When first issued in 1920, the Syrian pound was linked to the French franc. At independence French-and British-owned banks dominated banking activity. The largest bank, the French-owned Bank of Syria and Lebanon, became the bank of currency issue and assumed other central-bank functions, in addiÍÍÍÍtion to its commercial operations. In 1947 Syria joined the International Monetary Fund (IMF) and established a par value of LS2.19 equivalent to US$1. In 1949 Syria broke the link to the franc.

The primary legislation establishing a central bank and control of the banking system was passed in 1953, but the Central Bank was not formed until 1956. Its functions included issuing notes, controlling the money supply, acting as fiscal agent for the government, and controlling credit and commercial banks. It was also to act as the country's development bank until specialized banks were established for various sectors. The Central Bank had considerable discretionary powers over the banking system but was itself responsible to and under the control of the Council on Money and Credit, a policy group of high-ranking officials.

The banking system has exhibited resilience in the wake of widespread political change since independence. Before independence, Syria was the junior partner in terms of banking facilities in a customs union with Lebanon. Dissolution of that relationship in 1950 stimulated the establishment of foreign banks, especially Arab, and expansion of some already operating there. After the 1956 Suez War, French and British banking interests were sequestered as enemy assets. In 1958 and after the union with Egypt, the state began to Arabize the commercial banking system and in 1961 implemented a policy of limited nationalization.

In 1966 the state achieved complete ownership of commercial banking by merging all existing commercial banks into a single consolidated Commercial Bank of Syria. In addition, the government created specialized banks to promote economic development. It extended the charter of the Agricultural Cooperative Bank from the preindependence period and established the Industrial Bank in 1959, the Real Estate Bank in April 1966, and the Popular Credit Bank in July 1966.

In 1986 the banking system consisted of those five banks in addition to the Central Bank. Legislation in 1966 largely limited each bank's lending to the sector in its title. All five banks could extend short- to long-term credit and accept deposits. The Commercial Bank was by far the largest and most active.

The total assets of the specialized banks reached LS44.9 billion at the end of 1984, and total deposits amounted to LS28 billion. The Commercial Bank of Syria, the largest of the five specialized banks, had assets of LS33.7 billion in over 40 branches in 1984. Deposits totaled LS19.3 billion in 1985. The specialized banks extended credits of LS26.1 billion in 1984. Banking authorities allocated credit primarily to commerce (51 percent), industry (27 percent), and construction (15 percent). The public sector received 75 percent of the credit.

The Council on Money and C 200redit et established monetary policy and supervised banking, subject to review by a ministerial committee responsible for the whole economy. The general philosophy was that the banking system should be an agent of government economic policy. Direct controls were used more often than indirect ones credit, for example, was regulated by setting limits for each sector and each bank.

Although the money supply increased rapidly, it consisted primarily of money in circulation. In the 1960s, demand deposits generally were less than one-third of the money supply and by the late 1960s about one-fifth. Banking activity increased in the 1970s, and currency in circulation slowly decreased from 77 percent of the money supply in 1970 to 61 percent in 1980 and 56 percent in 1984.

Bank accounts were predominantly demand deposits use of time and savings accounts grew slowly. For example, in 1984 time and saving deposits were only 40 percent the size of demand deposits.

In fact, banking played a rather limited role in the economy. There were several possible reasons for the limited use of banks, including distrust of or unfamiliarity with banks, low incomes and limited savings, low interest on saving accounts, lack of more convenient branches, and, especially, the increased resort to the black market for currency transactions and imported goods in the mid-1970s.

Bank lending was mainly for short-term commercial transactions. Bank financing of trade was 53 percent of total lending in 1964, 67 percent in 1970, 79 percent in 1976, 46 percent in 1980, and 50 percent in 1984. The value of loans to the commercial sector nearly tripled from 1975 to 1984. Loans to other sectors of the economy, especially to industry and construction, diverted bank lending from commerce in the late 1970s. The value of loans to the industrial sector increased more than twenty-fold from 1975 to 1984, to become 27 percent of total lending. The value of construction loans grew seventeen-fold and agricultural loans tripled.

The sources of bank funds, largely borrowing from the Central Bank and demand deposits, contributed to the short-term nature of most lending. In general, the banks were undercapitalized. In the 1970s and 1980s, more medium-term loans and a few long-term loans (in agriculture and housing) were made. Long-term loans constituted 15 percent of agricultural loans and 71 percent of housing loans. Short-term commercial credits, however, increased faster. The Industrial Bank appeared to invest equity capital in both public and private plants instead of making long-term loans. Public sector enterprises received most bank lending, but the percentage fell from 84 percent in 1976 to 75 percent in 1984.

