Monetary Policy Reforms Since Early 2005 Adib Mayaleh Governor of the Central Bank of Syria London 7 Nov 2007
I would first of all like to express, on behalf of my country Syria and on my own behalf, our appreciation for the continuous efforts of the British Syrian Society to shed light on the reforms Syria is undertaking in order to keep pace with international ti economic developments and join the global economy. Perhaps the most important and noteworthy are the current reforms of the financial sector and monetary policy, owing to the crucial and pioneering role played by the financial sector in the reform process. 2
I would like to begin my speech today where the last conference of the British Syrian Society ended. That conference, held in Damascus in November of last year was entitled Incorporating Syria into the World lde Economy and produced da number of recommendations, some of which have been implemented and other of which have been included in the Central Bank s work plan for 2007. The following is a summary of the recommendations included in the final report in the areas of monetary policy and the work of the Central Bank: 3
1. The beginning of the report stated that there had been few achievements, that only a few new banks had been opened, all by investors from the Middle East, and that the Central Bank of Syria must carry out its required supervisory role. 2. The report also stated that the CBS must ensure that its monetary policy is completely l clear to the market and the public. 3. The report stated that the CBS should not try to express an opinion about borrowers and the interest rate on debts. 4
4. The report also stressed the necessity of not giving favorable treatment to government-owned owned establishments at the expense of private entities, and that these establishments must be reformed to ensure that they do not distort the efficiency and profitability of the banking sector as a whole. 5. Referring to the conference on banking and dfinancial i services, the report stated that the CBS must begin a steady program of selling its assets on the market; that is, selling its basic debt to the government. 5
6. The report also stated that the CBS must focus on the essential role of any central bank, which is managing monetary policy, regulating and supervising financial institutions and the infrastructure, and revising ii the payments system in an effort tto acclimatize the market, ktin addition to recommending that Syria move toward ensuring the convertibility of the Syrian pound. 6
With respect to the first four points, it should be noted that since the issuing of Law No. 29 of 2001 permitting the establishment of private banks, the private banking sector has developed rapidly and achieved excellent results in a short period of time. Since the end of 2006 when the last conference was held, nine private banks have been established, seven of which have begun operations, and three Islamic banks have been established, two of which h have begun operations. This development was accompanied by similar progress in bank supervision by the CBS. A number of decrees have been issued which are consistent with the most up-to-date international supervision standards, with no distinction between their application to private or public banks. 7
On the contrary, during this period these banks have been converted from specialized banks to comprehensive banks that can engage in all banking activities, without imposing on these public and private banks any administrative decrees that interfere with their operations, such as setting interest rates on loans or defining the quality of borrowers, as mentioned in the recommendations of the conference. The CBS has decided to adopt a gradual plan of freeing interest rates on loans, which was implemented in August of the past year. All this was accomplished in an atmosphere of credibility and transparency, which the CBS has attempted to create through its clear and unambiguous announcement, which was included in the 10th five-year plan that is considered the government s work plan, through the policy it has adopted. d The long-term goals of this policy are price stability and a stable exchange rate. 8
A number of gradual measures have been taken to reach our current unified exchange rate, after having experienced a situation where there were more than 10 different rates. The Syrian pound has also been linked to the SDR instead of the U.S. dollar, and is freely convertible for purposes of current account transactions from the balance of payments. I shall discuss these developments in detail in the course of my remarks. 9
Syria has adopted comprehensive reforms and taken gradual, sequential, and studied practical steps under the leadership of President BASHAR AL-ASAD since he came to power in 2000. The financial i and banking sector is at the centre of these reforms and most of the changes have been made as part of a reform process that aims to improve the performance of the Syrian economy and raise its competitiveness, in preparation for the post-oil economy. 10
In this context, the 10th strategic five-year plan (2005-2010) acknowledges the necessity of meeting the economic growth rates required to achieve the final objectives of the plan, which depend mainly on increasing gprivate and public investments by domestic, Arab, and foreign investors, concurrently with the following: 1-Developing l i the monetary sector and guaranteeing the full independence of CBS and its resolutions. 2- Developing the banking and financial sector, as well as financial policies, and launching the securities market. 11
