Republic of Yemen: Staff Report for the 2004 Article IV Consultation
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International Monetary Fund
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Publication Date:
23 Mar 2005
eISBN:
9781451840803
Language:
English
Keywords:
ISCR; CR; exchange rate; government; GDP; U.S. dollar; private sector; core consumer price index; oil price; current account; public expenditure
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This 2004 Article IV Consultation highlights that economic growth in Yemen slowed in 2004 owing to a sharp contraction in the oil sector. Oil production declined by 5.9 percent, reflecting diminishing recovery from aging large oil fields as well as the absence of significant new discoveries. Some progress has been made in structural reforms. The revised General Sales Tax law submitted to parliament in late 2004 included several improvements designed to protect the integrity and simplicity of this tax.

Abstract

This 2004 Article IV Consultation highlights that economic growth in Yemen slowed in 2004 owing to a sharp contraction in the oil sector. Oil production declined by 5.9 percent, reflecting diminishing recovery from aging large oil fields as well as the absence of significant new discoveries. Some progress has been made in structural reforms. The revised General Sales Tax law submitted to parliament in late 2004 included several improvements designed to protect the integrity and simplicity of this tax.

I. Introduction

1. Yemen’s strong adjustment efforts that began in the mid–1990s have stalled in recent years. Achievements under Fund-supported programs from 1996 to 2001 included macroeconomic stabilization, price liberalization, exchange rate unification, trade liberalization, and the reduction in external debt. Recently, the reform process has been held back by mounting opposition as the remainder of the reform agenda began to encroach on the interests of very powerful groups. The lack of broad-based political consensus for reform, fueled in part by a perception of rampant corruption, has not helped.

2. With oil depletion looming closer on the horizon, the government unveiled in October 2003 a reform package aimed at pushing the reform process forward and breaking the political deadlock. The package, which was designed to be adopted or rejected in its entirety, contained some popular measures, such as wage increases for civil servants and tariff reduction, in the hope of winning parliamentary support. However, in 2004, under political pressure, the government granted a public sector wage increase without any tangible progress in civil service reform; delayed the introduction of an amended GST Law by one year to July 2005; and postponed the adjustment in petroleum prices.

3. Strong commitment at the highest political level is needed to reignite and sustain reforms in the coming years. With the approaching presidential elections in 2006, it is critical that reforms be implemented soon. Otherwise, the adjustment process may be significantly delayed, putting at risk the achievements of the past.

II. Background

4. A steeper-than-expected decline in oil production in 2004 and a downward revision of the long-term production path raise serious concerns about sustainability. Oil production was estimated to have declined by 5.9 percent last year and is projected to decline by 4.7 percent in 2005 as the recovery from aging large fields diminishes. The prevailing opinion, within government and oil company circles, is that, while small discoveries are possible, they will not be sufficient to replace the loss from large oil fields. At current production levels, proven oil reserves could be depleted in five years. With more realistic lower production rates, the depletion horizon can be extended by 12–14 years (Box 1).

5. Recent developments point generally to a deterioration in macroeconomic indicators.

  • Real GDP growth was estimated to have declined to 2.7 percent in 2004, mainly because of the slowdown in oil production. Non-oil GDP growth is expected to have reached 4.1 percent, supported by stronger activity in the construction, transportation, and trade sectors, and fueled by domestic demand stemming from continued fiscal expansion and higher public sector wages. However, over the long term, non-oil growth is likely to taper off as oil production declines, and with it government spending, unless important reforms reverse the tide and boost private investment (Table 1).

Table 1.

Republic of Yemen: Selected Economic Indicators, 2000–05

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Sources: Yemeni authorities; staff estimates and projections.

Core CPI is defined as CPI excluding qat.

Oil price is different from the WEO price because Yemeni oil is traded at a discount.

Gross reserves minus commercial bank and pension fund foreign exchange deposits held with the central bank. Imports are for the current year and exclude oil and gas sector imports.

Public and publicly guaranteed debt including central bank foreign liabilities. Debt service ratio is measured as a percent of exports of goods and services.

The real effective exchange rate for 2004 is the average over eleven months through end-November.

Oil Sector: Recent Developments and Prospects

A sharp decline in production in two maturing large fields in 2004 is feared irrevocable. There are nine producing blocks in Yemen, the largest of which are Marib and Masila—together contributing about three-fourths of total production. Production in these two blocks is now expected to drop sharply in the next decade.

The authorities and oil companies feel that there is a possibility of discovering new small fields, but they do not believe that this will be sufficient to replace the loss from the existing large fields. They conjecture that, based on geological data, they are unlikely to find large new oil fields in the near future. However, there is a general optimism about discovering small fields with about 50 million barrels in reserves.

In the absence of major new discoveries, reserves would be depleted in about 12–14 years. According to the Production and Exploration Authority (PEPA) estimates, proven (and fully recoverable) oil reserves are at 750 million barrels. However, if we add the estimates of recoverable probable and possible reserves, the level of reserves could almost double to 1.4 billion barrels.

The reserves-to-production ratio—which indicates how long reserves would last if production were to continue at the current pace of 146 million barrels per year—is only 5 years for proven; and 10 years for proven, probable, and possible. Under more realistic declining production schedules, reserves could be extended, but not for long. The figure below shows the production paths under three different assumptions: (a) only proven reserves are considered (P); (b) proven, probable, and possible (3P); and (c) a more realistic assumption consistent with other countries’ experiences under which we assume that there is a 50 percent chance that the probable and possible reserves become proven (P+2P*Prob). Under the first and third scenarios, production will drop by more than 90 percent and under the second scenario, by about 60 percent by 2016. Under the third scenario, which is used in our projections, oil revenue and exports will be virtually depleted by 2018.

uA01fig01

Oil Production under Different Assumptions on Reserves

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

uA01fig02

Non-Oil and Oil Real GDP Growth, 1998–2004

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

  • The fiscal deficit was estimated at about 4.5 percent of GDP in 2004, about 1 percent higher than the original budget target due to higher development spending and the petroleum subsidy as authorized by the supplementary budget that was adopted late in the year (Table 2).

  • Broad money grew at a rapid pace during the better part of 2004 until it was reined in during November-December—ending the year with a growth rate of 15 percent. Money growth was driven largely by a buildup in net foreign assets (on account of high oil exports) and an expansion of credit to the private sector (33 percent) mainly to finance trade (Table 3).

  • Core inflation (excluding qat) picked up partly as a result of expansionary macroeconomic policies and partly because of the impact of adverse weather conditions on food prices. The end-year core CPI inflation rate reached 14.5 percent compared with 12.1 percent in 2003, while the headline inflation rate was at 10 percent.

  • The external current account deficit remained broadly unchanged in 2004. A pickup in the demand for imports mitigated most of the export gains resulting from higher oil prices (oil export volumes were actually lower than expected). International reserves increased to reach about $5.1 billion, or 16.4 months of imports, despite record sales of foreign exchange ($740 million) by the Central Bank of Yemen (CBY) to respond to increased demand for import financing (Table 4).

  • The nominal exchange rate remained fairly stable vis-à-vis the U.S. dollar in 2004 and depreciated against other currencies (by 9 percent against the euro). This depreciation was not sufficient to make up for inflation differentials with Yemen’s trading partners, leading to an appreciation of the real effective exchange rate by 3.5 percent over the 11 months through November 2004.

Table 2.

Republic of Yemen: Central Government Finance, 2003–09

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Sources: Ministry of finance; ministry of planning; and staff estimates.

In 2003–04 the increase reflects pending payments associated with project accounts.

Revenue excluding grants minus expenditures excluding interest obligations.

Overall balance (commitment including grants) excluding interest obligations and oil and gas revenue.

Domestic oil revenue net of cash petroleum subsidies.

External debt includes expected debt relief and projected stock-of-debt operations as well as expected future disbursements. Domestic debt includes net outstanding lending to government by the central bank and commercial banks, and treasury bills and repurchases held by the bank and nonbank sector.

Classification based on the ministry of finance bulletin (it may not include all expenditures in health or education).

Includes an acquisition of equity in Aden Container Facility of an amount of $200 million.

Table 3.

Republic of Yemen: Monetary Aggregates, 2000–05

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Sources: Central Bank of Yemen; and Fund staff estimates.

Includes valuation adjustment.

Table 4.

Republic of Yemen: Balance of Payments, 2003–09

(In million of U.S. dollars)

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Sources: Central Bank of Yemen, and Fund staff estimates and projections.

Oil sector includes oil companies share of exports less oil sector imports, expenses and repatriation.

Debt relief in 2004 from Bulgaria and Japan.

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 and pension fund reser

Imports are c.i.f. for current year and exclude oil sector imports. Include high grade oil imports for the refineries beginning 2005.

Public and publicly guaranteed debt including central bank foreign liabilities.

uA01fig03

External current account developments

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

uA01fig04

Nominal and Effective Exchange Rate Indices January 1998=100

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Sources: Yemeni authorities; and Fund staff estimates.

6. In early January, parliament approved the 2005 budget conditional on the government adopting a set of wide-ranging measures. These include: (a) submitting to parliament a national wage strategy to be implemented fully by 2007; (b) providing additional resources for social safety nets to reduce the impact of higher petroleum prices; (c) reducing customs duties to the levels of neighboring countries; (d) fighting smuggling through better border control; and (e) adopting policies that would encourage growth in non-oil sectors such as fisheries and tourism.

III. Policy Discussions

7. The 2004 Article IV discussions revisited almost all the themes raised in recent consultations—in particular the need for strong fiscal and structural reforms to address long-term challenges—but with particular emphasis on the additional challenges created by the downward revision of the oil production path. The mission stressed that the shorter time horizon for oil production will require even stronger adjustment to preempt serious fiscal and external imbalances that could threaten macroeconomic stability. Policies to spur non-oil sector growth would also be critical.

