Syria to end fuel subsidies

Syria will phase out massive fuel subsidies over five years to combat smuggling and prevent the budget deficit from sinking further into the red, a senior official said on Tuesday.

"The government will take the decision in the next few weeks and the subsidies will start to be removed before year's end," Abdallah al-Dardari, deputy prime minister for economic affairs, told Reuters in an interview.

"The government doesn't want to make profit on fuels, but the objective is to cover our costs in five years," he said.

The subsidies which cost 15% of gross domestic product have been a hallmark of Syria's Baathist government for decades. The move to abandon them could signal a shift in economic policy which has been criticised as too slow to adopt market mechanisms.

The lifting of fuel subsidies will help keep the budget deficit, which has risen in the last few years, stable at five% of gross domestic product in 2008 and in 2009, Dardari said.

Syria produces 380,000-400,000 barrels per day of crude oil but lack of refining capacity means it imports billions of dollars a year worth of fuel, especially gas oil used in transport and heating, which is sold at subsidised prices at the pump.

Dardari said the government has embarked on a public relations offensive to explain that the end of subsidies was in the national interest, especially as massive volumes of fuel were being smuggled to Lebanon, Turkey and Iraq.

A litre of gas oil costs the equivalent of 14 U.S. cents compared with $1.54 in Turkey for a roughly similar product, Dardari said. Petrol is sold by the Syrian government at 60 cents a litre after a sudden 20 percent rise in January 2006, which caused a public outcry in the tightly controlled country.

The smuggling is estimated to cost the government $800 million a year, according to economists. Dardari said smuggling to Lebanon alone cost Syria $300 million. "Tightening border security will not solve the problem. We have to adopt a fundamental solution. Economic growth will become unsustainable if we continue with this subsidies regime," Dardari said.

The gradual reductions are forecast to save the government $1.2 billion in the first year that would be spent more efficiently, including cash handouts to families worst hit by the rise in fuel prices, he said.

The Baathist government in Damascus is also under U.S. sanctions imposed in 2004 and has been seeking ways to strengthen its economic position to counter U.S. efforts to isolate Syria.

Dardari said the government was studying ways to tackle subsidies on agriculture and state enterprises that have been losing money for years. "The issue is not just subsidies, but restructuring the whole economy," he said.

The economy underwent heavy nationalisation when the Baath Party took power in 1963. President Bashar al-Assad, who succeeded his late father, Hafez al-Assad, in 2000, has taken limited steps to encourage private enterprise while keeping the Baath's monopoly on the political system.