The success of the economic development process and achieving higher economic growth rates through attracting more investments depends on create incentives for economic growth. Efforts have been made to establish an integrated t banking structure t by enhancing the role of CBS as the cornerstone of this structure and linking it to a solid, extensive, and varied banking base through a set of laws, regulations, and other legislation constituted in conformity with international standards. 12
Summary of reforms In monetary sector 13
1- CBS reform: (1/2) After 40 years of absence, the role of CBS in the economy was revived by issuing Basic Monetary Law No. 23 of 2002, which is considered a key turning point in the history of monetary policy in Syria. Besides its role in reactivating the Money and Credit Board, the highest monetary authority in Syria, it has taken the first step towards CBS autonomy. The law clearly states that CBS is an autonomous financial institution that operates within the general economic orientation i adopted dby the prime minister. i To complete this step, enhance the independence of CBS, and guarantee its credibility and the transparency of its procedures, the law is being amended to grant CBS greater autonomy. 14
1- CBS reform: (2/2) Furthermore, through coordination with the Ministry of Finance and the assistance of various Arab and international institutions, the relationship between CBS and the Ministry of Finance has been clarified through the issuance of treasury bills and notes in accordance with Legislative Decree No. 60 of 2007, which clearly states the need for the Ministry of Finance to stop depending on direct borrowing from the CBS to finance the budget deficit. The CBS has been the principle source of funds to cover inflation and finance all new deficits through borrowing by means of government bonds, and the Ministry of Finance has given the CBS complete authority to activate its accounts with the bank automatically in order to pay its obligations. Moreover, since early 2005 CBS has been trying to find the ebest way to ocarry yout its natural functions sof choosing and managing the optimal exchange rate regime and intervening in the market to maintain a stable exchange rate for the Syrian pound. 15
2- Reform of laws, resolutions, and other legislation: Great importance has been attached to the reform of laws, resolutions, and other legislation because such reform gives financial institutions access to Syria and enables them to carry out and diversify their activities in accordance with the regulations governing their activities and the objectives determined by the monetary authorities and international standards. In this context, we have seen a historical turning point over the past two years with respect to the reform of laws, resolutions and other legislation l i concerning monetary and financial issues, with more legislation being issued to obtain the objectives of the current stage of the reform process. These regulations, laws, and other legislation issued to complete the process of banking reform can be grouped into three types: 16
Legislation on establishing financial institutions: (1/2) Creating an integrated banking structure requires an extensive and varied base of financial institutions, which constitute the foundation of this structure. A number of laws and other legislation on establishing such institutions have been issued, the most important of which are the following: 1. Law No. 28 of 2001 on establishing private banks; 2. Decree No. 35 of 2005 on establishing Islamic banks; 3. Decree No. 24 of 2006 on establishing exchange bureaus and companies; 4. Decree No. 15 of 2007 on establishing small and micro credit institutions; 5. Legislative Decree No. 34 of 2005 on establishing insurance companies, including Islamic insurance companies. 17
Legislation on establishing financial institutions: (2/2) This legislation has helped to enrich the monetary and financial environment in Syria with the addition of all types of financial activities, including conventional commercial banks, Islamic banks, exchange companies, conventional and Islamic insurance companies, and micro credit institutions. This contributes greatly to achieving the requirements of all the strata of Syrian society, in accordance with the principles of a social market economy. It also serves the objectives and requirements of monetary policy, as these institutions i i are the ones affected by monetary policy resolutions, and the ability of these resolutions to obtain the desired results depends on the nature and extent of compliance on the part of these institutions. 18
Legislation regulating the activities of financial institutions: (1/2) The objective of financial sector reform, as defined by the 10th fiveyear plan, is not limited to creating a suitable banking and financial environment; it also includes activating the financial market and diversifying its products and lines of business. The monetary authority has issued a number of resolutions to ensure the removal of old financial restrictions and provide opportunities to enter the banking business and operate in a competitive way, in compliance with the principles i of a social market economy, adopted dby Syria as a longterm strategy. 19
