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Republic of Yemen : Selected Issues
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
Republic of Yemen: Selected Issues
Selected Issues: From Unification to Economic Reform: Yemen in the 1990s
II. The External Environment: Politics, Oil, and Debt
A. Political Developments: Unity, Gulf Crisis, Civil War, and Democracy
B. Yemen's Emergence as Oil Producer
Inception and evolution of exploration agreements
Production prospects
The role of crude oil in the Yemeni economy
Gas production prospects
C. External Debt
III. Macroeconomic Policy During 1990–99
A. Changing Policy Mix
B. Crisis, Controls, and Stagnation—Macroeconomic Policies 1990–94
Public finances, 1990–94
Controls in the monetary and exchange rate systems, 1990–92
Partial liberalization of the exchange and interest rates, 1993–94
C. Reform and the Return of Stability and Growth, 1995–99
D. Preserving the Oil Wealth—A Long-Term View of Yemen's Fiscal Policy Stance
IV. Microeconomic Reforms
A. Exchange Regime and Foreign Trade Reforms
Exchange system
B. Tax Reforms
Taxes on income and profits
Taxes on goods and services
Customs and customs administration
C. Public Expenditure Reforms
Subsidy reform
Civil service and wage reforms
Other expenditure reforms
Budget management reform
D. Reforms of the Regulatory Environment
E. Privatization
The privatization strategy
F. Financial Sector Reforms
Reforms in the banking system and in bank supervision
Establishment of treasury bills market
Instruments of monetary policy
Financial deepening and economic stabilization
Soundness of the banking system
V. Poverty and Social Safety Net Policies
A. Evolution of Pensions and Cash Transfer Programs
Social Welfare Fund and other cash transfers
B. The Social Fund for Development
C. Informal Safety Nets and Development Support Organizations
VI. Economic Performance, 1990–99
A. Growth and Employment 95
Sectoral growth in the non-oil economy 96
Agriculture and fishing
The industrial sector
Labor market developments
International labor migration trends
Labor laws and regulations
B. Inflation
C. Poverty and Social Indicators
Measures of poverty in Yemen 111
Main causes of poverty in Yemen
D. Saving, Investment, and External Vulnerability
I. Sector Potential
II. Size and Trends
III. Structural Impediments
Inadequate infrastructure
Threat to historic heritage and natural environment
IV. Policy Implications
V. Government Efforts to Date
Republic of Yemen: Crude Oil Production and Government Share 1/
Republic of Yemen: Crude Oil Comparisons, 1990–99
Republic of Yemen: Real and Nominal Effective Exchange Rate, 1990–99
Republic of Yemen: Government Revenue, 1990–99
Republic of Yemen: Customs Revenue, 1990–99
Republic of Yemen: Fiscal Developments, 1990–99
Republic of Yemen: Nominal Exchange Rates, January 1990–December 1999
Republic of Yemen: Interest Rates, 1990–99
Republic of Yemen: Oil Balances and Wealth, 1990–99
Republic of Yemen: Petroleum Product Wholesale Prices, 1995–2000 1/ 2/ 3/
Republic of Yemen: Credit and Currency, 1990–99
Republic of Yemen: Velocities and Multipliers, 1990–99
Republic of Yemen: Comparison of Liquidity and Credit Ratios with Selected Countries, 1990–99
Republic of Yemen: Comparison with Selected Countries, 1990–99
Republic of Yemen: Evolution of the Shares of Key Sectors in Real GDP, 1990–99
Republic of Yemen: Inflation, Money Growth, and Budget Financing, 1990–99
Republic of Yemen: Price Indices for CPI Groups that Include Items with Administered Prices
Republic of Yemen: Comparison with Selected Countries: Age Dependancy Ratio
Republic of Yemen: Comparison with Selected Countries: Total Adult Illiteracy Rate
Republic of Yemen: Comparison with Selected Countries: Total Life Expectancy at Birth
Republic of Yemen: Comparison with Selected Countries: Infant Mortality Rate
Republic of Yemen: Comparison with Selected Countries: Access to Safe Water
Republic of Yemen: Saving and Investment, 1990–99
Yemen: Visitor Arrivals Since Unification
1. The 1990s surely must have been one of the most dramatic periods in Yemen's rich history. Unification, rapid development of an oil sector, and a radically changed external environment fundamentally transformed the opportunities and challenges the Yemeni people face. This paper attempts to summarize economic developments in Yemen during the 1990s; to take stock of the many structural changes that took place in the economy during this decade; and to point out important reforms that are needed if Yemen were to move to a path of high and sustainable growth, to reduce rampant poverty, and to responsibly manage a highly volatile oil rent. It is hoped that this paper may provide useful input to the ongoing debate in Yemen on the appropriate development strategy for the coming years.
2. Section II summarizes the main political and exogenous events that shaped the decade. At the beginning stood the unification of the Yemen Arab Republic (YAR)—which itself had undergone dramatic change since it emerged in the 1960s as republican successor to the medieval regime of the Imam—with the People's Democratic Republic of Yemen (PDRY), which had emerged from the struggle for independence in the British colony and protectorates around Aden in 1967. A few months after unification, with the onset of the second Gulf Crisis, Yemen experienced a major shock with the return of about three quarters of a million workers from the Gulf states, challenging a fragile socioeconomic fabric already weakened by a severe two-year drought. At the same time, the development of oil fields provided a growing source of foreign exchange earnings, and may have been the element that kept Yemen away from the brink, even if it also added a new vulnerability due to fluctuations in world oil prices.
3. However, the strains from these developments eventually led to a brief civil war in 1994, following attempted secession by elements of the former PDRY leadership. It was only after the secession was militarily defeated—and as the new constitutional system providing for a multi-party democracy, a free press, and an essentially market-based economic system took hold—that the political consensus could be forged for the urgent economic reforms that had been delayed since unification. In 1995, Yemen thus initiated an economic reform program, supported by the Fund as well as by the World Bank and other institutions and countries, aiming in its core at enhancing the foundations of a market-based and private sector-driven economy, integrated into world markets and in a context of broad financial stability. This approach underpins government policy until today.
4. The first priority of reform was obviously to restore macroeconomic stability, which was threatened by large fiscal imbalances, price distortions (including exchange and interest rate controls) resulting from the attempt to suppress excess demand through controls, and a huge debt-overhang largely, but not only, arising out of the former PDRY's debt to the Soviet Union. The emerging macroeconomic policy mix is described in Section III. Fiscal policy was obviously key, and in light of the importance of oil for government revenue, it is assessed also from an inter-temporal perspective, given the fact that based on current information Yemen has only limited proven reserves.
5. While stabilization policy was highly successful, structural reforms faced greater difficulties and resistance and were also more severely constrained by Yemen's limited administrative capacity. Section IV describes the progress to date, pointing to impressive success in liberalizing the exchange and trade regime and lifting price controls, but also to a huge unfinished agenda in tax and budget management reform, privatization, and civil service reform. Deep-rooted obstacles to growth, notably weaknesses in the judicial system and governance, have been barely touched so far; and reform in these areas, perhaps more than in others, will have to emerge from and be shaped by civil society itself.
6. Section V looks at some of the "formal" social safety measures that were put in place to protect the most vulnerable segments of society against adverse effects of certain reform measures (notably the reduction in generalized subsidies), but—probably more important—the often brutal exogenous shocks Yemen society had to absorb, such as the return of workers in 1990–91, the dislocations from the civil war in 1994, and the collapse of oil prices in 1998. No data exist to gauge the scope of traditional, often tribal- or religious-based, social support systems; such systems likely remain far more important than formal systems and must have been at the core of Yemen's ability to somehow absorb the workers returning from the Gulf region.
7. Finally, Section VI looks at performance in terms of growth, inflation, social indicators, and savings and investment balances, also in comparison with other countries.1 Clearly, during the second half of the 1990s, performance improved on all three accounts, very much so for macro stability but considerably less for social indicators. This reflects the return to political stability and peace, on the whole favorable oil price sector developments, and the first fruits of reforms. But building on these achievements, an even greater focus on growth and poverty reduction will be needed. The Yemeni authorities have therefore embarked on preparing a comprehensive poverty reduction strategy in the context of the next Five-Year Plan (2001–2006) and in broad consultation with civil society to be launched in early 2001. It is hoped that this paper can contribute to the formulation of such a strategy by providing some of the needed background and by drawing some first lessons from Yemen's adjustment experience to date.
8. Unification of North and South Yemen in early 1990 opened a decade of dramatic sociopolitical and economic change. Similar to German unification, the YAR of North Yemen, a larger and broadly market-based economy, absorbed a smaller, centrally planned economy: the PDRY in the south.2
9. As in the German case, unification was a long-standing aspiration of the Yemeni people in both states and became possible mainly through the effects of Perestroika in the Soviet Union on the socialist PDRY. On the economic side, a reduction in financial and technical assistance from the Soviet bloc, combined with declining workers remittances—a main stay of the PDRY accounting for about half of government revenue in the late 1980s—created pressures for a rethinking of the PDRY's development strategy in the mid-1980s. While the PDRY had achieved respectable improvements in education and other social indicators (more so than the YAR),3 the economy was in a dismal state as a result of failed socialist reforms in agriculture, fisheries, and port activity. Large Soviet-financed investments in the Shabwah oil field (discovered in 1986) added half a billion U.S. dollars to South Yemen's staggering debt (largely to the Soviet Union and her allies), but the oil facilities were yet unfinished and production was limited to 10,000 barrels per day (bd) which were trucked to the decrepit refinery in Aden.4 On the political side, the last years of the PDRY saw some liberalization of political activity and the press, but at the same time it saw political instability within the leadership of the country with violent internal struggles in 1986.
10. The YAR, in contrast, had witnessed a measure of political stability with some consolidation of central control—even over traditional tribal areas—as well as a measure of economic development despite limited progress in education and health. Oil exploration was in private hands and, in 1984, oil strikes quickly led to development of a major oil field (Marib) starting production in 1987 with most output exported through a pipeline, reaching about 195,000 bd in the early 1990s. While the YAR was also dependent on workers' remittances, foreign debt averaged to a more manageable 60 percent of GDP, well below PDRY's 180 percent of GDP during 1987–89.
11. Development of oil was another important catalyst for unification. The simultaneous oil discoveries in the YAR (Marib) and the PDRY (Shabwah) were in adjacent areas, and development and exploration required settling of outstanding border issues. At first it triggered a bilateral agreement, demilitarizing the border zone in 1988, along with easing the bilateral travel restrictions and activation of common institutions, notably the Supreme Yemeni Council, formally in place since 1982. The dynamics set in motion were such that by late-1989 "historic agreement" was reached, calling for a draft constitution for a unified Yemen to be presented to both parliaments within six months and a referendum six months thereafter. A unity government was formed in early 1990 and a year later, an impressive majority in both parts of the country approved a new constitution by popular referendum. The new constitution provided for basic political freedom (inclusive of women), including the right to organize and vote, the right of private ownership, and sharia as principal (but not sole) source of law.
12. Early on, however, severe strains developed to challenge the newfound unity. Most importantly, during the Gulf crisis in late 1990, Saudi Arabia—home to the bulk of Yemeni migrant workers, made up an estimated 17 percent of the Saudi workforce—decided to end the visa and sponsorship exemptions traditionally enjoyed by Yemeni people living and working in Saudi Arabia. As a result, an estimated three-quarters of a million workers returned to Yemen.5 About 50,000 workers returned from other Gulf states. Some 60,000 returning migrants had to be put in refugee camps, most others returned to their hometowns and villages. Returnees initially ran through their savings, but the loss in remittances and official assistance from Gulf states (about US$200 million per year in the late—1980s) and the need to accommodate a million returnees contributed to a rapid deterioration in economic balances, contracting economic activity and fuelling inflation. These adverse factors were compounded by a severe drought during 1990–91.
13. Other economic (and political) strains resulted from the way the two very different economic systems were merged. The two civil services were simply added together, with 50/50 sharing of all posts between the former YAR and the former PDRY services, reflecting a similar sharing of the top leadership posts. Harmonization of wage scales at the higher level of the YAR added to pressures on the public finances. Tensions quickly arose, for example, as to what education policy to pursue. Hasty attempts to roll back the PDRY's farmland distribution and only slow reconstitution of real estate nationalized under the PDRY to businesses who had fled the South, led to dissatisfaction among farmers and the business community. The bloated bureaucracy fueled a rise in governance problems; many Southerners were concerned about aspects of traditional YAR society such as tribal influence and greater circumscription of the role of women (and many Northerners about what was perceived as non-Islamic behavior in the South). As a result, the leadership remained largely divided among former North-South lines, with Southern representatives often abstaining from joint cabinet meetings. Each side largely preserved control over its former armed forces.
14. At the same time, the introduction of democracy led to a flourish of political parties (more than 40 political parties emerged) and newspapers across a broad political spectrum. In the first "unified" election in 1993, the electorate largely voted along the traditional North-South line.6 The General Peoples' Congress (GPC), including much of the former YAR's leadership, emerged as the dominant political force, winning nearly half of the available seats; the newly formed Islamic Yemeni Reform Group (YRG), or Islah, came in a distant second; closely followed by the Yemeni Socialist Party (YSP), comprised largely of the former PDRY leadership, and which won most seats in the South. There were also a large number of independents and small parties. Although a coalition government including the GPC, YRG, and YSP was formed, the election results led to growing estrangement between the Southern and Northern leadership, with each focused on the rebuilding of regional power bases. This was also fuelled by development of a Southern oilfield (Masila), which came on stream in 1993 (with 40,000 b/d trucked to Aden); output rose to 150,000 b/d as a central processing unit and a pipeline to the Indian Ocean were completed in 1994. Despite many attempts—notably by other Arab states—to mediate between the two sides, the declaration of an independent Southern state by parts of the YSP leadership in 1994 triggered a civil war that ended with the defeat of the Southern forces a few months later and at the cost of considerable destruction of lives and property.
15. In September 1994, a new constitution was adopted, providing for direct popular election of the president and making sharia the principal source of legislation. A new government comprising only GPC and Islah representatives was formed and, in 1995–96, was able to reach a broad consensus to start needed economic and administrative reforms. New elections in April 1997 were boycotted by the YSP and gave the GPC an absolute majority, with Islah again the second largest party, followed by a number of smaller parties and independents. This time the GPC alone formed the government, although the cabinet included a few independents (including the Prime Minister). However, the President also instituted the Consultative Council, including members of YRG, YSP, and GPC, along with eminent tribal leaders and other representatives of civil society. The council has no legislative or executive mandate, except for debating the major issues and submitting recommendations to the president; it plays, however, an important role in mediating, for example, differences between parliament and the executive.
16. In September 1999, President Saleh won another five-year mandate in Yemen's first contested presidential election, running against another GPC member. The Yemeni Reform Group refrained from putting up a candidate, and other opposition parties were unable to muster the 10 percent votes in parliament, which was needed to field a presidential candidate.
17. From a regional perspective, with estimated proven oil reserves and production levels in 1998–99 at 0.6 percent and 1.8 percent of the corresponding Middle Eastern totals, Yemen is a minor player in the oil market. The oil sector in Yemen is characterized by little government intervention and dominated by the presence of large international oil companies that manage exploration and production operations. Oil production began in 1987 in the Marib concession held by a consortium of companies (including Hunt, Exxon, and Yukong). In 1993 the second major block, Masila, operated by Canadian Occidental Petroleum (CanOxy), came on stream, giving a major boost to oil GDP growth (Table 1). As oil production continued to increase at an annual average of about 3 percent throughout the rest of the decade (Chart 1), Yemen's economy became highly oil-dependent. The share of oil in real GDP nearly doubled, from 10.7 percent in 1992 to 20.2 percent in 1999, and government crude oil export revenues as share of GDP increased eight-fold over the same period.
Table 1.Republic of Yemen: Selected Economic Indicators, 1990–99
Prel.
(Change in percent)
Production and prices
Nominal GDP at market prices 43.2 18.6 27.0 23.8 28.4 67.1 43.7 21.5 0.4 24.3
Real GDP at market prices … −2.1 4.8 0.4 −3.6 7.9 2.9 8.1 5.3 3.8
Real non-oil GDP … −1.5 8.0 −0.1 −9.6 5.5 0.5 8.2 5.9 3.2
Real oil GDP … −5.7 −15.9 4.3 43.7 20.0 13.5 7.5 2.7 6.2
Consumer price índex (annual average) 33.5 44.9 50.6 62.4 71.3 62.5 40.0 4.6 11.5 8.0
Crude export oil price (weighted average, US$ per barrel) 22.1 19.8 19.7 15.9 15.4 16.9 20.3 18.5 11.6 18.7
(In percent of GDP)
Total revenue and grants 19.8 23.J 16.1 14.9 12.8 19.5 35.9 32.8 26.4 31.8
Oil revenue 7.5 9.4 4.7 4.2 3.7 9.3 25.1 22.1 13.8 19.8
Non-oil revenue 11.2 12.6 11.1 10.5 8.9 9.8 10.5 10.1 12.2 11.1
Grants 1.1 1.0 0.3 0.1 0.3 0.3 0.3 0.6 0.4 0.9
Total expenditure 32.3 30.1 28.9 29.5 29.0 25.6 39.8 34.7 32.7 32.1
Current 23.6 26.1 25.5 26.0 26.4 22.5 33.2 27.9 26.6 26.5
Development 8.7 4.0 3.4 3.5 2.6 3.1 6.6 6.8 6.1 5.6
Overall balance including grants (cash basis) −11.7 −5.6 −11.7 −13.9 −15.7 −5.2 0.6 −1.8 −7.9 −0.4
Overall balance excluding grants (commitment basis) −13.6 −8.0 −13.1 −14.8 −16.4 −6.4 −4.2 −2.5 −6.7 −1.2
(12-month change in percent of initial broad money)
Monetary data
Broad money 35.1 18.8 27.6 35.4 34.7 20.4 8.6 10.7 11.7 13.8
Credit to nongovernment sector 36.4 21.5 7.2 15.8 69.0 28.0 −29.4 46.6 54.2 15.0
Benchmark deposit interest rate (percent) 6.5 6.5 6.5 6.5 6.5 20.0 25.0 11.0 15.0 18.0
Velocity (non-oil GDP/M2) 1.5 1.5 1.5 1.4 1.2 1.7 1.9 2.0 2.2 2.1
(In millions of U.S. dollars)
Exports, f.o.b. 1,384 1,197 1,095 1,167 1,824 1,937 2,263 2,274 1,501 2,466
Crude oil 1,203 1,011 819 834 1,615 1,735 1,976 1,945 1,229 2,131
Imports, f.o.b. −1,726 −1,897 −1,891 −2,087 −1,522 −1,948 −2,294 −2,407 −2,228 −2,440
Services (net) −739 −661 −852 −917 −475 −411 −370 −470 −398 −489
Private remittances and transfers (net) 1,241 1,078 1,071 1,067 1,117 1,104 1,188 1,256 1,254 1,314
Capital account (net) 356 88 −36 74 −641 −876 −397 34 −154 11
Overall balance −65 −803 −1,283 −1,008 −779 −38 −625 116 −463 320
Central bank own gross foreign reserves 2/ 424 680 323 147 357 525 937 1,152 853 1,351
In months of imports 2/ 2.8 4.2 2.2 0.9 2.9 3.1 4.6 5.3 4.2 6.0
As percent of base money 8.6 12.5 4.9 1.7 3.0 19.0 73.2 103.5 79.3 112.3
As percent of M2 6.8 9.2 3.4 1.2 2.1 12.5 48.8 53.7 41.7 62.7
Current account, including grants (in percent of GDP) −3.1 −10.7 −13.2 −16.1 5.6 2.8 1.7 0.3 −3.7 2.9
Current account, excluding grants (in percent of GDP) −4.4 −12.2 −13.8 −16.5 4.5 2.2 0.7 −1.0 −4.6 1.5
Debt service ratio, obligation basis 3/ 46.7 91.3 89.1 80.8 46.8 42.1 31.9 12.6 17.0 10.5
Official external debt, before rescheduling 3/ 9,915 10,323 10,541 10,735 10,876 11,017 11,135 5,359 5,373 5,490
(In percent of GDP) 105.7 129.5 127.9 138.5 167.1 170.1 173.2 81.2 85.3 80.4
Terms of trade (1996=100) 122.3 113.0 107.4 91.8 85.5 85.3 100.0 100.7 69.5 114.1
Exchange rate (free market, cop) (YRls/US$) 17.5 29.7 42.7 67.8 101.0 127.1 126.9 130.5 141.7 159.7
Real effective exchange rate (1996=100) 4/ … … … … … 76.2 100.0 109.7 119.5 107.1
Sources: Yemeni authorities; staff estimates and projections.
1/ EBS/99/98 (6/15/99).
2/ Gross reserves minus commercial bank foreign exchange deposits held with the central bank. Imports are for the current year, and exclude oil and gas sector imports. Short-term debt by remaining maturity; excludes private debt for which data is not available.
3/ Public- and publicly-guaranteed debt including central bank foreign liabilities. Debt service ratios in percent of exports of goods and services and reflecting reschedulings in 1996 and 1997 under the auspices of the Paris Club.
4/ Based on the free market rate.
Chart 1.Republic of Yemen: Crude Oil Production and Government Share 1/
(In millions of barrels per year)
Source: Ministry of Oil and Mineral Resources; Ministry of Finance, and staff calculations.
1/ Based on proven recoverable reserves as of end-1999; excluding natural gas reserves.
18. While exploration activity took place in Yemen as early as in the late 1930s, it accelerated in the 1970s when 8 agreements were signed with oil companies to conduct exploration, mostly in the Hadramout and Tihama areas. Between 1982 and 1991, Yemen signed about 10 additional exploration and production agreements,7 including agreements for the 5 currently producing blocks—Marib, Masila, Jannah, Shabwah, and Ayad. The contracts in each case were fairly similar. Exploration commitments were specified,8 in addition to cost oil percentages9 and profit sharing ratios, and signing bonuses were granted in most cases. The share of cost oil was usually around 30 percent, while profit sharing was on average about 20 percent for the company.10
19. Three agreements signed in the 1980s eventually led to oil discoveries, which was quite substantial in two cases.11 The remaining agreements for the currently producing blocks were signed in the early 1990s. In the early to mid-1990s, foreign interest in the Yemeni oil sector diminished, mainly due to the civil war and a relatively low exploration success rate (primarily because of geological difficulties). As the government realized that without additional foreign investment, oil production would decline in the near future; it began to offer better financial terms for interested oil companies and eased the terms of existing contracts on a case-by-case basis. A major change implemented in the contracts was allowing the share of cost oil to be periodically revised in light of movement in world oil prices.
20. To provide better incentives to oil companies investing in small fields, the Yemeni government renegotiated deals with NPC and CanOxy in 1995–96. The new financial terms allowed oil companies to recover their initial exploration expenses in a shorter period of time.12 For the new agreements signed in 1996 and onwards, the starting point for the sliding scale of the profit-sharing formula was increased from 20 percent to 30 percent, and the share of cost oil was increased from about 30 percent to 50 percent-75 percent. That share was to be decreased, however, once the oil company had recovered its initial costs and entered into the operational phase. As a result of these better terms, the number of new companies in the oil sector increased significantly. During 1996–99, 20 exploration blocks were awarded (Statistical Appendix Table 11). As of February 2000, more than 26 oil companies were conducting exploration operations in Yemen on a total of 30 blocks. Most finished their seismic surveys and were in the process of drilling exploration wells. More recently, the authorities moved away from their traditional approach of negotiating concessions on a bilateral basis and embarked in late 1999 on road shows in London and Houston, inviting a new round of bids for the development of seven blocks. About 15 companies seemed interested but none was ready to make a formal commitment, possibly awaiting important discoveries in the current exploration operations.
21. According to the Petroleum Exploration and Production Board, Yemen's remaining recoverable reserves stood at 2.8 billion barrels at end-April 2000, allowing for a production horizon of about 18 years at the current level of output.13 Yemen's oil production is expected to increase from an average of 389,000 b/d in 1999 to about of 450,000 average in the year 2000. The main increase is expected to come from the Jannah and Shabwah blocks where large investments in infrastructure are taking place. Unless relatively large new fields come on stream, however, oil production is expected to start declining from 2001 onwards at an approximate average rate of 3 percent as fields in both Marib and Masila start drying up.14
22. Yemen has two state-owned refineries in Aden and in Marib. The refinery in Aden was constructed in 1954 by British Petroleum and nationalized by the PDRY. It is currently entirely state-owned and operated by the Aden Refinery Company (ARC). Initial capacity was about 150,000–170,000 b/d, but obsolescence of its equipment and other inefficiencies had reduced the refinery's capacity to about 110,000 b/d by 1990, and it sustained further significant damage during the civil war in 1994. It only refines about 70,000 b/d currently, producing an array of petroleum products (including gasoline, fuel oil, kerosene, and diesel) mainly for the domestic market. The Marib refinery was constructed much later in 1986, in the Marib block, specifically to refine oil extracted there. It is operated by Yemen Hunt Oil Company. Its capacity is much lower 10,000 b/d; and it mostly supplies the local market.
23. Under pricing arrangements introduced in early 1999, refineries pay the international price for crude oil delivered out of the government's share in production (through the Yemen Oil and Gas Corporation) and charge the Yemen Petroleum Corporation (YPC) international prices for refined products.15 The Ministry of Finance transfers the difference to the YPC between its payments to the refineries and its sales (at administratively fixed prices for most products).
24. Progress on the renovation of the Aden refinery has been plagued with problems including disagreements over how much capacity to restore. In May 1998 the Council of Ministers approved, in principle, the privatization of the Aden refinery, and in January 2000 preparations for the privatization of the plant began.
25. The bulk of Yemeni crude oil production has always been exported which accounted for 80–90 percent of total exports over the period 1994–99 (Chart 2). Companies export their entire share, which has averaged about 43 percent of production in the second half of the 1990s; the government sells about two-thirds of its share abroad. The second half of 1999 was an exceptionally favorable period for the Yemeni government, as both the government's oil share and oil prices increased; the former was mainly due to high oil prices allowing the government to negotiate substantially lower than usual cost oil shares for the companies.
Chart 2.Republic of Yemen: Crude Oil Comparisons, 1990–99
(Comparing Yemen to other non-major oil exporters)
Source: Ministry of Oil and Mineral Resources.
26. Over the course of the decade, dependence on oil to generate exports and budget revenues has increased quite sharply in Yemen, also when compared to other non-major oil producing countries (Chart 2). By the second half of the 1990s, Yemen's dependence on oil exceeded, for example, that of Syria, and it has always been higher than Egypt's.16 A simple simulation exercise highlights the extent to which Yemen has become more vulnerable to oil price movements. Table 2 shows the effect of a unit decrease in the export price of crude oil on government and export revenues for the sample countries, assuming unchanged production levels and profit-sharing arrangements for each year. For example, an oil price lower by one U.S. dollar in 1999 would have resulted in a drop in budget revenues of 0.68 percent of GDP in Yemen, higher than those all other sample countries except Saudi Arabia; it would have also reduced exports by 1.67 percent of GDP, an impact considerably larger than the one for all other sample countries.
Table 2.Republic of Yemen: Sensitivity to Oil Price Changes, 1990–99(In percent of GDP)
(1) Effect of US$1-decreased in the oil export price on budget revenues 1/
Egypt n.a. −0.05 n.a. n.a. −0.12 −0.16 −0.14 −0.11 −0.31 −0.36
Iran −0.45 −0.44 −0.46 −1.51 −1.09 −0.98 −0.81 −0.81 −0.65 −0.67
Saudi Arabia −1.46 −1.74 −1.7 −1.71 −1.54 −1.43 −1.32 −1.57 −1.4 −1.12
Syria −0.26 −0.3 −0.34 −0.37 −0.28 −0.21 −0.37 −0.5 −0.76 −0.53
Yemen −0.23 −0.18 −0.08 −0.09 −0.2 −0.38 −0.69 −0.81 −0.71 −0.68
(2) Effect of US$1-decrease in the oil export price on exports 1/
Egypt −0.18 −0.31 −0.26 −0.28 −0.23 −0.22 −0.21 −0.18 −0.15 −0.11
Saudi Arabia −1.58 −1.88 −1.96 −2.33 −2.3 −2.02 −1.58 −1.54 −1.82 −1.48
Syria −0.72 −0.78 −0.92 −0.93 −0.81 −0.91 −0.83 −0.86 −0.88 −0.83
Source: Staff estimates.
1/ Assumes unchanged production and sharing patterns between the government and oil companies. Because of different classifications for each country, the results should only be interpreted as broadly indicative of trends.
27. More generally, Table 3 summarizes key volatility measures of oil-related macroeconomic aggregates for Yemen and a sample of countries from the region. Terms of trade volatility in the 1990s were much higher for oil exporters than for non-oil exporting countries in the sample, clearly due to the volatility in oil prices. Yemen's terms of trade volatility was similar to that of other oil-exporters in the region, but is associated with higher than-average income volatility. Indeed, in Yemen as in Iran, GDP volatility is not much below terms of trade volatility; while for Saudi Arabia and Egypt, GDP is far less volatile than the terms of trade.17 Yemen's terms of trade variability is also associated with relatively larger volatility of government revenues, compared to countries such as Syria and Egypt, and high oil price variability could, therefore, have a bigger negative impact on Yemen. In part, this reflects the fact that under the cost-sharing agreements with oil companies' oil revenues accruing to the government do not change linearly with oil prices. The lower the oil price, the more oil volume is necessary to pay for oil production costs and thus the lower the oil volume available to the government. Hence, falling oil prices also cause a fall in government oil volume. The opposite holds true for rising oil prices.
Table 3.Republic of Yemen: Oil-Related Volatility in the Economy, Comparing with Other Oil Exporters in the Region(In millions of Yemeni Rials)
Crude Export Price 1/
Terms of Trade 1/
Oil Exports, Share of GDP 2/
Budget Revenues from Crude Oil, Share of GDP 2/
Real GDP 1/
(Major Oil Exporters)
Saudi Arabia 0.17 0.16 3.7 4.7 0.05
Iran 0.18 0.2 3.7 5.5 0.12
(Other Oil Exporters)
Egypt 0.2 0.31 1.4 1.2 0.1
Syria 0.17 0.1 1.9 1.9 0.16
Yemen 0.18 0.17 11.6 5.2 0.1
(Non-Oil Exporters)
Jordan … 0.07 … … 0.15
1/ The volatility for crude export price, terms of trade, and real GDP was calculated as the standard deviation of the natural logarithms of the corresponding annual values over the period 1990–99.
2/ The volatility for the GDP-shares of oil exports and budget oil revenues was calculated as the standard deviation of the corresponding annual values.
28. Fluctuations in real gross domestic income (RGDI) are another way to capture the impact of oil price volatility on the Yemeni economy, adjusting fluctuations in real gross domestic product (RGDP) for terms of trade effects:18
RGDI = RGDP + ToT effect.
The terms of trade effect adjusts the volume of production, measured by RGDP, for changes in the purchasing power of income generated by such production.19 Simple calculations show that in 1990–99 the volatility of RGDI reached 0.23, more than the double of RGDP volatility. In 1998, following the large drop in oil prices, the 30 percent decline in the terms of trade for Yemen was associated with a 15 percent decline in RGDI; the 61 percent improvement in terms of trade in the following year led to a 59 percent increase in RGDI (changes in RGDP for these two years were 5.3 percent and 3.8 percent, respectively).
29. Growing budgetary vulnerability can be illustrated by recent episodes. The collapse in oil prices in 1998, for example, was accompanied by a dramatic decline in government export revenue from 15 percent of GDP in 1997 to 8.5 percent in 1998. In that instance, because of oil shares cost rising, the price decline was aggravated by a 17 percent reduction in the government share of the total volume of oil production. By the same token, with the rapid rise in oil prices and an increasing government share in oil production, in 1999 oil export revenues reached 12.7 percent of GDP. The 1998–99 swing in prices also pointed to costs in adjusting expenditures. With limited access to foreign financing, avoiding inflationary deficit financing requires sharp adjustments to expenditures in times of low oil prices. Much expenditure is already predetermined by long-term decisions and cannot be cut at short notice. In 1998, the government coped with the unexpected revenue shortfalls by stopping development projects on an ad hoc basis, not always reflecting spending priorities. Moreover, wage increases were delayed and granted only after the recovery of oil prices in 1999. While difficult to quantify, the economy likely suffered costs, such as the unavailability of unfinished schools and infrastructure as well as more indirect effects on investment and saving.
30. Yemen's proven natural gas reserves are about 15 trillion cubic feet,20 about one percent of the Middle East total. So far, only few facilities for recovering and utilizing associated gas have been installed. About 30,000 b/d equivalent of liquefied petroleum gas (LPG) are currently produced in the Marib block, fully covering domestic consumption.
