Syria faces two interrelated medium-term challenges posed by the prospective decline in its oil reserves. The recently approved five-year plan (FYP) laid down a comprehensive strategy to address these challenges. Syria’s public finances are headed for challenging times in the coming 10–15 years. Large fiscal deficits have marked the economic history of many developed and developing countries alike during the 1970s and 1980s, with damaging consequences to their economies. Although financial markets can help keep the deficit bias in check, market discipline has proved mostly inadequate.

Abstract

Syria faces two interrelated medium-term challenges posed by the prospective decline in its oil reserves. The recently approved five-year plan (FYP) laid down a comprehensive strategy to address these challenges. Syria’s public finances are headed for challenging times in the coming 10–15 years. Large fiscal deficits have marked the economic history of many developed and developing countries alike during the 1970s and 1980s, with damaging consequences to their economies. Although financial markets can help keep the deficit bias in check, market discipline has proved mostly inadequate.

IV. Reforming Syria’s Trade Regime: Achievements and Prospects49

A. Introduction

82. In the early 2000s, Syria had one of the most restrictive trade regimes in the world. Trade restrictions included outright prohibitions of imports of most consumer goods, public enterprise trading monopolies, extensive licensing requirements, as well as a high and dispersed customs tariff. Foreign exchange restrictions, in the context of a multiple exchange rate regime and no current account convertibility, reinforced these restrictions and compounded their costs on the economy.

83. Over the last three years, however, the authorities have gradually begun to liberalize trade. Tariffs were lowered, some restrictions on imports were eliminated, including most notably a ban on imports of textiles and cement, and access to foreign exchange for current transactions was partly facilitated. Furthermore, negotiations for an Association Agreement with the European Union and a free trade agreement with Turkey were finalized, and, as of early 2005, goods can freely circulate in and out of Syria within the Greater Arab Free Trade Area (GAFTA).50

84. Yet, Syria’s trade regime remains relatively restrictive (excluding trade with GAFTA), on account in particular of nontariff barriers. Unclear regulations, quantitative restrictions, and other nontariff requirements continue to prevail and to add to the costs and length of conducting international trade transactions. Non-tariff barriers generate distortions in the allocation of resources in the Syrian economy and undermine the positive effects of the ongoing economic liberalization on domestic competition and external competitiveness.

85. The purpose of this chapter is to take stock of where Syria’s trade regime stands and to discuss how Syria could further liberalize its trade regime.

B. Customs Tariff

86. Syria’s customs tariff has been significantly lowered in recent years. Before 2002, customs duties consisted of several different taxes at the border that could accumulate up to 255 percent spread over 20 categories. Over the last three years, customs duties have been unified and gradually lowered to a maximum of 65 percent.51

87. However, the tariff is not published and the full extent of the revision is difficult to ascertain. The most up-to-date version of the tariff schedule (in Arabic only) was last updated in mid-2005. Since then, all government decrees revising the tariff have been published separately and are not compiled in a comprehensive tariff document (there is no electronic version of the tariff available). As a result, customs officials were not able at the time of the preparation of this document to identify the number of lines in the tariff, while the number of categories could only be estimated (at 20).52

88. The tax on international trade appears to be relatively high compared with most countries in the region. Given the lack of detailed data on tariff rates, the effective taxation rate (international trade taxes relative to imports) can be used to help measure the level of tariff protection. The effective taxation takes into account the impact of the concessional tariff rates applied in bilateral and regional trade agreements as well as the loopholes in the collection of customs duties and other charges. In 2004, Syria’s effective tariff protection was relatively high (Table 1) at a level comparable to Algeria and Morocco. In the coming years, this protection level should gradually decline as a result of the lower tariff rates (on a Most Favored Nation and concessional basis), although improved customs duties collection should mitigate some of the revenue lost.

Table 1:

Effective Protection in Selected Middle East Countries in 2004

(in percent)

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Source: Staff estimates.

