Photo: Lynsey Addario, The New York Times.
Syria has slipped from our news radar. That Arab leaders are welcoming President Bashar al-Assad with open arms may suggest to Westerners that things are all right. They’re not. Syria is a victim of Putin’s War. Russia and Ukraine have long been leading exporters to Syria. And the spikes in oil and grain prices provoked by Russia’s invasion of its western neighbor pummel Syria, which imports half of its oil and a third of its grain. Since 2019, the price of vital foods has grown twice as fast as unskilled wages. Last summer, “only 15% percent of households reported enough income to satisfy essential needs, and close to 50% had to, which sell assets to make ends meet,” reported the World Bank’s Syria Economic Monitor.
We need solid estimates of how rapidly prices are rising
in Syria, if only to avert famine. A common way to guesstimate inflation in poor
countries is to calculate the price increase in common purchases such as meat,
then extrapolate. This approach makes sense, and the United Nations’ Office for
Coordination of Humanitarian Affairs (OCHA) uses it. But the method overlooks that people
try to avoid high prices. If meat costs too much, they will buy more bread. This is especially likely when key prices like fuel are doubling every year. So the
guesstimate may overstate inflation severely in ostensible hyperinflations.
Humanitarian agencies may respond by sending money to places where it doesn’t
do the most good.
Another way to estimate inflation is to use a little economics. Of course, the amount that Syria spends on goods
equals their market value. Let’s take
this one step further. The amount spent
is the number of Syrian pounds (the nation’s currency) multiplied by the number
of times that each pound is spent. If we have 10 pounds and spend each one
twice, as it circulates through the nation, then total spending is 20 pounds.
What about market value? Well, this is the price of a typical consumer
basket (for example, two pounds of grain and a liter of gasoline) times the
number of baskets sold. If a basket costs one Syrian pound and we produce 10 baskets,
then market value is 20 pounds.
The shorthand for this idea is
MV = PQ
where M is the number of Syrian pounds; V is the annual
rate at which people spend a pound; P is the price of a basket of goods; and Q
is the number of baskets. Technically (if you really want to know), M is the
money supply, V is called velocity, P is the price level (that is, the average
price in an economy), and Q is quantity or output.
Crunching ciphers
With a little math, we can rewrite this formula as inflation:
dP/P = dM/M + dV/V – dQ/Q
This formula says that the rate of inflation equals
the rate of change in the money supply plus the rate of change in velocity
minus the rate of change in output (that is, the rate of economic growth). More
money and faster spending push up prices.
More output pushes down prices, because we spread the given spending
over more goods.
To estimate inflation, we need growth rates for money,
velocity, and output. Let’s begin with output, or gross domestic product (GDP).
In its biannual Syria Economic Monitor, the World
Bank forecast that output would fall 3.2% in 2023. But this was before the February earthquakes.
The World Bank assess the economic impact of the earthquakes in its later report,
Syria Earthquake 2023: Rapid Damage and Needs Assessment. But this is
available only by subscription, and individuals can’t subscribe. Yet another outstanding
example of how the World Bank generously provides data to help poor countries develop,
which I had foolishly thought was its main aim.
So let’s scuttle the World Bank and take a crude
approach: Relate the cost of the earthquakes to their impact on the population.
About 8.8 million Syrians were most affected by the
earthquakes, according to the UN’s office for humanitarian affairs. This is 40%
of the population. The earthquakes smashed water and electrical infrastructure and
buildings, halting the economy in affected areas. How long until the economy restarts?
Well, the US Treasury Department is suspending dollar sanctions for six months.
This implies that Treasury anticipates a six-month pause of economic activity.
The implied reduction in annual real GDP due to the earthquakes is .4*.5 = .02. Thus real GDP would fall roughly 3.2% + 2% = 5.2%
over 2023.
In principle, Syria can boost GDP again by exporting.
But it buys more from the world than it sells to it. The World Bank reports for 2020 that the
trade deficit—imports minus exports—was nearly a fifth of GDP. Such a large share
suggests that promoting exports may not revive Syria’s economy quickly. But the World Bank warns that payment data
may be too imprecise for an accurate estimate of the trade balance—especially
for countries with extensive illegal trade across borders.
To give you an idea of the wild variation in trade estimates
for Syria, consider 2021 estimates of the trade balance (merchandise exports
minus merchandise imports). Trading Economics puts it at $58.3 million, and
CEIC at $1.6 billion. As its source, CEIC
cites data from the International Monetary Fund, which is about as good as macroeconomic
data get. Trading Economics does not
disclose its sources but kindly invites you to learn them, maybe, by paying through
the nose for a subscription. Granted, Trading Economics is popular. Certain lazy
economists of my unfortunate acquaintance, lounging in the vicinity of
Kazakhstan, cite it as Scripture. But in truth, it is unreliable. It should document
its claims.
