Rebuilding Syria's economy will be challenging but comes with reward

Estimates of reconstruction costs range up to $500bn, and most Syrians only get a few hours of electricity per day. The country’s priorities are numerous and urgent, but amid the gloom, there is hope.

A US dollar note is placed on a stack of Syrian pounds at a market in the Kurdish-majority city of Qamishli in northeast Syria on September 10, 2019.
AFP / Delil SOULEIMAN
A US dollar note is placed on a stack of Syrian pounds at a market in the Kurdish-majority city of Qamishli in northeast Syria on September 10, 2019.

Rebuilding Syria's economy will be challenging but comes with reward

In recent TV interviews, the head of Syria’s new interim government said it would take time for an improvement in living conditions after the fall of Bashar al-Assad’s government last month. Speaking honestly about timescales, Ahmed Al-Sharaa dashed hopes of swift progress, suggesting that it may take a year or more to feel noticeable differences, three years to draft a new constitution, and four years to hold elections.

Time is of the essence. Syria has multiple priorities, many of which are urgent. After years of conflict, economic sanctions, and structural collapse, its industrial and service sectors have eroded, suffering from physical destruction and the displacement and migration of personnel.

With al-Assad gone, there is now a huge national reconstruction project to undertake, but there is also a historic opportunity to enact comprehensive economic reform, rebuild a modern nation-state, revive its economic fortunes, and end Syria’s endemic corruption and mismanagement. This, in turn, will help rebuild Syria’s fragile social fabric.

Immediate priorities

Some issues must be addressed swiftly, including stabilising the country’s security and bringing the militias under the banner of a new national army. Linked to this is the necessity of a civil peace fostered by inclusive governance that brings minorities (including those seeking autonomy) into the political system.

AFP
Turkish strikes on October 5 on the Kurdish-controlled region of Hasakeh in northeastern Syria hit a car, killing two people, the Syrian Observatory for Human Rights said.

Economically, a priority is restarting the vital production facilities in Syria’s energy sector, not least ensuring a ready domestic supply of fuel. This will require the reassertion of sovereignty over Syria’s east, which is rich in oil, grains, and cotton.

Oil production will keep the country’s power plants running, which in turn will power the refineries, revive the once-strong textile industry, increase agricultural productivity, and reduce the need for imports of goods such as wheat. Yet hanging over everything is the continuing plethora of Western sanctions. Damascus hopes that new US President Donald Trump will lift these in the coming months.

Read more: It’s now or never for US engagement in Syria

Oil and power

On the ground, Syrians are in desperate need of electricity. For years, they have had 20-hour electricity blackouts and rationing. This will not help efforts to revive Syria’s industrial base. Syria has oilfields but most are controlled by armed Kurdish groups in the north-east. As a result, Syria has had to import fuel from countries like Iran, but sanctions and a lack of foreign currency reserves have led to import limits.

Restoring the oil supply is one thing, but further challenges lie in production, distribution, and affordability, particularly as the new government needs to cut subsidies. This links to priorities in healthcare, education, and employment. Analysts warn that finding work for discharged army personnel is especially important, given extremist groups' interest in thousands of suddenly jobless soldiers.

Ensuring a domestic supply of fuel will require the reassertion of sovereignty over Syria's east, rich in oil, grains, and cotton

Public-sector pay

Far from announcing cuts to public spending, on 5 January, Syria's finance minister Mohammed Abazeed announced a 400% pay increase for many public sector employees from February, at a cost of around $127mn. The government has said this will be paid for by regional aid, new investments, and the unfreezing of Syrian assets held abroad, which it hopes is forthcoming.

The costs of funding Syria's armed forces have historically consumed more than half of Syria's general budget, so cutting the number of troops will have a big impact on the bottom line, as will trimming the bloated public sector payroll. Tens of thousands are currently paid by the Syrian state for unknown tasks.

Analysts have suggested the establishment of a fund to provide monthly stipends during the transitional period and initiatives to employ ex-soldiers, not least to prevent social problems and crime that may result from sustained joblessness. 

Stymied by sanctions

Syria's interim government will be hoping that Western sanctions imposed on Assad-era Syria will soon be lifted. They were added after Syria was designated a 'state sponsor of terrorism' and were a significant factor in Syria's economy halving—as measured by gross domestic product (GDP) compared to pre-2011 levels—and in record inflation. 

The sanctions are hampering reconstruction efforts. Vital infrastructure projects require equipment, technology, and materials that cannot enter owing to the restrictions. 

MUHAMMAD HAJ KADOUR / AFP
A man looks out to the devastation while clearing rubble and debris from a house at the Yarmouk camp for Palestinian refugees south of Damascus on December 22, 2024.

After the assassination of former Lebanese Prime Minister Rafic Hariri in 2005, the US Syria Accountability and Lebanese Sovereignty Restoration Act froze the assets of former Syrian officials and restricted foreign investments.

Further sanctions were added in 2011 under Executive Order 13582, which effectively banned dealings with Syria. The 2020 Caesar Syria Civilian Protection Act (aka the Caesar Act) expanded those sanctions, targeting any individuals or foreign entities supporting the Syrian government. European sanctions have also included asset freezes, an oil export ban, and banking transaction restrictions.

