10414-CoverFINAL.qxd 4/17/08 11:13 AM Page 1 Yemen 43600 Yemen Development Development Policy Review Policy Review THE WORLD BANK 10414-00_FM.qxd 4/17/08 11:09 AM Page i Yemen Development Policy Review 10414-00_FM.qxd 4/17/08 11:09 AM Page ii 10414-00_FM.qxd 4/17/08 11:09 AM Page iii Report No. 35393-RY Yemen Development Policy Review Social and Economic Development Sector Unit Middle East and North Africa Region 10414-00_FM.qxd 4/17/08 11:09 AM Page iv 10414-00_FM.qxd 4/17/08 12:14 PM Page v Contents E X E C U T I V E S U M M A R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1 Yemen Today: Mixed Development Outcomes . . . . . . . . . . . . . . . . . . . . . . 1 Macroeconomic Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Poverty and Unemployment Outcomes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Social Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Achievability of the Millennium Development Goals (MDGs) . . . . . . . . . . 7 Implementation of the Poverty Reduction Strategy. . . . . . . . . . . . . . . . . . . . 8 Priorities for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2 Yemen Tomorrow: Prospects For Good Governance and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The Quality of Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Understanding Yemen's Poor Governance. . . . . . . . . . . . . . . . . . . . . . . . . . 12 Understanding Yemen's Recent Economic Experience . . . . . . . . . . . . . . . . 16 Building the Will for Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3 Maintaining Fiscal Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Yemen's track record on fiscal sustainability . . . . . . . . . . . . . . . . . . . . . . . . 23 Medium term outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Perilously Increasing Public Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 External Debt Sustainability Critically Depends on Oil Price Trajectories . . . 40 The Reform Agenda to Maintain Fiscal Balance. . . . . . . . . . . . . . . . . . . . . . 40 4 Improving the Investment Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Reform Agenda to Improve the Investment Climate . . . . . . . . . . . . . . 48 v 10414-00_FM.qxd 4/17/08 12:15 PM Page vi vi C O N T E N T S 5 Managing Energy Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Conditions and Challenges in the Oil and Gas Sectors . . . . . . . . . . . . . . . 51 The Reform Agenda for Oil and Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Conditions and Challenges in the Power Sector . . . . . . . . . . . . . . . . . . . . . 55 The Reform Agenda in the Power Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 6 Managing Water Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Challenges in the Water Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 The Reform Agenda for Water Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 7 Slowing Population Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 The Reform Agenda for Population Policy. . . . . . . . . . . . . . . . . . . . . . . . . . 73 10414-00_FM.qxd 4/17/08 12:16 PM Page vii C O N T E N T S vii List of Figures 1 GDP Growth Over Recent Reform Periods . . . . . . . . . . . . . . . . . . . . . . . . . xiii 2 Oil Production in Yemen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 3 Quality of Governance in Yemen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii 4 Fertility in Yemen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviii 1.1 Risk of Internal Conflict and Quality of Governance . . . . . . . . . . . . . . . . . . 3 1.2 Domestic Investment, percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Quality of Governance in yemen, 1996-2004 . . . . . . . . . . . . . . . . . . . . . . . 12 2.2 Quality of Governance in Yemen and Comparator Countries . . . . . . . . . . 13 3.1 Overall fiscal balance and oil Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.2 Primary non-oil balance (% of gdp) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.3 Primary Non-Oil Balance, with and without subsidies (% of gdp) . . . . . . 26 3.4 Oil Subsidies and Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 3.5 Indirect Tales and Subsidies (% of gdp) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 3.6 Saving From Oil Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 3.7 Oil Revenue and Expenditures (% of GDP). . . . . . . . . . . . . . . . . . . . . . . . . 29 3.8 Current Expenditure Breakdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3.9 Exports and the Real Effective Exchange Rate . . . . . . . . . . . . . . . . . . . . . . . 30 3.10 Evolution of External Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3.11 Evolution of Arrears. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.12 Government Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.13 Government Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.14 Real GDP Growth by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3.15 Oil and Non-Oil GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 3.16 Poverty Headcount Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.17 Fixed Investment By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 3.18 Direct Foreign Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.19 Projected Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.20 Yemen Oil Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 3.21 Indicators of Public Debt Under Alternative Scenarios . . . . . . . . . . . . . . . . 39 3.22 Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.1 Leading Investment Climate Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4.2 ranking of cost of doing business indicators . . . . . . . . . . . . . . . . . . . . . . . . 45 5.1 Infrastructure Interruptions--2001 and 2005 . . . . . . . . . . . . . . . . . . . . . . . 56 5.2 Yemen: Electricity Demand Forecast (2005-20) . . . . . . . . . . . . . . . . . . . . . 57 7.1 Total Fertility Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 List of Tables 1.1 Yemen: Sectoral Contribution to Real GDP, 1991-2004 (%) . . . . . . . . . . . . 4 1.2 Poverty Lines and Poverty Measures: 1992-1998. . . . . . . . . . . . . . . . . . . . . . 5 3.1 Non-Oil Exports Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.1 Yemen--Petroleum Product Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 10414-00_FM.qxd 4/17/08 12:16 PM Page viii viii C O N T E N T S 5.2 Power Interruptions and Generator Supply, 2005. . . . . . . . . . . . . . . . . . . . 56 6.1 Water Withdrawal by Using Sector in Yemen and Comparators, 1998-2002 (In Percent of Total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.2 Reaching the Water Sector MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 List of Boxes 3.1 Fiscal Sustainability Analysis for Oil-Rich Countries. . . . . . . . . . . . . . . . . . 25 3.2 Promoting Non-Oil Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.1. Lessons from MENA Countries that have Progressed Rapidly in Fertility Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 E N D N O T E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 R E F E R E N C E S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 List of Appendix Tables A1 GDP at Producers Prices by Economic Activity (in 1990 Constant Prices), 1990­2004 (Million Yemeni Rials) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 A2 GDP at Producers Prices by Economic Activity (in Current Prices), 1990­2004 (Million Yemeni Rials) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 A3 GDP by Expenditure ( in Current Prices), 1990­2004 (Million Yemeni Rials) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 A4 Investment by sector (in percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . 90 A5 Republic of Yemen: Central Government Finance, 1990­2004 . . . . . . . . . 92 A6 Republic of Yemen: Balance of Payments (Analytic Presentation), 1990­2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 A7 Republic of Yemen: Prices, 1990­2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 A8 Republic of Yemen--Key Exposure Indicators, 1990­2004 . . . . . . . . . . . . 98 A9 Republic of Yemen: Select Governance Indicators, 1994­2006 . . . . . . . . 100 A10 Alternative Governance indicators for Yemen, 1996­2004 . . . . . . . . . . . 101 A11 Projections for Selected Economic Indicators: No Adjustment Scenario, 2005­25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 A12 Projections for Selected Economic Indicators: Most Recent Base Case Scenario, 2005­25. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 A13 Projections for Selected Economic Indicators: Low Oil Price Scenario, 2005­25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 A14 Country: External Debt Sustainability Framework, Baseline Scenario, 2006­2026 (in percent of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 A15 Country Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006­25 (in percent). . . . . . . . . . . . 116 A16 Yemen: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006­2026 (in percent of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 A17 Yemen: Sensitivity Analysis for Key Indicators of Public Debt 2006­2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 A18 Millennium Development Goals for Yemen, 1990­2004 . . . . . . . . . . . . 126 A19 Progress under the first poverty reduction strategy in Yemen, 2003­05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 A20 Specific measures to reduce fertility and maternal mortality in Yemen . . . . 129 10414-00_FM.qxd 4/17/08 11:09 AM Page ix Acronyms and Abbreviations CURRENCY AND EQUIVALENTS (As of March 27, 2006) Currency Unit ­ Yemeni Rial (YR) US$1 = YR 196 FISCAL YEAR January 1-December 31 AFMIS Accounting and Financial Management System AFPPF Agriculture and Fisheries Production Promotion Fund A21A Agenda 21 for Agriculture COCA Central Organization for Control and Audit CM Certified Midwife CPIA Country Policy and Institutional Assessment DFID Department for International Development DHS Demographic and Household Survey EITI Extractive Industries Transparency Initiative EIU The Economic Intelligence Unit ERF Economic Research Forum ERP Economic Reform Program ESMAP Energy Sector Management Assistance Program FDI Foreign Direct Investment FHS Family health Survey FP Family Planning GAREW-GARWSP General Authority for Rural Water ix 10414-00_FM.qxd 4/17/08 11:09 AM Page x x A C R O N Y M S A N D A B B R E V I A T I O N S GCC Gulf Cooperation Council GDI Gender Development Index GDP Gross domestic product GEF Global Environmental Facility GoY Government of Yemen GPC General People's Congress GST General Sales Tax HBS Household Budget Survey HCC Higher Committee for Coordination HD Human Development HDI Human Development Index HIS Health Information System HU Health Unit ICA Investment Climate Assessment IDA International Development Association IEC Information, Education, and Communication IMCI Integrated Management of Childhood Illnesses IMF International Monetary Fund IMR Infant Mortality Rate JIA Judicial Inspection Authority KAP Knowledge, Attitude and Practice KIT Royal Tropical Institute KKM Kaufmann, Kraay and Mastruzzi LAEO Literacy and Adult Education Organization LC Local Corporations LDA Local Development Association MAI Ministry of Agriculture and Irrigation MCA Millennium Challenge Account MDGs Millennium Development Goals MENA Middle East and North Africa MNA Middle East and North Africa MNSIF Middle East and North Africa Finance, Private Sector and Infrastructure Department MoCS Ministry of Civil Service MoE Ministry of Education MoF Ministry of Finance MoJ Ministry of Justice MoPHP Ministry of Population and Public Health 10414-00_FM.qxd 4/17/08 11:09 AM Page xi A C R O N Y M S A N D A B B R E V I A T I O N S xi MMR Maternal Mortality Rate MWE Ministry of Water and Environment NGOs Non Governmental Organizations NPC National Population Council NPP National Population Policy NWRA National Water Resources Authority NWSA National Water and Sanitation Authority NWSSIP National Water Sector Strategic Investment Plan ORS Oral Rehydration Solution PAP Population Action Program PDRY People's Democratic Republic of Yemen PEC Public Electricity Corporation PFM Public Financial Management PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper PSA Production Sharing Agreements PSP Private Sector participation PWP Public Work Program RH Reproductive Health SFD Social Fund for Development SDP Service Delivery Points SJC Supreme Judicial Council TFR Total Fertility Rate UAE United Arab Emirates UN United Nations UNDP United Nations Development Program UNESCO United Nations Educational, Scientific and Cultural Organization UNICEF United Nations Children's Fund US United States GST General Sales Tax WB World Bank WHO World Health Organization YAR Yemen Arab Republic YEM Yemen YR Yemeni Rial YSV Yemen Strategic Vision 10414-00_FM.qxd 4/17/08 11:09 AM Page xii xii A C R O N Y M S A N D A B B R E V I A T I O N S Vice President Daniela Gressani Country Director Emmanuel Mbi Chief Economist & Sector Director Mustapha K. Nabli Sector Manager Miria Pigato Task Manager Srinivasan Thirumalai Team Members. Isabelle Chaal (Team Assistance), Ingrid Ivins (Macroeconomic Analysis), Thilakaratna Ranaweera (Macroeconomic Projections and Scenarios), Carolin Geginat (Debt Sustainability Analysis), Hadi Esfahani (Political Economy of Reforms), GV Rao (Research and Database), Irina Shaorshadze (Research Assis- tance), Claudia Nassif (Judicial, Legal Reforms and Land Registration, Fisheries), Gail Richardson and Sharon Beatty (Population Policy), Jonathan Walters, Tjaarda P. Strom Van Leeuven, Somin Mukherjee, Pierre Audinet (Energy Sector issues), Maher F. Abu-Taleb, Naji Abu-Hatim (Water). Yahia Alanssi provided valuable help in facilitating country consultations. Hadi Esfahnai, professor at University of Illinois at Urbana-Champaign and Sharon Beatty, consultant provided background papers on political economy of reforms and population policy, respectively. Spe- cial thanks to Mustapha Rouis, Country Manager, Yemen, and peer reviewers Brian Pinto and Dorsati Madani for valuable suggestions in guiding the work. Emmanuel Mbi, Mustapha K. Nabli, Miria Pigato and Farrukh Iqbal provided critical com- ments and guidance in writing the report. The team wishes to thank Dr. Mutahar Al-Abassy and Dr. Yahya Mutawakeel and his team for providing valuable insights in the early stages of the work and for com- menting on the final draft. The DPR team owes it thanks also to government offi- cials, business leaders, parliamentarians and members of civil society for providing valuable information and interview during DPR mission and for feedback during consultation on early results presented in Yemen Roundtable on Growth, Employ- ment and Social Progress, April 9-10, Sanaa, Yemen and a series of three workshops in conjunction with Country Assitance Strategy consultation held from November 19-22, 2005 in Aden and Sanaa, Yemen. 10414-00_FM.qxd 4/17/08 11:09 AM Page xiii Executive Summary D espite rich resource endowments, political freedoms unique in the Middle East, and noteworthy resilience in overcoming civil war and oil price shocks, Yemen has not met the hopes raised at the time of its unification as a republic in 1990. Yemen's economy grew at a reasonable 5.0 percent rate (Fig- ure 1) for nearly a decade after unification, securing a decent 2 percent per capita growth. Its Human Development Index improved by 24 percent over roughly the F I G U R E 1 GDP Growth Over Recent Reform Periods, 1991­2005 14 12 10 8 Worsening of internal security Percent 6 USS Cole Attack French Tanker Limburg Attack 4 Gulf war Civil war 2 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Post-unification phase Economic stabilization Deceleration phase and structural reforms phase Source: Staff estimates on data from Central Statistical Organization and IMF. xiii 10414-00_FM.qxd 4/17/08 11:09 AM Page xiv xiv E X E C U T I V E S U M M A R Y same period, reaching 0.489 by 2003--the second highest improvement for all countries with low human development.1 Now, however, Yemen has lost momen- tum and trails behind most countries in important dimensions of development. Today, Yemen is the second poorest country in the Middle East and North Africa region, with 42 percent of its population counted as poor in 1998. GDP has stagnated at around US$530 per capita in real terms since 2002. Unemployment, estimated at 11.5 percent in 1999, is expected to have worsened as the population has climbed at 3 percent a year and the labor force has burgeoned. Extreme gender inequalities persist. Malnutrition is so severe that Yemeni children suffer the world's second worst stunting in growth. And natural resources are increasingly constrained. Two-thirds of Yemen's known oil reserves were depleted by 2003, and production has already begun to decline and will plummet by 2012 if no new reserves are discovered. Freshwater is also increasingly scarce: per capita avail- ability in Yemen is about 2 percent of the world average and projected to dimin- ish by a third in the next 20 years because of the expected increase in population. Growth of gross domestic product has slowed as reforms have stalled Compounding these economic, social, and resource problems are Yemen's policy and institutional failings, which have prompted donors to cut aid. Yemen received a meager US$13 in development assistance per capita in 2004. In 2005, the Devel- opment Assistance Committee cut IDA 14 (2006­08) allocations to Yemen by nearly a third, and the U.S. government's Millennium Challenge Corporation suspended Yemen's eligibility for assistance because of its worsening corruption, regulatory quality, and fiscal policies. All of these identified challenges, if not well managed, could wreck macro- economic management, fail to revive private sector investment, further deplete scarce resources, and add to human suffering, precisely at a time when the govern- ment expenditures will need to be pruned back substantially because of the decline in oil revenues. This Development Policy Review for Yemen reviews recent devel- opment outcomes, identifies key challenges that will affect Yemen's development, and proposes a selective agenda of reforms. The reforms include measures to improve fiscal and public sector management, combat corruption, strengthen judi- cial and legal systems, improve land registry, and revise energy, water and popula- tion policies. This report is intended to inform Yemeni authorities in finalizing the second Poverty Reduction Strategy Paper (2006­10). It also strives to raise aware- ness about the consequences of the impending oil depletion and to promote more diversified and sustainable development. Challenges Ahead The main challenges to Yemen's growth are the impending rapid decline in oil revenues, the weak capacity of governance institutions, the pressures of high pop- ulation growth, and the worsening scarcity of freshwater. The country has yet to 10414-00_FM.qxd 4/17/08 11:09 AM Page xv E X E C U T I V E S U M M A R Y xv come to grips with the imminent oil decline and its consequences. The Govern- ment is concerned about governance problems and is recently attempting to speed up reforms. The last two challenges--high population growth and water crisis-- are long recognized by the government, but reforms have been slow. Depleting oil revenues In 2000, Yemen developed a strategic vision for 2025, an ambitious plan for eco- nomic growth founded primarily on the continued extraction of presumed plen- tiful reserves of oil and gas. The proven2 reserves then were estimated to be 5.7 billion barrels; by the end of 2005, however, the proven reserves were only a tenth as much.3 Oil production has leveled off since 2001 and started to decline. The sum total of proven and probable reserves now is expected to last for only eight years at the current rate of production (Figure 2). New discoveries thus far in 2005­06 could help in slowing the decline in production but not eliminate it4. With 90 percent of exports coming from oil and 70 percent of government revenue dependent on oil, the disappearance of oil as a revenue resource will have serious consequences: unless non-oil exports grow rapidly, external debt will become unsustainable. The resource crunch for the government would under- mine hard-won macroeconomic stability and hinder provision of even basic social services. F I G U R E 2 Oil Production in Yemen, 1986­2004 and Forecasts to 2010 500 450 400 350 Scenario B 300 barrels/day 250 200 Scenario A Thousand 150 100 50 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Past production Forecast Source: World Bank 2004. Scenario A: PEPA estimates based on future oil production in existing production blocks. Scenario B: World Bank estimates based on data provided by industry and PEPA on existing and new production blocks. 10414-00_FM.qxd 4/17/08 11:09 AM Page xvi xvi E X E C U T I V E S U M M A R Y The government of Yemen has found it difficult to diversity exports.5 The dis- covery of oil in 1984 averted a crisis looming because of the collapse of remittance flows and external assistance. The initial estimate of low oil reserves of 1 billion barrels was tripled subsequently. The initial estimate of gas reserves at 4 trillions of cubic feet (tcf) was eventually quadrupled. Even now, the government is either exploring or producing oil from only 29 of the possible 78 blocks,6 supporting the hope that more oil could be found. More active exploration for gas could raise the estimate of gas reserves, too. Yemen's oil production will soon fall off dramatically Although oil reserves could increase in the future and gas exports could partially offset the loss of oil revenues, reorienting to non-oil-based development is urgent for two important reasons. First, export diversification will generate jobs. The entire oil sector employed only about 21,000 Yemenis in 2003, while some 190,000 new entrants to the job market sought work. With youth unemployment raging at 30 percent or more, the need for labor-intensive growth is urgent. Second, diversi- fying the export base will take time. The history of countries that achieved success- ful diversification, such as Costa Rica, Malaysia, or the United Arab Emirates, shows that it takes at least a decade or more for diversification polices to bear fruit. Weak governance The quality of governance in Yemen deteriorated until 2004. Corruption and bureaucratic quality both worsened from 1996­98 to 2002­04. During the same period, many other measures of administrative capacity, public accountability, and political rights remained unchanged, but low. Besides, Yemen's quality of gover- nance is the weakest among its neighbors.7 Since 2005, improvement in select governance components is discernible. Two of the six dimensions of governance ­ control of corruption and regulatory qual- ity--improved in 2005 (Figure 3). Further, policy changes initiated since January 2006 under the six-month National Reform Agenda8 (NAR) should also lead to improvements in the future. Some of the completed reforms under the NAR that have a bearing on governance quality are: The independence of Central Organization for Control and Audit has improved. A new financial disclosure law for all public servants has been legislated. A substantial number of ghost workers and double-dippers have been identified. A new, internationally comparable, anti-corruption law is on the anvil and the gov- ernment is planning to join the Extractive Industry Transparency Initiative. Judicial independence has improved. The President of the Republic is no longer the head of Supreme Court. The judicial infrastructure is under improve- ment. The World Bank's investment climate assessment of 2005 notes a dramatic decline in percentage of firms identifying crime as serious constraint to business between 2001 and 2005. 10414-00_FM.qxd 4/17/08 11:09 AM Page xvii E X E C U T I V E S U M M A R Y xvii F I G U R E 3 Quality of Governance in Yemen, 1996­2005 0 ­0.2 Control of corruption ­0.4 Regulatory quality Government effectiveness ­0.6 ­0.8 ­1 Voice and accountability ­1.2 Rule of law ­1.4 ­1.6 Political stability/no violence ­1.8 1996 1998 2000 2002 2003 2004 2005 Source: Governance Matters V: Governance Indicators for 1996­2005 by D. Kaufmann, A. Kraay, and M. Mastruzzi. Corruption is perceived to be a serious issue in Yemen, both by the govern- ment and by local firms. About 80 percent of the firms surveyed mentioned corruption as a modest or very severe constraint on their operations. Many in- ternational rating agencies concur. Transparency International's Corruption Per- ception Index places Yemen 103rd out of 159 countries surveyed in 2005. Since 2003, the government has taken measures to set up laws and institutions for fight- ing corruption, and in 2005 it ratified the UN convention against corruption. But to date, no case has been pursued against a high-profile person for corruption. Severe water crisis In Yemen's water-scarce environment, the use of groundwater has been driving rural growth for the past 30 years, but in an unsustainable and inequitable man- ner. Groundwater abstraction has steadily increased since the mid 1980s in most areas of Yemen. There are about 50,000 private wells in the country (8,000 opera- tional wells in the Sana'a Basin alone, half of which are tubewells), together with more than 200 drilling rigs. Groundwater use began to exceed recharge in the mid 1980s, with more than 80 percent of abstraction going to irrigated agriculture. At the present rate of depletion, the sustainability of livelihoods is jeopardized. Already, farming has been scaled down or abandoned, and some communities and towns are also running out of domestic water. The average tariff in Sana'a for domestic water supply and sanitation is YR100 per cubic meter (US$0.52 per cubic meter), based on a typical household 10414-00_FM.qxd 4/17/08 11:09 AM Page xviii xviii E X E C U T I V E S U M M A R Y that consumes less than 35 cubic meters per month. Given the efficiency losses in the distribution system, the average monthly bill is not enough to cover operations and maintenance costs plus depreciation, let alone investments. At these low levels of tariffs, consumers have no incentive for water conservation and suppliers have no incentive to improve performance. High population growth Yemen's population growth, at 3 percent annually, is high by regional standards and in comparison with countries with similar levels of per capita income. Yemen's fertility rate began to slow in early 1990s, as economic and social development brought conditions that have created a "demographic transition" to lower birthrates in many countries. But this transition appears to have stalled in Yemen (Figure 4). The rate of decline in the fertility rate has slowed between 1997 and 2003. The demographic transition to lower birth rates is slowing On current trends, the population will nearly double to 40 million in 20 years, nearly 5 million higher than the target of the national population policy adopted in 1997. Each new Yemeni child born is estimated to cost the government US$250 annually in 2005 prices for education and health care.9 The slowing of fertility decline is mainly attributed to the slowing in the spread of contraceptive use since 1997. F I G U R E 4 Fertility in Yemen, 1988­2004 and Forecasts to 2025 9 8.3 8 7.6 7.4 7 6.5 6.2 6 Current Trend 5 4 4 Target 3 3.3 2 1 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: Staff calculations. 10414-00_FM.qxd 4/17/08 11:09 AM Page xix E X E C U T I V E S U M M A R Y xix The Reform Agenda Yemen's active reform program in the mid 1990s propelled economic growth (as seen in Figure 1), but the recent history of weak governance, widespread corrup- tion, and heightened risk of internal conflicts has undermined the implementation of many later reform efforts. Chapter 2 looks in detail at reforms in Yemen since the mid-1990s to compare the period of strong reform in 1995-98 with the slug- gish period that followed. That analysis underscores the importance of changes in institutional quality for the implementation of reforms. It thus is a foundation for designing current efforts to address Yemen's four challenges. The reform agenda encompasses five main goals: maintaining fiscal sustain- ability (the subject of Chapter 3), improving the investment climate (Chapter 4), managing energy resources (Chapter 5), managing water resources (Chapter 6), and slowing population growth (Chapter 7). Maintaining fiscal sustainability For a government like Yemen, drawing on substantial oil revenues, fiscal sustain- ability10 is a stringent requirement, because the mining of exhaustible oil reduces wealth for the next generation. The government has an obligation to preserve its wealth (absolutely or in per capita terms). When governance is weak, the sustain- ability rule is even more restricting, because domestic and foreign lenders demand more immediate demonstration of credibility that their debt will be repaid. The track record of fiscal sustainability in Yemen is poor. The primary non-oil deficit--the correct indicator of fiscal sustainability--has stayed well above the optimal11 level of 5 percent of GDP. Fiscal sustainability has steadily worsened. Since 1999, the cumulative depletion of oil wealth (derived from oil revenues) amounted to about US$19 billion. Since the Central Bank's own foreign reserves increased by about US$4 billion over this period, it can be presumed that only about a quarter of the depleted oil wealth has been converted to financial wealth. Untargeted subsidies for domestic petroleum consumption and inadequate tax efforts lie at the root of this fiscal profligacy. Looking forward, Yemen's high risk of fiscal unsustainability and moderate stress in meeting external debt obligations calls for a variety of measures: Expenditures must be cut. Yemen needs to prune current expenditure from 31 per- cent of GDP in 2005 to 22 percent by 2015 and increase tax efforts from 7 per- cent of GDP to 14 percent by 2015. Even with these tough fiscal measures, the net present value of government debt will increase from 25 percent of GDP to 74 percent of GDP by 2025. If the tough fiscal measures are not implemented, the net present value of debt will balloon to 260 percent of GDP in the next twenty years. The level of domestic borrowing implied in this scenario carries serious risk of inflation because of monetary financing. If Yemen continues to borrow at concessional rates, external debt could, on average, remain around 23 percent of GDP. 10414-00_FM.qxd 4/17/08 11:09 AM Page xx xx E X E C U T I V E S U M M A R Y Tax revenues need to be more than doubled. In 2004, tax revenue was 7 percent of GDP. By 2015, tax revenues must raise to 15 percent of GDP to partly compen- sate for the loss of oil revenues. This increase will be due to the introduction of the general sales tax, recently revised downwards by the authorities from 10 per- cent to 5 percent. It is estimated that successful implementation of this tax could generate 1­3 percent of GDP over the next few years. Public financial management must be improved. Completing reforms to public financial management will hold the key to successful public expenditure man- agement. Public financial management needs to be strengthened in all major areas ­ budget programming and prioritization; budget execution; treasury and cash management; internal controls; internal audit; external audit; financial reporting and oversight. Civil service reform must be completed. Completing civil service reforms is essen- tial to generate savings and build a competent civil service. Yemen's civil service is considered to be underpaid, while at the same time overstaffed. The wage bill accounts for nearly one-quarter of the government's current expenditure, one of the highest levels in Middle East and North Africa. The government started to implement a four-stage National Wage Strategy in July 2005, and that plan needs to move forward. Improving the investment climate Private investment in Yemen has collapsed for lack of adequate returns. After peak- ing in 1998, private investment slumped in 1999 and continued to fall steadily to reach a mere 10 percent of GDP, halving from the average during the period of reforms. After the initial enthusiastic response to stabilization and early reforms, private investors have held back on investment because of poor returns. Yemenis have consistently been saving more than they can invest since 1999. Most of bank lending has been confined to trade credit. Foreign direct investment has been restricted to the oil sector. The main constraints to investment in the private sector are identified by the new Investment Climate Assessment (ICA) for Yemen. Based on firms' own iden- tification of constraints and other analysis, the ICA finds four key areas where the investment climate constrains the ability of the private firms and investors to respond to market opportunities, stimulate growth, and generate jobs: (a) macro- economic instability, (b) tax and regulatory burdens, (c) weak governance, partic- ularly expressed as corruption and (d) inadequate infrastructure services, especially for electricity, land, and water supply, and (e) insufficient access to finance. Many of these constraints can be addressed by measures to strengthen gover- nance--notably, by creating greater accountability, transparency, and efficiency in the judicial system. Though Yemen's judiciary has newly acquired independence under the National Reform Agenda of 2006, judges and administrators are poorly trained. The courts lack physical infrastructure to file and retrieve records quickly. The reform agenda is intended to do the following: 10414-00_FM.qxd 4/17/08 11:09 AM Page xxi E X E C U T I V E S U M M A R Y xxi Speed the processing of cases. Providing training, computers, information manage- ment systems, and other resources to judges and court personnel would reduce case backlogs and accelerate the disposition of new disputes. Revising the pro- cedures for filing and resolving lawsuits would help to weed out procedures that invite delay and raise costs. Increase access to alternative dispute mechanisms: The creation of mediation and conciliation services and other alternatives to resolving disputes in the courts reduces court costs, as does the introduction of small claim courts. Professionalize bench and bar. Professional training, now lacking in Yemen, is needed to enhance the performance of the main actors and instill the values of impartiality, professionalism, competency, efficiency, and public service. Train- ing needs to target administrative and notary staff as well as judges, and address the different requirements in specialized courts. Improve the administration of land tenure security. This encompasses initiatives to increase the limited demand for registration (by, for example, removing incen- tives for using court authentication as an alternative to registration), as well as enhance the quality and efficiency of registration services (by improving regis- tration processes and maintenance). Make state land management efficient. The present state land management process is in need of an overhaul. Key issues in improving state land management would include, among others, to more clearly define state-owned land in the law, set up a comprehensive and centralized inventory of state-owned land, better enforce existing measures to curb land speculation, as well as to identify and apply standardized procedures for the disposition of state land. Take advantage from international experience in the current revision of the law gov- erning land registration. The government of Yemen is moving in the right direc- tion with its initiative to replace the current land registration law. The draft laws proposed, however, show some weaknesses and could be amended to facilitate effective registration, ensure financial sustainability of the registry system, and strengthen the legal effect of the registry system. Managing energy resources Though Yemen's oil reserves are depleting fast, management and investment of the remaining reserves, indicatively valued at US$ 30 billion (nearly 200 percent of GDP) in 2005 prices, is of paramount importance to Yemen's future. The govern- ment's efforts to save oil revenues need to be strengthened. The government man- aged to add to its financial wealth only a quarter of the oil bonanza since 1999. For improving the management of oil and gas revenues, Yemen should consider join- ing the Extractive Industry Transparency Initiative, ending petroleum subsidies in a gradual but time-bound way, and improving the efficiency of the downstream petroleum sector. An incentive framework to develop gas resources would also help in finding and exporting gas. Additional reforms are also suggested in Chap- ter 5 to increase the reliability of electrical power generation. 