Project GCP/SYR/006/ITA Assistance in Institutional Strengthening and Agricultural Policy: Agricultural Credit docx

Final and Cleared Report on Credit

FAO / Government of Italy Cooperative Programme



Food and Agriculture Organization
of the United Nations

Italian Cooperation

Ministry of Agriculture
and Agrarian Reform
Project GCP/SYR/006/ITA
Assistance in Institutional Strengthening and Agricultural Policy
Final Report
on
Agricultural Credit

N.S Parthasaraty
FAO International Consultant
Damascus – Syria, October 2001
- Opinions and judgments expressed are the authors’ only. FAO proposes the text as basis for starting the
discussion among scholars and policy makers on the issues related to the subject of the study.
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TABLE OF CONTENTS

Nos. Chapters Page
Executive Summary 6
1 Background 17

2 Agricultural Setting 19
3 Administrative Set-up 20
4 Policy Environment 21
5 Macroeconomic and Monetary Policies and the Financial Sector
Monetary and Credit Policy – Role of Central Bank – Recent Monetary and Credit
Developments – Liquidity – Interest Rate Policy
22
6 Financial System
Structure – Credit Sources – ACB, its operational aspects, resource needs,
profitability – Other Banks – Cooperatives – Overview
26
7 Credit Sources for Rural Households
Loan Modes – Products – Modalities of Access – Alternative Sources – Security
and Recovery – Disbursements – Interest Structure – Implicit Interest rates –
Observations – Demand Potential
34
8 Capital Needs of Service Providers and Agro-processing Sector
Distribution Credit – Re-distribution Credit – Credit for Post-harvest Activities –
Potential Demand – Low Participation of Private Sector – Alternative Sources and
Implications
42
9 Savings
Products – Mobilization
49
10 Subsidy on Interest
Estimate of Subsidy – Subsidy Dependence Index
50
11 Objectives, Instruments, Decision Process and Linkage with Agriculture Sector
Policies
Agricultural Policy Implications for Rural Financial System – Outreach – Credit

delivery – Credit Planning – Autonomy – Delegation of Authority – Observations
53
12 Impact on Agricultural and Agro-industrial Performance 59
13 Recommendations 63
14 Broader Issues and Institutional Measures 81
15 Risks, Adjustment Costs and Benefits 83
Annexes
1 Terms of Reference
2 List of Meetings
3 References
4 ACB Balance Sheets – Summary (Paragraph 6.12)
5 ACB – Expenditure and Revenue Statements – Summary (Paragraph 6.17)
6 Estimate of Potential Demand for Short Term Loans (Paragraph 7.30)
7 Investment in Micro-irrigation Equipment (Paragraph 8.19)
8 ACB – Study of Loaning Capacity with Present Resources (Paragraph 13.14)
9 Summary of In-depth Interviews (Paragraph 1.3)






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Tables in the Text
(First numeral indicates Chapter Number in which the Table occurs)
Table No. Table Content
2-1 Crop Groups Area Distribution
4-1 Summary of Policy Reforms Affecting Agricultural Sector (Box)
5-1 Money Supply

5-2 Retail Price Index
6-1 Banks and their Activity Segments
6-2 ACB Operational Parameters 1999
6-3 ACB Deposit Growth
6-4 ACB Loan Outstanding Position
6-5 Summary of ACB Profitability
6-6 Cooperatives – Structure 1999
6-7 Overview of the Financial Sector
7-1 Summary of Collateral Requirements for Agricultural Loans
7-2 Loan Recovery Rate
7-3 Loans by Term
7-4 Loans by Sector
7-5 Central Bank’s Rate of Interest to Specialized Banks
7-6 Banks’ Rates of Interest
7-7 Model for Estimating Potential for Medium and Long Term Loans
7-8 ACB’s Plan for ST, MT and LT Loans versus Potential
8-1 Industrial Bank’s lending to Food Industries
8-2 Estimate of Potential demand for Capital for Food Industry
8-3 Investment in Micro-irrigation Equipment Manufacture
9-1 Savings Rates of Interest
9-2 Real Interest on Savings and Savings Growth
10-1 ACB – Current Average Lending Rate
10-2 ACB – Cost of Funds, Viable Lending Rate, Subsidy
10-3 Interest Cost and Input Cost as % of Production Cost
11-1 Specialized Banks’ Loans to Different sectors
11-2 Loans for Agricultural Priority Purposes
11-3 Loans, Beneficiaries and Average Loan Size 1994-99 and Graphical Illustrations
11-4 Banks – Number of Branches
12-1 Indices of Gross Output
12-2 Share of Gross Output

12-3 Sectoral Share of Net Capital Formation
12-4 Participation of Private Sector 1990-98
13-1 Estimate of Gold Holdings with Households
13-2 Drought Insurance – Outline
E-1 Summary of Recommendations – Operational, Policy, Institutional (in Executive
Summary)


O160601m





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GLOSSARY AND ABBREVIATIONS

ACB Agricultural Cooperative Bank
CBS Central Bank of Syria
CAR Capital Adequacy Ratio (Capital plus Reserves: Assets)
CB Commercial Bank of Syria
CRR Cash Reserve Ratio (Cash on hand and with CBS: Deposits)
Dunnum Area equal to about a tenth of ha
GFU General Farmers’ Union
Ha Hectare
IB Industrial Bank
MAAR Ministry of Agriculture and Agrarian Reform
Mantika District
MEFT Ministry of Economy and Foreign Trade

Mohaffazat Provinces or Governorates
Nahia Group of villages
PCB Popular Credit Bank
PDF Public Debt Fund
REB Real Estate Bank
SAC Supreme Agricultural Council
SP Syrian Pound
Zone referred to also as Settlement Zones and numbered 1 to 5 according to
rainfall quantum and dependability – zonal classification transcends
administrative division borders
Currency One US $ = 50 SP

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Acknowledgement

The Consultant would like to thank the following: Dr. Emad El Hawary, Chief Technical
Adviser, Mr. Atieh Hinde, National Project Director and Dr Cirro Fiorillo, Agriculture Economist
for their time and valuable guidance. Especially, to say that without Mr. Hinde’s help at all times
in using his good offices to arrange interviews, giving sound technical advice on issues relating to
this report and creating most pleasant working conditions, this task would not have been possible
and would have been far more strenuous, is not a platitude common on such occasions but an
earnest acknowledgement. Dr. Cirro Fiorillo was always available to provide constructive
suggestions and useful for the study.

To Mr. Mustafa Dawwa, Director, Credit Department and member the Task Force to assist this
study, specially, I place on record my grateful thanks for providing not only the required data but
also insights on the local situation.

Dr. Z.Abdullah, Dr. Saad Ahmed and Dr. Mostafa Nosseir of FAO RNER provided valuable
guidance, direction and reference material at the briefing session prior to commencement of
mission and I am grateful to them.

Thanks are also due to all project staff, especially the administrative staff as also the interpreters,
who through their cheerful and efficient support facilitated the completion of this task.
Interpretation, data retrieval and secretarial services of a high order provided by Ms Asma Matar
merit special mention. The trainees lent committed support in carrying out in-depth interviews
with farmers and in data collection and analysis. A special word of thanks is due to Mr. Salah

Saker, the trainee officer, who assisted in codifying and analyzing the in-depth interview data.



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PROJECT GCP/SYR/006/ITA

Implications for the Agricultural Sector of the Current Credit System
Executive Summary

Background
1. The rural financial system has played an important role in Syrian agriculture through state
owned agricultural credit institutions, fixed subsidized interest rates, integration of input, credit
and output procurement. Global changes and the new opportunities in their wake have made it
necessary for the rural financial system to be reorganized to facilitate establishment of a globally
competitive production system as a means to continuously improving living standards and to
spreading the fruits of prosperity among the disadvantaged social sections.

