Syria moves reserves to euros and will end dollar peg this year

By Dania Saadi
Bloomberg News Service
Tuesday, July 11, 2006

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CAIRO -- Syria, accused by the U.S. of supporting terrorism, plans to end its currency peg to the dollar by December to reflect closer trade ties with Europe, central bank Governor Adib Mayaleh said.

The Central Bank of Syria has already converted half its foreign-exchange reserves to euros, Mayaleh said in a telephone interview from Damascus, without being more specific. Syria's reserves, including gold, totaled $4.1 billion at the end of 2005, according to
the U.S. Central Intelligence Agency, similar to the amount held by Lithuania's central bank.

"We want to have a currency peg that will reflect our external trade," Mayaleh said yesterday. The European Union is Syria's largest trading partner, taking half of its exports, he said. Italy and France are the biggest destinations for Syrian goods abroad, according to data published by the CIA fact book.

The country may instead link the Syrian pound to a weighted group of currencies including the euro or loans from the International Monetary Fund that are known as Special Drawing Rights, Mayaleh said. SDRs comprise the euro, dollar, yen, and British pound.

Most Middle East countries, including the six oil-producing Persian Gulf monarchies and Jordan, peg their currencies to the dollar. Egypt and Iraq manage floated currencies. The Syrian pound is pegged at 52.2 versus the dollar, according to data compiled by
Bloomberg.

Central bankers from Kuwait, Qatar, the United Arab Emirates, Russia, Sweden, and Finland have this year indicated they aim to diversify their reserves away from the dollar. Central banks held 24.8 percent of reserves in euros in the first quarter, up from 18.1 percent in 1999 when the single currency was formed, International Monetary Fund figures show.

The euro is appreciating this year after its first annual decline since 2001. It traded at $1.2750 at 11:09 a.m. in New York, from $1.1849 at the start of the year.

The Syrian government is "studying options" with regard to ending the dollar peg, Abdallah Dardari, the country's deputy prime minister for economic affairs, told reporters on the sidelines of a conference in Damascus on June 10.

Syria last year sold $2.9 billion of goods, including crude oil and textiles, to the European Union, according to data from the European Commission. Imports from the EU totaled $2.7 billion. That compares with $155 million from the U.S., based on figures from the U.S. Census Bureau.

The U.S. imposed sanctions on Syria in May 2004, including a ban on trade transactions with the Commercial Bank of Syria, in an effort to halt exports to the country that is accused by President George W. Bush's administration of aiding militants in Iraq and pursuing weapons of mass destruction.

After the fall of the Ottoman Empire in 1918, Syria, Lebanon, Palestine and Jordan used the Egyptian pound as their official currency while under British and French control.

France, which controlled Syria and Lebanon, introduced a franc-based currency for the two countries in 1924 that lasted until the outbreak of the Second World War.

Syria's pattern of trade has shifted from the 1960s, when its major partners were communist-controlled Eastern European states such as Czechoslovakia and Yugoslavia, reflecting political ties with the Soviet Union.

By 1984, West Germany, France, Italy, and Japan were Syria's sources of imports, including machinery, transport equipment, iron, and steel. Turkey, followed by Ukraine, China and Russia are now the biggest exporters to the country, according to CIA data for 2004.

Syria is seeking to open its economy after the socialist Baath Party, which came to power 1963, began moving toward a market economy in the 1990s. Syrian officials have allowed private banks and insurance companies to operate for the first time as the country seeks to attract foreign investors.

Economic growth is forecast to reach 6 percent this year as investments continue to flow to the country, the third-largest non-OPEC oil producer in the Middle East, according to Mayaleh.