10414-00_FM.qxd 4/17/08 11:09 AM Page xxii xxii E X E C U T I V E S U M M A R Y Endorsing the Extractive Industries Transparency Initiative (EITI) would improve the government's credibility with civil society and the international donor commu- nity. This would call for regular publication of all oil, gas, and mining payments and revenues (by companies and by the government); making the publication accessible to the public; having payments and revenues subject to a credible, independent audit; and active engagement of the civil society in design, mon- itoring and evaluation of the EITI implementation process. Yemen places detailed oil sector information in the public domain, and is comparable to countries that have already adopted the EITI12. Phasing out petroleum subsidies would improve macroeconomic stability. Despite the steep raise in the administered prices of petroleum products for domestic consumption, the subsidies remain large (9 percent of GDP in 2005), and they are still well below international prices. Phasing the subsidy removal for all fuel types gradually over two years would help avoid redirection of demand between fuels and allow the social protection mechanism to work. Improving efficiency in petroleum refining and distribution would conserve resources and improve fiscal sustainability. The absence of quality standards for refined oil products combined with adopting inappropriate international reference prices for calculating oil products that are sold domestically act as an incentive to refineries to import low quality oil products for supplying to the domestic market and exporting higher quality products and crude oil. The power sector suffers from the varying and low quality of the fuel oil supply it is obligated to buy from the government refineries. Yemen also lacks relevant environmental laws and regulations on production and use oil and gas, and the establishment of quality standards and requirements for oil products. Managing water resources The government is well aware of the water sector issues and started institutional reforms since 1996 with donor support. Set against the key objectives in the water sector, the reform program has made a difference, but results have been slow. In water resources management, some instruments have been prepared and tested, but no significant reduction to groundwater overdraft, or improvement in inter- sectoral allocation or in water use efficiency is evident. In water supply and sanita- tion, reforms have started, but limited impact has been felt by the consumer, and only in some urban areas. In irrigation, some efficiency gains have been achieved but resource depletion has continued. In watershed management, resources and management effort have been tied up in a controversial dams program, which led to the neglect of broader objectives such as basin efficiency and poverty reduction. The reform agenda addresses: Depletion of groundwater. Lacking strong public governance structures, over- mining of groundwater can be controlled by alternative means. Such alternative means include intensive user involvement and organization, self-regulation by 10414-00_FM.qxd 4/17/08 11:09 AM Page xxiii E X E C U T I V E S U M M A R Y xxiii water user associations, monitoring and information sharing, tradable water rights, and improving incomes through technological improvements. Watershed management. Current watershed management activities are concen- trated on the flawed small dams program, which does not often improve over- all basin efficiency and suffers from poor design, questionable contracting practices, and low construction standards. Given the multi-institutional chal- lenge, there is scope for proactive involvement of donors and nongovernmen- tal organizations to relieve the burden on government agencies, which typically find it hard to coordinate the multiple interventions needed for watershed management. Better allocation. Allocation of water to its best economic use can be improved by introducing economic instruments. The problem with the present private markets is that they are economically inefficient and informal. There is no enabling framework to encourage investment. Water rights are unclear and there is no provision for equity or sustainable management in the source area. The development of more formal water markets should be a priority. At the current low levels of tariffs for domestic water supply that does not even cover operat- ing and maintenance costs, consumers see no incentive for water conservation whilst suppliers have no incentive to improve performance. Slowing population growth Speeding up the demographic transition is possible, as it has been achieved in Iran and Oman, countries culturally similar to Yemen. Iran lowered total fertility rate from 6.6 births per woman in 1985 to near replacement levels of 2 in 2005 by using support from religious institutions, combined with sound maternal health policies. In Oman, expansion of education opportunities for girls and health ser- vices seems to have helped in lowering the total fertility rate. Yemen has a sound population policy that enjoys wide support. The Popula- tion Action Program 2001­10 follows a comprehensive and integrated approach of reproductive health care and human development. This comprehensive policy follows international standards in targeting the most important known demo- graphic determinants and is consistent with the measures found to be successful in other countries. Implementation has been weak, however, because of limited resources and weak governance mechanisms. Per capita government expenditure on health is about US$6, compared with the estimated requirement of US$54 per capita per year needed to meet Yemen's Millennium Development Goals for health. Imple- menting programs selectively to support information campaigns, health of chil- dren and mothers, and education of girls could help achieve reduction in fertility. 10414-00_FM.qxd 4/17/08 11:09 AM Page xxiv 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 1 1 Yemen Today Mixed Development Outcomes Y emen's unification in 1990 has shaped the country's subsequent development. The Yemen Arab Republic (North Yemen) was a lower middle-income coun- try before 1990, functioning under a capitalist system. Compared with the People's Democratic Republic of Yemen (South Yemen), the North enjoyed a gross domestic product seven times larger, a population four times bigger, and a per capita GDP nearly 50 percent greater. The smaller and poorer South Yemen, however, had its strength in better health, education, and gender outcomes, because of 23 years of socialism preceding the unification. Some of the key problems facing united Yemen have their origin in the era before unification and in the terms of merger. The large civil service and difficulties in land titling are legacies of the socialist era of South Yemen. Difficulties in improving health or gender outcomes arise from the relatively conservative values in the northern part of Yemen. Since unification, Yemen has successfully overcome a civil war in 1994, coped with the return of around 800,000 Yemenis working in the Gulf countries, and weathered several adverse economic shocks, including interrupted flows of remit- tances, volatile oil prices, and suspension of most foreign aid. The negative spillover from the Iraq War also affected Yemen. Yemen continues to suffer from internal secu- rity issues.13 Traffic through Aden--the best natural port in the region--has barely recovered to the levels of 1988. Yemen continues to suffer from weak institutions and a high risk of internal con- flict. Although the World Bank ranks Yemen barely above the categorization of low- income countries under stress, the U.K. Department for International Development, an important bilateral donor for Yemen, has labeled Yemen as a fragile state since January 2005.14 The index of failed states compiled by Foreign Policy magazine and the Fund for Peace ranks Yemen eighth in a global list of 60 countries rated for risk of state failure, ahead of Afghanistan. The categorization of Yemen as a fragile state underscores its difficulties in initiating and sustaining sound economic and social policies. This difficult operating environment calls for Yemen's development part- ners to take a more selective, nuanced approach to reforms. Yemen's prospects are mixed, as democratic institutions are slowly taking root but the main engines of economic growth are sputtering. Helped by a vibrant but 1 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 2 2 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W somewhat muzzled press (third worst in the Middle East and North Africa), a nascent multiparty democratic tradition is taking root in Yemen. The holding of three multiparty parliamentary elections in 1993, 1997, and 2003, and the first direct presidential elections in 1999 are seen as substantial steps toward democ- racy. The passage of a law on local authority in 2000 is viewed as a major instru- ment of decentralization to elected councils at governorate and district levels. Until 1984, foreign aid and worker remittances served as the main sources of Yemen's foreign exchange. After the discovery of oil in 1984, it quickly emerged as the major foreign exchange earner, accounting for 90 percent of merchandise exports. However, Yemen's oil is depleting fast: at the current rate of production rate, oil supplies will be exhausted in merely eight years. Water resources, too, are scant and being overexploited. Demographic dynamics exacerbate the scarcity of Yemen's limited and declining natural resources. High birth rates (six per woman) and pop- ulation growth (3 percent per year) combine with rising labor force participation (especially among women in rural areas) to keep Yemen's labor force growing by 3.8 percent per year. Thus Yemen faces the stark reality that, if oil runs out and the looming water crisis cannot support sustained growth in agriculture, an exodus of workers abroad could become inevitable, unless non-oil sectors grow rapidly. Macroeconomic Outcomes For nearly a decade after the 1990 unification, Yemen achieved a reasonable annual GDP growth rate (around 5.2 percent), securing a decent 2 percent per capita growth. The integration of North and South Yemen provided a bigger market; new oil wells came on stream in 1994, boosting oil production by 80 percent; and a suc- cessful macroeconomic stabilization and reform program in the second half of the 1990s controlled inflation, liberalized trade, reduced subsides, unified the exchange rate regime and reformed the financial sector. Economic growth peaked in the period 1995 to 1998 (see Figure 1). The steady decline in internal conflicts in the second half of the 1990s and the improvement in four of the six dimensions of governance (Figure 1.1) encouraged a surge in domestic private investment (Figure 1.2). There was little support, however, from foreign direct investment (Figure 1.3). Endowed with a small manufacturing base and rooted historically in a strong tradition of trading, Yemen's economy is dominated by the service sector, which responded well in the reform period, pro- ducing nearly half of GDP (Table 1.1). Within the service sector, the trade, transport, and hospitality sectors were the main forces behind the growth spurt. Integration of the North and South also increased the internal flow of goods and people. The fiscal deficit in this period was steadily shrinking under the stabilization program agreed with the International Monetary Fund, and therefore much of the growth came from private sector investment. Since 1999 GDP growth has slipped steadily. Revenue from the dramatic increases in oil prices since 2000 and the outbreak of anti-government rebellion in parts of the country distracted the government from maintaining the momentum of the reforms. Over this period, quality of governance also deteriorated steadily. 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 3 Y E M E N T O D A Y 3 Figure 1.1 Risk of Internal Conflict and Quality of Governance, 1990­2005 A. Risk of internal conflict B. Quality of governance 12 0 ­0.2 Control of corruption 10 ­0.4 Regulatory quality Government effectiveness 8 ­0.6 ­0.8 6 ­1 Voice and accountability 4 ­1.2 Rule of law ­1.4 2 ­1.6 Political stability/ no violence 0 ­1.8 Jul-91 Jul-93 Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 1996 1998 2000 2002 2003 2004 2005 Source: Political Risk Service, Rating for risk of internal conflict Kaufmann, Kraay, and Mastruzzi 2005. Note: Vertical axis in part A indicates risk score, with 12 representing the highest risk. Figure 1.2 Domestic Investment as a Percentage of GDP, 1990­2004 35.0 Private Public 30.0 25.0 GDP 20.0 of 15.0 Percent 10.0 5.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 Source: Bulletin of Government Financial Statistics 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 4 4 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 1.3 Foreign Direct Investment, 1990­2004 1000 800 600 400 milliions US$ 200 0 ­200 ­400 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: International Financial Statistics, IMF, various issues. Several reform initiatives floundered: the privatization law of 1999 was never rat- ified, introduction of a general sales tax and the reduction in petroleum subsidies were repeatedly shelved, political commitment for legal and judicial reforms wavered, and the implementation of civil service modernization and health sector reforms slowed. Since 2000, gains from strong oil prices contributed to terms of trade gains averaging 4 percent of GDP, reversing the trend of the previous decade. Table 1.1 Growth and Composition of GDP, by Sector, 1991­2004 Contribution to growth Share in growth Share in GDP 1991­ 1996­ 2001­ 1991­ 1996­ 2001­ 1991­ 1996­ 2001­ 95 00 04 95 00 04 95 00 04 GDP 6.1 7.1 4.2 100.0 100.0 100.0 100.0 100.0 100.0 Oil Sector 1.0 1.3 -0.1 16.4 18.1 -2.0 12.8 16.0 14.5 Non-oil sector 5.1 5.8 4.3 83.6 81.9 102.0 87.2 84.0 85.5 Agriculture 0.9 1.4 0.7 14.2 19.0 16.8 23.9 22.3 21.2 Industry 1.5 0.7 0.7 23.8 9.9 16.4 14.5 14.5 13.9 Services 2.8 3.8 2.9 45.6 53.0 68.8 48.8 47.2 50.4 Source:Staff estimates. 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 5 Y E M E N T O D A Y 5 Internal conflicts increased after February 2000, preceding the infamous attack on USS Cole later that year and reversing the decline in violence over the preceding five years. Private investment slumped in 1999 and continued to fall steadily to reach a mere 10 percent of GDP, half the average during the period of reforms. Poverty and Unemployment Outcomes Yemen was among the poorest countries in the world in the late 1990s. Nearly 7 mil- lion people--42 percent of the population--lived in poverty in 1998 (the year of most recent household budget survey). Poverty was widespread nationally and per- vasive in rural areas (Table 1.2). Among the poor, 3 million people were probably Table 1.2 Measures of Urban, Rural, and National Poverty, 1992­98 1992 1998 Urban Rural National Urban Rural National Poverty line (YR/ 1374 3195 3215 3210 month/capita) Headcount Index 18.6 19.2 19.1 30.8 45.0 41.8 (percent) Poverty Gap Index 5.1 5.6 5.7 8.2 14.7 13.2 (percent) Squared Poverty Gap 2.2 2.7 2.6 3.2 6.7 5.8 Index (percent) Number of poor 504 2096 2600 952 5718 6670 people (thousands) Note: Poverty analyses based on household surveys in 1992 and 1998 are not comparable as they used different methodologies of constructing the poverty line and hence cannot provide the basis for identify- ing the trend of poverty in Yemen in the 1990s. Poverty measures used here are: (1) Headcount index: the share of people below the poverty line in the total population; this measure is insensitive to the relative depth of poverty below the poverty line; (2) Poverty gap index: this index measures the depth of poverty, but is insensitive to severity of poverty; (3) Squared poverty gap index: this measure is sensitive to differ- ences in both depth and severity of poverty. This can be stated as the poverty gap with weights to each poor person equal to his/her poverty gap. Source: World Bank 2002. undernourished, as they could not afford the cost of the minimum nutritional requirement. Moreover, another 25 percent of the population were economically vulnerable.15 Children and women living in rural areas without access to education and health services ranked highest among the vulnerable. Almost half of the popu- lation living in rural areas was classified as poor, compared with less than one-third of those in urban areas. About half of the poor were concentrated in four goveno- rates: Taiz, Ibb, Sana'a region, and Al-Hodeida. The incidence of poverty was lower in the two major urban centers, Sana'a City (23 percent) and Aden (30 percent), and lowest in Al-Baida (15 percent). 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 6 6 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Without a recent and comparable household budget survey, it is not possible to make accurate statements about trends in poverty since 1998. However, under the assumption of unchanged inequality, poverty must have changed little or even wors- ened since 1998, because per capita GDP growth has been very low. A recent poverty analysis estimates that poverty in Yemen has slightly decreased from 42 percent 1998 to about 40 percent in 2003.16 Most gains are estimated to have accrued to urban households (poverty incidence dropped from 30.8 percent in 1998 to 21­28 percent in 2003), while rural poverty barely changed. Poverty in rural households is esti- mated to have stagnated between 1998 and 2003 (around 45 percent as in 1998). Given the large share of rural households in the total population, small changes in rural poverty rates more than offset large changes in urban poverty rates. Inequality is a rising concern in Yemen. Access to water and land is increasingly concentrated in fewer hands. Youth, women, and rural people are increasingly mar- ginalized from the economy, as traditional livelihood systems decline but are not replaced with new opportunities. With rapid urbanization, shanty dwellers are increasingly marginalized socially and economically. And state expenditures tend to favor the non-poor (World Bank 2006a). Unemployment is also a serious concern. Even in the early years of unification, unemployment raged at around 25­30 percent (World Bank 1996). The return of some 800,000 migrant workers aggravated the problem in the early 1990s. By 1999, with macroeconomic stabilization and growth, unemployment declined to 11.5 per- cent.17 Among the youth, however, unemployment was 18.7 percent. As elsewhere in Middle East and North Africa, unemployment among women with higher educa- tion is very high, with one in every three women unemployed. The household bud- get survey in 1998 found unemployment to be largely an urban phenomenon, with 13.4 percent unemployed compared to only 6.3 percent in the rural areas. Since 1999, in the absence of labor force surveys, the unemployment situation has not been quantified. On the supply side, demographic trends of high birth rates and increasing participation of women keep the growth of the labor force high. Labor force growth is estimated at 3.8 percent per year (3.3 for men and 5.3 for women), but demand for labor is expanding only 2.8 percent per year,18 so the number of unemployed could reach close to a million in 2006. Thus the implied unemploy- ment rate would be 17 percent for the overall population and 34 percent for the youth (Republic of Yemen, 2003). The near doubling of estimated unemployment rate for the youth since 1999 calls for urgent attention. Social Outcomes Measures of education, health, and social well-being in Yemen have improved since 1990, but still remain very low. Yemen has made great strides in improving access to education, but it has a long way to go to achieve universal primary completion and gender parity. In 2003, gross primary enrollment was 83.5 percent (up from about 65 percent in 1990), and net primary enrollment reached 72 percent (compared with 52 percent in 1990).19 Between 1995 and 2000, total enrollment rates in basic edu- cation increased by 30 percent, while secondary education rates increased by 50 per- 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 7 Y E M E N T O D A Y 7 cent. However, the primary completion rate was only about 65 percent and had fallen short of the two-thirds of population of the relevant age group by 2003. The adult literacy rate was only 49 percent, and more than 70 percent of women were illiterate. The government's objective to achieve universal primary education in the next ten years requires a much accelerated expansion of the basic education sector, as well as improved efficiency. However, with education spending at 8 percent of GDP and 20 percent of total government expenditures, Yemen already spends much more on education than other countries in the region. The health status of the Yemeni population is poor. Maternal mortality rate (570 per 100,000 live births) and total fertility rate (6.0 children per woman) are the highest in the Middle East and North Africa region. Child malnutrition is also the highest in the region, and almost half of the Yemeni children suffer from stunt- ing. Contraceptive prevalence rate is very low at 23 percent. More than 1.2 million Yemenis have contracted malaria, and about 20,000 cases of tuberculosis have been reported. Although a national strategy for combating HIV/AIDS has been devel- oped, no serious actions have been taken to implement it. The prevalence of HIV/AIDS is not clearly known. In addition, the widespread chewing of Qat also affects public health. Nonetheless, life expectancy has improved significantly for both sexes since 1990. Women have increased their life expectancy from 52.6 years in 1990 to 58.1 in 2002. The infant mortality rate for every 1,000 births decreased from 98 in 1990 to 83 in 2002. In 1998, total health spending was estimated at 5.6 percent of GDP, of which about a third was from public sources (excluding all foreign assistance) and almost three-fifths came from private spending. At 3.3 per- cent of GDP, private (out-of-pocket) expenditures on health care in Yemen were among the highest in the region. High rates of gender inequality stubbornly persist, although some progress has been made. Yemen ranks 121 out of 140 countries on the Gender Development Index (UNDP, 2005). Although in 1990 female literacy was as low as 12.9 percent, compared with 55.2 for males, by 2002 the female rate had increased to 28.5 per- cent, compared with 69.5 percent for males. Only 33 percent of rural girls were enrolled in school, compared with 73 percent of rural boys and 78 percent of urban girls. Female adult illiteracy (at 78 percent in rural areas and 40 percent in urban areas) is more than twice that of males (32 percent in rural areas and 15 percent in urban areas). Young and relatively educated women (age 15­29) have a higher rate of unemployment than their male counterparts: 56 percent of all female unem- ployment is among young women compared with 47 percent for young men (World Bank 2004a). Achievability of the Millennium Development Goals Yemen is unlikely to meet most of the Millennium Development Goals, except for universal primary education and child mortality (see Appendix Table A.18). Universal primary education is the goal most likely to be met in Yemen. Despite poverty and rapid growth of the school age population, Yemen has been able to 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 8 8 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W increase gross enrollment rates from 73 percent to 83 percent over 1998­2002. However, the government and donors must make a strong and sustained com- mitment to mobilize resources and implement the policy and institutional reforms needed, since global experience demonstrates that the last 5 percent is the toughest to achieve. Reducing the mortality rate of children less than five years old (per 1000 live births) by two-thirds may be achievable, if neonatal and antenatal health care can be improved. The mortality rate for this group went down from 142 in 1990 to about 113 in 2003. Nonetheless, targets on alleviating poverty, reducing gender inequality, safe- guarding maternal health, combating HIV/AIDS, and increasing access to environ- mental resources all seem much more elusive. At the current rate of progress, the goal of halving the percentage of people under the national poverty line is unlikely to be met, but under optimistic scenarios the absolute poor (those living below the $1 poverty line) could potentially be halved with sustained effort. Closing the persis- tent gender gap in secondary school enrollment is also unlikely, because of the cul- tural discrimination against girls and the high dropout rate for girls, linked largely with early marriage. Early marriage and pregnancy, combined with the widespread malnutrition and anemia, the poor quality of health services, and the low levels of health coverage, also challenge Yemen's goal for reducing maternal mortality. Increasing the proportion of pregnancies covered by the health care system would go a long way in achieving this goal. Limited financial and other resources will also restrict Yemen's ability to achieve its goals of combating the spread of HIV/AIDS, malaria, tuberculosis, and other infectious diseases or halving the proportion of people without sustainable access to safe drinking water. The water problem may be addressed in urban areas with proper utility management and pricing, but rural areas are threatened by overall depletion of aquifers due to unrestricted agricultural use of water. The UN Millennium Project report estimated a total investment requirement of US$57.5 billion over 10 years to reach MDG goals. As recognized in the report, the simple addition of costs of reaching individual goals is biased upwards because of interlinkages among targets. On an annual basis, the investment needs to meet MDGs amount to an astounding 38 percent of GDP, compared to the total expen- diture of central government of 40 percent of GDP in 2005. There is no definite financing plan to meet the investment requirements of MDGs for Yemen. Even if the donors were willing to lend support for such massive investment efforts, it is not cer- tain Yemen will have the capacity to absorb this scale of investment in the near-term. Implementation of the Poverty Reduction Strategy The implementation of Yemen's poverty reduction strategy remains tardy. Progress made under Yemen's first poverty reduction strategy during 2003 and 2004 fell short of the targets in many respects. The main goal of reducing the percentage of 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 9 Y E M E N T O D A Y 9 the poor by 13 percent is not likely to have been met. It is most likely that poverty experienced little change in the first two years of the poverty reduction strategy. Missed targets in the period include GDP growth, mortality indicators for infants, children and mothers, and access to water, roads, and electricity. However, there have been some successes in meeting targets for basic education enrollment (for both boys and girls), road rehabilitation and maintenance, power plant operation and expanded coverage for social protection (see Appendix Table A.19). Stalled reforms and weak governance have hampered Yemen's realization of its poverty goals. The government attributes the weak performance to dampened investor confidence and interest in the region following the Iraq War and a slow- down in economic reforms following the elections of April 2003. Insufficient action to reform public sector management and governance may also have hampered the investment climate in Yemen. The unprecedented oil price increases since 2003 had the potential to offset any negative regional or internal security shocks. The gov- ernment opted, however, to delay key reform programs until mid-2005 and to con- tinue to subsidize domestic fuel at prices well below international levels. These measures contributed to a misallocation of scarce government resources, provided only marginal benefits to Yemen's poor, and added to the problems of governance and corruption. Further delays in the adoption of an amended general sales tax-- now scheduled for implementation on January 1, 2007--was also a setback, given the critical need for Yemen to shift to non-oil sources of revenue. The recent deci- sion to increase public wages and salaries also poses serious problems unless other major challenges in civil service wage structure of high compression ratio and exces- sive labor force are also not addressed in a timely manner. Priorities for Reform As Yemen strives to meet the challenges that lie ahead--including depleting oil rev- enues, weak governance, severe water stress, and burgeoning population growth-- it must focus on easing the constraints that are most likely to bind its social and economic development. The reform agenda proposed here identifies those con- straints that pose immediate problems and longer-term risks, and it recommends specific remedies. Growth diagnostics analysis is used here to identify the "binding" near-term constraints. Low returns to investment are a constraint, as they negatively affect all potential investors, whether foreign or domestic, and prevent private investment from functioning as a driver of growth. Low returns to investment also lead to low productivity. Looking closer at the causes of low return to investment, three main issues are identified as "binding" in the short term: weak property rights, inequities in the judicial system, and inadequate infrastructure for energy resources. These fac- tors have been confirmed by surveys and focus groups of local business owners. The Yemen Investment Climate Assessment (World Bank 2005a) also confirms these findings, while raising several additional concerns: potentially unstable macro- economic conditions and weaknesses in the tax and regulatory regimes. In fact, 10414-01_Ch01.qxd 4/17/08 11:15 AM Page 10 10 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W more Yemeni firms reported feeling constrained by the investment climate than did firms in most of the other Middle Eastern countries that participated in the assess- ment. Within the list of firms' concerns, governance, regulations, unfair competition, and infrastructure (power and land) issues emerged as top constraints.20 Women entrepreneurs are more constrained by some aspects of the Yemeni investment climate. Cultural norms and restrictions constrain women's ability to participate as workers and entrepreneurs. In addition, lower rates of education and literacy, lack of critical mass, supportive institutions and services (including childcare and transport) and entrepreneurial networks particularly constrain women. The growth diagnostics and investment climate assessment have helped to identify six priorities for reform that could secure better returns to private sector investment: Strengthening governance and economic stability. Given the fragile or nearly fragile state of Yemen's political institutions, a study of the political economy of reform and institutions in Yemen is the focus of Chapter 2. Maintaining fiscal sustainability. Because the rapid depletion of oil reserves is going to pose a daunting fiscal challenge, concerns about fiscal sustainability underpin the pervasive concerns about Yemen's macroeconomic stability and investment climate. Chapter 3 analyzes the prospects for better fiscal management to replace lost oil revenues. Improving the investment climate. Strengthening the governance environment for private sector development is addressed in Chapter 4, with emphasis on enforc- ing property rights, reforming the judicial system, and eliminating corruption. Managing energy resources. Reforms to better manage Yemen's energy sectors, including oil, gas, and power, and to build more efficient downstream infra- structure is discussed in Chapter 5. Managing water resources. As Yemen faces a deepening water crisis because of dis- tortions in the pricing of water, the risk of failing to meet the minimum needs for potable water could seriously compromise government's goals, as discussed in Chapter 6. Slowing population growth. Containing demand on social goods by slowing the growth of population, as discussed in Chapter 7, would also prove useful to stretch the rapidly dwindling resources of oil and water and help in the long run to promote growth by improving potential for savings by reducing the depen- dency ratio. 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 11 2 Yemen Tomorrow Prospects for Good Governance and Economic Growth Y emen's recent history of weak governance, widespread corruption, and height- ened risk of internal conflicts has already prompted many careful analyses of its political culture and economic policies. The reformers in Yemen have a good understanding of what is needed. The political will for change is often weak, like in other developing countries, and the implementation of reforms often flounders. This chapter examines Yemen's political culture and recent reform experience to assess the prospects for broadly strengthening Yemen's governance institutions and macro- economic stability. It looks in detail at reforms in Yemen since the mid-1990s to compare the period of strong reform in 1995­98 with the sluggish period that followed, presenting an opportunity to observe how changes in institutional quality affect the implementation of economic policies. The Quality of Governance Public sector governance--the nexus of relationships among citizens, politicians, and the administrative bureaucracy of government--is perhaps the most evident and important barrier to economic development in Yemen today. The poor functioning of market-supporting institutions blocks the entry of many new Yemeni businesses and constrains growth of established firms (World Bank 2002). Using two alternative measures of governance quality, both of them from the World Bank, the conclusions remain the same. In most dimensions, the quality of governance worsened until 2004. By Kaufman et al measures of gover- nance (accountability, political instability and violence, government effectiveness, regulatory burden, rule of law, and control of corruption), the quality of governance in Yemen has mostly deteriorated since the mid-1990s to 2004, before improving in 2005, as shown in Figure 1.1B (Chapter 1). The quality of governance has begun improving in 2005 in two dimensions--control of corruption and regulatory qual- ity. By the alternative measures used by the World Bank (2003)21, which has dif- ferent dimensions of governance grouped under Public Accountability and Bureaucratic quality, conclusions remain the same. The data from 1996 to 2004, spanning both active and sluggish reform periods, reveal that the quality of 11 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 12 12 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 2.1 Quality of Governance in Yemen, 1996­2004 Indicators of public accountability Indicators of quality of administration Repulic of Yemen Republic of Yemen 0.70 0.70 1996­98 2002­04 1996­98 2002­04 0.60 0.60 0.50 0.50 0.40 0.40 0.30 0.30 0.20 0.20 0.10 0.10 0.00 0.00 Democratic Polity Political Civil Press Corruption Bureaucratic Property Regulation accountability rights liberties freedom quality rights Source: Political Risk Services, 2006; Freedom House, 2006; Heritage Foundation, 2006; Center for International Development and Conflict Manage- ment. Note: Indices in figures draw from different organizations that employ varying scoring methodologies. For ease of reference, these scores have been normalized on the scale 0 to 1, increasing score denoting higher quality for the corresponding variable. administration has declined, as corruption has increased, while the quality of prop- erty rights and regulation has remained unchanged. Press freedom declined over the period, while indicators of polity, democratic accountability, and political rights have remained unchanged (Figure 2.1). Yemen's quality of governance is the weakest among its neighbors (Governance Matters V, Kaufmann, Kraay, and Mastruzzi 2006; see also Appendix Table A.10). Potential private investors in Yemen--Yemeni residents abroad or foreigners--have much to worry about regarding the quality of governance in Yemen. In five out of six dimensions--the exception being voice and accountability--Yemen's quality of governance is the poorest when compared with United Arab Emirates, Oman, and Saudi Arabia22 (Figure 2.2). Although the value of voice and accountability on its own as a political right is indisputable, for attracting investment, it is vital for Yemen to improve on all the dimensions of governance. Political stability, effective gover- nance, regulatory quality, upholding the rule of law, and running a corruption free government are important in rich and poor countries alike. Understanding Yemen's Poor Governance Observers typically attribute Yemen's weak economic performance to poor gover- nance (see, among many others, World Bank 2002b: Talib 2003: Burrowes 2005).23 What is the root of the problem? Two explanations are given in the literature: The natural resource curse. This explanation maintains that the large nontax funds falling into the hands of governing politicians enable them to become more dic- tatorial by buying out individuals and interest groups. This effect, theoretically, 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 13 Y E M E N T O M O R R O W 13 Figure 2.2 Quality of Governance in Yemen and Selected Comparator Countries, 2005 Voice and accountability Political stability Republic of Yemen and select comparators ­ 2005 Republic of Yemen and select comparators ­ 2005 Yemen United Arab Emirates Saudi Arabia Oman Malaysia Indonesia ­2.00 ­1.60 ­1.20 ­0.80 ­0.40 0.00 ­2.50 ­2.00 ­1.50 ­1.00 ­0.50 0.00 0.50 1.00 1.50 Government effectiveness Regulatory quality Republic of Yemen and select comparators ­ 2005 Republic of Yemen and select comparators ­ 2005 Yemen United Arab Emirates Saudi Arabia Oman Malaysia Indonesia ­1.50 ­1.00 ­0.50 0.00 0.50 1.00 1.50 ­1.50 ­1.00 ­0.50 0.00 0.50 1.00 Source: Kaufmann, Kraay, and Mastruzzi 2006. can increase uncertainty in the business environment, which may discourage pri- vate investment and growth. In fact, although resource revenues have reinforced some dictatorships, not all resource-rich countries have gone down that path (Norway, for example), nor have all dictatorships slowed growth (Iran in the 1960s, for example). Applying the idea to Yemen is further complicated by the fact that the country has managed to implement some reforms and attain some economic goals while it has stalled in other areas. The exact conditions that produce the resource curse effect and its applicability to Yemen need to be explored more fully. 