The impact of the slump in oil prices is all too visible in the Yemen 2002 budget, for which the government is forecasting a 1.2% fall in revenues to YR482.0bn ($2.78bn), compared to the 25% rise in revenues that were projected for the 2001 budget. Approved on 21 January by parliament, the 2002 budget also proposes increasing expenditure by only 6% to YR531.8bn ($3.06bn), despite Yemen’s pressing social needs. Furthermore, Yemen predicts that its deficit will climb by a staggering 528.6% to YR44bn ($253mn), jumping from only 0.57% of GDP (revised) in 2001 to 2.63% in 2002 (see table below). Of total expenditure, according to a report by a Yemen parliamentary committee, capital expenditure accounts for 18%, current expenditure 74%, and debt servicing amounts to 7.13%. However, according to Yemen’s Ministry of Finance, GDP is expected to climb 34.8% from 2001 forecast levels to YR1,660bn ($9.6bn). While a realistic analysis of the figures is hampered by the absence of closed accounts for the previous year, allowing only year-on-year budgetary allocations, preliminary numbers suggest that GDP growth in 2001 will be lower than the previous year according to World Bank estimates.

Oil-dependent Yemen is predicting that the low oil prices that characterized the latter part of 2001 will persist this year and the government is forecasting that 2002 oil revenues will fall by 6.9% to YR306.6bn ($1.77bn). Yemen’s forecast oil revenues are based on an oil price assumption of $18/B compared with the $22/B assumption in 2001 (MEES, 21 January). In an attempt to boost oil production, given the slow decline in output from some of its existing fields, Yemen has been trying to lure international oil companies and has met with some success. On 22 October 2001 Yemen signed a memorandum of understanding with Pan American Energy and US Reduction to explore for oil and gas in the al-Mahara province (MEES, 3 December 2001). This follows production sharing agreements signed earlier in the year with a consortium led by Calgary-based Pan-Canadian Petroleum (MEES, 30 July 2001), with Nexen and Occidental Petroleum (MEES, 18 June 2001) and a consortium including Occidental, Yemen’s Ansan Wikfs (Hadhramaut Ltd) and the state-owned Yemen Oil and Gas Company (MEES, 22 January). The state’s share of production in 2000 (the most recent period for which information is available) was around 100mn barrels or 63% of the total, up 19% on the previous year (MEES, 7 May 2001). Yemen’s oil minister Rashid Baraba' said on 28 November that his country’s output would reach 550,000 b/d in 2002, climbing from an average of 456,000 b/d in 2001 (MEES, 3 December 2001) and 436,000 b/d in 2000. Yemen’s production climbed in January to 465,000 b/d with the start up of some new fields (see story in A section).

The parliamentary committee report, noting that oil revenues account for 66.9% of Yemen’s so-called self-generating revenues and 63% of its total revenues, warned that the country’s high dependence on oil is a source of instability. The World Bank points out in its December 2001 report that tourism contributed less than 1% to GDP in the late 1990s and 2000 and, already weakened by kidnappings, was dealt a further blow after the events of 11 September. However, with the government’s recent actions against kidnappers, security is expected to improve and tourism is likely to recover this year, the World Bank noted. A plan to attract 50,000 tourists by 2005 is being developed by the Ministry of Tourism with EU support. Other industries are also struggling, with drought hampering crop production, disease hurting livestock production and fish stocks facing depletion, the World Bank warned, noting that Yemen’s non-oil economy grew by only 2.9% in 1999 and 4.7% in 2000.

Yemen needs to increase capital expenditure in order to expand its industry base, say economists, although it is still hampered by an unwieldy public sector. The government is trying to rationalize its public sector, but nevertheless continues to increase spending on public services, although the increase for 2002 is only 6.4% to YR26bn ($149.9mn) compared to a 21% climb in 2001. Furthermore, the Cabinet and the Civil Service Council invalidated 17,000 public posts in November 2001, the World Bank notes. After cutting education allocations last year, this year the budget includes a 42% increase in spending to YR15.5bn ($89mn), with health spending also up by 14.8% to YR4.96bn ($28.6mn), although less positively defense spending has climbed 120% to YR25.3bn ($146mn). However, the numbers are muddied by the approval in November of a supplementary budget for 2001, totaling YR75bn ($432mn). This was to be financed by surplus oil revenues, with 75% allocated for current expenditure (to cover salary increases approved in July) and 25% for capital investment (mainly road construction and electricity) with less than 1% for loan repayments. Also $150mn was likely to have been allocated for the cost of border demarcation with Saudi Arabia, notes the World Bank.