31. After the civil war, the government signed a joint contract establishing the Yemen liquefied natural gas (LNG) Company—a partnership of Hunt, Exxon, Yukong, and Total of France—with the public General Gas Corporation of Yemen, which retained 26 percent of the venture. The LNG project stipulates the construction of: (a) a two-train liquefaction plant with a capacity of 5.3 million tons per year; and (b) facilities for supplying gas to local power stations and industrial factories. The initial expenditure is estimated at about US$2.6 billion, but could reach US$5 billion if the cost of shipping the LNG to foreign markets is factored in. In addition, a 100–250 million cubic feet per day capacity gas line is to be constructed to supply Sana'a with gas for local consumption, and the maximum possible volume of LPG is to be extracted as well for both domestic consumption and for export. The agreement between the government and the foreign companies with holdings in Yemen LNG would expire 25 years from the start of exports.
32. The launching of the LNG project has been delayed so far because of the lack of secured markets in which to sell the gas. The Asian crisis in 1997–98 temporarily dimmed the prospects of finding markets for LNG in the region, and—even with the upturn of the economic situation in Asia—Yemen faces strong competition from Oman and Qatar, which already have LNG infrastructure in place with room to expand existing plants, if necessary. However, despite the fact that no definite gas sales contracts have yet been signed, Yemen LNG recently decided to invite bids for the execution of the project (including the plant, pipeline, and long-lead items) starting in March 2001. Three years would be needed to complete the construction of the plant.
33. Of the many burdens unified Yemen inherited, the crushing external debt was among the heaviest. By the end of 1990, unified Yemen's medium- and long-term external public and publicly guaranteed debt amounted to an estimated US$9.9 billion (equivalent to 106 percent of GDP) of which US$6.4 billion (valued at the official exchange rate) was debt to the members of the former Council of Mutual Economic Assistance (CMEA) with Russia accounting for 97 percent of it.21 Yemen's debt service obligations for 1990 were estimated at US$696 million (47 percent of exports of goods and nonfactor services) on a commitment basis. However, the actual debt service payments were in the order of US$426 million as debt service to the former CMEA and certain Middle Eastern countries and financial institutions had been in abeyance since mid-1990 (Table 4).
Table 4.Republic of Yemen: Balance of Payments, 1990–99
Current account −292 −849 −1,091 −1,248 366 183 106 23 −230 195
Current account excluding oil company transactions −370 −669 −516 −520 375 −135 −143 −153 −541 −193
Goods and services −1,080 −1,361 −1.648 −1,837 −173 −422 −401 −602 −1,124 −464
Trade balance −341 −700 −796 −920 302 −11 −31 −133 −727 25
Imports, c.i.f −1,726 −1,897 −1,891 −2,087 −1,522 −1,948 −2,294 −2,407 −2,228 −2,440
Food −554 −550 −489 −499 −427 −687 −915 −916 −787 −807
Wheat and flour imports … … … … −274 −433 −617 −484 −374 −378
Services, net −739 −661 −852 −917 −475 −411 −370 −470 −398 −489
Income −454 −566 −514 −478 −579 −499 −682 −631 −359 −655
Oil company profits −284 −290 −265 −244 −393 −324 −543 −554 −301 −599
Interest income, net 22 25 17 6 4 16 29 47 40 43
Current transfers 1,241 1,078 1,071 1,067 1,117 1,104 1,188 1,256 1,254 1,314
Workers' remittances, net 1,071 841 989 1,013 1,043 1,064 1,123 1,157 1,191 1,223
Capital and financial account 356 88 −36 74 −641 −876 −397 34 −207 −74
Financial account excluding oil company transactions 84 −390 −754 −829 −657 −626 −123 109 −11 364
Oil sector direct investment, net −131 282 718 903 16 −218 −60 −138 −267 −319
Trade credits, net … −12 12 −51 29 36 104 −16 −117 −119
Medium- and long-term loans, net 84 −678 −762 −771 −685 −694 −521 −66 −64 27
Private capital, net … … … … … … 80 255 240 337
Errors and omissions 1/ −129 −42 −156 165 −504 655 −334 60 −27 199
Financing 65 803 1,283 1,008 779 38 625 −116 463 −320
Net reserves, officiai ami banks (increase −) −205 −358 380 99 −79 −713 −37 −297 317 −459
Official net reserves 44 −272 332 144 −149 −260 −294 −27 330 −467
Commercial banks net reserves −249 114 48 −45 69 −453 257 −270 −13 8
Memorandum items:
Current account including grants (percent of GDP) −3.1 −10.7 −13.2 −16.1 5.6 2.8 1.7 0.3 −3.7 2.9
Official grants (percent of GDP) 1.2 1.6 0.5 0.4 1.1 0.6 0.9 1.4 0.9 1.3
(Months of imports) 4/ 2.8 4.2 2.2 0.9 2.9 3.1 4.6 5.3 4.2 6.0
Official external debt 5/ 9,935 10,323 10,541 10,735 10,876 11,017 11,135 5,359 5,373 5,490
Official external debt (percent of GDP) 5/ 105.7 129.5 127.9 138.5 167.1 170.1 3 73.2 81.2 85.3 80.4
Debt service (percent of exports of goods and services) 5/
Obligation basis 46.7 91.3 89.1 80.8 46.8 42.1 31.9 12.6 17.0 10.5
Actual 28.6 17.9 17.2 13.2 3.3 6.6 8.7 10.3 14.0 8.3
Change in outstanding Fund credit (US$ millions), increase (+) … … … … … … 120.6 129.8 84.5 73.5
Sources: Central Bank of Yemen; and Fund staff estimates and projections.
1/ For the period until 1996, includes private capital.
2/ Represents full settlement of overdue obligations to non-Paris Club official bilateral creditors under discussion to ensure comparable treatment and commercial debt subject to IDA debt buyback.
3/ Includes central bank SDR holdings, foreign exchange held abroad, foreign securities, gold, silver, and foreign currencies, excludes commercial bank required foreign exchange reserves with the central bank against their foreign currency deposits.
4/ Imports are c.i.f. for current year and exclude oil sector imports.
5/ Public- and publicly-guaranteed debt including central bank foreign liabilities. Debt and debt service reflect the 1996 and 1997 Paris Club reschedulings, including the 80 percent upfront discount provided by the Russian Federation.
34. In 1991, the government began to explore the possibilities to normalize the arrears situation and to seek debt relief. Following the temporary interruptions in 1990, debt service payments to all regional multilateral institutions were resumed. The government's debt-servicing policy was to fully service its contractual obligations to international multilateral creditors and to give debt-servicing priority to those bilateral and regional multilateral creditors who continued to provide resources for development.22 For the former CMEA creditors, the policy was to seek a write-off of all obligations relating to the military debt of the former PDRY and a rescheduling of principal and a write-off of interest obligations on civilian debt.23
35. In 1993, Germany forgave Yemen's debt to the former German Democratic Republic (US$46 million), but there were no negotiations with Middle Eastern or other former CMEA countries, except Russia, to seek ways to address Yemen's external indebtedness. While an agreement was reached with the Russian authorities in early 1993 on the magnitude of the ruble stock of debt, differences persisted over the currency and exchange rate for valuing and servicing the debt. In the end of 1994, Russia offered to cancel Yemen's debt for a cash payment equivalent to 10 percent of the stock of debt outstanding plus the accumulated interest arrears valued at the loan contracting rate. While the Yemeni government wished to resolve the Russian debt issue, the financial resources available at the time or in prospect were not sufficient to meet those terms.
36. In 1994, all debt service to multilateral creditors became current despite shortfalls continued in debt service payments to bilateral creditors.24 By the end of 1995, Yemen's public and publicly guaranteed external debt (including capitalized interest) had risen to about US$11.0 billion, or 170 percent of GDP, of which US$6.8 billion was debt to Russia. Over the same period, the stock of official external arrears reached an estimated US$6.4 billion of which US$4.8 billion were arrears to Russia.
37. In February 1996, the government requested debt relief from the Paris Club creditors and intensified its efforts to reach an agreement on debt relief with Russia and other bilateral official and commercial creditors. On September 24, 1996, Paris Club creditors reached an agreement with Yemen on a flow rescheduling on Naples Terms.25 The debt relief applied to medium- and long-term public and publicly guaranteed external debt contracted before the January 1, 1993 cut-off date and entailed a 67 percent reduction in the net present value (NPV) of consolidated debt, encompassing outstanding debt service arrears as of end-August 1996 and obligations falling due during the September 1, 1996–June 30, 1997 period.26 This provided a debt service relief in the amount of US$93 million for the remaining months of 1996. The participating creditor countries also agreed in principle to consider the matter of Yemen's debt service payments falling due after June 30, 1997 and relating to loans contracted before January 1, 1993.
38. Following the September 1996 Paris Club meeting, the authorities communicated to all other bilateral creditors requests to negotiate debt relief on terms that would be at least as favorable as those granted by the Paris Club creditors. In particular, intense direct contacts with Russia were initiated in late 1996.27
39. On September 17, 1997, Russia reached an agreement with the Paris Club creditors on Russia's participation in the Paris Club and, in line with the provisions of the agreement, agreed to provide debt relief to Yemen on Paris Club terms. The agreement applied to the totality of Russian claims on Yemen, including capitalized interest, and, for the purpose of their treatment within the Paris Club, entailed an 80 percent up front discount to be applied at the date of the signature of an Agreed Minute.28 The Agreed Minute negotiated in November 1997 between Yemen and its Paris Club creditors (including Russia) provided a 67 percent NPV reduction of consolidated public and publicly guaranteed external debt contracted before January 1, 1993, and encompassing outstanding debt service arrears as of end-October 1997 (including late interest); principal due from November 1, 1997 up to October 31, 2000; and interest obligations (excluding late interest) falling due during the July 1, 1999–October 31, 2000 period.29 This provided an immediate debt relief in the amount of US$6.0 billion of which US$5.9 billion was for arrears reduction.
40. In addition, the authorities requested assistance under the IDA Debt Reduction Facility in executing buybacks of the remaining commercial debt, which had been in default since 1991. Yemen's total commercial debt eligible for the Facility amounted to US$695 million of which US$415 million consisted of principal and the rest of interest arrears. Of the principal, about US$342 million was owed to Russian creditors and the rest to creditors from 51 countries. Under the proposed buyback operation, all interest arrears were to be forgiven; the principal arrears were to be bought back at a fixed price after an initial reduction of 80 percent was applied to the stock of Russian commercial debt in line with the provisions of the September 17, 1997 agreement between Russia and the Paris Club on Russia's participation in the Paris Club.30 A grant in the amount of US$15.10 million was approved in November 1999 and a buyback offer for a payment of 10 cents per U.S. dollar of outstanding principal was launched.31
41. As a result of the multiyear debt relief provided under the 1997 Paris Club, rescheduling, Yemen's external debt burden was substantially reduced. The total official external debt declined from US$11.1 billion (173 percent of GDP) by the end of 1996, to US$5.5 billion (80 percent of GDP) by the end of 1999 while the stock of amortization and interest arrears was reduced from US$7.0 billion to US$1.2 billion.32 Over the same period, external debt service obligations declined from 32 percent of exports of goods and nonfactor services to 11 percent.
42. In early 2000, the government undertook a debt sustainability analysis (DSA) in collaboration with the Fund and Bank staffs. The analysis was based on the stock of public and publicly guaranteed external debt outstanding as of end-1999 and assumed a full use of traditional debt relief mechanisms, in particular, a stock-of-debt operation on Naples Terms in the near future. The results of the analysis indicate that Yemen's external debt position would remain sustainable over the medium term with the stock of debt and the ratio of debt service payments to exports of goods and nonfactor services projected to decline further (after taking into account expected new borrowing), to US$5.4 billion (64 percent of GDP) and 7.8 percent, respectively, by 2005; and that Yemen would not be eligible for special assistance under the enhanced Highly Indebted Poor Country (HIPC) Initiative.
43. The macroeconomic policy mix differed radically between the first and the second half of the 1990s. Unification of the YAR and the PDRY in 1990 joined two countries that already faced considerable macroeconomic policy challenges on their own in the late 1980s. The budget deficits of the YAR ranged from 15 percent to 20 percent in 1988 and 1989, of which about two-thirds were financed by the central bank, keeping inflation in double digits. In the centrally planned economy of the PDRY, the fiscal deficit reached over 50 percent of GDP in both 1988 and 1989, of which 25 percent to 30 percent were domestically financed.33 Unification added new problems which were related to the merger of the two civil services and tax systems as well as the large number of publicly operated enterprises in the southern governorates. Since unification had resulted from negotiation between two sovereign governments that received equal weight in the new joint government, many conflicts inherent in the different economic philosophies were resolved only after the civil war in 1994.34 The Middle East crisis of 1990 also added strains to both public and private financial balances in the early 1990s with the return of workers from neighboring countries and the drying up of most external financial assistance. Faced with financial crisis, following some early price liberalization efforts during 1990–91, the authorities' macroeconomic policy mix centered in the first half of the decade around attempts to manage financial imbalances through direct control of the economy, affecting in particular imports, exchange rates, interest rates, and investment. The attempt to defend nominal exchange rates led to a sharp appreciation of the real effective exchange rate in the first half of the 1990s (Chart 3). As it became increasingly clear that multiple exchange rates and foreign exchange controls exacerbated the negative impacts of external shocks, in 1993–94 the authorities took some partial steps to achieve positive real interest rates and more realistic exchange rates.
Chart 3.Republic of Yemen: Real and Nominal Effective Exchange Rate, 1990–99
Source: International Monetary Fund, Information Notice System.
1/ The weighted exchange rate was derived by applying assumptions on the shares of various external transactions taking place at either the parallel or the official exchange rates.
44. However, it was only, during the period 1995–99, that the implementation of the authorities' reform program, with assistance from the IMF and the World Bank, slowly transformed the economy into one of the more open and market oriented systems in the region. This process was supported by rising oil revenue and the return of internal and extenral stability. Efforts to improve fiscal balances were essential to these achievements, along with the adoption of a unified floating exchange rate system that helped to broadly stabilize the real exchange rate at levels well below the earlier peaks. However, the large swing in oil prices in 1998 and 1999 served as a reminder of the fragility of macroeconomic balances in a country that depends largely on revenue from crude oil exports. The government's ongoing reform program therefore aims at preserving a larger share of the oil revenue to cushion swings in oil prices, and enhancing growth of the non-oil economy by encouraging investment and improving education.
45. Between 1990 and 1994, limited efforts were made to address severe structural fiscal problems in Yemen. Large and rising implicit subsidies for domestic petroleum products and wheat imports weighed heavily on public finances, the customs base was eroding; and the collection of taxes on goods and services was declining as a percent of GDP (Charts 4-5). An already large civil service was afforded large wage increases, albeit below levels of rampant inflation. The resulting financial pressures motivated the maintenance of controls, which, in turn, further aggravated fiscal imbalances and deterred private sector activity. After 1994, the newly constituted government was thus left with a large backlog of economic reforms as well as the task of repairing the physical damage of the war and mending the rift between North and South.
Chart 4.Republic of Yemen: Government Revenue, 1990–99
Source: Data provided by the Yemeni authorities.
Chart 5.Republic of Yemen: Customs Revenue, 1990–99
46. The large fiscal deficits were at the core of the severe internal and external imbalances in 1990–94 (Table 1; and Chart 6). With the exception of 1991, the deficit on a commitment basis remained above 12 percent of GDP between 1990 and 1994. Because loan disbursements dried up almost entirely in the years after the Gulf crisis of 1990 and because the dissolution of the Soviet Union, these deficits were largely financed by the accumulation of external arrears, or were simply monetized, and inflation accelerated from 33 percent in 1990 to 71 percent in 1994.
Chart 6.Republic of Yemen: Fiscal Developments, 1990–99
47. Overall revenues dwindled from 20 percent of GDP in 1990 to 13 percent of GDP in 1994 (Table 5). Both declining oil revenue and declining tax revenue contributed to these developments. Oil revenues suffered from the decline in oil prices, the impact of the dual exchange rate system, and the rising importance of domestic refining. Oil and gas revenues, which by the time of unification were 7.5 percent of GDP and 40 percent of budget revenues, deteriorated after peaking at 9.4 percent of GDP in 1991. In 1994, oil revenues were only 3.7 percent of GDP, representing 30 percent of budget revenues. Some of the decline in oil revenue can be explained by the fall in oil prices from US$22 per barrel in 1990 to USS15 per barrel in 1994. In addition, oil production at Marib, Yemen's major field in the early 1990s; fell by 10 percent in 1992 following technical problems. The widening gap between the market-based parallel exchange rate and the official exchange rate also contributed to the decline of oil revenues as a share of GDP.35 Receipts were credited to the budget at the official rate and thus assumed a declining share of the overall economy, in which most other external transactions took place at the parallel rate. The revenue loss to the budget resulting from use of the official rate also implied subsidies for those products whose import was financed at the official rate, particularly wheat and petroleum products. The implicit subsidies, including those for domestic petroleum product sales, reached 13 percent of GDP in 1996. Finally, following the Gulf crisis, the government increased oil deliveries to domestic refineries to substitute for previously imported petroleum products. At the same time, domestic petroleum prices were increased by 30–50 percent in 1990. As a result, domestic oil revenues surged in 1991 and continued to exceed export revenues until 1994, when exports increased because the Masila field came on stream for its first complete year and the Aden refinery was damaged during the civil war, disrupting domestic deliveries. Because domestic petroleum prices remained unchanged during 1992–94, their value dropped to about 10 percent of international prices (evaluated at the parallel exchange rate), reflecting a rising subsidy for domestic consumption of petroleum products. This policy implied increasing incentives for smuggling, further eroding the oil revenue base.
Table 5.Republic of Yemen; Central Government Finance, 1990–99(In percent of GDP)
Total revenue and grants 19.8 23.1 16.1 14.9 12.8 19.5 35.9 32.8 26.4 31.8
Total revenue 18.7 22.0 15.8 14.7 12.6 19.2 35.6 32.2 26.0 30.9
Oil and gas revenue 7.5 9.4 4.7 4.2 3.7 9.3 25.1 22.1 13.8 19.8
Crude oil exports 4.9 3.7 1.6 1.5 3.1 6.5 14.1 15 1 8.5 12.7
Domestic oil and gas 1/ 2.6 5.7 3.1 2.7 0.5 2.9 11.0 7.0 5.2 7.1
Tax revenue 8.2 9.2 8.8 8.5 6.9 8.0 8.4 8.2 9.2 8.0
Direct 1.9 2.3 2.4 2.5 2.4 2.0 2.1 2.2 3.1 3.0
Indirect 6.3 6.9 6.4 6.0 4.6 6.0 6.3 5.9 6.1 5.0
Nontax revenue 3.0 3.5 2.3 2.0 1.9 1.9 2.1 2.0 3.0 3.0
Grants (cash) 1.1 1.0 0.3 0.1 0.3 0.3 0.3 0.6 0.4 0.9
Total expenditure and net lending 32.3 30.1 28.9 29.5 29.0 25.6 39.8 34.7 32.7 32.1
Current expenditure 23.6 26.1 25.5 26.0 26.4 22.5 33.2 27.9 26.6 26.5
Civilian wages and salaries 9.2 10.2 10.0 10.7 9.7 7.3 6.8 6.1 7.5 7.4
Materials and services 1.9 2.0 2.4 1.7 1.8 1.5 2.3 2.9 3.0 3.1
Development 0 and M 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.2
Agriculture and road maintenance funds 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.3 0.3 0.2
Defense 8.4 8.9 8.9 8.3 9.7 6.7 5.6 6.0 6.1 5.8
Interest obligations 2/ 2.4 2.9 1.9 2.6 2.9 1.5 3.3 2.3 3.7 4.1
Transfers and subsidies 1.7 2.2 2.4 2.7 2.3 4.9 14.6 9.3 5.2 5.1
Subsidies 0.0 0.0 0.0 0.0 0.0 3.4 13.0 7.7 3.0 2.5
Petroleum cash subsidies 1/ … … … … … 1.0 5.3 2.9 … 2.0
Wheat and flour subsidy 3/ 0.0 0.0 0.0 0.0 0.0 2.3 7.4 4.5 3.0 0.4
Financial support electricity 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.0 0.0
Current transfers 1.7 2.2 2.4 2.7 2.3 1.5 1.6 1.6 2.2 2.7
Other current expenditure 0.0 0.0 0.0 0.0 0.0 0.4 0.3 0.7 0.5 0.6
Development expenditure 8.7 4.0 3.4 3.5 2.6 3.1 6.6 6.8 6.1 5.6
Net lending 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Overall balance (commitment) −12.4 −7.0 −12.8 −14.7 −16.2 −6.1 −3.9 −1.9 −6.3 −0.2
Overall balance (commitment, excluding grants) −13.6 −8.0 −13.1 −14.8 −16.4 −6.4 −4.2 −2.5 −6.7 −1.2
Overall balance (cash) −11.7 −5.6 −11.7 −13.9 −15.7 −5.2 0.6 −1.8 −7.9 −0.4
Financing 11.5 6.0 11.9 14.1 15.8 5.2 −0.7 1.8 7.9 0.0
External (net) 2.7 1.6 0.2 0.2 0.1 −0.2 0.4 0.3 1.2 2.3
Domestic (net) 8.8 4.4 11.7 13.9 15.7 5.3 −1.1 1.5 6.7 −2.3
Bank 8.8 4.4 11.7 13.9 15.7 5.1 −1.5 −0.1 3.3 −4.4
Central bank 9.1 4.1 11.3 14.0 16.1 4.6 −2.5 −3.4 3.1 −4.8
Commercial banks −0.3 0.3 0.4 −0.2 −0 4 0.5 0.9 3.2 0.2 0.4
Nonbank 0.0 0.0 0.0 0.0 0.0 0.2 0.4 1.6 3.4 2.1
Pension funds 0.0 0.0 0.0 0.0 0.0 0.0 .0.0 0.0 3.3 1.2
Public enterprises 0 0 0.0 0.0 0.0 0.0 0.0 00 0.0 0.0 0.6
Others 0.0 0.0 0.0 0.0 0.0 0.2 0.4 1.6 0.2 0.3
Discrepancy −0.3 0.4 0.2 0.2 0.2 0.0 −0.1 0.0 0.0 −0.4
Primary balance (commitment) 4/ −11.2 −5.1 −11.2 −12.2 −13.5 −4.9 −0.9 −0.1 −3.0 2.9
Public sector savings 5/ −4.9 −4.1 −9.7 −11.3 −13.9 −3.3 2.4 4.3 −0.6 4.4
Non-oil balance (commitment, excluding grants) −18.5 −11.7 −14.7 −16.3 −19.6 −12.9 −18.3 −17.6 −15.2 −13.9
Tax revenue, as percent of non-oil GDP 9.5 10.2 9.5 9.0 7.4 9.3 11.5 11.4 11.0 10.7
Indirect 7 3 77 6.9 6.3 4.9 7.0 8.7 8.3 7.3 6.7
Taxes on goods and services 2.3 2.3 2.4 2.2 1.6 2.4 3.0 3.5 4.1 3.1
Custom duties, as percent of non-oil imports 12.3 15.4 11.1 10.3 4.4 67 94 9.3 8.7 7.5
Average oil price for government exports ($/bbl) … … … … 15.5 17.3 18.3 18.2 13.1 16.3
Net domestic oil revenue 6/ 2.6 5.7 3.1 2.7 0.5 1.8 5.7 4.1 5.2 5.1
GDP (at market prices in billions of YRls) 122.1 144.8 183.9 227.7 292.3 488.5 702.1 852.9 855.9 1,063.6
Social expenditures (in percent of GDP) 7/ … … … … … … 46 5 8 8.8 9.3
Sources: Ministry of Finance; Ministry of Planning; and staff estimates.
1/ 1990–95: Revenues net of subsidies.
2/ Profit transfers from the Central Bank of Yemen were netted out against interest payments to the CBY until 1998.
3/ Until the unification of exchange rates, subsidies were implicit by applying a preferential exchange rate to wheat and flour imports.
4/ Revenue excluding grants, net of expenditures excluding interest obligations.
5/ Primary cash balance excluding grants and development expenditures
6/ Domestic oil revenue net of cash petroleum subsidies.
7/ Comprises spending on wages, salaries, materials, services, capital in the education and health sectors, and spending by the social welfare fund.
48. The fall in indirect tax revenue as a share of non-oil GDP over time was partially compensated by rising direct tax revenue as a share of non-oil GDP. The latter reflected largely the rising government wage bill as a share of GDP and "bracket creep" in the progressive tax system in a high-inflation environment.
49. Public expenditures were dominated by the heavy weight of the civil service wage bill (Chart 6). Following unification, the public work force of the YAR and the PDRY were merged, and the pay scale in the South was adjusted to the higher level of the North. Moreover, many civil servants received allowances for moving from the former PDRY capital Aden to Sana'a, the former YAR capital and capital of the unified country. The government also reinstated a policy that guaranteed employment to all university graduates and employees of public enterprises. In 1991–94, the government afforded sizable pay raises to public employees, which kept the wage bill in the order of 10 percent to 11 percent of GDP.36 Between 1990 and 1993, the share of wages in total expenditures rose from 29 percent to 36 percent, largely at the expense of development expenditures whose share fell from 27 percent to 12 percent. Defense spending ranged between 8.4 percent and 8.9 percent of GDP between 1990 and 1993, with a sharp increase to 9.7 percent of GDP in 1994 due to the civil war. Moreover, many of the loss-making public enterprises relied on government transfers, reflected in the rise of current transfers from 1.7 percent to 2.7 percent of GDP between 1990 and 1993.
50. To contain the spillovers from the fiscal imbalances to the external account, the authorities maintained a "hybrid" exchange system involving a large and relatively free parallel exchange market—with occasional ad hoc attempts to tighten control over this market—and a highly administered exchange system for certain (including official) transactions (Chart 7) involving quantity rationing and a highly appreciated exchange rate (Section IV.A).
Chart 7.Republic of Yemen: Nominal Exchange Rates, January 1990–December 1999
Source: Data povided by the Yemeni authorities; and staff estimates.
51. Thus there was little scope to formulate an independent monetary policy in the period immediately following unification. Rapid expansion of net domestic assets was driven by the need to provide financing for the budget given the absence of nonbank financing.
52. Commercial banks were reluctant to lend to the nongovernmental sector due to the absence of effective recourse within the legal system for the timely recovery of overdue loans. Accordingly, banks preferred to deposit their resources with the central bank for on-lending to the government at a remuneration of 1.5 percentage points above the banks' average cost of funds.
53. The continued existence of separate interest rate structures after unification posed special problems for the monetary authorities. While the authorities were targeting a unified system based on the structure of the former market-based YAR, the National Bank of Yemen-the only commercial bank (state-owned) in the South-was allowed to set its own rates as an interim measure. The statutory interest rates that existed in this period were very low and highly negative real rates (Chart 8) discouraged the mobilization of savings, facilitated inefficient consumption investment choices, and added further pressures on the foreign exchange market. Indeed, the level of foreign currency deposits in 1992 doubled from the level attained in 1991, while Yemeni rial deposits increased by only 15 percent over the same period. Also, negative real interest rates continued to facilitate financial disintermediation, as the absence of controls in the parallel financial market for rials spurred growth in this market at the expense of the banking sector.37
Chart 8.Republic of Yemen: Interest Rates, 1990–99
1/ Nominal rates minus inflation (CPI).
54. During the period 1993–94, economic structures became more unified and conducive to national macroeconomic policy making, and the authorities increasingly recognized the need for strong corrective fiscal policy actions, establishment of positive real interest rates, and unification of exchange rates at a realistic level. However, initial reform efforts remained partial and extensive controls remained. In particular, the appreciation of the real effective exchange rate accelerated, undercutting efforts to contain fiscal and external imbalances. For example, faced with a growing gap between the free market parallel rate and various official rates in November 1994, the authorities introduced a "managed official parallel market rate" at YRls 84 per U.S. dollar, to be "guided" by a committee of moneychangers and commercial bank representatives under the supervision of the central bank, taking into account market indicators. This attempt to manage the parallel market failed, however, and already by end- 1994, the unofficial parallel market rate depreciated to YRls 100 per U.S. dollar.
55. To allow a greater role of market forces in financial intermediation, the authorities took some steps to improve the competitiveness in the banking sector. First, they adopted a more liberal policy towards licensing of branches of banks, removing the monopoly of the National Bank of Yemen in the south. Second, the central bank began strengthening prudential regulation and supervision (Section IV.F). In particular, the banking system's vulnerability to exchange depreciation had to be addressed to prepare for liberalization of the exchange rate. The largest commercial bank, the Yemen Bank for Reconstruction and Development (YBRD) had built up sizable foreign currency deposits, but its net foreign assets position was negative. Unification of the exchange rate at a realistic level would thus trigger large valuation losses. This bank's problem was addressed by the government's assignment of most of this debt to public sector enterprises for which the (foreign) credits had been opened, shifting the vulnerability to the corporate sector. The foreign liability position of the central bank was also large, mainly reflecting deposits from foreign governments prior to unification, outstanding liabilities related to oil imports, and short-term liabilities to foreign banks.
56. A new phase of post-unification macroeconomic policy making began in early 1995. By this time, the political situation had stabilized and the new government embarked upon a macroeconomic adjustment and structural reform program with support from the World Bank and the IMF. The program included strong fiscal adjustment measures, liberalization of most interest rates, and reform of the exchange rate system, including in 1996 the elimination of the official exchange rate and unification of exchange rates at the free market level, and the adoption of a floating rate regime.
57. Fiscal improvements during the second half of the 1990s were the basis for the gradual return of some measure of macroeconomic stability to Yemen. Integrating the official and parallel exchange rates helped reduce the subsidy bill and, combined with rising government oil exports, strongly boosted revenues. As a result, the fiscal imbalance declined from 6 percent of GDP in 1995 to 2 percent in 1997. However, as a stark reminder of Yemen's oil dependence, macroeconomic stability suffered a blow in 1998 with the collapse of oil prices, and the budgel deficit rose to 6 percent of GDP. The reverse outcome could then be observed in 1999 when a surge in oil prices led to a balanced budget and a substantial strengthening of the external position.
58. Total revenues increased from 19 percent of GDP in 1995 to 32 percent in 1999, in large part due to improving oil revenues. Following the enforcement problems of the 1994 civil war, the government also improved its tax collection and introduced several simplifying reforms to tax and customs laws, which contributed to a rising ratio of tax revenues to non-oil GDP.38
59. Rising production and prices as well as the stepwise unification of exchange rates in July 1996 raised oil export revenue accruing to the budget from 3 percent of GDP in 1994 to 15 percent of GDP in 1997. The government's crude oil volume available for domestic deliveries and exports almost doubled between 1993 and 1997, partly because overall production rose and partly as investment costs had been recouped by concession holders, reducing the companies' share in production. Moreover, the stepwise adjustment of the official exchange rates to the parallel market rate substantially raised the value of oil revenue recorded in Yemeni rials while eliminating the implicit subsidization of certain economic activities resulting from preferred access to foreign exchange.
60. Domestic oil revenues increased from 3 percent of GDP in 1995 to 7 percent of GDP in 1999. Exceptionally high domestic revenues in 1996 resulted from a settlement of excess cost recovery charges with an oil company yielding 2.3 percent of GDP, as well as rising international prices and the integration of the exchange rates. While the unification of exchange rates removed one source of implicit subsidization, the transactions between the government, oil refineries, and distributors remained opaque and involved nonmarket-based transfer prices and free inputs. Only in 1999 was pricing of all wholesale transactions moved to be based on world prices.39 Therefore, the domestic revenues have to be evaluated together with the subsidy payments to receive a clear picture of domestic efforts. As shown at the bottom of Table 5, the resulting measure of net domestic oil revenue rose steadily over time.40
61. Tax revenue rose strongly to 11.5 percent of non-oil GDP in 1996, but then began to erode slowly, reaching 10.7 percent of non-oil GDP in 1999. The initial strengthening of tax revenue was a consequence of exchange rate unification, economic recovery, and several tax reforms undertaken in 1995 and 1996 (Section IV.B). Higher exchange rates applied to import valuation; the recovery of the economy that was followed by higher import volumes, and the simplification of the tariff structure with concomitant improvements in customs administration led to a rebound of customs revenues to more than 9 percent of non-oil imports in 1996. Taxes on goods and services also benefited from higher economic activity, a widening of the tax base, and higher tax elasticity after some specific taxes was replaced with ad valorem taxes. Direct tax revenues rose with a simplification of corporate rates at 35 percent. After 1996, direct taxes and—until 1999—taxes on goods and services continued to rise faster than non-oil GDP, but the decline in customs revenue pulled down overall revenue growth. Direct taxes benefited from the rising share of government wages in GDP, improving business income tax revenue after the 1996 rate unification, improving economic conditions, and an increase in top tax rates in 1999. Taxes on goods and services grew strongly after their base was broadened in 1996 but fell as a share of non-oil GDP after the 1999 tax amendments changed a number of tax rates. The poor performance at customs likely reflects the rising importance of smuggling, continuing weaknesses in administration, and to a certain extent elimination of import surcharges in 1998.
