Syria's uprising exacts heavy toll across economy

By Suleiman Al-Khalidi

AMMAN (Reuters) - In a restaurant in the once bustling Hamidiyah souk of the old city of Damascus, waiters prepare to serve a handful of customers in an ornate room with many empty tables. A singer now performs there weekly, instead of every day.

"The number of customers has almost halved," says Ahmad, a manager at the famous Abu al Izz restaurant, as he reminisces over days when he would turn away diners who could find no place to sit at the establishment's 250 tables.

Across cities, towns and rural parts of Syria, six months of pro-democracy protests aimed at overthrowing President Bashar al-Assad, and their violent suppression, have claimed hundreds of lives and put severe stress on the country's $60 billion economy.

Business sentiment has soured alongside a strong security presence in the capital and major cities, while in the restive provinces of Hama and Idlib, army checkpoints have transformed some residential areas into conflict zones.

In the five years before the uprising, when the authorities reformed a Soviet-style command economy to allow greater private sector involvement, boutique hotels sprang up in the old city of Damascus to cater to tens of thousands of tourists from Europe and weekend visitors from neighboring countries. Many of these hotels say they are now welcoming few if any guests.

"There is no occupancy at all and I don't know if I am going to close or continue," said the owner of a 12-room boutique hotel in an area where several establishments that housed European and American tourists have shut.

"I wish we could see foreigners, but the only people in the old city are Iranians. These are now the only visitors, along with weekend shoppers from Lebanon who are supporting the markets," the owner, who requested anonymity because of the sensitivity of the issue, said by telephone.

The economy has also been hit by international sanctions designed to pressure Assad, including a ban on Syrian oil sales to the European Union. The country has been earning some $2.5 billion a year from oil exports but must now look for customers further afield, who may pay less than Europe.

Last month Syrian Finance Minister Mohammad al-Jleilati played down the impact of the sanctions on government revenues, predicting the economy would grow 1 percent this year. Syria is cushioned by foreign reserves that were estimated at around $16-18 billion before the crisis -- a sizeable amount for an economy of its size -- and low government indebtness, estimated at just $6 billion by private economists.

But businessmen and analysts say the economy is shrinking; the International Monetary Fund last month forecast a 2 percent contraction for Syria in 2011, in contrast to 3 percent growth which it predicted earlier this year. Some private economists think the recession could be worse.

"The impact of the unrest is very negative and in many sectors it's hard to quantify, but there is a recession almost across the board, from tourism to real estate to investment," said Nabil Sukkar, a former economist with the World Bank who runs an economic think tank in Damascus.

RESERVES

Last month authorities imposed a ban on most imports in an effort to save foreign currency reserves, but this was revoked days later after soaring domestic prices provoked outrage in the business community, which has close ties to the government.

"The ban was short-sighted. It would have led to unemployment and encouraged smuggling. Even now prices have not gone down sufficiently as yet," said Sukkar, who predicted the economy would suffer stagflation -- stagnant growth and high inflation -- in coming months.

The authorities subsequently announced the central bank would reduce its role in financing imports. Minister of Economy and Trade Mohammad Nidal al-Shaar said the government had made a "mistake by financing everything in the past and is now leaving businessmen to seek other financing outlets."

Now, monetary authorities will only help importers of basic commodities and essential foodstuffs with tariffs of under 1 percent, Shaar said.

"Let's say if we were financing 100 million before, now we are only financing 25 or 27 million so as to prevent the depletion of Syria's currency reserves, which is our wealth, while continuing to finance the essentials and food requirements of people.

"Frankly, I am against financing the imports of the private sector by the central bank. This is not its job," Shaar added.

This has caused private businessmen to worry about access to trade financing. In more normal conditions, private banks could be expected to step in and play a bigger role, but this may be difficult as the political uncertainty causes hoarding of foreign currency.

A run on the currency, the Syrian pound, was only averted after the central bank raised interest rates. Bankers estimate Syria's reserves have dropped by at least $2 billion this year as the central bank has pumped in foreign currency in an attempt to halt the pound's fall in the black market.

Despite its efforts, pressure has been mounting on the pound, which has been changing hands in the black market at more than 52 to the dollar. In recent weeks authorities have allowed the official exchange rate to rise just above 49 pounds from a previously fixed rate of 47.4.

"There is a shortage of dollars in the market and it's gone up almost 10 percent in the last few weeks. No banks or the state are selling dollars and you have to go to the black market, where rates are going up," said Ghaith al-Mufti, a local businessman.

INVESTMENT

There is one bright spot for Syria's economy this year: the end of a drought that has ravaged crops over the last few years. Wheat production looks set to pick up to about 4 million tonnes in 2011 from 3.4 million last year.

But this is unlikely to offset the damage to the economy's medium-term prospects as the political uncertainty deters investment.

Big investment projects to which Gulf investors have pledged billions of dollars -- real estate developments and shopping complexes -- have not been formally suspended. But at least some of them appear to have been put on hold as local residents report little or no construction activity at the sites.

In the fertile southern province of Houran, the unrest has disrupted an important cash cow for state coffers in the form of taxes that range from construction permits to electricity and water bills, residents say.

So far many members of Syria's powerful business elite have tacitly backed the regime. Merchants in Damascus and Aleppo, and landowners in Homs and Hama, need to cooperate with officials of Assad's dominant Alawite minority to conduct their businesses.

But as the economic slump continues, it raises the possibility that businessmen will become more ambivalent or even critical of the government.

"They no longer want Assad. They have lost respect for the regime and they are saying, who are these people? They no longer fear them as before," one prominent Damascus-based trader said on condition of anonymity.

A textiles shop next to the Medhat Basha souk in Damascus prominently displays a poster that reads: "We are with you, Bashar al Assad, the merchants of Damascus."

The shopkeeper's neighbor whispers on the phone that government security forces have in recent weeks been paying more and more frequent visits to the area, reminding store owners to hang posters and asking for a share of the shops' dwindling profits.

(Editing by Andrew Torchia)