How is the Lebanese crisis affecting Syria?

Author : Mircea Birca | Tuesday, December 24, 2019
Posted in category Eurasia News
Comments Off on How is the Lebanese crisis affecting Syria?

On October 17, thousands of protestors took to the streets of Lebanon to voice their anger against corruption, financial cronyism, entrenched political sectarianism and a deteriorating economic situation.

Following the outbreak of these popular protests, Lebanese banks closed for almost two weeks with many fearing a potential run on the banks. After opening and then closing again for a week, banks reopened on November 19 to large lines of customers seeking withdrawals as Lebanese banks decided to impose withdrawal limits.

Even though the Lebanese pound (LBP) has been pegged to the US dollar at an exchange rate of LBP 1,507.5 since 1997, black market rates have surpassed LBP 2,000, with many fearing a further slip in the exchange rate.

But as Lebanon approaches the edge of financial collapse, Syria has already begun to feel the effects.

Syrian dependence on the Lebanese economy

Because of the close connections between the Lebanese and Syrian economies, the ongoing financial crisis in Lebanon is already contributing to economic disaster in neighboring Syria. In fact, the most recent freefall in the value of the Syrian pound (SYP) – which traded at over SYP 900 to the dollar on the black market in early December – can be largely attributed to events in Lebanon.

The Syrian economy relies upon Lebanon in three main ways: as an export market for Syrian goods, as a source of remittances from Syrian workers residing in Lebanon, and as a financial hub for Syrian capital and importers. The unfolding financial crisis is continuing to affect these three pillars of Syrian economic dependence on Lebanon.

A decline in Syrian exports

In 2010, Syrian exports to Lebanon valued at approximately $375 million, according to OEC data. The bulk of Syrian exports primarily consisted of metals, chemicals, minerals and basic agricultural commodities. By 2017, however, this figure fell to $132 million. Although this data does not account for illegal smuggling and black market goods, a 65% reduction in exports indicates a relatively high decrease in national revenue and foreign currency earnings. According to the Syrian economist Younis al-Karim, “we are talking about a large decline in Syrian exports to Lebanon, it’s a huge amount.”

Although Lebanon has steadily come under sustained economic pressure due to years of corruption, credit-fuelled growth and austerity, the outbreak of popular protests, closure of banks, and fears of economic collapse have triggered massive capital flight for Lebanon’s wealthiest and entailed large restrictions on dollar withdrawals for the majority of its residents. According to a recent statement by Lebanese economists, political scientists and jurists, nearly $800 million left the country between October 15 and November 7 when the banks were closed.

For Lebanese importers and consumers alike, this means that the flow of goods to and from Syria has come under further stress. Even though Syrian export capacity has deteriorated during the course of the conflict, the demise of Lebanon as an important export market will hurt Syrian exporters while adding additional burdens to the value of the Syrian pound.

Difficulties sending money home from Lebanon

Arguably more important than exports, remittances from Syrians working in Lebanon constitute a significant source of foreign currency earnings and sustain the livelihoods of many in Syria. According to the ILO, approximately 300,000 Syrians were working in Lebanon prior to the outbreak of the Syrian conflict in 2011. Today, 1.5 million Syrians live in Lebanon, though it is unclear exactly how many of them are participating in the labor force.

Throughout the conflict, Syria has come to rely on remittances from abroad. The pro-government al-Watan newspaper noted that remittances accounted for 19% of national revenue in 2016, up from 2% in 2011. The Norwegian Refugee Council (NRC) estimated that in 2015, 17% of total remittances came from Lebanon alone, making it the second largest source of remittances to Syria.

Given the importance of Lebanese remittances to Syria, any changes in the economic situation in Lebanon will likely have far-reaching effects in Syria. The protests in Lebanon and the possibility of financial collapse may impact remittance flows to Syria in two main ways.

First, the dramatic slowdown in economic activity in Lebanon may reduce the incomes of Syrians working in the country. With money pouring out of the country and ordinary people unable to withdraw deposits, the Lebanese economy is set to experience setbacks across all sectors. As the economy comes to a halt, Syrians working in Lebanon will feel the effects of the crisis, especially those in the construction sector. More specifically, given that wealthy Lebanese often invest in the real estate market, any slowdown will have an acute effect on Syrian workers who constitute approximately 70-80% of all construction workers in Lebanon.

Second, it is reported that some Syrians living in Lebanon are finding it difficult to send back money to their families and friends in Syria. Remittances are often transferred through a variety of mechanisms: formal exchange companies, informal brokers, family connections and couriers. However, following the outbreak of protests and closure of banks in mid-October, these channels have become increasingly difficult to access.

For example, some money transfer companies are no longer accepting Lebanese pound and are instead insisting on US dollars for transfers. This forces Syrian workers to exchange Lebanese pounds for US dollars even though the rate has increased on the black market by more than 30%. Moreover, Syrians working in Lebanon are also “facing the same restrictions experienced by Lebanese in terms of withdrawing from ATMs,” which makes it increasingly difficult to move money, noted al-Karim.

