Report No. 24514-YEM The Republic of Yemen Economic Growth: Sources, Constraints and Potentials 31 May 2002 Social and Economic Development Group Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EEQuIVALENTS Currency Unit =Yemeni Rial (YR) Exchange rate: YR 174.3 YR per 1 US Dollar (as of 4 May 2002) YEMEN FISCAL YEAR January 15 - December 315t ABBREVIATIONS AND ACRONYMS CBY Central Bank of Yemen CMSA Constant Market Share Analysis CPR Consumer Price Index CSO Central Statistical Organization DHS Demographic Household Survey EPA Environmental Protection Authority FDH[ Foreign Direct Investment FFYP First Five-Year Plan FTA Free Trade Area GDP Gross Domestic Product GDHI Gross Domestic Investment GLIA General Investment Authority GOAMM General Organization for Antiquities, Manuscripts and Museums GOPCH General Organization for the Protection of Cultural Heritage GoY Govemment of Yemen ICOR Incremental Capital Output Ratio lIFC International Financial Corporation HMF International Monetary Fund HSIC International Standard Industrial Classification LiDB Live Data Base (the World Bank) MENA Middle East and North Africa MoF Ministry of Finance MoHP Ministry of Health and Population MoPDX Ministry of Planning and Development PDRY People's Democratic Republic of Yemen PEC Public Electricity Corporation PRSP Poverty Reduction Strategy Paper RCA Revealed Comparative Advantage REER Real Effective Exchange Rate RoY Republic of Yemen SFYP Second Five-Year Plan SNA System of National Accounts TlFP Total Factor Productivity ICFR Total Fertility Rate UN United Nations uS United States WHO World Health Organization WTO World Trade Organization YAR Yemen Arab Republic YR Yemeni Rial Sector Director: Mustapha Nab_. Country Director: Mahnood Ayub. Sector Manager: Dipak Dasgupta. Task Manager: Nadir Mohammed. FOR OFFICIAL USE ONLY THE REPUBLiC OF YEMEN ECONOMIC GRowrH: SOURCES, CONSTRAINTS AND POTENTIALS TABLE OF CONTENTS EXECUTIVE SUMMARY i PART I: ECONOMIC GROWTH: PERFORMANCE AND STRUCTURE 1 Chapter 1: Economic Growth and Macroeconomic Performance ...1.... .......... 1. INTRODUCTION AND CoNTEXT ................................................ ............ ...... 1 II. POLmTCAL AND ECONOMIC DEVmEoPMENIs BEFORE UNIFICATION................. ..... 2 A. Major Poltical and Economic Developments 2 B. Trends in Economic Growth in the Former Republics . . 4 111. EcoNoIuc GROWTH IN THE 1990.. .. 4 A. The Early 1990s: Pre-Reforms Period and Macro-shocks. . . 5 B. Economic Growth During the Reform Period .....-....... ..... ........................................... 6 C. Sectoral Contribution to GDP and Economic Growth, 1990-2000 ... ......... ............ . 6 IV. DEMAND AND FACTOR DECOMPOSrITON OF GRownrH ... ........ ... ... ... . . . . ... 8 A. Demand Decomposition of GDP Growth........................................ ..................... 8 B. Factor Decomposition of GDP and TFP .... . .... ................. . 8 V. GDP AND SECTORAL GROWTH TARGETS OF THE 2025 VISION AND THE SFYP.. 9 A. Long- and Medium-Term Targets for Economic Growth in Yemen .. 10 B. Sectoral Composition and Growth Targets of the SFYP .12 Chapter 2: Potentials and Constraints of the Main Economic Sectors ...... ... ... 13 I. INTRODUCTION AND MAJOR FINDINGS 13 II. THE AGRICULTURAL SECToR .14 A. Fisheries . . .15 i. Roast Dmlppmxn&s axd Contibfeon to GDP . ....................5........ ... ... ................ ...... ........... 1t ii Raoesomn Potntnia/s and Conitrains in the F4iif Ssb-Sator . ......-........ .... ..... ... ... ....... .. 16 B. Farming, Forestry, Livestock and Qat . . . . 17 i Qat and Watkr Resors: The To Major Cowslwnt. in u th Sainer ... .......... . 1. -ii Greth Pot,tia& ofNen-FiJil.ApgnadtarSedor ................................... . ................ 19 Ill. THE INDUSTRIAL SECTOR ................................................ . . . ....... .... 20 A. The Oil Sector ......... ............................................................. ........................... 21 i Davkpmeti and Coniibstin to GDP, 1t99092000 .... 21 ii litiosons ofEaedDedw in Proin, 2001-20t10 - ...23 B. Gas and Mining .. ...... 24 C. Mau acturing ....g. 25 Ci Nanuzfactrnm hws gnJsPUfePno ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... .... ... .... .. ..... ... ... ....... ... ... ................ .... 25 i Mammf=&dxtiA8Adiais in the Prt-Uxfia6rox Pajod ... ........-.... .......................25 i. Cumnt Charctervirs ofMaxsfadung,iqariti6i in Yvx . .. ... . . ........... 26 i;. AaxfaWang Omps, Cosfribadto to Growth and E,erts in Me 1990s ............... ...... .... 27 iv. Growth Pro.redr and TaWref rofe SFYPfor MhMang faansi Seior ........-.... ............-... . .......... 29 D. Other Industrial Sub-sectors (Construction, Water and Electricity) ......30 IV. THE SERVICES SECTOR ..................................................... . . . . . 