Agriculture
2. The population of 16 million is growing at over 3% per annum expected to reach 24 million by
2010. Although the current calorie per capita of 3200 is considered satisfactory, food production
is required to keep pace with growing population, increasing per capita incomes and changing
food habits. Meeting the growing needs would not be a simple issue of motivating 25% of the
holdings with 76% of the area for higher production as any growth strategy has to consider the
majority of relatively smaller households farming under uncertain climatic conditions.

Policy Environment
3. In the Agricultural sector, as in other sectors of the economy, Syria has in recent years been
gradually introducing several reforms shifting the economy from a centrally planned system that
prevailed over several decades to a market system. Further pace to the reform process is currently
at the stage of resolving issues concerning redefinition of the role of public institutions, selection
of appropriate policy instruments for a competitive environment and engineering a smooth
transition at minimum hardship and social cost. Since the mid-eighties there have been many
important policy changes - such as: unification of exchange rates, private sector entry into defined
areas of agricultural procurement, private sector export of vegetables and fruits, reduced rigidities
in crop planning, removal of explicit subsidies and fixation of prices according to production
costs.

Macroeconomic And Monetary Policies And The Financial Sector
4. Social considerations, the fact that public sector has been the main user of credit and
apprehension that prices might increase seem to have kept critical monetary determinants
unchanged. Borrowing by banks are 1.44 times and 2.66 times the deposits (Demand and Time
Liabilities) in the case of Industrial Bank and Commercial Bank respectively suggesting that
banks rely more on borrowings to lend and invest than on deposit mobilization and that
observance of prudence norms are not institutionalized. As time deposits carry a uniform interest
rate of 7-8 % and lending for crops is at an average of 5% the difference is bridged by low cost
refinancing and loans from the CBS at 2.5 to 2.75%. In this sense, agricultural short, medium and
long-term loans are subsidized. The future interest policy assumes significance in the context of
government’s decision to allow private sector participation in banking.

5. The responsibilities of CBS include managing money supply, supervising and directing
banking activities according to norms and performing the role of financial and monetary
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counselor to the government. Much of the responsibility of supervising the banks seems to have

devolved, over a period of time, partly upon the MEFT and its officials in regard to policy matters
and the other part upon the Central Organization for Financial Monitoring.

The Financial System
6. The financial sector in its entirety is government owned and directed. With the Central Bank of
Syria as the banker’s bank at the apex the system consists of five “specialized” banks, namely, the
Commercial Bank of Syria, Agricultural Cooperative Bank, Industrial Bank, People’s Credit
Bank and Real Estate Bank with apportioned segments of the market categorized by nature of
end-use of the money. The specialized approach to banking has resulted in the following: (a) each
bank has virtually one category of customer and each customer one bank to go to and this, in turn,
has led to low motivation to enlarge the financial market; (b) each potential borrower has at times
to go to different banks for different financial need; (c) fragmentation of financial functions,
wastage of the potential combined strength of the infrastructure of all the banks, isolation of each
bank in its demarcated sphere and lack of competition are the inevitable outcome of this structure.

7. ACB has a network of 108 branches distributed over all governorates. Branches operate as
independent units, each regarded as a separate profit center. Each branch reports directly to the
Director General. The branch manager acts as notary public and as assistant head of the Real
Estate Office for purposes of registration of mortgages and debtor declarations.

8. Loans outstanding and to be collected are 2.54 times the annual disbursement. Although
borrowing is 0.88 times the deposit, appearing to be low, it seems to be due to severe liquidity
restricting ACB’s ability to avail of discounting. The balance sheet shows that loan assets are
supported by other liabilities unconnected with banking activity. Return on capital is poor
because of prohibitively high transaction costs at 11.59 % of loan disbursement.

9. Cooperatives: Although cooperatives, in the manner in which they operate in Syria, cannot be
considered an intermediary financial institution at the grass root level, they play a vital part in the
whole system of input supply, procurement, credit disbursement, proceed disbursement,
collection and creation of a collective will and mutual assurance for action. But for the

cooperatives the workload and cost per transaction for ACB would be much higher.

Credit to Rural Households
10. Agriculture directly received only 11.28 % of available credit in 1990 and this declined to
9.88 % in 1999. However, this does not capture the full picture, as there are no separate figures
for credit extended to input and output related agencies, both in distribution and in manufacture,
and to those engaged in agro-processing and exports. ACB extends assistance to private farmers,
cooperative member farmers, cooperatives, farmers’ unions and federations and public sector
organizations engaged in agriculture. Private sector has access even if in the same area a society
is functioning. The ownership of the private body intending to borrow should be farmer/farmers
with license from the MAAR.

11. Each farm household must have a crop license as a prerequisite for obtaining credit and even
for cash purchase of inputs if credit is not needed. In the case of medium or long-term loans the
access procedure is prolonged. Farmer groups in Homs and Sweida voiced dissatisfaction over
long procedural delays in processing applications for medium and long-term loans. Many even
had the impression that the bank does not give long-term loans. Farmers find it difficult to obtain
loans for machinery like harvesters and tractors and have to depend on supplier credit at high
interest rates of 20-30 %. According to them, lesser priority is given by the bank to medium and
long term lending affected important activities like land reclamation and fruit tree replanting.
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Loans for land reclamation is subject to a standard ceiling whereas the actual fund needed may be
higher depending on the nature of the terrain and the soil structure.

12. Output dealers, exporters’ agents and cold storage units are active in fruit and vegetable
growing areas. Financing by them takes several forms. Direct advances ahead of the season are
given with, and sometimes without, an agreement on the unit price at which the harvest would be
sold. The farmer is thus under obligation to sell the crop to the dealer at a price to be negotiated
and having to repay the loan the farmer finds himself at the weaker end of the bargain.

13. The enforcement mechanism is effective and as such repayments are generally satisfactory
except in times of poor rainfall and drought. In times of natural calamities like drought, a
committee, appointed by the Governor, consisting of representatives of ACB, administrative
authority of the affected area, MAAR and farmers’ union assesses the extent of damage based
upon which ACB Board is authorized to grant full or partial deferment.

14. The special powers of endorsing collateral charges on ownership titles, which are legally
enforceable, conferred upon the lending agency is a unique feature of the Syrian system
encouraging timely repayments, acting as deterrent on willful defaulters. Officials associated with
loan recoveries feel that the enforcement mechanism is the best answer to curb the tendency to
avoid repayment spreading among farmers who are generally dependable.

15. It is significant that, of the loans extended by ACB, private farmers accounted for over 50%
and cooperative members about 45%, the remaining going to the public sector (state farms,
Euphrates Basin Establishment, and other activities related to MAAR, etc). Another notable
feature is the low proportion of medium and long-term loans and the declining percentage from
year to year – from 17 % in 1997, to 15 % in 1998 and further down to 14 % in 1999. This trend
is to be noted in the context of farmers’ impression that ACB producers to extend medium and
long-term loans are quite cumbersome.

16. The differential interest against the private sector is 0.5 % in the case of ACB, 1 % by PCB
and 2 % by IB. IB’s interest rates are higher across the board by 0.5 to 2 % for the same borrower
category compared to other banks. It is seen that cooperatives get the benefit of lowest interest
and next the public sector with private sector subject to the highest rate perhaps because of the
lower risk that banks attach to lending to public sector agencies guaranteed by the respective
Ministries. Even in refinancing agricultural production loans CBS has a discriminatory margin of
25 % for discounting loans taken by private farmers who are not members of farmer associations.

