Abstract
This 2007 Article IV Consultation highlights that despite recent progress in poverty reduction, Yemen remains far from achieving the Millennium Development Goals. Oil production has been declining since 2000, and in the absence of major discoveries, proven oil reserves could be depleted in some 10 years' time. Economic performance in 2006 was generally favorable, but was accompanied by an increase in inflation. Overall real GDP growth reached 4 percent in 2006, with a 6 percent non-oil growth offsetting an 8 percent decline in oil production.
1. This supplement summarizes information that has become available since the staff report for the 2007 Article IV consultation was circulated to the Board on August 20, 2007. The additional information alters the thrust of the staff appraisal regarding the fiscal and inflation outlook.
I. Recent Economic Developments
2. Twelve-month inflation (excluding qat) fell further to 10.2 percent in June, from 12 percent in May. The Consumer Price Index (excluding qat) rose by almost 4 percent in June, largely driven by higher prices of vegetables and edible oils, and to a lesser extent of wheat and flour.
3. In July and August, food prices, and especially of wheat and flour, are reported to have further increased sharply. This reflects, in part, the rapid rise in wheat prices in international markets during this period.
4. Violent protests erupted in several cities in Yemen during the last few weeks, with some reported fatalities. The protests were sparked by large price increases and high unemployment.
5. In response to the unrest, the authorities have announced measures aimed at alleviating the impact of rising prices. Government workers received a one-month salary bonus before Ramadan. In addition, the state-owned Yemen Economic Corporation, which supplies foodstuffs to the military, was instructed to increase its wheat imports and to sell them at cost to the general public. The authorities believe that wheat prices are partly driven up by noncompetitive behavior of the main private trading firms. To enhance competition, the authorities have also amended the Commercial Law to extend the right of importation of wheat to fully foreign-owned firms. A World Bank analysis conducted earlier this year of the operation of the markets for basic food staples, including wheat, however, did not find evidence of anti-competitive behavior.
6. Since June, the Central Bank of Yemen (CBY) has stepped up its foreign exchange sales and the exchange rate of the rial vis-Ã -vis the U.S. dollar has remained broadly stable. This should help limit imported inflation somewhat. The net issuance of treasury bills has also increased in recent months, with the net amount issued in the first seven months of 2007 already reaching a level similar to that of 2006 as a whole. Preliminary fiscal data for the first half of the year suggest that the increased issuance reflects a widening fiscal deficit. Oil revenues have remained below budgeted amounts, despite the recent high oil prices.
Yemen: Nominal Exchange Rate and CBY Foreign Exchange Sales, Jan-Aug 2007
Citation: IMF Staff Country Reports 2007, 334; 10.5089/9781451840810.002.A004
Yemen: Nominal Exchange Rate and CBY Foreign Exchange Sales, Jan-Aug 2007
Citation: IMF Staff Country Reports 2007, 334; 10.5089/9781451840810.002.A004
Yemen: Nominal Exchange Rate and CBY Foreign Exchange Sales, Jan-Aug 2007
Citation: IMF Staff Country Reports 2007, 334; 10.5089/9781451840810.002.A004
II. Staff Appraisal
7. The authorities’ decision to grant a one-month bonus to government employees risks renewing inflationary pressures and makes achieving fiscal and debt sustainability more difficult. The bonus will increase the budget deficit by about 0.6 percent of GDP, to reach 5.2 percent of GDP in 2007. Last year, a similar bonus ahead of Ramadan helped push prices up by 6 percent in both September and October. Staff is concerned that the bonus could have a similar impact this year and drive inflation back up to well over 15 percent by end-2007. Absent a stronger tightening of monetary policy, the target range of 12-14 percent for core inflation by end-2007 no longer appears achievable.
8. The government intervention in the wheat market should not have an impact on the budget, but risks displacing private sector import activity. Staff welcomes the authorities’ efforts to further enhance competition in the markets for basic food staples, but urges them to withdraw from the wheat market as soon as possible. If the authorities wish to cushion the future impact of high wheat prices on the poor, it would be preferable to do so through the Social Welfare Fund, while continuing to address weaknesses in this system.