62. Large swings in expenditures were driven by the move to unify exchange rates and related subsidy reform. After the unification of exchange rates over 1995–96, the implicit subsidy through below market foreign exchange rates was replaced by explicit cash subsidies for wheat, flour, and petroleum products. In 1996, these subsidies rose to 13 percent of GDP because of a widening gap between domestic and international prices. In later years, these subsidies declined when domestic prices were moved closer to world market prices, and wheat and flour subsidies were eliminated entirely by mid-1999 (Section IV.C). The civil service wage bill declined to 6 percent of GDP in 1997 as wage increases were kept below inflation and despite rising currency costs for foreign workers (mainly teachers) paid in foreign exchange. However, following large wage increases in 1998–2000, the civil service wage bill has recently been on the rise again. These wage increases largely reflected the implementation, phased over three years, of a teachers' law passed by parliament in 1998 that granted 100 percent wage increases to workers in the education sector, where the majority of civil servants work. Similar wage increases were granted to health workers. Defense spending declined from 6.7 percent of GDP in 1995 to less than 6 percent in 1999. Development expenditures doubled as a percent of GDP in 1996, but were cut back in 1998 and early 1999 after the fall in oil prices.
63. The financing of the government deficit through central bank credit remained a critical source of macroeconomic instability. Although disbursements of foreign grants and loans in the order of 2 percent of GDP resumed in 1996, the government continued to face large amortization obligations and, hence, net external financing remained small until rescheduling agreements were reached with Paris Club creditors in 1996–97. To develop sources of noninflationary financing and deepen the financial system, a market for treasury bills was introduced in 1995 and the central bank subsequently closed its term deposit facility for banks and for pension funds to channel resources into this market (Section IV.F). Thus, in 1996 and 1997, the government reduced its indebtedness to the central bank, financing deficits with accumulation of arrears to wheat importers, as well as increasing treasury bill sales to commercial banks and nonbank. However, as oil revenue shrank dramatically in 1998, the government had to borrow 3 percent of GDP from the central bank, and the concomitant expansion in money supply resulted in an immediate spurt of inflation. Fortunes were reversed in 1999, and inflation rates fell when rising crude oil revenues led to a balanced budget, permitting the government to reimburse almost 5 percent of GDP to the central bank.
64. The use of monetary policy instruments became more flexible, responding to macrofinancial conditions. In the context of the reform program, in 1995 the central bank unified the reserve requirement at a rate of 25 percent, without remuneration, for all rial deposits to be lowered to 15 percent in December 1996 and to 10 percent in December 1997. A rate of remuneration of 5 percent on these deposits was initiated in December 1996, and rose the following year to the same level as the benchmark deposit rate. In December 1997, the reserve requirement on foreign currency deposits was lowered from 25 percent to 15 percent, and the rate of remuneration was set at half of a percentage point less than the rate received on the central bank's deposits abroad. The higher reserve requirements for foreign currency deposits and the much lower rate of remuneration on these deposits reflected the central bank's objective to stem the trend of increasing dollarization of the economy and to enhance the attractiveness of the rial as a store of value; undoubtedly, such discriminatory measures induced capital flight. The effectiveness of reserve requirements as an instrument of monetary policy might have been hampered by the less than full implementation of the penalties for shortfalls. While the central bank can impose a maximum daily penalty of 5 percent, in practice this figure lies in the 0.5–2.0 percent range. The central bank has used credit ceilings as an instrument of monetary policy in the early post-unification period, but this instrument was hardly effective then and subsequently lost all importance.41
65. Two sharp real exchange rate depreciations took place in early 1995 and mid-1996 (Chart 3). While the latter reflects the nominal depreciation that occurred at the time of unification of the exchange rates, the former was the result of a partial reform of the exchange rate system implemented at the time, including the elimination of special official rates and the depreciation of the only remaining official rate from YRls 12 to YRls 50 per U.S. dollar.
66. With the authorities' move to a floating exchange rate system throughout the period, the rial broadly stabilized in real effective terms; some small appreciation in real terms between end-1996 and end-1999 partly reflected a reluctance to tolerate substantial variability in the exchange rate. Indeed, exchange rate stability remains, in the eyes of the public, the main yardstick for the success of government policy. Accordingly, through interest rate policy, moral suasion, and the regular auctioning of foreign exchange to moneychangers and banks, the central bank attempted to stabilize the exchange rate in times of turmoil. In part, intervention reflected also an attempt to smooth sharp seasonal peaks in demand for foreign exchange (especially around the Ramadan and Hajj seasons), given the limited depth of the private market. For example, reflecting the impact of low oil prices on macroeconomic performance in 1998, the central bank employed its limited monetary tools to ease the pressure on the exchange rate. It raised the official benchmark interest rate (up to 3.5 percent in real terms) and removed remuneration on foreign currency deposits at the central bank, but still had to spend half of its reserves to limit exchange rate depreciation during 1998 to 7 percent against the U.S. dollar. Only in early 1999 did the authorities allow a faster rate of depreciation, coupled with further interest rate tightening.
67. In light of sharply improved macroeconomic balances in the latter half of 1999, the Central Bank of Yemen (CBY) initiated a gradual lowering of benchmark interest rates. As a result, the real effective exchange rate showed a modest depreciation in 1999, reversing some of the appreciation of 1998.
68. For oil exporting countries, an added complexity of fiscal policy involves the management of finite oil wealth. Yemen derives a significant share of government revenue from oil exports and oil-related economic activity. Unless further exploration activities result in new discoveries, most of the country's proven recoverable oil resources—estimated at 2.8 billion barrels in April 2000—will be depleted within 18 years.42Chart 1 presents the amount of crude oil accruing to the government after subtraction of cost oil and the oil producer's share between 1990 and 2020. Under these projections, the government's crude oil share will peak in 2000 and drop steeply after 2009 with the exhaustion of the Marib field. Unless revenue from the non-oil economy replaces oil revenue in future years, achieving long-run sustainability implies saving a portion of today's oil revenue in the form of financial assets, human capital, or infrastructure. In practice, it is highly uncertain whether spending oil wealth on education and infrastructure will boost growth sufficiently for the tax revenue generated from additional growth to sustain government spending.43
69. Fiscal policy decisions must rely on an estimate of oil wealth, i.e., the present value of all future government revenues generated by extracting crude oil. However, calculating oil wealth at any given point in time is subject to considerable uncertainty. It depends notably on a forecast of future oil prices, oil production, and interest rates. Oil prices change in unpredictable ways. Statistical tests of their movements generally have difficulties rejecting the hypothesis that oil prices do not systematically return to a long-run average and that the current price is the best predictor of future prices.44 As a result, small changes in the current price could lead to large changes in estimated oil wealth because price changes today would lead to revisions in all future prices. New information on oil reserves, extraction rates, and discount factors as well as new technology developments also affects oil wealth and permanent income estimates. Therefore, oil wealth estimates underlying long-run policy decisions must be adapted frequently to new information regarding prices, oil reserves, crude oil extraction rates, and long-run interest rates.
70. A simple rule to ascertain the long-run sustainability of consumption out of oil wealth45 can be derived from the permanent income theory of consumption. It would prescribe that each period governments should consume at most the real interest they receive on their total wealth.46 From the perspective of consumption possibilities, the permanent income model treats oil wealth and other forms of wealth as equivalent. Hence, consumption in excess of permanent income would result in a decline in total wealth over time. In more practical terms, this concept of government wealth would proxy the ability of governments to sustain current levels of spending in real terms. Preserving wealth thus means preserving the ability to deliver to future generations the same level of public services (health, education, etc.) available to the current generation.
71. The permanent income framework can be extended to account for growth of the population. Yemen's population growth exceeds 3 percent. If the government aims at preserving wealth per capita, it must adjust its consumption for the expanding population. The reason for maintaining per capita wealth is that it allows keeping the same per capita income stream over time and thus constant per capita government expenditures. Assuming a population growth rate of 3 percent, the government needs to save an additional 3 percent of wealth each period to keep per capita wealth at the same level. Returning to the example above, at a 4 percent real interest rate with a population growing at 3 percent, Yemen should consume only 1 percent of wealth and save the remaining 3 percent interest earnings to keep per capita wealth constant.
72. Apart from oil and financial assets, the non-oil sector provides an additional source of income for the government. Revenue generated by an expanding non-oil sector per capita could over time replace revenue from exploiting oil. In allocating consumption over time the government should thus take into account the expected future growth in non-oil revenue. However, additional non-oil revenue must be generated by growth in per capita non-oil GDP, not by increasingly heavier tax burdens. The latter would not reflect growing overall resources but simply change the distribution of wealth between the public and the private sector. Potential growth of the non-oil sector could be driven by investment into infrastructure or human capital, as well as increased factor productivity. However, as outlined earlier, such investment would have to generate tax revenue sufficient to replace oil revenue in order to sustain fiscal spending. Since the indirect impact of infrastructure and human capital investment on tax revenue is difficult to ascertain, the subsequent discussion is largely limited to the conversion of oil wealth into financial wealth.
73. To analyze past Yemeni fiscal policy from an intertemporal perspective, a few calculations based on a permanent income framework assessing sustainable consumption if the government were to keep per capita wealth derived from oil constant over time are presented below. These calculations do not consider how future growth of non-oil GDP per capita could enhance the government's revenue base, and thus may understate sustainable consumption.47,48 Optimal consumption is derived in each year (starting 1990) for the current and future years assuming that oil prices remain constant at current levels. For example, the optimal consumption level out of oil wealth for 1998 is derived under the assumption that oil prices from 1998 onwards remain at US$11.90 per barrel, Yemen's 1998 average oil export price. This assumption corresponds to the hypothesis that the current price is the best predictor of future prices, i.e., oil price shocks are permanent. Furthermore, the calculations assume that the amount of proven recoverable reserves as estimated today (2.8 billion barrels) constitutes total oil wealth. Other important assumptions are a 4 percent real interest rate and a population growth rate of 3 percent in 1999 declining to 2.5 percent in 2005 and 1.5 percent in 2050. The calculations also incorporate Yemen's initial net financial wealth, which is assumed to be equivalent to its foreign indebtedness. Under these assumptions, oil wealth at the beginning of 1999 stood at about 280 percent of the 1999 GDP, or USS1,080 per capita. Net total wealth, after subtracting external debt, was US$13.3 billion or USS765 per capita.
74. The calculations show that the level of consumption out of oil wealth as a percent of GDP consistent with preserving oil wealth per capita in the early 1990s was virtually nil. It would have been necessary to save almost the entire oil revenue to preserve wealth per capita because population growth rates partly reflecting the return of expatriates, were high and close to the assumed real interest rate of 4 percent. Moreover, the country entered unification with a debt stock of roughly US$11 billion. As a result, sustainable consumption of oil wealth was only between 0.1 percent and 0.5 percent of GDP. The rescheduling agreement of 1996 reduced external debt by about one-third and, together with declining population growth rates and somewhat higher oil prices, permitted higher consumption out of oil wealth after 1996. Sustainable consumption levels rose to 1.8 percent of GDP in 1997. However, the example of 1998 clearly shows that revaluing oil wealth with current prices would necessitate large adjustments of consumption levels. The fall in oil prices in 1998 resulted in a drop in oil wealth because future production is evaluated at current prices, and sustainable consumption fell from 1.8 percent of GDP in 1997 to 1.0 percent of GDP in 1998. Hence, following the permanent income rule would result in sizable fiscal adjustments. Under 1999 oil prices, oil wealth consumption of 2.4 percent of GDP would be sustainable. This level would rise to about 3.5 percent in the long run with the assumed decline in population growth rates to 1.5 percent.
75. The calculation of sustainable consumption out of oil wealth raises the question of how the government's actual policies stacked up against that benchmark. For that purpose, budgetary outcomes must be translated into consumption out of oil wealth. The government budget constraint can be summarized as follows:
ORt + TRt + rAt−1 − Ct − It = At − At−1
where OR stands for total value of oil production accruing to the government, TR for tax revenue net of transfers (such as subsidies), A for net financial wealth, C for government consumption, and I for government net investment after subtracting the depreciation of existing capital. Transfers must include the subsidies for domestic petroleum products implied by charging less than world market prices, even if the latter do not appear directly in the budget.49 Moreover, investment figures must be adjusted for assumed depreciation. The equation can be re-written as:
TRt − Ct + rAt−1 = At − At−1 + It − ORt;
that is, government non-oil savings (left side) equal the change in total public wealth (including financial wealth, infrastructure, and "oil in the ground").
76. Hence, if non-oil savings were zero, total wealth would be unchanged—as prescribed by the permanent income framework for the case of zero inflation and zero population growth. Positive non-oil savings would be required for a growing population. The major difficulty in applying the above concept lies in estimating net investment because depreciation levels are unknown. To overcome this problem, only two extreme cases are discussed, providing upper and lower bounds. The first assumes that depreciation equals investment (zero net investment), the second that depreciation is zero (gross investment equals net investment).
77. In the event, consumption out of oil wealth was much higher than can be sustained between 1990 and 1999. As presented in Chart 9, the difference between the optimal government non-oil saving and the actual such balance was large, between 10 percent and 25 percent of GDP. The results indicate that, under the assumptions made, Yemen has spent on average each year in the order of 10 percent to 25 percent of GDP more than can be sustained, and that up to today oil revenue has not been converted into sufficient amounts of wealth to sustain expenditure, even if all development expenditure are counted as net addition to wealth.
Chart 9.Republic of Yemen: Oil Balances and Wealth, 1990–99
Sources: Data provided by Yemen authorities; and staff estimates.
78. The analysis above is subject to great uncertainty regarding future oil and gas resources, as well as the general assumptions of the analysis. Yemen still has unexplored territory and future technologies could render currently inaccessible reserves available. Moreover, the large proven gas reserves, which could last for at least 25 years of LNG production exceeding 5 million tons annually, could prove another important source of revenue. However, developing the capacity to produce LNG is expensive and may produce limited revenue for the government until potential investors in the suggested LNG project have recouped their costs. Another uncertainty surrounds non-oil growth and growth strategies: the analysis implicitly assumes that the return to the government from investing in financial assets will be higher than returns from investing in other assets. It ignores the fact that some of the government consumption, especially in health and education, has contributed to build human capital and thus potential future non-oil growth. This, in return, could boost future government revenues from the non-oil economy. Similarly, structural reforms may eventually bring about positive TFP growth. However, despite increasing budgetary allocations to the education sector, the limited progress in improving social indicators and low non-oil per capita growth may indicate that too much oil wealth has thus far been used to support current consumption rather than the building of human or physical capital.
79. In the 1960s, the end of the reign of the Imam in the North of Yemen brought about the establishment of a republic which took first steps to introduce a modern market-oriented commercial and civil law; at the same time, the socialist government that took power following the end of the British mandate in the South established a legal regulatory system based on central planning and extensive government control over production. Thus the unification of the country in 1990 led to the unification of two very different legal systems. The product was the establishment of a complex and at the same time ineffective regulatory environment, combining elements of modern western law with sharia and tribal law, and at the onset of the 1990s an array of controls covered all economic sectors. For a large set of commodities prices were administratively fixed by the government, with the purpose of ensuring low basic consumer and input prices and to suppress inflation.
As discussed in Section III, multiple exchange rates and interest controls were in place, the latter mainly to control credit in the economy. Quantitative trade controls, such as bans and licensing, were used to protect domestic agricultural and industrial activities, while export bans (mainly on fish and unprocessed leather) aimed to maintain supply at low prices. Other laws allowed the government to enforce domestic and external trade monopolies. The Agencies Law and the Trade and Supply Law effectively protected certain monopolistic activities and the government-tolerated private monopolistic structures for example, the trucking carte] (Ferzah), a shipping agents' cartel in Aden—or even supported such practices through entry restrictions in various forms. The Investment Law gave the government discretion to approve projects as well as wide-ranging control over implementation. This economic and legal environment failed to attract much investment, especially foreign investment. Hence an important component of the reform program of 1995 was regulatory reform.
80. On July 1, 1990, the exchange and trade systems of the former PDRY and YAR were unified using the system of the former YAR; the latter system was adopted for the Republic of Yemen. However, as part of an attempt to contain growing financial imbalances through administrative controls, a complex system of segmented foreign exchange markets, ad hoc administrative measures aimed at curbing "speculative" activity, and wide-ranging trade restrictions were maintained through 1995.
81. At the time of unification, the foreign exchange market in Yemen was comprised of official and parallel markets. The official market was limited to government external transactions and covered crude oil and petroleum products, official receipts and payments, and external debt service payments. The official exchange rate applied to the allocations of foreign exchange by the CBY to the private sector for imports of wheat, flour, rice, and LPG under government tender, as well as for special purposes such as officially approved medical treatment or study abroad. The CBY prepared indicative foreign exchange budgets in parallel with commodity budgets prepared by the Ministry of Supply and Trade. All other external transactions occurred through the parallel market, which was operated by moneychangers and did not have a legal status until January 1, 1993. At that time a law was enacted establishing regulations for money changing operations including licensing, capital, and reporting requirements, and which assigned oversight powers to the CBY.50
82. Commercial banks operated in the foreign exchange market only as agents of the CBY and were permitted to buy or sell foreign exchange only for the accounts of their customers with the CBY, opening foreign currency accounts for residents and nonresidents only subject to a long list of restrictions on the sources and uses of funds.
83. Commercial banks were prohibited from participating in the parallel market or from transacting with each other in foreign exchange, and were required to use the official exchange rate for accounting and foreign exchange transactions with their customers.
84. At the time of unification, the exchange rate in the parallel market was YRls 13 per U.S. dollar compared to YRls 12 in the official market. On April 1, 1991, the exchange rate for imports of wheat, flour, and rice was increased to YRls 16; on January 1, 1992, the customs valuation rate for all imports (except petroleum products, wheat, flour, and at that time rice) was increased to YRls 18; and on May 1, 1992, an incentive rate of YRls 18 was introduced for purchases of rials by bilateral and multilateral assistance agencies and foreign embassies, as well as for imports by the government and public sector enterprises, all of which constituted multiple currency practices.51 On November 15, 1994, the parallel market oversight committee introduced an "official" parallel foreign exchange market for purchases of foreign exchange for self-financed imports with the exchange rate of YRls 84.52 The CBY enforced the official parallel market rate by mandating that commercial banks could open letters of credit only if the importer provided documentary evidence that the foreign exchange was purchased at the official parallel rate. By the end of 1994, the free market rate had depreciated by 700 percent compared to May 1990 and stood at YRls 103. In early 1995, the main official exchange rate was devalued to YRls 50 (from YRls 12) while the free market rate depreciated further to around YRls 125. To limit the depreciation of the free market rate, the CBY from time to time suspended the operations of moneychangers, pushing foreign exchange transactions in the parallel market underground.
85. The exchange system was free of surrender requirements or taxes and subsidies on purchases or sales of foreign exchange and, with the exception of local payments for hotel bills and airline tickets by foreign nationals which must be made in foreign currency, there were no prescriptions of currency requirements.
86. In January 1996, the authorities began a two-staged process of unification and liberalization of the foreign exchange market. In the first stage, the official exchange rate was devalued from YRls 50 to YRls 100 per U.S. dollar and all other official rates were eliminated (Chart 7). This rate continued to apply only to budget accounting, customs valuations, and transactions between the CBY and the Ministry of Finance. Commercial and specialized banks were allowed to fully participate in the parallel market, and foreign exchange regulations were amended to eliminate provisions inconsistent with free market operations. The exchange restriction entailing the prohibition on the issuance of letters of credit unless the foreign exchange was purchased in the official parallel market was eliminated, and the opening of letters of credit for public sector enterprises and purchasing of foreign exchange from foreign oil companies was shifted from the CBY to commercial banks. The government also eliminated the multiple currency practice related to wheat and flour imports by delinking the subsidy payment from the foreign exchange transaction.53
87. Following a short transition period under a dual rate system, full exchange market unification was implemented on July 1, 1996, and an independently floating exchange rate regime was adopted. All government and CBY transactions, including customs valuations, began to use the unified market rate thus completing the second liberalization stage by August 1, 1996. Finally, in December 1996, Yemen formally accepted the obligations under Article VIII, Sections 2, 3, and 4 of the Fund's Articles of Agreements, and since then has maintained an exchange system free of exchange restrictions on current or capital account transactions.
88. The CBY is empowered to conduct exchange rate policy, and aims to maintain an independently floating exchange rate regime by limiting its interventions in the foreign exchange market to smooth volatility. If the CBY had intervened in the market between 1996 and early-2000 (virtually always as a seller), it would have invited open bids from commercial banks and large moneychangers to buy dollars, and it would have sold to the highest bidder.
89. The Moneychangers Section of the central bank is responsible for the licensing and inspecting of moneychangers. The number of licensed moneychangers has declined from 260 in 1996 to 170 at present, of which 71 are located in Sana'a. A handful of large moneychangers account for up to 90 percent of total transactions in the market. Moneychangers are not part of the banking sector and their balance sheets are not included in the monetary survey, although their foreign exchange and rial accounts with commercial banks are. Moneychangers are supposed to report their transactions volume to the central bank, but currently less than one-fifth complies. Some of the moneychangers who have significant capital are reportedly involved in informal deposit taking and lending operations, which are not legal; it is also not usually recorded. The interest rate charged by moneychangers is estimated to have a premium of up to 15 percentage points over the lending rate quoted by commercial banks.
90. No firm data are available on the average daily volume of transactions in the foreign exchange market, but the underlying transactions for private current account activities are estimated by the CBY to be in the order of US$1.0–1.5 billion annually on both the buy and sell side. A fully functioning interbank wholesale market encompassing both spot and forward transactions among banks and moneychangers has not yet developed.54 The retail spot market continues to be centered largely on moneychangers, which provide easy and efficient transactions with very narrow spreads. According to CBY estimates, moneychangers account for about 60 percent to 70 percent of all transactions in the foreign exchange market, while the commercial banks account for the rest. Currently there is no clearinghouse for foreign exchange transactions, but commercial banks are considering establishing one as noncash instruments would grow in importance, which would shift the balance in favor of commercial banks and away from the moneychangers.
91. All transactions, including those for budget accounting purposes, use the market rate, although not all supply and demand for foreign exchange is channeled through the exchange market; certain transactions go through the central bank. The transactions that go directly through the CBY include mainly oil export proceeds, foreign loans and grants, and public sector debt service payments thus affecting the foreign exchange reserves of the CBY rather than the market rate. The CBY publishes its daily rate by calculating an average from a sampling of rates from a group of the large moneychangers and commercial banks; the CBY then uses this rate for its official transactions such as government debt service and budget accounting. Individual commercial banks usually call large moneychangers to sample the market rates that day and refer to them for their own transactions.
92. Both foreign and domestic banks are allowed to freely conduct all foreign and domestic currency operations. Effective January 15, 1996, commercial and specialized banks were required to observe prudential regulations regarding currency exposure and to begin reporting their positions. The open positions (both oversold and overbought) are limited to 25 percent on all foreign currencies and 15 percent on one currency. Banks report their daily open positions to the CBY at the end of each week, although the central bank only checks the last day's position against the limit.
93. Upon unification, the foreign trade regime (adopted from the former YAR) was inward-oriented and was characterized by import prohibition (through a positive import list), licensing, and a mean nominal tariff in the order of 27 percent. Virtually all imports required licenses from the Ministry of Supply and Trade, and the importation of certain products required the permission of particular government agencies.55 The annual commodity and foreign exchange budgets provided the basis for issuing import licenses. These budgets gave priority to imports of foodstuffs, medicines, petroleum products, and inputs for production. Imports of petroleum products were reserved for the YPC and the Aden Refinery. Foreign exchange for both private and official transactions had to be purchased at the official exchange rate from the central bank, which also had to approve its availability.
94. Imports were subject to a customs duty under a tariff structure, which incorporated 15 bands with the tariff rate ranging from 5 percent to 200 percent. In addition to the applicable customs duty, imports were subject to numerous taxes and surcharges, including an earthquake damage reconstruction tax, a Ministry of Finance surcharge, a Chamber of Commerce surcharge, and a Health Department surcharge.
95. Beginning August 1, 1990, the authorities permitted the self-financing of licensed imports through foreign exchange obtained from the parallel market. A commercial bank guarantee equivalent to 2 percent of the value of the imports was required for an import license to be issued. The commercial banks were then authorized to open letters of credit for holders of import licenses provided that the full foreign exchange value of the imports was deposited with a commercial bank. All importers holding an import license for wheat, flour, rice, and LPG could obtain the necessary foreign exchange from the central bank at the special official rate of YRls 12 per U.S. dollar, which also served as the customs valuation rate.56 In January 1991, the 100 percent import deposit requirement was reduced to 50 percent for commercial imports and to 25 percent for industrial imports, and was finally abolished altogether in January 1992.
96. In May 1993, the positive import list was replaced by a negative list which included 63 categories of items competing with domestically produced goods. Import licensing remained in effect due to foreign exchange shortages. The government assigned priorities among the import categories and granted licenses only up to a ceiling for each category. Export bans, such as the 1994 temporary ban on exports of fish, were imposed from time to time on commodities considered to be in short supply in the domestic market.
97. Over the period January-March 1996, a comprehensive reform of the tariff and trade system was implemented in order to reduce effective protection, enhance the economy's allocational efficiency and growth prospects, and facilitate its integration into the world economy. The main elements of the reform included:
All import bans maintained for economic reasons were abolished except for fresh fruit, vegetables, and coffee.57
All import licensing by the Ministry of Supply and Trade was eliminated except for wheat, flour, and petroleum products.
The 15-band tariff structure was replaced with a 4-band structure with tariff rates of 5, 10, 15, and 30 percent ad valorem.58
The tariff reform was accompanied by excise tax harmonization whereby excise taxes on industrial inputs and a production tax on local manufacturers applied uniformly on imported and domestic products.
A process of phasing out import fees and surcharges was initiated and, by September 1997, all import fees and surcharges were eliminated.
Duty exemptions for imports by the government and public sector enterprises were abolished.
Any new discretionary project-related import duty exemptions were not to be granted anymore except under the Investment Law.
Any government controls over exports were eliminated except for security, public health, religious, or environmental reasons.59
98. Following the unification of the exchange system on July 1, 1996, the customs valuation rate was unified with the market exchange rate on August 1, 1996. To mitigate the one-time price increase effect of the customs rate devaluation on the politically sensitive imports, tariff rates were reduced at that time for imports of seven basic food items and medicines. In October 1997, the maximum tariff was further reduced by 5 percentage points to 25 percent, and the tariff rate on inputs for production was lowered from 10 percent and 15 percent to 5 percent. Tariffs for goods prone to smuggling were also reduced on a selective basis.
99. In March 1998, the government began a phased elimination of the remaining import bans maintained for economic reasons, replacing them by the maximum tariff. By the end of 1999, the importation of 14 categories of fruits and vegetables had been liberalized and the remaining import bans were scheduled for removal in 2000.
100. These trade system reforms brought the trade regime in Yemen closer to standard international rules. Consequently, in 1999, the government initiated the process of accession to the World Trade Organization (WTO). Following the granting of observer status to Yemen at the WTO in 1999, the government is working toward full membership.
101. Under the reformed tariff structure, the mean tariff rate was reduced from 27 percent to 12 percent. This—together with the elimination of import bans, licensing, and other nontariff trade barriers—had reduced Yemen's trade restrictiveness index from 10 (closed or very restrictive) at the time of unification to 2 (open) by the end of 1999,60 The relative ranking of Yemen in terms of trade restrictiveness among the Middle Eastern countries is below:
Table 6.Middle Eastern and North African Countries: Trade Restrictiveness Rating
Rating OPEN MODERATE RESTRICTIVE
Country Djibouti
U.A.E. Bahrain
Yemen Mauritania Kuwait
Oman Saudi
Arabia Jordan Algeria
Pakistan Egypt
Tunisia – Iran
Source: IMF, Trade Policy Information Database.
After unification, the parliament of Yemen passed three new tax laws to give the country a consolidated new tax structure. Law No. 31/91 regulated the taxation of incomes and profits, Law No. 70/91 introduced a tax on production, consumption, and services (TPCS), and Customs Law No. 14/90 introduced a new tariff structure. All three laws remained virtually unchanged over the period 1990–94, but between 1995 tol999 were amended several times in an initial effort to make some improvements in the tax system. However, more comprehensive reforms are underway to modernize the entire tax code.61
103. The 1991 law specified an individual income tax with four brackets. Tax rates on wages, salaries, and rental income varied between 3 percent for the lowest bracket and 16 percent in the top bracket (22 percent for nonresidents). Owing to the high levels of inflation, by end- 1994 virtually all taxpayers were in the highest 16 percent bracket and the income tax had become essentially a proportional tax. Businesses were taxed at rates between 28 percent and 36 percent varying for proprietary status, monopolies, and residency status.62 Under the 1991 code, individual taxpayers were taxed differently depending on the source of income, and tax from different sources was not aggregated. Moreover, income taxes suffered from the numerous exemptions contained in the 1991 Investment Law. In 1996, the income tax law was amended and tax rates for corporations were unified at 35 percent. Proprietors continued to pay a flat rate of 28 percent.
104. Further changes to the income tax law were introduced by presidential decree in early 1999. These amendments replaced previous provisions with a progressive rate structure for personal income (including from proprietorship) above YRls 36,000; raised the top tax rate on wages and salaries from 16 percent to 20 percent, included foreign income in the tax base; simplified the depreciation schedule, and clarified the penalty regime.63 The authorities recognize that further adjustments to the income tax code are desirable to achieve a consistent treatment of income from different sources and restrict exemptions, and are therefore working towards a more comprehensive reform. Of particular concern are the integration of corporate and personal taxes to limit tax avoidance, the taxation of income from agricultural sources and rental income as regular income, the simplification of the depreciation schedule, the clarification of international tax rules, the simplification of procedures, and the design of an effective penalty regime.
105. The 1991 TPCS law consolidated numerous excise taxes. Despite its name, the tax covered originally only about 35 products, including qat, and tax rates varied between 5 percent and 40 percent with twice the rate applied to imported goods. Specific excises were levied on petroleum products and cigarettes. In 1996, the tax base was broadened to about 100 goods and services, and the rate differentiation for domestic and imported goods, was eliminated by presidential decree. The decree also established a limited tax credit mechanism to reduce cascading under the TPCS. Moreover, the specific taxes on petroleum products were converted to an ad valorem tax, mostly at the rate of 2 percent, and specific cigarette taxes were converted to ad valorem taxes at rates of 60 percent for domestic products and 80 percent for imported products.
106. The amendments introduced by decree were later altered by parliament, which reduced the number of goods and services covered by the TPCS in 1997.64 Additional minor changes regarding coverage were introduced by decree in January 1999. These related to the list of exempt goods, the tax base for certain imported goods, and confiscation of cigarettes. The administration of the tax suffers from the multiple rate structure. In addition, it has limited revenue potential owing to a restricted base. The authorities are therefore committed to replace the TPCS with a broad based value-added tax (called General Sales Tax or GST). A tax law providing for a 10 percent broad-based GST with a strictly limited list of exemptions, a credit mechanism, and zero-rating of exports was approved by the government in 1999 and is pending before parliament. The GST would originally apply only to all imports and to domestic sales of the 800–1,000 largest taxpayers, depending on turnover. A few excises on petroleum, tobacco products, and qat would remain in place under the cover of the TPCS.
107. Parliament removed stamp duties on banking and customs transactions in May 1998. Stamp duties were applied to commercial and government transactions and based on the value of transactions. The application of customs and banking stamp duties was complicated and the lost revenue was largely replaced by taxing services and imports.
108. The authorities have taken several steps to improve revenue collection and tax administration. The most important was the introduction of a new taxpayer identification number (TIN). While a TIN system existed before 1997, it suffered from shortcomings due to unnecessary codlings. A new computerized pilot system allowing for online registration of taxpayers in several tax centers was recently introduced and online registration of taxpayers should begin in 2000. The new system will allow for a range of tax reports based on the taxpayer database. Customs clearance of imports now also depends on the presentation of a valid TIN. In addition, the tax administration introduced cigarette bandrolls in 1997 to improve identification of untaxed cigarettes. Moreover, through improvements in manual procedures, efficiency gains have been realized in the tax authority. Jointly with the introduction of a GST, the tax administration plans further reform steps. These include the creation of a large taxpayer unit, which would handle all taxes, including income taxes and withholding taxes, paid by taxpayers above a certain threshold for turnover. Further, the Tax Authority plans to modernize tax administration through self-assessment procedures, targeted auditing, and enhancement of taxpayer services provided by the taxpayer services unit established in 1999.