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 14 14 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Traditional and tribal institutions. Yemen's traditional institutions, especially its tribal structure, have evolved with the development of modern state institutions and technology (Carapico 1998) which continue to survive as mechanisms that coordinated individuals within small groups to provide security and support for each other, at the cost of broader interests and impersonal exchange. Such struc- tures may impede governance reforms because they can add to the costs of form- ing broad coalitions representing nationwide interests. If these are indeed the forces that have kept Yemen underdeveloped, they may have far-reaching impli- cations for the development of the country. Again, however, the theoretical expla- nation needs to be consistent with evidence of the government's macroeconomic stabilization and trade liberalization, as well as the pattern of corruption and eco- nomic stagnation. Yemen's current political culture is a blend of ancient tribal cultures and modern political institutions, including informal parties and formal institutions of government. Tribal culture Perhaps the most notable historical feature of Yemeni society is the significant role of tribal institutions, particularly in the harsher North (Manea 2000). Although the triumphant republicans who established Yemen Arab Republic in the North were determined to develop new state institutions and modernize the economy, the legacy of tribal institutions limited the power of the republican state to exert full control and bring about improvement in many areas of life in Yemen, geographi- cally and politically. In the southern parts of Yemen, better opportunities for settled agriculture had facilitated transition to more feudal relations long ago. The British rule from 1834 to 1967 and the socialist regime between 1967­90 managed to fur- ther weaken tribal relations, especially around Aden (Manea 2000). However, even in that region, the state never became a sufficiently strong source of allegiance to overshadow the influence of kinship and other traditional groupings on economic and political exchange. Because state capacity to deliver services is limited, in many parts of the coun- try, especially the northern highlands, the tribal system still provides an impor- tant mechanism for community organization. With the exception of villages that are close to urban areas, the structure of the modern nation state has only mar- ginally touched rural areas. While rural inhabitants are increasingly relying on government services and institutions, they often have to go outside their villages to access these. As a result, tribal shaykhs24 continue to play a convening role both in mobilizing the community for collective purposes and serving as the commu- nity's interlocutors, lobbying local and central government for development pro- jects.25 Tribes have also managed to adapt to the development of modern state and mar- kets, and not only live with them, but penetrate and control them as much as possi- ble, using kinship and tribal culture as strong glues to maintain the cohesion of their networks (Dresch 2000: 196­98). The majority of the cabinet members or parlia- mentarians are not tribal leaders. Yet, tribes also have had effective means of resist- 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 15 Y E M E N T O M O R R O W 15 ing the extension of government authority in some areas and their norms sometimes defy political obligation to the state. Thus tribal networks affect governance. One important implication of the frag- mentation and polarization in Yemen is that security and trust are major concerns that give everyone, especially leading politicians, a preference to work with people who are close to them by kinship and by long-term relations. This obviously limits the choices for each position and causes two major governance problems. First, many positions end up being filled by individuals who are not best suited for conducting public policy. Second, the cost of misconduct in public office diminishes for the appointees because in cases of malfeasance, those who should be administering dis- cipline do not have the interest or sufficient options to take the necessary actions; they depend on those appointees and do not have many replacements for them. Political parties By far, the largest party is the General Peoples' Congress (GPC), which was formed before unification to bring together most Northern political parties, tribal leaders, and political figures. GPC's inclusiveness and flexible framework proved to be a suc- cessful strategy for winning a large block of seats and taking over the executive power after unification. The party has increased its share of parliamentary seats from 40 per- cent in 1993 to 79 percent in 2003.26 However, this success has come at the cost of a vague platform, a lack of party discipline, and an implicit requirement to act as a patronage machine. Southern elites also entered the unified government with their preexisting party, Yemen Socialist Party (YSP), hoping to gain broader mass support in the North. Although YSP appeared to have a more cohesive program and ideology, its appeal was narrower and more distant from the grassroots culture of Yemen at the time. Nevertheless, YSP's modernist redistributive ideology maintains some following, especially in the South. Between 1993 and 2003, YSP's share of parliamentary seats has declined from 18.6 percent to 2.7 percent (18.8 percent and 3.8 percent, respec- tively, for the share of popular vote). Between GPC's realpolitik and YSP's leftist ide- ological platforms, there is a range of smaller parties: some left-leaning parties that typically appeal to Arab nationalism (Baath and Nasserite) or religious parties (Islah and Ikhwan al-Muslimeen). Islah grew quickly in the early 1990s because it offered an appealing compromise between tradition, religion, and modernism and adopted a pragmatic approach to economic policies. Islah's share of seats have declined from 20.9 percent in 1993 to 15.3 percent in 2003, while its share of total votes have increased from 17.3 percent to 22.6 percent during the same period. Formal governmental institutions Under the current constitution, Yemen has an elected president and parliament, as well as a judiciary system to administer laws in accordance with Islamic jurisprudence. The presidency is a powerful office and its role has expanded over time. The powers of presidency and his own political skills and assets have enabled the President not 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 16 16 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W only to get reelected in 1999, but to initiate another constitutional amendment to further extend the presidential and legislative terms. Yemen's parliament has historically been in a weak position relative to the pres- ident, who holds dominance over the budget process and thus can reward and pun- ish members of parliament selectively and bring many of them into line. This mechanism may in fact account for GPC's significant gains in elections and its ability to attract electable independent candidates, or even members of other parties. The executive dominance over budget has further disadvantaged the parliament by effec- tively depriving it from having its own source of day-to-day expert advice on techni- cal matters concerning public policy. The judiciary's weak performance, however, is not entirely rooted in its politically vulnerable structure. The legal system is based on a mixture of Islamic law, customary law, vestiges of Ottoman codes, and Egyptian- patterned commercial, civil, and criminal codes. Customary and modern laws coexist--each mediated by sets of different institutions (tribal shaykhs and courts)-- but the state rarely interferes with tribal justice systems; the inconsistencies between modernlaws and customary law are also a significant problem. In particular, these are not always compatible with modern form of property rights and economic activity. Lately, under the National Reform Agenda, the Presidential powers are being narrowed. The president is no longer the head of the Supreme Judicial Council and the central auditing agency does not have to report first to the President. As discussed in Chapter 4, the judiciary faces some familiar administrative prob- lems, including insufficient legal training of staff, inadequate administrative systems and facilities, and heavy caseloads, as well as widespread corruption. It also faces a number of difficult problems specific to Yemen. Land and property disputes repre- sent immense proportion of legal battles in Yemen. This is to some extent due to property confiscations in the South during the socialist regime, which are now diffi- cult to trace back. However, a far bigger problem is untitled lands that have gained value and areas that have changed hands among tribes over decades. As a result, ordi- nary citizens are often discouraged from using the legal system and resort to tradi- tional dispute resolution mechanisms, so that access to justice is often arbitrary and inequitable. Too frequently tribal disputes turn into armed conflict, as a cursory look at day-to-day news in Yemeni media quickly reveals. Furthermore, the constitutional requirement that makes Islamic law the source of all laws is not always easy to imple- ment, because it is not clear how new issues must be addressed, or how tribal and other customs can be brought into compliance (ARD, Inc. 2004). One consequence of all these difficulties is that many disputes continue to be settled through tradi- tional mechanisms and the legal environment remains inhospitable for the expan- sion of modern industry, especially foreign direct investment. Understanding Yemen's Recent Economic Experience At the end of 1994, the ruling elites in Yemen's new coalition government faced an economy in crisis, but had rising revenues from oil exports to address the problems. However, some coordination was still needed to keep spending under control in the face of factional demands on the budget. How did they perform? 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 17 Y E M E N T O M O R R O W 17 Economic performance Issues under the coalition government Although a variety of factors favored coordination (including the consolidation of political power in the new government and the strong pressure of donors who offered large payoffs for coordinating over the deficit reduction policies27), the coali- tion government in 1994 did not have the ability to coordinate fiscal policy and carry out a thorough and efficient tax and budgetary reform. It mainly chose to slow down the pay increases for government employees and contractors across the board, which helped make coordination much easier than a thorough prioritization and restruc- turing of government activities. There were attempts at some ministries and piece- meal progress was made in some units and ministries depending on the abilities and personalities of policymakers in charge. But, even those efforts were often hampered by lack of coordination across departments. The same factors can help explain the uneven and often slow progress toward privatization, civil service reform, and infra- structure and public service development. Why did similar factors not block trade liberalization? Trade restrictions in Yemen before 1995 were not so much a means of protection as they were fiscal tools to generate revenue for the government or, in the case of quotas, for the traders. This meant that there were few producers who would be hurt by tariff reductions, com- pared with the benefits that the buyers of imports could reap. In fact, most businesses in Yemen could benefit from cheaper imports because they were not competing with those products. So, as soon as oil revenues increased, the government's motive to rely on trade restriction as a source of revenue greatly diminished. Moreover, with the expanded capacity to import, consumers' loss from protection rose sharply, but the benefits to potential producers remained unchanged, thus tilting the political calcu- lus of trade policy toward liberalization (Esfahani and Squire 2006). A key question is why subsidies rose in the midst of attempts to impose fiscal austerity. A possible answer comes from the nature of Yemen's political system. The public has a limited ability to put pressure on politicians through elections and riots, but cannot ensure that those who are elected will safeguard its interests. As a result, it is possible that citizens use their limited powers to extract whatever rents they can from the government (Esfahani 2002). Since they cannot make sure that any additional money in the treasury will be turned into better services and other benefits for the public, they ask for their share upfront, through subsidies on prod- ucts that are broadly used, especially the product that is the source of government revenue--oil. Rather than letting the government charge a high price for oil prod- ucts and waiting for the politicians to put it to good use, citizens demand that the price be kept low so that they can enjoy the immediate rent. Since this demand is contingent on the price that everyone pays, the public has an easy way of mobiliz- ing against the government whenever the price rises, hence the continuation of the subsidy and the phenomenon that it rises as the resource rents rise. Economic performance since 1998 As political power consolidated in the hands of the president after 1998, Yemen's macroeconomic policies produced a very stable, albeit stagnating, economy. A key 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 18 18 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W feature of this experience is the generally high oil revenues and the ability of the gov- ernment to manage its finances to build reserves and smooth out its expenditures. The government's success in making this stability possible is all the more note- worthy given the decline in worker remittances, the export revenue shocks of 1998 and 2003, and the fluctuations in other oil-exporting countries. This is a major achievement that is closely related to the consolidation of power in the hands of policymakers who have long horizons in office (Alesina and Perotti 1999). Nonethe- less, many economic reforms have stalled since 1998, and economic performance has slackened: Inflation-depreciation tradeoff. Despite stable output and high reserves, inflation has edged up to double-digit figures, although remaining rather steady. This seems to be due to the difficulties in managing adjustments in prices and the lingering effects of subsidies that occasionally need to be reduced. As the government raises some administered prices, some inflation is induced. Rather than trying to fight the inflation by cutting back on aggregate demand, the government allows the inflation rate to remain at moderate levels. The only difficulty in this situation is that the government is not devaluing the exchange rate fast enough, out of con- cern about further inflation. Consequently, the real exchange is appreciating and hurting whatever nonoil export incentives could exist. Investment rates. Although the government has raised its investment in infra- structure and some public services, the outputs of those activities remain largely inadequate and contribute to the weak incentives for the private sector, thus keeping the overall investment rate low. The government has found market solu- tions to some infrastructure and public service problems. In particular, the coun- try's major telephone shortages have been relieved largely with the help of mobile telephone systems. However, similar approaches have not worked in the case of electricity where the regulatory contracting is more complex and demand- ing. As a result, electricity shortages in rural areas and blackouts in urban areas are continuing problems. Allocations to education and health. Among other public services, education is per- haps the only sector which has received increased budget allocations and shown some results. This might be a self re-enforcing process, whereby the initial expan- sion of education in the mid-1990s created a large civil service force of more than half public employment. This group now offers a block of votes that cannot be ignored. This political support, together with strong backing from foreign donors and broad interest from domestic constituents, seems to have kept the education budget high. In contrast, public health care has remained in a fragile state, and most of the population has had to rely on private healthcare. Even private health- care remains limited, and public services such as immunizations are not widely delivered. Capacity of the civil service. Major weaknesses in healthcare, education, and infra- structure are part of the larger civil service deficiencies that plague the entire Yemeni administration. The government's failure to reform the system and build a more effective and disciplined civil service is rooted in the regime's central 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 19 Y E M E N T O M O R R O W 19 dilemma: how can the political leadership guarantee that the reform will be car- ried out properly and the results serve the purpose of maintaining the regime? This is a difficult problem because civil service reform cuts across all parts of the government and requires massive cooperation and strong leadership. The prob- lem is further compounded by the uncertainty and illusiveness of benefits-- several years from now a reformed bureaucracy may encourage investment and help generate more jobs and higher incomes. Meanwhile, the political leadership will have to bear the cost of convincing a large part of the population to take risks and trust a system that does not have a strong record of success. Putting all these considerations together shows a good part of the forces that have held civil ser- vice reform back. The analysis also shows why starting first with a policy with more tangible and immediate results, such as export promotion, can create pos- itive forces for more fundamental change down the road. Microeconomic reforms. Concerning microeconomic policies, the liberal trade regime has continued, with imports being relatively steady and non-oil exports remaining low. The forces that induce liberalization--significant import capacity and a small import-competing sector--are by and large unchanged. Privatization saw some action in the case of small public enterprises in the early years after con- solidation of power. However, the process came to a halt when the turn came to larger enterprises and resistance from their constituencies grew. The government may have been able to proceed with privatization. But, there are probably three considerations that have caused hesitation. First, private investment is already low and attracting buyers for the large public enterprises is difficult. Second, even if such investors can be found, there is no guarantee that they may not temporarily operate those enterprises and then close them down. Finally, the government may have to offer some support to the private sector anyway to keep the enterprises operational. Its current transfers achieve that end within a system that already works. Since budget constraint is not tight at present, the costs of maintaining public enterprises appears lighter than they were in the mid-1990s, hence less urgency to privatize them. Subsidies. In the case of market controls, large energy subsidies have continued under the consolidated regime, though the greater control of the government and the prospects of exhaustion seem to be motivating the policymakers to raise prices with greater determination, as the experience of the fuel price increase in July 2005 has shown. However, the public continues to suspect that the funds raised through price hikes will not be turned into broad benefits, and there is plenty of evidence from the past and current performance of the administration to support that suspicion. Therefore, the ultimate solution may have to wait until more fun- damental institutional reforms take place, or until there are no resource rents left to distribute. Decentralization.28 Finally, it is important to mention an initiative in Yemen to reform through devolution of power to subnational governments. In Yemen, the law provides a mechanism for formalizing traditional democratic practices that have served Yemeni society well and can also help mitigate the recent trend in power concentration among a handful of shaykhs. It also builds on Yemen's strong 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 20 20 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W tradition of promoting consultation and consensus in decision making, rooted both in tribal and Islamic tradition. The principle of mutual consultation (shu- rah), consensus (ijma) and independent interpretive judgment (ijtihad) are impor- tant bases for communal decisionmaking and are recognized as essential processes both within tribes and among them. There is a strong tradition of build- ing coalitions through consensus to counterbalance tendencies toward fragmen- tation. Teachers account for nearly 40 percent of those elected to district councils and shaykhs and civil servants each account for roughly 7 percent of office hold- ers. The overwhelming number of teachers among the ranks of council members suggests the electorate votes on the basis of perceived qualifications, rather than social status. Decentralized governance presents a potential for improved public delivery systems, is anchored in traditional systems of governance, and has an important precedent in the popular Local Development Association movement that was active in the Highlands during the 1970s. The LDAs lost their earlier community-based character and weakened as central control increased and funds were transferred to the central government. The interest in decentralization has been reaffirmed in the constitutional amendments of 2001 and the government has indicated support for the policy. In recent years, local councils have been elected to supervise the management of the districts and governorates, though the administration and budget remain highly centralized. This situation has not been very conducive to the solution of local problems. Many policy analysts have sug- gested that the administrative offices should also be turned to the localities and be funded by block grants out of central government revenues. Of course, for this to work well, many complementary institutions and policies are also needed. So, like many other reform proposals, such a reform entails risks that need to be man- aged by an effective central administration. This reform is unlikely to materialize if the government's central problem is not solved. Building the Will for Reform A major concern inside and outside Yemen is that continuation of the current con- ditions will render it a failed state once oil revenues run out in the next decade. With- out oil, export revenues and government finances could crash, and the economy may enter a free fall situation, bringing down with it the political and social system, as dif- ferent groups, especially the well-armed tribes, make desperate efforts to survive at the cost of each other. Some of the economic implications ahead for Yemen are examined in the next chapter and modeled in detail in the Appendix. The basic ques- tion, however, is whether the political system in Yemen has the means to reform itself and avoid the dire circumstances that are likely to lie ahead. Yemen has weathered very difficult circumstances and has enough experience with building coalitions that the necessary political and economic adjustments are not insurmountable. Yemeni tribes have particularly grown resilient to high level tensions and can still come together to deal with crises, especially if supported by the international community. Nonetheless, this political analysis suggests that the risks are not negligible. The problem is that the concentration power has raised the stakes 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 21 Y E M E N T O M O R R O W 21 and has hardened the positions of most players. The dominance of uneducated, unemployed, and poor young people in the population also provides armies of foot soldiers for conflicts that can be triggered by uncalculated moves. Already, guns are plentiful and intertribe conflicts claim many young lives every year. It is true that the tribes themselves might play positive roles in containing their fighters, but those who are not part of such networks may decide to enter the equation and trigger conflict. Therefore, it is possible that in the event of a major economic or political crisis, the situation may get out of hand. To avoid such disastrous possibilities, a shifting eco- nomic strategy is essential, as described in Chapter 3, as well as specific institutional reforms to improve the investment climate, as described in Chapter 4. How can Yemen build incentives for better governance and less risk of internal disruption around a strategy that promotes economic growth? The analysis here sug- gests that efforts should be put in building consensus around a new growth strategy, with focus on non-oil exports. The export-oriented strategy can offer gauges by which success is measured and contributions are evaluated. It can also offer means of build- ing trust in the government and softening the public's position on subsidies. Even- tually, even tribal connections, which have been a source of fragmentation, may be turned into commerce and business networks that help bring healthy competition to the economy in place of armed conflict. 10414-02_Ch02.qxd 4/17/08 11:16 AM Page 22 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 23 3 Maintaining Fiscal Sustainability W eak fiscal management lies at the root of macroeconomic instability in Yemen. The track record of fiscal management has not been favorable, except for a brief period under an era of successful macroeconomic stabilization (1995­98), as mentioned in Chapter 2. The country's oil and gas wealth is being steadily eroded by inadequate fiscal efforts to raise taxes and save on subsidies. This chapter reviews the track record of fiscal management in Yemen since 1990 and then develops a long-term outlook (2005­25) to guide where Yemen is heading in this regard. The long-term outlook looks challenging, with oil production set to decline rapidly. The outlook points to the conclusion that Yemen is likely to become mod- erately stressed regarding the sustainability of its external debt, as oil revenues fall. A reform agenda is developed to help balance the declining revenues by fostering growth and controlling public expenditures. Nonetheless, Yemen's fiscal sustain- ability is in serious peril, even if the reforms identified in this study are carried out. Yemen's Track Record on Fiscal Sustainability After improving during the stabilization period of 1995­98, fiscal prudence has weakened in the past five years. With over 70 percent of government revenues attributed to oil, the overall fiscal balance in Yemen has closely followed the for- tunes of oil revenues (Figure 3.1). During the period of stabilization, the overall fiscal deficit remained around 6 percent of GDP, and the non-oil fiscal deficit was reined back to 15 percent of GDP by reducing subsidies. The other main achievement during this period was switching the financing of the deficit away from monetary financing to sales of treasury bills to the general public. The oil price boom in 2000 fetched a 10 percent increase in oil revenues, which was prudently used to repay past advances from the Central Bank, partly helped by the expenditure restraint required under an IMF program (covering 1999­2001). Buoyant oil revenues (around 25 percent of GDP) in the past five years have helped Yemen run an over- all fiscal surplus in 2000­01 and then maintain a fiscal deficit below 5 percent of GDP. However, indicators of fiscal sustainability have steadily worsened since 1999 (Figure 3.2). In oil-exporting countries, it is more appropriate to look at the 23 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 24 24 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.1 Overall Fiscal Balance and Oil Revenues 10.0 30.0 Oil revenues 5.0 25.0 GDP of 0.0 20.0 GDP % of % ­5.0 15.0 Overall balance balanace, ­10.0 10.0 revenues, Oil Overall ­15.0 5.0 ­20.0 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Staff estimates based on IMF data. evolution of the primary non-oil deficit as the true indicator of fiscal sustainability (Box 3.1). The primary non-oil deficit has increased from 15 percent in 1999 (when the IMF program started) to 28.9 percent in 2005. There is a direct relationship between international oil prices and the cost of subsidies. The bulk of government subsides is made up of oil subsidies. Pressure Figure 3.2 Primary Non-Oil Balance 0.0 ­5.0 ­10.0 GDP ­15.0 of % ­20.0 ­25.0 ­30.0 1990 1992 1994 1996 1998 2000 2002 2004 Source: Staff estimates based on IMF data. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 25 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 25 B O X 3 . 1 Fiscal Sustainability Analysis In Oil-Rich Countries Assessing fiscal sustainability for oil-rich countries requires a distinction between the oil and non-oil fiscal position. Such a distinction is necessary because of the nature of oil-related fiscal revenue. First, oil is an exhaustible asset, which means that fiscal revenues from oil extraction result from (natural) asset depletion; this calls for treating oil revenue as a financing item, rather than current fiscal revenue. Second, faster depletion today means that future generations would be worse off, as oil will not last forever; to avoid leaving future generations worse off, part of the oil revenue needs to be reinvested in other forms of assets or capital. Finally, oil revenue and implicitly the size of the oil wealth are volatile, mainly because of volatile oil prices. These unique features of natural resources such as oil complicate fiscal manage- ment and underscore the importance of accounting for oil price volatility when assessing fiscal sustainability. There are two important steps when implementing sustainable fiscal strategy for oil-rich countries. The first step is to project the income stream of fiscal oil rev- enues, net of extraction costs, based on oil reserves estimates, oil price forecasts, and assumptions about oil exploration and extraction and oil sector taxation regimes. The second step is to estimate the income flow that can be spent. There are two alternatives in estimating the `optimal' spending. If the goal is to protect the real stock of oil wealth for future generations, only the rate of return from investing oil wealth can be spent. If the goal is to preserve oil wealth on a per capita basis (a more stringent spending rule than the first), the government can spend even less after allowing for population growth. on the non-oil primary deficit would be somewhat eased if oil subsidies alone were removed (Figure 3.3). Figure 3.4 reveals the tendency of oil subsidies to follow inter- national oil prices. Oil subsidies, currently representing 8­9 percent of GDP, are further wasteful by the fact that they disproportionately benefit the non-poor29 as only 15 percent of the subsidy goes to the poor. This is due to the pattern of fuel consumption by poor families, which consume far less diesel and LPG than the non- poor. Concerns regarding the potential adverse effect on the poor of eliminating the subsidy remain justified however, as product prices will rise across the board in response to increased transportation and production costs. In order to minimize these effects, a gradual and phased approach is recommended, while endorsing a transfer of part of the fiscal savings to pro-poor welfare programs. Untargeted subsidies and inadequate tax efforts have also undercut fiscal sus- tainability. Part of the increase in the non-oil balance (3.3 percentage points out of the total 12.4) went to productive and socially useful purposes. Development and social welfare expenditures have increased marginally. The rest of the increase is mainly attributable to the increase in subsidies (7 percentage points) and the weak- ening of tax efforts (1 percentage point) between 1999 and 2005, a worrisome trend. After eliminating food subsidies and implementing the petroleum price adjustment 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 26 26 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.3 Primary Non-Oil Balance 0 ­5 ­10 GDP ­15 Excluding subsidies of % ­20 Including subsidies ­25 ­30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Staff estimates based on IMF data. Figure 3.4 Oil Subsidies (left axis); Intl. Oil Prices (right axis) 6 40 5 Oil subsides 35 4 30 GDP 3 25 of % US$/bbl 2 20 1 15 Oil price 0 10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Staff estimates based on IMF data. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 27 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 27 in 1997, expenditures on subsidies fell to a low of 2.4 percent of GDP (1999). Since then expenditures on subsidies have steadily climbed, to 9.8 percent of GDP by 2005 (Figure 3.5). Most of the subsidies are for petroleum products that Yemen sells in the domestic market, below international prices. Despite the steep upward revision in petroleum product prices in July 2005, the domestic price for diesel (representing the largest subsidy outlay) is still only 40 percent of the international price. The government has not adopted a program to regularly revise the domestic price of petroleum as world prices change. As argued in Chapter 2, the true difficulty in implementing sensible price reforms stems from the lack of general trust that the government will put the saved resources to good use. Indirect tax collection has fallen from an average of 6 percent of GDP through 1998 to 4 percent of GDP by 2005. Despite the dramatic reduction in mean custom tariff rates, from 27 per- cent in 1990 to 7 percent in 2005, trade taxes still remain the dominant source of indirect tax revenues. The introduction of a value added tax (called the General Sales Tax) in Yemen by 2000 was part of the reforms implemented under the Enhanced Structural Adjustment Facility (1999­2001). Since then, the implemen- tation of the tax has been repeatedly postponed. The supplementary budget of 2005 moved the date of implementation to January 2007. Timely implementation of the tax could have generated revenues of 3 to 3.5 percent of GDP, doubling the collection of taxes on production, consumption, and services, which the new regime is set to replace. Yemen has saved none of its oil revenues in 11 out of the past 16 years (Figure 3.6). Saving out of oil revenues is defined as the excess of oil revenues Figure 3.5 Indirect Taxes and Subsidies 7 14 6 12 5 Indirect taxes 10 GDP of GDP 4 8 % of % taxes 3 6 Subsidies, Indirect2 4 Subsidies 1 2 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Staff estimates based on IMF data. