1970s, industrial concerns alone accounted for 75 percent of the surpluses transferred to the budget; this figure declined slightly to 70 percent in 1985. In the 1970s and 1980s, the government increasingly relied on the pricing of commodities and services rather than taxes to finance expenditures. In an effort to expand future budget revenues, officials intended to increase efficiency, productivity, and profits of public-sector business.

Foreign credits and grants and domestic borrowing also provided supplemental funding for key development projects. The 1984 budget projected LS1.9 billion in foreign loans and LS7.7 billion in "support funds" from Arab states. After 1982, grants in oil aid from Iran also significantly contributed to the growth of revenues. However, when external aid declined in the 1980s, domestic borrowing levels increased. Although the banking system provided most of the internal credits, reserves of public enterprises also provided some funds.

Until 1977,transit fees for crude oil pumped through international pipelines across Syrian territory were an important source of revenue. Pipeline payments, which averaged about 25 percent of total domestic revenues in the early 1970s, fell to zero in 1977. The pipeline reopened briefly in 1979, was shut down in the early stages of the Iran-Iraq War, and then reopened again in 1981 before Syria closed down the pipeline from Iraq in 1982 as a show of support for Iran in the Gulf war.

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