Reliable estimates of money growth are scarce. Really,
reliable economic estimates of anything in Syria have been scarce since the
civil war broke out in 2011, when Assad stopped reporting data. We might assume
that the central bank will print enough pounds to enable Syria to buy the going
dollar value of imports. In that case, the growth rate of pounds would equal
the depreciation rate of the pound in terms of dollars. For example, if the
dollar value of a pound drops 20%, then the central bank will print 20% more
pounds to enable Syrians to buy as many dollars, and thus goods denominated in dollars,
as before. Syria’s official exchange rate per dollar soared from 4000 pounds
in June 2022 to about 8950 pounds in June 2023, or a depreciation rate of 55%.
Street feud
On the street, the depreciation rate is higher. How much higher? In April, Syria’s central bank raised its
exchange rate 44% to account for the black market. If we use 44% as the long-run
rate of depreciation due to the street, then the total depreciation rate that the
central bank would target is 99%.
Time for a quick detour into why the exchange rate affects
inflation. The central bank of Syria has been losing dollars, thanks partly to Treasury
sanctions, so it can provide only Syrian pounds to pay for imports. Ergo, the government
prints a lot of pounds. The exchange
rate of pounds per dollar thus rises; that is, the Syrian price of a dollar of
imports rises. This sparks inflation, discouraging purchases by Syrians. GDP falls, because firms in Syria can’t sell
as much as before. This “pass-through” of
inflation into Syria is large, because Syrians buy a lot of imports—a third of
GDP in 2020. The exchange rate rose 224%
in 2020 and 26% in 2021. End of detour.
Velocity, the rate at which we spend money, is the
opposite of holding money. In turn, the demand to hold money depends inversely
on the interest rate, since we give up this amount of money if we hold a dollar
rather than lend it out. For example, suppose that the interest rate rises from
5% to 10%. Then we would earn a greater
return by spending our dollars on bonds rather than by continuing to stash them
in our piggy bank. Thus velocity depends
directly on the interest rate: Higher interest rates mean that we spend more
rapidly rather than stash our cash. Similarly, the rate of change in velocity rises
with the rate of change in the interest rate.
The benchmark interest rate in Syria is the rediscount
rate of the central bank. A word or two of
explanation: Western central banks charge the rediscount rate on cheap loans that
they offer to commercial banks hard up for cash. They use it in emergencies, so it is not
usually the benchmark rate. Instead, to set interest rates for the economy,
they manipulate a pliable securities market. For example, in the United States,
the Federal Reserve wades into the market for overnight loans between commercial
banks to target their interest rate, the “federal funds” rate. Thus the federal
funds rate is the benchmark interest rate for the US economy. But Syria does
not have such well-developed financial markets, so it uses its only policy rate,
the rediscount rate.
This rate in Syria has been 5% for at least a year. The
lack of change in the rediscount rate implies no change in the demand to hold
money. Thus there is no change in the rate of spending a Syrian pound.
Overall, the implied rate of inflation in Syria for
2023 is 99% + 5% =104%. Other estimates on the Internet are around 140%, but
they seem to be based on 2020 statistics.
Of course, my estimate is rough. Thanks to Assad’s
indifference to data, we don’t know enough about Syria’s economy to pinpoint what’s
happening. But my estimate, as crude as
it is, indicates that the economy is not mending to the point where anyone can
laugh off the possibility of famine.
The civil war has simmered down but not ended. Assad
would do well to spend less time on victory laps and more time feeding poor
Syrians, particularly if they’re in the opposition. — Leon Taylor,
Baltimore, tayloralmaty@gmail.com
Notes
As we’ve seen, the quantity equation of exchange is
MV = PQ.
We can rewrite the quantity equation in rates of
change:
dM/M + dV/V = dP/P + dQ/Q
where dM is the change in the money supply, and so
forth.
Solving for inflation,
dP/P = dM/M + dV/V – dQ/Q.
References
Exports
of goods and services (% of GDP) - Syrian Arab Republic | Data (worldbank.org)
Imports
of goods and services (% of GDP) - Syrian Arab Republic | Data (worldbank.org)
SYRIAN
ARAB REPUBLIC MPO (worldbank.org)
Syrian Arab Republic
Trade Statistics | WITS (worldbank.org)
Syria
Economic Monitor Winter 2022/2023 (worldbank.org)
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