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 28 28 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.6 Saving from Oil Revenues 15 10 5 GDP 0 of % -5 ­10 ­15 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Staff estimates based on IMF data. over the non-oil primary deficit. The saving effort is confined mostly to 5 out of the past 6 years. Since 1999, the cumulative oil wealth depletion (oil revenues) amounted to about US$19 billion. Since the Central Bank's own foreign reserves increased by about US$4 billion over this period, it can be presumed that only about a quarter of the depleted oil wealth has been converted to financial wealth. The rest of the oil revenues have been used for consumption or investment pur- poses. IMF (2002a) estimated that in Yemen the optimal primary non-oil deficit should be 2.4 percent of GDP, applying the goals of preserving per capita oil wealth in the late 1990s. Revaluing in 2005 prices and allowing for projected gas export revenues, an indicative optimal primary non-oil deficit around 5 per- cent of GDP is suggested. The actual non-oil primary deficit has always exceeded this optimal rate. Expenditures are linked to oil revenues. Expenditures, in particular current expenditures, are clearly linked to oil revenues (Figure 3.7). When current expen- ditures are further decomposed, it is apparent that expenditures on transfers and subsides increase in line with oil revenues (Figure 3.8). Exchange rate and debt dynamics The real effective exchange rate (REER) has been steadily appreciating over the last decade. Despite persistent appreciation of the REER, merchandise exports have also grown, on average, over the decade, as a substantial part of merchandise exports consists of petroleum products (Fig 3.9). 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 29 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 29 Figure 3.7 Oil Revenue and Expenditures 40 35 Current expenditures 30 25 GDP 20 of % 15 Oil revenues 10 5 Capital expenditures 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank calculations. Figure 3.8 Current Expenditure Breakdown 100 90 80 70 60 GDP of 50 % 40 30 20 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Wages and salaries Operations and services Interest Transfers and subsidies Defense Source: World Bank calculations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 30 30 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.9 Yemen: Merchandise Exports (left axis) and REER (right axis) 50 200 45 180 40 160 REER 35 140 100) = billions) 30 120 (US$ 25 (1995 100 20 Merch. exports 15 80 10 60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank calculations Yemen's external debt composition has shifted from a high proportion of private creditors to that of multilateral and bilateral lending. Yemen's external debt levels have remained fairly stable over the last several years, averaging US$5 billion, or 34 percent of GDP in 2005. The debt terms are generous, as the majority of Yemen's debt is on concessional terms (currently 85 percent of total external debt, Fig 3.10). Arrears have also been contained since the macroeconomic adjustment Figure 3.10 Evolution of External Debt and Share of Concessional Debt 4,000 100 Multilateral Bilateral 90 3,500 Private creditors, guar. Share of concess. debt 80 3,000 70 2,500 60 millions 2,000 50 Percent US$ 40 1,500 30 1,000 20 500 10 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank calculations 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 31 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 31 Figure 3.11 Evolution of Arrears 3,000 Principal Interest 2,500 2,000 1,500 millions US$ 1,000 500 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank calculations program of the mid-1990s (Fig 3.11). Domestic debt however has been increasing, from 33 percent of GDP in 2002 to 71 percent of GDP in 2005, putting further strain on fiscal accounts as interest payments rise. The Medium-term Outlook To offset the decline in oil sector, efforts must be made to stimulate growth in non- oil sectors. Several areas of the Yemeni economy have been identified as potential sources of non-oil growth: agriculture, particularly honey, which is known to be of high quality, and fishing; building stones; leather products; and tourism (Table 3.1). Again, even substantial increases in exports of these sectors are not expected to completely offset the losses from oil sector. To balance those expected losses, Yemen needs to further intensify its efforts to develop the still-emerging industrial and service sectors. Box 3.2 discusses countries that have achieved success in diversifying their exports and suggests policy actions. A temporary boost to GDP growth will be felt in the construction phase (2006­08) of a US$2 billion gas project, described below in the forecast for investment, and spillover effects of the gas project will be seen in the construction and services sectors. Gas production is expected to show a one-time jump in 2009 and remain constant thereafter. Given these assumptions about growth prospects in Yemen, the analysis in this section forecasts tax revenue, public expenditures, overall gross domestic product, poverty, investment, balance of payments, and debt for the period 2005­2500. This adjustment scenario (baseline) assumes that the authorities will move forward on implementing reforms. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 32 32 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Table 3.1 Assumed Growth of Non-Oil Exports, by Product Category (percent change) Growth in Assumed annual growth rate Product (SITC revision 3) world demand (over the projection period), or service (1998­2003) (current US$) Fish/shellfish/etc. 3.8 7.0 Vegetables and fruit 4.2 8.0 Natural honey 15.2 15.0 Beverages and tobacco 5.0 10.0 Animal/veg oil/fat/wax 4.0 8.0 Chemicals/products n.e.s 9.0 9.0 Manufactured goods 4.0 8.0 Other 12.0 Export services 4.5 of which: tourism n.a. 8.5 Sources: WITS and World Travel & Tourism Council Rising tax revenue In 2004, tax revenue reached 7 percent of GDP. As seen in Figure 3.12 below, non-oil revenue (largely made up of tax revenue) is expected to increase over the projection period. This increase will be due to the introduction of the General Sales Tax, recently revised downwards by the authorities from 10 percent to 5 percent. It is estimated that successful implementation of this tax could generate 1­3 percent of GDP over the next few years. B O X 3 . 2 Promoting Non-Oil Exports Historical evidence shows that heavy resource dependence can be overcome with active policies. Many countries that were once specialized in primary com- modities have successfully diversified their exports and as a result achieved rapid economic growth. Martin (2005) advocates promoting an open trade regime, stimu- lating technological advance, and investing in physical and human capital appropri- ate for the country's comparative advantage as policies for successful diversification. Successful diversification stories from Malaysia, the United Arab Emirates, and Costa Rica illustrate the merit of these policies. Malaysia transformed from being predom- inantly a rubber exporter in the late 1950s to a manufacturing powerhouse by early 1990s. United Arab Emirates rapidly diversified away from oil in three decades. Costa Rica matured from being a coffee and banana exporter in 1970 to a high-tech econ- omy by 2000. Yemen's situation is more urgent, in the sense that the country does not have two or three decades to achieve such diversification. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 33 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 33 Figure 3.12 Government Revenue 20 Export oil revenue 15 Non-oil revenue 10 GDP Domestic oil revenue of % 5 0 Gas revenue ­5 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. Slowing public expenditure growth An average reduction of 1.5 percent of GDP in current expenditures is assumed to be possible in the next 10 years (see Figure 3.13). Half the adjustment is expected from removal of subsidies and the other from saving on other current expenditures. Oil sub- sidies are assumed to be fully removed by 2007. This action will save a significant amountofexpendituresfromthebudget.Currentexpenditureswillbefurthercurtailed Figure 3.13 Government Expenditure 35 30 Current expenditures 25 20 GDP of % 15 10 Capital expenditures and net lending 5 0 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 34 34 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.14 Real GDP Growth by Sector 10 Non-oil industry 5 Agriculture 0 ­5 Percent ­10 ­15 Oil and gas ­20 ­25 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. bycontainingthecivilservicewagebill.Afterthetemporaryspiketoinvestinthemajor gasproject,capitalexpenditureswillremainsteadyatanaverageof7.5percentofGDP. Slowly rising GDP GDP growth will average 4 percent over the projection period (Figures 3.14 and 3.15). Based on the sector assumptions described above, overall GDP growth will remain Figure 3.15 Oil and Non-Oil GDP Growth 9 8 Non-oil GDP 7 6 Percent 5 4 Real GDP 3 2 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 35 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 35 moderate as the initial decline from the oil sector levels off and growth in the gas sector remains flat. In order to maintain the average growth rate of 4 percent per year, non-oil growth will have to remain sufficiently strong, at around 5 percent from 2009 onward, to maintain a positive per capita growth rate. Population growth will decelerate, from over 3 percent in 2004 to 2.2 percent by 2025, in line with goals of Yemen's poverty reduction strategy. Inflation, as proxied by the consumption deflator, will temporarily jump to double digits in the first few years of the projection period, driven by investment and import expenditures, and then will settle to an annual average of 5 percent from 2011 onward. On the expenditure side, domestic demand will return as the driver of growth, consumption growth in particular. Declining poverty The poverty situation in Yemen would improve in these forecasts in both rural and urban areas, through the poverty model's horizon of 2015. Absolute poverty in Yemen would decrease from 38 percent in 2005 to 18 percent by 2015 (Figure 3.16). Rising investment Investment will spike temporarily as the new gas project comes on stream (Fig- ure 3.17). Gas fields were discovered in Yemen in the 1980s, and a long-awaited contract to develop a liquefied natural gas refinery was signed by the government in August 2005. The project was awarded to the Yemen Gas Consortium (French, Japanese, and U.S. companies) for a total value of US$2 billion. Yemen LNG has secured a 20-year contract for the sale of 6.5 million tons per year (out of a total expected capacity of 6.7 million tons per year). Additional investments in the Marib Figure 3.16 Yemen: Poverty Headcount Ratio 50 40 Rural 30 Urban Percent 20 10 Yemen 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: World Bank calculations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 36 36 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.17 Fixed Investment 9 8 Private fixed investment 7 6 GDP of % 5 4 Public fixed investment 3 2 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. Power Plant and Aden Free zone will bring in foreign investment over the short term (Fig 3.18). As a result, investment, particularly private investment, will spike in 2008 and then moderate from 2009 onward. Worsening balance of payments Within the balance of payments, key export sectors will need to pick up the slack in order to compensate for the drop-off in the oil sector. The overall balance of payments position is expected to progressively worsen through 2011, leading to increasing financing needs. The current account balance is expected to turn signif- icantly negative starting in 2008 (from a surplus of 5 percent in 2005 to a deficit of 11 percent of GDP), due to the increased demand for imports and the decline in oil exports (Figure 3.19). While the current account deficit should eventually ease towards the end of the projection period, partially supported by steady inflows of workers remittances (from Yemenis working in neighboring countries' oil indus- tries), financing needs will accumulate to produce higher levels of foreign debt (from 37 percent of GDP in 2005 to 65 percent by 2025). The overall balance of payments deficit will be partially financed by direct foreign investment, though levels will return to normal after the temporary influx of gas-related investments. The level of international reserves will decline from six months of imports to two months of imports by 2018, and then gradually increase to almost six months of imports by the end of the projection period. Exchange rate policy will be maintained through the targeting of a constant real exchange rate. High international oil prices forecast for the near term will temporarily compen- sate for Yemen's declining stock of oil. The forecast price of Yemen oil is based on 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 37 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 37 Figure 3.18 Direct Foreign Investment 1000 800 600 400 millions US$ 200 0 ­200 ­400 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. Figure 3.19 Projected Balance of Payments, 2005­25 8,000 1,000 Merchandise exports Current account balance (right axis) 7,000 Merchandise imports 500 6,000 0 5,000 ­500 millions 4,000 ­1,000 US$ 3,000 ­1,500 2,000 ­2,000 1,000 ­2,500 0 ­3,000 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 38 38 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 3.20 Yemen Oil Price 65 60 55 50 US$/barrel45 40 35 30 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank calculations. the DECPG medium term forecast for international oil prices, with Yemeni oil tak- ing a $1/barrel discount. The price of oil is expected to remain above $55/barrel until 2011, after which a steady decline is expected and then a stabilization between $35­40 for the long term. Perilously Increasing Public Debt Due to the rise in the domestic debt stock all three public debt indicators (Figure 3.21) show an upward climb. Under the baseline, the net present value of the debt-to-GDP ratio rises gradually from 25 percent in 2005 to 74 percent in 2025. The net pre- sent value of the debt-to-revenue ratio triples over the same time horizon, reach- ing 324 percent by 2025. The debt service-to-revenue ratio, which stands initially at 9 percent, reaches 21 percent by the end of the projection period. The effect of lower oil prices on Yemen's debt sustainability is also reflected in the public debt ratios. The net present value of the debt-to-GDP ratio reaches 91 percent and the net present value of the debt-to-revenue ratio reaches just over 400 percent by 2025. The debt-service-to-revenue ratio also rises, to 36 percent. If the fiscal consolidation envisioned under the medium-term forecasts were not to materialize, the debt ratios would quickly spiral out of control, to unsustainable levels. The no adjustment30 scenario shows how the net present value of the debt-to-GDP ratio could reach 261 percent and the net present value of the debt-to-revenue ratio could reach almost 2,000 percent by 2025. The debt-service-to-revenue ratio would rise to 233 percent. It is obvious that the developing fiscal crisis could not be supported by further borrowing, turning Yemen into a grant-dependent country in order to finance expenditures. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 39 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 39 Figure 3.21 Indicators of Public Debt Under Alternative Scenarios NPV of debt-to-GDP ratio 300 250 200 No adjustment 150 100 Oil price shock 50 Baseline 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 NPV of debt-to-revenue ratio 2,000 1,800 1,600 No adjustment 1,400 1,200 1,000 800 600 400 Oil price shock 200 Baseline 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Debt service-to-revenue ratio 250 200 No adjustment 150 100 Baseline 50 Oil price shock 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: Staff projections and simulations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 40 40 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W External Debt Sustainability Depends on Oil Price Trajectories In the baseline medium-term forecast, Yemen's external debt burden indicators remain below their indicative policy-dependent thresholds throughout the pro- jection period (Figure 3.22). The net present value of the debt-to-GDP ratio rises from 19 percent to 35 percent over the projection period. The net present value of the debt-to-export ratio rises gradually from 45 percent in 2005 to 147 percent in 2018, and remains around that level through 2025. The debt service-to-exports ratio gradually rises from 3 percent in 2005 to 8­9 percent in the outer years of the projection period. Equally, the net present value of the debt-to-revenue and the debt-service-to-revenue ratios remain well below the indicative thresholds. A permanently lower oil price would threaten Yemen's external debt situation. In this scenario, the oil price projections under the baseline would be 10 percent lower in a given year, setting external debt indicators on a deteriorating path. The net present value of the debt-to-export ratio would cross the threshold by 2017, rising to a peak of 208 percent by 2018. The debt service-to-exports ratio would only be moderately affected, to levels just above the baseline trend. The no adjustment scenario would only marginally impact external debt ratios. Most of the burden would be felt on the fiscal front, with the net present value of external debt-to-GDP trending around baseline levels. The net present value of debt- to-exports, however, would breach the threshold by 2017 and deteriorate at a rapid rate, reaching 416 percent by the end of the projection period. The debt service-to- exports ratio is also severely affected, due to lower exports under the no adjustment scenario, surpassing the threshold by 2019 and rising to almost 60 percent by 2025. In sum, Yemen faces a moderate risk of debt distress. Under the baseline medium- term forecasts all the relevant debt distress indicators stay below their respective thresholds. However, several stress tests reveal that the baseline is vulnerable to shocks to the country's weak and barely diversified export base. In particular, lower than anticipated future oil prices would lead to a rapid deterioration of Yemen's prospects for external debt sustainability. The fiscal sustainability analysis underlines the importance of the planned fiscal adjustment program. The Reform Agenda to Maintain Fiscal Balance Looking forward, Yemen faces high risk in maintaining fiscal sustainability and moderate stress in meeting external debt obligations. For fiscal reform to be effective in diversifying revenues away from oil, its implementation needs to be accomplished far in advance of the expected oil depletion. Critical reforms include raising tax revenues, cutting public expenditures, strengthening public financial management, and completing civil service reforms. Tax revenue must rise. Assessment and collection efforts need to be more than doubled over the long-term. In 2004, tax revenue was 7 percent of GDP. By 2015, tax revenues must rise to 14 percent of GDP to partly compensate for the loss of oil revenues. This increase will be due to the introduction of the General Sales 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 41 M A I N T A I N I N G F I S C A L S U S T A I N A B I L I T Y 41 Figure 3.22 Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios NPV of debt-to-GDP ratio 45 Threshold 40 35 30 25 Oil price shock No adjustment 20 15 Baseline 10 5 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 NPV of debt-to-exports ratio 450 400 350 No adjustment 300 250 200 Oil price shock Threshold 150 100 50 Baseline 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Debt service-to-exports ratio 70 60 No adjustment 50 40 30 Threshold 20 Oil price shock 10 Baseline 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Source: Staff projections and simulations. 10414-03_Ch03.qxd 4/17/08 11:16 AM Page 42 42 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Tax, recently revised downward by the authorities from 10 percent to 5 percent. It is estimated that successful implementation of this tax could generate 1­3 per- cent of GDP over the next few years. Strengthening of tax and customs admin- istration should also generate higher tax revenues. In addition, an excise tax may be introduced when the oil subsidies are removed. Public expenditures must be cut. An average reduction of 1.5 percent of GDP per year in current expenditures is assumed to be possible over the next 10 years. Half the adjustment is expected from removal of subsidies and the other from saving on other current expenditures. Oil subsidies are assumed to be fully removed by 2007. This action will save a significant amount of expenditures from the budget. Current expenditures will be further curtailed by containing the civil service wage bill. Public finances must be managed better. Completing reforms to public financial man- agement hold the key to successful public expenditure management. In August 2005, the government approved a comprehensive reform strategy for public financial management, with action plan milestones stretching up to 2015. In implementing this strategy, public financial management needs to be strengthened in all major areas--budget programming and prioritization; budget execution; treasury and cash management; internal controls; internal audit; external audit; financial reporting and oversight. The budget lacks a medium-term expenditure framework and remains poorly linked to the government's poverty reduction strategy. After making some progress in areas of budget coverage, classification, and transparency in 1995­2001, reforms efforts slowed. The Accounting and Financial Management System was planned to be a useful tool to support the process of budget reform, but implementation is behind schedule. Civil service reforms must be completed. Completing civil service reforms is essen- tial to generate savings and build a competent civil service. Yemen's civil service, underpaid but overstaffed, accounts for nearly one-quarter of the government's current expenditure, one of the highest levels in the Middle East and North Africa region. The government started to implement a four-stage National Wage Strategy in July 2005. The agenda includes a revised pay and grading structure that rewards government employees based on well-defined job performance criteria instead of formal qualifications and length of service. The strategy also increases decom- pression of pay and consolidates most allowances into a universal pay scale. The salaries for the highest-ranking officials will likely increase by a factor of 5 or 6 when the program of reform is completed and salaries for lower level civil servants are expected to roughly double. The minimum wage will rise from YR 11,000 to YR 20,000 per month. 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 43 4 Improving the Investment Climate D ynamic and broad-based growth of the private sector is the key to reaching Yemen's goal of diversifying its economy and reducing its dependence on shrinking oil reserves, as has been recognized in earlier analyses (World Bank 2002b, for example). Yet, Yemeni entrepreneurs still feel constrained by a host of issues (Figure 4.1). As discussed in chapter 1, a recent Investment Climate Survey (2005) showed that Yemeni firms perceive more obstacles to business than firms in most other comparator countries and particularly complain of macroeconomic uncer- tainty, taxes, regulation, corruption, and many other barriers posed by poor gover- nance. The result has been a steady decline in private investment in Yemen. Arresting and reversing that decline is possible only if the investment climate is improved immediately. This chapter focuses on relieving three recognized constraints to private investment: corruption, judicial weaknesses, and lack of access to land. Ranking of Yemen in most Doing Business indicators worsened from 2005 to 2006. While overall Doing Business ranking of Yemen improved by three positions, ranking in eight out of ten indicators has gone down. Ranking improved for the `pay- ing taxes' indicator by 38 positions, while ranking of `getting credit' indicator has remained unchanged (Figure 4.2). Corruption One of most dismal consequences of corruption is that it undermines political legit- imacy and raises the costs of private investments, directly through bribes paid to gov- ernment officials and indirectly through uncertainty over expected returns. Yemen shows signs of widespread and pervasive corruption. During the October, 2006 Pres- idential election, corruption was highlighted as a major concern. The Transparency International Corruption Index 2005 ranks Yemen at 106 out of 159 countries, worse than countries such as Egypt, Saudi Arabia, or Vietnam.31 Inefficiencies in the judiciary system increase the impunity of corrupt activities by decreasing transparency and accountability. Corruption imposes a significant economic and financial cost. The Yemeni Cen- tral Organization for Control and Audit estimated that corruption-related criminal 43 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 44 44 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 4.1 Leading Constraints on Investment Identified by Yemeni Enterprises Macroeconomic uncertainty Tax rates Corruption Tax administration Anticompetitive or informal practice Smuggling or dumping Electricity Customs and trade regulations Access to land Cost of financing Legal systems/ conflict resolution Regulatory policy uncertainty Access to finance (collateral) Crime, theft and disorder Business licensing/ operating permits Skills/education of workers Transportation Labor regulations 0 10 20 30 40 50 60 70 80 Percent of respondents evaluating constraints as "major" or "very severe" Source: World Bank 2005a. cases in 2003 caused financial losses to public property exceeding YR 12 billion, in addition to other nonfinancial damages. Although corruption involving large indus- tries or government officials is more of a concern in Yemen than petty bribery, it is a deterrent to potential private investors and hurts the poor disproportionately. Tax evasion and use of informal channels to `get things done' undermines authority and reduces the amount of tax revenues that the government may collect. 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 45 I M P R O V I N G T H E I N V E S T M E N T C L I M A T E 45 Figure 4.2 Ranking of Cost of Doing Business Indicators, 2005 and 2006 Overall ranking 2005 2006 Enforcing contracts Dealing with licences Registering property Employing workers Closing Business Paying taxes Trading across borders Getting credit Protecting investors Starting business 0 50 100 150 200 Source: World Bank 2006b. Yemen has just begun to address corruption. In 2003 the President formed a commission called the Supreme Committee, which has a mandate to combat cor- ruption. A strategy for combating corruption was developed in 2003, and a law passed in 2004 aimed at combating money laundering. More recently, Yemen rati- fied the United Nations Convention Against Corruption in November 2005. A new Anti-Corruption Board has been formed in 2006 and a new Financial Disclosure Bill applicable to all public employees has been ratified by the parliament though the implementation is likely to be slower than planned. Judicial weaknesses The judicial system in Yemen is still in a state of transition. Since the 1990 unification efforts were made to blend North Yemen's legal system, which drew heavily on Ottoman traditions, with South Yemen's, which was influenced by British imperial mandates. As in many nascent democracies, the legal and judicial framework faces 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 46 46 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W many challenges and can be further improved. The main weaknesses of the Yemeni judiciary may be summarized as follows: Poor legal and administrative performance. As a result of a recruitment freeze and an increasing number of disputes, the daily caseload in some courts reaches 20 cases per judge, four times the international average. This results in long delays and a general inability of the judges to examine the cases carefully, which in turn favors corrupt practices such as bribery to speed proceedings along. The situation is aggravated by the inadequate training of administrators, notaries, and judges, which adds to the case burden per judge. Poor court administrative systems. Court procedures are generally inefficient and lack standardization. Some courts have computer-based management systems, but most of them are outdated. Often computers are only used for typing, because the necessary software and training are missing. Thus in many cases courts cannot properly file and record documents for on-going disputes, which delays resolution and compromises the accountability and transparency of decisions. Poor use of alternative mechanisms for dispute resolution. Alternative dispute resolu- tion mechanisms are less expensive and time-consuming, while relieving the courts from congestion. There has been a growing awareness for arbitration in Yemen. The Centre for Conciliation and Arbitration, started as a private initiative in 1997, provides services to resolve commercial disputes. Traditionally, the pub- lic uses tribal arbitration, and it is estimated that around 70 percent of private disputes are settled by one of the eldest members of the tribe. Yet, tribal arbitra- tion has not been fully institutionalized or supported to provide a useful com- plement to the formal justice system. Other mechanisms such as professional dispute mediation or small claim courts do not exist despite the fact that there are no legal restrictions on alternative dispute resolution. Reforms of the judiciary have been limited and slow. Early reforms focused on administrative organization and did not address the critical needs for efficiency and transparency of the judiciary. Since the mid 1990s more attention has been given to reforms focused on organizational, human resource, and infrastructure-related aspects of the judiciary. In 2001, the government of Yemen presented a strategy to restructure the Ministry of Justice, establish commercial courts, enhance the role of the Judicial Inspectorate, improve court infrastructure, and provide training pro- grams. These endeavors were supported by donors, including GTZ, UN Develop- ment Programme, and the World Bank, but the pace of reform has been very slow. The strong opposition to reform from the conservative forces within the government is most likely why reforms have not been implemented. Lack of access to land The process of acquiring land for investment is fraught with many problems. Accord- ing to a survey of businessmen (World Bank 2002a), one-third of the respondents identified problems related to land ownership as a significant constraint in doing 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 47 I M P R O V I N G T H E I N V E S T M E N T C L I M A T E 47 business in Yemen. A recent comprehensive study of the land administration system in Yemen (World Bank 2005) describes the causes of the problems as follows: Insufficient registration. Official land registration is critical for defining real prop- erty rights; recording information about tenure, value, and use of land; protect- ing the validity of transactions; and enforcing contracts and judgments. Overall, there is very limited use of the land registry in Yemen. The utilization rate of the land registry is believed to be no more than 20 percent of all annual land prop- erty transactions in Yemen, signaling the low quality of the land administration system. Unclear disposition. Few people use the registration system because they doubt that the act of registration is legally conclusive and they lack confidence in courts and judicial processes. High costs of registration and lengthy bureaucratic procedures add to the problem. Alternative and cheaper forms of obtaining land security, such as the authentication of transfer deeds at the courts, are preferred over securing property rights through formal land registration. Inadequate service. The quality of service provided by the Registry also discourages use. Problems include inadequate regulation of public notary activities, deficient registration and maintenance procedures, and a weak legal and technical frame- work for deed registration. Inefficient state land management. In some governorates in Yemen, inefficient state land management proved to be the main reason for about 30 percent of all licensed investment projects not being initiated or becoming operational. More- over, problems with state land management have also curtailed local govern- ments' ability to deliver public services. Land disputes account for a third to a half of all civil cases at the primary district courts. The large volume of land disputes clogs the court system: instead of being an arbitrator of last resort, the courts are in fact heavily relied on to bring about land tenure security, substituting in effect for the administrative mechanism of the land registry. Most land ownership cases take three or four years to resolve. Moreover, the perception that courts are unable to resolve land disputes expeditiously may be seen as a threat to stability, as more land disputes are resolved violently outside of the legal system. The government has embarked on a reform initiative to improve the willing- ness of businesses to invest and operate in Yemen by modernizing the judiciary and improving access to land. In mid-2005 the government undertook the most com- prehensive set of economic and administrative reforms to date, despite large resis- tance within the government, political opposition, and civil society. In December 2005 the Ministry of Justice presented a new strategy for the modernization of the judicial sector to be implemented until 2016, which would require a 50 percent increase in the judiciary budget. The government is also discussing two new draft laws to reform land registration and the management of state- land, and it presented a proposal on judicial and land reform to the Millennium Challenge Account Threshold Program, but the program was recently suspended for Yemen. At this 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 48 48 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W point, it is still unclear which elements of the different proposed reform projects will be implemented. The Reform Agenda to Improve the Investment Climate As reform efforts move forward, a guiding principle should be the close link between vibrant growth in the private sector and clear accountability, transparency, and effi- ciency in the legal system. Reforms to improve the investment climate should be designed to achieve the following goals: Make the judicial branch more effective. An effective judiciary requires indepen- dence. This includes the way judges are selected, evaluated, disciplined and pro- moted to ensure that decisions are insulated from improper influence. To this end, the Law of Judicial Authority (1991) needs to be amended to reflect the changes in the constitution of 1994. Further consideration might be given to redefine the composition as well as the role of the Supreme Justice Council to reinforce the separation of powers between the three branches. Speed the processing of cases. Providing training, computers, information man- agement systems, and other resources to judges and court personnel would reduce case backlogs and accelerate the disposition of new disputes. Revising the procedures for filing and resolving lawsuits would help to weed out procedures that invite delay and raise costs. Increase access to alternative dispute mechanisms. The creation of mediation and con- ciliation services and other alternatives to resolving disputes in the courts reduces court costs, as does the introduction of small claims courts. Actions could also include transferring responsibilities for uncontentious matters, particularly for the registration of property, to administrative agencies such as land registration, so that courts have more time for disputed cases. Professionalize bench and bar. Professional training, now lacking in Yemen, is needed to enhance the performance of the main actors and instill the values of impar- tiality, professionalism, competency, efficiency, and public service. Training needs to target administrative and notary staff as well as judges, and address the different requirements in specialized courts. Particular attention should be paid to infra- structure, resources, and the curriculum of the Higher Judicial Institute, which in its present state is not able to provide young judges with the necessary education to appropriately perform their tasks and duties. Improve the administration of land tenure security. This encompasses initiatives to increase the limited demand for registration (by, for example, removing incen- tives for using court authentication as an alternative to registration), as well as enhance the quality and efficiency of registration services (by improving regis- tration processes and maintenance). Make state land management more efficient. The present state land management process is in need of an overhaul. Key issues in improving state land management would include, among others, to more clearly define state-owned land in the law, set up a comprehensive and centralized inventory of state-owned land, better 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 49 I M P R O V I N G T H E I N V E S T M E N T C L I M A T E 49 enforce existing measures to curb land speculation, as well as to identify and apply standardized procedures for the disposition of state-owned Land. The government submitted a draft law to the House of Representatives in 2005, which addressed many of the problems in the existing law that governs state land management. However, there are still several issues that are not resolved by the new draft and which require a more thorough revision of the law. Take advantage from international experience in the current revision of the law governing land registration. The government of Yemen is moving in the right direction with its initiative to replace the current land registration law. The draft laws proposed, however, show some weaknesses. The government might seize the opportunity of the present wind of change and amend the draft laws to facilitate effective regis- tration, ensure financial sustainability of the registry system, and strengthen the legal effect of the registry system. 