8. While the near-term outlook is manageable, staff suggested that macroeconomic policies for 2005 and the immediate future be guided by the serious longer-term concerns. Staff stressed the benefits of casting macroeconomic policies in a coherent framework that focuses on these long-term prospects.

9. The authorities indicated that they had launched a public information campaign to highlight the long-term risks of declining oil production and the benefits of reforms. They hoped that these efforts would lessen the strong opposition to reform that has so far prevented the government from taking action. They also noted that the package of reforms that was originally proposed in October 2003 is an integral part of the 2005 budget, which was under discussion in parliament during the mission and which has since been approved.1

A. The Economic Outlook

10. To illustrate the medium- and long-term outcomes under different policy choices, staff prepared two scenarios: a nonadjustment scenario and an adjustment scenario. The first is based on unchanged policies and the second aims at deriving the fiscal adjustment required to maintain the debt-to-GDP ratio at a sustainable level (below).

A nonadjustment scenario

11. A nonadjustment medium-term scenario shows clearly that Yemen’s fiscal and external positions are unsustainable (Table 5). Without policy adjustments, the share of budgetary oil revenue to GDP drops from 25 percent in 2004 to 8.5 percent by 2009; the petroleum subsidy remains at about 6 percent of GDP; and the budget deficit increases to about 21.9 percent of GDP by 2009. If imports continue to grow modestly to sustain domestic demand, the current account deficit could exceed 13 percent of GDP in 2009, and gross international reserves are likely to be virtually depleted in about five years. Extending this scenario beyond the medium term, the debt-to-GDP ratio is projected to increase to 181 percent of GDP by 2014 and to 289 percent of GDP by 2025 (Table 6).

Table 5.

Republic of Yemen: Macroeconomic Summary Indicators, 2000–09

Non-adjustment Scenario

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Source: Yemeni authorities and staff estimates.

Core CPI is defined as the overall CPI less the CPI for qat.

Oil price is different from the WEO price because Yemeni oil

Table 6.

Republic of Yemen: Required Fiscal Adjustment and Long-Term Sustainability

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Inflation is assumed to be lower under the adjustment scenario.

Assumes the fiscal reforms described in the text.

An adjustment scenario

12. With the expected decline in oil production, it would be preferable to have a long-term anchor to the fiscal framework that would sustain the economy beyond oil. Staff assumed that maintaining the debt-to-GDP ratio at 50 percent (which is about the current level) could provide such an anchor and would be an important element in preparing Yemen to face the long-term challenges posed by the expected depletion of oil resources.

13. Staff’s analysis suggests that a cumulative adjustment of about 22.5 percent of GDP in the non-oil primary budget deficit is needed by 2016 (when oil is virtually depleted) to bring Yemen closer to a sustainable long-term path (Box 2). This estimate is derived by comparing the sustainable primary balance path required to maintain the debt-to-GDP ratio at 50 percent with the primary balance under the nonadjustment scenario.2 The comparison shows that a significant fiscal adjustment is needed upfront to maintain sustainability and help smooth the transition to a non-oil economy.

14. To realize such a large adjustment over the long term, a comprehensive fiscal strategy would be required. Given Yemen’s very low tax-to-GDP ratio (7.5 percent of GDP), raising tax revenue and strengthening tax administration at first are essential.3 Experience in other countries suggests that an expenditure cutting strategy would also tend to offer a great likelihood of effecting an enduring change in the budget, and is perceived as more durable and credible.

15. Staff identified several fiscal measures to compensate for some of the loss in oil revenue (Box 3). The set of measures could realistically generate about 12–15 percent of GDP. The authorities agreed with these measures, but noted that some of them would probably not be implemented in the period envisaged by the staff. In particular, officials pointed out that imposing an excise tax on petroleum products soon after the elimination of the subsidy is likely to be very difficult.

16. Fiscal measures should be supported by policies that stimulate economic growth and diversify the production base away from oil, easing the pains of adjustment. Particular attention should be given to the fishery sector, which has great potential for creating large employment and remains largely unexploited.4 While the recent adoption of a new strategy for fisheries (which divides territorial water into different zones and determines the size of boats in each of these zones) is a step in the right direction, it should be followed by a complete survey of fish resources and by strengthening monitoring mechanisms to reduce reported corruption and piracy. Transshipment activities (especially in the port of Aden) and tourism are potentially other important sources of growth. However, developing non-oil sectors requires, above all, improvement in the security situation and in the business environment.

Required Fiscal Adjustment for Long-Term Sustainability

In theory, the government is deemed solvent if it can generate future primary surpluses sufficient to service its outstanding debt. This definition does not preclude protracted large budget deficits provided that primary surpluses can be generated in the future. In practice, such an approach may require large future adjustments, which may not be feasible or desirable, economically and politically. A more operational definition (WEO 2003) suggests that a given debt level is sustainable if it implies that the government’s budget constraint (in NPV terms) is satisfied without unrealistically large future corrections in the primary balance.

We use different target debt-to-GDP ratios to assess debt sustainability and determine the required adjustment needed to achieve this target. According to recent studies, a sustainable debt level for emerging markets ranges between 15 percent to 50 percent of GDP. The poor quality of institutions in Yemen militates for a debt ratio closer to the lower bound of this range. However, given that Yemen is a poor country that is facing a rapid decline in oil production, a 50 percent target seems more realistic.

The difference between sustainable and nonadjustment primary balance is the cumulative adjustment required in any given year. The results are then tested against staff’s estimates of fiscal adjustment in terms of revenue and expenditure measures. Results are summarized in Table 6.

In the nonadjustment scenario, the debt-to-GDP ratio is projected to rise to 181 percent of GDP by 2014, at which time oil production and revenue drop by 94 percent. During the next 10 years, the non-oil primary deficit is projected to average 25 percent of GDP (equivalent to 29 percent of non-oil GDP).

For debt-to-GDP ratios between 15 and 50 percent of GDP, sustainable non-oil primary deficits over the next 12 years would have to average between 15 and 12 percent of GDP (17 percent and 14 percent of non-oil GDP, respectively). This is significantly lower than the current non-oil primary deficit of 27.5 percent of GDP (39 percent of non-oil GDP).

Achieving sustainability would require a total adjustment of 22.5 percent of GDP in the non-oil primary deficit over the next 12 years. Fiscal adjustment per year would have to average about 1.9 percent of GDP and postponing adjustment would require large primary surpluses at the time of reserves depletion, thereby increasing the adjustment costs. Staff identified fiscal measures that can be implemented over the long run that could amount to 12–15 percent of GDP (Box 3).

We assume that the deficit is financed by domestic and foreign borrowing or by seignorage. Evolution of debt in this case can be described as follows:

D t d + D t fUSD S t - D t - 1 d - D t - 1 fUSD S t + H t - H t - 1 = i t d D t - 1 d + i t f D t - 1 fUSD S t - P B t ( 1 )

where DtfUSD is foreign debt expressed in U.S. dollars, St is exchange rate (units of domestic currency per one unit of foreign currency), Ht is the stock of base money, itd is nominal interest rate charged on domestic debt, itf is the interest rate on foreign debt denominated in foreign currency, and PB is the primary balance.

Denoting by lower case letters ratios of variables to current nominal GDP, (1) becomes:

p b t = d t - 1 d ( 1 + g Y t ) [ 1 + i t d ] + d t - 1 f ( 1 + g S t ) ( 1 + g Y t ) [ 1 + i t f ] - d t d - d t f - h t + h t - 1 ( 1 + g Y t ) ( 2 )

If the government wants to reduce its total debt-to-GDP ratio from do to dn in n years with equal reduction per year, debt-to-GDP ratio at time t(dt) can be written as debt-to-GDP ratio at time t–1 (dt–1) plus a constant reduction, namely, dt=dtd+dtf=dt-1+c=dt-1d+dt-1f+c where satisfies c = (dn - do)/n. Assuming that reserve money’stock is growing at the same rate as nominal GDP, we obtain the following expression for primary balance in period t:

p b t = d t - 1 d ( 1 + g Y t ) [ i t d - g Y t ] + d t - 1 f [ ( 1 + i t f ) ( 1 + g S t ) - ( 1 + g Y t ) ] ( 1 + g Y t ) - h t - 1 g Y t ( 1 + g Y t ) - c ( 3 )

The first three terms of equation (3) give the primary balance necessary to maintain the debt-to-GDP ratio constant at the level of the previous period, and the constant c is the additional adjustment needed every year to bring the debt ratio to the desired level in n years.

Fiscal Reforms Toward Long-Term Sustainability

Yemen needs to embark on a large fiscal adjustment path to move to a post-oil economy within 15 years. To be successful, the adjustment needs to be comprehensive and front-loaded. Experience has shown that adjustment could be achieved with growth friendly policies that have a high social rate of return. A comprehensive fiscal strategy, based on both revenue and expenditure measures, as well as a substantial improvement in tax administration and public expenditure management are needed. An ill-designed adjustment that lacks credibility would likely lead to policy reversal. Priority reforms include:

Tax policy and administration. Given Yemen’s development needs and the low tax revenue in Yemen (about 10 percent of non-oil GDP), the fiscal adjustment will require a substantial increase in non-oil revenue:

  • Introducing the General Sales Tax (GST). Based on international experience, a 10 percent GST rate should generate between 3 and 5 percent of GDP. If the draft GST law is approved as recently amended by the government—simple to administer and with limited exemptions—it could generate between 3 percent to 3.5 percent of GDP in a few years, some 1–1.5 percent of GDP over the existing TCPS.

