Reports coming from Damascus, quoting bankers, said Syria has released new cash into circulation to finance its fiscal deficit, after violence and Western sanctions wiped out revenues and led to severe inflation and economic deterioration.
Reuters quoted four Damascus-based bankers as saying that new banknotes printed in Russia were circulating in trial amounts in the capital and Aleppo, the business hub, the first such step since a violent uprising against President Bashar al-Assad began in March 2011.
The four bankers said the new notes were being used not just to replace worn out currency but to ensure that salaries and other government expenses were paid. Some economists believe the move could increase inflation and worsen the economic crisis.
At least 10,000 people have died since the crackdown began in March last year. Syrian government insists more than 2,600 members of its security forces have died.
The four bankers, along with one business leader in touch with officials, claimed the new money had been printed in Russia, although they were not able to give the name of the firm that printed it. Two of the bankers said they had spoken to officials recently returned from Moscow where the issue was discussed.
“The Russians sent sample new banknotes that were approved and the first order has been delivered. I understand some new banknotes have been injected into the market,” one of the bankers told Reuters on condition of anonymity.
Outgoing Finance Minister Mohammad al-Jleilati acknowledged last week that Syria and Russia had been discussing a deal to print banknotes at the end of May in Moscow. He said such a deal was “almost done”, without going into details.
However, the central bank later denied through state media that any new currency had been circulated.
Friend in need
Russia is one of Syria’s few major political backers and a close trading and economic partner. The are no sanctions in place that would bar a Russian firm from printing money for Syria.
Oesterreichische Banknoten- und Sicherheitsdruck GmbH, a subsidiary of the Austrian central bank, has printed money for the Syrian regime. A central bank spokesman in Vienna said that order was suspended last year because of the EU sanctions.
The anonymous Syrian bankers described the decision to use newly printed money from Russia to pay the deficit as a “last resort” after several months of consideration.
Syria’s budget deficit has soared due to declining revenues and loss of oil exports. The government has so far resisted imposing unpopular measures to fight the deficit, like cutting subsidies or raising taxes.
“The deficit is there and it is already increasing and increasing quickly. And to finance it they have decided to print currency,” a senior Syrian businessman who is familiar with the subject and in touch with monetary officials, told Reuters.
Bankers say the Syrian government is making sure its over 2 million state employees continue to receive salary payments.
“You cannot allow the public sector to collapse,” said one of the bankers. ”People are getting their wages and there are no complaints if they are paid at the end of every month. If we reach a stage where they are not paid there will be a crisis.”
Many economists expressed their surprise over Syria’s $27 billion 2012 budget which was the biggest in its history. Bankers say the spending surge was motivated by the regime’s desire to create more state jobs and maintain subsidies to help ward off wider discontent.
While private sector has suffered large scale layoffs, workers in the public sector have kept their jobs and receive steady wages despite a salary freeze.
Financing the spending has proven difficult. The central bank has exceeded borrowing limits from public banks, and private banks are reluctant to buy government bonds, one of the bankers said.
Inflation in Syria hit 31.5% in April, though Reuters said the central bank considers it manageable.
Authorities have spent state funds on subsidies to keep the prices for household utilities and petrol unchanged, and have announced planned price controls on basic commodities. However, electricity prices for big industries have risen by 60%. The country has also seen the price of subsidised diesel fuel skyrocketing during the last few months.
The authorities plan to inject only a small amount of new currency to prevent runaway inflation, said one of the bankers.
“But there is a limit to how much fresh money could be injected into the economy in such highly uncertain times. Reckless printing of money as a way of buying short term reprieve could be economic suicide,” the banker added.