An economic vice squeezes Assad's patronage system

In his speech on Monday, President Bashar Al Assad made pointed reference to the dangers that Syria's burgeoning protest movement posed for the country's economy. What he didn't say, however, was that a prolonged economic crisis also threatened his regime. The crisis may be nearing the tipping point if one is to believe a report prepared in May by European Union diplomats based in Damascus.

The report paints a dire picture of what lies ahead economically for Syria. The diplomats do not make political predictions, but they do not need to. For an Assad regime fighting for survival, the economy is an Achilles heel, undermining the leadership's patronage power and its ability to keep onside a demoralised business class that is a pillar of the system.

The document warns that Syria's political predicament "could potentially lead to a long-term recession or even a collapse of the economy if the unrest continues". The European diplomats cite projections by the Institute of International Finance of a 3 per cent contraction in GDP this year. Liquidity has been running low, forcing the closure of companies, while the Damascus Securities Exchange, the report continues, has lost 20 per cent of its value since January.

Syria's tourism industry has been hit especially hard, with zero occupancy rates reported in major hotels for the foreseeable future. This is ominous for a sector that accounts for 15 per cent of GDP and employs, officially, 6 per cent of the workforce. Trade has also declined, even if the figures are sketchy. Internal trade has been interrupted by insecurity on the ground, while the transit trade from Turkey to the Gulf is estimated to have declined by 30 per cent. The demand for imports has also declined, eating into customs revenues.

The European diplomats are particularly troubled by prospects for inflation. In an effort to alleviate public displeasure, the Assad regime earlier this year raised public-sector salaries and pensions by around 25 per cent, effectively doing the same for those in the private sector. This, along with other recent governments commitments, represents an additional budgetary burden equivalent to $2.4 billion (Dh8.9 billion). The report predicts that the government will probably have to finance its deficit "through expansion of the monetary base (ie, printing money) as the availability and cost of international financing is set to be influenced by the lack of stability in Syria".

In plain English, the regime is pursuing clashing policies. On the one side it urgently needs to stabilise the Syrian pound, and on the other it may have to adopt inflationary measures that will most probably generate contrary dynamics. The regime has sought to cope with this contradiction by increasing the demand for pounds through higher interest rates on deposits. However, the diplomats warn that "the hike in interest rates will make credit more expensive which might discourage investment even further".

The authors point to "concern among influential Syrian business people and investors" with the turmoil and the possibility that the regime will impose more protectionist economic policies, reversing liberal reform. In other words, the regime may seek to use the economy as an instrument in its political struggle, which would be very damaging for investments, particularly from the private sector.

This points to a second disconnect in the Assads' approach to the unrest. The regime needs to maintain the loyalty of the business class, but few of its actions today will encourage business people to tie their fate to the president and his family in the long run. That is already increasingly apparent. Lebanon is awash with stories of Syrians having removed their funds from Syrian banks in order to place them in Lebanese institutions. Moreover, if investments plummet further in Syria, this will heighten unemployment, exacerbating social unrest.

The European economic report does not address patronage, which will be vital to the regime's staying power. The praetorian units of the Syrian army, notably the Republican Guard and the 4th Armoured Division, have long benefited from higher salaries and favours than their peers, even if one should not overestimate this in absolute terms. There have been stories of members of the elite corps having to take a second job to make ends meet. As for the regular army, opposition sources claimed in May that salaries had not been paid the previous month. The information has not been verified, but if true it would be serious, perhaps illustrating the liquidity shortfall.

As the regime feels the harder economic pinch, as pressures mount on the Syrian pound, and as the popular upheaval continues, there will be more stress on the army and the security forces. There is something deeply debilitating for a soldier or officer, even the most dedicated, to engage in mass repression and murder without respite. Numerous observers believe that the fatalities and arrests in Syria are much higher than those being publicised. If the regime's power of the purse deteriorates while the psychological load and fatigue felt by its security bulwarks intensify, the Assads will be more vulnerable.

It is difficult to see how the Mr Al Assad and his acolytes will be able to put Syria's genie back into the bottle. They know that time is of the essence, that popular resistance must be overcome swiftly in order to avert a meltdown. But they are working at cross-purposes. Syria's economic health requires social health and confidence. Massacring one's own population is not ideal for securing that outcome.