May 12, 2016 / 11:22 AM / 2 years ago

Damascus struggles to halt currency collapse as peace hopes erode

AMMAN (Reuters) - Damascus has announced measures to halt the fall of Syria’s currency, but traders expressed doubt it would work after the unraveling of a ceasefire and the collapse of peace talks brought one of the fastest falls of the five year civil war.

A cashier hands Syrian pounds to a customer inside a sweets shop in Damascus, Syria May 11, 2016. REUTERS/Omar Sanadiki

The pound has lost more than 90 percent of its value over the course of five years of fighting, and the fall accelerated in recent weeks since peace talks broke up in Geneva and fighting resumed in Aleppo between rebels and government forces.

The currency, worth 47 to the dollar on the eve of the civil war, now trades at around 635 to the dollar in Damascus and even higher rates in other cities, having fallen by 20 percent in less than a month, according to dealers reached by telephone.

Many Syrians have all but given up on the pound and use dollars for day to day transactions, hoarding hard currency to protect their savings.

Central Bank Governor Adeeb Mayaleh said on Wednesday he would do what it takes to halt the fall. The bank had injected $10 million into the market so far this week, he said.

“The rise in the dollar’s exchange rate is not at all justified in light of the Central Bank’s knowledge of the demand for foreign exchange and supply and the extent of liquidity in Syrian pounds,” Mayaleh told state media.

“The dollar’s exchange rate will see a big drop as the measures take effect and speculators will suffer big losses,” he said on Wednesday. He also met with currency traders to discuss the plans.

One senior financier in Damascus said the $10 million injection announced by Mayaleh so far was far too little to have an impact on exchange rates.

“If these measures are not accompanied by other broader steps to restore confidence we will see the pound hit the 700 benchmark against the dollar before June,” the financier told Reuters.

Two financial sources in the Syrian capital, who are not officials but are familiar with government policy, said they understood the bank was planning to spend $100 million supporting the currency in coming days.

The bank aims to put the additional hard currency into circulation by ordering each licensed currency exchange firm to sell up to $1 million in dollars to the public at a rate of 620 pounds to the dollar. That would move the official rate closer to the black market rate in a bid to drive black marketeers out of business.

FEAR ABOUT FUTURE

As fighting worsens in Aleppo and no signs of a political settlement emerge, Syrians are less hopeful the economy will improve. The crumbling of the currency has driven up inflation and aggravated wartime hardship as Syrians struggle to afford basics such as food and power. Government budget spending in pounds has more than doubled, but in dollar terms has crashed.

“There is now fear about the future of the pound due to lack of trust in government measures along with a shrinking economy,” said one financial investor familiar with central bank moves who requested anonymity.

The last rapid fall was when Russia announced it was reducing military support for President Bashar al Assad in March. At the time the pound traded at around 475 to the dollar.

Despite widespread devastation caused by the conflict and Western sanctions imposed on Syria, the currency has so far escaped a complete free fall. Assad’s ally Iran is believed to have deposited hundreds of millions of dollars into the country’s depleted reserves, which stood at $17 billion before the crisis.

A government crackdown on the currency black market had met some success in the past in reining it in, but the effect was wearing off now, one banker said.

Many people are reluctant to buy dollars through official channels, even when available at a better rate than on the black market, for fear they might be required to identify the source of their funds, bankers and businessmen contacted by Reuters said.

“Unfortunately no one believes in buying from licensed firms and most still ask for the dollars from the black market even if it might be more expensive,” said a currency dealer in the licensed Hanifeh exchange in war-torn Aleppo city, who gave his first name as Ahmad.

Reporting by Suleiman Al-Khalidi; editing by Peter Graff

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