10414-04_Ch04.qxd 4/17/08 11:17 AM Page 50 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 51 5 Managing Energy Resources A lthough Yemen's oil reserves are fast depleting, careful management and investment of the remaining reserves are of paramount importance to Yemen's future. The welcome development of gas resources will continue to keep the hydrocarbon sector a vital part of the Yemeni economy. Yemen's development partners are increasingly demanding greater transparency in managing resource revenues as a condition for development assistance. For improving the manage- ment of oil and gas revenues, Yemen needs to join the Extractive Industry Trans- parency Initiative, end petroleum subsidies in a gradual but time-bound way, and improve the efficiency of refining and distribution of petroleum (the so-called downstream functions). An incentive framework to develop gas resources would also help in finding and exporting gas. In the power sector, the focus needs to be on improving the availability of electricity and bringing the public electricity cor- poration up to financial health. Conditions and Challenges in the Oil and Gas Sectors The hydrocarbon industry plays a central role in Yemen's economy. Oil revenues represented 90 percent of export revenues and over 70 percent of government rev- enues in 2005, fairly typical of non-diversified oil-exporting countries, such as those in the Gulf Cooperation Council. The Yemeni government obtains oil revenues through its share of oil production agreed with foreign mining companies under production sharing agreements. The government supplies crude oil to the two state- owned refineries, located in Aden and Marib, from its share of oil production. The remaining share is exported to international markets. Because of the mismatch between domestic demand and supply of refined products, Yemen imports about 10 percent of its domestic consumption (mainly diesel). Transparent and efficient management of Yemen's remaining hydrocarbon wealth is critical. Yemen has about 1.2 billion barrels of unexploited proven oil reserves and 17 trillion cubic feet (tcf) of gas reserves. Hydrocarbon wealth (net of production sharing agreements with foreign oil companies) is valued at US$30 bil- lion, 2.5 times the U.S. dollar value of GDP in 2005. The state-owned Aden refinery, 51 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 52 52 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W which processes most of the domestic crude, is a half-a-century old plant, operating at nearly one-third of its installed capacity. In the coming years, oil production is expected to decline by 12­16 percent per year.32 Yemen discovered oil and gas in 1984 and production started in 1986. Even- tually, the original estimate of oil reserves tripled to 3 billion barrels and gas reserves quadrupled to 17 tcf. By the end of 2003, nearly two-thirds of Yemen's total oil reserves, estimated at about 3 billion barrels, was depleted.33 With no export market for gas until very recently, Yemen has been prudently re-injecting gas into the field, even as it is released as associated gas with oil. Since 2000, daily oil production has leveled off at around 420 thousand barrels. At current extraction rates, oil resources will be exhausted by 2012, if no new discoveries are made.34 Recent projections of oil production show that production from new oil fields will not be able to offset the decline in established fields. Yemen therefore faces the prospect of an unprecedented decline in oil production. Although the government has recently initiated a gas development and export program, gas is unlikely to fill the role of oil in the future. Yemen successfully secured (in a highly competitive market) 25-year contracts to develop and export of one-third of its gas reserves. It is not known at this time what the net value will be of this program, as the price of paying for development, transport, and liquefaction have not yet been costed out. Estimates of the gross annual value of the secured export contract is likely to be around US$1.5 billion (2005 prices), just a quarter of the value of crude oil exports in 2005. However, with the dwindling oil supply, gas resources will also need to be utilized for the energy needs of the domestic economy. The Reform Agenda for Oil and Gas The prospect of a steady decline in oil production will pose a major fiscal challenge for Yemen. Export revenues of oil accruing to the government are projected to decline by 14 percent a year, a slightly faster rate than the decline in oil production due to rising domestic consumption needs. If expenditures are not reined in or alternative revenues are not mobilized, the fiscal deficit could balloon to over 12 percent of GDP by the end of the decade. Attempts to shrink the fiscal deficit by pruning develop- ment expenditures would compromise goals on poverty alleviation. Monetization of the growing fiscal deficit would feed the acceleration of inflation to near 14 per- cent by the end of the decade. In this context, a variety of policies could be adopted to mitigate the fiscal impact of declining oil production. Improving revenue management To improve the management of oil revenues, adopting transparent policies for the distribution of oil revenues and strengthening the governance of oil revenue man- agement are essential. Endorsing the Extractive Industries Transparency Initiative (EITI) would be a quick-win action to raise the government's credibility with the civil society and the international donor community. Under EITI, it is required that each government-owned company that operates in the oil and gas sector publishes sepa- 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 53 M A N A G I N G E N E R G Y R E S O U R C E S 53 rate accounts35 to track financial flows generated from the refining, marketing, and distribution of petroleum products in the downstream sector.36 Yemen is already placing detailed information about its oil sector into the pub- lic domain, comparable to countries that have already adopted the EITI. Yemen releases information on production by block, field, and company, unlike most other oil producers. But making the information available to the public speedily, auditing before releasing the information, better and clearer dissemination using the internet and engaging the civil society are the key steps that Yemen would need to take under EITI. Reforming price subsidies Another policy to better manage oil revenues would target Yemen's large and grow- ing subsidies on domestic petroleum consumption. Most oil exporters subsidize domestic consumption,37 particularly diesel and residential fuel oil, motivated by a desire to share the oil wealth among a wider population. The subsidy for diesel in Yemen is the fourth highest in the world. Yemen imports 55 percent of its diesel and 90 percent of its fuel oil needs38 at international prices, but sells them at lower administered prices. Estimates of petroleum subsidies for 2005, subsequent to the steep increase in July 2005, are shown in Table 5.1 (representing 9 percent of GDP). The main reason for the rise in subsidies is the infrequent adjustment in retail prices of petroleum products. As a result, domestic prices have deviated from international prices sharply increasing the subsidy on petroleum products. Nearly one-quarter of the petroleum subsidy is wasted.39 First, the budgetary cost to the government exceeds the benefit to the consumers. Of the total petroleum cash subsidy in 2003 (about YR 100 billion), up to YR 20 billion is wasted with no corresponding benefit to the population.40 Second, estimates suggest that nearly 7 percent of diesel consumption in Yemen is smuggled abroad. Yemeni prices for diesel and kerosene are well below international prices and are also often below that of neighboring countries, particularly the African countries across the Gulf of Aden. The Yemeni diesel price was estimated to be US$0.18 per liter at the end of 2005, compared with US$0.25 in Eritrea, US$0.54 in Djibouti, and US$0.80 in Somalia Table 5.1 Petroleum Product Subsidies Before and After July 2005 Before July 2005 After July 2005 World price Retail price Ratio to world Retail price Ratio to world (YR/liter) (YR/liter) price (%) (YR/liter) price (%) Diesel 90 17 50 35 39 LPG 909 250 43.7 400 44 Gasoline 86 35 75.6 60 70 Kerosene 97 16 46.9 35 36 Source: Staff estimates. 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 54 54 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W (data for 2003 for comparator countries).41 Although the price differences with these countries are likely to persist (because of domestic tax policies) even if Yemen removes the subsidies, diesel smuggling is likely to become less attractive. Although the diesel subsidy is a significant issue for the budget, sensible subsidy reform should cover all fuels.42 If only diesel subsidies are eliminated, the incentives to divert LPG and kerosene as diesel substitutes will increase, making shortages of these fuels in remote areas more likely. The government, in its price revisions announced in July 2005, creditably made the prices of diesel and kerosene the same, at YR35 per liter. Phasing the subsidy removal for all fuel types over two years would help in avoiding redirection of demand between fuels and allow the social protec- tion mechanism to respond. Reform is required not merely in the reduction of sub- sidies, but also in improving their transparency and in instituting a permanent system that automatically adjusts prices in line with world market trends. Increasing efficiency downstream Restructuring and reform of the downstream petroleum sector--refining and distri- bution of products--is necessary to promote efficient operation. The government dominates the downstream petroleum sector, and the private sector is limited to the operation of filling stations. Two public enterprises--YPC and YGC--control the purchase of petroleum products from the two government-owned refineries. The lack of competition creates inefficiencies in the market. Current laws and regulations pre- vent or discourage private investors from participating in certain segments of the market, such as refining, import and export of petroleum products, and distribution to customers. Yemen also lacks relevant environmental laws and regulations on the production and utilization of oil and gas, as well as the establishment of quality stan- dards and requirements for oil products. It is important to allow for private partici- pation and efficient competition to develop in all parts of the petroleum chain. A comprehensive refining strategy is necessary. Two government-owned refiner- ies monopolize the refining market. Aden Refinery controls the import and export of petroleum production in Yemen. Operating costs at both refineries are relatively high. Both refineries rely on government subsidies to continue operating, and no link currently exists between the quality of refined oil products and product prices. The absence of quality standards for refined oil products, combined with the use of inappropriate international reference prices for the calculation of oil products that are sold domestically, act as an incentive to refineries to import low-quality oil products to supply the domestic market and export higher-quality products and crude oil. The lack of relevant laws based on a coherent energy policy, and an inadequate pricing system have discouraged investors to finance the development of downstream infrastructure and has delayed economic utilization of gas. The government has expressed interest in building new refining capacity. Before doing so, however, it is recommended that the government consider (a) the eco- nomic viability of the existing refining operations using appropriate crude oil and product price values; (b) the likelihood that Yemen may be a net crude importer by 2010 and that the Marib field is depleting rapidly; (c) the future supply and demand 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 55 M A N A G I N G E N E R G Y R E S O U R C E S 55 scenarios for petroleum products (considering the future conversion of generators from diesel/fuel oil to natural gas); (d) the need to reform current pricing arrange- ments for oil products; (e) the desirability of opening up the refining market for pri- vate participation and competition; and (f) the possibility of allowing industry to source its own supply (including directly importing oil products). An assessment of efficient alternatives for the expansion of the production capac- ities for liquefied petroleum gas (LPG) should be considered. The expansion to meet future domestic and export demand could potentially be financed through private investment. LPG consumption has grown at a rapid clip of 10 percent a year in Yemen, mostly driven by the household sector. Yemen has large LPG reserves and has the potential to increase LPG production, as increased production does not affect the available volume of gas. Under the current market arrangements, HOC re-injects large volumes of associated gas without stripping out the LPG, due to limitations in gas plant capacity and storage facilities. HOC does not have an incentive to increase LPG production because the government owns the associated gas and the conden- sates and receives HOC-LPG free of charge. This deprives the government of poten- tial revenues from higher LPG production and exports. Conditions and Challenges in the Power Sector Yemen's government-owned power sector constrains private sector development, drains public resources, and fails to deliver adequately in rural areas. There are three main reasons for the urgent need to improve the performance of the power sector. First, the availability of power is an important constraint on private sector develop- ment, as revealed in recent Yemen Investment Climate Assessments (2001, 2005). Second, as the government-owned Public Electricity Corporation (PEC) is finan- cially bankrupt, the explicit subsidies and accumulation of contingent liabilities are a concern. Third, increased access to power in rural areas is a goal that the govern- ment has been unable to meet. Yemen's Investment Climate Assessment (2005) emphasizes the lack of access and poor quality of electricity as serious impediments to the economy. Poor infra- structure is a significant contributor to Yemen's poor productivity. Obtaining a con- nection to the power grid is slow, reportedly involving a 31 day delay. Over half of firms wanting to connect report the expectation of an informal payment or gift, a more frequent occurrence than the reported rates in Egypt and Saudi Arabia. The typ- ical enterprise in Yemen suffers from a wildly unreliable power supply. On average, a firm in Yemen suffers power loss or fluctuation roughly 193 times per year. Com- pared with the 2001 survey results, electricity reliability has actually worsened, reflecting the increasing shortage of supply (Figure 5.1). Businesses report that on average, 10 percent of their sales are lost to power supply problems. To compen- sate for unreliable supply and to substitute for public power, the great majority of medium and large firms own generators (Table 5.2). However generator ownership requires a substantial financial outlay and is subject to variability in terms of effi- ciency of use. Both factors work against small firms and help explain why small firms derive substantially less of their power from generator supply. In interviews, business 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 56 56 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 5.1 Infrastructure Interruptions, 2001 and 2005 200 183 180 2005 2001 160 140 year 120 last in 100 days 82 80 74 Average 60 39 40 20 0 Frequency of Freqeuncy of power outages insufficient water supply Source: Yemen Investment Climate Assessment 2005. owners state that (with the diesel subsidy) generator power is less expensive than the price of power from the main grid, so in fact they prefer to rely on generator power. Thus the unreliability and high cost of public power not only impose a drag on productivity, but also a barrier to entry and competitiveness for small firms. Energy demand will outstrip available supply in the near term. Average monthly consumption of electricity is growing rapidly, and, by 2004, had reached 236 kWh per consumer connected to the PEC grid. Overall energy demand continues to grow at a steady pace of around 10 percent per year. The energy demand forecast for the PEC interconnected system over 2005­20 is presented in Figure 5.2. The current gap of about 200 MW would increase significantly to 1000 MW or more unless major new investments in new generation plants are made within the next decade. In addi- Table 5.2 Power Interruptions and Generator Supply, 2005 Firm size ICA survey items Small Medium Large Frequency of power outages (avg. no. of times last year) 183 205 212 Have own generator (%) 44 79 94 % of electricity coming from own or shared generator 42 50 72 Source: Yemen Investment Climate Assessment, 2005 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 57 M A N A G I N G E N E R G Y R E S O U R C E S 57 Figure 5.2 Forecast of Demand for Electricity, 2005­20 3,000 Maximum available 2,500 generation (MW) 2,000 1,500 Peak demand (MW) 1,000 500 0 2005 2006 2007 2008 2010 2015 2020 Source: Project Appraisal Document (PAD), Power Sector Project, Yemen, World Bank, 2006. Note: The forecast is derived from the PEC "low growth" projections of peak demand, assuming that system load factor remains at 65.5 percent. tion to the 220 MW of new diesel plants being installed at the main load centers (Sana'a and Aden), a capacity of 300 MW of new generation capacity has been con- tracted to be installed and commissioned in 2008 in Marib so as to close the gap between projected demand and available capacity. To provide adequate reserve capacity for the PEC interconnected system, other gas turbine generation projects need to be executed soon. The public power sector is financially unviable despite increasing tariffs. Weighted average tariffs have increased regularly over the last few years to reach US$0.064 per kWH in 2005. This is not too low by regional standards and yet cov- ers only about 80 percent of operating costs. The tariff structure still acts as a blan- ket subsidy to a large share of consumers, such as households consuming electricity within the limits of the first tariffs block of 200 kWh per month. The policy pro- posed in Yemen's poverty reduction strategy--to charge economic tariff rates, replacing the generous lifeline of 200 kWh, at below US$0.02 per kWh--has not been implemented. Furthermore, Yemen is the least electrified country in the Middle East and North Africa region, with electricity coverage stagnating and reach- ing only 40 percent of total population. The low access and the absence of reliable electricity supply, particularly in rural areas, have been recognized as severe con- straints to economic growth and poverty reduction. Power sector reforms are proceeding slowly. The improved maintenance of the existing power plants and the paring down of network losses contributed to increases in the availability of the installed capacity, although not at a pace that surpassed the steady growth in demand. Any improvement in access to electricity, particularly in 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 58 58 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W the rural areas, will require a strategy for improving rural access by judiciously com- bining alternative sources of power. The difficulties in mobilizing funding for the projects identified in the poverty reduction strategy thwarted the objective of aug- menting installed capacity by nearly one-third (to 1,266 MW) by 2005. In the long term, adequate incentives are needed to attract private investments in the genera- tion and distribution (including the development of sustainable rural electrification projects) of electricity. The government plans to implement a gas-to-power policy. Generation of elec- tricity should be shifted from the very expensive liquid fuels (Heavy fuel oil, diesel) to the domestically available natural gas. The government has decided to meet its future power needs primarily through gas-fired single cycle plants and has formally allocated 5.2 tcf of natural gas for power generation for the next 25 years. The gov- ernment has also decided to locate these power plants near the load centers. Accord- ingly, there will be a need for natural gas pipelines to be built, and the optimum network design is being covered under a gas utilization study. The Reform Agenda in the Power Sector Sustainable development of Yemen's power sector will require a variety of mea- sures to improve the efficiency of operations, the equity of distribution, and the clarity of legal and regulatory frameworks. The operation of the state-owned utility PEC needs to be more efficient. In a bid to improve its financial and technical performance, the PEC initiated aggressive pro- grams to collect unpaid bills, reduce electricity losses in the distribution networks, and rehabilitate its generation plants and transmission networks. Additional mea- sures will have to be implemented before PEC's performance can be rated as sat- isfactory. Some of the major transmission and distribution measures that will be tackled over the medium term include: (a) reduction of losses from the current level of 25 percent to 19.5 percent by 2010; (b) establishment of tariff-setting principles within a reasonable timeframe to reach full cost recovery and tariff levels in an equitable manner; (c) increased attention to maintenance expendi- tures, improved bill collection, etc; (d) functional unbundling of generation, transmission and distribution to strengthen cost control and accountability; and (e) restructuring to develop an effective organizational function, and defin- ing criteria for structuring regions and power plants. The challenge of rural electrification needs to be addressed. As a first step in addressing its rural electrification challenges, the government has launched a series of studies to develop effective policies and encourage the establishment of community- owned and operated utilities in the rural and isolated areas. Under financing from donors such as the Global Environmental Facility, the government is formulating a comprehensive rural electrification strategy. The strategies will initially be tested through pilot schemes before full-scale implementation. A legal framework needs to be adopted. A draft Electricity Law is currently under review by the government. The ratification of this law is paramount to the imple- 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 59 M A N A G I N G E N E R G Y R E S O U R C E S 59 mentation of reforms in the electricity sector. The law will strengthen corporate governance of PEC, provide an enabling environment for private sector partici- pation in the generation and distribution of electricity, provide adequate provi- sions for new institutional setups, and present policy directions for unbundling the sector at a later stage. Ratification of the law by the parliament is expected by June 30, 2006. A regulatory framework needs to be established. The empowerment of an indepen- dent regulatory authority is essential for the development of a financially sus- tainable electricity sector. The Electricity Law is fundamental to the creation of an independent regulatory authority, which will cover the legal aspects necessary to create an independent regulatory entity and define the regulatory philosophy and principles of its application. 10414-05_Ch05.qxd 4/17/08 11:20 AM Page 60 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 61 6 Managing Water Resources Y emen's deepening water crisis calls for immediate action. Yemen has one of the world's lowest rates of per capita water availability (150 cubic meters per year). It has no perennial surface water and depends entirely on rainfall, ground- water, and flash flooding. Much of what little water is available is allocated to agri- culture; in fact, Yemen has the lowest proportion of water used for domestic purposes and the highest proportion used for agriculture among many comparable countries (Table 6.1). Although Yemen has recently developed commercial irriga- tion systems for agriculture and piped water and sanitation services in both urban and rural areas, these developments have raised demand beyond sustainable levels, resulting in very rapid mining of groundwater, extreme water supply shortages in the major cities, and limited access to safe drinking water. The main causes of the water crisis are clear: the rising demand as population grows and market-led agri- culture develops; the exploitation of groundwater, that is now getting out of hand; the institutional framework that has promoted expansion rather than efficient use and sustainable management; and the weak capacity of governance. The likely increases in water consumption in all sectors will cause per capita water availability to dip below 100 meters per year in the foreseeable future. Mining of groundwater is creating problems of equity, an unsustainable "bubble" of agricultural prosper- ity, and competition between urban and rural sectors for the resource. Limited results, despite a decade of reform Since the early 1990s, Yemenis have been aware of the impending water crisis. Early measures focused on institutional restructuring and reform. The government moved first on the institutional front. The National Water Resources Authority (NWRA) was created in 1996 with support from the UN Development Programme and the Dutch government, with the intention of locating responsibility and creating capacity for an integrated approach to water resources management. For urban water, a process of decentralization back to autonomous utilities (called "local corporations") began in the 1990s, and a restructuring program was developed over the period 1996­98 with GTZ and World Bank support, and was formally adopted in 1999. The General 61 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 62 62 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Table 6.1 Water Withdrawal, by Sector, in Yemen and Comparative Countries, 1998­2002 (percent of total) Saudi Algeria Israel Jordan Kenya Lebanon Qatar Arabia Tunisia Yemen Agricultural use 64.9 62.4 75.2 63.9 66.7 72.4 89.0 82.0 92.0 Domestic use 21.9 30.7 20.8 29.7 32.6 24.1 9.8 13.8 6.9 Industrial use 13.2 6.8 4.0 6.3 0.7 3.4 1.2 4.2 1.1 Total 100 100 100 100 100 100 100 100 100 Domestic as % of 33.7 49.2 27.7 46.5 48.9 33.3 11.0 16.8 7.5 agricultural use Source: Aquastat Database, Food and Agriculture Organization, 2006. Authority for Rural Water was created in the early 1990s to bring together all gov- ernment activities on rural water supply and sanitation; however dramatically poor performance is currently compelling a restructuring of the whole rural water sector. Attempts were also made (largely under the IDA-financed Land and Water Con- servation Project) to refocus irrigation development on water use efficiency, partici- patory approaches to spate management, groundwater recharge and watershed management. Following a diesel price hike in 1996, the government created the Agri- culture and Fisheries Production Promotion Fund to invest a proportion of the extra revenue from diesel sales into projects promoting agricultural productivity. In 2003, a new Ministry of Water was created and charged with implementing the govern- ment's National Water Sector Strategic Investment Plan, which is more integrated, targeted, participatory, and inclusive than previous strategies and, if implemented, should make the water sector more service-oriented and pro-poor. The plan remains vague, however, on implementation of the water law and is generally weak on insti- tutions and sector management capacity. Overall, the reforms have made a contri- bution to reaching sector objectives, but broader and more sustained strategic actions are needed to meet the challenges ahead. Challenges in the Water Sector Yemen's water sector faces four challenges: (a) mismanagement of water resources, especially over-mining of groundwater and misallocation of water for unproductive uses; (b) poor access of the population to water and sanitation; (c) deterioration of water sources and water quality; and (d) weak institutional capacity. Mismanagement of water resources Groundwater use is driving rural growth, but groundwater mining is unsustainable and inequitable. Aided by technology and a profitable market (particularly in qat), groundwater abstraction has steadily increased since the mid-1980s in most areas of Yemen. It is estimated that there are about 50,000 private wells in the country (8,000 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 63 M A N A G I N G W A T E R R E S O U R C E S 63 operational wells in the Sana'a Basin alone, half of which are tubewells) together with more than 200 drilling rigs. By 1990, irrigated agriculture alone was consum- ing 130 percent of Yemen's renewable water resources. By 2005, this ratio had reached over 150 percent. If expansion continues, the overdraft will reach 200 per- cent by 2025--although many aquifers would be pumped dry before then. Apart from being unsustainable, groundwater mining is also inequitable. Under current anarchic conditions, better-off farmers have captured the lion's share of groundwater, and there is evidence that both shallow groundwater and springs available to poorer farmers have been depleted or exhausted. Towns too, have typically helped them- selves to water from rural areas, leading to social unrest and rural impoverishment (for example, the case of Al Haima, a green wadi, or water area, which was made a desert when Ta'iz city pumped out its water). Attempts to negotiate transfers, tried in the Ta'iz Pilot Project, have not produced a workable model. Water markets are one way of solving the rural to urban transfer problem. In practice, water markets already serve 30 percent of the needs of Sana'a, and large proportions of needs in other towns. In Ta'iz, 90 percent of drinking water is pro- vided from private purification plants. The present private markets, however, are economically inefficient and informal. They lack an enabling framework to encour- age investment, as well as clear water rights. Furthermore, there is no provision for equity or sustainable management in the source area. The paradox of groundwater mismanagement in Yemen is that the nation has three incompatible objectives: conserving groundwater, sustaining the rural econ- omy, and transferring water from agricultural to higher value domestic and indus- trial use. If poverty reduction objectives are added to these objectives, it is clear that Yemen faces tough choices. Poor access to water and sanitation Overall access to safe drinking water is very low, estimated at 31 percent nationwide. Access to sanitation is lower still, at 21 percent. This low coverage contributes to Yemen's dramatically poor indicators of human development: a 42 percent poverty headcount, a 78 percent illiteracy rate for adult females, and 46 percent malnour- ishment rate for children under five. Although Yemen has ambitious targets under the Millennium Development Goals for water (Table 6.2), they will be difficult to achieve in urban and rural areas alike. The Urban Water Sector An urban water sector reform program is underway to improve coverage and service levels. However, the urban population is growing fast and a very high rate of invest- ment will be necessary for Yemen to achieve its Millennium Development Goal tar- get of "halving the number of people unserved by 2015." Achieving the Millennium Development Goals target will also require adapting service levels to what people want and are willing to pay for. It may, in fact, be better to treat the MDGs as long- term goals rather than fixed time-bound targets and to progressively muster the 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 64 64 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Table 6.2 Yemen's Millennium Development Goals for Water Urban Rural NWSSIP revised 2002 2015 2000­03 2015 target in 2015 Water supply coverage target 47% 75% 25% 62% 33% Sanitation coverage target 25% 63% 20% 59% 26% Population covered--water 2.4 6.1 3.4 12 7 supply (millions) Population covered--sanitation 1.3 5.1 2.8 11.1 5 (millions) Total population (millions) 5.2 8.1 13.8 19 . . . Annual investment required 120 150 50 130 100 (US$ in millions) Source: Yemen National Water Sector Strategic Investment Program. financing and implementation capacity needed to reach these goals. However, the pace of reforms needs to be accelerated through decentralization, commercialization of service provision, and public-private partnerships. Implementation of the reform program to create local corporations as auto- nomous water authorities is ahead of schedule, which, while impressive, has tended to leave essential institutional development behind. Insufficient attention has been paid to the strengthening of management. Some local corporations have prelimi- nary business plans, but arrangements for capacity building and technical support are urgently needed. Some tariffs do not even cover operating costs and send the wrong signals to both consumers and utility managers. The average tariff in Sana'a for domestic water supply and sanitation is YR100 per cubic meter (US$0.52 per cubic meter), corre- sponding to a "typical" household that consumes less than 35 cubic meters per month. The water supply tariff includes an 80 percent added tariff for wastewater collection. Given the efficiency losses in the distribution system, the average monthly bill is not enough to cover operations and maintenance costs plus depreciation, let alone investments. At these low levels of tariffs, consumers see no incentive for water conservation, while