DAMASCUS, 25 September 2007 (IRIN) - Over 40 years of subsidising fuel and other vital commodities have benefited the rich more than the poor, encouraged smuggling and cost the state more than it can afford, say Syrian government officials.

Syria's socialist Baath Party government, with its centrally planned economy, has subsidised commodities such as bread, rice and sugar, as well as electricity and fuel by up to 40 percent since it came to power in 1963. (See box below.)

However, increasing domestic consumption by a rapidly growing population, further swelled by the influx of around 1.5 million refugees from Iraq, is now putting unbearable pressure on state coffers.

Subsidies permit low income families to afford basic necessities, but they are indiscriminate, benefiting the rich, who consume more, more than the poor.

"The best-off Syrian households benefited 59 times more from government subsidies than the poorest families," said Abdullah Dardari, deputy prime minister for economic affairs.

As Adnan Dakhakheni, a member of parliament and head of a consumer protection non-governmental organisation (NGO) put it: "One man may use 20 litres of diesel in one day heating his swimming pool, while another will use 10 litres in a whole year."

"If the prevailing situation remains through 2008, subsidies will reach 350 billion Syrian pounds (US$7 billion), 19 percent of gross domestic product (GDP). Subsidies are no longer bearable," said Dardari.

Cushioning the impact

Oil revenues have fallen in line with the decline in output - from 600,000 barrels per day in the mid 1990s to 380,000 barrels today.

But with oil prices having risen from below $30 to over $80 a barrel since 2003, the cost of subsidising Syrian fuel has become unsustainable. (See box below)

Dardari recently announced reductions in fuel subsidies and the plan for prices to increase to international levels by 2012. The greatest immediate impact would be a 70 percent increase in the price of diesel to 12 Syrian pounds (US$0.24) a litre in 2008.

To cushion the impact of subsidy reform, Dardari announced that next year every family in Syria will receive a cheque for 12,000 Syrian pounds (US$240).

However, according to Samir Seifan, head of an economics consultancy, with regard to fuel, the government has already cancelled the compensation scheme in favour of a quota system using smartcards to ration consumption.

While the details remain sketchy, the Syrian scheme might well follow that of regional ally, Iran, which in June introduced a 25 percent increase in basic petrol prices while allowing a rationed quantity of subsidised fuel to motorists carrying the so-called smartcards.

However, administrative problems with the new cards, as well as general public anger over having to pay more for fuel in such an oil-rich country, led to rioting and the burning of several petrol stations in Iran. Analysts are sceptical about the implementation of the new system in Syria.

"It isn't that straight forward to really reach the needy and it opens the door to corruption and abuse. A new disbursement method will be required and that is hard to do," said Andrew Tabler, analyst and chief editor of Syria Today magazine.

Threat of unrest

Subsidy reform has led to unrest in countries across the region such as Yemen, Egypt, Jordan and Iran, and the government is acutely aware of the inflammatory potential of oil price hikes.

In the words of a minibus driver in Damascus on hearing of Dardari's 70 percent increase in diesel prices by next year: "There is a lot of anger on the street about this new law. The situation might explode."

"The government has already stopped subsidising olive oil and tea; we rarely cook meat now, only when we have guests and then we only cook chicken, never red meat," said Muhammad Salem, a taxi driver in Damascus.

"If the government removes subsides on petrol and diesel the cost of everything will go up. Providing for my family is going to be very difficult if the cost of bread gets any higher," Salem said.

Inflation, currently running at about 14 percent, according to the International Monetary Fund, would rise: "The government says they expect inflation to increase 5 percent next year but I think the figure is very much below what we can expect," said Jihad Yazigi a Syrian economist and chief editor of The Syria Report.

Independent economists estimate unemployment levels to be over 20 percent and the UN Development Programme reported in 2005 that 30 percent of the population lived in poverty and 11.4 percent lived below subsistence level.

BOX: Crunching the numbers

Fuel

Subsidised diesel in Syria costs SYP 7 (US$0.14) per litre. The average cost of importing diesel in 2006 was SYP 25 ($0.56) per litre, the difference being the cost to the government. Total state expenditure on diesel subsidies over the past five years has averaged between $1 billion and $1.5 billion per year.

Diesel consumption has also risen from 5.5 million tonnes in 2002 to a forecast 7.8 million tonnes in 2007 encouraged by population growth. (See: http://www.irinnews.org/Report.aspx?ReportId=25628)

Smuggling

The hugely subsidised fuel price also encourages smugglers, who can sell a litre of diesel in Lebanon, for example, at around $0.63, while in Turkey motorists generally pay up to $1.50.

Prime Minister Naji Otri recently estimated that 25 per cent of the annual 4.5 million tonnes of domestically produced subsidised diesel was being smuggled out of the country.

"This means that we offer about US$300 million in subsidised diesel to our brothers in Lebanon," he said.

Inflation

The price of fruit and vegetables has risen sharply over the past three years. For example, in 2004, a kilo of zucchinis cost SYP 10 ($0.20), while a kilo of potatoes cost SYP 25 ($0.50). Today, the price of zucchinis has trebled, to SYP 30 (US$0.60) a kilo, while potatoes have risen to SYP 40 ($0.80)

Real estate prices have risen by up to 300 percent in the past three years making the cost of living all the higher. (http://www.irinnews.org/Report.aspx?ReportId=72967)

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