89. The tariff dispersion, albeit reduced, remains wide, reflecting the authorities’ concern to protect added value. Most raw materials and industrial equipment, as well as live animals and some medicines, are duty free or taxed at 1 percent or below. Semi-manufactured products/intermediates and final consumer/luxury goods remain taxed in the medium and upper range of the revised tariff, respectively. Although the lower duties on equipment and raw materials may help exporters, such a structure increases effective protection and if maintained for too long risks hampering long-term industrial development. It distorts resource allocation and reduce incentives to establish new export activities.

90. The authorities intend to proceed with further simplification and reduction of the tariff in 2006 (although the decision has not been made formal yet). They would lower the maximum rate to 50 percent and reduce the number of categories to 5.

91. While pursuing their reform, the authorities should also consider the following:

  • reduce the number of categories to 3 or 4 (including the zero rate) to facilitate the use of the tariff;

  • limit the number of items at the maximum rate to limit effective protection and encourage exports;

  • publish as soon as possible the revised tariff to keep traders and investors informed about tariff revisions. When possible, publish a version in English;

  • create an electronic version to facilitate updating of the tariff, as well as analysis and international comparisons.53

C. Non-Tariff Barriers

92. Some progress has been made in the past three years to remove non-tariff barriers. The number of prohibited imports for protection reasons has been gradually reduced, and was extended in 2006 to sensitive sectors such as textile and cement. The public sector monopoly on imports has been rescinded for consumer goods such as cars. Import licensing for raw materials was abolished. Export license requirements have been replaced by a statistical form, while export bans (except for seasonal agricultural products) and specific taxes and fees have been eliminated.

93. Yet, trade regulations and non-tariff barriers remain complex and opaque, and their impact on the cost of imports is believed to exceed substantially that of tariffs. As detailed below, there are various types of non-tariff barriers and trade regulations whose interplay with complex rules for access to foreign exchange for trade financing reinforces their restrictiveness. Furthermore, lack of transparency in rules and procedures add to the perceived unpredictability of policies, opening the door for discretion and corruption, and encouraging noncompliance. The costs incurred by these barriers are significantly larger than the cost imposed by tariff barriers, particularly in the wake of the recent lowering of the average tariff.

Non-tariff barriers

  • Restrictions on imports of goods comprise: (i) prohibitions for security, environmental, and health reasons; (ii) prohibition of imports to protect domestic industry; (iii) public enterprises trading monopoly for certain goods; and (iv) goods that can be imported by the private sector after receiving a permit and paying a fee.54 The lists of prohibited or restricted imports are not published, making it hard to assess the real progress made recently in shortening them.55

  • Industrial quotas allow the import of limited quantities of raw materials and semi-manufactured products at reduced duties. The quota levels are set by the ministry of Industry based on annual stated production capacities. Non-beneficiaries pay higher customs duties and commissions to public trade agencies against the import of the same items. The system is reportedly largely misused, in particular: (i) some companies exaggerate their annual needs to sell their surplus in the market; (ii) pseudo-industrial companies are established for the sole purpose of trading such goods; and (iii) small companies that would need to register to request an import license (and be liable to taxes) prefer to purchase goods through this system. Given its shortcomings, the scheme was eliminated in early 2006, but reinstated shortly thereafter in the wake of strong discontent voiced by ex-beneficiaries. The decision to maintain the scheme illustrates the widespread influence of vested interests in trading activities.

  • Import licenses: Obtaining an import license is particularly cumbersome. In particular, a license is specifically required for all goods (i.e., itemized), except for imports from GAFTA countries. The license can be obtained in 3-4 days if no further authorization is needed. However, for a large number of goods, importers need authorization from technical ministries (e.g., health, environment, defense, industry) that can be reportedly quite lengthy to obtain.

Restrictions on Imports 1

Goods that cannot be imported because of their negative impact on the Syrian industry include a long list of agricultural and industrial products, such as flowers, animal products, forestry products, vegetable oils, sugar-based products, quarrying products, plastic and rubber products, leather, wood, craft products, glass, electrical machinery, and materials.

The list of goods that can only be imported by the public sector includes oil and oil-related products, alcohol and beer, arms, cotton, some cereal products, tobacco, pharmaceutical products, some chemical products, salt, fish, fruits, olive oils, televisions and television components, animal feedstock, and phosphates.

