Syrian economy to shrink 20 percent in 2012: IIF

Since a revolt that has since descended into civil war started in March 2011, inflation has risen to 40 percent and the Syrian pound's official exchange rate against the dollar fallen by 51 percent, the Institute for International Finance said.

As well as financing the war, President Bashar al-Assad's government has spent billions of dollars of hard currency reserves on wages, fuel subsidies and propping up the pound, bankers in Damascus say.

The Washington-based IIF said the reserves could be depleted by the end of 2013.

Opposition activists estimate some 40,000 people have been killed in Syria as fighting between rebels and the army has raged in almost every city and has now reached the outskirts of the capital.

International measures to pressure Assad to step down have also affected the economy.

"The sanctions by the Arab League introduced in late 2011 and the September 2011 U.S. and EU. sanctions have meant more economic hardships for 2012 and 2013," said Garbis Iradian, deputy director of the IIF's Africa and Middle East department.

Syria has not yet released economic forecasts for 2012 but the finance ministry has said GDP growth will be positive.

REGION AFFECTED

Syria's war has affected the countries around it, with hundreds of thousands of refugees fleeing to Turkey, Lebanon, Jordan and Iraq. Trading routes have also been cut.

Lebanon, its smaller neighbor that is rebuilding after its own 15-year civil war, has borne the brunt of the turmoil.

Lebanon's economy is due to grow by 0.6 percent this year, a significant drop from 1.8 percent in 2011 and 7 percent in 2010, the IIF said, after political bickering and sporadic sectarian clashes linked to Syria's conflict have scared off investors.

"The deepening conflict in Syria continues to pose a threat to Lebanon's political order and economic stability," Iradian said.

If Lebanese politicians were to reach a consensus on effective government, improve domestic security and implement fiscal and structural reforms then the 2013 GDP forecast could reach 3.5 percent at best, he said.

"If this doesn't happen, it would likely be 1 percent."

Foreign direct investment dropped from 10 percent of GDP before the Syrian crisis to hardly 2 percent of GDP, he said. But the banking sector has remained resilient and the Lebanese pound is stable.

Nassib Ghobril, chief economist at Byblos Bank, which hosted the launch of the report, said Lebanon could have mitigated the adverse impact of the Syria turmoil on the economy "if Lebanese politicians and government officials made a concerted effort to maintain political stability."

(Reporting by Oliver Holmes; Editing by Angus MacSwan)