Damascus: Abdullah Dardari, Syria's deputy prime minister for economic affairs, said that his country is luring record foreign investment, mostly from Gulf states, and that US sanctions have had a limited impact.

"I don't think the US has managed to damp foreign direct investment," Dardari said in Damascus. "Sanctions have failed, especially when they are unilateral."

Foreign investment into the nation of 19 million from the Gulf was about $750 million last year, according to official statistics, and may have exceeded $2 billion annually over the past five years, Dardari said. The funds from Gulf states are compensating for a drop in oil production, helping push economic growth to about 6 per cent this year, he said.

The US imposed sanctions on Syria in May 2004, including a ban on trade transactions with the Commercial Bank of Syria, accusing the country of aiding Iraqi militants and destabilising Lebanon. Syria has denied both allegations. While relations are strained with the European Union, the bloc has granted aid money and resisted calls for sanctions.

Dardari's growth forecast may prove optimistic, with the Economist Intelligence Unit estimating that growth will slow to 2.4 per cent this year from 4.3 per cent because of falling oil production and a poor harvest.

Oil output has declined to 385,000 barrels of crude a day from a peak of 590,000 barrels a day in 1996.

Revenue from oil dropped to less than 4 per cent of gross domestic product last year from 17 per cent in 2004, Dardari said. Non-oil exports exceeded $12.5 billion, compared with less than $1 billion in 2000, spurred by regional demand for items such as textiles, pharmaceuticals, cotton and agricultural produce.

Rising inflation is also a challenge, forecast to accelerate to 16.8 per cent in 2008 from 12.2 per cent last year because of reductions in fuel subsidies and a 25 per cent increase in government salaries and pensions, according to the EIU.

Reducing some of the fuel subsidies "has cooled an overheating economy in the first half of 2008, which helped reduce inflation rates contrary to what everyone thought," Dardari said. "Raising the price of diesel reduced inflationary expectations and everyone realised the market will stabilise."

To boost investment, in January of last year, Syria introduced a law allowing foreign investors to own or rent land and take profits out of the country in any currency.

National Bank of Kuwait, the Gulf state's biggest lender by market value, has said it wants to operate a joint venture in the country.

It currently takes 43 days on average to start a business in Syria, compared with 14 days in Jordan, 46 days in Lebanon and 62 days in the UAE, according to a World Bank report.

Sanctions have had a limited impact. Turkcell Iletisim Hizmetleri, Tur-key's biggest mobile-phone company, suspended plans to purchase Syriatel, the country's main mobile-phone company, because of US objections, according to the Turkish company's Chief Executive Sureyya Ciliv.

Sanctions "haven't been devastating, in part because of Gulf money", said Justin Alexander, an econ-omist at the London-based EIU. "Gulf money is critical and will remain so."

Dardari said he could not give a precise figure for Gulf investment because "much of it comes through unofficial channels like Syrian partners and joint ventures with Syrian entre-preneurs".

Contributing factor

"Gulf inflows, whether into real estate, banking and industrial projects, as well as from tourism, have certainly been a contributing factor to economic growth," said Nassib Ghobril, head of research at Lebanon's Byblos Bank.

To achieve more than the targeted 7 per cent annual growth rate and reduce unemployment to below 6 per cent from an official figure of 8 per cent now and keep poverty below 10 per cent, Syria needs to attract $16 billion a year by 2015.