suppliers have no incentive to improve performance. Consumers are generally willing and able to pay much higher prices for water ser- vices than those currently charged, if local corporations can demonstrate better ser- vice delivery, efficiency, and accountability. Cost recovery would also encourage private sector participation and financing in building new infrastructure for water supply, as well as sewage collection and treatment. The Rural Water Sector Despite new approaches, the rural water program is in disarray and the Millennium Development Goals are a very unrealistic target. New approaches have been defined 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 65 M A N A G I N G W A T E R R E S O U R C E S 65 since 1996: (a) to work through community-based organizations; (b) to adopt a demand responsive approach; (c) to improve field implementation; (d) to aid the emergence of nongovernmental organizations; and (e) to develop low cost and appropriate technology. Several agencies are working in line with these principles, and the Bank-supported Rural Water Supply and Sanitation Project is piloting a full package of "demand-driven" interventions. However, the sector is still in disarray, largely because the sector strategy is still under preparation, and GARWSP, the major governmental agency involved in implementation, needs radical overhaul. Invest- ment levels are low compared with urban levels (US$4 per head of the rural popu- lation in 2002/03 compared with US$25 per head in urban areas), and public investment is focused in peri-urban areas with no mechanism for targeting the poor. Human resources and technical abilities on the ground are extremely limited and, in most cases, women are not involved. Many projects have been started and aban- doned by GARWSP, and those completed are usually handed over to local commu- nities without much benefit of training or financing for maintenance. The problems in the rural water supply and sanitation subsector include both technical and insti- tutional challenges. In implementation, agencies have a predilection for pumped schemes despite Yemen's difficult topography, and rainwater collection is not uti- lized to a great extent, despite its cost and sustainability advantages. Hygienic sani- tation in the rural areas is very limited. Coverage is 5­10 percent of households in small villages, and up to 20 percent of households in larger settlements. Deterioration of water sources and quality Yemen's ancient terrace systems and historical dams provide excellent examples of traditional watershed management, reducing soil erosion, slowing damaging run- off, aiding infiltration to groundwater and streams, and providing high-yielding agricultural land for the farmer. However, modern Yemen has not proved as adept at dealing with water management issues. Modern Yemeni communities have no tools to manage the classic watershed management tradeoff between upstream and downstream interests. As a result, there are frequent signs of catchment deterioration affecting both land and water: erosion, deforestation, groundwater depletion, saline intrusion, dried-up springs, and floods. In rural areas, water quality43 is often affected by pollution from human waste, agricultural fertilizer use, and, in some cases, sea- water intrusion and other point source pollutants. Current watershed management activities are concentrated on the flawed small dams program that does not often improve overall basin efficiency and suffer from poor design, questionable contracting practices, and low construction standards. Investments under the Sana'a Basin Project also concentrate on dams and down- stream interventions, with no investment in the upstream watershed. A broader approach to integrated watershed management is required. Watershed management is, however, one of the hardest challenges in development, because an integrated approach necessarily encompasses many functions, many institutions, and many costs and benefits to balance. Given the multi-institutional challenge, there is scope for proactive involvement by donors and nongovernmental organizations to relieve 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 66 66 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W the burden on government agencies that typically find it hard to coordinate the mul- tiple interventions needed for watershed management. Weak institutional capacity Despite an impressive record in creating a modern administration from virtually nothing over the last thirty years, Yemen faces an enormous set of problems in its public service. Competencies, management, and motivation are all low and, as a result, performance is frequently negligible or perverse. This contributes to a very weak governance environment; the more complex or innovative activities are a par- ticular problem--for example, the promotion of conjunctive use of surface water and groundwater, or wastewater reuse, or watershed management--all require energy and coordination skills lacking in the public sector. Clearly, it is essential to minimize the burden placed on government and to place more reliance on nongovernmental and community organizations, the uni- versities, and the private sector. For functions that are the core responsibility of the government, outsourcing and contracting may be possible. Participation at every level is key. Wherever possible, public interventions should be carried out through decentralized structures, which are more accountable and subject to feedback from communities. Where there is no alternative to working through the public sector, civil service reform may offer some hope. For the water sector, the Ministry of Agriculture and Interior's reform program `Agenda 21 for Agriculture', prepared in 1998­99, is one such program ready to go.44 The Reform Agenda for Water Resources The most critical measures needed to avert severe water stresses are intended to address weaknesses of governance, to increase participation in decision-making, and to introduce market-based mechanisms to improve allocation of scarce resources: Depletion of groundwater. Lacking strong public governance structures, over-mining of groundwater can be controlled by alternative means. Such alternative means include intensive user involvement and organization, self-regulation by water user associations, monitoring and information sharing, tradable water rights, and improving incomes through technological improvements. Watershed management. Current watershed management activities are concen- trated on the flawed small dams program, which does not often improve overall basin efficiency and suffers from poor design, questionable contracting practices, and low construction standards. Given the multi-institutional challenge, there is scope for proactive involvement of donors and nongovernmental organizations to relieve the burden on government agencies, which typically find it hard to coor- dinate the multiple interventions needed for watershed management. Better allocation. Allocation of water to its best economic use can be improved by introducing economic instruments. The problem with the present private markets 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 67 M A N A G I N G W A T E R R E S O U R C E S 67 is that they are economically inefficient and informal. There is no enabling frame- work to encourage investment. Water rights are unclear and there is no provision for equity or sustainable management in the source area. The development of more formal water markets should be a priority. At the current low levels of tar- iffs for domestic water supply that do not even cover operating and maintenance costs, consumers see no incentive for water conservation while suppliers have no incentive to improve performance. 10414-06_Ch06.qxd 4/17/08 11:21 AM Page 68 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 69 7 Slowing Population Growth P opulation growth in Yemen, at 3 percent per year, is well above the region's average of 1.9 percent and the average of 2.1 percent for low-income countries. Yemen's population of approximately 19.7 million (in 2004) is youthful, which will mean that an increasing number of couples will be having children in the coming decades. Even if fertility were to drop immediately to the "replacement level" of two children per couple, the population would continue to grow for a long time, as the increase in the number of younger couples having children will more than offset the decline in fertility. Although an increase in Yemen's population is inevitable, the growth rate can gradually be reduced by selectively implementing the country's com- prehensive population policies, for example, by increasing the demand for family planning, meeting that demand, and reducing the population momentum by encour- aging later marriage. Yemen is carrying the burden of a stalled demographic transition.45 With declin- ing mortality rates, Yemen entered the second stage of demographic transition around 1990. Lately, the transition appears to have stalled. Annual child mortality reductions are stagnating, and fertility decline is slow. As of 2003, with the total fer- tility rate is estimated at 6.2 children per woman, the crude birth rate at 41.3 (per 1000 population), and the crude death rate at 11.3 (per 1000 population), little has changed from the 1997 estimates of the Demographic and Household Survey (Republic of Yemen, 2005). On current trends, the population will nearly double to 40 million in 20 years, nearly 5 million higher than the target of the national popu- lation policy adopted in 1997 (Figure 7.1). Each additional Yemeni child born is estimated to cost the government US$250 annually in 2005 prices for education and health care.46 The maternal mortality rate also appears to be stagnating, with little change between the 1997 estimate of 351 per 100,000 live births (Central Statistical Office and Marco International 1994) and the 2003 rate of 365 per 100,000 live births (Republic of Yemen 2005). These rates are among the highest in the world, with levels similar to those in Sub-Saharan Africa (Rushwan 2005). Yemen's population is very young, with 45.7 percent under age 15, resulting in a high dependency ratio, and fueling the population momentum (Republic of Yemen 2005). Urbanization is also proceeding rapidly, with the urban 69 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 70 70 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Figure 7.1 Total Fertility Rate in Yemen and Selected Comparator Countries 9 8 Yemen, Rep. 7 6 5 Sub-Saharan Africa Middle East & 4 East Asia & Pacific Low income North Africa 3 2 High income: OECD 1 0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2003 Source: Demographic Health Surveys. population currently estimated at 26 percent, up from 17 percent in 1975. Yemen's population is 19.7 million, according to preliminary results of the 2004 census (Republic of Yemen, Central Statistical Organization 2005). Using these preliminary figures, average household size is calculated at 6.84 persons, down from 7.0 in 1997. Two important proxies of fertility--contraceptive use and age of marriage--have also improved. While this represents significant progress, recent rates of improve- ment show signs of slowing: The spread of contraceptive use has slowed. The gap between the number of children women want and the actual number of children born has decreased steadily since 1992 (5.4 versus 7.7 in 1992, compared with 4.6 versus 6.2 in 2003), but remains high. This suggests that contraceptive needs are being met to a greater extent than they were in 1992, but there is still a long way to go. As of 1997, 43 percent of rural and 80 percent of urban women knew a source for obtaining contraceptives, with no more recent data available for comparison. Public hospitals and health centers remain the primary source for contraceptives (52.1 percent of users) according to the 2003 Family Health Survey. Public sources of contraceptives and reproductive health services are increasing, from approximately 300 in 1999 (Bos, 2003) to 1,239 in 2005, according to Ministry of Population and Public Health data, but with actual regular availability of contraceptives being much more limited. Median age at marriage has improved steadily. Median age at first marriage is rising (17.2 years in 2003 versus 15.8 in 1991/92), and the pace of change appears to be accelerating. The difference in age of marriage between women age 20­24 and those aged 25­29 is a full two years. However, the mean age at which it is con- sidered ideal for a woman to marry is still low--18.3 years, with nearly 50 percent 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 71 S L O W I N G P O P U L A T I O N G R O W T H 71 of married women preferring a marriage age of below 20 years for their daughters. Fertility levels decrease with rise in age of first marriage, and school attendance is a powerful deterrent to teenage pregnancy, with only 1.4 percent of 15­19 year olds in school becoming pregnant or mothers versus 12.3 percent of those not in school. This suggests the crucial role of education in decreasing fertility. Yemen's population indices are worse than any other country in the Middle East and North Africa region, across the board for all of the indicators of fertility and mater- nal health. Similarly, child health indicators are significantly worse, including the percentage of children under five who are malnourished and the level of education enrollment. The lessons from across the region and the developing world show that, even with limited means, countries can put into place effective measures to reduce fertility rates. The most important factors are effective education and health care sys- tems, strong government support, and well-planned family planning and counsel- ing services (Box 7.1). B O X 7 . 1 Lessons on Controlling Fertility from Other Countries in the Region The experience of Middle East and North African countries shows that the religion and culture of the region are not absolute deterrents to reductions in fertility. Iran is one of the success stories in the region, with fertility dropping from 6.6 children per woman in 1985 to 2.5 in 2000. Policies that ensured this success were strong political will and support from religious authorities, including the use of fat- was (religious rulings) in support of family planning, which were often displayed in health clinics, and the use of mosques to preach a policy of small families, as well as the provision of family planning services by the Ministry of Health for women between the ages of 15 and 49 years on a sustainable and regular basis, with a strong focus on counseling and gaining back women who broke off counseling. These policies were built on a well-functioning national health system. Egypt has successfully used some of these same measures, including the issu- ing of fatwas, but cultural reasons still act as barriers for many Egyptian couples to access family planning services, and thus the gains have not been as great in Egypt. Despite such relative successes, it is not unusual for family planning to become politicized in Muslim countries, which remains a danger in Yemen, and a reason to proceed carefully. The prevailing prices of birth control pills and devices are not a constraint in Egypt, but perhaps are in Yemen, as only families at the higher eco- nomic levels tend to use modern contraceptives in Yemen. Oman, like Yemen. had very high fertility rates in the late 1980s. In slightly more than a decade the total fertility rate in Oman declined by 3.5 live births per woman to 5.1, whereas Yemen's fertility decline has been slow. The difference is related to Oman's political stability, expansion of education opportunities for girls, and rapid expansion of health and sanitation services. To date, Yemen's decline in fertility has been primarily due to women controlling fertility within marriage, whereas, in Oman, it was due to delayed age of marriage (Eltigani, 2001). 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 72 72 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Yemen's population policy Yemen has set a national population policy for 2001­25, which focuses on reduc- ing maternal and child mortality, decreasing population growth, promoting con- traceptive use, addressing population distribution issues, and promoting human and economic development. Its Population Action Program is the country's major vehicle for population policy. The 2001­05 program has been extended to 2010, and follows a comprehensive and integrated approach to reproductive health care and human development. It proposes a broad set of actions to reach its population targets, encompassing improvement in health care delivery, especially for women and children; information and education about family planning and availability of contraceptives; and improvement of the economic, social, and educational status of women. This comprehensive policy follows international standards in targeting the most important known demographic determinants and is consistent with the measures found to be successful in other countries. The Population Action Program is broadly consistent with the other sectoral and human development plans, such as the poverty reduction strategy, the five-year development plans, and the Millennium Develop- ment Goals, with which they have been integrated. Nonetheless, a good deal of work needs to be done to bring them all into full alignment for consistency, follow up, and costing. Thus, Yemen's population policies are appropriate and enjoy a wide base of support. It is likely that under the current policy fertility will continue to decline slowly, but that child mortality will experience slower declines, and urban- ization will continue at a rapid rate. The problem has been implementation, rather than the policies themselves. Most of the objectives of the population action program have not been achieved. Two overriding factors have influenced the success of implementation. One is weak governance; the other is budget constraints: Weak governance. Accountability, efficiency, administrative capacity, and trans- parency have been increasingly identified as major factors slowing development progress in Yemen, and measures to address these deficiencies will improve the ability of government to implement effective population policies. Strengthening governance is a long-term endeavor, however, as are the majority of the policies of the Population Action Program. Budget constraints. The poverty reduction strategy 2003­05 has costed out its pro- gram, which is broadly consistent with the Millennium Development Goals and with the Population Action Program. However, as pointed in this analysis, accu- rate costing cannot as yet be carried out because the three human development frameworks are not properly conceptualized and do not provide a consistent, comprehensive, and quantified set of processes and outputs. One conclusion of this analysis is that the "poverty reduction strategy, Population Action Program and Millennium Development Goals will be confined to a limited share of natio- nal resources as long as they do not tap into the five-year planning resources." It remains unclear as to what extent these policies and programs are affordable. 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 73 S L O W I N G P O P U L A T I O N G R O W T H 73 According to the poverty reduction strategy, the cost of development of human resources in 2003­05 will be YR 210,923 million (Republic of Yemen, 2002). Given these budget uncertainties, as well as the weak implementation capacities, it is likely that Yemen's MDG targets in health and population are unattainable. The Ministry of Public Health and Population calculated the cost of reaching all the Mil- lennium Development Goals related to health to be $53.52 per capita per year between 2006 and 2015. This compares unfavorably with the 2002 levels of per capita government expenditures for health of only US$6 (WHO, 2005). Given the current resource envelope, it is unlikely that such a dramatic increase in government funds will be made available. Program selectivity will be key to achieving success on population issues, given the constrained resource envelope. This does not argue against the broad strategy of the Population Action Program. It is well recognized that progress in the demo- graphic transition is linked with overall human and economic development, both as a cause and an effect. In addition, overall institutional strengthening of the health and education sectors are the necessary foundation for improving family planning, mortality, and girls' education indicators in the long term. Nevertheless, it is possi- ble to prioritize within the short term. A second implication of this costing exercise is that the health sector, key to any efforts to improve contraceptive usage and decrease mortality, is vastly under funded at present levels. Even if donor and pub- lic sector efficiency were to improve to optimal levels, funding would still need to increase. Although funding cannot increase tenfold to the levels suggested by the MDG-costing exercise, significant additional investment will be required to imple- ment essential population programs. The Reform Agenda for Population Policy The broad-based human development focus of the Population Policy should con- tinue. However, given the cost of implementing this broad program and the huge task of building efficient and effective institutions in this fragile state, progress is expected to be slow. With the population momentum now building, proceeding at a slow pace will lead to the creation of a high population burden in the future, with its attendant economic and human development costs. Creating a takeoff in fertility and mortality reductions should be the focus in the short term. Such a takeoff is entirely possible in Yemen, given the background consensus building, policy initiatives, and coordination that have taken place over the past 10­13 years since the National Population Council was formed. The most important tasks for the short term are rapid improvement of reproductive health, family planning, and child health services; acceleration of girls' school enrollment and women's literacy; promotion of family planning to the household level; and effective targeting of poor, illiterate, and rural households. Within these priority areas, concrete actions need to be taken. Candidates for such action are described in detail in Appendix Table A.20. 10414-07_Ch07.qxd 4/17/08 11:21 AM Page 74 74 Y E M E N : D E V E L O P M E N T P O L I C Y R E V I E W Yemen's current rapid population growth can be slowed down, even given all of the constraints posed by the lack of budget resources and governance capacities. Yemen has a sound population policy that follows a comprehensive and integrated approach to reproductive health care and human development. This policy follows international standards in targeting the most important known demographic deter- minants and is consistent with the measures found to be successful in other coun- tries and the policy enjoys broad public support. Although implementation has been weak so far, it can begin to be implemented selectively in the short term, focusing on information campaigns, health of children and mothers, and education of girls, for example, to help Yemen's demographic transition to take off. 10414-08_Notes.qxd 4/17/08 11:22 AM Page 75 Notes 1. Countries with low human development are those with scores less than 0.5. 2. Proven reserves are the reserves that have a reasonable probability of being recovered at the current oil price, extraction costs and technology. 3. Based on Ministry of Oil and Minerals (Petroleum Exploration and Produc- tion Authority) estimate, proven reserves stood at 675.26 million barrels. 4. The new estimate (end-June 2006) for the sum total of proven, probable and possible reserves amounted to 1.417 billion barrels and the proven reserves were 707 million barrels. These estimates are higher than the estimate at the end of 2005 by 5 percent for proven reserves and 17 percent for all reserves. 5. The World Bank has been calling for diversification of export revenues since 1986. 6. Data on blocks at the end of 2003. 7. In five of the six dimensions of governance identified by Kaufman, Kraay, and Mastruzzi (2005)--the exception being voice and accountability-- Yemen's quality of governance is the poorest when compared to United Arab Emirates, Oman and Saudi Arabia. 8. Details on the national reform agenda and the progress under it are avail- able at http://www.ymenccg.org 9. World Bank (1997) estimated saving in public expenditure per birth averted at US$161.22 per year in 1995 prices. To derive the estimate in 2005 prices this has been adjusted for changes to inflation and exchange rates between 1995 and 2005. 10. Fiscal sustainability is the requirement that the government should generate enough primary surplus to pay off all outstanding debt. Primary surplus is the excess of non-interest revenues less non-interest expenditures. 11. Optimal in the sense of preserving per capita oil wealth. 12. The government has started taking steps to join the EITI initiative. 13. This has been highlighted by the kidnappings of foreigners in 1998, the ter- rorist attack on the USS Cole on October 12, 2000, and the explosion of a French tanker on October 6, 2002. 14. The categorization as "low-income country under stress" or "fragile" both draw on the World Bank's Country Policy and Institutional Assessment 75 10414-08_Notes.qxd 4/17/08 11:22 AM Page 76 76 N O T E S indicators (CPIA). The initiative defines 35 countries with CPIA score of 3.2 or below in 2005. Yemen misses the categorization by a whisker with CPIA rating of 3.3 in 2005. DFID labels 46 countries as fragile states on the crite- rion that they were in the first two quartiles of CPIA ratings any year between 1999­2003. 15. World Bank's Yemen Poverty Update (2002) estimated the poverty line on the basis of the 1998 Household Budget Survey. The food poverty lines for Yemen are YR2,101 (US$15.5) per person, per month at the national level, YR2,093 (US$15.4) in urban areas, and YR2,103 (US$15.5) in rural areas. Nationally, in 1998 the poverty lines for Yemen were YR3,210(US$23.6) per person per month, YR3,195 (US$23.5) in urban areas, and YR3,215 (US$23.7) in rural areas. 16. See "Notes on Poverty Predictions and Projections for Yemen, 1998­2003," World Bank, April 25, 2003. In the absence of up-to-date household survey data, the analysis pursued a twofold approach. A consumption function was estimated over the 1998 data, and then fitted to the Arab Family Health Sur- vey, carried out in 2003. The predicted household per capita expenditures were then used to calculate predictions for poverty rates. Second, poverty pro- jections were obtained by carrying out a micro simulation over the 1998 data, under the assumption that household per capita expenditure grew at the same rate as per capita output in the sector of activity of the household head. 17. The definition of unemployed includes those who are available for work but not seeking. Open unemployment rates do not tell a full story in poor economies because the poor cannot afford to be openly unemployed. 18. Based on labor demand surveys. 19. The gender dimension of the education sector highlights Yemen's achieve- ments over the past decade. Female gross primary enrollment rate has dou- bled from 34 percent in 1990 to 68 percent in 2002. Female net primary enrollment has also shot up from 28 percent to 59 percent over the same period and compares favorably to the male percentage, which has moved up from 74 percent to 84 percent. 20. However, the surveys report some perceived improvements in the areas of crime, theft, and disorder, regulatory policy uncertainty and a sharply improved waiting time for services and approvals. 21. No update available for 2005 by this measure. 22. The list of comparators include Malaysia and Indonesia because Yemeni nationals have migrated to these countries in the past century. 23. Yemen's institutional history and scattered nature of settlements also con- tribute challenges to governance in Yemen. Not until the 1970s a civil ser- vice structure was established in the northern part of Yemen unlike the south or in some other developing countries. The geographically dispersed settle- ments with difficult access also inhibits quick and effective governance. 24. In today's Yemen, the term shayakh has come to denote not only tribal leaders but also rich and powerful social leaders who like themselves to be called so. 10414-08_Notes.qxd 4/17/08 11:22 AM Page 77 N O T E S 77 25. Yemen Country Social Analysis, World Bank January, 2006. 26. Election results in this section are obtained from Saif (2000) and www. ElectionGuide.org. 27. In addition, as Rodrik (1994) argues, the political benefit-cost ratio of macroeconomic stabilization is relatively high because the benefits are broadly distributed and the redistributive costs are usually not as large as those of structural reform. 28. This section draws from the Yemen Country Social Analysis. 29. Yemen Policy Note--Budgetary and Poverty Impacts of Petroleum Pricing in Yemen (December 2004), World Bank. 30. The no adjustment scenario assumes that key policy assumptions made in the baseline scenario, such adjustments on tax policy and administration, as well as expenditure policy, financial management, and enhancement of growth strategies for the non-oil sector, are not implemented. 31. Yemen also rates poorly, below the average for the Middle East and North Africa, in the governance indicators calculated by Kaufmann, Kraay, and Mastruzzi (2005). The World Bank's "Doing Business" publication also evaluates Yemen as having high barriers to entry for businesses and low performance in maintaining rule of law. 32. The two likely scenarios both indicate a rapid decline in oil production. Sce- nario A is the least optimistic scenario, with output coming only from the current seven production blocks. Under this scenario, production is likely to decline at an annual rate of nearly 16 percent, from the current level of 406,000 b/d in 2004 to 144,000 b/d by 2010. Scenario B is more optimistic, including new production fields that the government anticipates to come into production over the next five years. Under this scenario, production would decline by an average of 11.7 percent per year, from 383,000 b/d in 2005 to 205,000 b/d in 2010. 33. Yemen has large geographical areas that are currently unexplored. Some 84 oil concession blocks exist, of which 33 have been licensed for E&P activi- ties and only 7 are currently producing crude oil. 34. Based on the Oil Ministry official estimates of remaining reserves of 1.3 bil- lion barrels (September 2004). 35. Yemen's budget accounts publish aggregate cash flows received from oil companies including signing bonuses. 36. There are no published accounts available for YOGC, ARC, MRC, YPC, and YGC. 37. In 1999, the average petroleum subsidy in major oil exporters was 3.5 per- cent of GDP. 38. Based on Oil, Gas and Mineral Statistics, Annual Bulletin 2002. 39. This paragraph draws on ESMAP (2004). 40. Economists refer to this as "deadweight loss." 41. Based on International Fuel Prices, 2003, published by GTZ. 42. Price reform should cover changes to fuel oil pricing to reflect the quality of fuel (changing the benchmark international price used in compensating oil 10414-08_Notes.qxd 4/17/08 11:22 AM Page 78 78 N O T E S refineries to Platt's Gulf), charge freight charges more appropriate to Yemen, and broaden the tax base for road and maintenance tax to include lorries. 43. Water quality details are not known for the whole of Yemen, even though there is a water laboratory in each governorate: the laboratory only checks the water quality of each new well, with no arrangements for periodic monitoring. 44. Agenda 21 is a program of the United Nations related to sustainable devel- opment. It is a comprehensive plan of action to be taken globally, nation- ally and locally by organizations of the UN, governments, and major groups in every area in which humans impact on the environment. 45. Demographic transition is a four-stage process of demographic develop- ment, consisting of (a) stage 1: high fertility and high mortality, resulting in low population growth; (b) stage 2: high fertility and declining mortal- ity, resulting in accelerated population growth; (c)stage 3: declining fertil- ity and declining to low mortality, resulting in deceleration of population growth; and (d) stage 4: low fertility and low mortality, resulting in low population growth. 46. World Bank had estimated saving in public expenditure per birth averted at US$161.22 per year in 1995 prices. 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"Republic of Yemen: Country Social Analysis", Report No.: 34008-YE, Washington DC. 10414-09_Refs.qxd 4/17/08 11:23 AM Page 83 R E F E R E N C E S 83 World Bank, 2006b. Doing Business, Washington DC. World Bank, 2006c. "Republic of Yemen: Sector Wide Approach (SWAp) in the Water Sector: Assessment of Readiness and Opportunities", Draft, February 2, Washington DC. World Bank, 2006d. "Republic of Yemen: Making Multi-Sectoral Approach Work For Children and Youth", February 8, Washington DC. 10414-09_Refs.qxd 4/17/08 11:23 AM Page 84 10414-10_AppA.qxd 4/17/08 11:23 AM Page 85 Appendix Table A.1 GDP at Constant Producers Prices in Yemen, by Economic Activity, 1990­2004 (millions of Yemeni rials) 86 Table A.2 GDP at Current Producers Prices in Yemen, by Economic Activity, 1990­2004 (millions of Yemeni rials) 88 Table A.3 GDP by Expenditure at Current Prices in Yemen, 1990­2004 (millions of Yemeni rials) 90 Table A.4 Investment in Yemen, by Sector, 1990­2004 (in percent of GDP) 90 Table A.5 Central Government Finance in Yemen, 1990­2004 (in percent of GDP) 92 Table A.6 Balance of Payments in Yemen (Analytic Presentation), 1990­2004 96 Table A.7 Prices in Yemen, 1990­2004 98 Table A.8 Exposure Indicators for Yemen, 1990­2004 98 Table A.9 Selected Governance Indicators for Yemen, 1994­2006 100 Table A.10 Alternative Governance Indicators for Yemen, 1996­2004 101 Table A.11 Projections for Selected Economic Indicators, No Adjustment Scenario for Yemen, 2005­25 102 Table A.12 Projections for Selected Economic Indicators, Most Recent Base Case Scenario for Yemen, 2005­25 106 Table A.13 Projections for Selected Economic Indicators, Low Oil Price Scenario for Yemen, 2005­25 110 Table A.14 External Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (in percent of GDP, unless otherwise indicated) 112 Table A.15 Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt in Yemen, 2006­25 (in percent) 116 Table A.16 Public Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (in percent of GDP, unless otherwise indicated) 120 Table A.17 Sensitivity Analysis for Key Indicators of Public Debt in Yemen, 2006­25 124 Table A.18 MiTllennium Development Goals for Yemen, 1990­2004 126 Table A.19 Progress under the First Poverty Reduction Strategy in Yemen, 2003­05 128 Table A.20 Specific Measures to Reduce Fertility and Maternal Mortality in Yemen 129 85 10414-10_AppA.qxd 4/17/08 11:23 AM Page 86 86 A P P E N D I X Table A.1 GDP at Constant Producers Prices in Yemen, by Economic Activity, 1990­2004 (millions of Yemeni rials) Item 1990 1991 1992 1993 1994 A. Sector of economic activity 1. Agriculture, forestry & fishing 31246 27990 33483 34917 33707 Agriculture & foresty (without qat) 19708 16190 21460 22537 21092 Qat 10741 10993 11354 11638 11927 Fishing 797 807 669 742 688 2. Mining & quarrying 17624 16686 14140 14805 21180 Mining & quarrying 284 287 313 322 312 Oil & gas 17340 16399 13827 14483 20868 3. Manufacturing 9795 13100 13201 14449 12085 Manufacturing 9292 12582 12607 14036 11657 Oil refining 503 518 594 413 428 4. Electricity, water & gas 1463 1702 1765 1844 1687 5. Construction 3598 3633 3962 4076 3946 6. Wholesale & retail trade, restaurants & hotels 10777 11555 11520 11787 11300 Wholesale & retail trade 8553 9005 8915 8925 8287 Restaurants & hotels 1166 1446 1456 1663 1734 Maintenance 1058 1104 1149 1199 1279 7. Transport, storage & communications 16854 16964 16785 17186 16729 8. Financial institutions & real estate 10501 12314 13469 14398 13134 Financial institutions 3728 5177 6092 6626 5028 Real estate & business services 6773 7137 7377 7772 8106 9. Community social & personal services 1390 1463 1512 1548 1657 Total of industries 103248 105407 109837 115010 115425 B. Producers of government services 19598 21887 24239 28798 31980 C. Household sector 300 301 302 303 305 D. Producers of private non-profit services 195 235 250 335 339 E. Import duties 4012 5837 4316 4893 4831 Imputed bank services charge 2631 3360 4414 5049 4120 G D P at market prices 124722 130307 134530 144290 148760 Non-oil GDP 107382 113908 120703 129807 127892 Source: Central Statistical Office, Republic of Yemen. 