  • Eliminating custom exemptions and fighting smuggling. Customs exemptions and other exemptions under the investment code should be reduced to a minimum. The low collection rate—less than half of the simple average tariff rate—suggests that customs revenue could potentially increase by at least 1 percent of GDP, if supported by better border enforcement to fight smuggling—estimated at 20 percent of total imports.

  • Applying an excise tax on petroleum products. This will have to wait until the elimination of the petroleum subsidy. An excise tax of 5 percent introduced in 2007—raised to 10 percent beginning in 2010—is projected to generate up to 1.5–2 percent of GDP in revenue. While politically difficult, excises are potentially an important source of revenue in the long term. Higher excises, by reflecting the social costs, would also lead to a more efficient use of energy.

  • Strengthening the tax and customs administrations. Initial efforts should focus on the Large Taxpayer Office (LTO). However, the LTO will have to be supported by further strengthening and coordination with the customs administration. This could generate about 0.5 percent to 1 percent of GDP over the long term.

Expenditure policy and public expenditure management. Reforms should focus on:

  • Eliminating petroleum product subsidies. This will save the budget about 6 percent of GDP, which could be used in part to mitigate the impact of removing the subsidy on the poor and the rest to finance priority pro-growth spending as well as social expenditures, such as health and education.

  • Reducing the civil service wage bill. At more than 7 percent of GDP, the civilian wage bill is 1–2 percentage points higher than in comparator countries. The reduction in the bill should be achieved through retrenchment rather than a wage freeze. This reform should go hand in hand with a comprehensive review of the wage strategy.

  • Containing defense spending. Even taking into account domestic security needs, defense outlays could gradually decline to a level of about 3–4 percent of GDP (slightly above the average in countries outside the Middle East), realizing a saving of 1–2 percent of GDP.

The above measures could generate about 12–15 percent of GDP. If these measures are supported by a strong supply response, this adjustment would likely be sufficient to ensure sustainability in the long run. However, if the reform process slows down and the above measures do not generate the needed savings, then there will be no choice but to take some extraordinary measures, including cutting development spending and raising taxes.

17. Fiscal adjustment should be accompanied by institutional and structural measures. First, improving public expenditure management is an important step in the consolidation of the fiscal strategy. Second, designing and carrying out fiscal policy in a medium-term framework would enhance the credibility of the government and reduce public opposition to reforms. Third, core allocation of critical and poverty-related expenditures should be protected from ad hoc cuts and should be tracked over time to assess progress. Fourth, measures to strengthen revenue administration should be accelerated.

18. While the adjustment scenario could generate a cumulative adjustment of 17.6 percent of GDP in the non-oil primary balance (by 2016), this would not be sufficient for debt sustainability (Table 6), suggesting a need for additional corrective measures. Under the adjustment scenario, a cumulative adjustment gap of some 5 percent of GDP in the non-oil primary deficit would remain by 2016. To close this gap, some difficult measures are needed including reducing development spending (say by some 1–2 percent of GDP), cutting the wage bill by 1–2 percentage points of GDP, increasing the GST rate (from the current proposed rate of 10 percent), and introducing new taxes (which could generate about 1 percent of GDP). Because of the potentially adverse impact on growth and poverty reduction, reduction of pro-poor spending should be resisted until all other possible avenues are explored. The possible negative impact of raising taxes on growth will also need to be assessed. External assistance, preferably in the form of grants, would make the adjustment process less painful.

19. There are several risks to the long-term scenario and the outcome will depend on how these risks play out. The most important downside risks are the political economy obstacles that cast doubt on the feasibility of implementing such a large fiscal adjustment. It is possible that powerful vested interest groups, who have been successful in blocking reforms—since they reduce rent-seeking activities—could still hold back reform efforts. Other downside risks include lower oil prices, slower growth that could result in part from the proposed fiscal adjustment, and faster depletion of oil resources. On the upside, new oil discoveries, high oil prices, and potential exploitation of natural gas (which is now being discussed with foreign investors) could improve economic prospects.

20. Yemen’s external debt indicators are expected to deteriorate over the long term with the depletion of oil exports unless sufficient additional efforts are made to diversify and increase non-oil exports. Debt sustainability in Yemen is primarily driven by the projected path of oil production, which accounted for 94 percent of export revenue and nearly 70 percent of fiscal revenue in 2004. Even under optimistic growth rates in non-oil exports and non-oil budgetary revenue, the projected decline in oil production for the outer years sharply reduces export and budgetary revenue, casting doubt on long-term debt sustainability (Appendix II).

B. Fiscal Policy

21. Staff expressed concern about the deterioration in the fiscal position in 2004 at a time when more fiscal discipline was clearly needed. While the increase in petroleum subsidy—which was not reduced as originally planned—explains in large part the increase in the fiscal deficit, it was unfortunate that the supplementary budget was used also to increase other expenditure categories, including defense, wages, and development. The authorities explained that these were necessitated by the precarious security situation, the political decision to increase public sector wages, and overspending by some line ministries.

22. While the 2005 budget represents a strong adjustment effort, it is questionable whether the fiscal target can be attained given some of the budget’s unrealistic allocations and the risk of a further delay in implementing the required measures. The budget targets a deficit of 3 percent of GDP, representing a drop of 9 percent of GDP in the non-oil primary balance (Table 2). However, even if petroleum prices are adjusted in early 2005, the staff projected the deficit to end up close to 5 percent of GDP, mainly because of higher subsidy and development spending. Moreover, in view of the conditions imposed by parliament, which may not be fulfilled soon, there is a risk that the reform package would be caught again in a political stalemate, with a possible surge in the deficit to more than 8 percent of GDP. Under all circumstances, staff stressed that if a supplementary budget is needed, it should be subject to stringent budgetary discipline and be contained to respond only to the budgetary impact of unforeseen developments or external shocks.

23. The authorities renewed their commitment to the phasing out of the petroleum product subsidy beginning in 2005. The proposed price adjustment in 2005 consists of almost doubling the diesel price (to Yrls 33) and increasing the prices of gasoline and liquefied petroleum gas by 45 percent and 40 percent, respectively—in line with the government’s proposal of last year.5 The impact of this measure is to reduce the subsidy by about 3 percent of GDP if fully implemented at the beginning of the year. However, the authorities noted that these price adjustments could be lower if there is a need for a compromise with political partners and parliament.

The 2005 Budget

The 2005 budget is based on the following measures and assumptions: (a) significant reduction in petroleum subsidy; (b) an increase in the wage rate by 10–15 percent; (c) reduction in customs rates on cars and some other goods that can easily be smuggled; (d) a $30 per barrel oil price, more realistic price assumption than in previous budgets; (d) implementation of an amended GST law beginning July 2005 although no revenue impact is assumed; (e) lower development spending compared to recent years (about 1.8 percent of GDP); and (f) a decline in oil revenue by 7.6 percent of GDP.

Yemen: Fiscal Aggregates

(as share of GDP)

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Source: Ministry of Finance, and Fund staff projections.

24. Staff suggested that the remaining gap between domestic and international petroleum product prices be phased out during the 2005–06 period, according to a well-defined automatic price adjustment formula. This formula would have two components: the first consists of quarterly price adjustments, and the second would pass through the absolute change in the international price to domestic prices.6 If oil prices fall over the next two years, this would mitigate the required adjustment in the price. However, the authorities argued against setting a formula for fear of increased smuggling ahead of future price increases. While there is merit to this argument, staff considered that with the substantial increase planned for 2005, the incentive for smuggling will be significantly reduced.

25. The electricity subsidy, which has been small so far, could become a heavy burden on the budget if not addressed soon. According to an agreement with the World Bank and the Fund, the budget pays a subsidy of Yrls 6 billion a year until 2007 to the electricity company until it builds more efficient power plants. Anecdotal evidence suggests that the actual subsidy may be higher than budgeted and could grow further in the next few years. Staff expressed concerns and suggested that, among other things, serious consideration be given to revising the tariff structure to protect only the poorest segment of the population.7 The authorities agreed with this assessment, but noted that, in view of the heavy reform agenda, this particular issue was not one of their top priorities at this time.

uA01fig05

Revenues and Expenditures 1999–2009

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Source: Yemeni authorities; and Fund staff estimates.

26. The planned increase in petroleum product prices requires strengthening of social protection mechanisms to mitigate any possible impact on the poor. A poverty and social impact analysis conducted by the World Bank and DFID indicates that less than 2 percent of the subsidy reaches the poor. However, the study suggested that removing the subsidy would have an impact on food and transport prices and, thus, may have a regressive impact given the large proportion of income that the poor spend on food. In order to ease such an impact, the targeting and the coverage of the Social Welfare Fund (SWF), which distributes a cash subsidy to very poor families, should be improved. More generally, further efforts should be made to protect the most vulnerable groups from the long-term adjustment required for achieving sustainability (Box 4).

Social Protection and Adjustment Efforts

The success of fiscal adjustment will largely depend on how well it protects the most vulnerable groups and how it is perceived by the public at large. About 42 percent of Yemen’s population live below the poverty line, with an estimated 33 percent unable to meet the minimum daily calorie intake requirement. Protection mechanisms that are fair, transparent, and well targeted will mitigate the possible adverse impact of adjustment on the poor and facilitate the political acceptance of reforms.

The elimination of petroleum subsidy and the subsequent fiscal adjustment measures are expected to have an adverse impact on the poor. For example, although a large portion of the petroleum subsidy benefits the rich, its removal will likely be felt more by the poor through, inter alia, higher transportation costs and food prices—the latter representing a disproportionately much higher portion of the poor’s household budget.

