Tuesday, September 6, 2011

Syrian Crisis in the Garment Sector

Ramadan and Eid al-Fitr is the peak season for consumer spending in the retail sector in Syria.  It is similar to the Christmas season in Western economies It is in this season of Ramadan and Eid that profits in this sector get made for the whole year.  At this time, the horizon does not seem optimistic for this sector.  The lack of confidence is high among consumers.   A recession during this season will have serious consequences for the retail sector.  The disastrous management of the crisis of political legitimacy is having repercussions on the textile sector and on the economy overall.  The textile sector is one of the most important sectors in the Syrian economy which traditionally has exports totaling nearly 50 billion Syrian Liras (5 billion dollars).
With the collapse of the internal market and the siege imposed by the regime, the industry is going through a major crisis.  It manifests itself in the dramatic drop experienced in used capacity of production and employment in this sector.  Normally, production and employment reaches its maximum in the month of Ramadan, but this year it declined due to many factors, most importantly political unrest.  This year, the employment and production fell from 24/7 production to only three days a week during the usual run-up to Eid. 
There are two sides to the crisis in the sector.   The first dimension is the demand side.  The absence of consumer confidence for the near future leads to the postponement of consumption and the sharp decline in demand for finished products.  This is easily observable when reviewing the results of sales for the season of Ramadan compared to previous seasons.  The crisis of consumer confidence and the future economic stability results in putting off consumption.  It also manifests itself in the shift toward less expensive, lower quality goods.  We noticed many of the modern clothing firms lost customers who preferred to buy fashions from the past year over recent models.  Consumers were inclined to purchase lower brands leading the sector to face a decline in its real demand.
The second side comes from the lack of confidence of the producers. On the one hand, yarn and raw materials are imported and form a significant share of the production costs The shocks experienced by the Syrian currency lend support to the expectations of its devaluation against the dollar or the euro.  The Central Bank governor, Adib Mayalah, recognized in an interview late in August on French TV that the international reserve diminished by 35% during the last six months.  We realize that this bleeding of the reserves to support the Syrian currency cannot be sustained indefinitely.  This mismanagement and the regime’s policies shall affect the currency sooner or later.  Thus, producers in the textile sector will face difficult choices With the devaluation of the Syrian pound, inventories of imported raw materials will have more value as raw material than the final products.   This situation pushes the producers in the textile sector to delay production as much as possible.  The sector will enter the vicious circle in which increased costs and decreased expected sales will lead to a lack of supply and push prices even higher.
 In the medium and long term, this sector will be subjected to further problems if the regime’s control is prolonged.  We have a situation with higher prices (supply side inflation) and lack of demand.  The extension of the regime will mean forcefully denouncing its liberal economic policies and returning to protectionist and interventionist economic policy.  (See our article "Revolution and the End of Syrian Economic Reform.")  This will create great pressure on the investment in this sector; the shrinking of the margin caused by fixed prices determined by the government and increased production costs will lead to a real contraction in the sector that will have dire consequences.
In any case, workers and businesses are deeply feeling the Syrian crisis. The crises and the continuity of the Syrian regime do not promise a solution in foreseeable future.  Looming on the horizon is more protectionist and interventionist policies; a return to the government policies of the 1963 to 2000 period.  

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