The Relationship Between Excess Liquidity in Private Banksand Monetary Policy Tools in Syria

Abstract

This research aims to diagnose the issue of excess liquidity in private banks in Syria and analyze its relationship with various monetary policy tools during the period from 2011 to 2023. The researcher adopted a descriptive method to identify the phenomenon of excess liquidity and an econometric analytical approach to analyze the causes of this surplus and its impact on the effectiveness of monetary policy tools.

The study concluded that excess liquidity in private banks in Syria accumulated due to several factors, primarily the direct monetary policy based on administrative decisions implemented by the central bank. These decisions targeted both deposits and credit facilities to curb speculative activities, yet private banks were unable to utilize this excess liquidity effectively. Moreover, structural imbalances emerged in the composition of deposits in both Syrian pounds and foreign currencies, as well as in the distribution of deposits and credit facilities across different maturities. Additionally, the loan portfolios of private banks declined as a proportion of their total assets.

The reliance on direct monetary policy tools, along with the near absence of indirect tools, contributed to the accumulation of excess liquidity, which private banks failed to utilize effectively. On the other hand, excess liquidity in private banks reduced the effectiveness of indirect monetary policy tools, such as the discount rate, the reserve requirement ratio, and open market operations. The study emphasizes the importance of activating open market operations to manage excess liquidity by directing it toward strategic projects or infrastructure projects, thus easing the burden of holding idle funds on private banks. Instead of keeping this surplus at the central bank without generating interest, it should be channeled into productive investments. While direct monetary policy tools proved effective in controlling monetary variables and managing liquidity within banks and the economy, they resulted in imbalances in monetary and banking indicators, pushing them away from equilibrium. Moreover, these direct measures limited the flexibility of banks to respond to market factors and make sound decisions based on liquidity, profitability, and risk indicators, leading to the accumulation of surplus liquidity without the ability to deploy it effectively.