According to a World Bank study, about 60 percent of the direct diesel subsidy used by households is captured by the two top (income) deciles, while less than 2 percent goes to the two lowest deciles. At the same time, the aggregate impact of eliminating subsidies is regressive because of the dominance of the indirect impact. It is estimated that, for households using diesel as fuel, the impact of bringing diesel price to its economic price in percent of their expenditure would reach about 14 percent and 5 percent for the lowest and highest deciles, respectively. Similarly, for those using LPG (used more widely by the poor), the impact is about 13 percent and 2 percent for the lowest and highest deciles, respectively.

The authorities should focus mainly on strengthening the existing social safety nets (see below) while exploring with NGOs and representatives of the poor other mechanisms to respond to the potential impact of other adjustment measures. Additional efforts should aim at strengthening capacity at the subnational level, essential in the delivery of social safety net programs. Delivery instruments should take into account administrative and financial constraints, and could include: targeted cash transfers, public works programs, social funds, and microfinance.

******

The Social Welfare Fund (SWF) is the government’s primary safety net and provides direct cash assistance (with a limit of Yrls 2,000 or about $11 per family per month) to 650,000 beneficiaries. While at its inception it suffered from ill targeting and poor governance, according to the ministry of labor and social welfare targeting has improved and 80 percent of the most recent 200,000 beneficiaries are indeed poor, according to the formula used. The main delivery mechanism for the SWF, covering 58 percent of the total benefit transfer, is the postal system.

The Social Development Fund (SDF) provides assistance for long-term development projects. These are aimed at providing social and economic services—including education, health care, water supply, and microfinance—creating jobs and enhancing the capacity of local communities. Recently, the SDF has developed a five-year $137 million National Small and Micro-Enterprises Development Strategy focusing on poverty alleviation in both rural and urban areas. The SDF’s involvement with SME development has been met with limited success owing to the reluctance of banks to extend credit to SMEs.

C. Monetary and Exchange Rate Policies

27. Central bank officials did not see a need to raise interest rates, arguing that the pick up in inflation was mainly supply driven. They claimed that most of the increase in the inflation rate was due to the rise in food prices, which were affected by adverse weather conditions, and, hence, raising interest rates—as suggested by staff—would not help in combating inflation. They were also concerned about the impact of higher interest rates on investment and growth. They assured the mission though that they would monitor the situation very closely and intervene when necessary, including by raising the benchmark minimum rate on savings deposits.

28. Staff expressed concerns about inflation running at double digits, and indicated that the surge in prices during the past year reflected more than the transient effect of adverse weather conditions. Staff stressed the need for monetary policy to focus primarily on price stability and for interest rates to reflect market forces. Staff indicated that the rise in food prices did not explain fully recent inflationary trends, which were influenced to a large extent by expansionary fiscal and monetary policies. While at times there may be a need for the central bank to balance multiple and conflicting objectives, now that core inflation is running at close to 15 percent and macroeconomic stability is in jeopardy, more focus should be placed on price stability.8 Staff suggested that mopping up excess liquidity by issuing a large amount of treasury bills should push their interest rate sufficiently high to encourage banks to compete by paying higher interest rates on deposits. At this time, the minimum rate should become nonbinding and should then be liberalized.9 Until the benchmark is eliminated, the CBY should use it more actively to signal the stance of monetary policy and maintain a positive real interest rate. Officials at the central bank maintained that removing the benchmark rate would lead to a sharp drop in the interest rate on deposits, because of lack of competition between banks, and would encourage speculative behavior including against the domestic currency.

29. While a flexible exchange rate is the declared official policy, discussions with the central bank and its recent policy choices suggested a revealed preference for more exchange rate stability than is warranted by a free float. Officials at the central bank reaffirmed their adherence to an independently floating exchange rate and strongly contested any suggestion that they were pursuing a managed float. They asserted that interventions have been aimed primarily at dampening exchange rate volatility and at supporting to some extent the objective of price stability particularly given the rapid and strong pass through from exchange rate depreciations to prices. Officials, however, seemed to be content with the stability of the rial against the U.S. dollar, which, in their view, is the main anchor for public expectations. While staff supports the occasional need for the CBY to intervene in the foreign exchange market to minimize large speculative swings, the CBY should not resist strong and persistent pressures indicative of underlying fundamental changes. Notwithstanding the depreciation of the dollar in 2004, the value of the rial failed to fall sufficiently against other currencies to compensate for inflation rate differentials with Yemen’s key trading partners, leading to a real exchange rate appreciation of the rial by 3.5 percent. Although this appreciation does not suggest serious competitiveness problems at this time—especially in view of the very narrow non-oil export base—if it continues, it will undermine the development of non-oil sectors.

30. Staff argued that, in a longer-term context, greater exchange rate flexibility will serve Yemen well because of the expected deterioration in the external current account and the need to develop non-oil sectors. External competitiveness should be maintained, including through low inflation and appropriate exchange rate policy, to develop the non-oil sectors and diversify the production base away from oil. With declining oil exports and consequently international reserves, the exchange rate is expected to depreciate. The CBY should not resist such a potential movement in the rate to avoid sharp disruptive depreciations in the future.10 Although reserves seem comfortable now, seen in a longer-term context, they may not be sufficient to meet future demand if imports are to be sustained at a level that is commensurate with poverty-reducing growth. A managed gradual depreciation of the rial could be an option in the future to achieve the required depreciation.

31. The discussion on a possible change in the monetary policy framework did not go too far. The discretionary nature of the existing framework—reacting to developments after they occur—has proved to be ineffective in maintaining low inflation. Staff suggested that, in view of the instability of money demand, it would be useful for the CBY to adopt a framework based on a clear inflation objective, a monetary rule (perhaps interest-based), market-determined interest rates, and a flexible exchange rate. Recognizing the limited technical capacity at the CBY, moving to such an approach should be gradual and extend over three to five years. The authorities were reluctant to engage in a discussion on this issue, citing the lack of skills and the shallow nature of the financial markets, as well as the negligible role that interest rates play in the conduct of monetary policy in Yemen.11 They suggested that the forthcoming MFD mission on liquidity forecasting and management could look into these issues.12

uA01fig06

Gross Own International Reserves and Oil Exports 1999–2009

(In millions of U.S. dollars unless otherwise indicated)

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Sources: Yemeni authorities and Fund staff estimates and projections.

D. Key Structural Reforms

Tax reform

32. Staff welcomed the speedy revision of the draft GST law and hoped that it will be adopted soon by parliament. The revised draft includes several improvements: (a) reduction of exemptions; (b) elimination of the tax on production and consumption; (c) unification of the GST registration threshold; and (d) development of special refund procedures. At the same time, the mission pointed out the case for: (a) eliminating the few remaining unnecessary exemptions (e.g., electricity); (b) converting higher GST rates on specific goods (cigarettes, cigars, and qat) into a uniform GST rate of 10 percent plus an excise; and (c) shortening the time for processing refunds to one month. The authorities took note of these observations and indicated that these would be addressed at a later stage. They were hopeful that the current draft would be approved by parliament without amendments. Since major improvements were made in the draft, staff agreed that there was no need to reopen the discussions on the draft GST law at this stage, but warned that delays in adopting the proposed amendments are likely to result in further delays in the implementation of the GST and reduce the effectiveness of the METAC assistance.13

33. Staff emphasized the importance of strengthening the large taxpayers’ office and preparing customs administration for the implementation of the GST, which is expected in July. The METAC could provide some technical assistance to help strengthen the LTO organization and procedures, and finalize the preparation of GST administration once it is adopted. The apparent lack of awareness of customs officials of GST procedures should be quickly addressed. There is also a need to undertake a public relations campaign to explain the nature and impact of the GST to minimize its exploitation by businesses toward raising prices.

Public expenditure management

34. There was agreement on the need to improve public expenditure management as a condition for achieving a sustainable fiscal adjustment over the long term. Staff was encouraged by the use of macroeconomic indicators and indicative ceilings in the preparation of the 2005 budget. However, it underscored the importance of strengthening internal expenditure control mechanisms, including by developing a commitment control system and adhering strictly to budgetary allocations. The authorities acknowledged the difficulties they face in controlling some line ministries and executing agencies from exceeding their allocations. In view of the large number of remaining reforms in this area, staff discussed the prioritization and sequencing of these measures as suggested in Box 5.14

Civil service reform, labor market, and business environment

35. The ministry of civil service continued to set forth strong foundations for civil service reform, but the pace must be accelerated before the momentum is lost. Staff was encouraged by the completion of the civil service database and by the voluntary self declaration of multi-dippers (those who receive more than one salary) in light of the amnesty granted by the ministry.15 It reiterated that reform efforts should concentrate on pilot agencies and ministries that could be showcased to generate political and public support for this reform. The retrenchment effort should be scaled up soon before mounting political opposition curtails the government program.

Public Expenditure Management (PEM) and Reforms

Progress in public expenditure management and reforms has been slow in spite of extensive technical assistance (TA) provided by the Fund and donors. Recent reforms include, in particular, the adoption of a macroeconomic framework in the preparation of the 2005 Budget, and the subsequent use of indicative expenditure ceilings in negotiations with line ministries and spending agencies.

There remains a set of priority measures aimed at streamlining the budget presentation, strengthening expenditure controls, and improving fiscal transparency. The authorities indicated their intention to gradually dissolve a number of extra-budgetary funds and other “special accounts” in a move to create a fully-fledged Treasury Single Account. The adoption of a functional classification of expenditures according to GFS2001, while important for budgetary planning purposes and tracking poverty-related expenditures, is not one of the top priorities of the government at this time.