17. Observations on Loan and Interest Structure

i) There is little flexibility in loan structures to suit different crop and cash flow
situations.
ii) Standard loan terms and a one-size-fits-all approach has produced a sterile
lending environment in which there is no distinction between a good borrower
and a bad one, between a borrower who keeps his value addition in the bank and
one who either does not produce the value addition or squanders it.
iii) Narrow interest spread and high transaction cost crowd out the possibility of any
allowance for service improvement.
iv) The mission hardly heard from any of the farmer group reports of high interest
rates. On the other hand, their readiness to resort to more convenient and costlier
alternative sources is indicative of the higher value they place upon better service
and easy access than on cost.
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v) The low percentage of medium and long-term loans are not conducive to promote
long -term productivity of agriculture.
vi) The preferential rates of refinancing signify government’s desire to match
monetary policy with its commitment to promote industrial development through
an enlarged role for private sector.

18. In regard to short-term loans, from the figures of demand potential and planned coverage, it
seems that a substantial part of agricultural production is financed by farmers’ own resources and
from borrowings in the informal market. It is quite possible that large farmers who account for
over 70 % of production may be self-financing their farm expenses and the more affluent among
them lending money to friends and relations on profit-sharing basis permitted by religion.

Credit to Service Providers
19. According to senior officials of IB, demand for funds is larger than resources indicating the
need for strong fiscal, monetary and marketing measures to promote savings. Figures show that

food industry’s share of borrowing is steadily on the increase from 20 % in 1990 to 39 % in 1999.
In absolute terms it has grown from SP 298 million to SP 976 million, by well over 3 times.
Significantly, while sum borrowed has increased the number of borrowers has declined form
1129 to 976 suggesting that average size of loan has increased. This might imply a use of better
technology or higher degree of automation or scale increase or a combination of any of these. It is
a pity that CB does not have similar figures classified according to industry and nature of activity.

20. Against a theoretical potential of SP 73 252 million, calculated on the basis of approved
projects under Law 10, that can be financed by the banking system, IB can be said to have met
cumulatively SP 5844 million from 1990 to 1999 – less than 10 % of the potential. To the extent
of working capital funding from CB, the gap would narrow. Figures for CB’s credit to agro-
processing industry is unavailable. The low percentage is also due to a poor rate of maturation of
approved investments as well as to low participation by private sector in bank credit.

Low Participation by Private Sector
21. It seems that the reluctance of the private sector to avail of bank credit, assuming that it is
available without much procedure and red tape, arises out of the following:

i) Religious considerations preclude lending and borrowing against interest.
ii) Private sector is still unfamiliar with legitimate procedural and security
requirements of the banking industry, which after all is dealing with public funds
and has necessarily to make contingent provisions to recover money in the
eventuality of default.
iii) Many promoters do not appreciate the criticality of working capital and do not tie
up working capital along with financial arrangements for capital for plant and
machinery. They look for working capital after commencement of production
and quite often find themselves having to grapple with an acute cash crunch.
iv) The foregoing is not to imply that there is no scope for banks to make their
products and procedures more borrower-friendly. Slow progress in this direction
is due to the fact that they still look upon public sector as their chief customer.

Public sector lending is the softer part of the market, needing less effort in
evaluation, securitizing, monitoring and recovery.
v) The preferential treatment to public sector borrowers (example: lower interest)
not only places private sector at a competitive handicap but sends out a wrong
signal from the government to banks that private sector is of inferior priority.
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vi) Although agro-processing and other post harvest supports are rated as critical
elements of agricultural policy, banks like CB have not designed the management
information system to monitor progress to corrective measures.

Alternative Sources
22. Private funding is apparently taking place on a fairly large scale outside the banking system
going by the impression gathered from many entrepreneurs met by the mission. Return
expectations in the informal market are naturally high. High cost private financing has
ramifications.

i) Only projects with very high returns would pass the test and as a result many
projects with attractive returns, by normal standards, would get neglected
arresting economic growth.
ii) This would also affect expansion and modernization necessary to acquire global
competitiveness.
iii) Lack of competitiveness would force manufacturers to confine themselves to the
domestic market and exert pressure on the government to protect local industry
for its low efficiency and poor product design and quality
iv) Often the entrepreneur has to compromise on technology for want of adequate
capital and projects could become sick even before they have commenced
commercial production being uncompetitive in terms of pricing, technology and
quality.

Savings
23. Savings has been appropriately called the “forgotten half of rural finance” as provision of
financial services often focuses more on extending credit neglecting other services like savings,
family budgeting and insurance.

24. Earning rate on savings having remained constant for over ten years now, the attractiveness of
the rate has varied depending on the inflation rate and opportunity cost of capital. The following
picture emerges deflating the retail price index change from the interest rate of 8 %. Savings
increased when “real” interest rate improved and more so when it turned positive. Savings in
1990 were a bare SP 66,291 million and since then it has increased more than four-fold. This also
goes to show that opportunity cost of capital in the informal market is not such a heavy counter-
force as to dampen the effect of improvement in positive rates of return in the formal system.
Although informal lending rates are cited as varying from 24 to 36 %, such markets not being so
fluid and well organized, access to opportunities may not be easy, apart from the higher risk
involved in such investments compared to keeping money in an institution having the backing of
the government.

Savings Mobilization
25. The following factors inhibit savings mobilization.

i) Banks do not have the freedom to design different savings products carrying
different rates of return and cash flow features to meet varying saving
characteristics.
ii) Rates and other terms being standard, there is a sterile uniformity among the
banks and this lack of variation dampens any semblance of competition to attract
savers.
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iii) As lending rates cannot be varied by the management there is no way of the bank
being able to distinguish a good customer with large deposits and maintaining a

good account from, say, a one-time borrower.
iv) Any disciplinary minimum ratio of banks’ own funds and mobilization as a
condition of concessional refinancing or discounting, if in existence, is weakly
enforced; so, there is no pressure to mobilize savings and deposits.
v) Where agricultural credit is concerned, the low rate of interest based on 2.5 %
discounting by central bank to meet all lending needs, has taken away the
purpose of mobilizing deposits costing 8 %. More the deposits the higher would
be the loss to ACB.

Subsidy Dependence Index
26. The subsidy dependence of the rural financial institution is the percentage by which its
average on-lending rate would have to increase to make it self-sustainable (Jacob Yaron and
Others, Rural Finance, The World Bank, 1997). In the present case, the present average lending
rate of 7.44 % needs to be increased by 3.26 % toward interest plus 9.59 % toward additional
transaction cost incurred by ACB over the norm– that is, by a total of 12.85 %. This gives a
subsidy dependence index of 1.73 (12.85/7.44), which is extremely high and untenable. Of this
1.73, interest insufficiency accounts for 0.44 and the balance 1.29 is the very high transaction
cost. This stresses the urgency of restructuring ACB and lowering its transaction cost per loan.

Implications of Agricultural Policies for Rural Financial System
27. Total demand for funds has grown 3.2 times and loans to sectors other than the public sector
has grown faster than that for the public sector apparently stimulated by the policy reforms. The
public sector, however, continues to dominate the capital market with its share having nudged
downwards from 74.72 to 70.46 %. In absolute terms also, public sector absorption of available
resources is still very substantial indeed.

28. Priority areas enumerated in the Agricultural Policy have not fared well. Loans for irrigation
declined in 1999 to a little over a third of 1990. Greenhouses, which form the thrust for improved
quality and competitive costs for export, has limped from SP 301 million to SP 475 million in
1999. The share of these special purpose loans declined from 20 % of total loans to 12 % in 1999

besides registering a fall in absolute terms from SP 1695 million to SP 1271 million.
Encouragement of mechanization, micro-irrigation and similar activities is another activity that is
part of ACB’s objectives that has not made satisfactory progress as indicated by the low ratio of
medium/long term loans to short term loans.

29. ACB’s Objectives: ACB has succeeded in fulfilling its prime objective of providing cash and
in-kind loans to the agricultural sector. The loan volumes, however, have been declining year
after year. An important objective was to encourage establishment of cooperative societies. The
cooperatives could have been encouraged for a role in mobilization of savings and lending. The
development of such second tier financing activities would have considerably strengthened the
rural financial system and shifted the focus for ACB from retail lending to wholesale lending
leaving to grass-root financial functions responsibilities of credit rating of borrowers and ensuring
timely collections.

