Abstract
Recent economic performance in Yemen has been mixed. A sharp decline in oil production, coupled with inflexible government expenditure and only marginal improvement in the tax-to-GDP ratio led to an overall fiscal deficit of 5.8 percent in 2007. Executive Directors have noted that Yemen’s non-oil GDP growth has been solid in recent years, and progress has been made on a number of structural reforms. Directors have welcomed the authorities’ commitment to reduce expenditure in the event that oil prices remain below the benchmark price in the 2009 budget.
February 23, 2009
1. This statement summarizes information on recent developments in Yemen that has become available since the staff report was issued to the Board on January 22, 2009. This information does not change the thrust of the staff appraisal.
2. The WEO oil price baseline was revised in January. The average international oil price is now projected at $50 per barrel in 2009, compared with the previous assumption of $54.25 per barrel. As a result, under the adjustment scenario outlined in the staff report, the 2009 fiscal deficit is now projected at 6.1 percent of GDP (up from 5.7 percent of GDP) and the current account deficit at 2.8 percent of GDP (up from 2.4 percent).
3. In December, the cabinet approved an adjustment to the 2009 budget based on reductions in nonpriority current expenditures, a postponement of selected investment projects, and intensified efforts at non-oil revenue mobilization. The adjustment aims at containing the deficit if oil prices remain below the initial budget assumption of $55 per barrel. The authorities estimate that this adjustment would reduce public expenditure by about 1.3 percent of GDP. However, this adjustment does not incorporate the full range of measures envisaged in the adjustment scenario outlined in the staff report, and further fiscal efforts would be needed to contain the deficit in line with this scenario.
4. Coverage of the General Sales Tax (GST) has not yet been widened, although work continues on simplifying GST administration and identifying and registering new taxpayers. Work also continues on the income tax simplification project, with the assistance of the World Bank’s Foreign Investment Advisory Service (FIAS).
5. The authorities have adopted a revised CPI series with technical assistance from the Fund. Under the new series, overall inflation was 11.2 percent in December 2007, rising to a peak of 24.7 percent in March 2008, and then declining to 10.8 percent in December 2008. The decline since March has been driven mostly by lower food prices. Monetary aggregates continued to slow in December, with reserve money, broad money, and private sector credit growth ending the year at 8.3 percent,14.2 percent, and 17.5 percent, respectively. The central bank’s own gross reserves have remained stable, ending 2008 at approximately $7.3 billion, compared with the staff projection of $7 billion—suggesting less pressure on the balance of payments than earlier anticipated. In January, the central bank reduced the floor on deposit-interest rates for the first time since 2000 from 13 to 12 percent.