The project of creating an integrated and computerized financial management information system (AFMIS), with the assistance of the World Bank, is seriously lagging behind. Efforts are being made by the World Bank to put this project back on track.

Staff stressed that a prioritized and sustained progress in PEM reform is crucial to fiscal adjustment. Several reforms are yet to be undertaken, including the development of a commitment control system (CCS) and further strengthening of internal expenditure control mechanisms. Compared to countries in the region, Yemen lags behind in nearly all PEM reform areas (see Appendix VI). Given the large number of reform measures, there is a need for prioritization and sequencing, as proposed in the table below (a ranking of 1 has the highest priority).

PEM Reforms

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36. Staff stressed that ad hoc wage increases which are not part of the national wage strategy will undermine the ongoing civil service reform. While the proposed wage increase of 10–15 percent in 2005 aims at garnering the political support for the petroleum price increase, it reduces the incentives for employees to leave the public sector, and makes it more expensive for the Civil Service Fund to absorb excess labor and finance either their retirement or their severance packages. Given the need to reduce the wage bill by 1–2 percent of GDP over the long term—to help in the adjustment efforts and to bring it in line with other low-income countries—retrenchment and close monitoring of hiring and promotion policies are critical steps.

uA01fig07

A Comparison of Public Sector Wage Bill with that of Selected Country Groups

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Sources: Yemeni authorities, and Fund staff estimates.

37. Greater attention should be given to labor market issues and unemployment. While there are no official statistics on unemployment, it is reported to be very high. Staff and the authorities agreed on the need to redesign the education curricula and enhance vocational training to reduce the severe mismatch in existing skills and better cater to market demand. This is all the more important in view of the adverse impact of national employment programs in the region, especially the Saudization program, on unemployment in Yemen.16 Staff expressed hope that the revision to the labor code, which introduces more flexibility in hiring foreign labor by private investors when local skills are lacking, could be adopted soon.

38. Strong efforts are needed to improve Yemen’s business environment, which, as confirmed by recent studies, is plagued with several problems. A recent study by the World Bank ranks Yemen as one of the world’s ten most expensive countries in terms of business startups. Staff called for streamlining procedures and reducing costs to encourage private sector investment, growth, and bring more businesses into the formal sector.17

Yemen. The Cost of Starting a Business in Yemen and Selected Middle Eastern Countries, as of January 2004

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Source: Doing Business in 2005: Removing Obstacles to Growth, The World Bank, 2005.

39. Staff suggested that the government appoint a high-level committee of highly respected statesmen to look into governance and corruption issues. Discussions with different parties, including parliamentarians, business leaders, and labor unions, pointed clearly to an urgent need to fight corruption. Dealing with this issue would in all likelihood facilitate the political acceptance of reforms, contributing to improving the business environment. A weak judiciary and inefficient public service are also serious impediments to private sector development.18

Financial sector issues

40. Officials at the CBY felt that the quality of its banking supervision and its enforcement of prudential regulations are sound. They indicated that banks are adequately monitored (both through off-site and on-site inspections), especially with the recent strengthening of personnel in the banking supervision unit. However, staff considered that the quality of bank assets remained low, characterized by high concentration and dollarization of credit.

41. Progress in implementing the recommendations of the 2001 Financial Sector Assessment Program (FSAP) has been limited. In 2003, the CBY amended its accounting standards to conform to the latest international standards. In early 2005, the authorities launched a new initiative to modernize commercial courts. However, a project to adopt a new central bank law has been deferred indefinitely.19 In addition, there were no changes to report on the existing framework for anti-money laundering (AML) and the combating of financing of terrorism (CFT) since the last consultation.

External sector issues

42. The CBY should improve further its reserve and external debt management. Reserves are currently invested mainly in short-term liquid U.S. dollar dominated assets. While this is a sensible strategy, it may be worthwhile exploring, with the help of a reputable investment firm, the possibility of investing part of Yemen’s large reserves in longer-term assets with a higher rate of return, taking into account the risks stemming from the longer-term outlook. Staff welcomed the progress made in using the debt management system (DMFAS) within the CBY and recommended that it should be shared with other ministries and agencies that deal with external debt.

43. Yemen’s trade regime remains relatively open. Negotiations on World Trade Organization (WTO) accession are proceeding well. It is expected that Yemen would join the WTO in four to five years. While accession to the WTO is not expected to lead to higher market access or significantly increased trade in the near term, the authorities saw important potential gains from this upcoming accession, including increased investor confidence and an improved business environment.20 The authorities did not see that an agreement could be reached any time soon in joining the Gulf Cooperation Council (GCC). They confirmed that Yemen would begin reducing its tariffs in 2005 toward their full elimination by 2010 for the countries of the Greater Arab Free Trade Area (GAFTA). As for the diagnostic trade integration study that was prepared in 2003 under the Integrated Framework for Trade-Related Technical Assistance, the authorities indicated that they had prepared a detailed work plan to implement its recommendations.

Other issues

44. The final draft of the first PRSP progress report covering 2003 has recently been approved by the cabinet. Given the delay in producing this report, and the preparation for the combined new PRSP, which has already started, and the five-year development plan covering 2006–10, staff suggested, after consultation with the World Bank, producing only one progress report covering both 2003 and 2004, with the expectation that the new PRSP would be produced by the end of 2005. The authorities agreed to this suggestion. The mission stressed that the progress report be focused and candid, accounting for both accomplishments and setbacks. It should also be more forward looking, drawing lessons from the first year of implementation and assessing whether any changes in the strategy are needed. More important, the mission recommended that the new PRSP set realistic and well-prioritized targets, taking into account resource limitations including foreign financing.

45. While Yemen’s data are satisfactory for conducting surveillance, there are several areas where improvements are needed to enhance the quality of economic analysis. This is true for fiscal, national accounts and prices, and balance of payments data, in particular. Staff also underscored the importance of coordination and the flow of information among different government agencies. The authorities agreed with this assessment and requested further technical assistance on national accounts and balance of payments statistics.

IV. Staff Appraisal

46. Yemen’s long-term prospects are clouded by the expected rapid decline in oil production and the continued delays in undertaking needed reforms. Unless significant discoveries are made, oil reserves could be depleted in about 12–15 years, leading to serious long-term sustainability problems. While the near-term outlook remains manageable—supported by a high level of international reserves—Yemen’s high dependency on oil dictates that short-term policies need to be cast in a longer-term coherent framework. Decisive actions now could go some way in redressing policy credibility, following a few years of inaction, including on the package that was announced in October 2003, and of which almost none of the measures has yet been implemented.

47. Failure to undertake strong reform efforts soon will put at risk the achievements of the past and lead to macroeconomic instability. A strong and orderly adjustment now will obviate the need for a drastic and disorderly adjustment in the future. Sustained efforts, however, will need to be supported by strong commitment to reforms at the highest political level. The fact that the ruling party has an overwhelming majority in parliament and that there is still some time—although not much of it—before the presidential elections of 2006, provides a window of opportunity for taking actions now. Otherwise, staff is apprehensive that the political landscape will worsen, putting off the reform process and adding to the burden of adjustment.

48. It is encouraging that the authorities have taken the reform process one notch forward by launching a public information campaign to highlight the risks of inaction and by making the reform package an integral part of the 2005 budget. But significant risks remain. These risks stem mainly from political economy considerations and from the conditions imposed by parliament for the approval of the 2005 budget, which may take some time to address and may be used to block the reform process. Staff hopes that the adjustment process can be reignited in a way that will maintain social cohesion and avoid a further polarization of the political climate. Initiating actions to improve governance and enhance transparency should facilitate public acceptance of reforms.

49. At this critical juncture, there is a need to have a long-term anchor to guide fiscal policy and bring Yemen closer to a sustainable path. Maintaining a debt-to-GDP ratio of 50 percent can provide such an anchor. This requires a cumulative adjustment of at least 15 percent of GDP in the non-oil primary deficit over the next 12 years. This assessment provides a useful guide—but certainly not the only one—for policymaking in the difficult period ahead.

50. The sheer magnitude of the necessary fiscal adjustment requires a comprehensive and credible fiscal strategy. While in the first instance the strategy should rely on mobilizing non-oil revenues—in view of Yemen’s low tax revenue—expenditure cuts should lend support to the strategy and enhance its chances of success. The main elements of the strategy are raising tax revenue, adopting the GST Law, removing subsidies, reducing the wage bill and defense spending, improving public expenditure management, and strengthening tax and customs administration.

51. Demand management policies should be supported by policies aimed at improving the supply response of the economy. Developing some promising sectors such as fisheries, transshipments, and tourism will boost non-oil growth and ease the pain of adjustment. In addition to developing strategies to promote these sectors, the authorities should adopt structural policies that can improve the business climate and encourage investment and growth. Particular efforts should be devoted to reducing the high cost of starting a business in Yemen and removing impediments to the development of the private sector.

52. Staff welcomes the authorities’ intention to significantly reduce the non-oil primary deficit in 2005, although this may be difficult to achieve. In view of the expected sharp decline in oil revenue (7.5 percent of GDP), and the difficulty of fully compensating for it in one year, staff is of the view that the original fiscal target for 2005 seems unrealistic and achieving it will likely pose serious challenges. Staff also considers that the proposed increase in the wage rate in the budget—while desirable to improve governance and fight corruption—is premature as it undermines the ongoing civil service reform. Should a supplementary budget be adopted, staff recommends that it be contained to respond to unexpected developments and exogenous shocks and not to be used to increase spending in a manner that undermines the integrity of the budgetary process.