30. The number of beneficiaries in 1999 was only 54 % of the number in 1994. Even allowing for
the poor rainfall in 1999, it is seen that the market contraction process had already set in from
1995. It is significant to note that the number of borrowers peaked to 749,703 in 1989, nearly
three times the client base in 1999. This trend is indeed cause for concern. Loans are not reaching
farmers or farmers are unwilling to utilize the facility from the Bank or farmers are becoming
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self-sufficient for financing production activity. The last mentioned possibility seems unlikely
going by the impression one gains from meeting farmer groups in different parts of the country.
Loans advanced have also been going down reaching to 71 % of the 1994 volume in 1999 despite
increase of area during the same period. Not surprisingly, therefore, the average size of loans has
been increasing and is presently 1.32 times the size six years ago. The higher average size is
suggestive of a movement toward larger farmers and/or toward better-endowed zones.

31. Coordination of National Agricultural Objectives with the operational and marketing
strategies of the rural financial system has much scope for refinement. Matching measures and

monitoring systems are needed to ensure fund flow to identified priority sub-segments;
sufficiently sensitive alert signals in the form of data reporting, monitoring and management
information systems to track achievements with reference to quantified priority objectives are
required.

32. The combination of input distribution and banking, two unlike businesses, in the hands of
ACB is hardly conducive to sound internal management controls, performance parameters and
accountability.

33. Crop and land holding records maintained for the purpose of issue of crop licenses are of a
high order and constitute a good basis for examining feasibility of alternate and easier system of
access to credit. The recovery mechanism supported by special powers of confiscation of lands of
defaulters is sound

Aggregate Performance of the Sector
34. Growth in agricultural sector has been an average 3 % between 1995 and 1999 in a period
when other sectors like manufacturing, transport & communication and services have done much
better. Consequently, the share of the sector in the gross output has also declined from 25 % to 21
%. While other sectors have been able to take advantage of the reform, agricultural sector has
been languishing. The slow entry of private sector in to the less glamorous and more complex
agro-related economic activities, the risks associated with it and the traditional preference of
banks to stick to “safe” public sector lending could be reasons for the slower growth. The
liquidity pressure in ACB and the disinclination to assist farm investments on an increasing scale
through medium and long-term loans are responsible for the poor net capital formation in this
sector.



35. Export Performance: Fruit and vegetable form an important component of agro-food trade.
The export side of trade constituted 49 % of agricultural and 11 % of total trade. During the

second half of the nineties fruit and vegetable registered a net balance of $ 326 million and the
Standard Balance ratio has improved to + 0.74 in 1996-99 from – 0.15 in the early sixties.
(Standard Balance ratio is the ratio of net balance on total trade). While it is difficult to isolate the
effect of credit or the part played by it for want of such analytical data from the banking sector, it
is suffice to conclude that these are indicative of growing future prospects and the increasing
demand for credit that is likely to emanate from this sector.

Recommendations
36. The suggestions of this report have been arranged in the following summary tabulation in
order recommended sequencing. The sub-paragraph references in Section 13 are given to indicate
the portions in the main text containing more details.
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Table E-1
A. Operational decisions not involving policy or institutional changes which could be
implemented immediately
Sub-
para.
Ref.
1 Revision of loan features – tenure, ceilings, documentation requirements and procedure
simplification
2
2 Rebates fro early and prompt payments and discount to those holding deposits 2
3 Loans against gold/jewelry 2
4 Guarantee to supplier of machinery against fee to reduce fund exposure 2
5 For marginal farmers in zones 3 and 4 increase loan size to cover subsistence during crop 2
6 Abolish discriminatory interest rate between public and private sector, leaving this to
banks to charge same rate if security and risk are satisfactory
3

7 Remove discriminatory margin by CBS for cooperative members’ loans and private
farmers’ loans
3
8 Infusion of additional funds into ACB for a provisional sum ti ll balance sheets are re-
evaluated, to provide necessary liquidity for margins to support increase in MT and LT
loans
4
9 PCB to make available working capital facility limits to be used according to seasonal
needs instead of lump sum loans
5
10 Review loan norms for agro-processing industry to moderate harsh collateral norms,
reduce documentation and simplify procedures
6
11 Credit delivery at villages through weekly branches and pilot scheme to encourage
micro-finance savings and lending groups in backward areas
28
12 Form Customer Consultative Committees in CB and IB to promote regular exchange on
needs, procedure, difficulties
14
B. Policy decisions not necessarily requiring institutional changes which could also be taken up
immediately

1 Banks to be authorized to design wider variety of deposit instruments to meet different
saving habits and cash flow needs
15
2 ACB to be allowed to become a universal rural bank lending to rural trading and
processing activities to widen its market base and reduce incidence of transaction costs
15
3 Appoint a reputed management consultancy firm to streamline systems and MIS in ACB
as preparation for restructuring – including training to staff on computer and new system

45
4 Orientation programs for senior and supervisory staff, study tours in preparation for
restructuring
46
5 Strengthen institutional and financing linkages between Policy priorities and RFS 36d
6 Relief to Rural Finance System in times of drought – Agricultural Sinking Fund 41, 36d
7 Banks to be allowed to retain surpluses after tax, short term inter-bank lending to
rationalize overall liquidity
21
8 Ceiling on interest spread in place of control of interest rates for deposits and lending as
preparation for eventual free interest regime
17
9 Gold Deposit Scheme to mobilize idle gold with households for economic activity and
tax incentives to promote household and corporate savings and investment
3, 33,
34
C. Decisions involving institutional changes

1 Restructuring ACB, separating commercial and banking functions; Re-evaluation of
assets and liabilities and isolating them or writing off
9-13
2 Autonomy and Independent Board of stakeholders and experts 11-12
3 Infusion of capital, farmer participation through debentures, cumulative preference
shares
14
4 Gradually increase reliance on own mobilized resources based on a realistic timetable
duly formalized and made binding on the new management. Meantime CBS would
continue support on progressively improving ratio of ACB’s own mobilized resources
16
Final and Cleare Report on Credit

14
5 ACB would work on an Annual Business Plan and Loan Policy Document 18,19
6 Review proposed Passbook system and refine features for introduction on pilot scale as
prelude to implementation on national scale
26
7 Select farmer associations/unions to be tried out as savings and credit associations,
necessary legislation governing their conduct
24
8 Rehearsal of competition, open up agricultural lending to CB and PCB 20
9 Similarly working capital from more than one source, CB and IB, and PCB for small
sector
20


Broader Issues
37. Clear policy statements and necessary legislative changes are needed to prevent public sector
banks continuing unchanged despite political intentions to the contrary. Physical restructuring
cannot by itself achieve desired results without attitudinal reorientation and acceptance of new
realities by bank managements. Clear new mandates in writing, freezing and transferring past
losses out of the books for creating a new beginning, absorption of existing debts, essential re-
capitalization, constitution of new Boards of Management with independent outside experts
including representatives of outstanding private sector industrialists are steps necessary to
revitalize the financial sector. Fruits of economic reform would remain unrealized without a
vibrant pro-active competitive financial sector.

38. Banking Norms: Restatement and enforcement, in stages, of internationally practiced Basle
norms governing aspects like income recognition, asset classification, provisioning and capital
adequacy are needed. The roles of CBS and MEFT need redefinition more appropriate to the
emerging environment. Currently, the Ministry of Finance is the owner of public sector banks,
MEFT playing the combined roles of manager and regulator and CBS confined to the role of the

lender. The Banking Specialist suggests imparting fresh clarity to the role of CBS and
reconstituting its duties as those of a Regulator. The CBS is better placed than administrative
Ministries to evolve, stipulate and enforce prudential norms in accordance with international
banking standards.