109. The 1990 customs law contained a complicated rate structure, with 15 rates ranging from 5 percent to 200 percent. Most imports were taxed at the rates between 20 percent and 30 percent. Although the 1990 law already constituted a major simplification over the preunification customs laws, it still gave rise to classification difficulties and disputes. Until the stepwise exchange rate unification in 1995–96, customs revenue was also affected by the application of the highly appreciated customs valuation rate. In 1996, the customs tariffs were simplified to 4 bands entailing rates of 5, 10, 15, and 30 percent, with a further reduction of the top rate to 25 percent in 1997. The customs base also benefited from a stepwise elimination of import bans in 1998 and 1999. Further amendments of the customs law are planned for the future to bring the regulations and valuation procedures in line with WTO specification. Other than customs duties, Yemen also imposed a number of import surcharges such as a health department surcharge on cigarettes, a profits tax, and an earthquake tax. The last two of these surcharges were removed by parliament in December 1998. Customs revenue also suffers from broad exemptions introduced through the Investment Law of 1991. It exempts fixed assets for establishment, expansion, or upgrade of a project licensed by the General Investment Authority from all types of customs duties and taxes. Moreover, it provides for simplified customs procedures as soon as a project license is presented at the border.
110. Customs administration reform focused initially on customs procedures and regulations. Reforms covered the simplification of clearance procedures, and the improvement of the functioning of the Customs Authority. The control of the authority over arrival and exit of imports was strengthened and payment of duties before release of goods was enforced. Further reform steps included the elimination of the deferment of customs duties, the improvement of controls over temporary admissions, and the development of new customs forms. The Customs Authority is now working on introducing the ASYCUDA system with support from UNCTAD at three or four points of entry in 2001.
111. In spite of reform efforts, enforcement of customs regulations remains difficult. The long shoreline and before the recent signing of the Jeddah border treaty, the disputed borderlines led to major difficulties in controlling points of entry. In addition, the security situation was seen as necessitating a strong military presence at the border. To the extent that responsibilities between the military and customs are ill defined and the military has little incentive in prosecuting smugglers, border enforcement has been hampered. The declining share of customs revenue in imports likely reflects increasing smuggling activity and tax evasion.
112. High levels of public expenditures were the root cause of unsustainable public deficits from 1990 to 1995. The major elements of high expenditures were subsidies for wheat, wheat flour, and petroleum products, as well as the civil service wage bill. In the second half of the 1990s, the government took several steps to contain expenditures particularly through changes in administered petroleum prices and the removal of subsidies for wheat and wheat flour imports.
113. Until 1997, wheat and wheat flour subsidies constituted the government's primary social safety net and transfer program. Those subsidies were supposed to ensure impoverished families access to basic food items at low prices. However, according to World Bank staff estimates, only one-third of the subsidies reached consumers, the rest was used up by importers, distributors, and by smugglers to neighboring countries. Moreover, the poorest groups of the population benefited very little from subsidies because they spent disproportionately less on wheat and wheat flour than high income groups.
114. Substantial petroleum product subsidies were instituted to support the rural population. Subsidies for petroleum products other than diesel have been substantially cut over time but diesel prices have remained unchanged since 1997, when an YRl 1 increase led to political unrest and widespread violent riots. Diesel fuels rural transportation as well as agricultural machinery, particularly to pump ground water. The diesel subsidy has caused large distortions in the Yemeni economy. Car engines have been changed from gasoline to diesel engines. Diesel fueled pumps have depleted water tables rapidly, mostly to provide water for qat plantations, and richer households as well as many businesses have begun to generate their own power with concomitant losses for the electricity company (PEC). As PEC has been losing its best customers, affecting its ability to cross-subsidize its poorest customers.
115. From 1990 to 1994, subsidies for wheat, wheat flour, and petroleum products were implicit, resulting from the multiple exchange regimes.65 Importers of wheat and wheat flour had access to foreign exchange at the official exchange rate, which at end-1994 was about one-eighth of the parallel rate. Likewise, import of petroleum products and later sales to domestic refineries took place at exchange rates far removed from market rates. With the move to unified exchange rates, those subsidies that had previously been implicit through reducing oil export revenue, have to be recorded explicitly on the expenditure side. This became clear in 1996 when the explicit subsidy bill reached 13 percent of GDP after the exchange rates were unified. In addition to the explicit subsidies, there continued to be implicit subsidies through the application of nonmarket based transfer prices in the domestic oil and petroleum sector. In particular, the Aden refinery charged an additional USS15 per ton of delivered petroleum products (raised to US$17 in 1999), from transport services, but part of this is likely to reflect a production subsidy.
116. Reducing subsidy have played an important role in the fiscal adjustment efforts of the government since 1995 (Box 1). Jointly with its move to unify the exchange rate, the government began to raise domestic petroleum retail prices in March 1995. Gasoline retail prices were raised by 100 percent and the fuel oil price by 74 percent. Despite these increases, domestic wholesale prices (retail prices net of taxes and distribution fees) remained far below world market prices in 1995 (Chart 10). Gasoline prices were closest to world market levels at about 60 percent followed by fuel oil at 30 percent and diesel and kerosene at 15 percent. Further substantial administered price increases of 58 percent (gasoline), 100 percent (diesel), 167 percent (kerosene), and 133 percent (fuel oil) took place over January-March 1996. They brought price levels for gasoline close to world market levels, but left diesel, kerosene, and fuel oil heavily subsidized (Table 7). Prices were raised again in 1997, 1998, and 1999 but the price for diesel remained unchanged since September 1997 (Table 8). Owing to these measures, by 1998 gasoline prices were 80 percent above world market prices and allowed to cross-subsidize diesel and, to a lesser extent, fuel oil and kerosene. However, in 1999 rising oil prices were not matched by equivalent price adjustments and led to the reappearance of a substantial cash subsidy bill (Table 5). In 1999, the government also changed its transfer pricing system to charge world market prices for crude oil in its transactions with the domestic refineries, as explained in Section II.
Chart 10.Republic of Yemen: Petroleum Product Wholesale Prices, 1995–2000 1/2/3/
Sources: Data provided by the Yemeni authorities; and various oil publicalions.
1/Wholesale prices are defined as retail prices net of taxes and distribution fees.
2/World prices are Mediterranean ex-refinery prices.
3/Data for 2000 is for the first quarter only.
Table 7.Republic of Yemen: Petroleum Products Prices Compared to World Market Levels (March 2000)(YRls per liter unless otherwise stated)
Domestic Retail Price
Domestic Wholesale Price 1/
International Wholesale Price
International 1/ Domestic Price Ratio
Gasoline 35 28.35 32.18 0.88
Diesel 10 6.45 30.72 0.21
Fuel oil 13 10.09 20.23 0.50
Kerosene 16 12.76 31.80 0.40
Sources: International Energy Agency, Oil Market Report (March 2000); Ministry of Finance; and staff estimates.
1/ Domestic wholesale price is calculated by deducting from retail prices appropriate taxes and surcharges imposed for each product. International wholesale prices are actual average prices for February 2000, converted to rials at the current period-average exchange rate. (Gasoline prices are regular northwest Europe prices, while the other products are Mediterranean-based prices; fuel oil corresponds to the 3.5 percent sulfur type). The International/Domestic Price Ratio is the ratio of the two wholesale prices. For example, the wholesale price for gasoline in Yemen in February 2000 was 88 percent the level of the international wholesale price.
Table 8.Republic of Yemen: Adjustments in Administered Retail Prices, 1994–99
(Percentage change in unit price)
Gasoline … … 100 … 50 7 30 … 40 … …
Diesel … … … … 100 … … 67 … … …
Fuel oil 1/ … … 74 … 133 … … 57 … … 18
Fuel oil 2/ … 32 100 … 40 … … 57 … … 18
Kerosene … … … … 167 6 53 … 15 … 7
Aviation fuel … 67 150 … 8 … … … … … 85
LPG … 25 60 50 38 … … … 21 … …
Electricity (average tariff) … 60 … … 161 … … 7 50 … …
Wheat … 38 … … 150 … 15 … 30 25 FL
Flour … 38 … … 150 … 11 … 28 17 FL
Rice, milk, sugar, medicine … … FL … … … … … … … …
Water … … … … 120 … … … … … …
Sources: Ministry of Oil and Mineral Resources; Ministry of Finance; and World Banle
1/ For electricity plants.
2/ For cement plants.
3/ FL stands for full liberalization.
117. Sales to refineries are now conducted at export prices. Refineries charge world market prices to the distribution company for petroleum products (YPC) plus a surcharge (see above). The YPC's losses at administered retail prices are covered by subsidy payments from the budget.
118. Progress in utility tariffs took place at a slower pace (Table 6). After a 120 percent increase in water tariffs and a 161 percent average increase in electricity tariffs in January 1996, small-step increases took place in 1997 and 1998 for the latter. Electricity tariffs have not been changed since then, however, despite the fact that at this level, the average tariff currently covers about 90 percent of the average cost of production of 1 kwh. The previous opaque system of transfer prices and artificial exchange rates for domestic transactions led to implicit subsidies for consumers and utilities. Higher prices and the new settlement mechanism combined with the price distortions favoring diesel generation of electricity led to arrears of the electricity company vis-à-vis the petroleum distributor. The government reimbursed these arrears implying a subsidy of electricity consumption in the order of 0.4 percent of GDP in 1999.
Box 1.Reduction of Subsidies, 1995–99
Domestic prices of wheat, flour, and petroleum products have traditionally been set administratively well below market prices involving large subsidies. After the unification of exchange rates in mid-1996, many of the subsidies that were implicit giving importers access to foreign exchange at non-market rates became explicit in the budget.
The subsidies created incentives against domestic wheat production and for inefficient use of petroleum products (especially in the case of diesel). They also encouraged smuggling of subsidized goods to neighboring countries. Moreover, the untargeted price subsidy benefited all groups of the population independent of income levels and gave rise to rent-seeking activity by importers and distributors.
The government began in 1996 through several rounds of administered price increases to reduce the subsidy bill. The wheat and flour subsidies, which reached 7.5 percent of GDP and put wheat and flour almost 75 percent below world market prices in 1996, were eliminated entirely m mid-1999.
The decline in world market prices in 1997 and 1998 affected overall oil and petroleum subsidies which fell with the increase in administered prices, which resulted to violent unrest. However, domestic prices particularly diesel prices which have been unchanged since 1997, did not keep pace with the increase in oil prices in 1999 and the subsidy rose to about 2 percent of GDP.
Republic of Yemen: Subsidies, 1995–99
Wheat and flour subsidy
In percent of market value of consumption 1/ … 73.7 65.3 50.5 9.2
In percent of GDP … 7.5 4.7 3.1 0.4
Domestic oil and petroleum subsidy 2/
In percent of market value of consumption 1/ 85.3 48.9 12.0 10.6 27.0
In percent of GDP 10.7 5.5 1.0 0.7 2.1
Sources: Ministry of Finance; and staff estimates.
1/ Evaluated at world market prices and parallel exchange rates.
2/ Calculated as the difference between world market value at parallel exchange rates of domestic crude oil consumption and domestic oil revenue net of explicit budgetary subsidies. This calculation ignores the value added by refining and the potential additional subsidy or tax implied by selling refined products below or above world market prices.
119. Wheat and wheat flour subsidies were entirely phased out by mid-1999 through increases in administered prices. Small increases, ranging from 10 percent to 30 percent, took place between the second half of 1996 and January 1999, following a large increase (150 percent) in January 1996.66 The administration of wheat subsidies was complicated, giving rise to substantial rents of a few privileged import companies and distributors.67 The government gave importers access to foreign exchange at below market rates such that the latter were willing to sell at administered price levels.68 The government furthermore negotiated distribution fees with distributors. Import contracts were distributed through a tendering system but the latter was not transparent and generally invited only bids from the same few companies. There was little competition among distributors.
120. As a result of the reduction in subsidies, the subsidy bill fell substantially over time and reduced the pressure on expenditures. Owing to rising domestic petroleum prices and declining differentials with world market prices, net domestic oil revenue, a measure that tracks domestic oil revenue net of explicit subsidies, rose from 1.8 percent of GDP in 1995 to 5.4 percent of GDP in 1999. Wheat and flour subsidies, which peaked at 7.4 percent of GDP in 1996, fell to 3 percent in 1998 and will be completely eliminated in 2000.
121. Unification and the following political and economic events resulted in a large, partially redundant and poorly paid civil service. In 1990, the civil service of the North Yemen and the South Yemen were merged; and the southern pay scale adjusted to the higher levels in the North. With the return of expatriates and the re-instituted policy to hire university graduates, the civil service (excluding public enterprises) grew from 168,000 in 1990, to 322,000 in 1995, and to 336,000 in 1998; as a share of the total civil service population rose from 1.3 percent in 1990 to 1.9 percent in 1998.69 An estimated additional 83,000 were working in public enterprises in 1998. Most civil servants are employed in the education sector, followed by the health sector, and general administration (Table 9). Owing to high levels of inflation, real wages eroded substantially from 1994 to 1997. While these developments helped to reduce the wage bill from almost 11 percent of GDP in 1993 to 6 percent in 1997, it also left Yemen with an under qualified, underpaid, and overstaffed civil service that lacked in delivering adequate services to the population.
Table 9.Distribution of Civil Public Employees by Sector, 1998
Education 223,368 53
Health 33,328 8
General administration 33,006 8
Construction 21,751 5
Manufacturing 15,803 4
Other 92,153 22
Total 419,409 100
Source: MOCSAR Employee Database.
122. The government recently initiated a comprehensive reform program. The program aimed at reducing the size of the civil service through retrenchment and retirement to allow higher pay increases for the remaining civil servants. It also envisions a restructuring of public administration, beginning with six pilot ministries, the introduction of a new grade structure, and minimum qualifications for each job.
123. Several steps have been implemented. In 1998, a civil service census was conducted that identified all civil servants by age, occupation, time of service, and other characteristics. The census identified potential double dippers and overage workers as a precondition for future reduction in staff and established a database allowing computer-based management of the civil service. The Ministry for Civil Service has also begun to issue employee identification numbers. A law allowing the establishment of a Civil Service Fund (CSF), which would continue to pay laid off public workers for a certain period of time, and benefit from World Bank financial assistance. This was promulgated by presidential decree in January 1999.
124. Despite these preparations, no progress was made in reducing staff or containing the wage bill. The retirement of over age workers (estimated at 24,000 in total) has been delayed through early 2000. Since the CSF was not yet operational in early 2000, the so-called "at-home workers," who were supposed to be the first group transferred to the fund continued to be on government payroll. Hiring continued at a level of 20,000 people in 1999; given about 2,000 retirees, this amounts to a net addition of 18,000 civil servants. Average wages continued to rise at over 20 percent in 1998 and 1999, largely owing to a bill passed by parliament that granted a 100 percent increase of wages for teachers and health workers in 1998–2000.
125. As a result, the civil service wage bill has increased from 6 percent of GDP in 1997 to 7.5 percent of GDP in 1999. Moving ahead with retrenchment and organization will therefore be essential to make progress in refocusing government expenditures.
126. Since 1994, the Yemeni government has reduced its defense spending. At unification, total defense expenditures stood at 8.4 percent of GDP, over 80 percent of which went to pay salaries. During the first years of unification, defense spending remained high and peaked at 9.7 percent of GDP in 1994 during the civil war. Starting 1995, expenditures for the military began to fall to about 6 percent of GDP and reached 5.8 percent of GDP in 1999. At the same time, in parallel with the overall decline of the civil service wage bill, the importance of military wages declined from 60 percent to 70 percent of total defense spending.
127. Development expenditures remained volatile because it served as a first resort for expenditure cuts in difficult times. Immediately after unification, the government spent more than 8 percent of GDP for development. However, with financial difficulties emerging in 1991, less than 4 percent of GDP were spent for development. This declined further to 2.6 percent of GDP in 1994. With easing pressures after the unification of exchange rates and rising oil revenue, the government sharply increased development spending to more than 6.5 percent of GDP in 1996 and 1997. However, because development projects belong to the few discretionary items, the drop in oil prices in 1998 and continuing low prices in early 1999 led to a cut back in spending to 6.1 percent and 5.6 percent of GDP, respectively.
128. Between 1990 and 1997, government interest obligations fluctuated between 2 percent and 3 percent of GDP. Domestic interest payments, which in that period were recorded net of central bank profit transfers remained from 1 percent to 2 percent of GDP, with the exception of 1994. External interest obligations also remained within the range of 1 percent to 2 percent of GDP. In 1996, obligations were particularly high when the first Paris Club rescheduling agreements were reached, which required the settlement of some deferred interest payments. In 1998 and 1999, after the Paris Club agreement took full effect, foreign interest obligations were only about 1 percent of GDP. Domestic interest payments, since 1998 have been recorded on a gross basis and rose from 2.5 percent in 1998 to 3 percent in 1999, reflecting the rising interest rates in the wake of tight monetary policy.
129. Social indicators in Yemen point to major deficiencies in human development. For example, Yemen is the country in the Middle Eastern and North Africa region with the highest fertility rate, highest maternal mortality rate, and highest infant mortality rate (Section VI.C). The public sector is the major provider of basic social services, particularly health services. The Ministry of Public Health (MOPH) administers more than 2,200 public health facilities, among which are about 100 hospitals, 500 health centers, and 1,600 health units.
130. In addition, there are two hospitals outside the MOPH structure which receive direct allocations from the budget. The MOPH employs more than 30,000 people including 3,800 physicians and 9,400 nurses. However, health services are distributed unevenly among regions and between rural and urban areas.
131. Spending on education and health has been on the rise since 1996. Data on education and health expenditures have only been compiled since 1996. In 1996, education expenditures were 3.5 percent of GDP and health expenditures were 1 percent of GDP. Among those, 70 percent and 41 percent were spent on wages and salaries, respectively. Spending on education rose sharply since 1996 and reached 7.4 percent of GDP in 1999, and out of these expenditures, 61 percent went to wages and salaries. Thus, although the wage bill has grown more slowly than overall allocations to the education sector, the share of wages remains high. In contrast, the share of materials and services fell between 1996 and 1999 from 17 percent to 13 percent of expenditures. Development expenditures, largely school construction in rural areas, therefore took an increasing share of education expenditures. Health expenditures were increased much less rapidly from 1 percent of GDP in 1996 to 1.3 percent of GDP in 1999. Wages and salaries continue to take up about 40 percent of these expenditures.
132. Comparing Yemen's expenditure profile across the region, Yemen appears to have lower military expenditures than regional comparator countries but also lower education and health expenditures (Table 10). Some of these comparisons should be interpreted cautiously, owing to different definitions across countries. Nonetheless, measured as a share of GDP, military and security expenditures in Saudi Arabia, Oman, and Jordan have been much higher than in Yemen during the 1990s. Only Egypt shows considerably lower military spending than Yemen. Regarding education, spending in Yemen has risen sharply, largely on account of rising employment of teachers and increasing wages. As a result, Yemen's spending now is considerably higher than Oman's but remains smaller than Saudi Arabia's spending on manpower (including vocational training). Health spending remains exceptionally low also within a regional context; Yemen's 1 percent to 1.4 percent of GDP are lower than spending in Oman (2 percent of GDP) and Saudi Arabia (3 percent of GDP), but higher than Egypt.
Table 10.Republic of Yemen: Regional Comparison of Expenditures on Defense, Education, and Health, 1994–98(In percent of GDP)
Yemen 9.7 6.7 5.6 6.0 6.1
Oman 1/ 15.6 14.5 12.5 12.4 12.4
Saudi Arabia 2/ 9.7 10.0 8.7 9.7 10.3
Jordan 13.4 14.4 15.3 16.0 17.5
Egypt 3.3 3.2 3.1 2.9 2.8
Yemen n.a. n.a. 3.5 4.6 7.0
Oman 3.1 3.1 2.9 3.0 3.4
Saudi Arabia 3/ 8.4 7.8 8.0 8.8 9.9
Jordan 4/ n.a. n.a. n.a. 4.4 n.a.
Sources: Various Recent Economic Development reports.
1/ Includes security expenditures and capital expenditures.
2/ Includes health expenditures.
3/ Manpower expenditures.
4/ The amounts reported for 1997 reflect only direct budgetary spending by the central government and exclude some transfers.
5/ Social development, including health, social welfare, and labor affairs.
133. The budget management reform program attempts to address shortcomings in budget formulation, budget execution, and budget control mechanisms. Budgets were traditionally prepared without regard to a macroeconomic framework or financial limits, leading to a sub optimal budget process that did not address priorities. Moreover, the Ministry of Finance did not follow macroeconomic developments or prepare a macroeconomic framework. Budget execution is cumbersome because each ministry or independent government agency has three accounts at the central bank; one for current expenditures, one for development expenditures, and one for revenue. Until 2000, the ministry could follow account movements but had no information on subchapters. Budget control suffers from a clear system of guidelines and procedures as well as weaknesses in independent auditing.
134. The first phase of an IMF/UNDP supported technical assistance program resulted in improvements in budget preparation and accounting procedures. The 2000 budget was prepared with a revised circular and was based on a macroeconomic framework. It also followed the classification of the Government Financial Statistics Yearbook (GFSY). Budget reports are now regularly requested in standardized format from budgetary units. The accounting software at the central bank, which executes the treasury functions of the Ministry of Finance, was modified to a two-level classification (budget chapter and subchapter) in 1999. Recently, a deputy minister has been appointed to head the new macroeconomic studies unit and its staffing has begun. This unit will track and forecast revenue and expenditures and prepare a basis for a medium-term budget framework.
135. A number of traditional rules and practices in the Yemeni economy effectively sheltered producers from competition and protected monopolies in various sectors. Such obstacles to market entry likely contributed to relatively weak non-oil growth and job creation. The government has recently initiated a number of reforms in this area—such as overhauling the Investment Law, Agencies Law, and Trade and Supply Law—but is also preparing for the privatization and liberalization of monopolistic activities in the airline and telecommunications sectors. Furthermore, the government has established the Aden Free Zone, where deregulation seems to have taken place at a faster pace albeit with modest results (Box 2).
136. The current Investment Law aims at regulating and promoting investment of domestic and foreign capital in Yemen.70 It determines the sectors in which such investment could take place and the procedures needed to obtain legal authorization to undertake a business enterprise. It establishes the guarantees and benefits accorded to projects, including tax and customs duties and exemptions, and extensively elaborates on the rights and obligations of investors in their foreign exchange transactions. Many of its features likely deter potential investors. For example, the General Investment Authority (GIA) is granted a high degree of control in approving projects through licensing; in having access to annual balance sheets of projects which investors were obligated to provide; and in micromanaging aspects related to the disposal of property associated with terminated projects, including controls on foreign exchange transactions related to licensed projects. The law limits the kind of commercial activities that could be undertaken within a particular project, and provides a potential shelter for local production by allowing the imposition of additional customs duties on inputs used in the execution of some projects.
137. A major reform of the Investment Law was initiated in mid-1999. Amendments, to be considered by parliament shortly, aim at making the law more transparent and at streamlining the procedures to obtain registration for investment projects and carry out financial transactions related to them. In particular, investment licensing by the GIA is to be eliminated and replaced by a simple registration process; equitable treatment of all investment projects is to be ensured; tax exemptions are to be streamlined and clarified; and controls on foreign exchange transactions related to projects registered under the law would be liberalized.
Box 2.Aden Free Zone
Aden was once one of the world's top ports for ship bunkering and transshipment warehouses. About 7,000 vessels per year used its facilities in the 1950s and 1960s. The closing of the Suez Canal in 1967, subsequent security problems in the region, and changes in international routes of cargoes led to a sharp decline in business and loss of prosperity in Aden. Shortly after reunification, however, the government decided to initiate a development program for a free zone in Aden to restore some of its former importance.
With Aden's attractive location on the main Asia-Europe shipping routes, the Aden Free Zone and Aden Container Terminal (ACT) offer distance advantage over many other regional ports and could provide an international gateway to businesses in three continents (Africa, Asia, and Europe) provided it can compete with several other free zones in the region that have emerged. The development of modern transportation facilities and infrastructure related to the free zone area could spur regional trade, business opportunities, and economic growth.
The Yemen Free Zones Public Authority (YFZPA) was established in 1991 to develop a free zone in Aden and grant concessions and regulate development therein. The free zone, covering approximately 31,000 hectares within the Governorate of Aden, was established in 1993. In 1995, Yeminvest, a joint venture between Port of Singapore Authority Corporation Ltd. (PSA) and Yemen Holdings Ltd. (a Saudi-owned company), was awarded exclusive rights to develop the ACT and the industrial estate of the Free Zone. The PSA currently holds 60 percent of the project.
The beginning of the operations of the ACT on March 19, 1999, marked the completion of the first phase of the project, which gives the port a handling capacity of 500,000 twenty-foot equivalent units (TEUs) annually. This phase included the construction of two berths and a 700-meter quay wall, as well as dredging the harbor channel and berths to 16 meters. The second phase of the project will include the construction of an additional 325 meters of quay with a terminal capacity of up to 1.5 million TEUs annually. Future plans include expansion of the Aden airport and development of larger tourist facilities.
As of mid-1999, the YFZPA had received 653 local, Arab, and international applications to invest in the new free zone of Aden for a total value of US$ 1.5 billion. These applications range across industrial, storage, commercial, and tourism sectors. However, apart from shipping through the ACT, projects in the free zone have not yet started, and even activities in the ACT remain far below the container's total capacity.
Besides stipulating the formation of a "Competent Court" in the free zone (in compliance with the Judiciary Law in force) to settle disputes (in the spirit of the commercial U.K. law), the free zone law provides various investment incentives including: exemption from taxation on industrial and commercial profits for 15 years with a possible additional 10 years; the possibility of 100 percent foreign ownership; free transfer of capital and profits outside the free zone, not subject to exchange controls; and exemptions from income tax on salaries, wages, and bonuses of non-Yemeni employees working on projects in the free zone.
138. Entry restrictions were also implicit in the original "Agencies Law," aimed at regulating the establishment of commercial ventures between foreign companies and Yemeni representatives (which must be locally owned companies registered with the Ministry of Supply and Trade).71 The law made it illegal to act as an agent for a foreign supplier without a license.72 Enforcement was in great part achieved through import licensing, as licenses were not issued to importers who are not approved agents of foreign companies. In its original form, the law gave discretionary powers to the ministry in the process of granting licenses and in allowing import activities without the agent's approval. This led to effective enforcement and protection of import trade monopolies. Amendments to this law decreed in 1997 and 1999 redefined the government's authority and should ensure a more competitive environment for these activities.
139. Similarly, the original Trade and Supply Law effectively allowed the government to mandate and enforce prices in the private sector, with the purpose of guaranteeing a stable supply of basic commodities and to avoid overpricing and monopolies.73 It also aimed at supervising trade activities in the private sector to avoid disruption in supply in the spirit of a centrally planned economy. Amendments decreed in 1998 cancelled the authority of the government to set prices except for the limited number of basic commodities. Moreover, a law to promote competition and prohibit monopolies and commercial fraud was recently issued by presidential decree.74 It includes explicit provisions for the market determination of prices of goods and services and for the prevention of the collusion of producers. It calls for the establishment of a Competition Promotion and Anti-Monopoly Authority within the Ministry of Supply and Trade with the purpose of identifying and eliminating monopolistic practices and activities that disrupt the competitive operation of markets.
140. The transportation sector is another part of the economy that has long remained under the control of various state monopolies (such as the National Shipping Company in the Port of Aden, the Yemen Navigation Line, the General Land Transportation Company, and Yemenia, the state airline) and that was consequently plagued by inefficiency. The government set tariffs in all areas of transport and kept the provision of all related services under its control through licensing requirements. In the context of the economic reform program, a privatization and liberalization process has been initiated, covering land and maritime transport and to some extent, air transport.
141. In particular, a draft Surface Transportation Law was approved by the cabinet in 1999 calling for establishing the General Land Transport Authority in charge of granting trucking licenses and posting suggested tariffs, a practice that will replace administrative tariff-setting by the government. By-laws specifically regulating the trucking sector have already been issued, allowing any trucker to obtain a license for operation, which would be valid anywhere in Yemen.75 Previously, the trucking sector was controlled by the (private) Ferzah cartel, which had kept transport costs high through price fixing and preventing free entry as well as preventing private sector producers and traders from providing their own transport. Although the regulations recently introduced do not abolish directly the cartel, the government's intention is to provide a competitive environment by allowing other truckers to enter the market.
142. Progress in other parts of the transport sector includes the liberalization of stevedoring and the privatization of the National Shipping Company. However, the latter led to the establishment of a cartel of shipping agents at Aden, supported by the government in exchange for the absorption of former public sector employees by these agents. In the air transport sector, privatization of ground handling operations is on hold until the exclusive right of the airline Yemenia to provide these services expires in 2001.
143. Deregulation of the telecommunications sector is only at an initial stage. The Public Telephone Corporation (PTC) has a monopoly on local services, while international services is another monopoly which was renewed in 1999 for four years, of TeleYemen, a joint venture between PTC and a U.K. company. The only liberalization currently taking place is in the market of mobile services: the government recently tendered two GSM licenses, and a few offers were received but no decision had yet been reached. While these licenses will break the monopoly enjoyed by TeleYemen in the mobile sector, GSM providers will still have to go through TeleYemen to ensure international communications services to their customers.
144. Reforming the judicial system and, in particular, the functioning of the commercial courts has been initiated. The increasingly recognized problems in the way courts were run, records were kept, cases were processed and judgments enforced were important obstacles to private investment. Moreover, tribal affiliations hindered the administration of court decisions, and lack of manpower and judges' absenteeism rendered the process slow and inefficient. To address these issues, the government in recent years consolidated jurisdiction over the administrative functioning of the courts in one ministry with a view to streamlining processes to reduce the backlog of pending cases; created a special unit to monitor the courts and organize training of judges and provide technical assistance on legal issues; and in early 2000 started publication of judgments and reasoning.
145. The current Land Law also presents obstacles to investment. The system for land registration and proof of ownership is considered ineffective, and, indeed, the majority of litigation cases in Yemen are related to land ownership disputes. Yemen uses the registration of deeds system in recording land ownership: a deed, registered by a public officer and with copy held in a registry, testifies to ownership. Land registration is governed by Law No. 12 of 1976, which is considered by many experts to be ambiguous and ineffective.76 Consequently, many land sales are currently done without registration partly to avoid paying the sales tax and the zakat tax but also because the parties involved often have little confidence in the Land Registration Authority, the government body in charge of applying the law. Major problems in certifying ownership arose after unification, leading to the issuance of Decree No. 65 in May 1991 to ensure the return of land in the south to former lawful owners. The decree was not adequately implemented, however, and appears to have led to several instances of "land grab" and corruption. Current steps taken to help remedy the shortcomings in the Land Law include the formation of an interministerial committee, which is currently working on streamlining procedures for proving clear title and registration for all properties that will be privatized pending a broad review of the law.
146. In a step to improve the overall legal environment, the authorities plan, with support from the World Bank, to carry out a diagnostic assessment of the overall legal framework governing economic activity; an awareness campaign on the importance of the law in a society is also being planned. In addition, a steering committee was formed in early 1999, involving both private sector and government institutions to review the regulatory structure and administrative procedures for trade and investment and assess the obstacles to private sector investment. This committee is expected to make recommendations on further reforms needed to increase efficiency and transparency in the regulation of private sector activity.
147. Following the end of the civil war, the government initiated in early 1995 the privatization of public enterprises in various sectors of the economy (industry, tourism, agriculture, fishing, transportation, oil, trade, and finance). In order to identify the enterprises to be privatized within the program, a census was compiled in mid-1996 listing a total of 192 enterprises, of which more than 110 were located in the former socialist south. These public enterprises, employing over 86,500 employees (more than 25 percent of total civil servants at the time), inefficiently run and sometimes even shutdown, constituted a heavy burden on the budget as operational losses had to be covered by budget transfers or accumulation of arrears.
148. Over the period 1994–97, over 60 small enterprises were privatized—16 tourism enterprises, 8 of which by lease, and 8 by restitution; and 53 other mostly agricultural units primarily through restitution to their original owners. In the absence of a general strategy and a strong institutional framework, these privatization operations were mainly conducted at the discretion of the ministries involved and in an ad hoc manner. Ministries independently established their own internal committees to privatize or liquidate some of the enterprises under their jurisdiction. In cases where the Technical Privatization Office (TPO)77 was in charge of privatization, these ministerial committees still participated in each step of the process (such as in approving the short list of consultants and the report that the eventual consultant submits), and there were delays in bringing the committee members to meet and in obtaining these members' input to short-listing, report evaluation, etc. During 1998 and most of 1999, privatization operations were largely put on hold, while the government was putting in place an overall legal framework to conduct these operations in a more systematic and transparent way.