The list of goods that were previously imported only by particular public entities and which can be imported by the private sector, provided the payment of a fee of 2 to 5 percent of the value of imports to these public entities, includes notably cars and transport machinery, steel and steel products, wood, cement, some pharmaceutical products, coffee, tea, rice, canned fish, meat, raw sugar, fertilizers, raw leather, and paper.

The list of goods that cannot be imported for security, environmental, and health reasons is not public.

1 Detailed information on restricted imports is difficult to collect, therefore the following may contain inaccuracies.

Other non-tariff barriers include:

  • a host of impediments for public tenders such as an obligation for the bidder to have an exclusive local agent and for the winner to have an official domicile in Syria and to contract shipping with a public trading agency; cumbersome and time consuming technical and financial evaluation; tenders being reopened (even after a bid has been awarded) or additional requirements being imposed; and problems with release procedures of bid and performance bonds;.

  • All maritime shipments must access the country through a Syrian port. In 2004, the Ministry of Economy and Trade made mandatory the exclusive use of Syrian ports for imports of a wide range of products and consequently prohibited the transit of imported products via Lebanon, Jordan, or other regional ports;

  • storage and other fees need to be paid at the border on the basis of complex regulations.

  • all imports must be authorized by the Consulates of Syria abroad and subject to a stamp fee to be paid at the Consulates (1 percent of the value of imports capped at US$1,500).

  • despite minimal regulations (licensing, foreign exchange, imports) in free trade zones,56 administrative controls remain important and can deter time-sensitive investment, while porous boundaries encourage fraud and inefficient investment into the zones.

94. The authorities acknowledge that non-tariff barriers undermine their efforts to open the economy, but have not yet defined a clear agenda for reform. In formulating this agenda, the authorities could consider the measures listed below. These measures will not incur direct fiscal costs, and might even have a positive fiscal impact by widening the tax base and adjusting upward import prices to the actual value. Social safety nets/targeted budgetary support may be needed while the protection for some goods is phased out. Finally, such trade reform should contribute to reduce corruption and pressure from vested interests and to improve income distribution within the economy:

  • publishing a negative list on goods that are restricted for imports (differentiating the four types of restrictions mentioned in Box 1) to inform traders and send signals on the authorities’ willingness to enhance transparency and predictability. The authorities have repeatedly indicated that such a publication was a priority, but the list is still being prepared;

  • replacing restrictions on imports for reasons other than the environment, security, and health by applying the maximum tariff rate (with phasing-out when needed) or the rate corresponding to the type of goods consistent with the tariff (to limit dispersion and distortion);

  • abolishing industrial quotas (the authorities are considering doing it soon);

  • granting autonomy to public enterprises for their imports of goods to reduce monopoly costs;

  • abolishing fees paid by private traders to public enterprises, and replacing them by an explicit government subsidy, if its merit can be established;

  • removing gradually public trading monopolies to enhance competition;

  • replacing the licensing process (in particular, verification by technical ministries) with an open general or a specific license scheme to expedite international transactions;

  • abolishing the payment of a stamp at the Consulates and the related verification to reduce red tape.

D. Implications of Foreign Exchange Restrictions on Trade

95. Limited access to foreign exchange, as well as the use of multiple exchange rates,57 encourages transactions in parallel markets (see Annex III of the staff report for a description of the current exchange regime). The authorities have facilitated access to official foreign exchange for private sector traders over the last two years. They estimate that about 65 percent of imported goods can now be traded in the official market (at an exchange rate adjusted daily to the parallel market rate to which a low spread is applied, respectively reducing/increasing the costs of imports/exports). However, a large amount of trade transactions continues in practice to be held in a parallel market. Foreign exchange trade financing by banks through the official market accounted for about 20 percent of total estimated imports by the private sector in 2005.

96. Trade financing in the parallel market reportedly may lead to invoicing below the actual transaction level. Given the absence of means to verify the amount of financial transactions conducted through off-shore banks, a company can show a lower bill than the amount actually paid. Customs officials must therefore rely on their own weak valuation procedures.