Analysts have criticized Yemen’s increased defense spending pointing out that a more aggressive focus on reducing poverty and improving education would more effectively address the country’s socio-economic challenges. Yemen has one of the highest poverty rates in the Middle East which is climbing as employment fails to keep pace with growth in the labor force, notes a paper published in the October issue of Forum of the Economic Research for the Arab Countries, Iran and Turkey. In Yemen the gap between the annual rate of growth in the labor force and that of employment is estimated at about 1.3% and if this trend continues with a total population of around 17mn, Yemen will need to provide at least 2mn work opportunities to new entrants to the labor market over the next 10 years (MEES, 3 December 2001). In Yemen the annual GDP per capita is only $380 and given the trends in the rates of employment, economic growth and labor force expansion it "will lead to more poverty with more sinister implications yet," warns Muhammad al-Maitami, professor of economics at San'a University in Yemen.

Meanwhile, the parliamentary committee report also noted that much of the precious financial resources in the budget are lost due to widespread corruption and customs and tax evasion. It also criticized the government's 5-year economic plan (2001-2005) for its planned 5% devaluation of the Yemeni riyal. The riyal has continued to depreciate against the dollar, falling from $1=YR160 in December 2000 to $1=YR168.50 in June 2001 and down to the current level of $1=YR173.50. Interest rates have remained stable over the last 12 months and rates on saving deposits, determined by the Central Bank of Yemen (CBY) rather than the market, have been fixed at 13% since July 2000. The CBY was considering reducing interest rates when inflation, best illustrated by the Consumer Price Index, was at 7.2% in July 2001, but when the rate increased dramatically to 20% in November the plan was put on hold. The major increase behind Yemen’s inflation is the partial removal of diesel subsidies in July and the increase in tariffs for electricity, telephone and water. The CPI was also boosted during this period by increases in prices for food (16%), Qat and tobacco (39%), and education (24%).

The parliamentary committee has asked the government not to hike petroleum prices, or electricity and water tariffs, amid reports that there are plans to reform subsidies and cut them from YR38bn ($219mn) to YR29bn ($167mn) this year. The government is expecting to receive increased revenues from taxation and customs this year, which are forecast to climb by 16.8% and 10.1% respectively, after seeing increases of only 5% and 3% in 2001. This comes in part from a general sales tax which was approved in November 2001 by parliament. Parliament members who voted against the budget said that they had taken this action because of the price hikes and what was described as the government’s failure in fighting corruption. The budget was approved by 199 votes with 243 members present with 40 against. The rest of the 301 members of parliament either abstained or were absent.

Despite its problems, however, Yemen has been able to attract funding from international aid agencies, and the International Monetary Fund (IMF) said on 24 October that it had disbursed $121mn to Yemen after a review of the nation's performance. Fiscal restraint in the face of large oil windfalls in 2000 and 2001 had allowed Yemen to build up a substantial cushion of external reserves and while it has seen setbacks in some areas, macroeconomic policies remain on track, said the IMF. It noted that structural reform is continuing, albeit slowly, with further liberalization seen in the areas of trade, pensions and civil service (MEES, 29 October 2001).

Also, while it was politically isolated after the Gulf war following its support of Iraq, Yemen is now reaping the benefits from improved relations with the US. Yemen’s President 'Ali 'Abd Allah Salih was among the first Arab leaders to meet with president Bush to discuss global efforts to fight terrorism after the 11 September attacks on the US. And US officials have underscored on several occasions that Yemen is a partner in the war on terrorism. Yemen was also brought some way closer to joining the GCC fold when it was recently accorded membership of certain non-political organizations (MEES, 7 January).

Yemeni Budgets: 1999-2002

(YRMn)

Yemeni Budgets: 1999-2002 (Cont’d)

(YRMn)

FX: $1=YR173.50.

®=Revised.

Copyright © 2002 Middle East Economic Survey

© Copyright MEES 2003.