10414-10_AppA.qxd 4/17/08 11:23 AM Page 87 A P P E N D I X 87 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 37182 38172 41614 47305 47708 49704 52711 52653 54629 56518 24239 24759 27535 32779 33055 34332 36896 36165 37542 38777 12220 12483 12812 13141 13471 14247 14296 14733 15231 15709 723 930 1267 1385 1182 1125 1519 1755 1856 2032 25262 28625 30720 31560 34116 37303 37901 38284 37018 36458 345 396 403 364 368 382 395 411 429 455 24917 28229 30317 31196 33748 36921 37506 37873 36589 36003 18206 19062 20259 22077 22799 23429 24585 26315 27504 28633 17733 18630 19771 21525 22240 22857 23993 25686 26850 27945 473 432 488 552 559 572 592 629 654 688 1898 2100 2188 2261 2374 2525 2667 2836 2958 3153 4353 4890 4988 4489 4771 4894 5130 5278 5497 5695 11950 11935 12775 14162 16298 19763 20704 23218 24368 25571 8788 8897 9335 10617 12746 16017 17011 19210 20145 21068 1836 1664 2015 2067 2021 2122 1922 2093 2214 2353 1326 1374 1425 1478 1531 1624 1771 1915 2009 2150 16461 17951 19530 21192 23763 25689 27263 29806 31250 32572 13651 13669 15093 16785 19391 20362 21687 22474 23501 24051 5132 4618 5527 6604 8564 8765 9304 9306 9425 9656 8519 9051 9566 10181 10827 11597 12383 13168 14076 14395 1542 1700 1834 1922 2298 2554 3031 3355 3559 3974 130505 138104 149001 161753 173518 186223 195679 204219 210284 216625 35555 39552 42358 45454 47875 50303 52315 55022 57425 60511 307 308 309 310 311 314 316 320 322 325 342 343 356 373 377 384 391 395 400 406 4681 5450 5387 4378 4237 4193 4170 4212 4254 4297 4537 4078 4978 6005 8583 8451 8390 8296 8345 8395 166853 179679 192434 206263 217735 232966 244481 255872 264340 273769 141936 151450 162117 175067 183987 196045 206975 217999 227751 237766 10414-10_AppA.qxd 4/17/08 11:24 AM Page 88 88 A P P E N D I X Table A.2 GDP at Current Producers Prices in Yemen, by Economic Activity, 1990­2004 (millions of Yemeni rials) Item 1990 1991 1992 1993 1994 A. Sector of economic activity 1. Agriculture, forestry & fishing 31246 32206 44488 51205 69111 Agriculture & foresty (without qat) 19708 18566 28347 31595 41690 Qat 10741 12256 14240 17545 21607 Fishing 797 1384 1901 2065 5814 2. Mining & quarrying 17624 15369 13744 13180 18511 Mining & quarrying 284 310 441 609 858 Oil & gas 17340 15059 13303 12571 17653 3. Manufacturing 9795 13114 19005 26360 39798 Manufacturing 9292 12576 18461 25814 39300 Oil refining 503 538 544 546 498 4. Electricity, water & gas 1463 1914 1981 2095 2034 5. Construction 3598 5017 7634 8559 13139 6. Wholesale & retail trade, restaurants & hotels 10777 15820 20420 28633 40985 Wholesale & retail trade 8553 12334 15955 21683 30077 Restaurants & hotels 1166 2017 2650 4192 7007 Maintenance 1058 1469 1815 2758 3901 7. Transport, storage & communications 16854 20413 27193 37469 42505 8. Financial institutions & real estate 10501 15729 18933 23942 32608 Financial institutions 3728 6730 7122 9011 13868 Real estate & business services 6773 8999 11811 14931 18740 9. Community social & personal services 1390 1821 2179 3026 4141 Total of industries 103248 121403 155577 194469 262832 B. Producers of government services 19598 25170 32480 40893 48609 C. Household sector 300 310 320 340 360 D. Producers of private non-profit services 195 292 328 354 423 E. Import duties 4012 6012 6647 7535 7440 Imputed bank services charge 2631 4368 5160 6866 11364 G D P at market prices 124722 148819 190192 236725 308300 Non-oil GDP 107382 133760 176889 224154 290647 Source: Central Statistical Office, Republic of Yemen. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 89 A P P E N D I X 89 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 103767 127094 148041 175909 195302 215457 247520 265169 296420 329250 67378 81598 95549 117106 131715 143774 163657 165267 186521 203700 27557 34796 39236 44188 49844 58056 64154 72746 80020 90478 8832 10700 13256 14615 13743 13627 19709 27156 29879 35072 70569 195008 249010 141976 333667 550971 492744 508001 628398 751033 1640 2449 2506 1412 1568 1694 1821 1914 2001 2127 68929 192559 246504 140564 332099 549277 490923 506087 626397 748906 66052 61794 69025 65812 67195 79792 84852 90980 97207 106760 64287 57065 65605 60467 60979 73141 77034 81990 87527 95938 1765 4729 3420 5345 6216 6651 7818 8990 9680 10822 3111 5334 6718 7912 8977 10117 12263 16500 18654 21695 21203 34228 48398 53157 66081 69138 74606 82611 88795 95623 67326 82479 95168 111739 139821 180022 209618 259967 291979 344799 49464 61390 70185 84594 110358 145037 172391 218490 245689 292895 11568 13727 17105 18518 20000 24601 25831 28973 32568 36847 6294 7362 7878 8627 9463 10384 11396 12504 13722 15057 59318 73633 98210 108245 136277 165271 195078 220985 242561 270294 49006 60647 64821 84635 106767 115831 137291 151207 169419 196509 18828 16856 17437 30643 41899 43362 55296 58099 59874 71354 30178 43791 47384 53992 64868 72469 81995 93108 109545 125155 6173 6987 8042 9054 11135 12521 16898 20142 23965 27775 446525 647204 787433 758439 1065222 1399120 1470870 1615562 1857398 2143738 65777 73963 82175 93635 131941 150822 173161 210186 221742 248726 380 390 400 410 424 452 482 541 584 633 577 584 656 738 334 208 136 265 271 288 16804 26251 25785 24080 25680 29842 33355 36689 40525 48403 16644 14886 15703 27865 41990 41808 49866 51795 53288 56698 513419 733506 880746 849437 1181611 1538636 1628138 1811448 2067232 2385090 444490 540947 634242 708873 849512 989359 1137215 1305361 1440835 1636184 10414-10_AppA.qxd 4/17/08 11:24 AM Page 90 90 A P P E N D I X Table A.3 GDP by Expenditure at Current Prices in Yemen, 1990­2004 (millions of Yemeni rials) Item 1990 1991 1992 1993 1994 1995 1. Domestic factor income 111151 129044 166371 208292 275598 456739 2. Consumption of fixed capital 5276 8615 11927 15245 19884 28845 3. GDP at factor cost 116427 137659 178298 223537 295482 485584 4. Indirect taxes (net) 8295 11160 11894 13188 12818 27835 5. GDP at market prices 124722 148819 190192 236725 308300 513419 1. Final consumption expenditure 113646 158345 189228 255403 300037 502199 Public final consumption 22115 28800 37187 45483 57585 74017 Private final consumption 91531 129545 152041 209920 242452 428182 2. Gross investment 18406 24334 43026 48249 64390 112713 Gross fixed capital formation 15074 20955 38157 41627 58267 106227 Change in stocks 3332 3379 4869 6622 6123 6486 3. Exports of good & services 18060 19416 22513 32833 42091 115957 Exports of goods 16197 16861 18164 26218 34002 99947 Exports of services 1863 2555 4349 6615 8089 16010 4. Imports of goods & services 25390 53276 64575 99760 98218 217450 Imports of goods 17400 40997 48184 77975 77102 172660 Imports of services 7990 12279 16391 21785 21116 44790 5. Expenditure on GDP at market prices 124722 148819 190192 236725 308300 513419 Source: Central Statistical Office, Republic of Yemen. Table A.4 Investment in Yemen, by Sector, 1990­2004 (in percent of GDP) Item 1990 1991 1992 1993 1994 1995 Private investment 6.3 12.6 19.7 17.3 18.8 18.4 Public investment 8.4 3.8 2.9 3.1 2.1 3.5 Total investment 14.8 16.4 22.6 20.4 20.9 22.0 Source: Staff estimates. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 91 A P P E N D I X 91 1996 1997 1998 1999 2000 2001 2002 2003 2004 683876 843105 772110 1062118 1474088 1530112 1691559 1974078 2148042 42080 57346 78691 97648 92917 98331 109997 129959 195752 725956 900451 850801 1159766 1567005 1628443 1801556 2104037 2343794 7550 ­19705 ­1364 21845 ­28369 ­305 9892 ­36805 41296 733506 880746 849437 1181611 1538636 1628138 1811448 2067232 2385090 628835 737395 750099 930785 1141679 1306315 1448897 1643503 1768016 97458 116832 124473 175547 202955 237688 280497 332075 335127 531377 620563 625626 755238 938724 1068627 1168400 1311428 1432889 170879 221215 276465 278493 284568 308108 376462 456274 549498 158016 191666 267810 265371 256086 279377 361053 436733 527748 12863 29549 8655 13122 28482 28731 15409 19541 21750 285587 320822 228025 414527 645230 596005 695131 787195 930952 262407 293983 204327 385994 614336 567330 647339 719810 861828 23180 26839 23698 28533 30894 28675 47792 67385 69124 351795 398686 405152 442194 532841 582290 709042 819740 863376 285035 311112 311002 330263 401844 439189 541755 652556 687945 66760 87574 94150 111931 130997 143101 167287 167184 175431 733506 880746 849437 1181611 1538636 1628138 1811448 2067232 2385090 1996 1997 1998 1999 2000 2001 2002 2003 2004 15.6 17.6 24.7 16.8 11.2 11.8 11.8 11.7 10.5 7.7 7.5 7.9 6.7 7.3 7.1 9.0 10.4 12.5 23.3 25.1 32.5 23.6 18.5 18.9 20.8 22.1 23.0 10414-10_AppA.qxd 4/17/08 11:24 AM Page 92 92 A P P E N D I X Table A.5 Central Government Finance in Yemen, 1990­2004 (in percent of GDP) Item 1990 1991 1992 1993 1994 1995 Total revenue and grants 19.3 22.2 16.4 15.1 12.9 19.6 Total revenue 18.2 21.2 16.1 14.9 12.6 19.3 Oil and gas revenue 7.3 9.1 4.8 4.2 3.7 9.4 Of which: exports 4.8 3.5 1.6 1.5 3.1 6.5 Non-oil revenue 10.9 12.2 11.3 10.7 8.9 9.9 Tax revenue 8.0 8.8 9.0 8.6 6.9 8.0 Direct 1.9 2.2 2.5 2.6 2.4 2.0 Indirect 6.1 6.6 6.5 6.1 4.6 6.0 Nontax revenue 2.9 3.3 2.4 2.0 1.9 1.9 Grants 1.1 1.0 0.3 0.1 0.3 0.3 Total expenditure and net lending 31.4 29.0 29.4 29.9 29.0 25.7 Current expenditure 22.9 25.1 25.9 26.4 26.5 22.6 Civilian wages and salaries 9.0 9.8 10.2 10.9 9.7 7.4 Materials and services 1.8 1.9 2.4 1.7 1.8 1.5 Operation and maintenance 0.0 0.0 0.0 0.0 0.0 0.0 Defense 8.2 8.6 9.0 8.4 9.7 6.8 Interest obligations 2.3 2.8 1.9 2.7 2.9 1.5 Transfers and subsidies 1.7 2.1 2.4 2.7 2.3 4.9 Subsidies 0.0 0.0 0.0 0.0 0.0 3.4 Petroleum cash subsidies . . . . . . . . . . . . . . . 1.0 Wheat and flour subsidy 0.0 0.0 0.0 0.0 0.0 2.4 Financial support electricity 0.0 0.0 0.0 0.0 0.0 0.0 Current transfers 1.7 2.1 2.4 2.7 2.3 1.5 Other current expenditure 0.0 0.0 0.0 0.0 0.0 0.4 Development expenditure 8.5 3.8 3.4 3.6 2.6 3.1 Net lending 0.0 0.0 0.0 0.0 0.0 0.0 Overall balance (commitment) ­12.1 ­6.7 ­13.0 ­14.9 ­16.2 ­6.1 Overall balance (cash) ­11.4 ­5.4 ­11.9 ­14.1 ­15.7 ­5.2 Financingc 11.2 5.8 12.1 14.3 15.9 5.2 External (net) 2.6 1.5 0.2 0.2 0.1 ­0.2 Domestic (net) 8.6 4.2 11.9 14.0 15.7 5.4 Bank 8.6 4.2 11.9 14.0 15.7 5.1 Nonbank 0.0 0.0 0.0 0.0 0.0 0.2 Discrepancy ­0.3 0.4 0.2 0.2 0.2 0.0 10414-10_AppA.qxd 4/17/08 11:24 AM Page 93 A P P E N D I X 93 1996 1997 1998 1999 2000 2001 2002 2003 2004 36.5 33.8 28.5 30.7 39.2 35.3 33.6 33.2 33.4 36.3 33.2 28.1 29.8 37.9 35.0 32.0 32.8 33.4 25.6 22.8 14.8 19.1 27.9 25.3 22.3 23.7 24.0 14.3 15.6 9.2 12.2 19.2 17.2 15.2 15.6 15.4 10.7 10.4 13.2 10.7 10.0 9.8 9.7 9.1 9.4 8.5 8.4 9.9 7.7 7.2 7.1 7.5 7.2 7.3 2.1 2.3 3.3 2.9 2.6 2.9 3.2 3.4 2.9 6.4 6.1 6.6 4.9 4.6 4.2 4.2 3.8 4.4 2.2 2.0 3.3 2.9 2.8 2.7 2.2 1.9 2.1 0.3 0.6 0.4 0.9 1.3 0.3 1.6 0.4 0.0 40.5 35.8 35.3 30.9 31.2 32.8 34.8 38.4 35.4 33.8 28.8 28.7 25.5 25.8 25.2 27.7 28.7 26.0 6.9 6.3 8.1 7.1 6.4 6.9 7.7 7.1 6.6 2.4 3.0 3.2 3.0 2.2 2.5 2.6 2.6 0.6 0.0 0.2 0.3 0.2 0.5 0.2 0.2 0.5 0.3 5.7 6.2 6.6 5.6 5.0 5.7 7.4 7.3 5.6 3.4 2.4 4.0 4.0 2.3 2.1 2.0 1.9 2.3 14.9 9.6 5.6 4.9 9.0 7.2 7.2 8.7 9.8 13.2 7.9 3.2 2.4 5.7 3.8 3.2 5.3 6.2 5.4 3.0 . . . 2.0 5.7 3.8 3.0 5.0 5.9 7.5 4.7 3.2 0.4 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.0 0.0 0.0 0.0 0.3 0.3 0.2 1.6 1.6 2.4 2.6 3.2 3.4 4.0 3.5 3.6 0.3 0.7 0.6 0.6 0.5 0.6 0.6 0.7 0.7 6.7 7.0 6.6 5.4 5.4 7.5 7.1 9.7 9.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ­4.0 ­2.0 ­6.8 ­0.2 8.0 2.6 ­1.2 ­5.2 ­2.0 0.6 ­1.9 ­8.5 ­0.4 8.6 2.0 0.6 ­4.7 ­2.0 ­0.7 1.9 8.6 0.0 ­8.6 ­1.4 ­1.0 4.0 2.1 0.4 0.3 1.3 2.2 0.7 0.3 0.6 0.8 1.1 ­1.1 1.6 7.3 ­2.2 ­9.2 ­1.6 ­1.5 5.0 1.0 ­1.6 ­0.1 3.6 ­4.3 ­11.1 ­3.0 ­1.4 4.1 ­0.8 0.4 1.7 3.7 2.1 1.9 1.4 ­0.1 0.9 1.8 ­0.1 0.0 0.0 ­0.4 0.0 0.6 ­0.4 ­0.7 0.1 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 94 94 A P P E N D I X Table A.5 Central Government Finance in Yemen, 1990­2004 (Continued) (in percent of GDP) Item 1990 1991 1992 1993 1994 1995 Memorandum items: Primary balance (commitment)d ­10.9 ­5.0 ­11.4 ­12.4 ­13.6 ­5.0 Primary non-oil balance ­17.1 ­13.0 ­15.9 ­16.4 ­17.0 ­14.0 (commitment, including grants)e Public and publicly guaranteed debtg GDP (at market prices in 126 151 181 225 292 486 billions of YRLs) Social expenditures . . . . . . . . . . . . . . . . . . (in percent of GDP)h (In percent of non-oil GDP) Non-oil revenue . . . . . . . . . . . . . . . . . . Tax revenue . . . . . . . . . . . . . . . . . . Non-tax revenue . . . . . . . . . . . . . . . . . . Grants (cash) . . . . . . . . . . . . . . . . . . Total expenditure and net lending . . . . . . . . . . . . . . . . . . Primary non-oil balance . . . . . . . . . . . . . . . . . . (commitment incl. grants) Source: IMF staff estimates. a. The 2005 projections reflect the Supplementary Budget of December 2005. b. The 2006 projections reflect the staffs' estimate of an anticipated Supplementary Budget of 2006 based on information from previous years. c. Includes an acquisition of equity in Aden Container Facility of an amount of US$200 million in 2003. d. Revenue excluding grants minus expenditures excluding interest obligations. e. Overall balance (commitment including grants) excluding interest obligations and oil and gas revenue. f. Domestic oil revenue net of cash petroleum subsidies. g. External debt includes expected debt relief and projected stock-of-debt operations as well as expected future disbursements. Domestic debt includes net outstanding lending to government by the central bank and commercial banks, and treasury bills and repurchases held by the bank and nonbank sector. h. Classification based on the Ministry of Finance bulletin (it may not include all expenditures in health or education). 10414-10_AppA.qxd 4/17/08 11:24 AM Page 95 A P P E N D I X 95 1996 1997 1998 1999 2000 2001 2002 2003 2004 ­0.9 ­0.1 ­3.3 2.8 9.0 4.4 ­0.8 ­3.7 0.3 ­26.2 ­22.4 ­17.7 ­15.4 ­17.6 ­20.5 ­21.5 ­27.0 ­23.7 129.2 102.9 58.8 57.8 52.8 56.2 44.7 690 826 794 1,102 1,539 1,608 1,754 2,027 2,409 4.7 6.0 9.5 8.9 7.8 8.5 9.5 9.2 5.2 . . . . . . 14.8 14.0 15.7 14.2 13.8 12.9 13.6 . . . . . . 11.2 10.1 11.3 10.3 10.6 10.1 10.5 . . . . . . 3.7 3.8 4.4 3.9 3.1 2.7 3.0 . . . . . . 0.5 1.2 2.0 0.5 2.3 0.6 0.0 . . . . . . 39.6 40.4 49.0 47.7 49.4 54.3 51.1 . . . . . . ­19.9 ­20.1 ­27.7 ­29.9 ­30.6 ­38.2 ­34.2 10414-10_AppA.qxd 4/17/08 11:24 AM Page 96 Table A.6 Balance of Payments in Yemen (Analytic Presentation), 1990­2004 1990 1991 1992 1993 1994 1995 A. Current account (net) 738.7 ­663.2 ­1091.3 ­1247.6 365.9 182.7 Goods: exports, f.o.b. 1384.4 1196.6 1094.9 1166.9 1824.0 1937.2 Goods: imports, f.o.b. ­1475.6 ­1896.8 ­1891.1 ­2086.9 ­1521.9 ­1948.2 Balance on goods ­91.2 ­700.2 ­796.2 ­920.0 302.1 ­11.0 Services: credit 105.6 114.0 161.9 177.2 148.0 179.4 Services: debit ­694.4 ­775.0 ­1013.8 ­1094.6 ­622.6 ­590.5 Balance on goods & services ­680.0 ­1361.2 ­1648.1 ­1837.4 ­172.5 ­422.1 Income: credit 37.9 43.3 38.1 22.0 22.0 37.4 Income: debit ­491.6 ­609.5 ­552.5 ­499.5 ­600.6 ­536.5 Balance on goods, services, & income ­1133.7 ­1927.4 ­2162.5 ­2314.9 ­751.1 ­921.2 Current transfers: credit 1896.8 1309.1 1100.2 1092.8 1133.6 1120.5 Current transfers: debit ­24.4 ­44.9 ­29.0 ­25.5 ­16.6 ­16.6 B. Capital account (net) . . . . . . . . . . . . . . . . . . Capital account: credit . . . . . . . . . . . . . . . . . . Capital account: debit . . . . . . . . . . . . . . . . . . Capital account total (group A through B) 738.7 ­663.2 ­1091.3 ­1247.6 365.9 182.7 C. Financial account (net) ­284.2 237.7 91.8 ­87.9 ­837.5 ­819.0 Direct investment abroad . . . . . . . . . . . . . . . . . . Direct investment in the Republic of Yemen ­130.9 582.5 713.6 897.1 10.5 ­217.7 Portfolio investment assets . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . Portfolio investment liabilities . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . Other investment assets ­348.5 ­57.1 32.3 ­53.7 71.8 105.7 Monetary authorities . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . Banks ­348.5 ­45.0 20.2 ­2.4 70.5 138.2 Other sectors . . . ­12.1 12.1 ­51.3 1.3 ­32.5 Other investment liabilities 195.2 ­287.7 ­654.1 ­931.3 ­919.8 ­707.0 Monetary authorities 46.1 13.6 ­43.2 ­31.0 57.0 3.4 General government 83.8 ­660.2 ­737.6 ­774.5 ­682.3 ­678.9 Banks 65.3 158.9 26.7 ­225.8 ­94.5 ­81.5 Other sectors . . . 200.0 100.0 100.0 ­200.0 50.0 Financial account: total (group A through C) 454.5 ­425.5 ­999.5 ­1335.5 ­471.6 ­636.3 D. Net errors & omissions ­711.4 ­268.0 ­248.5 222.4 ­181.0 161.8 Total groups A through D ­256.9 ­693.5 ­1248.0 ­1113.1 ­652.6 ­474.5 E. Reserves & related items 256.9 693.5 1248.0 1113.1 652.6 474.5 Reserve assets ­14.0 ­254.6 343.8 174.8 ­204.2 ­263.2 Use of funds credit & loans 0.1 ­0.2 . . . . . . . . . . . . Exceptional financing 270.8 948.3 9.4.2 938.3 856.8 737.7 Source: IMF balance of payments statistics. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 97 1996 1997 1998 1999 2000 2001 2002 2003 2004 106.3 ­68.8 ­472.2 358.2 1336.6 667.1 538.2 148.7 224.6 2262.8 2274.0 1503.7 2478.3 3797.2 3366.9 3620.7 3934.3 4675.7 ­2293.5 ­2406.5 ­2288.8 ­2120.5 ­2484.4 ­2600.4 ­2932.0 ­3557.4 ­3858.6 ­30.7 ­132.5 ­785.1 357.8 1312.8 766.4 688.7 376.9 817.1 185.7 207.6 174.4 183.2 210.9 166.4 166.2 317.7 369.7 ­555.4 ­677.4 ­692.9 ­718.7 ­809.4 ­847.8 ­934.8 ­1003.6 ­1059.4 ­400.4 ­602.3 ­1303.6 ­177.6 714.2 85.1 ­79.9 ­308.9 127.3 46.8 69.6 69.0 56.7 149.6 178.5 135.0 98.9 103.6 ­728.5 ­670.6 ­413.4 ­752.3 ­926.7 ­869.4 ­900.6 ­1008.3 ­1450.1 ­1082.1 ­1203.3 ­1648.0 ­873.2 ­62.9 ­605.8 ­845.6 ­1218.3 ­1219.1 1207.6 1177.6 1223.5 1262.1 1471.9 1344.4 1456.8 1442.1 1493.1 ­19.2 ­43.1 ­47.7 ­30.7 ­72.4 ­71.4 ­73.1 ­75.0 ­49.4 . . . 4236.2 2.2 1.5 338.9 49.5 . . . 5.5 163.3 . . . 4236.2 2.2 1.5 338.9 49.5 . . . 5.5 163.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.3 4167.4 ­470.0 359.7 1675.5 716.7 538.2 154.2 387.9 ­252.0 ­197.6 ­418.0 ­415.1 ­376.2 ­53.5 ­156.8 19.7 ­68.6 . . . . . . . . . . . . . . . . . . . . . . . . . . . ­60.1 ­138.5 ­219.4 ­307.6 6.4 155.1 114.3 ­89.1 143.6 . . . 5.0 4.9 4.1 0.1 ­1.4 ­5.8 ­0.4 ­6.4 . . . 5.0 4.9 4.1 0.1 ­1.4 ­5.8 ­0.4 ­6.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.9 196.3 60.1 ­110.1 ­177.9 5.6 ­124.5 49.1 ­25.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63.5 70.7 ­119.4 . . . 75.6 ­57.6 . . . ­5.7 3.2 ­122.3 ­10.6 9.3 ­177.9 ­70.0 ­147.7 ­12.8 ­19.7 103.7 255.1 . . . . . . . . . . . . 80.8 61.9 . . . ­298.8 ­260.4 ­263.6 ­1.5 ­204.8 ­212.8 ­140.8 60.2 ­180.4 119.9 34.3 ­3.0 ­23.7 ­8.1 ­11.5 ­22.4 ­10.9 ­45.7 ­520.6 ­145.7 ­250.5 27.1 ­207.7 ­171.6 ­110.3 68.1 ­165.6 21.9 ­149.0 ­10.1 ­4.9 11.0 ­29.7 ­8.1 2.9 30.9 80.0 . . . . . . . . . . . . . . . . . . . . . . . . ­145.7 3969.8 ­888.0 ­55.4 1299.3 663.2 381.4 173.9 319.3 ­222.6 48.4 307.0 129.4 295.1 ­110.0 43.3 156.4 53.3 ­368.3 4018.2 ­580.9 74.0 1594.4 553.2 424.7 330.3 372.5 368.3 ­4018.2 580.9 ­74.0 ­1594.4 ­553.2 ­424.7 ­330.3 ­372.5 ­415.9 ­192.7 210.9 ­482.2 ­1429.4 ­761.3 ­556.9 ­326.3 ­532.3 122.5 139.4 72.3 79.5 ­71.0 69.0 ­17.2 ­19.3 ­41.2 661.8 ­3964.9 297.7 328.7 ­94.0 139.1 149.4 15.3 201.0 10414-10_AppA.qxd 4/17/08 11:24 AM Page 98 98 A P P E N D I X Table A.7 Prices in Yemen, 1990­2004 Item 1990 1991 1992 1993 1994 Exchange rates (rial per US$) Nominal official (average) 12.010 12.010 12.010 12.010 12.010 Nominal official (end-of-year) 12.010 12.010 12.010 12.010 12.010 IEC conversion factor (atlas) 26.200 29.700 33.370 48.630 80.750 Consumer price index, period averages (2000=100) 11.2 15.3 19.8 26.8 40.1 Source: International Financial Statistics, IMF and World Bank. Table A.8 Exposure Indicators for Yemen, 1990­2004 Indicator 1990 1991 1992 1993 1994 1995 Total debt outstanding and disbursed 6352.1 6473.1 6571.1 5923.0 6125.2 6216.8 (TDO) (US$, millions) Net disbursements (US$, millions) 224.0 . . . 65.5 ­746.6 98.7 36.1 Total debt service (TDS) (US$, millions) 169.4 . . . 133 119.6 105.8 101.9 Debt indicators (%) TDO/XGS 921.5 990.2 974.0 877.3 1175.1 652.4 TDO/GDP 133.4 129.2 115.3 121.7 160.4 147.3 Concessional/TDO 50.706 50.787 50.161 56.993 56.682 56.727 Official development assistance 404.66 298.44 253.99 312.31 170.12 169.12 (US$, millions) Source: Yemen Live database and Global Development Finance Database. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 99 A P P E N D I X 99 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 40.839 94.157 129.281 135.882 155.718 161.718 168.672 175.625 183.448 184.776 50.040 126.910 130.460 141.650 159.100 165.590 173.270 179.010 184.310 185.870 121.690 128.190 129.286 135.822 155.718 161.718 168.672 175.625 186.174 183.027 62.2 81.3 83.0 88 95.6 100 111.9 125.6 139.2 155.9 1996 1997 1998 1999 2000 2001 2002 2003 2004 6362.1 3873.8 5732.6 6193.6 5075.2 5086.6 5224.5 5375.4 5473.4 139.5 219.2 203.8 491.0 268.3 ­166.6 ­57.4 ­93.7 2.7 86.8 98 196.5 178.3 243.3 259.1 171 175.8 219.2 285.6 156.1 341.5 232.7 127.2 144.0 132.0 127.1 107.6 111.2 56.9 91.7 81.6 53.3 52.7 50.7 48.4 42.0 55.367 79.568 85.726 81.757 77.337 82.004 84.144 86.101 85.749 247.48 356.26 370.31 458.28 264.84 460.96 583.73 234.01 251.87 10414-10_AppA.qxd 4/17/08 11:24 AM Page 100 Table A.9 Selected Governance Indicators for Yemen, 1994­2006 Item 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Quality of administration Political Risk Services 3 3 3 3 3 3 2 2 2 2 . . . . . . index of corruptiona Political Risk Services index 2 2 1 1 1 1 1 1 1 1 . . . . . . of bureaucratic qualityb Heritage Foundation index 4 4 4 4 4 4 4 4 4 4 4 4 of property rightsc Heritage Foundation index 3 3 4 4 4 4 4 4 4 4 4 4 of regulationd Heritage Foundation index 5 5 5 5 5 5 5 5 5 5 4 4 of informal market activitye Item 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Public accountability Political Risk Services (PRS) . . . 4 3 4 4 4 4 3 3 4 4 index of democratic accountabilityf (CIDCM) Polity IV database ­2 ­2 ­2 ­2 ­2 ­2 ­2 ­2 ­2 . . . . . . polity scoreg CIDCM Polity IV database 2 2 2 2 2 2 2 2 2 . . . . . . regulation of executive recruitmenth CIDCM Polity IV database 0 0 0 0 0 0 0 0 0 . . . . . . competitiveness of executive recruitmenti CIDCM Polity IV database 0 0 0 0 0 0 0 0 0 . . . . . . openness of executive recruitmentj CIDCM Policy IV database 2 2 2 2 2 2 2 2 2 . . . . . . executive constraintsk CIDCM Polity IV database 3 3 3 3 3 3 3 3 3 . . . . . . regulation of participationl CIDCM Polity IV database 3 3 3 3 3 3 3 3 3 . . . . . . competitiveness of participationm Freedom House political . . . 5 5 5 5 5 6 6 5 5 5 rights measuren Freedom House civil . . . 6 6 6 6 6 6 5 5 5 5 liberties measureo Freedom House freedom . . . 68 68 68 68 68 69 65 69 67 76 of the press rankingp Notes: a. 0 through 6 (6 no corruption) i. 0 though 3 (3 is good, 0--NA), see above b. 0 through 4 (4 high quality) j. 0 through 4 (4 is open, good 0--NA), see above c. 1 through 5 (1 is good) k. 1 through 7 (7 is constrained--good), see above d. 1 through 5 (1 is good) l. 1 through 5 (5 is regulated, good), see above e. 1 through 5 (1 is good-- no informal market) m. 0 through 5 (5 is competitive, good), see above f. 0 through 6 (6 high accountability) n. (1 to 7, 7 least free) g. -10 to 10 (-10 high autocracy, 10 high democracy) o. (1 to 7, 7 least free) h. 1 through 3 (3 is regulated--good), see above p. (1 to 100) 100 least free Source: Political Risk Services 2006; Freedom House 2006; Heritage Foundation 2006; Center for International Development and Conflict Management. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 101 A P P E N D I X 101 Table A.10 Alternative Governance Indicators for Yemen, 1996­2004 Percentile rank Estimate Standard Number of Governance indicator Year (0­100) (­2.5 to +2.5) deviation surveys/polls Voice and accountability 2004 22.8 ­0.99 0.14 9 2002 21.2 ­0.88 0.17 7 2000 25.7 ­0.72 0.22 5 1998 33.0 ­0.60 0.23 4 1996 23.6 ­0.91 0.21 4 Political stability 2004 7.3 ­1.48 0.24 7 2002 13.0 ­1.40 0.24 6 2000 13.3 ­1.11 0.32 4 1998 10.3 ­1.35 0.31 3 1996 17.7 ­0.90 0.40 3 Government effectiveness 2004 20.7 ­0.84 0.19 8 2002 17.9 ­0.84 0.18 7 2000 25.8 ­0.68 0.23 4 1998 33.9 ­0.47 0.27 3 1996 26.8 ­0.59 0.26 3 Regulatory quality 2004 14.8 ­1.04 0.20 7 2002 27.6 ­0.61 0.19 6 2000 28.9 ­0.43 0.38 3 1998 30.4 ­0.39 0.39 3 1996 19.9 ­0.72 0.29 4 Rule of law 2004 12.1 ­1.11 0.14 11 2002 7.7 ­1.23 0.16 9 2000 16.6 ­0.90 0.20 7 1998 28.6 ­0.68 0.22 6 1996 13.3 ­1.04 0.19 5 Control of corruption 2004 22.7 ­0.84 0.16 8 2002 32.7 ­0.70 0.18 7 2000 29.0 ­0.67 0.22 5 1998 32.2 ­0.57 0.23 4 1996 49.3 ­0.25 0.26 3 Source: Kaufmann, Kraay, and Mastruzzi 2005. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 102 102 A P P E N D I X Table A.11 Projections for Selected Economic Indicators, No Adjustment Scenario for Yemen, 2005­25 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Annual percentage change) Real sector Real GDP 3.8 3.9 2.5 3.0 3.1 2.9 2.8 2.7 2.5 Real oil GDP ­0.9 ­6.3 ­7.2 ­9.1 ­2.4 ­6.7 ­4.8 ­12.9 ­19.1 Real non-oil GDP 5.8 5.5 2.9 3.5 4.3 4.0 3.5 3.5 3.0 (in percent) As a share of GDP in LCU: GDP at factor costs 105.7 104.6 101.8 102.6 101.5 100.6 98.9 99.0 99.0 Agriculture 13.2 12.6 11.6 11.0 10.4 9.9 9.3 8.8 8.4 Oil & gas 36.7 33.9 28.4 23.0 19.2 16.6 14.7 11.1 8.1 Industry 9.4 8.9 8.4 8.1 7.9 7.6 7.4 7.1 6.9 Manufacturing 4.5 4.3 4.0 3.9 3.8 3.6 3.5 3.4 3.3 Services 46.5 49.2 53.4 60.5 64.0 66.5 67.5 71.9 75.7 (Annual percentage change) Money & prices GDP deflator (period 11.8 15.9 16.4 13.8 13.1 13.3 13.8 13.9 14.1 average) Broad money 9.4 18.4 25.9 13.8 14.7 15.5 16.3 18.7 16.9 (in percent of GDP) Investment & saving Total investment 22.3 28.5 32.0 34.4 24.0 22.0 20.0 18.0 18.0 Gross domestic savings 29.6 25.9 24.3 23.1 20.3 15.8 13.2 11.0 10.0 (in percent of GDP) Government finance Revenue 38.1 35.3 28.9 24.3 22.7 21.5 19.7 17.9 15.7 o/w: Oil & gas revenue 29.0 25.8 19.7 15.7 13.1 11.0 9.3 7.6 5.5 Total expenditure & net 40.5 43.1 38.3 38.7 43.9 42.7 44.0 46.8 49.8 lending Current 31.2 34.5 30.0 30.6 35.9 34.9 36.4 39.5 42.8 Capital & net lending 9.3 8.6 8.2 8.1 8.0 7.8 7.6 7.3 7.0 Overall balance (deficit(­)) ­2.4 ­7.8 ­9.4 ­14.4 ­21.1 ­21.2 ­24.3 ­29.0 ­34.1 Non-oil primary deficit ­28.9 ­31.2 ­24.9 ­25.7 ­25.0 ­23.9 ­21.9 ­21.8 ­21.6 10414-10_AppA.qxd 4/17/08 11:24 AM Page 103 A P P E N D I X 103 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2.5 2.5 1.8 2.0 3.0 2.5 2.7 2.6 3.0 3.0 3.0 3.0 ­1.7 ­6.0 ­13.9 ­21.5 ­10.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.7 2.7 2.1 1.8 3.4 2.3 2.5 2.4 3.0 3.0 3.0 3.0 99.2 99.0 99.0 99.3 98.8 98.9 99.1 99.2 99.1 99.0 98.9 98.8 7.9 7.4 7.3 7.3 7.1 7.0 6.9 6.8 6.7 6.6 6.5 6.4 7.4 6.4 5.7 4.6 4.2 4.1 4.0 3.8 3.7 3.6 3.5 3.3 6.6 6.3 6.3 6.4 6.4 6.4 6.4 6.4 6.3 6.3 6.3 6.3 3.1 3.0 3.0 3.1 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 77.3 78.9 79.6 80.9 81.1 81.4 81.8 82.2 82.3 82.5 82.7 82.8 15.0 15.1 9.9 9.6 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 17.9 17.9 11.9 11.8 13.4 12.8 13.0 12.9 13.4 13.4 13.4 13.4 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 18.0 10.0 9.8 10.4 9.7 4.8 5.4 6.1 6.8 5.8 5.0 4.2 3.5 15.1 15.0 14.8 14.4 14.7 14.3 14.0 13.8 13.8 13.7 13.7 13.7 5.0 4.8 4.3 4.1 3.9 3.7 3.5 3.4 3.2 3.0 2.9 2.8 48.4 49.1 46.4 48.1 47.7 48.7 49.4 50.0 50.9 51.2 52.0 52.2 41.9 43.2 40.5 42.0 41.6 42.6 43.2 43.8 44.7 44.9 45.7 45.9 6.5 5.9 6.0 6.0 6.1 6.1 6.1 6.2 6.2 6.3 6.3 6.3 ­33.3 ­34.1 ­31.7 ­33.6 ­33.0 ­34.4 ­35.4 ­36.2 ­37.1 ­37.5 ­38.3 ­38.5 ­19.6 ­18.9 ­18.9 ­19.1 ­18.1 ­16.8 ­16.4 ­15.7 ­15.2 ­14.4 ­14.0 ­13.2 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 104 104 A P P E N D I X Table A.11 Projections for Selected Economic Indicators, No Adjustment Scenario for Yemen, 2005­25 (Continued) 2005 2006 2007 2008 2009 2010 2011 2012 2013 (in billions of U.S. dollars) External sector Current account 0.7 ­0.9 ­1.7 ­2.4 ­1.0 ­1.3 ­1.3 ­1.6 ­1.8 Exports of goods & services 6.9 7.3 6.6 6.0 6.5 5.6 5.3 5.2 4.9 Imports of goods & services 5.8 7.7 8.2 8.5 7.4 7.3 7.3 7.3 7.6 Gross reserves 6.2 7.1 8.0 7.2 5.8 4.4 3.8 3.1 2.2 Gross reserves (months 9.7 8.8 9.5 8.5 7.5 6.0 5.3 4.2 3.1 of imports) Current account balance 4.7 ­4.9 ­8.6 ­10.7 ­4.0 ­5.0 ­4.6 ­5.2 ­5.4 (% of GDP) (in billions of U.S. dollars) Total external debt Total debt stock 5.3 6.2 8.1 9.2 9.5 10.0 11.1 12.2 12.9 Debt to GDP ratio (%) 34.8 35.5 40.8 41 .5 39.0 38.1 39.0 39.5 38.8 Debt service ratio (%) 1.8 1.5 1.9 2.2 2.8 3.3 3.0 2.4 2.0 Net present value of debt 23.3 18.8 24.2 23.8 20.7 19.6 19.8 19.5 18.4 to GDP (%) Memorandum items Oil price, Yemen (US$/b) 50.8 57.4 59.2 58.9 58.2 57.4 56.4 50.0 44.2 Exchange rate, average 203.4 213.6 223.2 234.3 249.6 269.6 291.1 314.4 339.6 (Rial/US$) GDP (in billion US$, 14.3 16.4 18.7 20.9 22.9 24.7 26.7 29.0 31.4 average rate) Source: Staff estimates. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 105 A P P E N D I X 105 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ­1.6 ­1.6 ­1.4 ­1.5 ­2.7 ­2.6 ­2.4 ­2.1 ­2.4 ­2.7 ­3.0 ­3.3 5.1 5.0 4.9 4.6 3.2 3.4 3.7 4.0 3.8 3.6 3.4 3.2 7.7 7.8 7.4 7.4 7.6 7.7 7.8 7.9 8.1 8.2 8.3 8.5 2.2 2.2 2.1 2.1 1.5 1.5 1.6 1.6 1.6 1.6 1.7 1.7 3.0 3.0 3.0 3.0 2.2 2.1 2.2 2.2 2.2 2.2 2.2 2.2 ­5.0 ­4.9 ­4.2 ­4.5 ­8.1 ­7.6 ­6.8 ­6.0 ­6.9 ­7.7 ­8.4 ­9.1 14.3 15.5 17.1 18.6 20.6 23.0 25.4 27.3 29.8 32.6 35.8 39.2 44.7 46.1 50.7 55.4 60.6 67.2 73.4 78.5 84.6 91.5 99.1 107.1 1.6 1.2 1.4 1.6 1.9 2.3 2.8 3.2 3.6 4.1 4.6 5.1 20.7 20.0 20.8 21.6 23.4 26.0 27.9 28.5 30.0 31.9 34.1 36.5 39.1 34.6 34.7 34.9 35.1 35.3 35.6 35.8 36.0 36.2 36.4 36.6 417.3 467.4 523.4 586.3 656.6 735.4 823.6 922.5 1033.2 1157.2 1296.0 1451.5 30.1 31.7 31.6 31.6 32.0 32.2 32.5 32.8 33.2 33.6 34.0 34.4 10414-10_AppA.qxd 4/17/08 11:24 AM Page 106 106 A P P E N D I X Table A.12 Projections for Selected Economic Indicators, Most Recent Base Case Scenario for Yemen, 2005­25 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Annual percentage change) Real sector Real GDP 3.8 3.9 2.5 3.0 4.5 4.7 5.0 4.5 4.4 Real oil GDP ­0.9 ­6.3 ­7.2 ­9.1 ­2.4 ­6.7 ­4.8 ­12.9 ­19.1 Real non-oil GDP 5.8 8.1 5.9 6.7 6.3 7.4 7.0 7.8 7.9 (in percent) As a share of GDP in LCU: GDP at factor costs 105.7 104.7 102.1 99.7 96.0 92.6 92.6 92.4 92.3 Agriculture 13.2 12.6 12.3 11.9 11.4 10.9 10.5 10.3 10.2 Oil & gas 36.7 33.9 29.9 25.0 21.1 18.5 16.6 13.0 9.8 Industry 9.4 8.9 8.9 8.8 8.6 8.5 8.3 8.3 8.3 Manufacturing 4.5 4.3 4.2 4.2 4.1 4.0 4.0 4.0 4.0 Services 46.5 49.3 51.1 53.9 54.9 54.7 57.2 60.8 64.0 (Annual percentage change) Money & prices GDP deflator (period 11.8 15.9 10.4 10.3 10.6 10.1 9.5 8.1 7.8 average) Broad money 9.4 18.4 19.4 10.3 13.7 14.2 14.3 14.6 12.5 (in percent of GDP) Investment & saving Total investment 22.3 28.5 32.0 34.4 26.0 26.4 25.8 28.0 28.4 Gross domestic savings 29.6 26.3 25.0 23.0 24.5 21.5 20.3 22.3 21.6 (in percent of GDP) Government finance Revenue 38.1 36.1 32.6 29.3 28.1 26.8 25.1 23.7 21.8 o/w: Oil & gas revenue 29.0 25.8 20.7 17.1 14.4 12.2 10.5 8.9 6.6 Total expenditure & net 40.5 39.1 37.7 36.1 34.2 31.7 31.9 32.2 32.5 lending Current 31.2 30.6 29.2 27.6 25.7 23.2 23.4 23.7 24.0 Capital & net lending 9.3 8.6 8.5 8.5 8.5 8.5 8.5 8.5 8.5 Overall balance (deficit(­)) ­2.4 ­3.0 ­5.0 ­6.7 ­6.1 ­4.9 ­6.8 ­8.4 ­10.7 Non­oil primary deficit ­28.9 ­26.4 ­23.3 ­20.9 ­17.4 ­13.9 ­13.8 ­13.6 ­13.4 10414-10_AppA.qxd 4/17/08 11:24 AM Page 107 A P P E N D I X 107 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 4.2 4.2 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 ­1.7 ­6.0 ­13.9 ­21.5 ­10.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.9 5.2 5.7 5.9 4.9 4.2 4.2 4.2 4.2 4.2 4.2 4.2 91.6 90.8 90.1 89.5 88.4 88.4 88.4 88.4 88.4 88.3 88.3 88.3 9.9 9.7 9.6 9.4 9.3 9.1 8.9 8.7 8.6 8.4 8.3 8.1 9.4 8.4 7.4 6.0 5.4 5.2 5.1 4.9 4.7 4.6 4.5 4.3 8.3 8.3 8.3 8.3 8.3 8.2 8.2 8.1 8.1 8.1 8.0 8.0 3.9 3.9 3.9 4.0 3.9 3.9 3.9 3.9 3.9 3.8 3.8 3.8 64.0 64.5 64.9 65.8 65.6 65.9 66.2 66.7 67.0 67.3 67.5 67.9 9.0 8.8 8.4 8.1 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 13.6 13.3 12.7 12.4 13.4 13.4 13.4 13.4 13.4 13.4 13.4 13.4 25.8 24.5 21.6 23.2 23.3 23.3 23.4 23.5 23.5 23.6 23.7 23.3 19.3 17.9 16.3 17.8 12.2 13.8 15.6 17.6 17.4 17.4 17.7 17.9 22.2 23.0 23.1 22.9 20.2 20.3 20.4 20.4 20.5 20.6 20.6 20.7 6.3 6.3 5.6 4.6 2.9 2.8 2.7 2.7 2.6 2.6 2.5 2.5 30.9 30.0 30.0 30.1 30.1 30.1 30.2 30.2 30.4 30.5 30.7 30.9 22.9 22.5 22.5 22.6 22.6 22.6 22.7 22.7 22.9 23.0 23.2 23.4 8.0 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 ­8.6 ­7.0 ­6.9 ­7.3 ­9.9 ­9.8 ­9.8 ­9.8 ­9.9 ­9.9 ­10.0 ­10.2 ­11.1 ­9.7 ­9.0 ­8.2 ­7.1 ­7.1 ­7.0 ­7.0 ­6.9 ­6.8 ­6.7 ­6.7 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 108 108 A P P E N D I X Table A.12 Projections for Selected Economic Indicators, Most Recent Base Case Scenario for Yemen, 2005­25 (Continued) 2005 2006 2007 2008 2009 2010 2011 2012 2013 (in billions of U.S. dollars) External sector Current account 0.7 ­0.8 ­1.5 ­2.2 ­0.4 ­0.9 ­0.7 ­0.8 ­1.1 Exports of goods & services 6.9 7.3 6.8 6.2 6.7 6.0 5.7 5.7 5.6 Imports of goods & services 5.8 7.7 8.1 8.5 7.1 7.1 7.1 7.2 7.4 Gross reserves 6.2 6.4 5.9 4.8 4.3 3.5 2.8 2.9 2.5 Gross reserves (months 9.7 8.0 7.2 5.7 5.9 4.8 4.1 4.2 3.5 of imports) Current account balance 4.7 ­4.5 ­7.9 ­10.7 ­1.6 ­3.7 ­2.9 ­3.1 ­4.1 (% of GDP) (in billions of U.S. dollars) Total external debt Total debt stock 5.3 5.4 5.5 5.8 6.1 6.4 6.6 7.5 8.0 Debt to GDP ratio (%) 34.8 31.1 29.3 28.4 27.5 27.0 26.3 28.5 29.2 Debt service ratio (%) 1.8 1.7 1.9 1.6 1.3 1.1 1.0 0.8 0.8 Net present value of debt 23.3 18.8 17.7 16.7 15.8 15.4 15.3 16.7 18.5 to GDP (%) Memorandum items Oil price, Yemen (US$/b) 50.8 57.4 59.2 58.9 58.2 57.4 56.4 50.0 44.2 Exchange rate, average 203.4 213.6 223.2 234.3 249.6 269.6 291.1 314.4 339.6 (Rial/US$) GDP (in billion US$, 14.3 16.4 17.8 19.2 20.9 22.3 23.7 24.8 25.8 average rate) Source: Staff estimates. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 109 A P P E N D I X 109 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ­0.9 ­1.0 ­0.7 ­0.8 ­2.4 ­2.1 ­1.7 ­1.3 ­1.1 ­0.9 ­0.5 ­0.1 5.9 5.9 5.9 5.9 4.6 5.1 5.6 6.2 6.2 6.3 6.5 6.8 7.5 7.6 7.3 7.3 7.5 7.6 7.7 7.8 7.9 8.1 8.2 8.3 2.4 2.3 2.4 2.6 1.7 1.7 1.8 2.7 3.1 3.7 4.5 5.5 3.3 3.1 3.3 3.5 2.2 2.1 2.2 3.2 3.8 4.5 5.4 6.7 ­3.4 ­3.8 ­2.7 ­3.0 ­9.0 ­7.8 ­6.4 ­4.9 ­4.1 ­3.1 ­1.9 ­0.5 8.3 8.6 9.0 9.5 10.4 11.9 13.1 14.6 15.5 16.3 17.0 17.6 32.7 33.5 34.8 36.8 39.7 44.7 48.6 53.6 56.3 58.4 60.1 61.5 0.9 0.8 0.8 0.8 0.8 0.8 0.7 1.0 1.1 1.2 1.2 1.3 19.6 21.0 22.0 23.1 25.6 27.4 29.2 30.8 32.1 33.3 34.2 34.7 39.1 34.6 34.7 34.9 35.1 35.3 35.6 35.8 36.0 36.2 36.4 36.6 417.3 467.4 523.4 586.3 656.6 735.4 823.6 922.5 1033.2 1157.2 1296.0 1451.5 23.9 24.1 24.3 24.4 24.7 25.0 25.3 25.6 26.0 26.3 26.6 27.0 10414-10_AppA.qxd 4/17/08 11:24 AM Page 110 110 A P P E N D I X Table A.13 Projections for Selected Economic Indicators, Low Oil Price Scenario for Yemen, 2005­25 2005 2006 2007 2008 2009 2010 2011 2012 2013 (Annual percentage change) Real sector Real GDP 3.8 3.4 4.5 4.2 4.5 3.8 3.8 3.8 4.0 Real oil GDP ­0.9 ­4.8 ­8.0 ­9.9 ­3.4 ­4.8 ­6.3 ­6.1 ­5.8 Real non-oil GDP 5.8 6.7 9.0 8.4 6.5 5.7 5.9 5.6 5.6 (in percent) As a share of GDP in LCU: GDP at factor costs 105.7 101.9 93.8 93.4 92.8 93.2 93.4 93.5 93.5 Agriculture 13.2 12.0 11.5 11.2 11.0 10.8 10.8 11.0 11.2 Oil & gas 36.7 27.4 21.6 16.4 13.4 11.8 10.8 10.0 9.3 Industry 9.4 8.5 8.4 8.3 8.3 8.4 8.5 8.9 9.2 Manufacturing 4.5 4.1 4.0 4.0 4.0 4.0 4.1 4.2 4.4 Services 46.5 54.0 52.3 57.5 60.1 62.2 63.2 63.6 63.9 (Annual percentage change) Money & prices GDP deflator (period 11.8 15.1 10.0 9.1 7.9 8.0 6.5 5.0 5.0 average) Broad money 9.4 17.0 21.3 10.5 10.9 11.0 10.0 10.6 9.2 (in percent of GDP) Investment & saving Total investment 22.3 27.0 32.0 26.4 25.0 24.0 24.0 24.0 24.0 Gross domestic savings 29.6 23.8 18.0 13.6 12.3 11.5 13.9 13.7 13.3 (in percent of GDP) Government finance Revenue 38.1 33.3 32.1 29.3 27.9 25.9 24.8 24.1 24.1 o/w: Oil & gas revenue 29.0 24.1 19.6 15.2 13.3 11.1 9.9 8.9 8.6 Total expenditure & net 40.5 40.8 40.4 36.7 35.2 32.1 30.0 29.1 28.6 lending Current 31.2 33.2 32.2 28.9 27.9 25.2 23.0 21.9 21.4 Capital & net lending 9.3 7.6 8.1 7.8 7.3 6.9 7.0 7.1 7.2 Overall balance (deficit(­)) ­2.4 ­7.5 ­8.3 ­7.4 ­7.3 ­6.2 ­5.2 ­5.0 ­4.5 Non­oil primary deficit ­28.9 ­30.7 ­26.5 ­20.8 ­18.8 ­15.5 ­13.4 ­12.2 ­11.5 10414-10_AppA.qxd 4/17/08 11:24 AM Page 111 A P P E N D I X 111 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 ­5.6 ­5.3 ­5.1 ­4.8 ­4.5 ­4.3 ­4.0 ­3.8 ­3.5 ­3.3 ­3.1 ­2.8 5.4 5.2 5.0 4.9 4.8 4.7 4.6 4.6 4.5 4.4 4.4 4.4 93.5 93.5 93.5 93.5 93.4 93.4 93.3 93.2 93.0 92.9 92.7 92.5 11.3 11.5 11.7 11.9 12.1 12.3 12.6 12.8 13.0 13.3 13.6 13.9 8.7 8.2 8.0 7.7 7.4 7.2 7.0 6.8 6.7 6.6 6.5 6.3 9.5 9.8 10.1 10.5 10.8 11.2 11.6 11.9 12.3 12.8 13.2 13.6 4.5 4.7 4.8 5.0 5.2 5.3 5.5 5.7 5.9 6.1 6.3 6.5 64.0 64.0 63.7 63.5 63.1 62.7 62.2 61.7 61.0 60.3 59.5 58.7 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 9.2 24.0 24.