149. After a long gestation period, a Privatization Law was promulgated in November 1999, which aims at organizing and unifying privatization procedures across state-owned economic units. Subsequently, the World Bank approved in November 1999 a project for financial and technical assistance to the government's privatization program. The Privatization Law stipulates the establishment of a High Commission (HC) and a TPO to ensure the implementation of standardized, unbiased, and transparent privatization procedures. The HC was established in December 1999 and held its first meeting in June 2000. It is chaired by the prime minister; other members include the ministers of planning, finance, legal affairs, and state. It is expected to provide policy oversight of the privatization program, approving transactions and program designs, and appointing temporary executive board members to the state-owned units approved for privatization. The TPO is expected to act as a secretariat to the HC, coordinating the whole program. Its functions include the formulation of privatization strategies (mostly by way of carrying out studies and reviewing proposals) and the monitoring of their implementation. Monitoring operations entail for example the provision of advice and assistance to individual ministries in carrying out privatization transactions as well as the preparation of necessary documents and contracts and coordinating with all concerned institutions such as labor unions.
150. In addition to the above two bodies, the law stipulates the establishment of temporary committees representing each concerned ministry and/or its economic unit approved for privatization.78 Each committee would participate in privatization operations of the concerned enterprise under the supervision of the HC and in coordination with the TPO. While the sector ministries will have responsibility for carrying out privatization operations of small/medium enterprises in collaboration with the TPO, full authority for approving large privatization transactions remains with the HC.
151. According to the Privatization Law, any person—citizens and foreign nationals alike—is eligible to buy or lease the units offered for privatization, and sufficient land will be provided for the investor with the winning bid to carry on the activities of the enterprise taken over, either on a lease or on a sales basis. The negotiated terms of contract between the government and potential investors will also cover the number of employees that will be hired to remain on the job and the conditions offered to these workers should be at least as good as the current ones (in terms of salaries, bonuses, and other benefits). Those employees that investors would choose to keep would be guaranteed the job for a minimum period of five years, while the remaining workers would be transferred to the Civil Service Fund. While intended to protect workers, many observers fear that as a result of this provision investors will agree to take on only a small number of the former employees, to avoid being locked into long-term contracts. Privatization proceeds are to be deposited with the Central Bank of Yemen, in a special account earmarked to finance economic and social development projects.
152. Privatization strategies for each of the five large enterprises have already been prepared and endorsed by the government, including implementation steps and schedules. For the Aden Refinery, new shares would be issued in return for capital contribution by investors, and an internationally recognized refinery operator would be attracted to ensure expert control over the enterprise. The privatization of Airport Ground-Handling Services is also projected to result in a joint shareholding and/or revenue sharing venture between the government and the private sector. The privatization of the General Land Transport Company is expected to start with strategic restructuring in the perspective of creating a joint-stock limited liability company partly funded by the government and potentially also by employee stock ownership. The Yemen Cement Company and the Yemen Drug Company will be privatized through issuing shares to strategic investors and selling government equity.
153. The aforementioned IDA project aims at providing assistance to achieve an effective and transparent government management of Yemen's privatization program. There are three components to this program: (a) the privatization of five large enterprises (Aden Refinery Company, Airport Passenger and Cargo Ground-Handling Services at six airports, General Land Transport Corporation, Yemen Corporation for Cement Production and Marketing, and Yemen Drug Company); (b) the pre-privatization strategy work on three other large enterprises (Port of Nashtoun, Public Telecommunications Company, and Yemenia Airlines);79 and (c) financial and legal assistance in the privatization of about 50 of the 70 small- and medium-sized enterprises earmarked for privatization by the government. As of early 2000, the project implementation schedule was on track: consultants were shortlisted for all five large enterprises, and consultants' studies were expected to be completed by the end of the second quarter of 2000 for the Aden Refinery, the General Corporation for Land Transport, and the Yemen Drug Company, and by the end of the third quarter of 2000 for the Airport Ground-Handling Services and the Yemen Cement Company.
154. Quantitative estimates of the impact of the privatization program are only available for the fiscal impact of the large-enterprise component of the project, indicating that the privatization of these five units would result in net sales proceeds of about US$20 million (about 0.3 percent of GDP) and that in the medium term an annual flow of USS62 million (0.8 percent of GDP) would go to the budget in the form of taxes and dividends. The emergence of new competitors in Airport Ground-Handling Services, Land Transport, and Cement Production and Marketing could generate another US$7 million in annual flows to the budget.
155. In the financial sector, the five state-owned banks are all earmarked for liquidation, restructuring, or privatization under the government's reform program. Privatization of the Housing Bank was recently turned over to the TPO.
156. In the period between unification and the end of 1994, the authorities' efforts regarding the financial system were focused on unifying the financial structures of the north and the south.80 Largely reflecting the lack of consensus and coherence in government and civil service, little progress was made in achieving positive interest rates and taking steps to stop financial disintermediation. Genuine financial sector reform did not begin until early 1995 as part of the economic reform program. At the start of this process, the authorities tackled interest rate reform and reform in the area of bank supervision, both of which produced quick and quantifiable results.
157. Interest rate reforms initiated in 1995 entailed the freeing of all lending rates, the elimination of concessional loan rates, and the establishment of minimum benchmark commercial bank savings deposit rates. The benchmark rates were set at high levels in view of the excess liquidity situation and the general reluctance by banks to attract new deposits. The benchmark rates subsequently were adjusted in light of macroeconomic conditions, maintaining positive real rates most of the time (Section III.B).
158. In order to improve the financial intermediation process, reform of bank supervision was also launched in 1995 (Box 3). From early 1996, banks were required to start reporting foreign currency positions and by end- 1997 the minimum capital requirement was doubled to YRls 500 million. During 1996–97, the central bank issued a number of circulars related to risk management, loan classification and provisioning, foreign exchange exposure, and external auditors. Provisioning requirements were set at 15 percent for substandard loans (90 days past due), 45 percent for doubtful loans (180 days past due), and 100 percent for bad loans (more than 365 days past due). Also, the banks were required to maintain a minimum capital adequacy ratio of 25 percent of total amounts and standards for new audit procedures and terms of reference for external auditors and risk management standards were established. The law governing the operations of moneychangers was amended so that moneychangers were required to be licensed by the central bank, while provisions that were inconsistent with the operation of a free market were eliminated.
159. Adoption of a new banking law in 1998 established a more solid legal basis for the central bank to address prudential concerns, and in particular to set limits on credit concentration and insider lending. Thus in 1999 the CBY started to lay down clearer operational rules in the areas of credit concentration, insider lending, and use of overdraft facilities. To address the problem of concentration of credit to a small number of companies and groups of companies, a circular was issued limiting total credit to such entities to 15 percent of a bank's total paid-in capital and reserves, and under certain circumstances to 25 percent. If the central bank determines that the interests of two or more groups of persons are so intermingled that they should be considered as one, the liabilities of the two groups are combined and considered as a single liability.
160. To address the problem of insider lending, the central bank issued a circular that prevents lending to any insider except to the following: (a) a member of the board of directors, who is not also a senior officer or manager, and for an aggregate amount that does not exceed one-half of 1 percent of the bank's total paid in capital and reserves; (b) a shareholder owning 5 percent or more of the common stock or voting power of the bank, and for an aggregate amount that does not exceed 15 percent of the bank's total paid in capital and reserves; or (c) a senior officer, manager, or employee, including any such person who also is a member of the bank's board of directors, an aggregate amount that does not exceed that person's total annual wage and salary. This circular also streamlined the process of loan application by insiders.
161. To deal with the prevalent use of overdraft facilities, which account for about 90 percent of bank credits, the central bank first introduced a new category of classification of exposures, special attention, to the existing categories—substandard, doubtful, and loss.
Box 3.The Yemeni Banking System
The Yemeni banking system is comprised of the Central Bank of Yemen, 13 commercial banks, and three specialized state-owned development banks. The commercial banks are made up of three private domestic banks, four private foreign banks, two state-owned banks, and four Islamic banks. The structure of the banking system has been broadly maintained since the political unification of the country in 1990, with the exception of the establishment of the Islamic banks after 1995.
At the end of 1999, the assets of the commercial banks totaled YRls 233 billion (US$1.5 billion), equivalent to 22 percent of GDP. The largest bank, accounting for over 20 percent of commercial bank assets and having 3 7 branches, is the Yemen Bank for Reconstruction and Development (YBRD), in which the government has a majority share. The YBRD is heavily undercapitalized and has a large portfolio of nonperforming loans; it is being restructured with the objective of bringing the bank to full compliance with prudential regulations. The government also fully owns the National Bank of Yemen, the only commercial bank in the South before the political unification of the country. It will be put up for sale in the near future.
The four private banks are all fully owned branches of banks with headquarters in France, Iraq, Jordan and Pakistan. Of the three private commercial banks, one is a joint venture with Saudi Arabian banks, with a share of local ownership amounting to 75 percent. The four Islamic banks began operations between 1995 and 1998 and, thus far, their share of commercial bank assets is about 8 percent.
The three specialized banks are all state-owned and were established to promote agriculture, housing, and industry; but especially the Industrial Bank of Yemen was burdened for years by a large portfolio of nonperforming loans and an interministerial committee was recently formed to liquidate this bank.
The banking system as a whole is relatively weak as reflected, at end-1999, in high ratios of nonperforming loans (17 percent of total), low capitalization (a Cooke ratio of 5.2 percent), and significant provisioning shortfalls. These problems are particularly acute for public sector banks, which hold about one-third of total commercial bank assets.
A number of other problems beset the Yemeni banking system. Bank concentration is high, as almost 70 percent of both deposits and loans are with the top four banks, and the banks are generally located only in a few cities. Cash is the predominant medium of exchange as reflected by the low ratio of quasi-money to broad money. Banks have generally maintained excess reserves for years, reflecting their reluctance to extend loans outside of a narrow group of borrowers in the absence of effective recourse within the legal system for timely recovery of nonperforming loans.
A number of actions by the authorities are aimed at an improved banking environment. The Banking Law of 1998 and subsequent central bank circulars have addressed problem areas such as credit concentration, insider lending, and use of overdraft facilities. Measures have also been taken to improve the operations of commercial courts, and the central bank is enforcing a notification system under which delinquent borrowers are disqualified from receiving new loans. The new central bank law gives the central bank more independence to perform its role as the supervisor of the banking system, and resist open-ended financing of the budget. A recent World Bank assessment of compliance with the Basle Core Principles methodology revealed that banks were either compliant or largely compliant with 10 of 24 principles.
This category was intended for banks to identify and remedy potentially weak credit relationships at an early stage. This classification was used to identify and monitor exposures which contain weaknesses or potential weaknesses that, at the time of review, did not jeopardize the repayment of the credit or reflect a potential for loss, but which, if not addressed or corrected could result in the deterioration of the credit to a substandard or more severe classification. Second, to clarify the treatment of bank guarantees, the new regulation allows banks to consider guarantees of other banks as a basis for not classifying an otherwise nonperforming credit exposure, provided that the banks issuing the guarantees have a capital adequacy ratio of 12 percent or higher, are rated A+ or better by a reputable, international bank rating agency, and that the guarantees are unrestricted.81 However, such credits need to be returned to a performing status or the guarantee called upon within a reasonable time. Third, the central bank streamlined the process that should be used by banks for determining borrower performance of credit lines that are in continuous overdraft for three months or more.
162. To develop sources of less inflationary financing from the nonbank sector, the authorities initiated sales of treasury bills to the public through central bank auctions in December 1995. The central bank started its monthly auctions with 30-day treasury bills, but this bill was discontinued in the following year in favor of three-month and six-month bills. By the end of 1996, the outstanding stock of treasury bills had reached YRls 12 billion (1.7 percent of GDP), over half of which were held by the banking system. During 1997, the authorities introduced the one-year treasury bill and phased out the term deposits facilities in the central bank. The treasury bills issued during 1996–97 were used mainly as monetary policy instruments for liquidity management during that period, reflecting the strengthened fiscal positions in each of those years. A sharp increase in the amount of bills issued took place after the reserve requirements were lowered from 25 percent to 15 percent in December 1996, in order to mop up the banks' excess liquidity.
163. With the strengthening of fiscal balances in 1999, the authorities' issuance of treasury bills slowed down, although in early 2000 the authorities started to convert large amounts of outstanding government overdrafts into treasury bills. Most of these were used to meet additional bills required by banks for their own liquidity management through repurchases operations (repos), initiated in November 1999. Although the central bank offers clearing and settlement facilities, secondary trading of treasury bills has not yet developed. In part, this reflects banks' lack of information on other banks and a general mistrust of the available information released by individual banks, which to date also prevented development of an interbank market.
164. In addition to the changes in the minimum benchmark interest rate and some use of treasury bills for monetary policy purposes, the central bank has relied on reserve requirements on rial deposits and on foreign currency deposits, intervention in the foreign exchange market and credit ceilings, and central bank credit facilities as monetary policy instruments.
165. Credit facilities were little used, reflecting the excess liquidity situation of commercial banks. The central bank does not have an overdraft facility, but it can discount treasury bills held by commercial banks (and others) at a rate of 2 percentage points above the highest accepted yield on three-month treasury bills at the latest auction. Throughout the period 1990–99, the central bank has also provided a small amount of credit to public enterprises at market rates and on commercial terms. The central bank has intervened actively in the foreign exchange market, especially in late 1998, to smooth volatilities in the exchange rate. Credit ceilings were used in the early post-unification period but were hardly ever binding. Since 1997, the central bank has refrained from setting any ceilings.
166. The need for financial deepening was evident since the early post-unification period, as commercial banks maintained excess reserve positions with the central bank, in spite of high legal reserves, reflecting their reluctance to grant loans to the private sector in the presence of fixed interest rates and in the absence of effective recourse within the legal system for the timely recovery of nonperforming loans. Consequently, commercial banks had little interest in mobilizing rial deposits, and were content with placing a large part of their deposits with the central bank at a rate of 1.5 percent above the banks' average cost of funds. Negative real interest rates were, not surprisingly, accompanied by an increasing trend toward dollarization of the economy (Chart 11). The share of foreign currency deposits in total deposits rose steadily from 9 percent in 1990 to 29 percent in 1999, continuing to rise even after real interest rates turned positive in the last three years. Partly this may have reflected expectations of depreciation of the rial; indeed, during 1999, the holder of a U.S. dollar deposit earned a real return of 2 percent, compared to the average minimum saving deposit rate of 10 percent. In addition, Yemeni expatriate workers, reflecting the experience of several years of high inflation and political unrest, traditionally hold part of their remittances in U.S. dollar deposits. On the lending side, the growth of foreign currency loans as percentage of total loans has been much slower, reaching only 9 percent of total loans in 1999, reflecting strict central bank regulations that borrowers of foreign currency must also be foreign exchange earners.
Chart 11.Republic of Yemen: Credit and Currency, 1990–99
Source: International Monetary Fund, International Financial Statistics.
167. The economic stabilization program has so far translated into some limited progress in financial deepening. The trend increase in credit to the private sector as a share of total credit is partly the result of the government repayments to the banking system and the added importance of nonbank financing of the budget deficit. However, it also reflects positive real private credit growth in 1996–99, averaging 2.4 percent, compared to an average annual decline of 15.7 percent during 1990–95. A rising multiplier points to increasing efficiency of the banking system (Chart 12), and a rising ratio of credit as percent of non-oil GDP (from 44 percent at the end of 1996 to 78 percent in 1999) indicates that financial deepening is taking place in the non-oil sector. Other indicators point to an opposite trend; for example, the use of currency has grown relative to that of deposits (Chart 11). A comparison of various indicators of depth and efficiency of financial markets with selected countries highlights the underdevelopment of the financial system of Yemen (Charts 13-14).82 The ratio of M2 to GDP in Yemen is one of the lowest among the selected countries in 1998, and the same holds for the ratio of private credit to GDP, the share of private sector credit to total credit, and the share of commercial banks' credit as a percent of total credit; the multiplier is much lower than those of the other countries.
Chart 12.Republic of Yemen: Velocities and Multipliers, 1990–99
Chart 13.Republic of Yemen: Comparison of Liquidity and Credit Ratios with Selected Countries, 1990–99
Chart 14.Republic of Yemen: Comparison with Selected Countries, 1990–99
1/ The high ratios for Saudi Arabia reflect large claims by the government on the banking system.
168. One of the objectives of the financial reform program was the implementation of legal reforms that would give commercial banks the ability to take effective judicial recourse to deal with nonperforming assets. Such action, together with a more independent central bank implementing stricter supervision on the credit operations of banks, was expected to significantly improve the soundness of the banking system. While there was considerable progress in the central bank's role as bank supervisor, implementation of the new legal framework has remained timid. Among the more effective steps was the introduction by the CBY in May 1997 of a notification system for delinquent private sector borrowers, and prohibition of new bank loans to such borrowers until they regularized their relations with creditor banks. The notification system has yielded some results, reflected in fewer delinquencies among large borrowers.
169. Despite the wide spreads between lending and deposits rates (Statistical Appendix; Table 26), banks' profitability has remained low, reflecting large excess reserves (and their lack of interest in granting credit and in mobilizing deposits), as well as large nonperforming portfolios. Wide spreads also reflect the lack of competition from within the banking system, and the nonexistence of a nonbank financial system. Low profitability rates may have also contributed to some erosion of the capital base since the early post unification period, but these were only detected with the strengthening of the provisioning requirements after the implementation of the reform program.
170. Partly reflecting the problems of judicial recourse, commercial banks in Yemen have traditionally been reluctant to lend outside of a core group of customers. The strengthening of the central bank's supervision in these areas is therefore creating considerable friction, as banks resist or try to circumvent enforcement of prudential regulation. While the provisioning against problem loans has improved in recent years, the ratio of problem loans to total loans has increased steadily (Statistical Appendix; Table 29). Banks' exposure to foreign exchange risk, as measured by the difference between assets and liabilities denominated in foreign exchange is also a cause for concern, with a large part of foreign currency exposures relating to two public sector banks. In the case of one of them, the government began in 1997 to buy back its foreign overdue obligations at a significant discount and one of these banks is scheduled to be put up for sale shortly. For private commercial banks, the exposure to foreign exchange risk is not large. Concentration of credit risk among the sectors of the economy is broadly in line with the structure of GDP, except that lending for construction accounts for only 5 percent of total credit to the nongovernmental sector, a much lower percentage than in most economies (Statistical Appendix; Table 27). This is probably explained by the absence of property guarantees in Yemen, with the consequence that banks extend housing loans only to their best customers. With regard to maturity structure, over 90 percent of all commercial bank loans have maturities of less than one year, reflecting a lack of willingness on the part of banks to lend for investment purposes, and the importance of import and domestic trade financing in the Yemeni economy and the associated prevalence of overdraft facilities.
171. The government traditionally offered few social insurance and welfare benefits, leaving the majority of the population to rely on informal safety nets within the family or tribal, religious, and other community. The pension system covers only civil servants, the military, security forces, and workers in the tiny formal private sector. Other social assistance is either indirect through subsidization of food and petroleum products through cash transfers or transfers with work requirements such as the Social Fund for Development (SFD) (see below) and the public works program. A formal cash transfer program, the Social Welfare Fund (SWF) was instituted in 1997. Other budgetary cash transfers are medical grants, benefits for war veterans and families, payments for tribal affairs, and discretionary compensations for emergencies.
172. Yemen has four separate pension schemes. Employees in the public sector are covered by a general scheme for civil servants and public enterprise employees, a military pension plan, and a plan for the internal security forces. A private sector plan covers workers in the formal private sector.
173. Relatively little is known about the plans of the military and security forces; indications are for about 50,000 beneficiaries in the military plan and 4,500 beneficiaries in the plan of the security forces. Information for 1993–95 indicates that both funds were running large surpluses. However, neither have the authorities undertaken long-term actuarial studies, nor is the financial status of the investment portfolios known.
174. The public sector plan for civil servants resulted from the merger of the North Yemeni Public Social Security and Pension Agency, created in 1982, with the South Yemeni plan that was established in 1967. The South Yemeni plan's surpluses were mostly invested in real estate, which yielded low returns. As a result, the South Yemeni plan added considerable net liabilities to the joint pension system.
175. Law 25 of 1991, as amended by presidential decree in December 1999, governs the public employee pension plan. Participation is mandatory for all public sector employees. Until recently, contributions and benefits were based on the basic wage, which excludes allowances and bonuses and generally amounts to between 50 percent and 60 percent of the full wage. The decree of December 1999 provided that benefits and contributions be based on the full wage. Employees and employers each contribute 6 percent to the public pension plan. An additional contribution of 1 percent is collected for disability and work-related injury insurance. Full public sector pensions of 100 percent of the last wage (until 1999; basic wage) are paid after 35 years of service, and the minimum service requirement is 15 years. Standard retirement ages are 55 for women and 60 for men, but early retirement is possible after 20 years of service (women) or 25 years of service (men). Survivor benefits are generous because the pension of the deceased is divided among the extended family, including parents, children, and children of deceased siblings. As a result, benefit spells can be very long because a number of survivors potentially survive the primary beneficiary by a long time. A minimum pension, which was doubled to YRls 7,000 per month in December, is paid to those with benefits below that threshold. Retirement of civil servants has not been enforced in part because many over age civil servants qualified only for the minimum pension. Moreover, as the administrative capacity of the pension authority is weak, while it tries to reconcile individual records for each applicant for benefits, only about 2,000–3,000 new pensioners per year have been accepted by the authority. Therefore, at end-1999, more than 20,000 over age civil servants were eligible for retirement. The government started to enforce retirement of these employees in early 2000.
176. In the near term, the public pension plan is expected to remain in a favorable financial position. Between 1995 and 1999, the plan was running surpluses between 0.5 percent and 0.8 percent of GDP, reflecting the small number of beneficiaries compared with the number of contributors. In 1999, there were about 40,000 beneficiaries compared with more than 400.000 contributors. Assets, which were estimated at YRls 30 billion at end-1999, are now mostly invested in treasury bills with only minor holding in low-yielding real estate. Because contributions are henceforth based on the full wage (basic wage plus most allowances) in the future, surpluses are expected to rise in the near future. However, owing to the high replacement rates, the plan is projected to run deficits in the medium- and long-term because more and more civil servants will retire and few new employees are expected to be hired. In light of these projections and the necessity to streamline the civil service, the government is committed to a reform of the public pension scheme that would provide for stronger links between benefits and contributions and support the long-run sustainability of the scheme.
176. The private sector pension plan is based on the North Yemeni institution established in 1987 and is governed by Law No. 26 of 1991. Eligibility and benefit rules are very similar to the public plan, with the exception that there is no minimum pension.83 Employees contribute 6 percent and employers 9 percent of wages, which following a 1995 decree of the Minister of Social Insurance, includes the basic salary and other allowances. Disability contributions are 4 percent of wages but they are rarely paid or enforced. In 1999, the private fund had about 1,000 beneficiaries, many with small pensions, and 40,000 contributors. The plan was also running surpluses between 1995–99 and is expected to continue running surpluses in the near and medium future. Currently, most assets are held in the form of treasury bills. Actuarial studies show that the private sector's plan benefits are also likely to be unsustainable in the long run.
178. The Social Welfare Fund (SWF) began its operation in 1997. Previously, the Ministry of Social Affairs paid cash transfers on a discretionary basis to families appealing for assistance. The SWF started with a caseload of 39,000 people. Since then, their number has been growing rapidly to about 350,000 cases at end-1999. Cash benefits are set at YRls 1,000 per month for a one-family household, rising by YRls 200 for each family member up to YRls 2,000 per family, and payments are made every three months.84 Beneficiaries must satisfy the condition to be without fixed income, without assets, and without support of a family member. Targeted groups are the disabled, orphans, women outside a family support network, and the poor. The law stipulates that each case should be re-evaluated once a year, but owing to the rapidly growing caseload the SWF has not been able to keep up with this requirement. Most of the full-time employees are located in the capital and largely part-time employees perform evaluations in the governorates. The budget of the SWF has grown with the caseload from YRls 2.4 billion in 1998 to YRls 5.2 billion in 1999 and expected YRls 7.7 billion in 2000 (0.7 percent of GDP). Operating costs have remained small at 4 percent to 5 percent of total expenditures. However, the low operating costs also resulted in a number of deficiencies of the SWF coverage. Spending patterns do not match the geographical distribution of poverty and population in Yemen, indicating a deficiency in reaching the rural poor. Much of the administration is centralized in the capital, resulting in long delays between application and payment of beneficiaries and difficulties in verifying eligibility.
179. Other cash transfer programs include the benefits for veterans and tribal organizations. These benefits are for fairly narrowly defined sets of the population. The number of recipients for veteran benefits is estimated at 28,000–29,000 in 1999, and about 9,000 for tribal benefits. In addition, the government provides medical grants and cash compensation for emergencies. Detailed breakdowns of transfers have not been available before 1997, and the effectiveness of these benefits has not yet been evaluated. Most of these specific transfers have grown little over time and are declining in importance compared with the SWF.
180. The Social Fund for Development (SFD) was established by Law No. 10 of 1997 with the purpose of helping alleviate any negative effects of the Economic Reform Program on the poor. It is headed by a board of directors chaired by the prime minister and with members representing key ministries, NGOs, and the private sector. The board decides on the general policies and orientations of the SFD on its annual operation plan, and monitors its performance.
181. Direct management of all aspects of the SFD's operations is the responsibility of the managing director, however, this is undertaken according to a strict and detailed operations manual developed jointly with World Bank consultants.85 This institutional set-up provides a large degree of autonomy within the SFD for quick and efficient decision-making and program implementation.
182. By the end of 1999. the SFD had grown to include over 85 employees and 6 branches. At inception, a sum exceeding US$80 million was earmarked for the first five-year phase of operations of the Fund, with various donors involved (IDA, the Arab Fund, and the EU). The government contributes an annual sum of YRls 98 million to the SFD. The capital made available to the SFD is deposited in private commercial banks; it is directly accessible to management, which provides for efficient disbursement of funds.
183. The SFD carries out three major types of programs; (a) community development services, aimed at directly improving living conditions of the poor and marginalized, and involving, wherever possible, implementation of labor-intensive subprojects to create employment in the targeted communities; (b) small and micro enterprise development, mainly through delivering credit to income-generating activities; and (c) capacity building, to The first type of programs includes the provision of basic education, primary health care, water and sewerage facilities, rural road access, etc. While small enterprise development has not yet taken place, the SFD undertook several projects aimed at micro enterprise development, through loan packages generally accompanied with participation in the design of the economic activity that will benefit from the credit. These programs are often implemented through NGOs and community-based associations, while the first type of (i) enable local community groups to initiate, operate, and maintain development projects;86 and (ii) enhance capacity in various NGOs, associations, and government institutions.87
184. programs are usually implemented through committees of beneficiaries, specifically set up for that purpose with SFD support.88 Projects in education, health, and water and sewerage are also implemented through institutions that can provide for a legal (and hence accountable) umbrella to ensure sustainability of operations (for example, local councils or NGOs). There is generally close coordination with the corresponding government institution to avoid duplication of projects and to ensure the supply of employees to work on the projects—the government particularly supplies the necessary providers to run education and health care facilities.
185. The SFD follows a two-pronged approach in program development, by both responding to demand and targeting specific needs; it also attempts to cover fairly the Yemeni territory, including remote rural areas and all marginalized groups.89 Targeting is necessary because most needy communities are often hindered from submitting any demand for various reasons, ranging from helplessness, desperation and frustration to illiteracy and physical illness, and to domineering by local sheiks. The Planning and Monitoring Unit of the SFD designed a separate measure of poverty based on nine indicators capturing basic socio demographic and economic characteristics. This measure is regularly updated and refined, and the SFD relies on it in its targeting policy.
186. The SFD succeeded in operating efficiently because of a large degree of autonomy and simple decision-making processes, and because of simplified procurement and disbursement procedures.90 It started operations early on its inception year, contracting 50 projects at a cost of about US$4 million; in 1998, it contracted 337 projects with total investments of US$21.2 million and total disbursements of US$6.2 million. By September 1999, the SFD had implemented a cumulative total of 785 projects and subprojects covering a large part of the country, with total investments of about USS47 million, of which about USS20 million were disbursed (Table 11).91
Table 11.Republic of Yemen: Social Fund for Development—Accumulated Investment, Disbursement, Number of Expected Beneficiaries, and Job Opportunities, up to September 30, 1999, According to Sector
Committed ($)
Disbursed (4)
(Person-day)
(Person)
Education 490 24,474,98 12,407,008 262,927 40,009 888,057 3,506
Health 101 5,700,093 2,003,775 495,335 38,006 130,951 1,066
Water 85 7,148,680 3,111,320 337,598 8,498 190,217 176
Envirornnental activities and sewerage 16 2,894,732 338,676 154,575 60,000 104,337 126
Roads 9 855,464 23,255 64,836 55,996 60,709 0
Social services 8 2,859,371 60,929 1,900 0 95,527 138
Capacity building 63 885,498 471,396 7,807 685 13,096 414
Micro enterprise 13 2,220,087 1,582,776 10,995 59,942 2,864 154
Total 785 47,038,913 19,999,135 1,335,973 263,136 1,485,758 5,580
Source: Social Fund for Development Newsletter, Issue No.8 (October-December, 1999).
187. The success of the SFD operations shows in both the high repayment rate on credits delivered and the numbers of beneficiaries and jobs created by its programs. Although the effective rate of interest charged by the SFD is quite high, often exceeding 20 percent, the repayment rate on SFD credit is in the upper 90s.92 Moreover, direct beneficiaries from SFD programs reached a cumulative total of 1,335,973 persons by end-September 1999, while the number of indirect beneficiaries stood at 263,136. During the same period, these projects have allowed the creation of permanent jobs for 5,580 individuals.
188. Besides programs carried out at the central government level, there were several welfare initiatives at the local government and community levels in the 1980s in both Yemens. Local organizations raised contributions within their own communities to undertake development projects such as roads, clinics, schools, and parks. In the early 1980s, as reported in the World Bank 1996 Poverty Assessment Review (PAR), these organizations completed the construction of 852 kilometers of roads, 783 classes, 267 potable water projects, 71 clinic rooms, and 261 parks and mosques. They also undertook a greater number of maintenance projects. While the organizations in North Yemen (known as LCCDs—Local Councils for Cooperative Development) were initially independent but worked with the collaboration of the central government, those in South Yemen were under direct central government control. However, the government increased its control of these units, which discouraged community involvement and commitment, and led to a large decline in financial, labor, and time contributions of local communities.93
While the involvement of Yemeni local communities in welfare operations-was on the decline in the first part of the 1990s, mostly due to lack of institutional capacity and financing, the role of international organizations and NGOs increased.
189. Some 15 reasonably active NGOs provide health, education, and other social services to urban areas, and these seem to be relatively successful at targeting low-income groups. However NGOs face problems in terms of limited capacity and resources available to allow them to grow and improve the efficiency of their services.94
190. Three types of informal safety nets can be identified in Yemen: religious charity, traditional community-based assistance reinforced by a strong tribal system, and within family transfers. Religious charity can take the form of zakat, which represents the donation of 2 percent to 5 percent of wealth to the poor, or satqa, which represents voluntary contributions, pecuniary or in kind, donated to the poor. Community support is provided for example through voluntary work or neighbors' labor pooling. In the early 1970s neighborhood groups often grew into organized cooperatives (the latter LCCDs). Although hard to estimate, family support must be an important source of assistance, because society is very traditional and has a structure based more on family network and solidarity than on economic achievement. This is particularly striking in the rural areas, whereas larger cities are being slowly transformed by the transition to a market economy.
191. Sociologists believe that the informal support systems in Yemen work reasonably well and explain the apparently rare incidence of starvation. However, in the absence of systemic research on the issue, there is no quantitative assessment of the scope and effects of these safety nets.
A. Growth and Employment95
192. The external shocks to which Yemen was subject in the 1990s had a strong impact on economic growth. Dislocations associated with the Gulf crisis of 1990 and unification, and again with the civil war in 1994, contributed to sharp economic contractions while resumption of economic activity after both instances was associated with high positive growth (Table 1). These swings in growth rates were exacerbated by a severe drought in 1990–91 and a milder one during the first rain season of 1999. On the other hand, oil discoveries that brought on stream the large Masila field in mid-1993 compensated for anemic growth in other sectors at the time and helped in mitigating to some extent the impact of the civil strife in 1994 on national income. Indeed, the sectoral composition of GDP shows a growing importance of the oil sector over the decade (Chart 15). Government policies have also played a major role in Yemen's growth performance. As described before, controls imposed in the first part of the decade, laws that either created or protected monopolistic practices, and regulations that inhibited or discouraged private sector activities were important obstacles to economic expansion. On the other hand, the liberalization and reform of the regulatory environment initiated after the end of the civil war were probably important elements in triggering economic growth, although such effects are difficult to quantify.
Chart 15.Republic of Yemen: Evolution of the Shares of Key Sectors in Real GDP, 1990–99
193. The improvement in performance is striking when growth is compared over the pre-and post-reform periods (Table 12). Real GDP growth averaged 5.6 percent in 1995–99, compared with −0.2 percent in 1991–94. Even if the civil war effect is isolated by eliminating the year 1994 from the calculations, the difference in average annual growth remains impressive. While this improvement originates in part in the oil sector, average annual non-oil GDP growth also rose, more than doubling in the second half of the decade, even after abstracting from the adverse effect of the civil war. With population growth little changed between these two periods, the higher growth appears to have come from higher capital accumulation and a considerably better performance of total factor productivity (Box 4).
