SYRIA - The Subsidies Burden.

Syria runs on very cheap gasoil/diesel but can no longer afford to subsidise the fuel whose sulphurous fumes pervade the traffic-clogged streets of Damascus. State finances are already strained by depleting oil reserves which in 2007 turned Syria into a net oil importer. The subsidies cost 19% of GDP, keeping low-paid Syrians above the poverty line but enriching smugglers who sell fuels to nearby Lebanon, Turkey and Iraq.

Smuggling costs the Syrian treasury some $800m a year and is highly organised. A UN mission which investigated security on Lebanon's border with Syria in June 2007 reported that it had observed "permanent installations [pipes] for the smuggling of fuel crossing the border downhill to Lebanese lowland". This is one of the prices the Assad regime pays for keeping Syria's border with Lebanon open to arms trafficking - a key factor in its desperate effort to control its smaller neighbour. The same is true in the case of Syria's much longer border with Iraq. The US last week accused Syria of allowing arms and Neo-Salafi militants to cross into Iraq through its border.

Delays in tackling the subsidy burden have made the problem worse. Nabil Sukkar, managing director of the Syrian Consulting Bureau, was on Dec. 12, 2007, quoted as saying of the need to cut subsidies: "You cannot put it off indefinitely. And now we are losing the stable macro-economic framework, unfortunately".

The government drew up solutions in 2005. But it has yet to act, aware that subsidy cuts could fuel inflation and spark discontent among Syrians who rely on diesel to run their vehicles and gasoil to heat their homes and power their farms and factories. But it also knows that leaving subsidies intact will worsen the budget deficit, itself a motor for inflation, and eventually compromise economic growth, put by the IMF at 4% in 2006. Sukkar said: "Either way the result will be inflationary. The government also fears the social impact. In countries like Jordan, Yemen and even Myanmar, when they removed the subsidy on heating oil, there were demonstrations within a few days".

The regime wants to phase out diesel/gasoil subsidies over five years from 2008, but has tinkered with plans to soften the impact on poorer families. Deputy PM for Economics Abdullah al-Dardari in August 2007 said subsidies would start to be removed by end-2008. However, prices of the gasoil - high-sulphur diesel - are low, and so is the price of gasoline.

Jihad Yazigi, editor of The Syria Report, an online economic newsletter, in late 2007 said of the government: "They were not aware of how poor people had become and how they were incapable of taking any more hits. The regime knows it has to lift subsidies, at least partly, but they don't know how. They don't have the social safety nets".

Dardari had floated the idea of cash handouts to families to compensate for higher prices. Another minister, sacked in December 2007 for unrelated reasons, had promoted a smart-card scheme which would enable everyone to buy a limited amount of subsidised gasoil. Bigger consumers would have to pay market rates.

Per capita income is independently estimated at less than $1,000/year, with 30% of Syrians being under the poverty line. The options in developing Syria's energy base are limited by political factors. Still called a "terrorist state" by the US and getting less help from the EU, Syria is stuck with a regime getting weaker. Major investments into its economy depend on a revival of the peace process between Syria and Israel, but the chances of this in the near future are not encouraging.