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 12.8 12.4 13.7 13.5 13.3 13.1 12.7 12.2 11.8 11.3 10.9 10.3 23.7 23.3 23.6 23.6 23.5 23.4 23.6 23.8 24.0 24.2 24.4 24.7 7.9 7.3 7.4 7.1 6.8 6.5 6.3 6.3 6.3 6.2 6.2 6.2 28.0 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 20.7 20.1 20.1 20.0 19.9 19.9 19.8 19.8 19.8 19.7 19.7 19.7 7.3 7.4 7.4 7.5 7.6 7.6 7.7 7.7 7.7 7.8 7.8 7.8 ­4.4 ­4.2 ­3.9 ­3.9 ­4.0 ­4.1 ­3.9 ­3.7 ­3.5 ­3.3 ­3.1 ­2.8 ­10.7 ­9.8 ­9.5 ­9.2 ­8.9 ­8.9 ­8.6 ­8.4 ­8.2 ­7.9 ­7.7 ­7.4 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 112 Table A.13 Projections for Selected Economic Indicators, Low Oil Price Scenario for Yemen, 2005­25 (Continued) 2005 2006 2007 2008 2009 2010 2011 2012 2013 (in billions of U.S. dollars) External sector Current account 0.7 ­0.2 ­2.0 ­1.6 ­1.6 ­1.5 ­1.2 ­1.1 ­1.1 Exports of goods & services 6.9 6.5 5.6 5.0 5.5 4.9 4.5 4.2 4.0 Imports of goods & services 5.8 7.1 8.2 7.5 8.0 7.4 6.5 6.2 6.0 Gross reserves 6.2 6.1 6.8 6.0 5.3 4.5 3.6 3.1 2.8 Gross reserves (months 9.7 8.7 8.8 8.6 7.2 6.7 5.9 5.3 5.0 of imports) Current account balance 4.7 ­1.0 ­10.6 ­8.2 ­8.4 ­7.7 ­6.3 ­5.9 ­5.7 (% of GDP) (in billions of U.S. dollars) Total external debt Total debt stock 5.3 6.3 8.4 9.3 10.0 10.4 10.5 10.7 10.9 Debt to GDP ratio (%) 34.8 31.2 34.1 36.1 38.2 40.2 40.1 40.7 41.5 Debt service ratio (%) 1.8 3.7 5.6 8.2 7.1 8.2 10.6 13.1 12.7 Net present value of debt 23.3 18.8 20.2 19.8 19.1 19.2 19.9 22.3 24.6 to GDP (%) Memorandum items Oil price, Yemen (US$/b) 50.8 49.7 46.1 41.7 38.1 35.5 34.6 33.7 32.8 Exchange rate, average 203.4 220.6 242.4 268.1 293.3 330.6 367.4 402.7 441.3 (Rial/US$) GDP (in billion US$, 14.3 16.6 17.4 17.9 18.4 18.3 18.2 18.1 18.1 average rate) Source: Staff estimates. Table A.14 External Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (in percent of GDP, unless otherwise indicated) Actual 1999 2000 2001 2002 2003 2004 2005 External debt (nominal)a 72.9 50.5 51.1 50.5 44.2 39.4 34.4 o/w public and publicly guaranteed (PPG) 72.9 50.5 51.1 50.5 44.2 39.4 34.4 Change in external debt ­14.8 ­22.4 0.5 ­0.6 ­6.3 ­4.8 ­5.1 Identified net debt­creating flows ­20.9 ­30.3 ­7.8 ­10.1 ­11.6 ­9.4 ­8.3 Non-interest current account deficit ­3.7 ­13.8 ­5.9 ­5.9 ­0.4 ­2.3 ­5.1 Deficit in balance of goods and services 6.4 ­6.4 1.1 0.7 2.5 ­1.1 ­8.0 Exports 34.5 41.6 36.0 38.9 34.9 36.7 45.5 Imports 40.8 35.2 37.2 39.6 37.4 35.6 37.5 Net current transfers (negative = inflow) ­17.5 ­14.6 ­13.4 ­14.1 ­10.0 ­9.5 ­7.7 Other current account flows (negative = net inflow) 7.4 7.2 6.3 7.4 7.1 8.2 10.6 Net FDI (negative = inflow) ­0.6 ­1.5 ­2.7 ­3.1 ­2.6 ­2.5 0.7 10414-10_AppA.qxd 4/17/08 11:24 AM Page 113 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ­1.1 ­1.0 ­1.0 ­1.0 ­0.9 ­0.9 ­0.9 ­0.9 ­0.9 ­0.9 ­1.0 ­1.0 3.7 3.6 3.5 3.5 3.4 3.3 3.5 3.7 3.9 4.2 4.4 4.7 5.9 5.8 5.7 5.6 5.6 5.6 5.8 6.1 6.4 6.7 7.0 7.4 3.0 3.0 3.0 3.0 3.0 2.9 3.0 3.1 3.3 3.4 3.6 3.7 5.5 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7 ­5.6 ­5.5 ­5.4 ­5.2 ­5.0 ­4.9 ­4.8 ­4.9 ­5.0 ­5.1 ­5.2 ­5.3 11.2 11.6 11.9 12.3 12.7 13.0 13.4 13.8 14.2 14.7 15.3 15.9 42.3 43.1 43.9 44.5 45.1 45.7 46.2 46.7 47.1 47.5 47.7 46.7 14.6 17.7 19.9 22.0 23.7 26.0 25.8 24.0 21.9 22.3 21.8 20.7 26.5 28.4 29.9 31.2 33.0 34.1 35.2 36.1 36.5 36.8 36.7 36.1 31.9 31.0 31.2 31.4 31.6 31.8 32.0 32.2 32.4 32.6 32.8 33.0 483.6 530.0 580.9 636.6 697.7 764.6 837.9 918.3 1006.4 1102.9 1208.7 1324.7 18.0 17.9 17.9 17.8 17.8 17.7 17.6 17.6 17.5 17.4 17.4 17.3 Projections Historical Standard 2006­11 2012­26 averagef deviationf 2006 2007 2008 2009 2010 2011 Average 2016 2026 average 28.4 26.8 25.1 23.5 22.7 22.3 34.9 52.7 28.4 26.8 25.1 23.5 22.7 22.3 34.9 52.7 ­5.9 ­1.7 ­1.6 ­1.6 ­0.8 ­0.5 1.6 ­4.8 ­1.9 1.9 4.9 1.1 2.5 1.6 0.2 ­4.4 ­4.4 4.6 4.1 7.5 10.4 1.3 3.4 2.7 2.4 ­1.4 3.5 1.6 6.4 10.7 0.9 4.4 5.2 5.2 4.6 42.0 35.9 30.4 30.4 25.6 23.8 22.9 24.6 43.7 42.3 41.1 31.3 30.0 28.9 28.1 29.2 ­13.4 4.4 ­7.0 ­7.1 ­6.6 ­6.2 ­6.2 ­6.2 ­7.1 ­9.5 ­7.8 9.5 8.1 6.2 6.6 5.1 3.7 4.3 3.5 ­1.5 1.4 ­5.3 ­5.3 ­5.1 0.5 ­0.1 ­0.3 ­1.3 ­1.2 ­1.3 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 114 114 A P P E N D I X Table A.14 External Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (in percent of GDP, unless otherwise indicated) (Continued) Actual 1999 2000 2001 2002 2003 2004 2005 Endogenous debt dynamicsb ­16.6 ­15.0 0.7 ­1.1 ­8.6 ­4.6 ­3.9 Contribution from nominal interest rate 0.9 0.5 0.6 0.5 0.5 0.4 0.5 Contribution from real GDP growth ­2.4 ­2.5 ­2.3 ­1.9 ­1.3 ­1.0 ­1.3 Contribution from price and exchange rate changes ­15.1 ­13.0 2.5 0.3 ­7.8 ­4.0 ­3.0 Residual (3­4)c 6.1 7.9 8.4 9.5 5.3 4.6 3.2 o/w exceptional financing ­1.8 ­0.6 0.0 0.0 0.0 ­0.6 ­1.0 NPV of external debtd . . . . . . . . . . . . . . . . . . 23.3 In percent of exports . . . . . . . . . . . . . . . . . . 51.2 NPV of PPG external debt . . . . . . . . . . . . . . . . . . 23.3 In percent of exports . . . . . . . . . . . . . . . . . . 51.2 Debt service-to-exports ratio (in percent) 10.6 6.1 6.4 3.8 3.4 3.3 3.3 PPG debt service-to-exports ratio (in percent) 10.6 6.1 6.4 3.8 3.4 3.3 3.3 Total gross financing need (billions of U.S. dollars) 0.0 ­1.2 ­0.6 ­0.7 ­0.2 ­0.5 ­0.5 Non­interest current account deficit that stabilizes debt ratio 11.1 8.6 ­6.4 ­5.4 5.9 2.5 0.0 Key macroeconomic assumptions Real GDP growth (in percent) 3.5 4.4 4.6 3.9 3.1 2.6 3.8 GDP deflator in US dollar terms (change in percent) 20.8 21.6 ­4.6 ­0.7 18.1 10.0 8.2 Effective interest rate (percent)e 1.4 0.9 1.1 1.0 1.1 1.1 1.3 Growth of exports of G&S (US dollar terms, in percent) 54.2 53.4 ­13.7 11.5 9.2 18.7 39.1 Growth of imports of G&S (US dollar terms, in percent) 9.9 9.6 5.2 10.1 14.9 7.5 18.1 Grant element of new public sector borrowing (in percent) . . . . . . . . . . . . . . . Memorandum item: Nominal GDP (billions of US dollars) 7.5 9.6 9.5 9.8 12.0 13.5 15.2 Source: Staff simulations. a. Includes both public and private sector external debt. b. Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms. c. Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. d. Assumes that NPV of private sector debt is equivalent to its face value. e. Current-year interest payments divided by previous period debt stock. f. Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 115 A P P E N D I X 115 Projections Historical Standard 2006­11 2012­26 averagef deviationf 2006 2007 2008 2009 2010 2011 Average 2016 2026 average ­0.8 ­0.3 ­0.4 ­0.7 ­0.7 ­0.8 ­0.9 ­1.7 0.4 0.4 0.4 0.3 0.3 0.3 0.4 0.6 ­1.2 ­0.7 ­0.7 ­1.0 ­1.1 ­1.1 ­1.3 ­2.3 . . . . . . . . . . . . . . . . . . . . . . . . ­4.0 ­3.6 ­6.5 ­2.7 ­3.3 ­2.1 1.4 ­0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 18.8 17.7 16.7 15.8 15.4 15.3 22.0 35.1 44.6 49.4 55.0 51.9 60.4 64.4 95.9 142.8 18.8 17.7 16.7 15.8 15.4 15.3 22.0 35.1 44.6 49.4 55.0 51.9 60.4 64.4 95.9 142.8 3.3 4.1 4.3 3.6 3.9 4.3 5.4 8.7 3.3 4.1 4.3 3.6 3.9 4.3 5.4 8.7 0.0 0.7 1.3 0.6 1.0 0.8 0.6 ­0.2 10.1 9.2 12.0 2.9 4.2 3.1 0.8 3.4 3.7 0.7 3.9 2.5 3.0 4.5 4.7 5.0 3.9 4.0 4.0 4.1 10.5 10.4 10.4 5.7 5.0 3.9 0.4 ­1.4 4.0 ­3.2 ­2.7 ­2.8 1.1 0.2 1.3 1.4 1.4 1.5 1.5 1.5 1.4 1.3 1.0 1.2 24.6 25.2 6.1 ­7.5 ­8.4 8.7 ­11.6 ­3.8 ­2.8 0.0 5.1 1.8 10.8 4.4 33.7 4.9 5.2 ­17.4 0.8 ­0.2 4.5 ­4.6 2.0 1.3 . . . . . . 33.7 31.1 31.1 31.1 31.1 31.1 31.5 47.4 48.0 50.3 17.4 18.9 20.4 22.2 23.3 24.1 25.8 29.0 10414-10_AppA.qxd 4/17/08 11:24 AM Page 116 116 A P P E N D I X Table A.15 Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt in Yemen, 2006­25 (in percent) Projections Item 2006 2007 2008 2009 2010 2011 2012 Baseline--(NPV of debt-to-GDP ratio) 19 18 17 16 15 15 17 A. Alternative scenarios A1. Key variables at their historical averages in 2007­25a 19 12 4 ­16 ­6 ­10 ­13 A2. No adjustment scenario 19 24 24 21 20 20 20 A3. Permanently lower oil price from 2007 19 20 20 19 19 20 22 (20 percent decline) B. Bound tests B1. Real GDP growth at historical average minus one 19 18 17 16 15 15 17 standard deviation in 2007­08 B2. Export value growth at historical average minus one 19 16 12 12 11 11 13 standard deviation in 2007­08c B3. US dollar GDP deflator at historical average minus 19 19 19 17 17 17 19 one standard deviation in 2007­08 B4. Net non­debt creating flows at historical average 19 19 20 19 18 18 20 minus one standard deviation in 2007­08d B5. Combination of B1­B4 using one­half standard 19 11 ­1 ­1 ­1 ­1 0 deviation shocks B6. One-time 30 percent nominal depreciation relative 19 25 23 22 22 21 23 to the baseline in 2007e Baseline--(NPV of debt-to-exports ratio) 45 49 55 52 60 64 72 A. Alternative scenarios A1. Key variables at their historical averages in 2007­25a 45 34 14 ­2 ­23 ­44 ­57 A2. No adjustment scenario 45 72 87 77 90 105 115 A3. Permanently lower oil price from 2007 45 66 77 74 88 98 112 (20 percent decline) B. Bound tests B1. Real GDP growth at historical average minus one 45 49 55 52 60 64 72 standard deviation in 2007­08 B2. Export value growth at historical average minus 45 42 35 33 38 40 46 one standard deviation in 2007­08c B3. US dollar GDP deflator at historical average minus 45 49 55 52 60 64 72 one standard deviation in 2007­08 B4. Net non­debt creating flows at historical average 45 54 65 62 72 77 85 minus one standard deviation in 2007­08d B5. Combination of B1­B4 using one-half standard 45 25 ­2 ­2 ­3 ­4 ­1 deviation shocks B6. One-time 30 percent nominal depreciation relative 45 49 55 52 60 64 72 to the baseline in 2007e 10414-10_AppA.qxd 4/17/08 11:24 AM Page 117 A P P E N D I X 117 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 18 20 21 22 23 26 27 29 31 32 33 34 35 ­16 ­18 ­20 ­21 ­22 ­25 ­27 ­27 ­28 ­28 ­28 ­28 ­27 18 21 20 21 22 23 26 28 28 30 32 34 37 25 26 28 30 31 33 34 35 36 37 37 37 36 18 20 21 22 23 25 27 29 31 32 33 34 35 14 15 16 18 19 21 23 25 27 28 30 31 31 20 22 23 24 26 28 30 32 34 36 37 38 38 22 23 24 25 26 29 30 32 34 35 36 37 37 1 2 3 4 6 9 11 13 15 17 19 20 21 26 27 29 31 32 36 38 41 43 45 46 48 48 83 84 91 96 102 147 144 141 136 143 147 148 146 ­71 ­78 ­86 ­93 ­99 ­141 ­141 ­132 ­123 ­126 ­124 ­121 ­115 124 128 133 143 155 249 257 257 243 277 318 364 416 128 132 142 150 157 207 196 186 175 176 174 169 160 83 84 91 96 102 147 144 141 136 143 147 148 146 54 56 61 66 71 105 105 104 102 108 113 114 114 83 84 91 96 102 147 144 141 136 143 147 148 146 97 98 105 110 116 164 159 154 148 154 158 159 156 3 5 9 13 17 34 39 43 46 52 57 60 62 83 84 91 96 102 147 144 141 136 143 147 148 146 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 118 118 A P P E N D I X Table A.15 Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt in Yemen, 2006-25 (in percent) (Continued) Projections Item 2006 2007 2008 2009 2010 2011 2012 Baseline--(Debt service ratio) 3 4 4 4 4 4 4 A. Alternative scenarios A1. Key variables at their historical averages in 2007­25a 3 4 4 2 2 1 1 A2. No Adjustment Scenario 3 4 5 5 7 7 6 A3. Permanently lower oil price from 2007 3 5 5 5 5 5 5 (20 percent decline) B. Bound tests B1. Real GDP growth at historical average minus one 3 4 4 4 4 4 4 standard deviation in 2007­08 B2. Export value growth at historical average minus one 3 4 4 3 3 3 3 standard deviation in 2007­08c B3. US dollar GDP deflator at historical average minus 3 4 4 4 4 4 4 one standard deviation in 2007­08 B4. Net non-debt creating flows at historical average 3 4 4 4 4 5 5 minus one standard deviation in 2007­08d B5. Combination of B1­B4 using one-half standard 3 3 3 2 2 2 2 deviation shocks B6. One-time 30 percent nominal depreciation relative 3 4 4 4 4 4 4 to the baseline in 2007e Memorandum item: Grant element assumed on residual financing 43 43 43 43 43 43 43 (i.e., financing required above baseline) Source: Staff projections and simulations. a. Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. b. Assumes that fiscal adjustment measures expected in the baseline do not take place. c. Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). d. Includes official and private transfers and FDI. e. Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 119 A P P E N D I X 119 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 5 5 5 5 6 8 8 8 7 8 8 9 9 0 0 ­1 ­2 ­2 ­3 ­4 ­4 ­4 ­4 ­4 ­4 ­4 6 6 7 9 11 20 23 26 27 34 41 49 58 6 6 6 7 8 11 10 10 10 10 11 11 11 5 5 5 5 6 8 8 8 7 8 8 9 9 4 4 4 3 4 5 5 5 5 5 6 6 6 5 5 5 5 6 8 8 8 7 8 8 9 9 5 5 6 6 7 9 9 9 8 9 9 10 10 2 2 1 0 0 0 1 1 1 1 2 2 2 5 5 5 5 6 8 8 8 7 8 8 9 9 43 43 43 43 43 43 43 43 43 43 43 43 43 10414-10_AppA.qxd 4/17/08 11:24 AM Page 120 120 A P P E N D I X Table A.16 Public Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (in percent of GDP, unless otherwise indicated) Actual Historical Standard Item 2002 2003 2004 2005 averagee deviatione Public sector debta 54.0 52.3 44.9 41.7 o/w foreign-currency denominated 50.5 44.2 39.4 34.4 Change in public sector debt ­2.8 ­1.7 ­7.4 ­3.1 Identified debt-creating flows ­2.0 ­4.4 ­4.8 ­3.0 Primary deficit ­0.8 3.1 0.1 0.0 ­1.3 4.0 Revenue and grants 33.6 30.9 32.0 38.1 of which: grants 1.6 0.4 0.7 0.0 Primary (noninterest) expenditure 32.8 34.0 32.1 38.1 Automatic debt dynamics ­1.2 ­7.5 ­4.4 ­2.0 Contribution from interest rate/growth ­1.1 ­1.4 ­1.0 ­0.1 differential of which: contribution from average 1.0 0.3 0.3 1.5 real interest rate of which: contribution from real GDP ­2.1 ­1.6 ­1.3 ­1.6 growth Contribution from real exchange rate ­0.1 ­6.1 ­3.4 ­1.9 depreciation Other identified debt-creating flows 0.0 0.0 ­0.6 ­0.9 Privatization receipts (negative) 0.0 0.0 0.0 0.0 Recognition of implicit or contingent 0.0 0.0 0.0 0.0 liabilities Debt relief (HIPC and other) 0.0 0.0 ­0.6 ­0.9 Other (specify, e.g. bank 0.0 0.0 0.0 0.0 recapitalization) Residual, including asset changes ­0.8 2.7 ­2.6 ­0.1 NPV of public sector debt 26.9 28.8 24.7 25.3 o/w foreign-currency denominated 23.4 20.7 19.3 17.9 o/w external 23.4 20.7 19.3 17.9 NPV of contingent liabilities (not included in . . . . . . . . . . . . public sector debt) Gross financing needb 52.7 48.2 47.8 41.5 10414-10_AppA.qxd 4/17/08 11:24 AM Page 121 A P P E N D I X 121 Estimate Projections 2006­11 2012­26 2006 2007 2008 2009 2010 2011 average 2016 2026 average 39.1 41.0 44.2 44.9 44.8 46.5 66.1 100.5 28.4 26.8 25.1 23.5 22.7 22.3 34.9 52.7 ­2.6 1.8 3.2 0.7 ­0.1 1.7 1.6 3.5 ­2.6 1.7 3.0 0.5 ­0.4 1.4 2.3 4.0 0.6 2.7 4.1 1.8 0.4 2.1 1.9 3.2 5.7 4.6 36.1 32.6 29.3 29.5 28.2 26.5 25.4 22.7 0.6 0.7 0.7 0.6 0.6 0.6 0.8 1.1 36.7 35.4 33.4 31.2 28.6 28.6 28.5 28.5 ­3.2 ­1.0 ­1.0 ­1.3 ­0.8 ­0.6 ­0.9 ­1.8 ­0.6 0.1 ­0.2 ­1.2 ­1.4 ­1.4 ­2.6 ­4.4 1.0 1.0 1.0 0.7 0.6 0.7 ­0.1 ­0.7 ­1.6 ­1.0 ­1.2 ­1.9 ­2.0 ­2.1 ­2.5 ­3.7 ­2.7 ­1.0 ­0.8 ­0.1 0.7 0.8 . . . . . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.3 0.3 ­0.7 ­0.5 29.5 31.9 35.8 37.2 37.5 39.6 53.2 82.9 18.8 17.7 16.7 15.8 15.4 15.3 22.0 35.1 18.8 17.7 16.7 15.8 15.4 15.3 22.0 35.1 . . . . . . . . . . . . . . . . . . . . . . . . 37.8 39.8 42.8 42.8 42.2 44.1 63.3 95.1 (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 122 122 A P P E N D I X Table A.16 Public Debt Sustainability Framework, Baseline Scenario for Yemen, 2006­26 (Continued) (in percent of GDP, unless otherwise indicated) Actual Historical Standard Item 2002 2003 2004 2005 averagee deviatione NPV of public sector debt-to-revenue ratio 80.0 93.2 77.3 66.3 (in percent)c o/w external 69.6 67.0 60.3 46.9 Debt service-to-revenue ratio (in percent)c, d 8.9 8.0 9.2 9.1 Primary deficit that stabilizes the 4.8 7.5 3.1 debt-to-GDP ratio Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 3.9 3.1 2.6 3.8 4.5 1.5 Average nominal interest rate on forex debt 1.0 1.2 1.1 1.3 1.3 0.5 (in percent) Average real interest rate on domestic 22.3 20.6 11.0 27.0 5.6 19.8 currency debt (in percent) Real exchange rate depreciation (in percent, ­0.2 ­12.6 ­8.0 ­5.0 5.2 32.7 + indicates depreciation) Inflation rate (GDP deflator, in percent) 4.9 20.4 12.2 11.8 15.3 14.8 Growth of real primary spending (deflated by 11.2 7.0 ­3.2 23.2 10.9 21.3 GDP deflator, in percent) Grant element of new external borrowing . . . . . . . . . . . . . . . . . . (in percent) Sources: Country authorities; and Fund staff estimates and projections. a. The public sector covers the central government. b. Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. c. Revenues including grants. d. Debt service is defined as the sum of interest and amortization of medium and long-term debt. e. Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 123 A P P E N D I X 123 Estimate Projections 2006­11 2012­26 2006 2007 2008 2009 2010 2011 average 2016 2026 average 81.6 97.9 122.0 126.1 132.9 149.2 209.6 364.5 52.0 54.3 57.0 53.6 54.7 57.7 86.6 154.3 9.4 10.4 12.4 12.4 12.7 13.7 14.3 22.3 3.2 0.9 0.9 1.1 0.4 0.3 1.6 2.3 3.9 2.5 3.0 4.5 4.7 5.0 3.9 4.0 4.0 4.1 1.4 1.5 1.5 1.6 1.6 1.6 1.5 1.4 1.1 1.3 14.7 9.2 7.5 4.5 3.5 4.0 7.2 0.2 ­0.5 0.0 ­8.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 10.4 10.3 10.6 10.1 9.5 11.1 8.4 9.0 8.8 0.2 ­1.3 ­2.8 ­2.2 ­4.1 4.9 ­0.9 4.0 4.0 4.1 33.7 31.1 31.1 31.1 31.1 31.1 31.5 47.4 48.0 . . . 10414-10_AppA.qxd 4/17/08 11:24 AM Page 124 Table A.17 Sensitivity Analysis for Key Indicators of Public Debt in Yemen, 2006­25 Projections Item 2006 2007 2008 2009 Baseline--(NPV of debt-to-GDP ratio) 29 32 36 37 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 29 30 32 33 A2. Primary balance is unchanged from 2006 29 31 33 34 A3. Permanently lower GDP growtha 29 32 36 38 A4. Permanently lower oil price from 2007 (20 percent decline) 29 36 37 39 A5. No Adjustment Scenario 29 41 50 61 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations 29 32 35 37 in 2007­2008 B2. Primary balance is at historical average minus one standard deviations 29 33 38 39 in 2007­2008 B3. Combination of B1­B2 using one half standard deviation shocks 29 32 35 36 B4. One-time 30 percent real depreciation in 2007 29 40 43 45 B5. 10 percent of GDP increase in other debt-creating flows in 2007 29 38 41 42 Baseline--(NPV of debt-to-revenue ratiob) 82 98 122 126 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 82 93 109 113 A2. Primary balance is unchanged from 2006 82 94 111 114 A3. Permanently lower GDP growtha 82 98 123 128 A4. Permanently lower oil price from 2007 (20 percent decline) 82 121 140 146 A5. No Adjustment Scenario 82 138 200 261 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations 82 97 121 125 in 2007­2008 B2. Primary balance is at historical average minus one standard deviations 82 102 128 132 in 2007­2008 B3. Combination of B1­B2 using one half standard deviation shocks 82 97 118 123 B4. One-time 30 percent real depreciation in 2007 82 123 148 151 B5. 10 percent of GDP increase in other debt-creating flows in 2007 82 116 140 143 Baseline--(Debt service-to-revenue ratiob) 9 10 12 12 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 9 10 11 10 A2. Primary balance is unchanged from 2006 9 10 11 10 A3. Permanently lower GDP growtha 9 10 13 13 A4. Permanently lower oil price from 2007 (20 percent decline) 9 11 13 13 A5. No Adjustment Scenario 9 18 23 48 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations 9 10 12 12 in 2007­2008 B2. Primary balance is at historical average minus one standard deviations 9 10 14 13 in 2007­2008 B3. Combination of B1­B2 using one half standard deviation shocks 9 10 12 12 B4. One-time 30 percent real depreciation in 2007 9 11 13 13 B5. 10 percent of GDP increase in other debt-creating flows in 2007 9 10 19 14 Sources: Country authorities; and Fund staff estimates and projections. a. Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period). b. Revenues are defined inclusive of grants. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 125 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 38 40 45 49 50 52 53 55 61 62 63 65 66 69 71 74 34 36 39 41 41 41 41 41 44 42 41 40 39 38 38 38 34 35 39 41 40 40 40 40 42 40 39 38 36 36 35 34 39 41 46 51 53 56 58 61 67 68 71 74 76 80 84 88 42 46 53 58 60 61 62 65 69 71 74 77 80 84 87 91 72 85 100 116 131 142 157 172 184 197 210 220 231 241 252 261 37 39 44 48 49 51 52 54 60 60 62 63 65 67 69 72 39 41 46 51 52 54 55 57 63 64 65 67 68 71 73 76 37 39 44 48 49 51 52 54 60 60 62 64 65 68 70 73 45 47 51 55 56 58 59 62 66 67 69 71 73 76 80 84 42 45 50 54 56 58 59 61 67 67 69 71 72 75 77 80 133 149 176 207 208 208 210 218 265 265 270 271 281 295 309 324 121 135 155 175 170 165 161 163 191 180 175 167 165 165 165 165 121 133 153 172 166 160 156 158 184 172 166 158 154 153 151 151 136 154 183 217 220 222 227 238 291 294 303 308 323 343 362 384 162 189 225 263 267 263 264 273 317 323 334 341 358 378 397 418 327 423 545 719 848 924 1036 1161 1223 1343 1460 1557 1638 1717 1798 1863 131 147 173 204 205 204 206 214 260 259 264 264 274 288 301 316 139 156 182 215 216 215 217 226 274 274 278 279 290 304 318 333 130 146 171 203 204 203 206 214 260 261 266 267 277 292 305 321 159 176 201 232 232 230 233 243 289 289 294 297 310 328 345 366 150 168 196 230 231 230 232 242 291 291 295 296 307 322 336 351 13 14 15 17 15 14 14 15 17 16 16 16 17 18 19 21 11 13 14 14 11 10 11 11 12 10 9 9 9 9 9 10 11 13 13 14 11 10 10 11 12 9 9 8 9 8 8 9 13 14 16 17 16 15 16 16 18 19 19 19 20 21 23 25 14 16 18 20 19 18 18 19 22 24 25 26 29 31 33 36 48 70 96 130 140 150 131 148 147 169 183 198 208 217 227 233 12 14 15 16 15 14 14 15 16 16 16 16 17 18 19 20 13 14 15 17 16 14 14 15 17 17 17 17 18 19 20 21 12 13 15 16 15 14 14 15 16 16 16 16 17 18 19 21 13 14 16 17 16 15 15 16 18 18 18 18 19 20 21 23 13 14 16 17 16 15 15 16 18 18 18 18 19 20 21 23 125 10414-10_AppA.qxd 4/17/08 11:24 AM Page 126 126 A P P E N D I X Table A.18 Millennium Development Goals for Yemen, 1990­2004 1990 1994 1997 2000 2003 2004 1. Eradicate extreme poverty and hunger Percentage share of income or 7.4b consumption held by poorest 20% Population below $1 a day (%) 15.7 Population below minimum level of 36.0 33.0d 36.0 dietary energy consumption (%) Poverty gap ratio at $1 a day (%) 4.5 Poverty headcount, national 41.8c (% of population) Prevalence of underweight in children 39.0 46.1 (under five years of age) 2. Achieve universal primary education Net primary enrollment ratio 51.7 57.4 67.1 71.8 (% of relevant age group) Primary completion rate, total 57.8 57.9 65.5 65.5 (% of relevant age group) Proportion of pupils starting 74.5 grade 1 who reach grade 5 Youth literacy rate (% of age group 15­24) 50.0 67.9e 3. Promote gender equality and empower women Proportion of seats held by women in 4.0 1.0 1.0 1.0 0.0 national parliament (%) Ratio of girls to boys in primary and 50.0 55.6 60.8 secondary education (%) Ratio of young literate females to males 60.3 (age group 15­24) Share of women employed in 9.3 8.0 7.4 6.7 6.1 6.1 non-agricultural sector (%) 4. Reduce child mortality Immunization, measles (% of children 69.0 31.0 46.0 71.0 66.0 66.0 aged 12­23 months) Infant mortality rate (per 1000 live births) 98.0 89.0 84.0 82.0 82.0 Under 5 mortality rate (per 1000) 142.0 126.0 117.0 113.0 113.0 5. Improve maternal health Births attended by skilled health 21.6 staff (% of total) Maternal mortality ratio 1400.0 570.0 (per 100,000 live births)a 10414-10_AppA.qxd 4/17/08 11:24 AM Page 127 A P P E N D I X 127 Table A.18 Millennium Development Goals for Yemen, 1990­2004 (Continued) 1990 1994 1997 2000 2003 2004 6. Combat HIV/AIDS, malaria and other diseases Contraceptive prevalence rate 9.7 20.8 23.0 23.0 (% of women aged 15­49) Incidence of tuberculosis 137.6 121.8 111.1 101.4 92.5 92.5 (per 100,000 people) Prevalence of HIV, (% of population 0.1 0.1 aged 15­49) Tuberculosis cases detected under DOTS (%) 30.0 54.3 43.3 43.3 7. Ensure environmental sustainability Access to an improved water source 69.0 69.0 (% of population) Access to improved sanitation 21.0 30.0 (% of population) CO2 emissions (metric tons per capita) 0.7 0.7 0.8 0.5 Forest area (% of total land area) 1.0 0.9 GDP per unit of energy use 2.8 3.4 3.6 3.7 3.7 (2000 PPP $ per kg oil equivalent) 8. Develop a global partnership for development Aid per capita (current US$) 34.1 11.5 22.2 15.1 12.7 12.7 Debt service (% of exports) 7 4 4 5 4 4 Fixed line and mobile phone subscribers 11.0 12.4 14.1 20.6 48.9 (per 1000 people) Internet users (per 1000 people) 0.2 0.8 Personal computers (per 1000 people) 1.2 1.9 7.4 General indicators Adult literacy rate (% of people 40.0 46.0 49.0 aged 15 and over) Fertility rate, total (births per woman) 7.5 6.5 6.4 6.0 6.0 Life expectancy at birth (years) 52.2 55.0 57.7 57.7 Population, total (millions) 11.9 14.8 16.1 17.5 19.2 19.8 Roads, Paved (% of total roads) 9.1 8.1 8.1 11.5 12.0 Source: World Bank World Development Indicators database. Note: Data refer to the nearest available year. a. No national data on maternal mortality available. Estimates derived from model. b. Survey year: 1998. Refers to consumption shares by percentiles of population. Ranked by per capita consumption. c. Data refers to 1998 Household Budget Survey conducted in Yemen. d. 1999­2001 average. e. UNESCO Institute of Statistics estimates, data for 2000­04. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 128 128 A P P E N D I X Status 2.8 4.0 5.8 3.0 2.3 ­0.3 38.8 24.4 43.1 12.0 ­2.0 68.9 82.0 53.3 84.3 99.8 63.0 62.4 34.0 37.0 25.8 88.0 21.0 71.1 59.9 365.0 256.0 650.0 474.9 2004 Actual 1436.0 7617.0 4.7 6.3 1.5 5.3 3.1 5.7 38.0 26.1 41.6 10.0 ­4.0 67.6 81.2 52.7 61.5 84.1 63.8 68.0 32.0 38.5 28.0 96.9 22.0 66.0 56.1 314.0 233.0 570.0 450.9 Target 2050.0 2143.0 sector sector sector sector Total Urban Rural Total Male Female Urban Rural Total Urban Rural Public Private Public Private km) grid 2002-04. period births) national km) the the (in 2003­05 maintenance(in thousands) over Indicators 1000) networks thousands) 100,000 (in from (in exceeded. rates 1000) (per roads coverage or (per rate water km) thousands) routine Yemen, index enrollment (per care power (in (in met in growth growth growth ratio balance asphalt public GDP price mortality growth with beneficiaries pensioners being mortality of losses roads GDP health of covered of fiscal average growth count undergoing education mortality target the Strategy to GDP Non-oil Percapita Head Consumer Overall Basic Maternal Infant Under-five Fertility Increase Population Coverage Population Electricity Asphalted Rehabilitated Roads Number Number Number refer indicates grey grants. Reduction and estimates. and services services indicators met includes Staff GDP enrollment markets through and and Poverty to welfare real GDP electricty coverage being network of growth sanitation basis First of not stated. Goals real areas services social road of education and to of pension estimates. 2003­2004 the of rural target role of staff to poverty Inflation basic health population water coverage otherwise access improvement Report, under discipline are commitments the refers on easy expansion unless 2004 red is Improvement Reduce Control Fiscal Increase Improve Control Improve Increase Connecting Reinforce Expansion Progress under for Progress column, balance figures Annual percentages numbers fiscal in A.19 status PRSP actual the Poverty Overall Pillars Achieving Economic growth Developing human resources Improving infrastructure Ensuring social protection The In Figures Table Notes: 1. 2. 3. 4. 5. Source: 10414-10_AppA.qxd 4/17/08 11:24 AM Page 129 A P P E N D I X 129 Table A.20 Specific Measures to Reduce Fertility and Maternal Mortality in Yemen Area of reform Specific measure to reduce fertility and maternal mortality Civil Service, in coordination 1. The Ministry of Civil Service (MoCS) to take immediate action to confer with the health and up to 1000 civil service slots each to the MoPHP and Ministry of Educa- education sectors tion (MoE) for the employment of currently trained but unemployed midwives and female teachers in rural areas that are unserved by female staff. To assure proper targeting of rural areas not currently served by female staff, given that governance and accountability structures are still immature in all three ministries, special procedures and monitoring will need to take place prior to and after employment to ensure that these female staff are from the target communities, are properly qualified, are slotted for schools/facilities where other female staff are not in place, and in fact become deployed. This monitoring function could be carried out by a special disinterested committee, possibly from the NPC and local NGOs. If successful, this measure could be repeated annually, or alternatively, a quota system put in place for hiring key female staff into these sectors. Information, education, and 2. Double or more the air time of radio and television to promote accept- communications ability of contraception, using tested messages based on sound social marketing techniques, and utilizing means effective within the society such as plays and poetry. 3. Utilizing the training materials already developed for the training of clerics, and those clerics already trained and committed to population issues, initiate a decentralized IEC campaign with the objective of reaching 90 percent of all clerics, and the catchments areas of the mosques where they preach Friday sermons. Such a campaign will be able to reach the majority of adolescent and adult males, and through them, their households in rural areas. Tribal leaders are also important targets of an information campaign, particularly in the northern and eastern sections of the country. Messages will need to be carefully tested, given the likely political nature of objections to family planning by this group. 4. Utilize the results of the current NPC Knowledge, Attitude and Practice (KAP) study on adolescent reproductive health to design a culturally acceptable decentralized information campaign for adolescent boys and girls in preparatory and secondary schools. The target is to reach 90 percent of all students in these schools two to three times each with information that will discourage early marriage and early child bearing. The IEC campaign should be carried out by acceptable staff, either teachers, health workers, or clerics, or a combination of these. These messages should be evaluated for effectiveness, and eventually be incorporated into the preparatory and secondary level curriculum of the MoE. Health 5. Create a "fast track" program to improve RH/FP services. Using a "scal- ing across" methodology of system building, improvements/reforms carried out in the RH/FP service system can then be utilized to build improvements and reform across into other service categories through transferring lessons learned in building logistics, supervision, Health Information System (HIS), and management systems. Utilizing the (continued) 10414-10_AppA.qxd 4/17/08 11:24 AM Page 130 130 A P P E N D I X Table A.20 Specific Measures to Reduce Fertility and Maternal Mortality in Yemen (Continued)Area Area of reform Specific measure to reduce fertility and maternal mortality forum of the Reproductive Health Technical Group, and based on high level commitment within the Ministry, implement a nation-wide (not a pilot project) step-wise improvement of RH/FP, beginning with the most practical and high priority areas. The most important improve- ments in approximate order of priority would be the following: 1) employment of already trained female staff; 2) contraceptive supply logistic system made functional down to the level of Service Delivery Points (SDPs); 3) target new training of CM/mershidat (Certified Mid- wife) to Health Units (HUs) where no female staff exist; 4) initiate refresher courses in contraception for all current female staff for those who have not already received such training; 5) initiate a basic quality control/supervision system to strengthen RH/FP practice; 6) design and implement outreach programs for RH/FP/child, health targeting poor and illiterate women; 7) provision of essential drugs and sup- plies for maternal health; and 8) HIS/monitoring system put in place which focuses on monitoring and improving the effectiveness of the above measures. 6. Within the above, institute mechanisms to improve the reach of family planning services. Within the public health sector, this will necessarily mean the use of outreach services, and perhaps combining family planning service provision and IEC with vaccination campaigns and outreach services. This is necessary because stationary health services are unlikely to reach even 50 percent of the rural population, given Yemen's mountainous terrain, and limited and expensive transporta- tion system. 7. Increase government funding to the health sector by at least the amount specified in the PRSP. Without this measure, there is little hope for vital improvement in RH/FP and child health services. However, because the MoPHP chronically under spends its budget, correspond- ing changes will need to be introduced to ensure that the funds allo- cated are in fact able to be spent. Changes in disbursement and other budget procedures will need to be introduced into both the MoPHP and the Ministry of Finance (MoF). 8. Community participation and community co-management of health facilities should be given a greater emphasis within the health sector, in order that the powerful potentials of communities to improvement of maternal and child health service coverage, including family planning services, be realized. Given the stalling of this element of health sector reform, the first step should be a focused study on how to revitalize and focus community participation for the sector. Education 9. Reorient the focus of Literacy and Adult Education Organization (LAEO) on women and adolescent girls, with the target of improving literacy of this group by at least 15 percent over the next five years. Population education should be incorporated into the curriculum. Given that three years of LAEO curriculum is equivalent to six years of basic education, that the basic network and other means to carry out this program are already in place, and that interest is high, this is the 10414-10_AppA.qxd 4/17/08 11:24 AM Page 131 A P P E N D I X 131 Table A.20 Specific Measures to Reduce Fertility and Maternal Mortality in Yemen (Continued) Area of reform Specific measure to reduce fertility and maternal mortality single most rapid and inexpensive means to increase literacy of women of child bearing age and in adolescent girls just entering this age. In order to be successful, LAEO will need to be reorganized, key reforms put in place, and funding improved. The MoE Task Force on Elimination of Illiteracy and donor organizations working in the area of literacy are well placed to be utilized for this purpose. 10. The MoE to implement those institutional mechanisms necessary to improve girls' enrollment. With cultural constraints to girls' education lessening in Yemen, a decision by the Ministry to put in place mecha- nisms to make its administration and classrooms more girl-friendly (based on its own and the analysis of donors) has the potential to rapidly increase girls' enrolment. A key action will be to improve access for young girls through opening multi-grade classroom community schools within small communities. Health and education 11. MoPHP and MoE to devise methodologies to monitor their coverage of poor, rural and illiterate families, and implement targeting mecha- nisms to improve such coverage through recognition of the special access issues of the poor and rural families. Legal actions to create 12. Explore the feasibility of Yemeni Imams issuing a fatwa on family planning, incentives and disincentive such as was done in Iran and Egypt, and if feasible, promote such an action through study tours and advice from the key actors in these other coun- tries. Follow up through with dissemination of information on this action. 13. Utilize the current review of laws related to gender equity to study openings for laws that have the potential to create incentives to reduce family size. There will be significant overlap between popula- tion and gender agendas, warranting coordination between these two efforts. Incentives within health and education sector policies should also be included in this review, as should be a review of incentive sys- tems attempted in other parts of the world. Any effect of this action is likely to be felt in the medium and long term. Social marketing 14. Given the high degree of unmet need for contraception, social market- ing efforts should be expanded beyond the single project now in place. Social marketing efforts should focus on rural areas, and like the current project, attempt to increase the demand for contraceptives, and to improve the supply of affordable, high quality contraceptives, especially in areas not currently served. Close monitoring of the progress of such efforts is essential, and any problems of implementation corrected early. National population council 15. NPC to quantify IEC and social marketing targets, and closely monitor the results, in order to better understand to what extent the popula- tion is being reached with family planning messages. Both men and women should be targeted, using the results of the numerous KAP studies already carried out to guide education messages. 10414-10_AppA.qxd 4/17/08 11:24 AM Page 132