39. Legal Environment: The government is contemplating a new banking law in the context of
the recent decision to permit private sector entry into banking. The Banking Specialist
recommends enactment of a law on negotiable instruments governing transactions relating to
checks, bills of exchange, promissory notes and transactions with banks.

40. ACB - Future Strategy: Substantial improvement in the farmers’ capacity to hold the
produce is to be promoted through micro-level institutions with stores and refinance facilities to
advance monies against the grain deposited. Cold stores for fruits and vegetables and packing
houses for export are rightfully in the domain of the ACB and when it has consolidated its
position in the core area of production loans it could look into these and other areas for profitable
lending. ACB should get out of retail lending and move more into wholesaling of credit,
operating through cooperatives, private mini-banks and micro-finance groups in backward
segments which, by the nature of their location and size, could more easily develop and maintain
closer relationships with local communities and be able to operate at lower costs, provide better
service and enforce high recovery rate. ACB should, in due course, become the rural bankers’
bank.

41. Creating Debt Capacity: Investments in technological innovation, extension, creating
market certainty and post harvest infrastructure are important for creating greater debt capacity
among the farming community as well as for a sustainable growing rural financial system. Close
Final and Cleare Report on Credit
15
guidance to technologically weak farmers through effective extension, crop insurance or credit
guarantee and strict enforcement mechanism combined with incentives to farmers with
consistently good repayment record are needed.

Impact Of Proposals In Terms Of Benefits, Risks And Adjustment Costs
42. Risks: The sources of risks to the implementation of credit reforms could arise from any of
the following factors.

i) Stability of macroeconomic indicators such as inflation and currency valuation
ii) More development oriented banking norms and emergence of private banks may
not take place in the short run. The proposals in this report support continuance
and re-invigoration of the existing system to facilitate higher effectiveness and as
such while there may be delays in private participation, basic services to farmers
would not suffer.
iii) The speed with which rural credit is reorganized might be subject to delays in
decision-making.
iv) The shift toward autonomy may meet with initial difficulties and problems. This
should be overcome by ensuring that training and orientation precede the
implementation of institutional changes and greater autonomy.
v) Entry of private sector banks –especially in the working capital and industrial
lending segments – may cause initial shocks to public sector banks but this would
soon attain equilibrium as the sectors would find their own market niches and as
the potential demand for capital is large enough to need both sectors
vi) Interest rates may increase marginally if deposit rates have to be increased to
attract savings but this would be more than compensated by higher liquidity with
ACB, easier access to loans and lower transaction costs.

43. Social Adjustment Costs: The proposals do not visualize the closure of downsizing of any of
the existing public sector institutions but recommends revamping them, re-capitalizing them,
enriching their roles and arming them with greater autonomy to compete, expand and grow.
Surplus staff would be absorbed by the additional needs for monitoring and regulating bank
operations either at the CBS or at the proposed Bank Audit and Supervision Agency or at CB for
their agricultural lending division and would more than pay for itself through greater

effectiveness in supervision, better service and lower overall transaction costs. The cost of re-
training bank staff on credit evaluation, credit design, credit delivery and marketing techniques to
prepare them for responsibilities in a new environment would result in substantial enhancement
of technical and operational skills.

44. The gradual adjustment toward a healthier balance of own funds and borrowings would
ensure that no serious hardship arises out of a sudden liquidity shock to the system. As a matter of
fact, at no time in the near future can agricultural credit be left without refinancing support from
the central bank. What is, however, needed is a more balanced portfolio of resources and
sustainability.

45. Benefits: The following benefits are expected to flow from the proposals.

i) Smooth change over to a competitive and efficient rural credit system without
abandoning existing institutions and, on the contrary, building it around the many
excellent features of the existing structure.
ii) The public, cooperative and private sectors would have their respective roles to
play
Final and Cleare Report on Credit
16
iii) No retrenchment of personnel from public institutions or any other form of
hardship is envisaged
iv) The competitive environment emerging from these reforms is likely to result in
better service and at lower cost.
v) The proposals would result in increased volumes of medium and long term
lending leading to asset formation at the farm level, technology enhancement and
higher debt capacity.
vi) Improved self-reliance ratio and higher profitability in ACB, in due course,
would release public resources to be invested in larger measure on critical
infrastructure such as research and extension.

vii) Public resources supporting untenable transaction costs in the system as implicit
subsidies constituting revenue expenditure would get shifted to investment
securing benefit flows over years producing a more lasting effect on farmer
welfare.
viii) Increased savings mobilization measures suggested in the report would
help to meet the increased demand for capital as a result of economic reforms and
to bring idle assets into the formal system to support economic activity.

Final and Cleare Report on Credit
17


PROJECT GCP/SYR/006/ITA

Implications for the Agricultural Sector of the Current Credit System

First Mission at Duty Station – 17
th
March – 11
th
April 2001
Second Mission at Duty Station – 19
th
May – 17
th
June 2001


1. BACKGROUND

The Setting

1.1. The rural financial system has played an important role in Syrian agriculture through state
owned agricultural credit institutions, fixed subsidized interest rates, integration of input, credit
and output procurement. Global changes and the new opportunities in their wake have made it
necessary for agriculture to seek growth by becoming competitive. The Government has
recognized the need for shifting from a centrally owned, controlled and protected economy to a
more market driven system with corresponding restructuring of policies and institutions and,
importantly, installation of necessary checks and balances to insulate consumers in general and
the weaker sections of the community in particular from inevitable hardships of the transition. In
the Agricultural sector, as in other sectors of the economy, Syria has in recent years been
gradually introducing several reforms moving in stages to a market system. The reorientation is
characterized by a sense of caution with a view to minimize possible adverse social costs of major
structural changes over a relatively short period of time. Government’s commitment to reform
and the political will to introduce further consequential measures are critically dependent on
resolving issues concerning redefinition of the role of public institutions and government
agencies, selection of policy instruments and priority sequences to engineer a smooth transition at
minimum hardship and social cost. Against this background, the Government of Syria with
financial support from the Government of Italy and technical collaboration from the FAO
successfully implemented Project GCP/SYR/002/ITA, which concluded in July 1996. The
Government of Syria requested continuance of assistance to strengthen the capacity of the
Ministry of Agriculture and Agrarian Reforms (MAAR) in the formulation and implementation of
policy reforms to make the economy globally competitive over a period of time. The present
Project GCP/SYR/006/ITA is the response to this request and is a follow-up on the earlier project.
Perhaps the most critical pre-requisite to graduate to a globally competitive production system, to
become the means of continuously improving standards of living and to spread the fruits of
prosperity among the disadvantaged social sections is responsive rural credit policies, institutions
and delivery systems.

Terms of Reference

1.2. As required in the explanatory note to the TOR, training sessions for the project trainees on
data collection, analysis and methodology for the study were held on March 27, April 10, May
26, 2001. A seminar was given for senior government officials and representatives of concerned
institutions at which the findings and recommendations of the study were presented. TOR is in
Annex 1

Report by N. S. Parthasarathy, FAO Consultant, Rural Credit
Final and Cleare Report on Credit
18


The findings of the Banking Specialist, Mr. K S Narasimhan, have been synthesized into this
report wherever appropriate and relevant to the improvement of the rural financial system.

Methodology

1.3. The procedure for the study comprised the following approaches

Field studies and interviews with experts at Damascus and in the field were conducted. Four days
of field visits and over thirty interviews were completed during the mission covering a cross
section of stakeholders and experts (Annex 2 for list of meetings) The consultant met with senior
officials of different Ministries, senior officials of various Banks, provincial and district officials,
extension staff, farmers, village officials, public institutions, agriculture related manufacturing
and export units, farmer unions, agricultural bank branches, retailers and importers.

Analysis of published and collected data and reports was carried out (Annex 3 for References)

By undertaking field visits covering three provinces, and with a questionnaire, the trainees
gathered information on farmers’ habits and perceptions of credit and savings from 46 in-depth

interviews (summary of the survey is at Annex 9).