97. The setting of an administered exchange rate each year for the budget also complicates international transactions. This rate varied between a minimum of 4.9 percent and a maximum of 13.9 percent below the parallel market exchange rate in 2005. It is used by the public sector for all external transactions and by the customs administration to convert the value of trade invoices into Syrian pounds. The difference between the budget and the parallel market rate is equivalent to an implicit subsidy applied to the full amount of the transaction in the public sector and for the dutiable part for all other transactions. Using this fixed rate helps cushion the effect of an increase of the value of imports when the Syrian pound depreciates.

E. Customs Procedures

98. Noteworthy progress has been made in the past three years to streamline customs procedures. The authorities have already introduced the World Customs Organization’s single administrative document (SAD) and are finalizing a new customs law which will modernize operations. The clearing process has been simplified, including by establishing one-stop offices at the border and a “green line” to facilitate entry for frequent and fully registered exporters and for goods coming from mostly developed countries.

99. Notwithstanding this progress, import clearing remains relatively long. Syrian companies, as indicated in a survey prepared by the World Bank (for the Doing Business Report), estimate that on average clearance takes 15 days (with a maximum of over a month), against eight days in Egypt, seven days in India, and six days in China.

100. The clearance process is notably lengthened by some of the non-tariff barriers indicated above and by sanitary and phyto-sanitary (SPS) verification requirements (including by laboratories). Companies report that testing and clearance procedures are difficult to understand and to predict. Exporting companies have difficulties ascertaining whether the SPS verifications are based on scientific and realistic risk assessments or if they are purely arbitrary. This also makes it more difficult for a company to know in advance whether the SPS practices applied in the originating country are acceptable in Syria. Furthermore, there is no reference in the Syrian legislation on recognized international standards such as the SPS agreement under the WTO.

101. The customs valuation process does not meet international standards. The customs law defines customs valuation as the usual price of the imported merchandise paid between two traders. However, the process lacks good sources of information on reference prices and these can be either above or below the actual value.58 Furthermore, the price can be distorted because the exchange rate used to value goods is revised once a year in the budget law. With the decline in the average tariff, there should be less incentive to reduce actual values at customs and hence more efficiency in tax collection.

102. Customs officials intend to address these issues. They indicate that the establishment of an effective single window at the border under the sole supervision of customs authorities will, however, necessitate good cooperation from technical ministries. As to valuation, the gradual computerization of the customs administration should provide access to relevant databases and references.59

F. Bilateral and Regional Trade Agreements

103. The recently concluded bilateral or regional trade agreements should have positive effects on trade liberalization:

  • Trade is nearly fully liberalized with Arab countries since the beginning of 2005, both from a tariff and non-tariff barrier standpoint. All imports coming from countries adhering to GAFTA enter Syria duty free (a 2 percent surcharge is applied)—and Syrian exports are treated similarly.60 Licensing requirements have been removed as well as most import prohibitions. These point to substantial preferences currently granted to GAFTA countries, given the prevailing tariff and non-tariff restrictions applied to Syria’s non-GAFTA trading partners.

  • Syria signed in 2004 an Association Agreement with the European Union. Following years of negotiation, a breakthrough was achieved in October 2004, with the initialization of the Agreement, the last in a series the EU has signed with other Arab Mediterranean countries under the process launched in Barcelona in 1995 aiming at a free-trade zone in the region by 2010. The Agreement has, however, stalled at the level of the EU Council of Ministers. The Agreement would imply a phasing-out of customs duties for most goods over a period of 12 years. The Agreement would also require, upon entering into force, the elimination of the main non-tariff barriers applied to EU countries and updating/establishing key economic regulations (Box 2).

  • Finally, the Free Trade Agreement with Turkey, which provides broadly similar preferences to those in the Association Agreement, is expected to become effective later in 2006.

The Association Agreement with the EU: A Stimulus for Economic Reforms

Although not yet formally in force, the Association Agreement is providing an impetus for reforms and the Syrian authorities are using the draft document to frame their policies. The Agreement could yield, beyond the benefits from liberalized trade, major benefits from the revamping of outdated regulations and procedures and the strengthening of institutions that it calls for.

