Damascus gets boost from Gulf investors
Financial Times
9/11/2007

Syria's foreign policy has put it at odds with most of its Arab neighbours but Gulf petrodollars are still finding their way to Damascus and giving the isolated economy a much-needed boost.

According to Abdullah Dardari, deputy prime minister for economic affairs, nearly half of the $2.5bn (€1.7bn, £1.2bn) in non-oilrelated foreign direct investment expected this year comes from Arab sources, with much of the rest from Syrian expatriates.

Some of the Gulf capital is going into real estate projects but the tourism and manufacturing sectors are also winning a share.

Although Arab investors would be more encouraged to look for opportunities in Syria if political risks were lower and policies friendlier, current investment levels, up from $2.2bn in non-oil FDI during 2006, appear to have given the government confidence to pursue its policies.

"There is an opportunity cost but if you ask any Syrian 'would you sacrifice the national position to get more investment?', the answer would be no," Mr Dardari said in an interview.

While hoping to attract more investment from the Gulf, he said the government was also promoting closer economic relations with Iran, Syria's main ally in the region. Iranian companies are involved in projects worth a total of $3bn.

Mr Dardari was speaking on the sidelines of an investment conference in London designed to showcase progress in the economy, in spite of US sanctions and the deterioration in Damascus's relations with Europe and the Arab world.

The controversial standing of the regime, however, was highlighted by the protests outside the conference hall, where Syrian opposition activists called on UK companies to shun business with a police state and warned that the regime and its cronies were the main beneficiaries of foreign investment.

With Syria's oil production dwindling and international pressures growing, the government in recent years has implemented long-promised economic reforms, with notable progress reported in the financial sector, where eight foreign banks and three Islamic banks are now operating. An anti-business tax system has been simplified and tariffs reduced.

But the economy this year has been distorted by the influx of more than 1m Iraqi refugees, who have boosted demand but pushed inflation to double-digit levels.

"They brought cash and that cash is a source of growth but it has put tremendous inflationary pressures and consumed huge subsidised resources - they go to schools and hospitals for free," said Mr Dardari.

Moreover, bankers and businessmen say progress on reforms has been uneven. The deeper measures, particularly reducing massive subsidies and restructuring a bloated and inefficient public sector, are only now being contemplated, and could be difficult to implement at a time of regional and international tensions. "International pressures have a cost. Arabs are investing because money is coming out of their ears but we could get a lot more. FDI should be $7bn or $8bn a year," said one banker.

Copyright The Financial Times Limited 2007