The State of Syria’s Domestic Debt

Our article in the previous issue of Syria in Figures discussed external debt and highlighted how official data does not reflect the full picture, as Damascus’ borrowing from Iran and Russia during the conflict was not captured in official statistics. In this article, we broaden the picture by examining Syria’s domestic debt. However, the same lack of transparency persists in the public-facing data, which is why we had to rely on limited information from multiple sources. Karam Shaar Advisory also accessed primary data from the Central Bank and the Ministry of Finance.

At the onset of the conflict, Syria’s reliance on debt as a means of funding fiscal spending was minimal. However, during the conflict domestic debt became more frequently used, taking the domestic debt-to-GDP ratio from just under 5% in 2011 to over 50% in 2021, the latest year for which we managed to obtain official data.

To provide context for these numbers and account for the depreciation of the Syrian pound (SYP) during the conflict, we present the figures in US dollars (USD), using the annual average parallel market exchange rate. Notably, the domestic debt burden declined significantly in absolute terms in 2020 due to the SYP’s depreciation, which eroded the savings of debt holders who saw their real interest rates fall sharply—often into negative territory. This shift contributed to a rise in the share of reported external debt, which constituted nearly 55% of the gross public debt by 2021.

Given the dwindling government resources, a growing share of public spending began to be allocated to servicing the stockpile of domestic debt. The debt-service ratio surged from less than 10% before 2016 to over 30% as forecast in the 2024 budget, leaving significantly less funding available for critical services such as healthcare, education, and infrastructure repairs. As noted in our previous article, the bulk of this debt-service spending pertained to domestic debt rather than to foreign debt, which remains largely unpaid.

The figure below shows that a substantial gap has long existed between budgeted and actual debt servicing, reflecting the unpredictability of wartime conditions and the state's weakened capacity to manage the economy. The same is true for the amounts of debt forecast and actually raised. For example, the government’s end-of-year audit for 2022 states that 4.1 trillion SYP was raised in domestic debt, while the budget had estimated only 600 billion SYP—more than six times the projected amount.

Complicating the picture of domestic debt further still, the share of the budget allocated to debt servicing has surged since 2018, when the state budget law began grouping funds for the Presidency of the Republic and the Ministry of Defense under Branch 19202 (the Public Debt Fund), possibly to obscure the amounts allotted to these institutions. However, end-of-year audit records indicate this reallocation started in 2017.

The government’s deficit has been financed through multiple vehicles, with domestic debt playing the primary role. While the exact composition of domestic debt remains unclear, budget figures suggest it primarily consists of treasury bills and an item called “taken from reserves.” Borrowing from abroad to fund the deficit remains negligible. As highlighted in our previous issue of Syria in Figures, however, international borrowing—particularly from Iran—played a critical role in funding state institutions and the regime, but such funding was not reported in official statistics. 

Treasury bills, notes, and bonds—which mature over varying durations—are managed by the Ministry of Finance based on Law 60 of 2007, which allows auctions to sell treasury notes (2–5 year maturity) to banks operating in Syria, as well as to financial intermediaries and the public through the Damascus Stock Exchange. Between 2020 and 2024, we identified 15 auctions. Domestic borrowing was also used for swap operations. In addition, the Central Bank announces auctions in which authorized banks and their clients can buy treasury notes.

From an accounting perspective, internal debt refers to borrowing from domestic creditors, including the Central Bank. The Central Bank can lend to the government by either printing money or using existing reserves raised, for instance, through certificates of deposit. In annual state budgets, this lending appears under the item “taken from reserves.”

Given the depletion of the Central Bank’s reserves during the conflict, we believe that much of the government’s borrowing under this item consists of newly printed money. Persistent budget deficits, and the inability to rely solely on treasury borrowing, led the government to rely on the Central Bank to finance the deficit by expanding the monetary base. Combined with a shrinking economy, the rise in money supply significantly impacted inflation, contributing to stagflation—a situation of rising inflation while the economy stagnates or contracts.

With inflation exceeding the rate offered on treasury bonds (2–5 year maturity), negative real interest rates made it increasingly difficult for the government to borrow additional funds domestically. Reports indicate that Assad’s government forced commercial banks to buy debt. Traders were also reportedly obligated to buy domestic debt to finance oil and wheat imports through the Public Debt Fund.

For post-Assad governments to handle the country’s debt effectively, a full audit will be essential. The new government must accurately assess the country’s fiscal position, as the previous regime’s opaque operations make it difficult to establish a clear baseline of the country’s fiscal standing. One thing is clear, however: the bulk of the reported domestic debt does not need to be repaid, as it consists primarily of money obtained from the Central Bank through money printing.

Looking ahead, access to domestic credit can speed up the country’s recovery; state investments can be implemented on credit, spurring growth while creating opportunities for repayment. However, access to credit is always—among other variables—a function of trust. Given the state’s current fiscal position and the damage left by Assad, rebuilding trust will take time. This requires adhering to repayment schedules and keeping real interest rates sufficiently positive and stable by controlling inflation, ensuring predictable profitability for lenders. Responsible borrowing will also improve the country’s creditworthiness, which can enhance access to foreign credit markets as well at a time where every dollar in government spending counts.