31 A. Tourism ......32 i Roat Tr,sr and Tht Prws SiV .............. ... ..... .................. ... .............. . 32 ii CoGnshinfs and Cha&s,gu to Dewipmwt of Tovism in Yamwn ........3........................ ... ..... ........ 33 ii GrowthPrespets efTfTiwAiviti . ..... 35 B. Government Services ...... 36 C. Transport and Communications . . . . . . 37 D. Wholesale and Retail Trade ......... 39 This doc.ument has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PART II: PRIVATE SECTOR ENVIRONMENT AND GOVERNANCE 40 Chapter 3: Developing the Private Sector and Improving Governance ......... ... 40 I. OVERVIEW AND MAJOR FINDINGS ............................................................. ... 40 Il. CHARACTERISTICS OF YEMEN' PRIVATE SECTOR AND THE INvEsTmENT CLIMATE ... 41 A. Size and Structure of Yemeni Private Sector ...................................... ... ... .................. 41 B. Pnivate Sector Environmnent and Governance ............................. ... ... ... ... .................. 45 III. TOWARDS A REFORM AGENDA FOR PRIVATE SECTOR DEvELOPMENT ... ........... ...... 51 A . Reducing Policy U ncertainty ............................................... ........................... 51 B. Improving Govemance and Maket Institutions ....................... ... ... ...... .................. 53 C. Improving the Quality of Public Services .................................. ... ... ... ... ................ 55 D. Improving Financial Intermediation ............................................... ...................... 56 Chapter 4: External Trade Sector and Export Competitiveness ... .................. .... 58 1. INTRODUCIONAND SUMMARY OF FINDINGS ............................................... ............. 58 II. EXPORT PERFORMANCE, DIVERSIFICATION AND DIRECToN OF TRADE ......... ............ 58 III. EXCHANGE RATE POLICY REFORMS AND COMPETrIIvENEss ........ ..... ..... ... ... ............ 60 IV. CONSTANT MARKET SHARE ANALYSIS (CMSA) ...... ... .. ... ... ..... ..... ......... ... ............. 62 V. REVEALED COMPARATIVE ADVANTAGE (RCA) ANALYSIS ............... ........ ............. 65 VI. MARKET POsmONING (RiSING AND FALLING) STARS ................................... ............. 66 PART III: TAPPING THE POTENTIALS OF YEMEN'S ECONOMY 67 Chapter 5: High and Sustained GDP Growth in Yemen: The Way Forward ... 67 PLAN OF ACTION FOR REDUCTION OF CONSTRAINTS IN ECONOMIC SECTORS ....................... 70 Bibliography ........................................................... 76 Annex Tables. ........................................................... 78 Annex A. National Accounts Data ........................................................... 86 Annex B: Population Growth Estimates in Yemen ..................................................... 89 TABLES. BOxES. FIGURES AtND ANNEXFS List of Tables Table 1.1: Macroeconomic Indicators in Yemen, 1991-2000 ............ ............................................... 5 Table 1.2: Sectoral Contribution to GDP in Yemen, 1991-2000 ..............7. ............... .................... 7 Table 1.3: Contribution of Industrial Sector to GDP, Yemen and Comparators, 1990-1999 ... ........... 7 Table 1.4: Demand Decomposition of GDP Growth .........8..... .................................................. 8 Table 1.5: Total Factor Productivity (TFP) Estimates ......... .............................................. ....... 9 Table 1.6: Trends in Private and Public Investment .................... ............................................ 9 Table 1.7: Targets of the Second Five-Year Plan (SFYP ............................................................11 Table 1.8: Yemen GDP By Sector, 1990-2005. ............................... 12 Table 2.1: Agricultural Value-Added, 1990-2005 ..................................................... ......... ...... 15 Table 2.2: Agricultural Land in Yemen by Major Crops ................................................... ...... ... .. 17 Table 2.3: A Scenario for Increased Agricultural Value-Added ............... ....................... .......... 19 Table 2.4: Industrial Value-Added, 1990-2005 (C/o) ............................................................ ....... 20 Table 2.5: Oil Fiscal Revenues, 1990-2000 .................. ....................................................... 22 Table 2.6: Projected Oil Production by the SFYP .........................................23.............................. 23 Table 2.7: Revised Projections for Oil Production, 2001-2010 ................................... ............ ....... . 24 Table 2.8: Important Fields for Mineral Exploration in Yemen ...... .................... ............... .......... 25 Table 2.9: Manufacturing Establishments by Size and Activity, 1999 ......... .................... ...... ......... 