Monetary expansion in the 1960s largely resulted from financing government budget deficits. The growth of the economy, extension of the use of money, and government price controls minimized the impact of deficit financing on prices. Monetary expansion accelerated in the 1970s, particularly after 1972. The large inflows of foreign funds, plus the sharp increase in Syria's own oil revenues, facilitated rapid growth of government expenditures while building up government deposits with the banking system. A high rate of credit expansion, primarily to public sector enterprises, followed, and private sector borrowing also increased substantially. After 1976, the expansion of the money supply continued in tandem with the need to finance chronic budget deficits. The money supply grew 21.3 percent during the 1970s and 22.8 percent a year during the early 1980s, a rate much higher than the growth of GDP.

Monetary expansion, along with shortages of goods and labor, caused a period of high inflation. Inflation was also fueled by steep rises in world prices of imported commodities. The wholesale price index increased an average of 18.2 percent a year between 1972 and 1976 from 1977 to 1984, wholesale prices more than doubled. This period was Syria's miniboom--a smaller version of the high level of investment and construction activity, rapidly rising prices, shortages of goods and labor, and overtaxed storage and transportation facilities that characterized the nearby Arab and Iranian oil economies.

In addition to setting a great number of prices directly, the government controlled many more. Limited markups (generally between 5 and 10 percent) were applied to a wide range of commodities produced or imported by the private sector. Essential commodities were supplied at low, subsidized prices. When the price discrepancy of an item became too great, encouraging smuggling, the government rationed the amount that could be bought at subsidized prices. Rationed commodities included rice, sugar, and cottonseed oil. A person wanting more than the ration could buy as much as he wanted at the much higher open-market price.

The government's rationing policy directly contributed to black market growth in the early 1970s. The black market flourished during Syria's miniboom of the mid-1970s and substantially increased as the Syrian presence in Lebanon facilitated the transfer of consumer goods, raw materials, and industrial spare parts across the border. Frustrated by bureaucratic delays in obtaining import permits and letters of credit, the private sector increasingly turned to the underground economy to acquire essential imports. The public sector, also suffering from strict government control over imports and from shortages of foreign exchange, resorted to similar means to import spare parts for state-run factories. Observers estimated black-market trade at about US$1 billion per year in the mid- 1980s, almost one-quarter the size of officially recorded imports.

The black market in foreign exchange also played a more active role in the economy, as Syrians working abroad sought higher exchange rates for their currency. In mid-1986 Syrian pounds traded for about 30 to the dollar in contrast to official exchange rates of LS3.9 to the dollar.

Government responses to increased resort to the black market for imported goods and currency exchange varied. In 1984 and 1985, as part of its efforts to alleviate the foreign exchange crisis, the state launched a campaign against black-market money changing and currency smuggling. Syria decreed heavy sentences for black marketeering, including up to twenty-five years' imprisonment for currency smuggling and one-to five-year sentences for Syrians who failed to repatriate funds earned overseas from business inside Syria. Widespread but brief arrests of money changers signaled the government's intention to limit the black market, rather than eradicate it in the late 1980s, the official economy still remained heavily dependent on underground transactions for foreign exchange. In addition, the government issued new regulations severely limiting the amount of foreign exchange allowed out of the country and requiring tourists to change US$100 upon entry.

In 1986 the Commercial Bank issued a new regulation to facilitate private sector imports through official channels and reduce black market activity. The regulation permitted any importer with an official import license and source of foreign currency to pay the Commercial Bank 105 percent of the total amount required in the letter of credit and receive a letter of credit immediately. The regulation was designed to reduce the waiting period for letters of credit, which had reached up to two years for some private sector firms in the mid-1980s. However, private businessmen initially reacted cautiously to the reform measure, fearing retribution from state tax collectors or the police by admitting they held large amounts of foreign currency outside the system.

In the 1980s, the government also revised exchange rates in an attempt to attract workers' remittances to official channels, make government rates more competitive with the black market, and stop the depreciation of the pound. In 1981 Syria reverted to a multitier exchange rate, in which the government established a "parallel" rate for private sector imports that floated against major international currencies. 68c In 198686 the parallel rate was LS5.4 to US$1. The "official" rate of LS3.9 to US$1 remained in use for public sector imports. In 1982 the government established a "tourist" rate for Syrians working abroad this rate was LS9.75 to US$1 in 1986. By 1986 many commercial activities were calculated at the "tourist" rate to encourage a return to official banking channels. In addition, government regulations instituted in 1984 permitted Syrians working abroad and foreigners doing business in Syria to maintain hard currency accounts of up to 75 percent of the value of agricultural and industrial imports. After September 1985, the government permitted resident Syrians to open hard currency, interest- bearing accounts at the Commercial Bank of Syria specifically to finance imports.

Data as of April 1987