Steps in the right direction

Damascus has taken yet another step to unpeg its currency from the US dollar by delinking the Syrian pound (SYP) from the greenback and replacing it as a foreign exchange anchor with the Special Drawing Rights (SDR) of the International Monetary Fund (IMF). The shift was partly due to Washington’s 2004 sanctions on Damascus, which escalated in 2006 following a ban on the state Commercial Bank of Syria dealing in dollars over an allegation of Syrian connections to illegal activity.

Syria had also moved early this year to distance itself from the greenback by diversifying foreign currency reserves, previously all in dollars, to include euros, sterling, and Swiss francs, with the dollar now representing around half the total held. Given the tension between Washington and Damascus, such a move was on the cards as the Syrian government at the start of had 2006 issued an official circular instructing all ministries and state companies to adopt the euro instead of the dollar for foreign transactions.

However, decisions such as these are not just emotional or diplomatic: it was economically and financially smart for Syria to shift out of dollars, irrespective of the political correctness of the move. Ending the long-standing link between the currencies of the two countries is allowing Syria a more sensible exchange rate while at the same time tweaking Washington’s nose.

A basket of major currencies used in international trade — the euro, the pound sterling, the Japanese yen and the US dollar — defines SDRs. The amounts of each making up an SDR accord with the relative importance of the individual currency in international business. The IMF Executive Board determines the currencies in the SDR basket and their amounts every five years. Current weights of SDR currencies (and hence those Syria uses) are dollars 44%, euro 34%, yen 11%, and sterling 11%. (However, there is an element of flexibility here: for the half-decade to 2005, the first three had been respectively 45%, 29%, 15%, and all could change again after 2010.)

Syrian moves to adopt the SDR basket make economic sense, as weakening links with the greenback help reduce the impact of dollar exchange rate fluctuations against other currencies, which gives more stability to the SYP. With the fall in the dollar, the Syrian pound lost around 10% of its value last year, adding to the costs of imports, especially from Europe. Syria’s Central Bank estimates that decoupling the pound from the dollar would take two percentage points off the country’s inflation rate, which hit 10% in 2006, in part a reflection on the weaker local currency. The IMF website thus gives an estimate for the current year of Syrian consumer prices rising at a rate of 8%, while the forecast for 2008 is an even milder 5%. At the same time, the IMF noted that Syria’s economic performance was strong in 2006, and that the outlook for 2007 is positive. Notwithstanding an unsettled regional environment, the Syrian economic recovery that started in 2004 remains on track: GDP in 2006 benefited from growth in exports and from sizeable inflows of private investment. The IMF’s recent final report on Syria for 2007 projected a rise in real GDP of a respectable 3.3% for this year, while for 2008 the Fund’s forecast for growth is an even healthier 4.7%.

The IMF advises Syria to ensure implementation of a managed float within a tight trading range, helping adjust to changes arising from trade liberalization and the transition to a market economy. On the other hand, it should be interesting to watch how the central banks of Arab countries with currencies pegged to the dollar and political ties to America can move away from over-reliance on the greenback. Jordan is an example, as a number of economic and political considerations keep the kingdom wedded to a fixed exchange rate that pegs the Jordanian dinar to the dollar. Yet as the greenback continues to depreciate, this point is now the subject of discussion: Marwan A. Kardoosh and Anne Mariel Peters writing recently in Amman’s Jordan Business magazine grant that the Jordanian dinar’s peg to the US currency “has been important to overall macro-economic stabilization and the development of certain sectors.” However, they quickly add, “in the face of an increasingly weak dollar as well as creeping inflation from other sources, perhaps it is time to re-evaluate Jordan’s choice of exchange rate regime.” As Jordanian prices rise and the value of reserves falls, can the kingdom learn from Damascus? On that score, I am personally not holding my breath. Meanwhile, the irony is that an American bluster has pushed Syria in the right direction: towards better monetary management.

Riad Al-Khouri is Middle East director of GeoEconomica GmbH