Syria is to become the latest Middle Eastern country to sever its currency links with the US dollar, setting next month as the date to abandon pegging the Syrian pound to the greenback.
On June 5, Adeeb Mayaleh, governor of the Central Bank of Syria, said that as of the middle of July, the pound would be pegged to the International Monetary Fund's (IMF) special drawing rights (SDR), rather than against the dollar.
However, unlike Kuwait's dropping of its US dollar peg for the dinar, which was announced in late May, Damascus' move has not come as a surprise. Syria flagged its intentions to cut the link with the US dollar and shift to the SDR in July last year. Though initially planned to take place in the first half of this year, Mayaleh said that additional time had been needed to put all of the mechanisms in place.
Despite the shift, Syria will still have some exposure to the US currency. The IMF's set weightings for its account unit include 44% for the US dollar, 34% for the euro and 11% for both the British pound and the Japanese yen.
Mayaleh said the change in the peg would provide more stability for the Syrian pound, provide a further incentive for direct foreign investment, and reduce the risks posed by fluctuations of currencies such as the euro and the dollar.
"The decision is final," he said in an interview with a news agency. "This will help stabilise the Syrian pound and bring down inflation."
According to Mayaleh, the move to the mixed basket of currencies may ease inflation, possibly lopping 2% off the 2006 figure of 10%. The Syrian pound had been hit by the falling dollar, which has lost more than 10% against the euro, driving up the cost of imports at a time when Syria is trying to kick-start its economy and is investing in new plants and equipment bought from overseas.
He denied there was any political motive behind the move, saying the decision to make the shift had been based on financial considerations alone.
However, according to Monica Malik, an economist with regional investment bank EFG Hermes, Damascus' decision to abandon the dollar peg was driven by both economic and political motives.
"Although Syria has cited rising import costs and inflation as the reasons for its decision to move away from their currency peg to the dollar, geopolitical factors are likely to have also played a role," she said in an interview with a Middle Eastern paper on June 7. "Syria has been under immense political and commercial pressure from the US," said Malik.
Syria has been lowering its exposure to the dollar since last year, after officials in Washington banned the Commercial Bank of Syria (CBS) from dealing in US currency, accusing it of involvement in money laundering and financing terrorism, the first time such action had been taken against any bank in the world. The decision was taken after the US Treasury's Financial Crimes Enforcement Network tabled a report in March 2006 alleging the CBS was a "primary money laundering concern".
Having had all of its estimated $4.1 billion in foreign currency reserves in dollars, Syria has now lowered this by half, with the remaining 50% in euros, a position that Mayaleh said would remain for the present.
"We will keep it at 50:50, but we might change it later on depending on any new developments," he said.
Syria's decision to decouple the pound from the dollar probably will not have any negative effects on the economies of either country. While Syria has been hurt by the falling price of the dollar, it is does not have any trade with the US to speak of. In turn, the US is not a real player in the Syrian economy as Washington now restricts direct investments in the country.
However, Damascus' decision, along with that of Kuwait, could be a sign of things to come for the greenback. While other Gulf states have said they have no plans for the present to change their own currency pegs away from the dollar, the continued link is a contributing factor to inflation among Gulf Co-operation Council countries.
Jason J. Nash is Head of Research at the Oxford Business Group
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