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July 12, 2013

Doubt Over Syrian Steps to Control Hyperinflation

by Jamie Dettmer

The Syrian government is moving to shore up the value of its free-falling currency, imposing harsh penalties on black-market dealing in foreign currencies.
 
Economists, however, predict the rescue effort won’t halt the currency’s plunge as evidence mounts that the war-battered Syria is now in the grip of hyperinflation.
 
Penalties for dealing in foreign currencies include substantial fines and prison terms of up to 10 years – necessary punishments, the government said this week, to “prevent manipulation of prices in the market and curb exploitation of citizens’ needs.”
 
But Steve Hanke, an economics professor at The Johns Hopkins University, warns the measures are unlikely to stop the currency’s free fall, or prevent Syrians anxious to protect their savings from converting them to U.S. dollars. He says the government’s rescue attempt is “futile and wrong-headed.”
 
“This strategy proved wildly unsuccessful when it was utilized by the Iran in October of 2012 to protect its troubled currency,” he says. “People will do everything they can to get around the restrictions.”
 
With the 28-month-long civil war and international economic sanctions wreaking havoc on the country’s economy Syrians are facing a bleak Ramadan, the Islamic holy month that started this week, as they scramble to come up with ways to pay for food and shelter.
 
Plunging on the black market
 
On the black market the value of the country’s currency has hit an all time low, with the exchange rate now ranging from 300 to 310 Syrian pounds to the U.S. dollar. Before the uprising began against President Bashar al-Assad’s government in March 2011, the rate was 50 pounds to the dollar.
 
​​For ordinary Syrians, just getting by has become a nearly impossible task in the face of wildly rising prices for basic goods.
 
“My salary of 20,000 pounds doesn’t stretch enough to keep us from going hungry,” says Mustafa, a father of four and government worker in Damascus who talked with VOA by phone. “Our savings have long gone.”
 
Hanke, an internationally noted expert on troubled currencies, says the plight of ordinary Syrians will get worse.
 
He believes the Assad government has lost control of the official currency and that Syria has gone from suffering galloping inflation to hyperinflation. In the absence of reliable economic data from the Syrian government, Hanke bases his assertion on a set of complex economic calculations to estimate price shifts.
 
“Syria’s implied monthly inflation rate is now 91.9 percent. This means that Syria has exceeded the threshold for hyperinflation -- an inflation rate of 50 percent per month,” he says.
 
Hyperinflation and currency collapse
 
The 20th century saw a total of 28 hyperinflations, nearly all caused by monetary collapse following the two world wars or the fall of communism.
 
The most infamous case of hyperinflation was during the Weimar Republic in Germany in the 1920s, which was triggered by First World War debt. The monthly inflation rate peaked at 32,400 percent.
 
So far his century, there has been only one other case of hyperinflation – Zimbabwe’s from 2004 to 2008. That was sparked by the government printing money to pay for a war in the Congo and then compounded by droughts and farm confiscations. The inflation rate was 98 percent a day. It ended when Zimbabweans in effect ditched the local currency and traded instead in foreign banknotes.
 
“When you are in hyperinflation the local currency becomes in effect useless,” says Hanke. “You have to unload the local currency as quick as you can, within hours and not just days or even weeks as with inflation. In hyperinflation everything is speeded up.”
 
In the 1990s, as a result of a civil war, Serbia witnessed a staggering hyperinflation that at its peak reached a monthly rate of 313 million percent. Efforts by the Assad government’s closest ally, Iran, to assist with credit lines and loans of billions of dollars, plus foreign assistance from Russia, is saving Syria from Serbian-style inflation. But Hanke says Assad’s allies will have to dig deeper.
 
Crop failure
 
“The worst case scenario is if Syria has another very bad season with agriculture. They had one last year because of a drought. And this year they have problems because the farmers aren’t getting out to the fields as much,” said Hanke.
 
“So that would be one thing that would aggravate the hyperinflation very much. And if government expenditures are retained at high levels, you’ll end up with more obligations on the Central Bank to print money,” he said.
 
The Assad government appears to be trying to cut spending. This week it announced price increases for medicines and said it had sacked hundreds of workers, claiming the firings were part of an anti-corruption drive. It has also lifted a ban on the U.N. World Food Program bringing in medicines, according to senior U.N. officials.
 
Kadri Jamil, Syria’s deputy prime minister for economic affairs, claims the U.S. and Britain have fomented his country’s economic woes through international economic sanctions. Those sanctions aside, the civil war’s effects inside the country have been devastating: towns and cities have been pummeled into ruins, industrial infrastructure destroyed and thousands of factories abandoned.
 
Oil production, one of Syria’s biggest foreign currency earners, has dropped by 95 percent. Tourism -- another foreign currency mainstay --  has ground to a total halt. The World Bank says Syria’s GDP dropped almost by a third in 2012.