26 Table 2.10: Growth of the Manufacturing Sector, 1990-2000 .................... .............................. .. 28 Table 2.11: Water and Electricity Value-Added, 1990-2000 ..................3.....1.........1.................. ...... . 31 Table 2.12: Services Value-Added, 1990-2000 ......................................................................... 31 Table 2.13: Value Added and Employment by Hotels and Restaurants ......... ................ ................ 33 Table 2.14: Road Transport Network in Yemen ......................................................................... 37 Table 3.1: GDP by Private/Public Sector ....................... .................................................. 42 Table 3.2: Investment Projects Licensed by the General Investment Authority (GIA) ... .................. 43 Table 3.3: Trends in Private and Public Sector Investments, 1990-2005 .................. ......................... 44 Table 3.4: Targets for GDP Growth and Demand Components of the SFYP ...... ................... ... 46 Table 3.5: Rank 1 Obstacles by Firm Size ................................................. ........................ 48 Table 4.1: Yemen's Main Export Markets .........60.......................................... ..... ............ 60 Table 4.2: Yemen's Main Export Markets for Non-Oil Exports, 1991-1998 ... . .................... ..... 60 Table 4.3: Yemen: Constant Market Share Analysis (CMSA), % ......... ................... ................... 62 Table 4.4: Trend and Composition of Yemen's Imports, 1994-2000 ............ ..... ............................ 64 Table 4.5: RCA Against the World ........................... .........65................................. 65 List of Figures Figure 1.1:Yemen's Pre and Post-Unification GDP Growth ............................................ ....... 2 Figure 1.2: GDP Growth in the 1990s: Yemen and Comparators ...... ......... ............. 4 Figure 1.3: Yemen's Stabilization Record, 1990-2000 .......................................................................... 6 Figure 1.4: Pre and Post Stabilization Growth 1990-2000 ............................... ............6......... 6 Figure 2.1: Oil Sector, Oil Prices and GDP, 1991-2000 ............................. .................................. 22 Figure 2.2: Oil Production in Yemen, 1990-2000 ................................................................. ....... 22 Figure 2.3:: Manufacturing Establishments by Size ........................................................... ........... 26 Figure 2.4: Sources of Financing to Manufacturing Activities, 1996 ......... ..................................... ... 27 Figure 2.5: Licensed Private Investment Projects by the GIA ............... ........ I ;.. ........................... 30 Figure 2.6: Intemational Tourism Arrivals by Region, 1995-2000 ........... .........I............................ 33 Figure 2.7: Govemment Consumption Expenditure: Yemen and Comparators .... 36 Figure 3.1: Investment Projects Licensed by the GIA by Nationality, 1992-2000 ...... ........ ................ 42 Figure 3.2: Aggregate Governance Indicators: Yemen .46 Figure 3.3: Govemance Indicators: Yemen, OECD and MENA Average .......... ......................... 47 Figure 3.4: Obstacles to Business and Profitable Expansion ................................................... 48 Figure 3.5 Incidence of Irregular Payments ............................................ ......................... 49 Figure 3.6: Influence over Policy Formulation ................................................................... 50 Figure 3.7: Percentage of Firms Identifying Corruption as a Moderate to Severe Obstacle ................. 53 Figure 3.8: Percentage of Firms Identifying Tax Administration as a Moderate to Severe Obstacle ...... 53 Figure 3.9: Percentage of Firms Identifying Legal System as a Moderate to Severe Obstacle ................ 54 Figure 3.10: Percentage of Firms Identifying Electricity Supply as a Moderate to Severe Obstacle ....... 55 Figure 3.11: Source of Finance .......................................................................... 56 Figure 4.1: Trends in REED during 1990-2001 .......................................................................... 61 Figure 4.2: Yemen's Market Strategy in the 1990s .......................................................................... 63 List of Boxes Box 1.1: Per Capita Growth ..... .........5........................................ .......... S Box 2.1: Towards An Agenda for Qat ... ......... .......................................................... 18 Box 2.2: Exports of Coffee, Fruits and Vegetables .........2........0......................................... ...... 