Debt and rebuilding

Another Syrian priority is to secure the funds necessary for reconstruction. In 2016, the World Bank estimated the cost of this at around $216bn. That figure is now understood to have risen to somewhere between $300bn and $500bn. 

Syria's success hinges on its ability to rebuild the state (including its infrastructure) and rehabilitate the economy (such as by reviving its heavy industries), but doing so is made more difficult by the country's debt servicing obligations, not least to countries like Russia and Iran. 

Tehran, an ally of al-Assad's, provided a credit line that was renewed several times. This facilitated the import of oil, goods, and materials from Iran. In return, al-Assad offered Iran concessions in phosphates, ports, and a mobile network operating licence. Likewise, Russia was granted gas exploration rights and a 49-year renewable lease to operate the Port of Tartus on the Mediterranean coast. 

Infrastructure projects require equipment, technology, and materials that cannot enter owing to the sanctions on Syria

Experts need to assess Syria's debt obligations and revisit the legitimacy of sovereign contracts and financial transactions made after 2011, not unlike the exercise undertaken after Iraq's invasion of Kuwait. These Syrian debts arose from foreign intervention in a conflict between the regime and a broad segment of the Syrian population. 

The Russian and Iranian interventions not only obstructed the implementation of United Nations Resolution 2254 but contributed to the killing of hundreds of thousands of lives and the displacement of millions, with Russian jets having dropped an estimated 70,000 barrel bombs over Syria since 2015. 

Compensation may be sought for those affected by Russian and Iranian military intervention. While that is reviewed, it is likely that all concessions granted to Iran and Russia, not least involving carbon exploration agreements and phosphate mines, may be suspended.

Ensuring stability

Although the timelines for a new constitution (3 years) and elections (4) may be realistic, they will give no succour to investors who will need to be reassured of the state's legal and political stability before ploughing money into it. The longer post-Assad Syria goes without a new legal underpinning and a legitimate elected government, the longer capital markets may sit it out, raising the costs of reconstruction and of accessing the markets for financing.

In the meantime, Syria's new rulers need to reset the balance sheet. Part of this involves strengthening foreign currency reserves, attracting remittances from expatriates, increasing exports, and combating the black market by regulating currency markets and enhancing the role of the Central Bank of Syria.

AFP
Syrian refugees cross back into Syria on December 10, following al-Assad's fall.

Rebuilding the country will not be easy without the 6.5 million Syrians who fled abroad after al-Assad's crackdown in 2011. With most having made homes in the Middle East and Europe, a lack of electricity, services, housing, schools, hospitals, and employment opportunities is hardly likely to entice them back.

A fund financed by the UN and donor states to facilitate their resettlement and job creation would help, as would an authority dedicated to this endeavour, which could coordinate with host countries to arrange the return of (willing) expats. 

Tariffs and imports

Under the banner of free market economics, some have suggested that Syria adopt a unified tariff policy and open the doors to unrestricted imports. Since its independence, the country has suffered from a trade deficit. Mismanagement of the economy has led to severe import restrictions that have stifled the economy.

Establishing a foreign trade policy that regulates imports to align with Syria's status as a developing economy will be important. This includes promoting exports and developing agricultural, textile, and pharmaceutical industries to make them competitive.

Additionally, trade routes must be reopened, transport infrastructure improved (to connect local markets with those of neighbours), and economic relations must be strengthened by diversifying trade partners and attracting foreign investments. Allowing unrestricted imports without a coherent economic policy would devastate the Syrian economy.

Timelines to draft a new constitution (3 years) and hold elections (4 years) may be realistic, but they will not give succour to investors

Reserves and currency

When al-Assad left, he left a treasury depleted of foreign currency reserves. This necessitates an exchange rate policy that prioritises investment and exports over the import of non-essential goods. The exchange rate cannot stabilise if unrestricted imports are allowed. 

There are also risks associated with dollarising the economy, which would strip the Central Bank of Syria of its ability to implement monetary policy, which will be needed to curb inflation. Commensurately, confidence in the financial system will be improved by updating banking laws, recapitalising existing banks, and licensing new ones.

The dire state of Syria after 14 years of civil war has led to a perception that Syrians are dependent on humanitarian aid. Transitioning from dependency will require redirecting resources toward infrastructure projects and development programmes. Engagement with development funds will, therefore, be crucial to financing reconstruction. 

Hope from elsewhere

In seeking to understand Syria's possible recovery from war, it helps to consider other examples from the 20th century, such as Germany and Rwanda. Around a fifth of Germany's housing stock was destroyed during World War II. In Syria, it is roughly half. Yet from 1951-61, Germany's annual economic growth rate was around 8%. 

Likewise, during the 1994 Rwandan genocide, an estimated one million people were killed, a figure not too dissimilar to the number killed or missing in Syria, but by 1995, growth in Rwanda hit 50%. If Syria can address the challenges it faces, it is not unreasonable to expect similar rates.  

Rebuilding and fixing the multitude of sizeable problems in Syria will be far from easy, and the country's new government will have much work to do. However, the experience of other war-torn nations emerging from periods of destruction offers hope for the future.

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