Syria is to allocate $7bn in its budget for 2008 to subsidise energy, basic commodities and food supplies, further increasing the drain on the treasury at the very time the country is trying to implement reforms to ease the state out of the marketplace.

On July 23, Abdulla Al Dardari, the deputy prime minister for economic affairs, said the government was committed to protecting the Syrian people and their standard of living through the provision of subsidies.

Al Dardari said that the subsidies would be "distributed effectively among citizens, affirming the government's commitment to delivering support to deserving groups".

The government will also keep its promise to provide free education and health services, with funding to be made available in the 2008 budget, Al Dardari said.

If the Syrian government does follow through on its spending commitments, it will face a massive increase in its outlays in the coming year, expenditures it may find hard to support. With much of the country's agricultural industry reporting poor harvests due to drought, the key cotton and wheat sectors in particular being hard hit, export earnings and tax revenues are expected to be down this year.

The $7bn in subsidies represent a major increase in spending by the state. By comparison, the 2006 budget set aside just $500m for subsidy payments for basic foodstuffs, electricity and fuel, according to a report by the US embassy in Damascus. Analysts doubted the accuracy of these figures, believing they did not reflect the full extent of the subsidies being distributed. A US government report issued in early 2006 suggested fuel subsidies alone would amount to $1bn for the year. However, none of the estimates made at the time came close to the 2008 total announced by the deputy prime minister.

With Syria's gross domestic product currently estimated at around $38bn, the figure announced by Al Dardari represents over 20% of GDP, well up on the 15% given in an International Monetary Fund report issued in early 2006.

However, while committing the state to boosting subsidy payments, Al Dardari also flagged an overhaul of the system.

"Any new aid system will be gradual to eliminate economic and social shocks and achieve tangible improvement in living standards for the majority of Syrians," he said.

Another to raise the issues of subsidies was President Bashar Al Assad. In his address to the parliament on July 17, when formally being sworn in for his second term as head of state, Al Assad said that one of the government's main priorities was the economy and reducing the role played by the state in it.

However, while having touted the measures taken by the government to open up the economy and to reform its infrastructure, the president was less forthcoming about ending or reducing the levels of subsidies handed out. The repeated talk of the state ending subsidies or preparing to do so was "either misleading, rumour or indicates a lack of knowledge," he said.

Only if a resolution was passed by the United Nations' Security Council would the role of the state change and the programme of subsidies be ended, Al Assad said.

Much of the state's subsidies goes to the country's agriculture industry, aiming to keep down the price of basic foods such as wheat used in bread and pasta. These subsidies come in both the form of cheap fuel and in direct payments to primary producers.

President Al Assad said the government was committed to maintaining its support for the sector.

"One of our priorities will be to provide the agricultural sector with the requirements of growth and to fend off negative impacts from this sector because of its vitality to the Syrian economy and its importance to our food sufficiency and national security," he told the parliament.

Other funds are dedicated to ensuring a cheap supply of electricity to both industry and households, while the figure is also inflated by support to marginal or unprofitable state enterprises.

With regard to state enterprises, in his July 17 address, the president was more forceful in his intent to implement change and reduce the burden on the exchequer.

"Many decisions have been made to develop the public sector and address its production, management and financial issues with the objective of ridding it of the impediments which limit its capacity to compete," he said. "There are new steps which will be taken in the near future in order to rectify the conditions of the industrial public sector."

Syria may want to reduce the role of the state in the economy but as yet there are some steps it cannot take, due to the political unpopularity of cutting subsidies and the need to provide the wherewithal for the country's people to survive if not yet prosper. Price support and subsidies appear set to remain on the Syrian scene for a long time to come.

Oxford Business Group