Local Support

1.4. The following Task Force was formed by the National Project Director.

Mr. Mustafa Dawwa, Director, Credit Department, ACB
Mr. Saed Agel, Deputy Director, Credit Department, ACB
Mr. Haitham Haidar, Planning Department, MAAR, Secretary, SAC

The following Trainee Officers were assigned to the mission for gathering data, conducting
surveys and assisting in analysis.

Messrs. Baibars Abaza, Ghada Masri, Nadia Toubeh (all of Agricultural Economics Directorate),
Salaeddin Saker (Economic Sector), Abdulhamid Madani (Information), Abdulrehman Nasmeh
(Al badia Dvelopment Project), Sabah Abukalam (Planning & Statistics) and Mohamed Ghassan
Jbara (Olive Bureau, Idleb)

Data Sources

1.5. The sources of data used in this report are the following: (a) published statistical information
from the Annual Agricultural Statistics Abstract, Statistical Abstract (Office of the PM, Central
Bureau of Statistics) and the Country Profile compiled by the Project Center (b) Project Center’s
Data Base (c) information provided by ACB and other Banks (d) Annual Accounts of the Banks
wherever these were provided (e) CBS’s Monetary Survey. A set of documents collected from the
institutions is available in the archives at the Project Center - in some cases in original Arabic
along with the translation.

Final and Cleare Report on Credit
19
2. AGRO-CLIMATIC SETTING

2.1. The western part of Syria consisting of the mountainous and coastal regions is the area of
heaviest rain. Second in order is the northern region of Aleppo. From the climatic point of view,
the country may be divided into four regions according to the rainfall caused by the Syrian
mountain range and the western Lebanese mountain. The coastal area is characterized by heavy
rainfall in winters and moderate temperature and high relative humidity in summer. Rainy
winters, hot, dry summers and large diurnal range of temperature is the feature of the interior
area. The mountainous area with an altitude of 1000 meters or more is known for rainy winters
where rainfall may exceed 1000 mm and a moderate climate in summer. The desert region is
characterized by a small amount of rainfall in winter and hot dry summers. The mountainous and
coastal regions are the regions of heaviest rain. Second in order is the northern region.

2.2. Of the total area of 18.5 million ha 5.9 million ha is cultivable and about 8.2 million ha is
area of very low rainfall and are largely pasture and steppe lands. In 1997, irrigated area totaled
1.2 million ha. Rain fed areas totaled 3.6 million ha divided into five agro-climatic zones out of
which 0.6 million ha was planted with trees and 3.0 million ha with annual crops. Pump irrigation
from rivers accounted for 20% of the total irrigated area, pump irrigation from wells 60% and
from springs 20%. The major rivers with their lengths within the country are as follows:
Euphrates (680 km), Al Aaassi and its tributaries (366 km.) Al khabour and its tributaries (442
km) and Al Baleekh (116 km)

2.3. The rain-fed area of 3.7 million ha is classified into five settlement zones according to
quantum of rainfall and its reliability, such demarcation transcending administrative borders. The
First Zone has average annual precipitation of more than 350 mm The Second Zone with average
annual rainfall between 250 and 350 mm. with a reliability rating of two out of three seasons has
1.2 million ha representing about 50% of the area in this zone planted with field crops, mainly
barley, wheat and legumes. The Third Zone has an average annual rainfall of more than 250 mm

in more than half the number of seasons. About 0.8 million ha in this zone is planted with, lentils,
and chickpeas. The Fourth Zone with average annual rainfall between 200 and 250 mm in more
than half of the seasons and about 0.6 million ha is under lentils, chickpeas and other crops. The
Fifth Zone with average annual rainfall of less than 200 mm in more than half of the seasons
consists of rangelands and desert areas and covers over 10 million ha representing about 55% of
the total area of the country. This zone includes 86% of the pastoral land and is not suitable for
rain fed cultivation.

2.4. The average land holding is 22.7 ha which is much higher than that in many developing
countries; about 75 percent of holders have average holdings of less than 3 ha each, accounting
for 24% of the total area, the balance 25% accounting for 76% of the area. Aleppo, Al Rakka and
Al Hassake account for more than 60% of the cultivated area. Al Rakka and Al Hassake also have
average holding size of more than 25 ha, much higher than other governorates. In all there are
532,691 holdings and 28.6% of the country’s labor force is in agriculture.

2.5. Syrian agriculture has a wide range of crops – wheat, barley, lentils, chickpeas, cotton, sugar
beet, tobacco and a variety of fruits and vegetables. Wheat and barley account for two thirds of
the cultivated area and cotton is the main cash crop. Wheat is raised both under irrigated and rain-
fed conditions. Cotton is cultivated under irrigation. Barley, lentils and chickpeas are raised
almost entirely under non-irrigated conditions. The distribution of area among the main crop
groups in 1999 is as follows.

Final and Cleare Report on Credit
20
Table 2-1
Crop Groups - Area Distribution 1999
Crops Area ‘000 ha %
Cereals and Legumes 3332 71
Industrial Crops 320 7
Vegetables 115 3

Fruits 790 17
Fodder 76 2
Total 4633 100

2.6. Livestock contributes 32% of agricultural production besides holding good prospect for
exports in the form of live animals and meat. The most important animals bred in Syria are cattle,
sheep, goats and chickens. From 1980 to 1993, the cattle population varied between 706,000 and
800,000 heads. Since then there has been an increasing trend reaching 932,000 heads in
1998.Total sheep number shows a long term increasing trend from 9.3 million heads in 1980 to
15.4 million heads in 1998.Total goat number was slightly above 1.1 million in 1998. Over the
last two decades, total meat production increased by 78%. Seven governorates produce almost
75% of all lactiferous meat, and four of them account for 52% of total production - namely Deir
Ezzor (16%), Homs (13%), Al Hassake (12%) and Damascus (11%). Milk production reached 1.8
million tons in 1998 doubling in the last two decades. The total number of milking animals
increased by 22% over the same period, while cow milk production increased by 128% (from 0.5
million tons to 1.1 million tons). Chicken population increased by almost 48% in the period 1980-
98 reaching 20.5 million heads. Chicken meat production has increased by 139% over the last
two decades reaching 97,000 tons in 1998.

2.7. The population of 16 million is growing at over 3% per annum expected to reach 24 million
by 2010. Although the current calorie per capita of 3200 is considered satisfactory food
production is required to keep pace with growing population, increasing per capita incomes and
changing food habits. Meeting the growing needs would not be a simple issue of motivating the
25% of the holdings with 76% of the area for higher production as no growth strategy can ignore
the needs of the majority of relatively small households, farming under uncertain climatic
conditions.

3. ADMINISTRATIVE SET-UP

3.1. The country is divided into 13 governorates (mohafazat), besides the capital at Damascus,

each governorate divided and sub-divided as mantikas (equivalent to districts) and nahias (sub-
districts). There are 60 mantikas in the country, excluding those located at the mohafazat, 204
nahias, excluding those at the mantikas and 6541 villages as at 1997. The Governor nominated by
the President is the chief executive of the governorate. He chairs the Agricultural Council at the
governorate level.

3.2. The main authority concerned with policy design for all aspects of Agriculture is the
Supreme Agricultural Council (SAC) chaired by the Prime Minister and composed of his deputies
and Ministers of agriculture, irrigation, planning, economy, industry and supply and the
Chairman of the Farmers’ Federation. The SAC approves the production plan, prices of the
strategic crops, determines the procurement prices, identifies the agencies for input procurement
and delivery, and decides upon policies for marketing and financing operations.

