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© 2007 International Monetary Fund
September 2007
IMF Country Report No. 07/334
Republic of Yemen: 2007 Article IV Consultation—Staff Report; Staff Supplements; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Yemen
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with the Republic of Yemen, the following documents have been released and are included in this package:
The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 13, 2007, with the officials of the Republic of Yemen on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 17, 2007. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A supplement on the joint IMF/World Bank debt sustainability analysis.
A staff supplement of September 13, 2007 updating information on recent developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its September 17, 2007 discussion of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for the Republic of Yemen.
The document listed below has been or will be separately released.
Statistical Appendix
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
REPUBLIC OF YEMEN
Staff Report for the 2007 Article IV Consultation
Prepared by the Staff Representatives for the 2007 Consultation with the Republic of Yemen
Approved by Adam Bennett and Adnan Mazarei
August 17, 2007
The 2007 Article IV consultation discussions were held in Sana’a during May 31-June 13, 2007, with the prime minister; the deputy prime minister and minister of planning and international cooperation; the ministers of finance, oil and minerals, industry and trade, civil service, and social affairs and labor; the governor of the central bank, and other government officials. The mission also met with various private sector representatives and donors.
The staff team comprised Messrs. van Rooden (head) and Davoodi, Mses. Guin-Siu, Jardaneh, and Naqi (all MCD), and Mr. Kato (PDR). Mr. Bennett (MCD) joined the discussions for a few days.
Yemen has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.
The Yemeni authorities maintain that the exchange rate system is an independent float. Staff are of the view that de facto it is a crawling peg, in which the rate of crawl has recently slowed to resemble a conventional peg. Accordingly, under the IMF’s classification, Yemen is currently considered a de facto conventional peg.
The quality and timeliness of data are weak, but still adequate for surveillance purposes. Yemen participates in the General Data Dissemination Standard.
Contents
Executive Summary
I. Introduction
II. Recent Economic Developments
III. Policy Discussions
A. Policies for 2007: Reducing Inflation
B. Medium-Term Policies: Ensuring Fiscal Sustainability
C. Medium-Term Policies: Promoting Sustained Nonhydrocarbon Growth
D. Data and Other Issues
IV. Staff Appraisal
Tables
1. Selected Economic Indicators (Adjustment scenario), 2003-12
2. General Government Finances (Adjustment scenario), 2003-12
3. General Government Finances (Adjustment scenario), 2003-12 (in percent of GDP)
4. Monetary Aggregates (Adjustment scenario), 2000-07
5. Balance of Payments (Adjustment scenario), 2003-12
Figures
1. Recent Developments, 2001-07
2. Fiscal Developments, 2001-12
3. Competitiveness Indicators
Boxes
1. Implementation of Past IMF Recommendations
2. Exchange Rate Regime and Level
3. Hydrocarbon Sector Developments and Prospects
Executive Summary
Focus of the report
The discussions for the 2007 Article IV consultation focused on the need to (i) bring down inflation; (ii) achieve fiscal sustainability in the context of declining oil reserves; and (iii) promote nonhydrocarbon growth to create employment opportunities and reduce poverty.
Background
Economic performance in Yemen in 2006 was generally favorable, with strong non-oil growth more than offsetting a decline in oil production, but inflation doubled to over 20 percent. The higher inflation partly reflected rising world food prices, but also buoyant domestic demand, driven by high government spending from record oil revenues—including a large wage increase—and rapid money growth. Inflation slowed in early 2007 due to seasonal factors. As oil could run out in some 10 years time and oil revenues account for three-fourths of government revenues, fiscal (and external) sustainability would be at risk without a large fiscal adjustment. Fuel subsidies take up a large part of government spending and exceed non-oil tax revenues. Without corrective actions, or major new oil or gas finds, government finances would deteriorate rapidly in the coming years, risking domestic and external instability.
Authorities’ views
The authorities agreed to effect a modest tightening of fiscal and monetary policies to bring down inflation. They intend to delay a large government wage increase planned for 2007 and compress other expenditures as much as possible. The central bank will more actively mop up excess liquidity and will aim to slow down the nominal depreciation of the currency.
The authorities acknowledged that fiscal policy, if unchanged, was unsustainable, and that the key to achieving sustainability lies with increasing non-oil revenues and rationalizing spending, including the elimination of fuel subsidies. They noted that the latter was likely to be delayed due to political economy considerations and weaknesses in the social safety net. Efforts to improve tax collection faced strong opposition from the business community. The authorities were hopeful that new oil and gas reserves could ease the adjustment process.
Staff recommendations
Staff welcomed the authorities’ efforts to reduce inflation, but argued that some nominal appreciation in the short run could help bring down inflation further, also as the exchange rate appears slightly undervalued. Eliminating the minimum interest rate for local currency deposits would allow for a more active interest rate policy and would enhance financial intermediation.
Staff urged the authorities to consider a more front-loaded fiscal adjustment, by taking early steps to reduce fuel subsidies and making stronger efforts to raise non-oil tax revenues. Staff stressed, however, that reducing fuel subsidies should be accompanied by measures to strengthen the social safety net to mitigate the impact on the poor.
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INTERNATIONAL MONETARY FUND
REPUBLIC OF YEMEN
Staff Report for the 2007 Article IV Consultation
Informational Annex
Prepared by Middle East and Central Asia Department
(in consultation with other departments)
August 17, 2007
Contents
I. Republic of Yemen: Fund Relations
II. Republic of Yemen: World Bank Relations.
III. Republic of Yemen: Statistical Issues
IV. Technical Assistance Program.
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INTERNATIONAL MONETARY FUND
REPUBLIC OF YEMEN
Joint World Bank/IMF Debt Sustainability Analysis
Prepared by the Staff of the International Monetary Fund and the International Development Association
Approved by Adam Bennett and Adnan Mazarei (IMF) and Mustapha Nabli and Vikram Nehru (IDA)
August 30, 2007
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INTERNATIONAL MONETARY FUND
REPUBLIC OF YEMEN
Staff Report for the 2007 Article IV Consultation
Supplementary Information
Prepared by the Staff Representatives for the 2007 Consultation with the Republic of Yemen
Approved by Adam Bennett and Adnan Mazarei
September 13, 2007
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Public Information Notice (PIN) No. 07/120
FOR IMMEDIATE RELEASE
September 27, 2007
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