Legislation regulating the activities of financial institutions: (2/2) For example, the monetary authority has established an inter-bank market in accordance with the resolutions of the Money and Credit Board, which allows trading both between banks and between CBS and banks, whether in SP or foreign exchange, in addition to freeing debit interests rates and giving gbanks a margin of 4 percent on the credit interests rates defined by the Money and Credit Board. Banks have also been allowed to issue bank deposit certificates and to finance all imports of the private and semipublic sectors. There is draft legislation on financing operations, mortgages, and financial leasing, in addition to amending foreign exchange regimes to allow more foreign exchange transactions for non-trade purposes, as well as issuing gg government bonds and Islamic bonds, and allowing these institutions to subscribe for them. 20
Resolutions and instructions on supervising financial institutions and regulating g their activities (1/4) Reform of this sector is extremely important because the absence of such supervision can lead to the proliferation of different working methods and the deviation of practices from the rules established by the monetary authorities to create a suitable financial environment in accordance with international practices and standards. Such legislation also enhances compliance with principles of good governance by bank staff. CBS has made efforts to develop the banking supervision departments of the banks concerned by training their staff to increase their skills and expertise. In addition, the Money and Credit Board has passed resolutions to apply the most important accounting standards, particularly the Basel II standards, such as the standards for liquidity risk management, instructions relating to the standards of credit risk management, the classification of credit exposure, the system of provisions for non-performing debts, the maximum limits of banking risk concentration, instructions relating to operational risks, and capital adequacy standards. 21
Resolutions and instructions on supervising financial institutions and regulating g their activities (2/4) Legislative Decree No. 33 of 2005 was issued for the purpose of supervising banking operations and protecting them from money laundering and terrorism financing operations. The principles of Islamic exchange are not inconsistent with the standards of banking supervision, and CBS Decree No. 35 authorizes application of the standards issued by the Accounting and Audit Commission for Islamic Financial Institutions and Islamic Financial Services Board, which will ensure that CBS provides the necessary foundation for the success of this industry and subjects Islamic banks, as well as traditional banks, to supervision and compliance with uniform standards that are consistent with the aims and objectives of monetary policy. 22
Resolutions and instructions on supervising financial institutions and regulating g their activities (3/4) The direct and material results of the reform efforts made to date are the establishment of a sound, extensive, and diverse banking structure. Syria currently has six public and comprehensive banks, nine private banks, and three Islamic banks which have recently been licensed: Cham Islamic Bank, the International Islamic Bank of Syria, and Dallat Al-Barakah Islamic Bank, in addition to other license requests which are still being reviewed. To date, eight exchange companies and two exchange bureaus have been licensed, in addition to other requests that are still awaiting the completion of all required documents. In the insurance sector, a number of insurance companies have been licensed and it is expected that a number of Islamic insurance companies will also be licensed. 23
Resolutions and instructions on supervising financial institutions and regulating g their activities (4/4) The aim of financial system reform is to fulfill the economic and social needs of society, and to create an appropriate environment for achieving the reform objectives. CBS has clearly made significant progress in its reform efforts, with the support of the government and under the guidance of the President. Over the past two years ago, we have achieved remarkable success in building a strong foundation for effective monetary policy that is based on firmly established and announced principles, p rather than merely being reactive. CBS has defined price stability as a longterm goal and the exchange rate target as a medium-term goal, in addition to its continuous efforts to activate additional indirect monetary policy instruments. 24
Summary of the steps undertaken by CBS to establish its monetary policy: 1- CBS has achieved exchange rate stabilization of the Syrian pound despite the crises that have occurred in the region and the political pressures on Syria. Monitoring the exchange rate during 2006 and to date provides sufficient evidence, as the exchange rate has remained stable for a year and a half. 2- Through the resolutions passed by the Money and Credit Board, CBS has been able to achieve a uniform exchange rate, which went into effect at the beginning of 2007, in accordance with Resolution No. 5787 of December 20, 2006 by the Prime Minister. 25