3.3. The Prime Minister chairs the Supreme Agricultural Council at the national level. At the
administrative apex of agriculture is the Ministry of Agriculture and Agrarian reforms (MAAR)
Final and Cleare Report on Credit
21
headed by the Minister and assisted by two Deputy Ministers, each having allotted functions
headed by Directors. There are forty functions/Directorates in MAAR at the country level. The
main functions such as Statistics & Planning, Extension, Agricultural Affairs (in charge of
implementation of the crop plan), Plant Protection, Livestock, and Animal Health are replicated at
the mohafazat and mantika levels, suitably grouped, according to workload, under sub-directors
reporting to the Director. The functions finally converge at the service units below the mantika.
The service units thus play a crucial front-line role dealing with almost all aspects of agriculture
management.

4. POLICY ENVIRONMENT

4.1. Agriculture has been a part of the centrally planned economic system with government
organizations and agencies closely involved in all production and distribution activities. Since the

mid-eighties there has been a graduated and cautious shift toward domestic liberalization and
more private sector participation and competition in economic activities in all sectors. Fixed and
multiple end-use oriented exchange rates, government monopolies in procurement of strategic
crops, fixed crop prices with balancing subsidies to neutralize production cost increases, rigidly
enforced crop plans down to the individual farm level, strict control on imports through licensing
and negligible use of private sector resources and energies to generate competition and efficiency
were the main characteristics of the economy till the mid-eighties. Since then there have been
many major changes such as: unification of exchange rates, private sector entry into defined areas
of agricultural procurement, imports of certain inputs and export of vegetables and fruits, reduced
rigidities in crop planning, removal of explicit subsidies, fixation of prices according to
production costs and similar measures.

4.2. A summary of important policy decisions in recent years that affect the input production and
delivery system is in the following page.
Box 4-1 SUMMARY OF POLICY REFORMS AFFECTING AGRICULTURE
Exchange Rate System
1980s – multiple rate system
1992 – reduced to two effective rates
Foreign Trade
Before 1987 – strategic crops trade was monopolized by public sector organizations
From 1987 – liberalization of foreign trade – private sector allowed to export vegetables, fruits, barley and legumes and to retain
foreign currency for import of inputs that are not included in the import ban list
Private Sector in Agricultural Investment
Decree 10 of 1986 encourages joint ventures with govt. contribution of 25% against land
Law 10 of 1991 relates to private sector investment in all sectors including agriculture
Law 10 modification of 2000 gives more incentives to agricultural investments
Taxes
1991 – law 20 amended legislative decree 85 of 1949 exempting farm income from income tax, exempting cooperatives from
profit tax, giving machinery, pesticides and improved seeds customs tariff reduction
Levies on Agriculture and Livestock

1957 – law 437 taxed agricultural products 9 – 12 % on value at exportation or at entry at processing plant
1958 – law 25 levies on livestock at SP 2.25 per head of sheep/goat, SP 4 per camel, SP 74 per buffalo and SP 11 per pig
1962 – law 27 establishes a committee entitled to exempt some agricultural products from export tax. It meets once a year to
determine the products to be exempted.
2001 – law 15 exempting all agricultural products from agricultural production tax
Input Subsidies
Final and Cleare Report on Credit
22

Till 1987 – input subsidies played a major role for strategic crops (wheat, barley, lentils, legumes, chickpea, cotton, sugar beet,
tobacco) – output prices fixed and remained constant with input subsidy increasing to compensate for production cost increases
After 1987 – SAC resolution eliminated subsidies on pesticides and bags – gradual elimination of subsidies on fertilizer and farm
machinery followed –subsidy on fuel and irrigation from public systems still continues
1989 – law 19 increased irrigation fee from SP 70 per ha to SP 1075
1996 – legislative decree 8 increased irrigation fee, from the public irrigation system, to SP 2500 and in 1999 to SP 3500 – still
subsidy element continues in the field of irrigation and maintenance cost
Output Prices
After 1987 – prices of strategic crops determined centrally according to production cost and profit margin – for other crops
“indicative prices” were fixed
Produce Marketing
Before 1987 – Strategic crops were heavily restricted with very little role for private sector – farmers obliged to deliver all crops
to public sector organizations at official prices– the obligation was strictly enforced
1987 – compulsory delivery limited to cotton, sugar beet and tobacco processed by government factories – government
intervenes if market prices varies on basis of production cost plus 10 % profit margin – MSIT monitors prices of vegetables and
fruits sold in domestic markets
1993 – SAC resolution 8 and 9 allowed all sectors in domestic and international trade in lentils and chickpeas
Inputs Marketing
Currently seedlings for fruits and forest trees produced directly and sold by MAAR at subsidized prices
Private sector can import vegetable seeds with approval of MAAR
Other seeds are produced by GOSM – it also imports seeds for potato, sugar beet and soybean – distributing through ACB and its

own branches
Fertilizers produced by GECM and imported by GEZA are distributed by ACB through cooperatives and to farmers who are not
members of cooperatives
Agricultural chemicals are imported and distributed by private sector
1996 – minutes 106-108 of Chemicals Committee stipulates that agricultural chemicals can be imported only from producers of
active material with some exceptions
1997 – resolution 34 of MAAR lays down conditions for approval of new chemicals and lays down procedures
Livestock medicines and vaccines distributed free of cost by government through official channels – GEZA imports what is not
locally produced
Agricultural Planning
1975 - law 14 lays down procedures for crop planning and its enforcement specifying accountability at different levels of
administration and penalties for deviation
Before 1987 – centralized – cropping plans laid down and enforced
After 1987 – shift to “indicative objectives” for strategic crops – objectives limited to identification of major crops and planting
areas – farmers can choose minor crops – farmers with less than 0.5 ha have freedom to choose any crop


5. MACROECONOMIC AND MONETARY POLICIES AND THE FINANCIAL
SECTOR

Macroeconomic Policy and the Financial Sector

5.1. The Syrian economy has a diversified base consisting of the agricultural and industrial
sectors and an important oil sector. Consequently, the level of economic activity and growth are
largely influenced by two exogenous factors, namely, rainfall and world oil prices. In the past the
government had a dominant say in the production, distribution, pricing of economic goods in both
the agricultural and manufacturing sectors and also controlled foreign trade. Prices, interest rates
and exchange rates were fixed. Public sector undertakings operating under the direction of
concerned ministries pervaded the economic system. Since late eighties, there has been a strategic
shift in macroeconomic management leading to a policy of deregulation in various spheres such

as opening new area of investment to the private sector through incentives, liberalization of
foreign trade, easing access to foreign exchange, pricing of foreign exchange closer to market
realities, greater flexibility in the administered pricing system, reduction in subsidies and,
recently, decisions to open bulk fertilizer imports to private sector and allow private sector entry
Final and Cleare Report on Credit
23
into banking. The Law no. 10 of 1991provided a turning point giving access to private sector in
traditional industries and encouraging foreign investment.

5.2. The evolutionary process toward a market-oriented economy, set in motion by these reforms,
has led to increased demand for capital for investment in industry and infrastructure. Between
1991 to 1994 gross fixed capital formation increased from 18 % of GDP to 30 % although
domestic savings financed only about half of this increase, widening the saving-investment gap
from minus 8 % to minus 14 %. This underscores the crucial importance of encouraging savings
and capital formation and canalizing them through the formal financial system to support
increasing investment that the new economic policy seeks to achieve.

Monetary and Credit Policy

5.3. The Permanent Economic Committee in the PMO representing ministries of Economics and
Foreign Trade, Finance, CBS, the Banks is the principal institutional instrument of the
government to conduct monetary policy. The annual credit plan provides for the financing
requirements of the public sector, which account for the bulk of bank lending even now. The CBS
is the major source of lending to the government with additional resources from the Commercial
Bank through obligatory subscription to treasury securities. Public sector undertakings borrow
mainly from the CB. Although ceilings for lending to public sector companies are in place,
whenever there is financial pressure, the concerned ministry of the government takes over the
obligation or provides funds from the public debt fund. Thus, till recently, the chief concern of
credit policy has been the need of public enterprises and finding the ways and means to meet their
requirements. This situation has changed with increasing role for private sector in investments

and the current position is still in a state of transition to adjustment of the banking system to meet
this new pressure.

