Economic Development in the Republic of Yemen

The First Five Years Plan

Top Exports and Imports in 2000

Over 1990-94 Yemen experienced severe economic difficulties arising from a series of shocks such as Gulf war, the loss of a major trading partner in the former Soviet Union, the challenges of unifying two very different political and economic systems, and the civil disturbances. Output fell, unemployment increased, the economy faced high inflation and severe balance of payments difficulties.

To address the economic difficulties, in November 1994, the Government embarked upon a comprehensive Economic, Financial and Administrative reform Program (EFARP) which was supported by the IMF, the World bank, and all of our other multilateral and bilateral donors through financial resources and policy advise and technical assistance. Although the implementation of the program has been challenging, Yemen have succeeded in implementing the program. This is reflected in the significant improvement in the performance of the economy over the past two years.

At the heart of the EFARP was the reduction of the fiscal deficit from nearly 16.7% of GDP in 1994 to about 2.5 percent by a set of revenue and expenditure measures. This reduced government borrowing from the banking system and reduced the growth of broad money supply from 34% in 1994 to only 10%. Other monetary policy measures included an increase in benchmark interest rates to achieve positive real rates in 1996 and successful introduction of three and six-month treasury bill auctions.

As a result of the strong fiscal and monetary measures, the core inflation rate (excluding administered price adjustments) fell from a high of 71% in 1994 to about 11 percent in 1996 to 8 percent in 2000 and 2001. Since mid 1996, prices have been stable. Preliminary data suggest that non-oil GDP grew by 7.5 percent in 1995, by 4.0 percent in 1996 and by 6.0 in 2001.

The Government adopted a flexible exchange rate regime in early 1996. The rates were fully unified in July 1996 and has been market-determined since then. The market rates has been remarkably stable in the range of YR 160-165 over the last several months.

The country’s foreign reserves stood at nearly $940 million (equal to 4.5 month’s imports) by end 1996 and to 2.0 billion by 2001. Finally in March 1996, Yemen was able to get debt relief on Naples terms from the Paris club.

The fiscal and monetary policies were supported by a series of structural reforms to enhance the growth potential of the economy. First, trade policy was reformed by abolishing import bans, export restrictions, and import licensing. In parallel a simplified and less protective tariff structure was introduced. Second, the competitiveness of industry was increased by initiating a privatization program and public enterprise reform.

The Government has already established regulations and guidelines for privatization and also set up a Technical Privatization Office (TPO) to support the privatization program.

A first batch of six industrial enterprise are now being liquidated and an additional ten enterprise have been offered for sale. In preparation for the privatization of utilities, a draft study of a regulatory framework has been completed. Finally, an action plan phase out budgetary transfers to PEs and to settle their arrears has been adopted by the Ministry of Finance. Third, policies were implemented to encourage both domestic and foreign investors to invest in Yemen. A study of the investment regime and the functions and structure of the General Investment Authority (GIA) has been completed, and its main recommendations are being implemented.

During the process of adjustment the Government is very keen to protect the most vulnerable sections of the Yemeni society. Towards this, despite strong fiscal adjustment measures, the 1996 budget maintained the expenditures on health and education at the 1995 level in terms of percentage of GDP and allocated YR 1 billion for the establishment of Social Welfare Fund. In addition, a public works project designed to generate employment and improve infrastructure and other services is being implemented.

Despite the significant achievements during the last two years the Government is aware that much remains to be done. A large proportion of our population remains poor.

Access to basic health and education needs to be increased, and physical infrastructure such as roads, water supply, agricultural services and ports needs to be improved to lay the basis for growth.