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IMF Country Report No. 14/276

REPUBLIC OF YEMEN

2014 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF YEMEN

September 2014

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 2014 Article IV Consultation with the Republic of Yemen and its request for a three-year arrangement under the Extended Credit Facility, the following documents have been released and are included in this package:

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 2, 2014, following discussions that ended on May 24, 2014, with the officials of Yemen on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 3, 2014.

• An Informational Annex prepared by the IMF.

• A Debt Sustainability Analysis prepared by the IMF and the World Bank.

• A Supplement to the Staff Report of August 27 updating information on recent developments.

Press Releases including a statement by the Chair of the Executive Board, and summarizing the views of the Executive Board as expressed during its September 2, 2014 consideration of the staff report on issues related to the Article IV Consultation and the IMF arrangement.

• A Statement by the Executive Director for Yemen.

The following documents have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of Yemen*

  • Memorandum of Economic and Financial Policies by the authorities of Yemen*

  • Technical Memorandum of Understanding*

  • *Also included in Staff Report

The publication policy for staff reports and other documents allows for the deletion of market-sensitive information.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

©2014 International Monetary Fund

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REPUBLIC OF YEMEN

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY

July 3, 2014

Key Issues

Background: Yemen has made good progress since the 2011 crisis in advancing the political transition. However, the fledgling economic recovery remained insufficient to make a dent in unemployment and poverty, and fundamental reforms were postponed for fear of derailing the National Dialogue that was central to the political transition. The macroeconomic situation weakened further since early 2014, with increased sabotage of oil facilities leading to a decline in oil revenue and, therefore, a deterioration in the fiscal and external positions and severe fuel and electricity shortages. To address the difficult economic situation, the authorities have adopted a bold reform agenda to preserve macroeconomic stability and set the stage for boosting growth, employment creation, and poverty alleviation. They requested Fund support under an ECF arrangement with access of 150 percent of quota in consideration of the strength of the reforms and large financing needs.

Outlook and Risks: Growth and other macroeconomic indicators are projected to improve steadily over the medium term as a result of the reform efforts and improvements in security. Institutional capacity constraints and/or deterioration in security or the political environment could delay reform implementation, in particular energy subsidy reforms. Such delays could destabilize the economy and necessitate even stronger adjustments later on.

Policy Discussions: Discussions focused mainly on sequencing and speed of reforms in view of the large financing needs of the budget. Since the successful implementation of the RCF in 2012, there has been an ongoing dialogue with the authorities and a broad agreement on priority reforms, with differences of views on the timing and feasibility of the various reforms during the political transition. After the recent progress achieved in advancing political transition, and the increased economic challenges, the authorities have decided to move ahead with a strong reform program. The program aims to reduce the fiscal deficit to more manageable levels and reorient public spending from generalized subsidies to infrastructure investment and direct social transfers, with the objective to generate growth and employment and better benefit the poor. The authorities also agreed with staff on the need to improve fiscal performance by eliminating ghost workers and double dippers from the civil service payroll, and by increasing nonhydrocarbon revenue. Other agreed reforms aim at ensuring financial sector soundness and improving intermediation and the business environment to support growth and job creation.

Other Article IV Issues: An updated debt sustainability analysis indicates that the risk of debt distress continues to be moderate. Plans to introduce fiscal federalism need to ensure appropriate expenditure and debt-contracting policies and controls. A gradual increase in exchange rate flexibility over the medium term would help protect competitiveness and reserves, and would support growth and job creation. More efforts are needed to further improve economic data and to strengthen capacity in AML/CFT.

Approved By

Daniela Gressani and Bob Traa

The mission took place during May 13–24 in Amman, Jordan. The staff team comprised Messrs. Khaled Sakr (head), Faisal Alotaibi, Nabil Ben Ltaifa, and Ms. Inutu Lukonga (all MCD); Ms. Wafa Amr (COM), Messrs. Valerio Crispolti (FAD) and Toshiyuki Miyoshi (SPR). The mission was joined by Messrs. Gazi Shbaikat (the Fund’s resident representative), Fouad Al-Kohlany (the economist in the Sana’a office), and Guido Rurangwa (World Bank economist). Ms. Mira Merhi (Advisor to the Executive Director representing Yemen) participated in the policy discussions. The mission met with Minister of Finance Sakhr Al-Wageeh, Governor of the Central Bank Mohamed Bin Humam, Deputy Minister of Planning Mohamed Al-Hawri, and other senior officials. Discussions with representatives of the financial sector, civil society, and the business and donor communities were held by the resident representative in Sanaa, and by the team through teleconferences in the months preceding the mission.