To make matters worse, some workers are being paid in Lebanese pound rather than dollars, which ultimately reduces the value of their incomes, especially when they transfer and exchange money. Castro Abdullah, the President of The National Federation of Employees’ and Workers’ Unions in Lebanon (FENASOL), said that foreign workers in factories and companies are “now losing 30 to 40 percent of their salaries. Those workers have to exchange their salaries paid in the Lebanese lira to the US dollar before transferring the sum to their families.”

Although it is too early to measure the precise impact of the Lebanese financial crisis on Syrian workers and their remittances, the Syrian government has already issued a decree providing monthly raises to all civilian and military employees to counter rising inflation. The government has cited “economic changes and its repercussions” for its decision. Several media outlets, however, attribute these measures to western sanctions and a decline in remittances from Syrians living abroad.

Syrian capital stuck in Lebanon

The Lebanese banking sector has historically been a financial hub for Syrian capital. Since the Syro-Lebanese Customs Union dissolved in March 1950 and Syria embarked on a path of economic nationalism, Beirut became increasingly important as a market through which Syrian businessmen could conduct foreign economic transactions.

Following the outbreak of the Syrian conflict and the imposition of international sanctions on the Syrian regime, Syria has come to rely on Lebanon to finance critical imports and evade sanctions.

But as the Lebanese financial crisis unfolds and the country faces a nation-wide dollar shortage and unprecedented capital flight, Syrian importers and the business community are finding it increasingly more expensive to buy dollars to finance their imports. Not only does this put further downward pressure on the value of the Syrian pound, but it also makes imports, including basic commodities, more expensive.

The Lebanese Central Bank’s restrictions in financing imports have forced a large number of Syrian importers in Lebanon to acquire dollars from the Syrian market, which further depreciates the Syrian pound. Moreover, given that the Association of Banks in Lebanon (ABL) announced that cash withdrawals would be limited to $1,000 a week, even Syrian importers with dollar-denominated accounts cannot access the necessary amounts to finance their imports.

A source with close ties to the Syrian business community explained the situation to Syria Direct under the condition of anonymity. “All the Syrians who live in Lebanon that I know have their money stuck in the banks,” the source said. “The banks are only allowing them to withdraw $500 or $1,000 a week and there are talks that it is going to change to $500 or $1,000 a month. But it depends on the bank; some have a maximum withdrawal limit of $300 a week, whereas others have a limit of $1,500.”

Because government-controlled areas are more dependent on imports from Lebanon than opposition-controlled areas, the effects of Lebanon’s protests and financial collapse on Syria have been uneven. This may be one of the reasons why the Syrian pound traded at 740 SYP to the dollar in government-controlled Aleppo and Damascus on November 20, but only at SYP 715 in opposition-controlled Idlib.

Although wealthy and middle-class Syrians also keep their money in Dubai, Jordan or Turkey, according to a report in the Financial Times, roughly 80% keep their money in Lebanon. According to al-Karim, Syrians are now trying to “transfer their money or secure a way to get the money out of Lebanon.”

Even traders within Syria are being affected by the crisis in the Lebanese banking sector. “People who are buying commodities within Syria, trading from one Syrian trade house to another, would usually conduct financial transactions in Lebanon,” the same source close to the Syrian business community told Syria Direct.

Due to a weak Syrian pound, Syrian businesses who have the means to do so, often conduct their business in dollars in Lebanon. But because of Lebanese financial difficulties, “a lot of the people doing business in Lebanon end up being in debt to people inside Syria because they were supposed to simply transfer money from one account to the other.” The source went on to add: “now that many of these transfers are no longer possible, that’s putting a huge strain on the whole system.”

Small businesses in Syria are not spared

In addition to large-scale importers and businesses having difficulty securing dollars for their business transactions, small and medium-sized businesses in Syria are experiencing severe stress due to recent events in neighboring Lebanon.

Ali, a young man from Damascus, who spoke under the condition of anonymity, told Syria Direct that the situation in Lebanon has already had serious consequences for his livelihood. He recently left his job to start a communications subcontracting firm so that he could spend more time at home to take care of his bed-ridden sister. However, the equipment needed for the project was expensive, especially given a weak Syrian pound. But he went ahead and ordered the communications equipment from Japan. He had two options for delivery: either collect it from Dubai or Beirut. Given that Beirut is much closer to Damascus, he chose the latter. Soon after, however, popular protests broke out in Lebanon and his equipment experienced severe delays at Lebanese customs.

To make matters worse, Ali had to pay a significant fee for each day that the equipment was not collected. Until now, he has been forced to pay over $1,000 for equipment storage at the Beirut airport. But as the Syrian pound rapidly depreciated, this sum became further inflated for Ali, representing an additional and unexpected burden.

The same restrictions and obstacles affect many Syrian businesses that rely on importing raw materials or equipment through Lebanon. At the Port of Beirut, which serves as an important logistics hub, containers have been sitting for weeks as importers are struggling to make payments. Similar to Ali’s case, port authorities are charging companies for storing their containers at the port, even if those companies have the requisite funds but cannot make transfers on time.

For many businesses in Syria who depend upon Lebanon, the events in the country have increased business risk dramatically. Even now, Ali still doesn’t know when he’ll be able to start his business.

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