Table 12.Republic of Yemen: Macroeconomic Indicators Comparing, Pre-Reform and Reform Period, 1991–99
Annual Average
(Growth rates in percent)
Real GDP 1.0 −0.2 5.6
Oil GDP −6.1 4.4 9.8
Non-Oil GDP 2.1 −1.0 4.7
Agriculture, forestry, fishing 4.8 2.7 6.1
Manufacturing 4.7 2.1 5.6
Construction 8.3 0.7 13.6
Trade, wholesale, and retail 4.4 −0.3 8.9
Transportation, storage, and communications −1.7 −6.4 0.0
Financial and real estate services 1.3 2.8 4.6
Govemment services −4.0 −7.8 −0.3
Real per capita consumption −20.3 −26.5 2.9
Inflation 52.6 57.3 25.3
M2-growth (Dec/Dec) 27.1 28.9 13.0
External current account (excluding grants) −14.1 −9.5 −0.2
Fiscal balance (excludmg grants) −120 −13.1 −4.2
Gross national savings 6.4 11.3 21.8
Gross investment 19.7 19.9 21.0
Sources: Yemeni authorities; and Fund staff estimates.
194. Even so, for the decade as a whole, average TFP growth was negative, pointing to a substantial scope for structural reform to improve non-oil growth performance, without necessarily higher levels of investment.
Sectoral growth in the non-oil economy96
195. Agriculture is the largest sector of the Yemeni economy, and in 1998–99 accounted for about 30 percent of GDP and 58 percent of total employment- Seventy seven percent of the population derive its income from agriculture and related activities (such as trade and transport). However, reliance on irrigation in a country with scarce water resources, coupled with a prevalence of traditional methods of cultivation, constrained agricultural growth over the past decade. Real growth in agriculture averaged a modest 4.5 percent per annum between 1990 and 1999, and its contribution to real non-oil growth declined when comparing the two halves of the decade (Box 4). The sector is highly vulnerable to variations in rainfall. For instance, following a severe drought in 1990–91, real agricultural activity contracted by 7.6 percent; it recovered impressively in 1992 (20.1 percent real growth) owing largely to exceptional rainfall.
Box 4.Growth in the Non-Oil Sector
On the basis of recent official data on national accounts, real non-oil growth picked up to an annual average of 4.7 percent in the second half of the 1990s, compared with 2.1 percent in 1991–93. While sectoral shares have remained broadly stable, the share of agriculture in non-oil GDP growth rose by 1.5 percentage points during 1995–99, but its contribution to non-oil growth declined from 70 percent in 1991–93 to 43 percent in 1995–99. It was partly compensated by fishing, financial institutions, and real estate, each of which contributed an additional 3 percent to 4 percent with non-oil growth in 1995–99 compared with the pre-civil war period. The share of government services fell slightly over 1995–99. Tourism, although generally perceived as a sector in which Yemen has a comparative advantage, did not perform well as its contribution to non-oil growth (proxied by the value added of restaurants and hotels) increased by only 0.3 percent, from a low base of 0.6 percent of GDP growth (Annex I).
Title: Sectoral breakdown of Non-oil GDP
Sector's Share in Non-oil GDP
Contnbution to Non-oil GDP Growth
Agriculture and forestry 33.4 35.0 70.5 42.6
Fishing 0.7 1.2 −0.8 3.2
Manufacturing 14.8 13.2 26.0 15.5
Construction 3.9 5.0 13.3 11.6
Transportation, storage, and communications 13.1 11.3 −13.8 0.0
Government services 11.5 10.9 −34.3 −0.9
Wholesale and retail trade 9.1 10.2 17.8 17.3
Restaurants and hotels 0.4 0.5 0.6 0.9
Financial institutions and real estate 7.2 7.6 4.2 7.6
Other 5.4 4.7 16.5 2.2
Sources: Central Statistics Organization of Yemen; and Fund staff estimates.
While poor data quality hinders any precise conclusions, the growth accounting exercise below attempts to shed some light on the roles of factor accumulation and productivity in contributing to growth. For the period 1991–99, non-oil per-capita GDP growth was negative, at −1.3 percent on average, while labor and capital factor accumulation were substantial, reflecting relatively high population growth and investment levels. Thus total factor productivity was significantly negative, and this result holds for a broad range of reasonable assumptions regarding the capital-output share and initial capital stock. Reforms that would enhance factor productivity, thus, emerge as a key element to promote economic growth. Indeed, factor productivity in the reform years 1996–99 was much higher (by about 50—100 percent) compared with the whole period depending on the assumed capital-output share and initial capital stock.
Growth Decomposition in the Non-oil Sector, 1991–99 1/
Average Annual Percentage Change
Real non-oil GDP
per-capita
TFP (a=0.2)
1991–99 2.1 −1.3 3.5 10.8 −2.8 −4.2
Of which: 1996–99 4.4 0.3 3.5 9.5 −0.9 −2.1
Of which: 1996–99 4.4 0.3 3.5 12.8 −1.6 −3.4
1991–99 2.1 −1.3 3.5 5.6 −1.7 −2.2
1/ Assumes a standard, neo-classical, constant returns to scale. Cobb-Douglas production function: Y=AKaL(1-a), where Y=potential output, A=total factor productivity (TFP), K=capital, L=labor, a=capital/output production share. It is assumed that actual GDP growth equals potential output growth and population growth equals employment growth. Average annual capital stock was calculated as K(t)=K(t-l)*(l-0.03) + GKF(t) where it is assumed that the depreciation rate of capital stock is 3 percent per annum, GKF is real gross capital formation in year t, and ? (1990) was set equal to real GDP in the first two rows, to 50 percent of real GDP in the second row, and to 200 percent of GDP in the last two rows.
196. Government policies had an important impact on agricultural growth. In the first part of the decade, import subsidies on wheat and flour kept prices artificially low, discouraging local production.97 More importantly, the large depreciation of the parallel market exchange rate in 1992–94 led to an increase in input costs (as seeds, fertilizers, machinery, and parts are imported), which lowered net returns to farmers. At the same time, domestic production was stimulated through import bans on various products such as fruits, vegetables, fats and grains, and high import tariff rates on others. The gradual removal of bans and controls in the context of the reform program that started in 1995, nonetheless, coincided with an increase in production,, partly by reducing costs of inputs and liberalizing prices, but also because of the privatization of about 50 agricultural units at the onset of the privatization program.98 Another factor was some improvement in cold storage and transportation facilities for agricultural production. Hence, average annual agricultural growth rose to 6.1 percent per annum in 1995–99 compared with 4.8 percent in 1991–93.
197. Two decades of rapid growth under the umbrella of protectionism and subsidies had achieved by the mid-1990s near self-sufficiency in both fruits and vegetables. The second half of the 1990s saw a continued rise in the production of these crops, partly underpinned by the spread of irrigation, and despite the gradual removal of import bans imposed on similar products (Statistical Appendix Table 14). However, production of cereals was generally declining over that period with a sharp drop estimated for 1999 due to the drought that occurred in the first rain season of the year. Qat is another important crop in Yemen, capturing more than 7 percent of the total cultivated area (see Box 5). However, there are insufficient statistics on qat production and its contribution to GDP is difficult to assess. Qat does seem highly water intensive, though; with production largely supported by indirect subsidies on diesel and water pumps, its expansion may have contributed to the decline in cereal production.
198. Livestock and other noncrop production significantly increased over the second part of the decade (Statistical Appendix Table 15). Among these products, fish is particularly important. The country is endowed with important resources of surface water fish, as well as deepwater fish, shrimp, and other shellfish. In the first half of the decade, industrial activity related to fishing was protected with the ban on imports of fresh and frozen (but not canned) fish. At the same time export controls maintained the prices of fish at a low level, discouraging the activity. With the removal of trade controls, fishing became more lucrative, and total catch increased by about 60 percent between 1995 and 1998.
Box 5.The Role of Qat1
Chewing of qat leaves is a widespread practice in Yemen, usually in the context of social gatherings in the afternoon. The leaves, which contain an amphetamine-like substance, come from the hardy and drought resistant small qat tree (edulis), and chewing has the effect of a mild stimulant. There are some indications that qat chewing was for a long time confined to the wealthy and only in the 20th century spread to the wider population. A study in the 1960s found that in the city of Taiz about 60 percent of males and 35 percent of females were "habitual" chewers. Since late 1999, qar chewing in public buildings and during working hours is prohibited, and a public campaign to reduce chewing has been launched.
Qat comes in many qualities and prices vary accordingly. Recent household surveys indicate that qat absorbs 5–10 percent of total household expenditure in all regions of Yemen except the desert governorates, and probably accounts for a similar share in GDP. Consumption is in fact widely thought to have increased in recent years, and the area cultivated with qat is thought to have increased by 10 percent between 1995 and 1990 (to 9S,000 ha), roughly in line with total cultivated area. Over the same period, qat prices rose faster than the average CPI.
Qat is appreciated especially by small farmers as a crop with a very high market value and low labor demand. At least in the Sana'a basin qat depends on irrigation and is highly water-intensive. Water is typically pumped with diesel pumps, contributing to the rapid decline in water tables. While reliable statistics do not exist, production expanded during the 1980s and 1990s and partially displaced other crops such as grapes, coffee, and cereals—with the latter also driven out by subsidies that kept grain prices low.
Qat leaves have to be brought fresh to the market to be consumed within 12 hours from harvesting. Accordingly, a highly efficient transport and marketing system has developed, even in the most remote areas. The qat trade is probably an important mechanism in transferring wealth from urban to rural areas, said to directly benefit 170,000 families (i.e., one million people). Import of qat is banned. Some export to neighboring countries and Yemeni communities abroad may occur through informai channels but no data are available.
Qat retail sales are taxed at 20 percent but tax collection suffers from logistical and governance problems; in 1999 the qat tax yielded YR1 1.6 billion (0.2 percent of GDP). Shifting qat tax collection to the local authorities and basing it on acreage rather than sales is under consideration. The Yemeni authorities have recently commissioned a study to better understand the role of qat cultivation in the economy, in particular regarding overall production, water use, profitability and distribution of revenues, labor requirements, and substitution with other crops.
1/There is little quantified information on qat production and use—partly reflecting official uneasiness with the importance of qat in Yemeni society. The box is based on an unpublished World Bank paper (Ward et. al., 1998) and some information from the authorities.
199. The agriculture and fisheries sector is largely market-oriented, with production privately undertaken by farmers, but encouraged by the government and cooperatives that provide subsidized inputs. The government traditionally financed the purchase of fertilizers and pesticides at low cost through the Agricultural Credit Bank. Farmers also have long benefited from low diesel and electricity prices, which encouraged the reliance on pumping water for irrigation and contributed to the depletion of underground water resources. Other bans and controls have practically been eliminated, however, and the government is shifting its focus toward more market-based ways to promote agriculture.
200. First, the Ministry of Agriculture is becoming active in the development and maintenance of water resources. In 1999 it undertook preliminary studies for 77 dams, prepared the design for 40 other dams and reservoirs, and prepared an irrigation policy that was approved by cabinet; the construction of 12 dams was finished, and 17 other dams are under construction. The ministry also plays an important role in protecting crops from diseases through information campaigns, providing quality control checks on insecticides and pesticides to ensure their adequacy, and assisting farmers in controlling crop and livestock diseases.99 It provides funding for various activities (fertilizing, transportation using cooling systems, livestock production, water resource management, and agriculture-related activities such as transportation and marketing). While this marks an improvement from earlier neglect of the sector, as recently developed in a broad-based participatory approach in the "Aden Agenda," more needs to be done in terms of encouraging rain-fed crops, eliminating subsidies (particularly on diesel), and improving the overall quality of public services in agriculture.
201. The industrial sector contributes a meager 16 percent to real GDP, mostly manufacturing (11 percent) and construction (4 percent). Manufacturing, limited mainly to the production of consumer goods and construction materials (Statistical Appendix; Table 13) was steadily growing at about 4–5 percent in the first part of the decade. A boom in construction and real estate activities occurred in the early 1990s following the return of 1 million Yemenis after the Gulf crisis. Indeed, the sector registered a real growth rate of 6.3 percent in 1991 and 16.1 percent in 1992. This boom may have also been partly due to high demand for land and property as a hedge against inflation, running at 45–50 percent in 1991–92. The civil strife of 1994 caused disruption in industrial activity and led to contraction in both manufacturing (5.3 percent) and construction (19 percent). Extensive damage to private property and public infrastructure, including the Aden refinery and electricity generating stations, constrained activity mostly in the south but also in the north.
202. Recovery from the war, coupled with the initiation of the reform program in 1995, led to a strong pick-up in industrial activity. A construction boom in 1995 extended into 1997. Similarly a jump in the growth rate of manufacturing took place in 1995, but was not sustained in the following years.
203. Services today account for about 35 percent of real GDP, of which 9 percent for each of transportation, storage and communications; government services; and trade; and 6 percent for financial institutions and real estate. Most of these shares had been relatively stable throughout the decade except for government services, which declined from 16 percent of GDP in 1990 to 9 percent in 1995, and transportation, storage, and communications which declined from a 15 percent GDP-share in 1990 to 9 percent in 1996. While there are considerable doubts on the accuracy of the underlying data, public services may have declined due to the privatization of a large number of small-scale public enterprises in 1995—96. The growth pattern in other sectors related to services also broadly reflects the effect of the Gulf crisis, the war, and the reform program of 1995. Trade and financial services jumped in 1991 following the repatriation of Yemeni immigrants from the Gulf; while trade kept growing at an annual average of 4.2 percent in 1992–93, financial services subsequently contracted. The post civil war period saw another boom in both sectors, as the annual average growth rate reached 9 percent for wholesale and retail trade and 4.6 percent for financial services; wholesale and retail trade even grew by 15.5 percent in 1995, probably triggered by the recovery from the civil war, but also the import and excise tax reforms introduced at the time.
204. Labor market data in Yemen are scanty and do not go back beyond 1991.100 Only recently, and motivated by the rise in unemployment in Yemen in the aftermath of the Gulf War in 1990, a more focused monitoring of labor market developments was initiated. The Ministry of Labor and Vocational Training (MOLVT) was created in 1997. In an effort to consolidate labor market statistics, and improve its functions in vocational training, job matching, and labor force planning, MOLVT embarked in 1998 on a major project to develop a Labor Market Information System database (LMIS). LMIS will provide links between various concerned government agencies and the Ministry of Labor and its job offices located in different parts of the country, including information on the supply and demand of labor according to professional description, based on input provided by various government agencies and periodic market surveys.
205. It is estimated by the Ministry of Planning that, in early 2000, out of the 9.7 million-strong Yemeni workforce (population aged 15 and above), the labor force stood at about 4.2 million, implying a 43 percent participation rate. Participation rates are very different between the male and female population with about 72 percent and 15 percent, respectively. By both regional and international standards, these differences are striking. As a result, female labor accounted only for about 18 percent of the total labor force as compared with an average of 41 percent for low-income countries, and 43 percent for high-income countries.
206. Data on the sectoral distribution of employment (Statistical Appendix Table 6) indicate a high concentration in informal sectors such agriculture and fisheries (49 percent), followed by trade, restaurants, and hotels sector (about 11 percent). Female employment in Yemen is concentrated in the informal sectors, particularly agriculture and fisheries, which employ about 86 percent of all female workers. Other important sectors include manufacturing industries and education with each accounting for about 4 percent of female employment. The low female participation and employment in general, and in the formal sector in particular, appear to be attributable to a number of factors such as traditional values which discourages female employment in nontraditional areas; early marriage for females;101 relatively low educational attainment among females;102 and labor legislation which imposes additional cost for hiring female workers (Box 6).
207. Available unemployment data suggest a growing unemployment rate among the Yemeni population, as the pace of employment creation during the last eight years was insufficient to absorb the new entrants in the labor force. The 1994 population census estimated an unemployment rate of 10.1 percent (Table 13), while the preliminary results from the recent labor market survey suggest that unemployment has risen to 20 percent in 1999.
Table 13.Republic of Yemen: Distribution of Labor Force by Employment Status, Age Group (+10 Years), and Sex, 1994(In percent)
Total Labor Force
10–14 11 39.5 14.7 3.4 14.7 5.7
20–24 21 14.7 20.7 11.9 11.1 11.8
25–29 13 6.2 12.1 14.0 12.9 13.8
30–34 8 2.5 6.9 13.2 11.9 12.9
40–44 4 1.0 3.9 9.6 8.4 9.4
65+ 3 0.9 2.6 5.1 2.4 4.5
Unspecified 0 0.1 0.0 0.0 0.0 0.0
Total 100.0 100.0 100.0 100.0 100.0 100.0
Total (thousand) 286 39 325 2,550 659 3,209
Memorandum items: Percentage population age 10–24 56 86 59 23 40 26
Sources: Central Statistics Organization; General Population Census 1994.
208. There are no reliable data relating unemployment to age category, educational level, the duration of unemployment, or the causes of unemployment, and data on wages in the private sector are nonexistent. Data available from the 1994 census suggest that the majority of the unemployed (about 60 percent) were below the age of 24, and that unemployment rates fall sharply as age increases (Table 13). In terms of educational level, the current long list of university graduate applicants at the Ministry of Civil Services (see below) suggests that unemployment is not confined to people with low educational attainment alone.103
Box 6.Republic of Yemen: Current Labor Legislation1
General principles: The legislation deals with private sector employment only. Certain activities such as traditional agriculture, domestic servants, and international organizations are exempt. Under the law, every citizen has a right to work with no discrimination of sex, age, or race.
Hiring and foreign employment: Firms must report all vacant jobs to the Ministry of Labor and Vocational Training (MOLVT) first, and may hire directly from the market only if MOLVT does not nominate candidates within 15 days. Non-Yemeni workers may only be employed in jobs for which no Yemeni expertise is available, and provided their total number does not exceed 10 percent of the workforce in the establishment. Firms hiring foreign workers are required to appoint local counterpart workers with appropriate qualifications and proficiency throughout the tenure of the non-Yemeni employee. Companies in certain sectors may be exempted from abiding by these rules.
Work contracts: Unless specified in the two parties' agreement, contract duration is unlimited for Yemeni employees. After a six-month trial period for a new worker, the latter may not be dismissed unless he fails to comply with the contract terms, displays noticeable negligence, or commits unlawful acts. Yet employers may terrninate the contract if needed to reduce staff for economic or technical reasons. In all cases, the employee would be eligible for a special compensation for damages resulting from contract termination. The amount of this compensation, determined by a specialized arbitration committee, must not exceed six-month salary.
Special rules apply for employing women and minors. Women work at most five hours per day in the six months of pre-natal and post-natal periods; they should not be employed in dangerous jobs, and are not allowed to work at night except during the holy month of Ramadan and as determined by MOLVT. They are entitled to paid leave for 40 days in the case of the husband's death, and to leave without pay for up to 90 days.
Wages and other reimbursements: Wages and bonuses differ for overtime, night shifts, holidays, and training. An hour of work is equivalent to one hour and a half of basic wage for overtime work, and two hours of basic wage for work at night and on weekends and public holidays. MOLVT may set minimum wages at a general or sectoral level. Wage discrimination based on sex or nationality is prohibited.
Working hours, breaks, and vacations: Official working hours must not exceed 8 per day, or 48 per week, and must include at least one break. Employees are entitled to at least 30 days of annual leave (net of public holidays), have to take at least half of these every year, and may not trade vacation for financial compensation.
Every establishment of 10 employees or more must formulate, within given guidelines on obligations and rights of employees, a charter of penalties and conditions of applying them, displayed in a conspicuous place.
Vocational training: Employers are required to either provide direct training to their workers or make annual financial contributions to MOLVT training programs in amounts proportional to the number of employees. The ministry organizes public vocational training programs, and supervises the standards of programs offered by the private sector.
Occupational health and safety: Employers are required to adhere to standards specified by the authorities.
Health and service insurance: Employers are required to provide medical care and, for larger firms, to establish in-house health facilities. Upon the end of service, employees are entitled to a monthly pension or lump sura reward, according to the rules of the social insurance law and, if not covered by social insurance or a similar system, to severance pay of at least a one-month wage for every year of service.
Work inspection: MOLVT's safety and health inspectors are responsible for monitoring workplace conditions and its inspectors have the legal power to conduct unscheduled inspections.
Labor disputes may be resolved by either direct MOLVT intermediation or specialized arbitration committees set up by MOLVT, or through a specialized appeals court. Strikes for nonpolitical reasons are permitted only after exhausting intermediation efforts and reaching a final court decision; must be voted for by union members, with a minimum participation of 60 percent, and approval of at least 25 percent in a secret ballot; and need to be notified to MOLVT three weeks in advance. Some businesses such as hospitals, electricity and telecommunications plants, and banks should maintain a rninimum level of personnel during strike periods.
Collective organizations: Employers and employees have the right to create and join organizations to look after their rights. It is prohibited to take punitive actions against employees participating in union activities.
Punishments: The law describes the penalties and punishments for violating different articles of the labor law, which include a maximum imprisonment of three months or a fine ranging between YRl 5,000 and YRl 20,000.
1As amended in 1997.
209. Emigration has a long tradition in Yemeni history for providing an alternative source to absorb new entrants in the labor force and provide much needed foreign exchange. Migration flows have headed mainly toward three regions of the world: for many centuries, migrants went to the far east; particularly India, Indonesia, and Malaysia, and also east Africa; in recent decades migration to the GCC became dominant. Emigrants to the first two regions have mostly settled permanently and were assimilated within the local communities, while those in the GCC still maintain a strong link with Yemen and remit a sizable portion of their income on a regular basis. The Ministry of Immigrant Affairs estimates put the total number of Yemenis abroad at around 6 million to 7 million, of which, about 4–5 million in Indonesia, 0.8 million in the GCC countries, and 0.2 million in African countries—notably Kenya and Ethiopia.
210. As discussed before, international migration has slowed considerably in the aftermath of the second Gulf crisis. Although in 1997, a partial resumption of labor migration to the GCC appears to have taken place on a small scale, prospects for migration to the GCC countries will likely remain limited since most of the GCC countries are currently facing rising unemployment among their national labor force, while former Yemeni labor has been replaced by Asian workers.
211. The Labor Law governs employment in the private sector as last amended in 1997. Among other features, the law enables the government to set up a minimum wage,104 provides unrestricted right to form labor unions and to conduct strikes, and sets relatively restrictive dismissal rules, women work conditions and benefits, and working hours (Box 6). In view of the administrative weakness of the implementation agencies, the main effect of the law appears to be to add to fiscal and regulatory incentives for firms to remain in the informal sector, contributing to the predominance of the latter.
212. General education in Yemen includes nine years of basic education; three years of secondary schooling; and technical, vocational, and higher education.
213. Technical, vocational, and higher education in Yemen is primarily run by two government bodies; the Ministry of Education, which overlooks professional level education (three-year teachers training, and four-year university education), and the General Authority for Vocational and Technical Training (GAVTT) which falls under the jurisdiction of the Ministry of Labor and Vocational Training. Other ministries that provide specialized education include health, transport, fisheries, agriculture, tourism, civil services, and Awqaf.
214. GAVTT has 3 levels of training institutes: 2-year vocational centers providing semiskilled and skilled training, 3-year vocational colleges providing crafts level training, and 2 to 3 year post-secondary technical colleges offering technician diplomas. Currently there are 26 such institutes specializing in fields such as tourism, manufacturing, hotels, agriculture, and veterinary medicine. Funding comes primarily from the budget and a 1 percent tax on the wages of workers in medium- and large-sized firms (10 or more workers), plus expatriate labor visa fees (YRl 5,000).
215. Enrollment levels and graduation at various colleges and universities is heavily biased toward the arts and humanity colleges (77 percent and 70 percent, respectively), followed by teaching colleges (11 percent and 19 percent, respectively), and technical colleges run by GAVTT (Table 14). The education system appears poorly tuned to market needs and skill mismatch is likely a major cause of unemployment. The current structure of a ratio of 1:17 technical to university graduates compares to international standards of 4:1. Among the causes cited for the low enrollment in technical training is the insufficient resources made available to these colleges, the inadequate skills covered by its programs, and the general preference among the population, particularly among females, for government and administrative jobs.
Table 14.Republic of Yemen: Students Enrollment and Graduation from Colleges and Universities in 1998/99
(Students)
Technical colleges 1/ 3,326 476 3,802 1,015 132 1,147
Teaching colleges 16,190 3,469 19,659 4,293 678 4,971
Universities 117,967 34,128 152,095 15,063 4,433 19,496
Public 109,135 30,687 139,822 13,805 3,940 17,745
Arts and humanities 99,030 26,729 125,759 12,900 3,637 16,537
Science and technical 10,105 3,958 14,063 905 303 1,208
Private 8,832 3,441 12,273 1,258 493 1,751
Arts and humanities 7,110 2,938 10,048 979 438 1,417
Science and technical 1,722 503 2,225 279 55 334
Total 137,483 38,073 175,556 20,371 5,243 25,614
(In percent)
Technical colleges 1.9 0.3 2.2 4.0 0.5 4.5
Teaching colleges 9.2 2.0 11.2 16.8 2.6 19.4
Universities 67.2 19.4 86.6 58.8 17.3 76.1
Public 62.2 17.5 79.6 53.9 15.4 69.3
Arts and humanities 56.4 15.2 71.6 50.4 14.2 64.6
Science and technical 5.8 2.3 8.0 3.5 1.2 4.7
Private 5.0 2.0 7.0 4.9 1.9 6.8
Arts and humanities 4.0 1.7 5.7 3.8 1.7 5.5
Total 78.3 21.7 100.0 79.5 20.5 100.0
Sources: Ministry of Planning; UNDP.
1/ Includes training institutes and programs run by GAVTT, Ministries of Health, Communications, Fisheries and Agriculture, Culture, Civil Services, and Awqaf.
216. Inflation in Yemen is largely determined by monetary developments, which in turn are driven by domestic budgetary financing needs. As monthly CPI data prior to 1995 is not available,105 annual data was used to derive Chart 16, which illustrates that the path of money growth and inflation closely mirror that of domestic deficit financing. Indeed, the correlation coefficient between CPI inflation and domestic fiscal finance (as percent of GDP) is 0.66, almost equal to the correlation between CPI inflation and broad money growth, while the correlation coefficient between broad money growth and budgetary finance is 0.85.
Chart 16.Republic of Yemen: Inflation, Money Growth, and Budget Financing, 1990–99
217. Price instability in Yemen was particularly acute in 1990–94. These years witnessed very high inflation, fueled by large fiscal deficits translating into high rates of money growth (Table 9). inflation accelerated from 34 percent in 1990 to peak at 71 percent in 1994, the year of the civil war, as fiscal deficits and the rate of broad money growth surged (Table 1).
218. The structural reform program initiated in early 1995 succeeded at reducing inflation, to single-digit levels by end- 1999. This improvement reflects declining budget deficits (from about 16 percent of GDP in 1994 to near balance in 1999) allowing tight money growth.
219. Indeed, the average annual rate of expansion of broad money in 1995–99 was halved compared with the first part of the decade.
220. Inflation only declined slowly in the beginning of the reform period, from 71 percent in 1994 to 63 percent in 1995 and 40 percent in 1996, partly owing to significant adjustments in administered prices. Indeed, excluding the effect of administered price increases,106 CPI inflation would have reached a much lower 33 percent in 1996, the year in which the diesel price was increased by 100 percent, wheat and flour prices were raised by 150 percent, and average electricity tariffs were raised by 161 percent. Administrative price increases implemented at different times as part of the reform process (Table 6) accentuated CPI increases and contributed to inflation at least until end-1997 (throughout that period, inflation excluding administered prices was about 7–15 percent lower than overall CPI inflation).
221. Chart 17 attempts to isolate the effect of administrative price increases on several CPI components. The transportation price index shows four jumps: in April 1995 following the doubling of gasoline prices; in January 1996 following another 50 percent increase in these prices and a doubling of diesel prices; in September 1997 following another 67 percent increase in diesel prices; and in July 1998 following a 40 percent increase in gasoline prices.
Chart 17.Republic of Yemen: Price Indices for CPI Groups that Include Items with Administered Prices
The fuel and lighting index shows major jumps in May 1995 following increases in electricity tariffs (60 percent, enacted in January 1995) and fuel oil (74 percent for Public Electricity Corporation (PEC)), and in January 1996 following another 161 percent increase in average electricity tariffs and 133 percent increase in the fuel oil price. Subsequent increases in prices of both products were milder (September 1997, July 1998, and June 1999) and had smaller effects as shown by the relatively smooth path of the index from February 1996 and onwards. The price index for cereals also shows an upward effect due to increases in administrative prices of wheat; the two significant responses are registered following the 150 percent increase in wheat prices in January 1996 and the full liberalization in the third quarter of 1999.
222. Other important factors driving inflation were fluctuations in the prices of vegetables and qat. Both products exhibit strong seasonality, with prices affected by rain/drought and seasonal demand (around holidays for qat), and on trend these prices have been rising faster than the overall index. Indeed, CPI inflation has always been lower (by 10–25 percent at least) when both products are excluded from its measurement. Qat and vegetable prices strongly rose in the first part of 1999 following a severe drought, which contributed to more than 50 percent of inflation over the period April-August 1999. Two additional factors affected the price of vegetables in the reform period: the exchange rate unification in July 1996 led to a rise in the price of imported vegetables; and the gradual phasing out of import bans on vegetables (in March 1998 and in mid-1999) contributed to drops in vegetable prices around these dates (Chart 17).
223. With an annual average decline in real per capita GDP by about 0.5 percent over the past decade, resulting from both sluggish real growth and a large increase in population size, it is not surprising that poverty levels seem to have deteriorated in Yemen. According to a World Bank report,107 20 percent of Yemenis lived in conditions of absolute poverty in 1992, with below socially acceptable spending levels, poor health status, and limited access to education. A UNDP report108 states that by 1998 absolute poverty had spread to cover 30 percent of households, and that 15 percent of families lived below the poverty line.
224. The UNDP109 attributes to Yemen a human development index (HDI)110 specific measures of basic human needs, all take into consideration a core set of socioeconomic indicators related to levels of income, health, education, and access to basic services, in most of these categories and despite some improvement over the past two decades, the record of Yemen fares relatively poorly compared to the MENA region average (Charts 18-22). In particular, based on the latest available data, life expectancy in Yemen is almost eight years shorter, the infant and under-five mortality rates are about double and the adult illiteracy rate is 25 percent higher than the corresponding values for the MENA region.
Chart 18.Republic of Yemen: Comparison with Selected Countries: Age Dependancy Ratio
Source: World Development Indicators, World Bank.
Chart 19.Republic of Yemen: Comparison with Selected Countries: Total Adult Illiteracy Rate
Chart 20.Republic of Yemen: Comparison with Selected Countries: Total Life Expectancy at Birth
Chart 21.Republic of Yemen: Comparison with Selected Countries: Infant Mortality Rate
Chart 22.Republic of Yemen: Comparison with Selected Countries: Access to Safe Water
Source: World Development lndicators, World Bank.
Measures of poverty in Yemen111
225. The extent of poverty in Yemen can be gauged through socio demographic variables, which, although showing improvement over the course of the past two decades, look weak compared with those of other MENA countries. Life expectancy at birth, although having increased by nearly eight years between 1987 and 1998, is lower than the MENA region average by about eight years. Similarly, although infant and under-five mortality rates in Yemen declined by 15 percent and 31 percent, respectively, within a decade, they remain on average nearly twice as high as in MENA countries. Less than half as much people have access to safe water and sanitation in Yemen when compared to the MENA region average. Yemen also falls behind the region in terms of educational achievement, with a higher illiteracy rate and a widening gender gap in education. At the same time, some indicators have even improved faster than in the rest of MENA or the average developing country over the past two decades. For example, between 1985 and 1998, the illiteracy rate decreased in Yemen by about 27 percent; the decline over the same period was about 10 percent for least developed countries and 15 percent for the MENA region.
226. Not surprisingly, poverty tends to be correlated with family size and low education. The household size of poor families, at 8.5 persons on average, is greater than the average for nonpoor households (6.8 persons). Education levels are also significantly worse across the poor, for whom the illiteracy rate was about 66 percent in 1996 compared with 59 percent for the nonpoor. The difference is even more striking at the household level: 77.3 percent of poor households are headed by illiterates while only 7.7 percent are headed by individuals with secondary education or above. Moreover, the poor/non-poor gaps are wider for females than they are for males. In 1998, for example, about 80 percent of poor adult females were illiterate, compared to a 64 percent illiteracy rate among all adult women; the corresponding numbers for males were 44 percent and 31 percent, respectively. Female-headed households are also more likely to be poor—the risk of poverty increases by 20 percent for them vis-à-vis male-headed households.