Contents

  • BACKGROUND

  • RECENT DEVELOPMENTS, OUTLOOK, AND RISKS

  • A. Recent Developments

  • B. Outlook and Risks

  • POLICY DISCUSSIONS

  • A. Fiscal Policy for 2014 and the Medium Term

  • B. Monetary and Exchange Rate Policies

  • C. Financial Sector Reforms

  • D. Structural Reforms and Other Issues

  • PROGRAM MODALITIES AND CAPACITY TO REPAY THE FUND

  • STAFF APPRAISAL

  • BOXES

  • 1. Implementation of Key Recommendations of the 2013 Article IV Consultation

  • 2. Reform of Fuel Subsidies

  • 3. Risk Assessment Matrix

  • FIGURES

  • 1. Recent Economic Developments

  • 2. Selected Real Sector Indicators

  • 3. Selected Fiscal Indicators

  • 4. Selected External Sector Indicators

  • 5. Monetary and Financial Developments

  • TABLES

  • 1. Selected Economic Indicators, 2010–18

  • 2. General Government Finances, 2010–18, in billions of Yemeni rials

  • 3. General Government Finances, 2010–18

  • 4. Monetary Survey, 2010–14

  • 5. Summary Accounts of the Central Bank of Yemen, 2010–14

  • 6. External Financing Requirements and Sources, 2014–17

  • 7. Balance of Payments, 2010–18

  • 8. Indicators of Banking System Financial Soundness, 2007–13

  • 9. Illustrative Medium-Term Scenario, 2010–18

  • 10. Millennium Development Goals, 1990–2012

  • 11. Fund Disbursements and Timing of Review Under the Prospective Three-Year ECF Arrangement, 2014–17

  • 12. Indicators of Capacity to Repay the Fund, 2013–27

  • ANNEXES

  • I. External Sector Assessment

  • II. Principles of Fiscal Federalism: The Yemen Case

  • APPENDICES

  • I. Letter of Intent

    • Attachment I. Memorandum of Economic and Financial Policies

    • Attachment II. Technical Memorandum of Understanding

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REPUBLIC OF YEMEN

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—INFORMATIONAL ANNEX

July 3, 2014

Prepared By

Middle East and Central Asia Department (In consultation with other departments)

Contents

  • FUND RELATIONS

  • WORLD BANK RELATIONS

  • STATISTICAL ISSUES

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REPUBLIC OF YEMEN

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS

July 3, 2014

A pproved By

Daniela Gressani and Bob Traa (IMF) and Bernard Funck and Jeffrey D. Lewis (IDA)

Prepared by the Staffs of the International Monetary Fund and the International Development Association

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This debt sustainability analysis (DSA) updates the joint IMF/IDA DSA from July 2, 2013. The results indicate that Yemen continues to face a moderate risk of debt distress. Although the level of public and publicly guaranteed external debt is modest, it is vulnerable to shocks to export receipts. Public domestic debt is large, leading to increased vulnerabilities, particularly to a growth shock.1

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REPUBLIC OF YEMEN

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION AND REQUEST FOR A THREE-YEAR ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY—SUPPLEMENTARY INFORMATION

August 27, 2014

Approved By:

Daniela Gressani and Bob Traa

Prepared by MCD

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Press Release No. 14/526

FOR IMMEDIATE RELEASE

September 24, 2014

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Telephone 202–623–7100

Fax 202–623–6772

www.imf.org

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Press Release No. 14/408

FOR IMMEDIATE RELEASE

September 2, 2014

International Monetary Fund

Washington, D.C. 20431 USA

Telephone 202–623–7100

Fax 202–623–6772

www.imf.org

Republic of Yemen: 2014 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Yemen
Author: International Monetary Fund. Middle East and Central Asia Dept.