Summary of the steps undertaken by CBS to establish its monetary policy: 3- CBS has also announced that it is adopting an exchange rate regime that can guarantee the effective management of a real and stable exchange rate, and switching the SP reference from USD to the SDR basket, in accordance with Decree No. 3424 of August 15, 2007 by the Prime Minister, in order to protect the SP from international exchange rate fluctuations and bring the exchange rate into line with Syria s balance of payments position. 26
Summary of the steps undertaken by CBS to establish its monetary policy: 4- CBS has corrected the foreign exchange cycle in Syria and established sound foundations for the money market. The Money and Credit Board passed Resolution No. 197 of April 25, 2006, amended by Resolution No. 249 of December 26, 2006, which stipulates that banks must comply with the instructions related to their foreign exchange positions, because of their importance in protecting banks from exchange rate risk, in addition to limiting speculation of the SP and bringing the foreign exchange cycle back to its correct position through the role of the CBS as the main player in the money market and its interventions in selling/buying foreign exchange from banks in accordance with this decree, and then enhancing its role to maintain the value of the domestic currency. 27
Summary of the steps undertaken by CBS to establish its monetary policy: 5- The Money and Credit Board passed Resolution No. 201 of May 24, 2006, which endorsed the implementing instructions for the exchange profession. This has allowed CBS to incorporate a large part of the unofficial foreign exchange market within the official market, which enhances its ability to monitor foreign exchange operations and ensure exchange rate stability. 6- To avoid the effects of the American sanction against dealing with the Commercial Bank of Syria, CBS adopted Resolution No. 184 of January 23, 2006 to use the Euro instead of the US dollar in all public and joint sector transactions. 28
Summary of the steps undertaken by CBS to establish its monetary policy: 7- The Money and Credit Board, in accordance with its gradual plan to adjust the structure of bank deposits and move towards liberalizing interest, adopted Resolution No. 216 of August 16, 2006, which makes the debit interest rates set by previous resolutions of the Money and Credit Board non-obligatory obligatory rates to be used as guidelines by all public and private banks operating in Syria, as the first step towards interest liberalization. It subsequently adopted resolution No. 289 of June 18, 2007, which gives banks a margin of ± 2 percent on credit interest rates endorsed by the most recent resolution on interest rates, No. 174 of December 3, 2005. 29
Summary of the steps undertaken by CBS to establish its monetary policy: 8- With respect to the structure of the financial market, a set of procedures was adopted to develop this market, which at present comprises six comprehensive public banks, nine private banks, three Islamic banks, and a number of insurance companies as well as a number of license requests still being reviewed, in addition to the Damascus Securities Market which will play a major role in activating the financial market. The process of expanding this market was accompanied by development of the banking supervision mechanism by CBS, and a number of resolutions were issued to ensure that financial activities in Syria are in compliances with international standards, particularly the Basel II standards for banking supervision. 30
Summary of the steps undertaken by CBS to establish its monetary policy: 9- CBS has also diversified financial market activities by launching additional bank products such as banking deposit certificates, and allowing banks to finance all imports of the private and public sectors, in accordance with Resolution No. 5204 of November 15, 2006 by the Prime Minister on current account liberalization. Another set of resolutions was issued to allow banks to carry out foreign exchange transactions and provide new services to customers in this area, such as opening foreign currency accounts, and to liberalize non-trade operations such as buying foreign exchange for travel, study, and medical purposes. Measures were also taken to provide bank credit services to the poor social classes. Decree No. 15 of 2007 was issued to allow the establishment of financial institutions concerned with small and micro financing. 31
Summary of the steps undertaken by CBS to establish its monetary policy: 10- In this context, we should not fail to mention the major efforts made and the success achieved by Syria in the area of combating money laundering and terrorism financing. A special commission was established at CBS concerned with banking supervision and combating money laundering and terrorism financing, in accordance with Decree No. 59 of 2003, subsequently amended by Decree No 33 of 2005, to comply with FATF recommendations. Syria contributed actively to establishing MENA-FATF as a base for regional cooperation in this field. Syria was selected for membership in the mutual evaluation group, whose first meeting, including FATF, was held in Syria. 32