227. Expenditure inequality in Yemen reflects poverty patterns. Spending by the poor was only about 6 percent of total private spending in 1992, while that of the richest quintile was nearly half of that total. The picture improved a little by 1998, as the results of the latest Household Budget Survey (HBS) indicated that spending by the 30 percent of Yemenis with the lowest level of expenditure (hence the absolute poor) was about 13 percent of total private spending.112 However the richest quintile still captures a large share, about 41 percent of that total. Moreover, Yemen also suffers from growing income inequality: the Gini coefficient for income distribution increased from 0.39 in 1992 to 0.43 in 1998.
228. As in many poor countries, poverty in Yemen is more associated with low wages than with unemployment. Indeed, 80 percent of the poor are employed; given that the labor force is about 25 percent of the population this suggests that the percentage of employment of the nonpoor is lower. While the poor enter the labor force earlier than the nonpoor and remain employed at ages exceeding the ones for nonpoor individuals, both groups have the same labor participation rate, which indicates that poor people do not suffer from a larger incidence of unemployment than nonpoor individuals. The percentage of the poor employed in the private sector (about 80 percent) is somewhat higher than that of the nonpoor (about 73 percent).
229. Poverty in Yemen is mainly a rural phenomenon: in 1995, 3.8 percent of the urban population lived in poverty, compared with 16.7 percent in rural areas. This is not surprising as, based on anecdotal evidence, living conditions in terms of access to education, health services, and sanitation seem to be much worse in rural areas than in urban areas.113 In particular, there seem to be more schools and health facilities per capita in larger agglomerations than there are in small villages. Access to safe water in rural areas is only available for 19 percent of the population, compared with 74 percent in urban areas. The corresponding rural/urban difference in access to safe water is far less significant for other developing countries (50 percent and 61 percent, respectively, in 1993) and for the MENA region (70 percent and 98 percent, respectively, in 1990).
230. Another striking characteristic of poverty in Yemen, emphasized by UNDP and World Bank assessments, is its unbalanced distribution across governorates. About 43 percent of the poor live in three governorates—Sana'a, Taiz, and Ibb—and an additional 28 percent live in Dhamar, Hodeidah, and Hadramout. Four population groups in particular are distinguished as suffering from high poverty levels: Somali refugees of Yemeni descent, foreign refugees living in United Nations High Commissioner for Refugees (UNHCR) camps, dispossessed fanners in the south who were not compensated after the government decreed the return of the land to its original owners and the Akhdam, an ethnic group constituting the lowest social class in Yemen.114
231. A number of country-specific characteristics contribute to poverty in Yemen's society. The rough desert-like climate in certain parts of the country and the general scarcity of water prevent the use of a large part of the land for agricultural production and severely limits productivity. On the demographic level, population growth exceeded 3 percent per annum for most of the 1990s, partly due to a high fertility rate, which contributes to large household sizes and high dependency ratios. Coupled with a low labor participation rate, this prohibits the achievement of satisfactory productivity levels and keeps income per capita depressed.
232. Two major shocks contributed to economic decline in the 1990s. First, the war in the Gulf led to the repatriation of about three-quarters of a million Yemenis without most of their possessions. For a society geared towards migration and dependent on workers located abroad for the provision of essential financial transfers to the benefit of the economy, there was a two-pronged negative effect. A substantial cut in national income resulted from the loss of remittances, and a significant increase in unemployment at home was brought about by the closure of regional labor markets to Yemeni workers; both factors reduced per capita income and led to deterioration in the dependency ratio. The costly civil war that broke out in 1994 was another cause for the decline in living standards, and the resulting economic losses accentuated the level of poverty.
233. However, as discussed before, inadequate economic policies also played an important role in maintaining high poverty levels. Many distortions in the Yemeni economy are being addressed only since the implementation of the adjustment program in 1995. High rates of inflation, a multiple exchange rate system, and extensive protectionist policies depressed real income, distorted rural-urban terms of trade by creating a bias against promotion of exports in agriculture, and led to inadequate access to credit in the early 1990s.
234. The inadequate design and composition of government expenditure accentuated the inefficiencies that contribute to the persistence of poverty in Yemen. Unification in 1990 resulted in a bloated and inefficient civil service, with wages and benefits absorbing a large share of public expenditure. Current expenses are large relative to spending on core activities such as infrastructure build-up and social programs. Moreover, as explained earlier, the government spends large amounts in generalized subsidies, intensifying economic distortions, and not necessarily benefiting the most needy.115 Even more direct transfer policies such as the provision of cash to the most deprived face difficulties because of problems in asserting the claims of the beneficiaries, which causes leaks to the nonpoor.
235. Poorly devised implementation of anti-poverty government programs adds to the negative effects created by inadequate budgeting. For example, the World Bank PAR highlights the mismatch between the population size or incidence of poverty and the share of education budget received across regions; some poor areas remotely located are virtually ignored by such programs, which end up being implemented in areas with relatively less needy people. A second important problem resides in the low quality of services offered by these programs, which translates into low rates of success. Indeed, regarding health for example, although the level of health expenditure per capita was comparable in Yemen and Egypt in the mid-1990s (US$39 in 1994 in Yemen, compared to US$38 in 1995 in Egypt), the latter reported much better statistics regarding life expectancy (seven years higher), infant mortality (47 percent lower), and immunization rates (about 65 percent to 80 percent higher). In the context of education programs, low quality takes the form of unsatisfactory facilities because of the lack of water, electricity, and sanitation, and because of the low level of education provided. This translates into high repetition rates in classes and double length of time for the completion of primary education compared to what is usually needed. Although the GNP share of public spending on education in the mid-1990s was higher in Yemen than the average for MENA (6.1 percent of GNP in Yemen compared with 5.2 percent in MENA), the adult illiteracy rate in Yemen is higher, at 47.3 percent compared with 37.8 percent. The high illiteracy rate in Yemen is in great part due to very low female literacy; the World Bank PAR states that female education is hampered in great part by the absence of adequate facilities in schools to host female students (such as special toilets, separate classrooms, or flexible hours to accommodate female child labor within families).
236. Data on private investment are highly unreliable and involve mostly estimation rather than recorded data; savings are estimated as residual using GDP and external sector estimates. Accordingly, any analysis of savings and investments can at best hope to highlight broad trends. On this basis, over the period 1990–99 gross fixed capital formations picked up from 12.3 percent of GDP in 1990 to 18.6 percent in 1999 (Table 15). There was some shift in the composition of investment (Chart 23): as a share of GDP, private sector investment remained unchanged, on average, when compared across the two halves of the decade, while government investment rose. The latter reflected the improving fiscal situation, efforts at reconstruction after the 1994 civil war, and a growing focus on the state as provider of infrastructure and social services.
Table 15.Republic of Yemen: Phasing of Macroeconomic Adjustment, 1990–99 1/
Real GDP at market prices 1/ … −2.1 4.8 0.4 −3.6 7.9 2.9 8.1 5.3 3.8
Real non-oil GDP 1/ … −1.5 8.0 −0.1 −9.6 5.5 0.5 8.2 5.9 3.2
Inflation … 44.9 50.6 54.8 71.3 62.5 40.0 4.6 11.5 8.0
Consumption 96.3 98.9 97.2 103.3 82.1 85.8 85.3 85 3 96.6 88.2
Public sector 19.5 21.1 21.3 20.7 21.2 16.0 15.0 15.8 17.2 16.9
Private sector 76.9 77.8 75.9 82.6 60.9 69.9 70.4 69.5 79.5 71.4
Gross investment 14.6 16.8 22.4 20.0 20.5 20.7 20.8 23.7 21.1 18.6
Change in stock 2.3 2.6 2.0 2.1 1.0 0.4 0.4 0.4 0.0 0.0
Gross fixed capital formation 12.3 14.2 20.4 17.9 19.4 20.3 20.4 23.3 21.1 18.6
Public sector 8.7 4.0 3.4 3.5 2.6 3.1 6.6 6.8 6.1 5.6
Private sector 3.6 10.2 17.0 14.4 16.9 17.2 13.8 16.5 15.0 13.0
Domestic absorption 110.9 115.7 119.5 123.4 102.6 106.5 106.1 109.0 117.8 106.8
Net exports of goods and nonfactor services 1/ −10.9 −15.7 −19.5 −23.4 −2.6 −6.5 −6.1 −9.0 −17.8 −6.8
Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Net factor income 1/ −4.8 −7.1 −6.2 −6.2 −8.9 −7.7 −10.6 −9.6 −5.7 −9.6
Net current transfers 1/ 12.7 12.1 12.5 13.4 17 1 17.0 18.4 19.0 19.9 19.2
Gross national disposable income 107.8 105.0 106.3 107.3 108.2 109.3 107.8 109.5 114.2 109.7
Gross national savings 11.5 6.1 9.1 4.0 26.1 23.5 22.5 24.2 17.6 21.5
Public sector −3.7 −3.0 −9.4 −13.1 −13.6 −3.0 2.7 4.9 −0.2 5.3
Private sector 15.2 9.1 18.5 15.1 39.7 26.5 19.8 193 17.7 16.1
Total fiscal revenue and grants 19.8 23.1 16.1 14.9 12.8 19.5 35.9 32 8 26.4 31.8
Fiscal revenue 18.7 22.0 15.8 14.7 12.6 19.2 35.6 32.2 26.0 30.9
Oil revenue and payment for past excess cost recovery 7.5 9.4 4.7 4.2 3.7 9.3 25.1 22.1 13.8 19.8
Total fiscal expenditures 32.3 30.1 28.9 29.5 29.0 25.6 39.8 34.7 32.7 32.1
Overall fiscal balance (cash basis) −11.7 −5.6 −11.7 −13.9 −15.7 −5.2 0.6 −1.8 −7.9 −0.4
Foreign financing (net) 2.7 1.6 0.2 0.2 0.1 −0.2 0.4 0.3 1.2 2.3
Domestic financing (net) 8.8 4.4 11.8 19.7 157 5.3 −1.1 1.5 6.7 −2.3
External trade balance −3.6 −8.8 −9.7 −11.9 4.6 −0.2 −0.5 −2.0 −11.5 0.4
Exports, f.o b. 14.8 15.0 13.3 15.1 28.0 29.9 35.2 34.5 23.8 36.1
Oil and oil products 13.9 14.4 11.7 13.1 26.0 28.9 34.0 32.5 21.7 34.0
Non-oil 0.8 0.6 1.6 2.0 2.0 1.1 1.2 2.0 2.1 2.0
Imports −18.4 −23.8 −22.9 −26.9 −23.4 −30.1 −35.7 −36.5 −35,4 −35.7
Total current account balance −3.1 −10.7 −13.2 −16.1 5.6 2.8 1.7 0.3 −3.7 2.9
Debt service (as share of exports of goods and services, obligation basis) 46.7 91.3 89.1 80.8 46.8 42.1 31.9 12.6 17.0 10.5
Gross official reserves (in months of imports) 2.8 4.2 2.2 0.9 2.9 3.1 4.6 5.3 4.2 6.0
Total subsidies (implicit and explicit in percent of GDP) 20.2 10.0 15.2 17.6 18.4 8.9 13.5 7.7 2.2 2.5
Real per-capita consumption (1996=100) 335.4 271.8 217.1 169.8 97.6 104.9 100.0 112.4 110.8 112.7
Real per-capita private consumption (1996=100) 438.7 350.6 278.0 222.5 87.9 103.6 100.0 111.1 110.6 110.6
Real per-capita GNDI (1996=100) 297.2 228.4 188.0 139.5 101.8 105.8 100.0 114.1 103.1 110.9
Incremental capital output ratio (ICOR) … −8.0 4.6 50.1 −5.6 2.6 7.1 2.9 4.0 4.9
Terms of trade 122.3 113.0 107.4 91.8 85.5 85.3 100.0 100.7 69.5 114.1
Real effective exchange rate … … … … … 76.2 100.0 109.7 119.5 107.1
Sources: Yemeni authorities: and slaff estimates.
1/ For 1990–96, a weighted exchange rate based on the official and parallel rates was used to convert external Iransactions into Yemeni rials, following the methodology set out in SNA 1993. This allows to adjust for the implicit taxes (subsidies) involved in export transactions undertaken at the more appreciated (depreciated) rate and in import transactions undertaken at the more depreciated (appreciated) rate.
Chart 23.Republic of Yemen: Saving and Investment, 1990–99
Sources: Yemen authorities; and IMF staff estimates.
237. During the period 1991–94, the relatively low level of private investment likely reflected the macroeconomic instability and uncertainty associated with very high rates of inflation, large fiscal deficits crowding out bank credit to the private sector, multiple exchange rates, external shocks, political instability, and deep-rooted weaknesses in the investment environment.116117 However, the stagnation in private investment, around the level of 15 percent of GDP on average in pre- and post- reform periods appears somewhat difficult to explain. Macroeconomic stabilization, price liberalization, removal of trade and exchange restrictions, and other structural reform efforts that aimed at facilitating and encouraging private investment should have significantly improved the investment climate after 1995 and should have led to a significant increase in the GDP share of private investment. Yet the more deep-rooted obstacles to investment were hardly addressed and high real interest rates stifled investment projects.
238. In addition, major investments in the oil sector were completed by the mid-1990s; while the data do not permit to separate out oil-related investments, it may well be that non-oil investment ratios rose in the reform period.
239. Private savings averaged 19.9 percent of GDP per annum during 1995–99 as against an annual average of 20.6 percent of GDP during 1991–94. While during the period 1991–94, high inflation was disruptive to saving via negative real interest rates and increased difficulty in anticipating real future returns and interest rates, it is striking that the relatively low and stable inflation during the period 1995–99 appears to have been insufficient to stimulate higher levels of private savings. Given the drastic improvement in public savings between the two periods (as detailed in the earlier sections on fiscal policies), in part this may reflect a measure of Ricardian equivalence; but also the presence of liquidity constraints forcing the population to reduce savings in order to meet consumption needs. Indeed, the path of consumption seems to confirm the strong effect of liquidity constraints: real per capita consumption declined dramatically during 1990–95 and improved only marginally during 1996–99; in 1999 real per capita consumption was still below the 1993 level. This decline mainly mirrored the per capita decline in real income in the first half of the 1990s, and the only small per capita growth in more recent years, consistent also with the observed rise in poverty. Finally, with oil revenue accruing largely to the government, private savings had to take place out of non-oil income (including remittances); and as a share of non-oil GDP private savings has been at a respectable 23.2 percent during 1997–99, considerably higher than during 1991–93 (15.4 percent).
240. As a result mainly of the sharp improvement in government saving, the external current account improved dramatically in the second half of the 1990s, from an average deficit of 9.5 percent of GDP during 1991–94 to a near balance on average during 1995–99 (Table 9). Excluding the civil war period, the difference is even more striking (a narrowing of the deficit by 14 percent on average). As with the movements in fiscal balances, these developments reflect mostly the rise in oil revenues. The surging share of exports in GDP is virtually all due to oil, albeit (from extremely low levels) non-oil exports also doubled as a share of GDP from 1 percent in the early 1990s to 2 percent in recent years. While coffee and fish still account for most non-oil exports, exports of these items are stagnating or declining, and non-oil export growth was largely driven by fruits and vegetables for the regional market. The weak development of non-oil exports is consistent with the observed trend of a real appreciation of the Yemeni rial against partner countries in recent years—and pointing to symptoms of the "Dutch disease" in Yemen. In the same vein, imports grew strongly throughout the decade, doubling their share in GDP from 20 percent in 1990 to 36 percent in 1999. Other components of the current account have been rather stable over the decade—reflecting broad stability in workers' remittances after the secular decline in the early 1990s, and a disappointing performance of the tourism sector marred by security problems and inadequate infrastructure that have hindered development of a sector with obvious potential to create jobs and foreign exchange earnings (see Annex I for a more detailed account).
241. While underlying the improvement in the external accounts is a growing dependency on oil, and thus vulnerability to oil price and production volatility, recent years have witnessed a reduction in Yemen's external financial vulnerability (Table 16). In particular, through substantial debt relief and a prudent borrowing policy, external debt as share of GDP has declined dramatically; this decline masks an even larger decline of the net present value of debt as new borrowing was largely on concessional terms and debt rescheduling similarly stretched the maturities of existing debt (see Section II.C for details). Accordingly, debt service (on a commitment basis) as a ratio of goods and nonfactor services was brought down to 10 percent in 1999, from eight to nine times that level in the early 1990s. The elimination of the external debt overhang was not bought at the expense of domestic indebtedness: government domestic debt was cut, if less dramatically, from more than half of GDP in the early 1990s to a quarter in 1999, even though interest payments as a share of government income remained at about 10 percent—reflecting the phasing out of financial repression as the government increasingly paid market rates for its borrowing. At the same time, the maturity of public domestic debt increased steadily during the reform period. By any measure, the reserve position has also greatly strengthened. Since 1996, gross official reserves (net of reserves needed to cover foreign exchange deposits of commercial banks with the central bank) roughly covered reserve money, and by end- 1999 more than half of broad money. Since 1995, reserves exceeded the equivalent of three months of imports, often taken as a benchmark for sufficient reserves.
Table 16.Republic of Yemen: Vulnerability Indicators(In percent unless otherwise indicated)
External solvency indicators
Real effective exchange rate (average period, percent change) … 39.2 42.0 67.7 62.3 −41.0 −42.6 −33.6 8.9 −10.4
Total external debt (in millions of US$) 9,915.2 10,323.5 10,540.7 10,734.7 10,876.2 11,017.4 11,134.7 5,359.2 5,373.4 5,490.1
Short-term external debt (in millions of US$) 1/ 586.0 975.6 922.4 916.4 766.7 747.2 659.0 218.2 225.4 204.5
Debt service ratio
(Obligations basis, in percent or GNFS exports) 46.7 91.3 89.1 80.8 46.8 42.1 31.9 12.6 17.0 10.5
External liquidity indicators
Total official own gross foreign reserves (in millions of US$) 424.0 679.6 322.6 147.4 357.0 525.5 937.4 1,152.2 853.2 1,350.7
In months of imports 2.8 4.2 2.2 0.9 2.9 3.1 4.6 5.3 4.2 6.0
In percent of shnrt-term external debt 72.4 69.7 35.0 16.1 46.6 70.3 142.3 528.1 3785 660.5
In percent of M0 18.6 44.7 24.8 12.6 32.5 51.7 98.8 118.4 86.5 129.3
In percent of M2 9.9 22.8 12.2 6.5 17.5 26.9 44.1 50.4 36.3 56.9
Public sector solvency indicators 11.7 12.0 12.0 12.0 12.0 50.0 126.9 130.5 141.7 159.7
Government's net domestic debt/GDP 60.7 55.1 54.5 63.4 67.9 46.2 30.9 25.3 32.3 24.2
Government's external debt/GDP 105.7 129.5 127.9 138.5 167.1 170.1 173.2 81.2 85.3 80.4
Total debt service/total revenue 1/2/ 40.3 47.6 49.0 50.2 47.1 39.4 39.2 17.3 27.5 22.1
Interest payments/total revenue 1/2/ 12.0 12.6 11.6 17.7 22.6 7.6 9.3 7.2 14.0 12.7
Oil revenue/total revenue 3/ 37.8 40.8 29.1 28.1 28.7 47.9 69.9 67.4 52.1 62.7
Financial sector indicators
Net domestic credit (percent change) 18.9 10.1 219 40.7 40.7 16.6 −11.7 −5.5 37.5 −13.8
Private seclor credit (percent change) 33.1 14.9 15.3 26.0 39.2 35.4 −6.3 53.8 57.7 15.2
Net domestic credit/GDP 63.5 58.9 56.5 64.2 70.4 49.1 30.2 23.5 32.2 22.3
Nongovernment credit/GDP 8.8 9.0 7.6 7.1 9.3 7.1 3.5 4.2 6.5 6.0
Nonperforming loans/GDP … … … … … … 21.0 10.2 15.2 17.0
Average maturity ofpublic domestic debt (months) … … … … … 1.0 4.7 6.0 7.9 7.2
Treasury bill spread (over US. T-bills) … … … … … 18.1 19.7 7.8 7.1 7.2
Private credit/total assets of banks 14.7 13.5 12.1 11.3 11.1 13.4 12.5 18.0 25.6 25.8
Share ofcrude oil exports in total export 80.7 77.2 65.5 62.0 81.9 82.0 80.7 78.4 71.3 80.8
Source: The Yemeni authorities.
1/ Defined as amortization obligations with maturity of less than one year.
2/ Domestic interest payments are recorded net of central bank profits until 1998.
3/ Includes domestic oil and gas revenue
4/ Net domestic credit refers to the sum of net credit to government and nongovernment sectors, and excludes other items net.
242. The limited role of financial intermediation also limits the potential risks emanating from the financial sector. Credit as percent of GDP has been declining, reaching 22 percent of GDP in 1999 compared with over 50 percent in the mid-1990s. This decline, however, is mostly due to the strong fiscal situation, as private sector credit remains about 6–7 percent of GDP. However, as discussed earlier, recorded vulnerabilities in the banking sector have been rising in recent years (which likely reflects better reporting and enforcement of prudential regulations rather than a genuine deterioration of portfolios) and the size of nonperforming loans (17 percent of GDP in 1999), while still manageable, points to the importance of the planned reforms in the banking sector. While Yemen has no private credit ratings, and although in the absence of a secondary treasury bill market interest rates may not fully reflect market forces, the declining spread of Yemeni government paper over U.S. treasury bills indicates that in the view of investors inside (and outside) Yemen the progress in macroeconomic stabilization is appreciated and has improved substantially Yemen's creditworthiness.
Tourism Sector in Yemen: Problems and Prospects
The tourism sector is widely seen as a potential source of growth in the non-oil sector. It is also widely recognized that a number of structural impediments—such as security concerns, first and foremost, and lack of infrastructure—constrain the attainment of this potential and would need to be fundamentally addressed before the tourism industry could start making a major contribution to future economic growth and employment.
Yemen has abundant tourism resources and potential for further growth and development. Yemen's ancient history, reflected in its rich and unique culture, has left a wealth of significant archaeological sites and a unique vernacular architecture. Yemen has a mixture of scenery, ranging from desert to verdant valleys to mountain ranges, some 2,000 kilometers of coastline, fringing the Red Sea and the Gulf of Aden, and more than hundred islands. Finally, after centuries of isolation from the rest of the world, Yemen remains one of the last unknown destinations.
In addition to the traditional tourism potential based on the existing historic heritage and scenic attractions, Yemen has significant opportunities for the development of other forms of tourism that are largely yet unknown in Yemen but, which possess increasing market potential. These include: trekking and mountain hiking, mountain biking, beach resort tourism, scuba diving, and eco-tourism, both terrestrial and marine.
In general, since unification in 1990, international tourism in Yemen has been on an upward trend with visitor arrivals growing on average by about 5 percent a year (Table I.1 and Chart I.1). The tourism sector suffered major setbacks in 1991, after the Gulf crisis erupted; in 1994, the year of the civil war in Yemen; and in 1999, after the December 1998 kidnapping incident, which turned fatal.
Table I.1:Visitor Arrivals and Tourism Revenues
Visitor arrivals, thousands 51.8 27.3 72.2 69.8 39.9 61.4 74.5 80.5 87.6 57.8
Revenue, US$ million 40.0 21.0 46.9 54.0 35.0 50.0 55.0 69.0 84.0 48.4
Source: General Tourism Authority
Chart I.1.Yemen: Visitor Arrivals Since Unification
By nationality, Yemen's principal tourism source market is Western Europe (Table I.2), in particular, Germany, France, Italy, and Britain, which to a large extent reflects the contacts established by the existing tour operators. The peak tourism season in Yemen is between October and March. International tourism is mainly concentrated in the governorates of Sana'a, Hadhramout, Al-Jouf, Al-Hodeidah, Marib, and Shabwa.
Table I.2:Average Tourism Statistics Since Unification
Yearly Arrivals, Thousands
Duration of Stay, Nights
Revenue per Stay, US dollars
(Of which: By National Regions)
Percent Share
Europe 65.2 6.1 …
Middle East 17.4 5.4 …
Asia 7.2 5.6 …
The Americas 6.7 6.4 …
Africa 2.4 7.7 …
Australia 1.1 5.1 …
Source: General Tourism Authority.
In 1998, the tourism sector provided jobs, either directly or indirectly, to an estimated 23,000 workers including the hotel industry and related sectors. As tourism activities extend to remote regions, they help provide employment opportunities and increase incomes among the local population. Total foreign exchange revenues from tourism are still relatively small—at about 3 percent of total exports of goods and services, or 3 8 percent of non-oil exports in recent years—but have been growing on average by 8 percent a year.
The Yemeni government believes that developing tourism will help to achieve the following two primary objectives: (a) to enhance long-term economic growth and to improve the living standards of the Yemeni people; and (b) to protect and preserve Yemen's cultural heritage and its natural environment.
Concerns over peace and security and inadequate infrastructure are the two largest immediate obstacles to the successful development of the tourism industry in Yemen, while the danger of losing the historic and cultural heritage and environmental degradation is a longer-term problem.
At present, the image of Yemen in the Western world is relatively poor and, prompted by continuous security-related incidents, the country is often characterized in the Western media as "kidnapping and bombing prone".1
Although Yemen was unified in 1990, civil unrest lasted and a 70 days civil war erupted in 1994. There are areas, especially in the North, which are still not under the full control of the central government. Reportedly, there are large numbers of firearms in the country, almost four per head.2 Illicit weapons, including assault rifles, are openly carried in Yemen. Politically motivated violence persists and security violations occasionally occur in rural areas.3 Tribal disputes, kidnappings, and shootouts between sheikhs' armed entourage and government security forces are frequent occurrences, including in major cities and in public places such as Sana'a International Airport.
More than 100 kidnappings have occurred throughout Yemen since 1991, mainly conducted by armed tribesmen with specific grievances against the Yemeni government.4 These kidnappings are normally resolved peacefully, but tribesmen have held some foreigners for extended periods, and the December 1998 incident—which turned fatal when four tourists were executed by a group of Islamic militants—put Yemen on the front page of international news and dealt a severe blow to the nascent tourism industry.
Since then, many countries, including the U.S., the U.K., and Japan, have advised their nationals against traveling to Yemen;5 Germany has reduced the number of accredited Yemeni tourist agencies to two; and the KLM Airlines has suspended its service to Yemen.6
Addressing security concerns is a necessary but not sufficient condition for the successful development of the tourism sector in Yemen. The lack of adequate infrastructure—such as hotels, roads, catering, and airport services—is another major factor constraining the growth of the tourism sector.
Only a third of roads in Yemen are paved. Poor quality of roads and lack of easy access to tourist attractions necessitate long and uncomfortable journeys by four-wheel drive vehicles, which means that visits to places of interest have to be of relatively short duration.
The existing hotel stock is heavily concentrated in the urban areas of Sana'a, Aden, Hadhramout, and Taiz, with more than 50 percent of first class rooms located in Sana'a. Despite a significant increase in hotel construction since unification, the number of hotel rooms that can be considered as being suited for international tourists who prefer to stay in high-grade properties has remained unchanged and is currently only about 1,100, or less than 15 percent of the total room stock.7 Consequently, tour operators have already reported a problem of room availability of a suitable standard during the high season and often had to reject big tour group reservations because of accommodation and transportation constraints.8
The development of tourism is also constrained by the absence of basic services—such as eating and toilet facilities—and a shortage of potable water supplies both at places of interest and at possible stopover points. Furthermore, there are no tourist information or interpretation centers outside Sana'a, while those available in Sana'a are not up to international standards with tour guides not appropriately trained or licensed to operate.
The situation is compounded by the shortage of trained and experienced personnel and the absence of facilities providing professional training in the services sector. As a result, expatriates often have to be hired, especially in the hotel industry, thus, further hindering the development of the tourism sector.
Finally, airport facilities have limited baggage and passenger handling capacity, partly reflecting Yemenia's monopoly in this area, and could become congested if more than one aircraft is being served.
At present, regulations that could prevent the destruction of buildings of significant historic and cultural heritage or protect the natural environment are limited and poorly enforced. As a result, there is a real threat to the loss of the historic heritage of Yemen, the very feature that constitutes the principal tourist attraction. According to anecdotal evidence, some 30 percent of "physical" heritage in the countryside has been lost in the past 10 years to unregulated commercial development, and the coastline with significant beach resort potential is being lost to industrial development.9 Furthermore, the potential for eco-tourism, especially in the coastal areas, is being destroyed as various species—such as sea turtles—are driven to extinction as a result of poor enforcement of the hunting and fishing seasons.
Given the undoubted potential of tourism in Yemen, the foregoing discussion suggests that critical to the future successful development of the tourism sector in Yemen are:
Guarantee of security and maintenance of a stable political and economic environment as necessary preconditions for investment, both domestic and foreign, in the tourism sector, given the long-term and hence high-risk nature of such investment;
Investment in essential supporting infrastructure and tourism-related services and facilities;
Provision of training and licensing for both public and private sector personnel involved in tourism to ensure that tourists receive a standard of service consistent with internationally accepted norms;
Protection and conservation of the historic and cultural heritage and natural environment of the country.
Critical to the attainment of policy objectives for the tourism sector in Yemen is the formation of a public sector institutional structure with well-defined functional responsibilities that would readily facilitate the planning, development, marketing, and regulation of the sector. This would require structural changes and training initiatives in order to make the public sector more effective in carrying out its statutory functions, including collaboration with the private sector.
After the kidnapping incident in December 1998, the government stepped up its effort to address the security problem and shore up the tourism industry. Special courts to try kidnappers were set up, and the death penalty for the offence was introduced.10 A weapons ban in the capital was issued, and a Special Forces unit to combat terrorism was formed in November 1999.
A new Tourism Law was issued in August 1999, and three new government entities were established—the Tourism Promotion Board, the High Council on Tourism, and the Environmental Council—in addition to the existing government structures in charge of tourism affairs such as the Ministry of Tourism and Culture and the General Tourism Authority.11
The Tourism Promotion Board was set up under the umbrella of the Ministry of Tourism and Culture and consists of the representatives of the government, private sector, and media. It is charged with improving the image of Yemen in the Western media as well as increasing the general awareness abroad and at home about tourism in Yemen. It is chaired by the Minister of Tourism and holds weekly meetings to discuss the sector's promotion and development strategy but has no decision-making authority. In addition, the Board undertook to study the experience of Egypt in limiting the fall-out from terrorism on the tourism industry.
The High Council on Tourism is chaired by the Prime Minister and comprises seven other ministers, including the Ministers of Tourism, Information, Industry, Planning, Interior, and Defense. It meets to discuss key policy, investment, and security issues in the area of tourism and has decision-making powers.
The authorities, led in their efforts by the General Tourism Authority, have recently been actively seeking technical assistance and external financing for project implementation, including updating the Master Plan for Tourism Development in Yemen which was sponsored in 1991 by the European Community.
See The Economist, April 10, 1999, page 61.
See Yemen – A Travel Survival Kit, Lonely Planet Publications, January 1996, page 87.
See Business Middle East, January 1, 2000, The Economist Intelligence Unit, page 11.
See Yemen – Consular Information Sheet, September 14, 1999, U.S. Department of State website, http://travel.state.gov/yemen.html, and Business Middle East, February 1, 1999; The Economist Intelligence Unit, page 10.
See Yemen – Travel Warning, November 5, 1999, U.S. Department of State website, http://travel.state.gov/yemen warning.html.
Preliminary estimates suggest that, as a result, tourist arrivals in 1999 declined by about 35 percent relative to 1998 and tourism foreign exchange receipts stood at less than 60 percent of their 1998 level. The two largest hotels in Sana'a have seen a drop in their occupancy rates below 50 percent, and the Yemenia Airlines was reported to have lost more than US$2 million in revenues.
Currently, there are about 250 hotel establishments offering some 7,700 rooms.
The potential absorptive capacity of the tourism sector in Yemen is rather limited. According to local businessmen, the existing historic and scenic attractions can potentially accommodate no more than 150 thousand visitors a year. This calls for the need for the tourism sector to be oriented towards low volumes and high yields—that is, to attract the more affluent category of international tourists who are mostly senior citizens in the middle and higher income groups, and require more comfortable accommodation than younger and more adventurous backpackers.
The most recent examples of the latter include the proposed Burum Port construction 20 km southwest of Mukalla and a gas pipeline construction through a white sand beach of Bir Ali.
Three kidnappers in the December case, including the group leader, were sentenced to death by the court and have been executed.
According to a local observer, there is currently a lot of duplication and a lack of coordination of responsibilities among the various government and public entities involved in the tourism sector, some of which also appear to be overstaffed and lack the technical capability to carry out their statutory obligations satisfactorily.
Republic of Yemen: Summary of the Tax System as of end-June 2000
Nature of Tax
Exemptions and Deductions
1. Taxes on business income
1.1 Domestic corporations Levied on net profits. Assessment base encompasses most forms of income, including interest, dividends, and foreign income. Deductions: Operating costs; depreciation allowance; charitable contributions up to 5 percent of net income; and Zakat.