5.4. As regards monetary policy, there appears to be no system of announcing the credit policy at
periodic intervals, say, once or twice a year revising, as appropriate to prevailing economic
conditions, quantitative norms for cash reserve, liquidity ratio, prime lending rates and similar
determinants of liquidity and cost of money. Discount and interest rates have remained
unchanged over several years through varying degrees of inflation. Social considerations, the fact
that public sector was the main user of credit and apprehension that prices might increase seem to
have kept these critical monetary determinants unchanged. Borrowing by banks are 1.44 times
and 2.66 times the deposits (Demand and Time Liabilities) in the case of Industrial Bank and
Commercial Bank respectively suggesting that banks rely more on borrowings to lend and invest
than on deposit mobilization.

5.5. Interest rates and tax incentives could be used as valuable tools to promote savings but as
such there is limited use of these tools for such an objective. Interest rate being uniform and free
of pressure to mobilize minimum quantum of deposits to qualify for matching refinance and loan
facilities from the central bank, specialized banks seem to have little scope, wherewithal,
incentive and, therefore, motivation to carry out aggressive mobilization campaigns for savings.

5.6. Capital Adequacy Ratio is generally used to discipline banks by stipulating a minimum of
owners’ capital to be maintained in relation to the assets, to ensure that the owner has a stake in
lending/investing decisions. In the Syrian context where all banks in the financial system are
owned by the government, where sums are lent to banks for on-lending out of proportion to their
owned resources and deposit mobilization and where arrears are further funded from the CBS or
the PDF (Public Debt Fund), the distinction between owner and lender appears thin. The
distinction between risk capital and loans that have high degree of flexibility in regard to
Final and Cleare Report on Credit
24
repayment and servicing is indistinguishable. As such it is doubtful whether CAR has presently

any practical significance, until these disciplines are introduced and enforced, banks are made
autonomous and made to operate within their own capital and mobilized resources maintaining a
healthy balance of borrowings.

5.7. A policy of minimum lending is indirectly enforced in respect of crop loans in the sense that
ACB is required to give crop loans to all farmers approaching them with the crop license
stipulating the approved crop areas and input needs. The CBS discounts the loan receipts
automatically and, in fact this is decentralized to the provincial level, which enables ACB
branches to receive reimbursement from the local CBS upon submission of loan disbursement
documents.

5.8. As time deposits carry a uniform interest rate of 7-8 % and lending for crops is at an average
of 5% the difference is bridged by large low cost refinancing and loans from the CBS at 2.5 to
2.75%. This way agricultural short, medium and long-term loans are subsidized.

5.9. Banks are also subject to tax according to the marginal rates applicable to different slabs of
income and are further subject to a defense surcharge at 30 % calculated on the tax payable on the
income. Profits, after tax, are appropriated toward statutory reserves and free reserves. No
dividend as such is paid to the government as owner but all surpluses are transferred to PDF.

Role of CBS in the Financial System

5.10. According to MEFT, the CBS is assigned the responsibility of monitoring the performance
of the banking sector. The legislation of 1953 spells out the responsibility of the CBS. The
Objectives set for it by this law are to develop and regulate monetary markets according to
national needs and to monitor the value of the Syrian Pound and securing its convertibility to
other currencies. The responsibilities flowing out of these Objectives include managing money
supply, supervising and directing banking activities according to norms and performing the role
of financial and monetary counselor to the government. Much of the responsibility of supervising
the banks seems to have devolved, over a period of time, partly upon the MEFT and its officials

on policy matters and the other part upon the Central Organization for Financial Monitoring. CBS
is not represented on the Boards of specialized Banks. The scrutiny, audit and approval of the
Accounts and Balance Sheets is subject to such long delays that any existing monitoring process
if of very little practical use to guide major capital restructuring or other organizational or
disciplinary decisions of a corrective nature. For instance, the last ACB Accounts cleared by the
Central Organization for Financial Monitoring is for 1993 and was given in 1996. Applying the
same time lag, audit till the Accounts of 1997 should have been completed by now but has not
been done. Evidently, the delays are increasing, as even 1994 accounts remain unapproved
although more than six years have passed.

Recent Monetary and Credit Developments

5.11. Growth of domestic liquidity decelerated steadily from 26% in 1991 to 16% in 1993 as the
expansionary influence of both net domestic and net foreign assets declined in relation to the base
position of liquidity in 1990. Net foreign assets fell from 10% of initial stock in 1991 to 3% in
1993 on account of the decline in overall balance of payments surplus. Net credit to government
increased by about 12% both in 1992 and 1993 mainly reflecting the transfer of the accumulated
public enterprise bank debts to the Government’s account. In 1993 claims on private sector
increased by 24% due to the strong increase in private sector activity, particularly, in the
commercial sector. Claims on public enterprises increased by 34% owing mainly to large
Final and Cleare Report on Credit
25
increases in credit to the General Organization for Cotton Ginning and Marketing and to the
General Organization for Cereals, to finance the purchases of large stocks following good
harvests during the previous three years. Both in 1992 and 1993, other items exerted a strong
contractionary impact on domestic liquidity. Since 1995 domestic liquidity has been registering
deceleration year by year till 1999 at incremental values of SP 65, 39, 54, 25 and 29 billion
respectively. While increase in net foreign assets reflecting the increasing balance of payments
surplus, rising claims on public enterprises and gradually increasing claims on private sector
indicative of improved activity exerted an expansionary effect the substantial reduction in net

claims on government from sp 72.879 billion to 0.548 billion accounts for the contractionary
effect and the deceleration

Table 5-1
Money Supply (SP billion)
1993 1994 1995 1996 1997 1998 1999
Net Foreign Assets 108.017 133.177 169.038 214.325 259.891 294.449 335.448
Net Claims on Government 75.120 72.879 70.907 55.205 39.126 34.938 0.548
Claims on Non-financial Public
Enterprises
160.215 120.773 140.545 147.308 164.686 160.487 179.817
Claims on Private Sector 44.457 52.343 63.666 66.634 73.352 72.617 75.345
TOTAL 387.809 379.172 444.156 483.472 537.055 562.491 591.158
Total Money and Quasi Money 387.809 379.172 444.156 483.472 537.055 562.491 591.158
Source: Monetary Survey, Central Bank of Syria, Quarterly Bulletin Volume 37 No 3-4, 1999, pages 6-7

Liquidity in the Credit System

5.12. Public enterprises remained the major recipients of bank credit. The emergence of the
private sector has not made a major dent on the credit supply system and still occupies a
subsidiary position. Private sector manufacturers met by the mission stated that they relied mainly
on private funding sources outside the banking system. Private sources could be either funds
remitted and routed through the banking channels but not financed by the banks or funds received
through informal channels outside the formal system. External commercial borrowing is not
permitted.

5.13. From the following analysis it is seen that against capital reserves and DTL (demand and
time liabilities/deposits), after allowing for absorption by fixed assets and the statutory reserve
requirements there is a balance lendable availability of SP 227,319 million against which claims
on economic sectors was SP 255,056 million suggesting a strong demand for funds exerted on the

system. Of this public sector accounted for SP 179,817 million, that is, over 70 % in respect of
which recovery is not a matter of concern to the bank management as these loans are government-
backed. This “comfortable” position and the “overcrowding” effect of public sector demand for
capital are reasons why banks are generally under pressure of demand for funds from public
sector and do not show enough attention to opportunities in the emerging private sector.

5.14. It is also interesting to note that borrowings and other liabilities (SP 351501 million) are
1.33 times the deposits the source being mostly CBS loans, other than “unclassified liabilities”.
As postal savings are also accounted in the consolidated balance sheet, the underlying source for
borrowings could be the budget and public sector surpluses through the central bank.