53. The authorities’ decision to raise petroleum prices beginning in 2005 should be followed by a clear plan to remove the subsidy within two years. After the initial increase in 2005, staff recommends that Yemen adopt an automatic price adjustment formula to adjust prices on a quarterly basis until the full elimination of the subsidy. This formula will insulate price adjustments from constant political bargaining and will mitigate these adjustments if the oil prices fall over the next two years.

54. The planned adjustment in petroleum prices and the sheer magnitude of the long-term adjustment more generally require strong social protection mechanisms. Social and poverty impact analysis shows that, while the petroleum subsidy is not benefiting the poor, its elimination may lead to increases in food prices and disproportionably hurt the most vulnerable groups. Because of this, and the potential impact on the most vulnerable groups from the longer-term adjustment required for sustainability, the coverage and targeting of the SWF should be improved and the Social Development Fund should be supported.

55. Staff is concerned about the surge in inflation and calls for a tighter monetary policy to curb continuing inflationary pressures. While the central bank may need at times to strike a delicate balance between conflicting objectives, price stability should take precedence, especially when inflation is running close to 15 percent and macroeconomic stability is in the balance. To enhance the role of interest rates in the conduct of monetary policy, the central bank should liberalize the minimum benchmark rate on savings accounts so that interest rates reflect market forces.

56. In the staff’s view, greater exchange rate flexibility should help in achieving long-term sustainability. With the expected rapid decline in oil exports and foreign reserves, the CBY should not resist pressures on the exchange rate to depreciate over time so as to avoid large and disruptive depreciations in the future. A flexible exchange rate policy should be supported by other structural reforms that enhance competitiveness and boost growth in non-oil sectors

57. It is proposed that the next Article IV consultation discussions take place on the standard 12-month cycle.

Table 7.

Republic of Yemen: Macroeconomic Summary Indicators, 2000–09

Adjustment Scenario

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Source: Yemeni authorities and staff estimates.

Core CPI is defined as the overall CPI less the CPI for qat.

Oil price is different from the WEO price because Yemeni oil is traded at a discount.

Table 8.

Republic of Yemen: Macroeconomic Framework, 2000–09

(In percent of GDP, unless otherwise indicated)

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Source: Yemeni authorities and staff estimates.

Core CPI is defined as the overall CPI less the CPI for qat.

Oil price is different from the WEO price because Yemeni oil is traded at a discount.

Table 9.

Republic of Yemen: Millennium Development Goals, 1990–02

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Source: World Bank, Statistics Yemen

Survey year: 1998. Refers to consumption shares by percentiles of population. Ranked by per capita consumption

Unesco Institute for Statistics (UIS) estimation.

1990–92 average.

1995–97 average.

1999–2001 average.

UNESCO Institute of Statistics estimates.

Data for 2000–04.

ILO estimate.

No national data on maternal mortality available. Estimates derived from model.

Data refer to the most recent year available during the period 1995–2002.

APPENDIX I: Republic of Yemen: Fund Relations

As of December 31, 2004

I. Membership Status: Joined May 22, 1990; Article VIII

II. General Resources Account

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III. SDR Department

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IV. Outstanding Purchases and Loans

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V. Latest Financial Arrangements

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VI. Projected Obligations to Fund Under the Repurchase Expectations Assumptions

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VII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Central Bank of Yemen (CBY) was subject to the transitional procedures with respect to the EFF arrangement which expired on October 28, 2001. The assessment, which was completed on May 23, 2001, concluded that CBY’s external audit mechanism was not fully adequate at the time, and recommendations to address the shortcomings were reported. A review of information necessary to conduct a full safeguards assessment of the CBY has been initiated, with a view to completing the assessment prior to approval of a new PRGF arrangement.

VIII. Exchange Arrangements

The currency of Yemen is the Yemeni rial. Yemen maintains an independently floating exchange rate system.

Yemen has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement and maintains an exchange system that is free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions.

IX. Article IV Consultation

The latest Article IV consultation was concluded on December 22, 2003. Yemen is on the standard 12-month consultation cycle.

X. FSAP Participation

FSAP (with the World Bank), October–November 2000.

XI. Technical Assistance

(See ANNEX I)

XIII. Resident Representatives

None.

APPENDIX II: Republic of Yemen: External and Public Debt Sustainability Analysis (DSA)

1. This note examines the sensitivity of Yemen’s external and public debt dynamics under the staff’s baseline scenario to a number of standardized shocks in the debt sustainability framework for low-income countries. The baseline scenario assumes that the government implements reform measures such as the elimination of the fuel subsidy, the introduction of GST, or undertakes structural measures to improve the business environment and enhance non-oil sector growth the medium and long term.

A. The Current Situation

2. Yemen’s total external public debt was $5.1 billion at end-2004 (39 percent of GDP), of which $1.3 billion is owed to the Russian Federation. Other external debts (46 percent of total external debt) are mostly from multilateral creditors, primarily the World Bank, at highly concessional terms. Domestic public debt, all denominated in local currency, accounted for about 5.6 percent of GDP at end-2004.

3. The baseline scenario underlying the DSA is based on the medium-term framework under the adjustment scenario in the staff report. It assumes that future borrowings to meet the external financing requirements are made at a highly concessional rate given the impending vulnerabilities of the economy.

B. Public Debt Sustainability

4. Under the baseline scenario, although the total public sector debt starts at acceptable levels in 2004 (45 percent of GDP, see Table 1), it increases over the medium term to reach 69.9 percent in 2009. This is mainly due (as discussed before) to the tapering of revenues and grants with more than 10 percent of GDP from 2004 to 2009. Public sector debt stocks in NPV terms start at 27.4 percent in 2004, but rise rapidly to 51.1 percent of GDP in 2009. The NPV of the debt-to-revenue ratio is projected to rise from 78.2 percent in 2004 to 232 percent in 2009 and to 804 percent in 2023.

Table 1.

Republic of Yemen: Public Sector Debt Sustainability Framework, Baseline Scenario, 2000–23

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

Central government debt (net).

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

5. Stress tests (Table 2 and Figure 1) show that Yemen’s fiscal sustainability will depend on the implementation of actions to sustain and improve fiscal adjustment and growth, particularly in the non-oil economy. The main results are the following:

Table 2.

Republic of Yemen: Sensitivity Analyses for Key Indicators of Public Sector Debt, 2003–2023

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 1.
Figure 1.

Repblic of Yemen: Indicators of Public Debt Under Alternative Scenarios, 2003–2023 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2013.2/ Revenue including grants.

6. Given the fact that Yemen was able to substantially improve its fiscal position during the second half of the 1990s,23 it is possible under scenario (1), that assumes real GDP growth and the primary balance at historical (low) averages, to improve the NPV of debt-to-GDP to 36 percent in 2009,24 compared to 51 percent in the baseline scenario. However, in 2009 the debt service-to-revenue ratio would be almost 10 percent lower than in the baseline scenario. Under scenario (2), where the primary balance is kept unchanged from 2003 onwards to “historic averages” scenario mentioned above, the NPV of debt-to-GDP would increase to 49 percent and the debt-to-revenue ratio to 222 percent in 2009.

7. Scenarios (1) and (2) discussed above are however not feasible given: (a) the dependency of public finances on oil revenues; and (b) the expected depletion of oil reserves by 2016.

8. A more realistic stress would be to impose a shock to real growth (lowering it permanently by reducing it to the historical average minus one standard deviation). Under this scenario a significant deterioration in all debt ratios would take place. In 2009, the NPV of debt-to-GDP would reach 55 percent; the NPV of debt-to-revenue would increase to 251 percent; and debt service would absorb 25 percent of revenue.

C. External Debt Sustainability

9. Under the baseline scenario, although the external debt stock in NPV terms starts at a modest level (22 percent of GDP in 2004) and remains there over the medium term (35 percent in 2013), debt indicators measuring Yemen’s ability to service external debt deteriorate significantly over the long term as Yemen runs out of oil. The NPV of the debt-to-exports would increase to about 340 percent, and the debt service-to-exports ratio to 20 percent by 2023. The risks to the debt dynamics primarily stem from the fact that oil, the largest source of export earnings for Yemen, is expected to virtually run out by 2016, generating a spike in sustainability indicators. Subsequently, debt indicators improve with the growth in non-oil exports.

10. External debt dynamics are most vulnerable to the decline in exports. A shock to export growth equal to the size of one standard deviation under the stress tests (B2) raises the NPV of debt-to-exports ratio to about 560, and debt service would absorb 36 percent of exports in 2013. This scenario clearly demonstrates that, without a strong commitment to export diversification, Yemen’s external debt would be unsustainable.

11. A lack of concessional new borrowing will also aggravate the external sustainability by pushing up the NPV-to-export ratio to over 270 by 2013.25

Table 3.

Republic of Yemen: External Debt Sustainability Framework, Baseline Scenario, 2000–2023 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.

Republic of Yemen: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2003-23

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 2.
Figure 2.

Republic of Yemen: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003–2023

(In percent)

Citation: IMF Staff Country Reports 2005, 111; 10.5089/9781451840803.002.A001

Source: Staff projections and simulations.

APPENDIX III: Republic of Yemen: World Bank Relations

A. Partnership in Yemen’s Development Strategy

1. World Bank assistance to the implementation of Yemen’s Poverty Reduction Strategy Paper (PRSP) has progressed, and the Country Assistance Strategy (CAS) for FY03–06 program of lending and policy dialogue is being implemented as envisaged.

2. The four main objectives of the CAS are: (a) better public sector governance; (b) an attractive environment for private investment; (c) building and protecting human capital; and (d) ensuring environmental stability, particularly in the critical area of water. The implementation of the CAS is progressing well with $387.4 million committed between FY03 and the second quarter of FY05 for seven credits. These include two credits for agriculture/rural development, two for infrastructure/urban development, one for water, one for the innovative and successful social funds for development, and one for basic education development program. Two additional projects (Second Rural Access Program, and Second Vocational Training) are expected to be approved this Fiscal Year (FY05).