Exemptions: Income of cooperatives, and agricultural and humanitarian societies, provided trade is limited to members; and income from agriculture, livestock, poultry, fishing, and beekeeping, subject to regulations. Corporations may be granted an exemption if they qualify under the Investment Law (IL); this entails a five-yeaT exemption, but Council of Ministers may grant an additional five years. 35 percent flat rate.
Penalties are levied for late payment.
1.2 Foreign corporations Same as above. Same as above 35 percent flat rate.
1.3 Proprietorships Same as domestic corporations. Deductions: Same as above.
Exemption: YRls 36,000. Personal tax rates, 10 percent −35 percent.
2. Taxes on personal income
2.1 Tax on wages and salaries
2.1 Tax on wages and salaries Levied on tolal wage income (wages, salaries, bonuses, etc,.) including gratuities in cash or kind.
Monthly withholding by the employer from wages of both residents and nonresidents and paid to tax authorities during the first 10 days of the following month. Companies with eight or more workers must keep tax records for their employees. Deductions: Pension contributions, and work-related costs.
Exemptions:
Monthly exemption: YRls 3,000.
exemption not granted for nonresidents. Fully exempted: diplomats; UN experts; pension and severance payments; wages paid to Yemeni agricultural and fishing workers; domestic servants; and income of day laborers. Personal tax rates with a ceiling of 20 percent.
2.2 Tax on professional income Levied on noncommercial and nonindustrial income. Deductions: Costs deducted according to specified list. Personal tax rates, 10 percent – 35 percent.
3. Social security and retirement contributions
3.1 Civil service and public enterprise employees Paid to General Authority for Insurance and Pensions (GA1P). 12 percent with equal contributions from employees and Government; Government also pays 1 percent for accident insurance.
3.2 Police employees Paid to separate pension fund. 12 percent with equal contributions from employees and Government.
3.3 Defense employees Paid to separate pension fund. 12 percent with equal contributions from employees and Government.
3.4 Private sector employees Paid to separate pension fund. 6 percent employee, 9 percent employer.
4. Taxes on property
4.1 Real estate income tax Levied on all net income from leased buildings and land. Exemptions: Government; religious organizations; local councils; diplomatic housing; and hospitals. One month's rent (8.33 percent).
4.2 Real estate sales lax Levied on sales proceeds from land and buildings. Deductions: None allowed.
Exemptions: Transfers through inheritance; donations to religious or charitable organizations; religious organizations; and agricultural land. 3 percent on sales value.
5. Taxes on goods and services
5.1 General excise taxes Harmonized laxes are levied on certain domestic and imported goods. The tax applies to the import costs (before the tariff) or at the domestic manufacturer level. For mineral water and soft drinks, tax applies to retail price paid by consumer. 5, 7, 11, 15 percent; 25 percent applies to certain specified transportation vehicles and luxury items.
5.2 Selected excise taxes Items taxable at manufacture level.
5.2.2. Tobacco Levied on domestically produced and domestically trademarked or foreign trademarked cigarettes; imported tobacco, and tobacco products. For domestically produced cigarettes: 60 percent on domestically-trademarked and 65 percent on foreign-trademarked; 80 percent on imported cigarettes; 60 percent for cigars; 25 percent for imported tobacco.
5.2.3 Taxes on petroleum products Levied on retail sales price. Percent
Gasoline:2
Kerosene:2
Turpentine:2
Oils:2
Diesel oil:2
Liquid gas:0.5 per cylinder
Lubricants:1
5.3 Qat tax Levied on assessed market value. 25 percent
6. Customs tariff Applied to all imports not specifically exempted. Exemptions may be provided to corporations that qualify under the IL. Four-band structure with rates of 5, 10, 15, and 30 percent. A single exemption of 70 percent applied to cigarettes and other tobacco products.
7. Other taxes
7.1 Motor vehicle taxes Levied on all motorized vehicles operating in Yemen with gasoline or diesel powered engines; levied on purchases of fuel (domestic or imported) Exemptions: Government vehicles, diplomatic and embassy cars, and emergency vehicles. YRls 0.25 per litre of gasoline;
YRls 0.15 per litre of diesel
7.3 Counselor fees For Yemeni visas. According to a specific schedule.
7.4 Passport fee Fee varies with the type of passport.
7.5 Compulsory military service fee Levied on Yemenis from exemption or postponement of compulsory national military service. Yrls 86,000 for exemption.
Table 1.Republic of Yemen: Social and Demographic Indicators
Selected MENA
1/2/
Socio-demographic indicators
GNP per capita (in U.S. dollars) 260 270 2,070
GNP per capita (PPP, current international dollar) 730 720 4,630
Total population (in millions) 15.3 16.1 280
Population growth rate (in percent) 3/ 3.2 3.5 2.1
Total fertility rate 6.7 6.4 3.6
Age dependency ratio (Dependents to working-age population) 1.2 1.1 0.7
Urban population (in percent) 33.6 34.4 58.4
Labor participation rate (In percent of population aged 14–64) 69.3 67.0 57.2
Female labor participation rate (In percent of total population) 27.8 27.9 26.5
Life expectancy at birth (in years) 3/ 53 59 67
Infant mortality rate (per 1,000 live births) 3/ 100 98 49
Under five mortality rate (per 1,000 live births) 145 137 63
Maternal mortality rate (per 100,000 live birth) 1,471 … 205
Immunized: DPT, under 12 months
(In percent of age group) 53 57 90
Child malnutrition, under 5 years
Access to safe water (percent of population) 39 … 85
Access to sanitation (percent of population) 19 … 62
Adult literacy rate 40 42 62
Sources: Central Statistics Organization, Statistical Year Book; and IBRD, World Development Indicators database.
1/ Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Malta, Morocco, Oman. Saudi Arabia, Syria, and Tunisia.
2/ Data for the nearest year to 1997.
3/ Second column data is for 1998.
Table 2.Republic of Yemen: Selected Economic and Financial Indicators, 1994–99
Nominal GOP at market prices 28.4 67.1 43.7 21.5 0.4 24.3
Real GDP at market prices −3.6 7.9 2.9 8.1 5.3 3.8
Real non-oil GDP −9.6 5.5 0.5 8.2 5.9 3.2
Real oil GDP 43.7 20.0 13.5 7.5 2.7 6.2
Consumer price index (annual average) 71.3 62.5 40.0 4.6 11.5 8.0
Crude export oil price (weighted average, U.S. dollar per barrel) 15.4 16.9 20.3 18.5 11.6 18.7
Total revenue and grants 12.8 19.5 35.9 32.8 26.4 31.8
Oil revenue 3.7 9.3 25.1 22.1 13.8 19.8
Non-oil revenue 8.9 9.8 10.5 10.1 12.2 11.1
Grants 0.3 0.3 0.3 0.6 0.4 0.9
Total expenditure 29.0 25.6 39.8 34.7 32.7 32.1
Current 26.4 22.5 33.2 27.9 26.6 26.5
Development 2.6 3.1 6.6 6.8 6.1 5.6
Overall balance including grants (cash basis) −15.7 −5.2 0.6 −1.8 −7.9 −0.4
Overall balance excluding grants (cash basis) −16.4 −6.4 −4.2 −2.5 −6.7 −1.2
Broad money 34.7 20.4 8.6 10.7 11.7 13.8
Credit to nongovernment sector 69.0 28.0 −29.4 46.6 54.2 15.0
Benchmark deposit interest rate (percent p.a.) 6.5 20.0 25.0 11.0 15.0 18.0
Velocity (Non-oil GDP!M2) 1.2 1.7 1.9 2.0 2.2 2.1
Exports, f.o.b. 1,824 1,937 2,263 2,274 1,501 2,466
Of which 1,615 1,735 1,976 1,945 1,229 2,131
Imports, f.o.b. −1,522 −1,948 −2,294 −2,407 −2,228 −2,440
Services (net) −475 −411 −370 −470 −398 −489
Private remittances and transfers (net) 1,117 1,104 1,188 1,256 1,254 1,314
Capital account (net) −641 −876 −397 34 −154 11
Overall balance −779 −38 −625 116 −463 320
Central bank own gross foreign reserves 357 525 937 1,152 853 1,351
In months of imports 1/ 2.9 3.1 4.6 5.3 4.2 6.0
Current account, including grants
(In percent of GDP) 5.6 2.8 1.7 0.3 −3.7 2.9
Debt service ratios 2/
Obligation basis 46.8 42.1 31.9 12.6 17.0 10.5
Actual 3.3 6.6 8.7 10.3 14.0 8.3
Official external debt 10,876 11,017 11,135 5,359 5,373 5,490
(In percent of GDP) 167 170 173 81 85 80
Terms of trade (1996=100) 85.5 85.3 100.0 100.7 69.5 114.1
Exchange rate (free market, eop) (YRls/US$) 1010 127.1 126.9 130.5 141.7 159.7
Real effective exchange rate (1996=100) 3/ … 76.2 100.0 109.7 119.5 107.1
Sources: Yemeni authorities; and staff estimates.
1/ Gross reserves minus commercial bank foreign exchange deposits held with the central bank. Imports are for the current year and exclude oil and gas sector imports.
2/ Public and publicly guaranteed debt, including central bank foreign liabilities. In percent of exports of goods and services.
3/ INS, based on free market rate.
Table 3.Republic of Yemen: Sectoral Origin of Gross Domestic Product at Current Prices, 1994–99
(In millions of Yemeni rials)
Agriculture and forestry 63,342 90,330 108,526 124,750 158,397 167,441
Fishing 5,814 8,832 10,700 13,256 16,110 18,610
Mining and quarrying 858 1,640 2,449 2,506 2,524 2,705
Oil and gas 1/ 17,790 69,116 191,273 244,915 137,758 263,309
Manufacturing 39,300 64,287 57,065 65,605 77,191 83,829
Oil refining 2,438 8,645 23,207 26,600 27,769 30,433
Electricity, gas, and water 2,034 3,111 5,334 6,718 7,912 8,401
Construction 10,423 16,867 25,713 37,442 41,977 41,867
Wholesale and retail trade 30,077 49,634 58,918 72,877 87,910 99,807
Restaurants and hotels 2,065 3,375 4,047 5,101 6,152 6,983
Transportation, storage, and communications 44,625 64,618 83,056 104,337 113,219 127,814
Financial institutions 13,868 18,828 16,856 17,437 31,467 33,602
Real estate and business services 7,831 12,149 16,840 21,007 25,045 28,827
Community, social, and personal services 6,933 11,000 12,784 14,536 16,728 18,625
Government services 48,609 65,777 73,963 82,175 96,479 121,982
Private, nonprofit services 196 140 270 304 342 384
Import duties 7,440 16,804 25,997 29,034 29,653 30,994
Less: Imputed bank services charges −11,364 −16,644 −14,886 −15,703 −20,688 −22,056
Total GDP 292,279 488,509 702,112 852,897 855,945 1,063,557
Non-oil GDP 274,489 419,393 510,839 607,982 718,187 800,247
(In percent of GOP)
Agriculture and forestry 21.7 18.5 15.5 14.6 18.5 15.7
Fishing 2.0 1.8 1.5 1.6 1.9 1.7
Mining and quarrying 0.3 0.3 0.3 0.3 0.3 0.3
Oil and gas 6.1 14.1 27,2 28.7 16.1 24.8
Manufacturing 13.4 13.2 8.1 7.7 9.0 7.9
Oil refining 0.8 1.8 3.3 3.1 3.2 2.9
Electricity, gas, and water 0.7 0.6 0.8 0.8 0.9 0.8
Construction 3.6 3,5 3.7 4.4 4.9 3.9
Wholesale and retail trade 10.3 10.2 8.4 8.5 10.3 9.4
Restaurants and hotels 0.7 0.7 0.6 0.6 0.7 0.7
Transportation, storage, and communications 15.3 13.2 11.8 12.2 13.2 12.0
Financial institutions 4.7 3.9 2.4 2.0 3.7 3.2
Real estate and business services 2.7 2.5 2.4 2.5 2.9 2.7
Community, social, and personal services 2.4 2.3 1.8 1.7 2.0 1.8
Government services 16.6 13.5 10.5 9.6 11.3 11.5
Non-oil GDP 93.9 85.9 72.8 71.3 83.9 75.2
Source: Central Statistics Organization.
1/ The large increases in oil and gas GDP in 1995 and 1996 are in large part due to exchange rate effects. The official exchange rate increased from YRls 12/US$ in 1994 to YPls 40.5/US$ in 1995 and YRls 114 /US$ in 1996.
Table 4.Republic of Yemen: Use of Resources at Current Prices, 1994–99(In million of Yemeni rials)
Consumption 240,105 419,296 599,098 727,558 827,233 938,112
Public sector 1/ 61,976 78,033 105,161 134,623 146,820 179,257
Private sector 178,129 341,263 493,937 592,935 680,413 758,855
Gross investment 59,785 101,057 146,155 202,029 180,976 197,758
Gross fixed capital formation 56,773 99,025 143,207 198,543 180,976 197,758
Public sector 7,498 15,048 46,529 57,815 52,584 59,496
Private sector 49,275 83,977 96,678 140,728 128,392 138,262
Oil companies 14,678 15,307 18,598 20,106 16,850 23,246
Change in stocks 3,012 2,032 2,948 3,486 0 0
Domestic absorption 299,890 520,352 745,253 929,587 1,008,209 1,135,870
Net exports of goods and nonfactor services −7,611 −31,843 −43,141 −76,690 −152,264 −72,318
GDP at market prices 292,279 488,509 702,112 852,897 855,945 1,063,557
Net factor income 2/ −25,994 −37,682 −74,414 −81,535 −48,813 −101,968
Gross national product (GNP) 266,285 450,827 627,698 771,362 807,132 961,589
Net current transfers 2/3/ 50,019 83,278 129,212 162;350 170,340 204,675
Gross national disposable income (GNDI) 316,304 534,105 756,909 933,712 977,473 1,166,264
Gross domestic saving 52,174 69,213 103,014 125,339 28,712 125,445
Gross national savings from disposable income 76,199 114,810 157,812 206,154 150,239 228,152
Public sector national savings 5/ −39,706 −14,696 18,834 41,391 −1,537 56,877
Private sector national savings 5/ 115,905 129,506 138,977 164,763 151,776 171,275
Consumption 82.1 85.8 85.3 85.3 96.6 88.2
Public sector 21.2 16.0 15.0 15.8 17.2 16.9
Private sector 60.9 69.9 70.4 69.5 79.5 71.4
Gross investment 20.5 20.7 20.8 23.7 21.1 18.6
Gross fixed capital formation 19.4 20.3 20.4 23.3 21.1 18.6
Public sector 2.6 3.1 6.6 6.8 6.1 5.6
Change in stocks 1.0 0.4 0.4 0.4 0.0 0.0
Domestic absorption 102.6 106.5 106.1 109.0 117.8 106.8
Net exports of goods and nonfactor services −2.6 −6.5 −6.1 −9.0 −17.8 −6.8
Net factor income −8.9 −7.7 −10.6 −9.6 −5.7 −9.6
Gross national product 91.1 92.3 89.4 90.4 94.3 90.4
Net current transfers 17.1 17.0 18.4 19.0 19.9 19.2
Gross national disposable income 108.2 109.3 107.8 109.5 114.2 109.7
Gross domestic saving 17.9 14.2 14.7 14.7 3,4 11.8
Gross national savings from disposable income 26.1 23.5 22.5 24.2 17.6 21.5
Public sector national savings 5/ −13.6 −3.0 2.7 4.9 −0.2 5.3
Private sector national savings 5/ 39.7 26.5 19.8 19.3 17.7 16.1
1/ Uses data from the fiscal accounts.
2/ Utilizes balance of payments data.
3/ Includes workers remittances.
4/ Equivalent to total budget revende.
5/ The large increases in public sector savings and declines in private sector savings in 1995–96 are attributable largely to the effects of exchange rate depreciations and world prices increases.
Table 5.Republic of Yemen: Sectoral Origin of Gross Domestic Product at Constant Prices, 1994–99
(In millions of 1990 Yemeni rials)
Agriculture and forestry 33,365 35,688 36,158 39,075 44,497 44,375
Fishing 688 722 930 1,267 1,381 1,505
Mining and quarrying 312 345 396 403 364 368
Oil and gas 20,156 24,197 27,469 29,542 30,326 32,217
Oil refining 2,322 2,470 2,376 2,385 2,233 2,266
Construction 3,373 4,206 5,092 6,734 6,771 6,371
Wholesale and retail trade 8,452 9,764 10,563 11,263 12,185 12,929
Restaurants and hotels 408 467 506 563 609 646
Transportation, storage, and communications 14,379 13,973 12,016 13,998 13,623 14,373
Financial institutions 3,616 3,289 2,495 2,469 3,996 3,988
Real estate and business services 4,117 4,404 4,598 4,953 5,296 5,697
Community, social, and personal services 2,364 2,395 2,573 2,771 2,860 2,976
Government services 14,135 12,249 10,588 11,157 11,748 13,893
Private, nonprofit services 57 65 69 73 67 76
Import duties 4,831 4,681 5,450 5,387 4,378 4,237
Less: Imputed bank services charges −3,303 −3,100 −2,028 −2,088 −3,496 −3,490
Total GDP at market prices. 121,273 130,912 134,754 145,652 153,342 159,160
(Changes in percent)
Agriculture and forestry −3.3 7.0 1.3 8.1 13.9 −0.3
Fishing −7.3 4.9 28.8 36.2 9.0 9.0
Mining and quarrying −3.1 10.6 14.8 1.8 −9.7 1.1
Oil and gas 43.7 20.0 13.5 7.5 2.7 6.2
Manufacturing −4.4 27.6 1.4 1.2 5.5 0.6
Oil refining −9.5 6.4 −3.8 0.4 −6.4 1.5
Electricity, gas, and water −10.3 13.6 12.3 2.0 2.4 7.2
Construction −18.9 24.7 21.1 32.2 0.5 −5.9
Wholesale and retail trade −13.2 15.5 8.2 6.6 8.2 6.1
Restaurants and hotels −13.6 14.5 8.4 11.3 8.2 6.1
Transportation, storage, and communications −19.2 −2.8 −14.0 16.5 −2.7 5.5
Financial institutions 8.6 −9.0 −24.1 −1.0 61.8 −0.2
Government services −18.4 −13.3 −13.6 5.4 5.3 18.3
GDP −3.6 7.9 2.9 8.1 5.3 3.8
Non-oil GDP −9.6 5.5 0.5 8.2 5.9 3.2
Sources: Central StatistIcs Organization; and Central Bank of Yemen.
Table 6.Republic of Yemen: Distribution of Employment (Age 15 Years and Over) by Economic Activity 1/
Percent of Total Employed
Agriculture forestry and fishing 1,667 52.3 1,928 49.2 1,996 48.5
Mining and quarrying 10 0.3 13 0.3 13 0.3
Manufacturing 131 4.1 188 4.8 206 5.0
Electricity, gas, and water 14 0.4 21 0.5 21 0.5
Construction 217 6.8 341 8.7 382 9.3
Trade, restaurants, and hotels 332 10.4 415 10.6 440 10.7
Transport, storage, and communication 150 4.7 196 5.0 210 5.1
Finance, insurance, and real estate 35 1.1 47 1.2 49 1.2
Social and community services 224 7.0 365 9.3 412 10.0
Public administration 410 12.9 405 10.3 389 9.5
Total employment 3,188 100.0 3,919 100.0 4,119 100.0
Source: Ministry of Platming.
1/ Data for 1994 are based on the general population census of that year; 1998 and 1999 data based on Ministry of Planning estimates.
Table 7.Republic of Yemen: Distribution of Employment (Age 10 Years or Over) by Sectors in Urban and Rural Areas, 1998(In percent; unless otherwise specified)
Government 38.7 58.3 41.2 14.5 1.3 10.9 19.7 6.8 16.5
Administration 29.9 49.3 32.4 12.6 1.2 9.4 16.3 5.8 13.7
Other 8.8 9.0 8.8 2.0 0.2 1.5 3.5 1.0 2.9
Private sector 59.5 39.7 57.0 84.4 97.7 88.0 79.0 92.1 82.3
National 58.8 38.3 56.2 83.9 97.6 87.7 78.6 91.9 81.9
Foreign 0.7 1.4 0.8 0.4 0.1 0.3 0.5 0.2 0.4
Mixed 0.6 0.7 0.6 0.2 0.0 0.2 0.3 0.1 0.2
Cooperative 0.4 0.4 0.4 0.1 0.2 0.2 0.2 0.2 0.2
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Total (thousand) 669.4 99.3 768.7 2,453.7 931.0 3,384.7 3,123.1 1,030.3 4,153.4
Source: Central Statistics Organization, 1998 Household Expenditure Survey.
Table 8.Republic of Yemen: Household Income and Expenditure, 1998(Yemeni Rials, unless otherwise specified)
Average household income 36,988 26,654 29,035
Average household member income 5,024 3,763 4,096
Average household expenditure on food 20,727 19,818 20,026
Average household expenditure on nonfood 17,624 9,562 11,421
Ratio of household income to expenditure (in percent) 96.4 90.7 92.3
Average household size (persons) 7.11 7.08 7.09
Illiteracy rate (in percent) 27.47 56.57 49.47
Median age of population (in years) 15.9 14.2 14.6
Table 9.Republic of Yemen: Distribution of Population (10 Years and Over) by Education Level, Region, and Sex(In percent of total)
Illiterate 34.2 63.5 36.7 76.3 56.0 27.5 56.6 28.2 70.9 49.5
Read and write 33.4 24.5 36.9 16.1 26.8 38.2 30.3 44.4 20.0 32.2
Primary 9.2 5.4 9.4 3.1 6.3 5.4 2.8 4.5 2.3 3.4
Combined level 2.5 0.8 1.6 0.8 1.2 1.5 0.9 1.2 0.9 1.0
Preparatory 8.2 3.5 7.4 1.8 4.7 10.9 5.2 10.2 3.0 6.6
Pre-secondary diploma 0.9 0.3 0.8 0.1 0.5 1.1 0.4 1.0 0.2 0.6
Secondary 7.7 1.6 4.9 1.3 3.2 10.3 2.8 7.2 2.0 4.6
Post-high school diploma 0.8 0.2 0.6 0.1 0.4 1.4 0.6 1.3 0.2 0.8
University and above 3.1 0.4 1.7 0.4 1.1 3.8 0.5 2.0 0.6 1.3
Total 100 100 100 100 100 100 100 100 100 100
Total (thousand) 2,417 7,040 4,853 4,604 9,457 2,581 8,009 5,303 5,287 10,590
Sources: Central Statistics Organization; General Population Census 1994; and Household Expenditure Survey 1998.
Table 10.Republic of Yemen: Crude Oil Summary, 1994–99(In thousands of barrels per day)
A. Total net output 1/ 334 342 344 360 367 389
Marib 185 168 162 149 129 116
Masila 149 174 177 190 201 207
Jannah … … 4 20 19 48
East Shabwa … … … … 16 17
Ayad … … … 1 1 1
B. Companies' exports 154 155 137 137 177 158
Marib 69 57 53 49 52 47
Masila 85 98 82 79 104 77
Jannah 2/ … … 2 8 8 20
1. Companies' net output share 107 110 117 118 100 112
Masila 25 28 35 41 35 47
Jannah 2/ … … 1 2 3 7
East Shabwa … … … … 1 2
2. Cost recovery 88 85 60 56 107 75
Jannah … … 1 6 5 13
3. Income tax 41 41 40 37 30 28
Masila 0 0 0 0 0 0
Jannah … … 0 0 0 0
C. Government exports 135 123 129 150 112 146
D. Government sales to refineries 45 64 78 73 77 85
Average oil export price ($US/bbl) 15 17 20 18 12 19
Export revenue (Million $US) 1,615 1,735 1,976 1,945 1,229 2,131
Companies 862 957 1,018 933 758 1,138
Government 753 778 958 1,012 471 993
Source: Ministry of Oil and Mineral Resoures.
1/ Net of miscellaneous oil field uses.
2/ Including YICOM share.
Table 11.Republic of Yemen: Oil Exploration Blocks Awarded in 1996–99
Company licensed
Selected terms of contract
13 Bakrie 1996
R2 Bakrie 1996
S1 Vintage/TransGlobe 1997 150 km2 of 3-d seismic data to be acquired and three wells to be drilled over the first 2½ year phase, at estimated minimum cost US$11 million.
S2 Preussag 1997 Block had just been relinquished by consortium of Oxy/Amerada Hess/Mol.
9 Cal Valley Petroleum 1997 USS8 million to be spent during the initia] three-year exploration period.
31 Oil and Gas Mine Co. 1997 US$20 million to be spent on the two blocks
41 Oil and Gas Mine Co. 1997 (31 and 41) including the acquisition of 800 km of 2-d seismic data and the drilling of two exploration wells.
49 MOL 1997 Minimum expenditure of USS8 million, including 300 km of seismic acquisition and two exploration wells over three years.
50 Kerr-McGee/CanadianOxy/ YGCOG 1997 Current stakes are 47.5 percent, 47.5 percent, and 5 percent, respectively.
53 Dove/YGCOG 1997 Stakes: 75 percent and 25 percent respectively.
11 CanadianOxy 1998 At least US$11.5 million to be spent over seven years.
43 First Calgary Petroleum/ Ocean Energy 1998 Expenditure set at US$7.5 million for each of the two 2½-year periods
48 MOL 1998 A minimum of US$15 million to be spent over three years; work program to include acquisition of 500 km of 2-d seismic data and the drilling of two exploration wells.
15 Oil Search/Muhammad AI-Otaiba Group 1999 A minimum US$10 million to be invested in the first phase, two exploration wells to be drilled, and geological studies to be conducted.
2 Agip/Sonarrach 1999 The Algerian Sonatrach has a 40 percent interest in the block.
20 Adair International Oil and Gas lnc./PIE 1999 Seismic operations to begin in 2000; two exploratory wells and a minimum of US$16.8 million to be spent in two exploratory periods.
Sources: Arab Oil Directory; and Ministry of Oil and Mineral resources.
Table 12.Republic of Yemen: Domestic Consumption of Petroleum Products, 1994–99
(Millions of liters)
Total petroleum products 3,653 3,927 4,033 4,155 4,043 3,911
Gasoline 1,332 1,458 1.391 1,420 1,322 1,107
Diesel 1,023 1,083 1,175 1,273 1,215 1,302
Kerosene 147 172 169 163 150 140
Aviation fuel 93 102 93 93 99 111
Fuel oil 589 808 909 909 938 898
LPG 468 303 297 297 318 353
(Percent change)
Total petroleum products −7.6 7.5 2.7 3.0 −2.7 −3.3
Gasoline 0.2 9.5 −4.6 2.1 −6,9 −16.2
Diesel −1.4 5.9 8.4 8.4 −4.6 7.1
Kerosene −9.0 17.0 −1.7 −3.4 −8.0 −6.7
Aviation fuel −11.0 8.7 −8.0 −0.5 6.2 12.6
Fuel oil −27.6 37.2 12.4 0.0 3.2 −4.3
LPG −28.5 −35.2 −2.2 0.0 7.2 10.8
Source: Ministry of Finance.
Table 13.Republic of Yemen: Output of Industrial Products, 1994–99 1/
Electricity (million kwh) 2,159 2,369 2,457 2,482 2,557 2,633
Salt (thousand tons) 118 71 135 136 147 149
Quarried stone (thousand cubic meters) … 2,823 2,397 2,437 2,497 2,547
Gypsum (thousand tons) 99 100 97 99 102 103
Food, beverage, and tobacco industries
Bread (thousand tons) 7 178 159 162 170 179
Biscuits and confectioneries (thousand tons) 69 68 64 65 43 44
Ghee and edible oils (thousand tons) 99 97 106 108 108 109
Soft drinks (million liters) 67 51 34 35 45 46
Mineral water (thousand cubic meters) 114 81 76 77 56 57
Vimto drink (thousand of liters) 1,602 2,963 2,718 2,491 … …
Ice (thousand tons) 36 54 58 59 61 61
Milk and products (million liters) 68 66 47 48 54 55
Ice cream (tons) 144 2,054 1,632 1,665 1,715 1,749
Cigarettes (million units) 5,423 6,540 6,740 6,800 6,040 5,859
Textile industries
Underwear (thousand pieces) 360 278 287 293 … …
Woollen pullover (thousand pieces) … 0 28 0 … …
Weaving (million meters) 7 5 5 5 5 …
Ginning (thousand tons) 1 1 2 2 … …
Metallic industries
Household utensils (tons) 747 604 2,434 1,740 1,775 1,793
Barrels (thousands) 4 3 3 … 723 730
Doors and windows (thousand square meters) … 604 690 703 … …
Metallic scrubbers (tons) 123 110 52 53 … …
Stationary engines (thousands) … 28 31 32 … …
Metal suitcases (thousands) 50 … 10 … … …
Beds (thousands) … … 1 … … …
Nonmetallic industries
Cement (thousand tons) 898 1,100 1,070 1,038 1,207 1,231
Red bricks (thousands) … 14,033 14,319 14,605 14,897 15,120
Cement bricks (thousands) … 81,118 85,315 87,021 89,000 90,780
Tiles (millions) 9 34 81 83 73 72
Marble (thousand square meters) 11 75 82 83 86 88
Plastic footwear (thousand pairs) 5 9 7 7 7 7
Foam rubber (tons) 1,642 1,918 1,556 1,572 … …
Household utensils (tons) 985 4,730 3,830 3,873 … …
Buckets (tons) 1,387 1,532 1,804 1,840 … …
Water tubes (tons) 813 5,917 3,721 3,759 … …
Plastic sheets (tons) 4,786 5,673 10,151 10,354 … …
Plastic tubes (tons) 4,307 7,640 7,264 7,409 … …
Paint (thousand liters) 7,752 9,882 8,331 8,247 7,137 …
Soap (thousand tons) 30 32 24 23 20 …
Perfume (thousand ounces) 1,049 900 901 919 … …
Oxygen gas (thousand cubic meters) 110 117 0 … … …
Heat insulation (tons) … 12 13 … … …
Fuel gas (thousand tons) 233 313 298 325 … …
Paper tissues (tons) 455 1,082 1,917 1,936 1,948 1,967
School books (tons) … 6,807 6,944 4,014 7.063 7,204
Cartons (thousand tons) 12 12 11 11 13 14
1/ Data for 1998–99 is provisional as compilation of the underlying data is not yet completed.
Table 14.Republic of Yemen: Production, Area, and Yield of Major Crops, 1994–99 1/(Production in thousand metric tons; area in thousand hectares; and yield in tons per hectare)
Cereals (total)
Production 802.0 810.2 663.9 646.2 833.3 687.0
Area 734.7 733.2 704.2 720.2 770.4 770.4
Sorghum and millet
Yield 1.0 1.0 0.8 0.8 1.0 0.8
Production 63.1 63.8 53.6 47.2 56.2 53.4
Area 48.8 49.5 48.8 48.8 49.4 49.4
Yield 13.7 13.6 12.9 12.7 12.6 12.7
Grapes, dates, and other fruits
Production 146.4 150.6 98.0 150.2 154.9 159.1
Production 193.7 2284 269.1 293.0 373.0 3998
Production 8.5 9.0 10.6 10.3 11.3 11.3
Production 7.2 8.1 8.6 10.2 11.5 11.5
Area 3.6 4.0 4.2 5.0 5.4 5.4
Sources: Ministry of Agriculture; and Central Statistics Organization.
1/ Data for 1999 is preliminary.
Table 15.Republic of Yemen: Noncrop Primary Production, 1994–99(In thousands of metric tons)
Total meat and milk 220.4 241.3 253.0 261.1 274.9 280.4
Meat 39.8 40.6 41.6 43.1 45.3 46.2
Poultry 30.1 47.2 55.5 56.3 61.4 62.6
Milk 150.5 153.5 155.8 161.7 168.2 171.6
Eggs (millions) 351.0 358.0 367.0 495.0 600.0 612.0
Total fish catch 81.9 85.9 103.7 115.6 127.6 137.3
Surface water fish 80.3 84.3 94.3 93.5 104.9 111.2
Deep water fish 0.1 0.1 6.7 12.4 12.1 14.5
Other aquatic catch 1.5 1.5 2.7 9.7 10.6 11.6
Sources: Central Statistics Organization and Ministry of Agriculture.
Table 16.Republic of Yemen: Consumer Price Index for Urban Areas, 1994–99 1/
(December 1994 = 100)
Overall index 100.0 157.2 200.0 214.1 239.6 264.0
Food stuffs 100.0 146.8 187.4 199.6 231.6 257.3
Housing 100.0 169.7 232.2 248.1 269.2 296.4
Clothing 100.0 207.8 250.4 280.3 248.7 258.2
Others 100.0 180.1 197.9 212.7 236.0 254.4
Overall index n.a. 57.2 27.2 7.1 11.9 10.2
Food stuffs n.a. 46.8 27.7 6.5 16.1 11.1
Housing n.a. 69.7