Upon entry into force, all the main constraining non-tariff barriers will need to be removed (such as bans on imports, complex licensing requirements, and multiple exchange rate practices). It will be critical that these barriers be removed similarly for all EU and non-EU countries.

All the key regulations will need to be updated, including the company law and commercial code. A competition law (and the related regulatory body) will need to be established, as well as laws on intellectual property rights, consumer protection, and leasing. Overall, 12 economic laws are planned for adoption.

The EU intends to provide technical assistance and financial resources to set up the relevant regulatory bodies and strengthen administrative capacities (including the customs administration). Its financial arm, the European Investment Bank, will help modernize economic infrastructure.

The early implementation of the agreement appears to be a remarkable incentive to guide Syria toward establishing market economy structures. Ultimately, the agreement will promote openness and international trade beyond the liberalized trade between the EU and Syria.

104. Notwithstanding the benefits of free trade agreements, the risks of trade diversion need to be acknowledged. Although these agreements will promote trade with some trading partners,61 the risks of trade diversion increase with the relative preferences given to a group of countries. Reducing the differential in relative preferences will therefore help the country fully benefit from trade liberalization. Priority should be given to removing non-tariff barriers for all trading partners, as these barriers are high and their elimination bears no fiscal costs (see above). Lowering the level of customs tariffs for all trading partners (on a Most Favored Nation basis) in parallel with the implementation of the preferential agreement with the EU and Turkey would help reduce the preferential gap and facilitate competitive access to efficient import goods, while taking into account possible fiscal costs.

G. Conclusion

105. Trade reform has just started. Syria’s trade regime is relatively restrictive and a concerted effort will be needed if the authorities are to fulfill their objective of joining the WTO.62 Eliminating key non-tariff barriers should be the first priority and will signal the authorities’ determination to address the trade agenda. Implementing the regulatory measures provided for in the Association Agreement with the EU will bode well for the future and help Syria progress toward observing WTO rules and disciplines. As these reforms are implemented, Syria will gain credibility as a full-fledged trading partner, establish a solid track record in shifting toward an open economy, and boost its potential for a much-needed insertion into the global economy.

49

Prepared by Stephane Cossé.

50

GAFTA includes Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen.

51

For instance, customs duties on luxury and standard cars were lowered, respectively, from 255 and 150 percent to 60 and 40 percent.

52

The simple average tariff cannot therefore be identified in Syria.

53

The structure of the tariff is already based on the Harmonized System (8-digit level) and should therefore be consistent with international standards.

54

A World Bank study by Chemingui and Dessus (2003) estimates that non-tariff restrictions raise the domestic price of imported goods by 19 percent, that is, twice as much as the effective tariff protection. These estimates are close to rough estimates of 15–20 percent provided by some companies in discussions during the 2006 Article IV consultation mission

55

For certain goods, imports can be made only after a certain quantity is procured locally from a public enterprise.

56

The government operates seven duty free zones to promote foreign investment and industrial activities (Damascus, Damascus Airport, Adra, Latakia, Latakia Port, Dara, and Tartus). Two others are being established in the Eastern part of the country.

57

For instance, some imports, particularly by public enterprises, were valued until 2004 at a rate significantly below the market exchange rate (sometimes as much as four times), thereby providing an implicit subsidy to companies.

58

There has been some progress with regard to the reference price for European cars as the price quoted directly by the car makers is now used, implying a reduction in the quote of 15 to 30 percent.

59

The authorities intend to acquire the ASYCUDA-World system to automate customs processes. Implementation will take place over the coming 24 months, by which time the system is expected to be rolled out to the majority of international airports, ports, and some 60 border stations.

60

The agreement requires that imports should have a 40 percent added value content in GAFTA.

61

Arab and EU countries accounted in recent years respectively for roughly 15 and 20 percent of imports and 10 and 60 percent of exports.

62

Syria’s request (sent in 2001 and reiterated in 2004–05) needs approval by the WTO’s General Council to start negotiations.