3. The Bank’s key non-lending support included completion of analysis of public expenditure management, civil service modernization, and country financial accountability assessment, petroleum price policy reform, household energy supply and use, development of national gender strategy, environmental safeguard requirements, and strategic plans for long-term development of coastal aquifers. The Bank is also assisting Yemen in preparing a progress report on PRSP by providing early comments as the draft is being prepared. Coordination among donors has become more regular and has elaborated into subgroups dealing with specific sectors (civil service, water, education, etc.). Collaboration with, and support for, civil society organizations has also deepened, both directly (e.g., NGO capacity building grants) and indirectly (e.g., credits for projects employing NGOs).

B. Status of the Portfolio

4. As of December 31, 2004, the International Development Association (IDA) had approved 132 credits for Yemen for a commitment value of $2.2 billion (net of cancellations), of which about $1.7 billion have been disbursed. The current portfolio has 19 projects with total commitments of $816 million (net of cancellations), of which $648.5 million are undisbursed. About 26 percent of the portfolio, by value, is dedicated to the water sector, 19 percent to education, almost 15 percent to health and other social sectors, over 16 percent to public administration, 9 percent to agriculture, 8 percent to transportation, 6 percent to energy, and 1 percent to financial sector.

5. Overall portfolio performance and management remain satisfactory. Out of 19 projects in the portfolio, only two (Civil Service Modernization and Health Reform Support) are rated unsatisfactory/problem projects. The Bank and the government are making efforts to address issues affecting the implementation of these projects. A Country Portfolio Performance Review (CPPR) was held in Sana’a in May 2004. Disbursements in FY04 was about $91 million; this, however, translated into a lower disbursement ratio (about 16.5 percent) than in FY03 that was 20 percent. The disbursement ratio is expect to improve by end of FY05.

6. The International Finance Corporation (IFC) has three active investments in grain processing, ceramic tile manufacturing, and bottled water, totaling $11 million. Problems with the investment environment limit IFC activities in Yemen and (as in the case of the grain processing project) impede implementation and profitability. However, the IFC has a very clear developmental role to play in the country and has devoted considerable resources to promote business there. Several large projects are currently under consideration. In addition, the IFC received approval for a new regional facility that will provide technical assistance in Yemen to help improve the business environment, strengthen the financial sector, and stimulate the growth of SMEs.

C. Bank-Fund Collaboration in Specific Areas

7. Bank and Fund staffs consult regularly and coordinate their activities. A major activity over the past year was assistance to the Yemeni experts who produced the PRSP and subsequently collaboration on a Joint Staff Assessment of the PRSP. In addition, the staffs have worked closely together on civil service reform and government financial management, and in particular, budgeting and public expenditure modernization. Collaboration on these issues is expected to intensify. Bank and Fund staffs have also collaborated on financial sector development issues, with the aim of restoring financial stability (by now largely achieved) and removing constraints on economic development.

Contact Persons:

Questions may be addressed to:

Mr. Thirumalai G. Srinivasan, (202-473-1288)

Ms. Roseleen K. Mba-Kalu, (202-473-5060)

APPENDIX IV: Republic of Yemen: Statistical Issues

1. In view of wide-ranging statistical deficiencies, the authorities are making an effort to improve data compilation with technical assistance from the Fund and other donors. The Republic of Yemen has participated in the General Data Dissemination System since April 26, 2001. While some progress has been made, significant work remains to be done before major improvements can be seen.

2. The most reliable and timely data are those on the monetary sector produced by the Central Bank of Yemen (CBY). To strengthen monetary statistics further, the multisector mission in August 2000 recommended that (a) repurchase agreements be treated as collateralized loans; (b) all nonstandard loans be reclassified as claims on the relevant sector; (c) counterparty for several monetary accounts need to be accurately identified; and (d) a number of monetary accounts should be disaggregated so as to enable the CBY to present the position for each financial instrument. In June 2003, the authorities began reporting to STA a more disaggregated set of data that allowed for their improved sectoral and instrument classification in monetary statistics. Based on this more detailed data reporting, a revised series of monetary statistics starting December 1999 was published beginning with the August 2003 issue of IFS.

3. The CBY disseminates data on total official reserve assets with a lag of one week and is in the process of compiling the reserve template with data on reserve and foreign currency liquidity. The authorities should aim to disseminate the reserve template with a monthly periodicity and a lag not exceeding one month.

4. Although important progress have been achieved in terms of coverage, classification, and compilation methods of national accounts in accordance with the System of National Accounts 1993, significant work remains to be done to further improve data quality and compilation methods. Based on technical assistance provided by STA in real sector statistics from September 2001 to June 2004, the Central Statistics Office (CSO) has compiled national accounts statistics for the years 1999–2002 that include: current accounts and the capital account by institutional sector; goods and services account and the integrated economic accounts for the total economy; supply and use tables (SUT). The compilation of the SUT for 2003 is well underway, but the sectoral accounts have not been completed due to delays experienced with the surveys. Unlike previous estimates, most of the production and expenditure estimates are now based on direct methods that mainly use the results of recently conducted surveys. Looking ahead, quarterly establishment sample surveys are planned for late 2004 to provide short-term indicators for moving annual benchmark series, and a household expenditure and income survey is scheduled for 2005. Additional work is still needed to (i) ensure the accuracy and the speed of collecting and processing survey results; (ii) to conduct new surveys to cover additional activities; (iii) better identify the informal sector; and (iv) cover unorganized units and update survey samples to improve coverage.

5. With regard to price statistics, some improvements have been made in the CPI compilation and the production of foreign trade indices starting with the 2001–03 series. However, development of a producer price index had to be postponed due to the limited human and financial resources. With the assistance of the real sector mission by STA, the CSO has constructed a CPI that is consistent with international standards. The weights were derived from the 1998 Households Budget Survey. The CPI has a broad geographic coverage and a sufficient number of consumption items, although some deficiencies remain in data collection practices. The real sector mission recommended further improving the sources of data in general, expanding the price statistics to cover different areas, and enhancing training and internal coordination within the CSO.

6. Regarding the fiscal accounts, data reliability is uncertain, and timeliness is weak, particularly for detailed revenue and expenditure items. There are also discrepancies between reported budget data and below-the-line financing data obtained from the monetary statistics. Since the beginning of 2000, fiscal data have been prepared according to the GFS economic classification, and monthly reports are available, albeit irregularly, at the subchapter level. Further progress, particularly in providing expenditure data based on GFS functional classification on a chapter and subchapter level, as recommended by FAD technical missions, is expected to be made following the installation of the proposed integrated information system (AFMIS). The authorities have not reported data for publication in the Government Finance Statistics Yearbook (GFSY) from 2000 onwards. The latest data are estimates for 1999 published in the 1999 GFSY. A GFS mission visited Sana’a in January 2004.

7. The CBY, which compiles balance of payments statistics, is responsible for data collection from various sources, implementation of the proper methodology, and dissemination of the data. More recently, the CBY has started preparing the international investment position (IIP) statement in the framework of the Balance of Payments Manual, fifth edition (BPM5). The tasks are performed on a rather ad hoc basis, mostly relying on survey-based questionnaires whose response rate is generally poor. Also, the quality of the questionnaires themselves is poor due to the limited expertise and experience in developing such material. Further compounding the weak quality of the statistics are inadequacies in documented sources and methods, and financial and material resources dedicated to balance of payments compilation. The CBY publishes quarterly external debt statistics within one quarter of the reference period for the banking sector, general government, and monetary authority.

8. A STA mission on balance of payment statistics in January 2003 found that little progress had been made in implementing the recommendations of either the IMF’s resident advisor on balance of payments statistics (1998–2000) or the 2002 multisector statistics mission. The coverage of the oil industry transactions remains weak. The quality of the questionnaires is poor, with questionnaires on FDI and selected items in services being either discontinued or not followed up. The shortage of qualified staff dedicated to data compilation as well as weak coordination between the CBY and other government agencies (such as the customs authority, the CSO, and the ministry of oil and mining resources) were also responsible for the slow progress. The mission recommended that a new work program be carried out over a period of 22 months. The plan calls for, among other things, better coordination between the CBY and other government agencies for more timely and effective data collection and compilation, improved staffing and training, and the reinstitution of discontinued surveys. Further technical assistance may be required for designing and implementing surveys aimed at improving data collection on workers’ remittances. Yemen recently began submitting quarterly BOP and IIP data (for 2003) for publication in IFS and the Balance of Payments Statistics Yearbook.

