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AMMAN - Syria has released new cash into circulation to finance its fiscal deficit, flirting with inflation after violence and sanctions wiped out revenues and led to a severe economic contraction, bankers in Damascus say.

Four Damascus-based bankers told Reuters that new banknotes printed in Russia were circulating in trial amounts in the capital and Aleppo, the first such step since a popular revolt against President Bashar Assad began in 2011.

The four bankers said the new notes were being used not just to replace worn out currency but to ensure that salaries and other government expenses were paid, a step economists say could increase inflation and worsen the economic crisis.

The United Nations says Assad's forces have killed at least 10,000 people in a crackdown, and the government says more than 2,600 members of its security forces have died.

The four bankers, along with one business leader in touch with officials, said the new money had been printed in Russia, although they were not able to give the name of the firm that printed it. Two of the bankers said they had spoken to officials recently returned from Moscow where the issue was discussed.

"(The Russians) sent sample new banknotes that were approved and the first order has been delivered. I understand some new banknotes have been injected into the market," said one of the bankers. All requested anonymity.

Two other senior bankers in Damascus said they had heard from officials that a first order of an undisclosed amount of new currency had arrived in Syria from Russia, although they were unable to confirm whether it had entered circulation.

Outgoing Finance Minister Mohammad al-Jleilati said last week that Syria had discussed printing banknotes with Russian officials during economic talks at the end of May in Moscow. He said such a deal was "almost done," without going into details.

However, the central bank later denied through state media that any new currency had been circulated.

Goznak, the state firm that operates Russia's mint and has exclusive rights to secure printing technology, regularly prints money for other countries. It declined to comment.

A 'last resort'

Russia is one of Syria's major political backers and a close trading and economic partner. There are no sanctions in place that would bar a Russian firm from printing money for Syria.

Syrian money was previously printed in Austria by Oesterreichische Banknoten- und Sicherheitsdruck GmbH, a subsidiary of the Austrian central bank. That order was suspended last year because of European Union sanctions, an Austrian central bank spokesman said.

One of the four bankers described the decision to use newly printed money from Russia to pay the deficit as a "last resort" after several months of consideration.

Syria's deficit has swollen because of declining government revenues and loss of oil exports hit by sanctions. The government is loathe to impose unpopular measures to fight the deficit, like cutting subsidies or raising taxes.

"The deficit is there and it is already increasing and increasing quickly. And to finance it they have decided to print currency," said the senior businessman, who is familiar with the subject and in touch with monetary officials.

Bankers say a priority has been to continue salary payments for over 2 million state employees among a workforce of 4.5 million in a country of more than 21 million people.

"You cannot allow the public sector to collapse," said one of the bankers. "People are getting their wages and there are no complaints if they are paid at the end of every month. If we reach a stage where they are not paid there will be a crisis."

Syria's $27 billion 2012 budget was the biggest in its history, taking many by surprise. Bankers say the spending surge was motivated by a desire to create more state jobs and maintain subsidies to help ward off wider discontent.

The private sector has suffered large scale layoffs, but workers in the public sector have kept their jobs and had steady wages despite a salary freeze.

Financing the spending has proven difficult. The central bank has exceeded borrowing limits from public banks, and private banks are reluctant to buy government bonds, one of the bankers said.

Inflation is already running at 30 percent, although the central bank considers it manageable.

Authorities have spent state funds on subsidies to keep the prices for household utilities and petrol unchanged, and have announced planned price controls on basic commodities. However, electricity prices for big industries have risen by 60 percent and the price of subsidized diesel fuel has also risen.

The authorities plan to inject only a small amount of new currency to prevent runaway inflation, said one of the bankers.

"But there is a limit to how much fresh money could be injected into the economy in such highly uncertain times. Reckless printing of money as a way of buying short term reprieve could be economic suicide," the banker added.

Figures to be published today are expected to show that the Government failed to meet its statutory target to halve the problem by 2010 – despite the huge amount of taxpayers’ money spent on tackling it.

Mr Duncan Smith will unveil a new analysis which will show that hundreds of thousands of children will be lifted out of poverty if at least one of their parents works 35 hours a week earning the minimum wage.

The introduction of the universal credit, under the Government’s welfare reforms, will mean that people returning to work from benefits will continue to receive some state support.

Any child living in a household which earns less than 60 per cent of the typical income is defined as living in poverty. This is likely to be changed so that children living in workless households or those with drug-dependent parents are highlighted.

Mr Duncan Smith will also set out plans to change the definition of child poverty so that a more sophisticated analysis is used.

Speaking ahead of his speech at the Abbey Community Centre in London, Mr Duncan Smith told BBC Radio 4's Today programme: "What I'm talking about is getting away from a system that got so trapped in the idea of meeting a relative income target so narrowly that more and more money was spent on welfare but keeping people out of the work process.

"What we need to do is make sure we tackle poverty but tackle it in the process of trying to move them on (to work).

"If you just measure relative income levels you know nothing about what's happening to the family."

In his speech, he will accuse Labour of “pouring vast amounts of money” into increased benefit payments to tackle poverty. He is expected to say that the strategy has failed and parents need to be helped back to work rather than simply subsidised by the state.

He will say: “Getting a family into work, supporting strong relationships, getting parents off drugs and out of debt — all this can do more for a child’s wellbeing than any amount of money in out-of-work benefits.

“With the right support, a child growing up in a dysfunctional household, who was destined for a lifetime on benefits could be put on an entirely different track — one which sees them move into fulfilling and sustainable work. In doing so, they will pull themselves out of poverty.”

He will add: “Our latest analysis suggests that universal credit will ensure the vast majority of children will be lifted out of poverty if at least one parent works 35 hours a week at the minimum wage — or 24 hours if they are a lone parent.

“For those who are able to work, work has to be seen as the best route out of poverty. For work is not just about more money — it is transformative. It’s about taking responsibility for yourself and your family.”

Mr Duncan Smith will indicate that Labour wasted large amounts of public funds as it failed to halve child poverty. “The last Government spoke about the need to tackle poverty, and poured vast amounts of money into the pursuit of this ambition — £150 billion was spent on tax credits alone between 2004 and 2010.

“Overall, the welfare bill increased by some 40 per cent in real terms, even in a decade of rising growth and rising employment,” he will say.

Ministers are drawing up plans to introduce a series of measures to gauge whether families are living in poverty, such as whether parents have drug or alcohol problems or whether they are working.

In today’s speech, the Work and Pensions Secretary is expected to defend the need to change the definition of child poverty. “If a family has less than 60 per cent of the median income it is said to be poor, if it has 60 per cent or more it is not,” he will say.

“By this narrow measure, if you have a family who sits one pound below the poverty line you can do a magical thing. Give them one pound more, say through increased benefit payments, and you can apparently change everything — you are said to have pulled them out of poverty. But increased income from welfare transfers is temporary if nothing changes.”

Mr Duncan Smith’s call for disadvantaged families to return to work may come at an inopportune time with unemployment rising as the double-dip recession has led to a lack of jobs.

William Hague, the Foreign Secretary, caused controversy recently by telling Britons they had to work harder to help the UK escape from recession.