Summary of the steps undertaken by CBS to establish its monetary policy: In addition, Syria was the first country to be assessed by MENA-FATF. Through this evaluation, Syria showed a high level of transparency and compliance with international standards of combating money laundering and terrorism financing. Syria also signed memoranda of understanding with a number of countries to combat money laundering and terrorism financing, and is making efforts to expand the base of these agreements. Syria recently joined the EGMONT Group, which includes 107 financial intelligence units as members, including only six Arab financial intelligence units. 33
Summary of the steps undertaken by CBS to establish its monetary policy: 11- As a result, there has been notable development in the domestic banking sector, which has become more active and efficient. This can be shown through various financial indicators; for example, during the period January 2005 through December 31, 2006, banking activity increased significantly in terms of deposits and credits in Syrian pounds and foreign exchange. 34
Data Annex (1/5) Private Sector Deposits (In Syrian Pounds) Millions of Syrian Pounds Private Banks State Owned Banks Total As of Jan-2005 11 847 3.0% 379 627 97.0% 391 474 As of Dec-2005 30 127 7.8% 356 103 92.2% 2% 386 230 Growth Rate 2005 154% -6% -1.0% As of Dec-2006 64 869 14.6% 379523 85.4% 444 392 Growth Rate 2006 115% 7% 15.1% As of Jun-2007 90 855 18.8% 391 499 81.2% 482 354 Growth Rate 2007 (ANNUALIZED) 80% 6% 17.1% 35
Data Annex (2/5) Millions of Syrian Pounds Credit to Private Sector (In Syrian Pounds) Private Banks State Owned Banks Total As of Jan-2005 4 311 3.70% 112 463 96.30% 116 775 As of Dec-2005 10 440 5.90% 165 549 94.10% 175 990 Growth Rate 2005 142% 47% 51% As of Dec-2006 31 300 15.70% 168 097 84.30% 199 397 Growth Rate 2006 200% 2% 13% As of Jun-2007 40 200 18.21% 180 558 81.79% 220 758 Growth Rate 2007 (ANNUALIZED) 57% 15% 21% 36
Data Annex (3/5) Private Sector Deposits (Foreign Exchange) Equivalent amount in Millions of Syrian Pounds Private Banks State Owned Banks Total As of Jan-2005 14 034 46.30% 16 293 53.70% 30 327 As of Dec-2005 26 997 54.50% 50% 22 530 45.50% 50% 49 527 Growth Rate 2005 92% 38% 63% As of Dec-2006 76 874 72.67% 28 904 27.33% 105 778 Growth Rate 2006 185% 28% 114% As of Jun-2007 96 036 75.84% 30 599 24.16% 126 635 Growth Rate 2007 (ANNUALIZED) 50% 12% 39% 37
Data Annex (4/5) Equivalent amount in Millions of Syrian Pounds Credit to Private Sector (Foreign Exchange) Private Banks State Owned Banks Total As of Jan-2005 191 8.40% 2 078 91.60% 2 269 As of Dec-2005 1 541 36.30% 2 707 63.70% 4 248 Growth Rate 2005 707% 30% 87% As of Dec-2006 3 148 47% 3 589 53% 6 737 Growth Rate 2006 104% 33% 59% As of Jun-2007 5 126 62% 3 124 38% 8 250 Growth Rate 2007(ANNUALIZED) 126% -26% 45% 38
Data Annex (5/5) USD Millions Import Financing Operations Private Banks State Owned Banks Total 2005 11.9 1.3% 894.4 98.7% 906.3 1 st half 2006 120.0 30.3% 276.1 69.7% 396.1 2 nd half 2006 192.7 61.3% 121.9 38.7% 314.6 1 st half 2007 176.1 39
There are still a number of steps to be taken, the most important of which are: (1/3) All the resolutions and procedures adopted in accordance with monetary policy over the past two years constitute a set of coordinated steps that represents the first stage of a long-term plan, but there are still a number of steps to be taken: Adjusting the monetary control systems to meet the requirements of the next stage. Developing banking supervision in order to apply all the Basel standards and comply with international standards. In order to learn from varied opinions and experiences in this area and to show the progress made by Syria in this connection, the CBS is organizing a conference entitled Corporate Governance and Transition from Basel I to Basel II, to be held in Damascus on November 11-12, 2007. 40
There are still a number of steps to be taken, the most important of which are: (2/3) 3. Proposing suitable amendments to the Basic Monetary Status Law No. 23 of 2002 and the law on establishing private banks, to bring them into line with developments in the field of monetary policy over the past two years and to develop the banking sector. 4. Continuing expansion of the financial market by licensing more Islamic and private banks. 5. Issuing legislation to permit mortgage financing operations. 6. Issuing legislation to permit leasing operations. 7. Establishing a deposit insurance entity. 41
There are still a number of steps to be taken, the most important of which are: (3/3) 8. Revising the structure of the CBS to make it consistent with the new tasks assigned to it, such as creating the Financial Markets Department, which is concerned with all purchase and sale transactions of foreign exchange, whether in the domestic or international market, and transactions involving investment of foreign reserves, along with reviewing the mechanism used to manage these reserves; and creating a department concerned with payment py systems, responsible for activating gpy payment systems tools managed by the CBS and for supervising other payment systems. The CBS has made great progress in this area and has recently completed preparation of the terms of reference for obtaining a real time gross settlement (RTGS) system, which has been announced through the CBS website. 42