Republic of Yemen: Table of Common Indicators Required for Surveillance

(as of January 31, 2005)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

APPENDIX V: Republic of Yemen: Technical Assistance Program26

  1. UNDP/IMF Program:

    • BCS—Computerization needs of the ministry of finance, April 1995

    • FAD—Long-term expert (LTE) on customs and administration reform since August 1996

    • FAD—General sales tax and tax administration, June 1997

    • FAD—Short-term expert (STE) on budget management, February–March and November–December 1997

    • FAD—STE on tax identification number system and computerization, February and July–August 1997

    • FAD—STE on input tax credit mechanism, July–August 1997

    • MED—STE on dept management, November 1996–June 1997

  2. IMF

    • FAD—Tax policy and customs administration, April 1995

    • FAD—Budget control and reporting, July–August 1995

    • FAD—Personal income tax reform and preparations for general sales tax, June 1996

    • FAD—Social safety net: food subsidies, Social Welfare Fund, and pension funds, July 1996

    • FAD—Modernization of tax administration, August 1997

    • FAD—Customs and tax reform, March 1999

    • FAD—Budget management reform, April 1999

    • FAD—Pension reform, May 1999

    • FAD—Introduction of GST, September 1999

    • FAD—Pension Reform, January 2000

    • FAD—Introduction of GST, February 2000

    • FAD—Pension Reform, April 2000

    • FAD—Pension Reform, August 2001

    • FAD—Reform of the Budgetary Process, April 2002

    • FAD—Public expenditure management expert installation, September 2002

    • FAD—Tax policy, tax administration and customs reform, October–November 2002

    • INS—Techniques of financial analysis and programming, March 1996

    • INS—Techniques of financial analysis and programming, October 1997

    • MAE—Financial sector reform, May 1995

    • MAE—STE on Treasury bill issuance, November–December 1995

    • MAE—Operation of a floating exchange rate system, December 1995

    • MAE—LTE on monetary policy, January 1996–July 1999

    • MAE—STE on monetary policy, November 1997 and February 1998

    • MAE—STE on central bank information technology, March and August 1996

    • MAE—Monetary and financial market overview, February–March 1998

    • MAE—LTE on central bank accounting and computerization, November 1995–January 1998

    • MAE—Central bank legislation, banking supervision, and monetary operations, February 1998

    • MAE—Monetary operations, foreign reserves management, and organization and management April 1999

    • MAE—Monetary operations, October–November 2000

    • MAE—FSAP (with World Bank), October–November 2000

    • MAE—Foreign reserves management, February–March 2001

    • STA—STE on national accounts and price statistics, March 1996

    • STA—Balance of payments statistics, July–August 1997

    • STA—STE on balance of payments statistics, November 1997

    • STA—National accounts and prices, September 1998

    • STA—National accounts and prices, April 1999

    • STA—National accounts and prices, October 1999

    • STA—National accounts and prices, April 2000

    • STA—Multisector statistics, August 2000

    • STA—Balance of payments statistics, January 2003

    • STA—Government Finance Statistics, January 2004

  3. UNDP/IMF/DFID Program:

    • FAD—LTE on general sales tax, January 1998–December 2000.

    • FAD—LTE on tax administration, January 1998–December 2000.

    • FAD—LTE on budget management, March 1998–June 2001, and September 2002–January 2004.

    • MAE—LTE on bank supervision, May 1997–May 2001.

    • MED—LTE on debt management, July 1997–March 2001.

    • STA—LTE on balance of payments statistics, February 1998–February 2000.

    • FAD—Peripatetic experts on customs reform, July 1999–July 2001.

    • STA—Peripatetic expert on national accounts, September 2001–August 2002.

    • MAE—Peripatetic expert on foreign reserves management since April 2002.

APPENDIX VI: Republic of Yemen: Priority PEM Reform Areas27

Budget Preparation and Coverage of the Budget

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Budget Execution Control and Audit

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Fiscal Reporting and Publication of Fiscal Data

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Note: (X equals yes DZA = Algeria; IR or “moderately well”) and YMN = Yemen; JOR = Jordan; EGY = Egypt; OMN = Oman; SYR = Syria; N = Iran; MAR = Morocco; SND = Sudan; and LBN = Lebanon.
1

The main elements of this package are: adjusting petroleum product prices, introducing the GST; adopting a national wage strategy in the context of the ongoing civil service reform; and reducing customs tariff rates on vehicles and other easily smuggled goods.

2

While not a panacea, the 50 percent of debt-to-GDP target allows one to evaluate the size of adjustment required over the medium and long term, although it may be considered high for a low-income country like Yemen, with weak institutional capacity. Under the current debt structure, a debt-to-GDP ratio of 50 percent is roughly equivalent to a net present value of debt-to-GDP of 30 percent.

3

Experience has shown that countries with relatively low initial revenue-to-GDP ratios were more successful in their adjustment efforts.

4

Yemen possesses a long coast of more than 2,500 kilometers with access to some 700,000 squared kilometers of territorial water.

5

This would bring most domestic prices very close to international prices especially for gasoline, while the price of diesel fuel would still be at 85 percent of the international price.

6

If the subsidy is to be eliminated over the next two years, each quarterly adjustment would eliminate one eighth of the gap until it is fully eliminated. The domestic price should not be reduced until the subsidy is fully eliminated.

7

The first segment of Yemen’s tariff structure, which is targeted at the poor, is too generous compared to other countries and imposes a large cost burden on the budget.

8

A tighter monetary policy in 2005 is needed to contain the trend inflation at 12 percent—inflation that excludes the impact of higher fuel prices on the CPI, which is estimated at a one-off increase of 6 percent. This is consistent with the monetary program that targets broad money growth of 13.5 percent and credit to the privates sector of 25 percent.

9

In the staff’s view, the minimum interest rate on savings deposits—which has been fixed at 13 percent since 2001—has distorted market signals and has outlived its usefulness, since it was originally intended to mobilize deposits in the mid–1990s, when inflation was running very high and sharp exchange rate depreciations were all too frequent.

10

While a large real exchange rate depreciation could help in developing non-oil sectors, it would have adverse balance sheet effects and worsen external debt indicators.

11

The role of interest rates, according to the CBY, is also limited by the fact that Islamic banks, which are growing in importance, do not accept interest and do not deal with treasury bills.

12

At the request of the authorities, a Monetary and Financial Systems Department (MFD) mission on liquidity forecasting and management and on developing technical capacity at the central bank will visit Yemen in early April of 2005.

13

The mission was assisted by Mr. Benon, the METAC revenue administration advisor, who prepared a comprehensive assessment of the new draft GST Law, which was shared and discussed with the authorities during the mission.

14

The mission shared with the authorities tables comparing Yemen to other countries in the region. The comparison clearly shows that Yemen is lagging behind in terms of nearly all public expenditure management areas (Appendix VI).

15

Due to technical delays, the issuing of biometric cards (used to identify public sector employees) should begin in early 2005.

16

National employment programs aim at replacing foreign labor by nationals over time according to specific employment targets in various job categories. Given the large number of Yemenis working in Saudi Arabia, this could exacerbate the unemployment problem in Yemen.

17

Yemen could follow the path of a number of countries that reformed business start-up procedures in the recent past. For example, Ethiopia reduced official registration fees from five times its per capita income to 0.7 and new registrations went up by 48 percent. Morocco and Slovakia implemented similar reforms, resulting in new registrations increasing by 21 percent and 12 percent, respectively.

18

In the context of a general plan for reforming the commercial judiciary process and upgrade its performance, the government has adopted a project to modernize and develop the commercial courts in Sana’a and in four other governorates: Aden, Hadramout, Taiz, and Hudeaida.

19

The monetary authorities fear that submitting this piece of legislation to parliament may lead to changes in the banking law that would reduce the independence of the central bank.

20

For example, the dispute settlement mechanism within the WTO provides additional security to foreign investors.

21

Amount available after reduction in access by SDR 33 million in February 2001.

22

Amount available after reduction in access by SDR 26 million in February 2001.

23

Improvement as measured in the change in the primary balance from a deficit of 11.4 percent of GDP in 1994 to a primary surplus of 4.4 percent in 2001.

24

The public debt-to-GDP ratio in 2009 would be at 69.9 percent of GDP under the baseline scenario (see Table 1).

25

Given that growth and capital account surplus were high in the past, primarily reflecting the performance of the oil-economy, the scenario with historical averages delivers implausible debt ratios.

26

Mission; unless otherwise indicated.

27

These results are taken from the study done by Ahmad, Calcoen, Danninger, and Sabharwal, 2004, “Institutions and the Public Sector in Reforming the Public Finances in Middle Eastern and North African Countries” (draft) for the 2004 MENA Conference in Washington, DC and the Regional Conference on Fiscal Reforms in the Arab Countries, Beirut.

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Cover IMF Staff Country Reports
Republic of Yemen: Staff Report for the 2004 Article IV Consultation
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 111
Publisher:
International Monetary Fund
ISBN:
9781451840803
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781451840803.002
  • View in gallery

    Oil Production under Different Assumptions on Reserves

  • View in gallery

    Non-Oil and Oil Real GDP Growth, 1998–2004

  • View in gallery

    External current account developments

  • View in gallery

    Nominal and Effective Exchange Rate Indices January 1998=100

  • View in gallery

    Revenues and Expenditures 1999–2009

    (In percent of GDP)

  • View in gallery

    Gross Own International Reserves and Oil Exports 1999–2009

    (In millions of U.S. dollars unless otherwise indicated)

  • View in gallery

    A Comparison of Public Sector Wage Bill with that of Selected Country Groups

  • Figure 1.
    View in gallery
    Figure 1.

    Repblic of Yemen: Indicators of Public Debt Under Alternative Scenarios, 2003–2023 1/

    (In percent)

  • Figure 2.
    View in gallery
    Figure 2.

    Republic of Yemen: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003–2023

    (In percent)

Oil Production under Different Assumptions on Reserves

Non-Oil and Oil Real GDP Growth, 1998–2004

External current account developments

Nominal and Effective Exchange Rate Indices January 1998=100

Revenues and Expenditures 1999–2009

(In percent of GDP)

Gross Own International Reserves and Oil Exports 1999–2009

(In millions of U.S. dollars unless otherwise indicated)

A Comparison of Public Sector Wage Bill with that of Selected Country Groups
Figure 1.

Repblic of Yemen: Indicators of Public Debt Under Alternative Scenarios, 2003–2023 1/

(In percent)
Figure 2.

Republic of Yemen: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003–2023

(In percent)