20 Box 2.3: Telecommunications Market in Yemen ..............3........8................................................ 38 Box 3.1: Public and Private Sector Consequences of an Oil Boom ...... . .................................... .. 43 Box 3.2: Yemen Private Sector Environment Survey 2001 ................................................. ......... 44 Box 3.3: Large Firns in Yemen .......................................................................... 45 Box 3.4: Mauritius: Enclave Manufacturing as a Way of Developing a Manufacturing Sector ...... ........ 51 Box 3.5: Fast-Track Institutional Mechanisms for Legal Reform (ranzania and Bangladesh) ........ ...... 55 Box 3.6: Yemen's Privatization Program .......................................................................... 57 Box 4.1: Fish Exports .......................................................................... 59 Box 4.2: Yemen's Export of Manufactured Goods ............................................................ 63 list of Annex Tables Annex Table 1: Share of Services Sector in GDP and Its Contdbution to GDP Growth, 1991-2000 ... 78 Annex Table 2: Share of Industry in GDP and Its Contribution to GDP Growth, 1991-2000 ............ 78 Annex Table 3: Share of Agriculture in GDP and Its Contribution to GDP Growth, 1991-2000 ......... 79 Annex Table 4: International and Domestic Bed-nights in 3, 4 and 5 Star Hotels, 1995-2000 ................ 79 Annex Table 5: Tourist Arrivals by Average Length of Stay and Daily Expenditures, 1995-2000 ........... 79 Annex Table 6: Hotel Rooms by Class, 1995-2000 .............................................................. ... 80 Annex Table 7: Tourism Establishments by Type and Governorate ......................... ............. ........ 80 Annex Table 8: Growth of Manufactuing Sub-sectors 1990-2000 (C/o) ............................... .......... 81 Annex Table 9: Projected Oil Production Levels, 2001-2010 from Existing Fields ......... ......... ......... 81 Annex Table 10: Targets for GDP and Demand Components of the SFYP ... ... ....... ...................... 82 Annex Table 11: Legal Organization of Firms .......................................................................... 82 Annex Table 12: Sector of Activity, Pdvate Sector Firms, 2001 ............ ................. .............. ....... 83 Annex Table 13: Private Sector's Assessment of Efficiency of Governmernt Services .... . .................... 83 Annex Table 14: Ownership of Land, Private Sector Survey ............. ........................ ...... .... ... .. 84 Annex Table 15: Entry Costs .......................................................................... 84 Annex Table 16: Delays in Bureaucratic Interactions ....................................8.......... ... ... .... ... ..... 85 Annex Table 17: Employment in the Oil Sector .............................................8....................... ... 85 ACKNOWLEDGEMENTS A multi-sectoral World Bank team prepared this report. Led by Nadir Mohammed, the team included Gianni Brizzi (tourism), Jean-Francois Barris (agriculture and fisheries), Arup Banerji (governance and private sector), Julia Devlin (private sector), Elisabeth Sherwood, (manufacturing), Masakazu Someya (trade and external competitiveness), Caralee McLiesh (private sector survey), Mohammed Al-Sabbry (research assistance and mnanufacturing) and Maria Victor Handal (team assistance). The peer reviewers (M. Atarnan Aksoy and Philip E. Keefer) provided valuable comments and suggestions on the first draft of the report. Mustapha Nabli (Chief Economist and Director, MNSED) and Dipak Dasgupta (Sector Manager, MNSED) provided useful insights and suggestions during the various stages of the preparation of the Report. Valuable comments were also received from the IMF Middle Eastern Department (particularly Edward Gardener and Sherwyn Williams) during discussion of the Concept paper and on the first draft of the Report The themes researched in this report were identified during a series of consultations with the Yemeni authorities and individuals in 2001. In particular, H.E. Minister Ahmed Mohammed Sofan, Minister of Planning and Development, requested the analysis for preparation of the Poverty Reduction Strategy Paper (PRSP). The team working on the Strategy Vision 2025, the Second Five-Year Plan and PRSP provided guidance on the content of the report. Suggestions and comments by Mr. Abdel Rahman Tarmoum (Vice-Minister of Planning and Development), Dr. Mutahar Al-Abbasi (Deputy-Minister of Planning and Development) and Dr. Yahya Al- Mutawakil (Coordinator, the National PRPS Team) are highly appreciated and acknowledged. Professors Mohammed Al-Hawiri and Abdel Karim Al-Sieyaghi (Sana'a University) participated in the study by organizing and undertaking the private sector survey in 5 Govemorates. Finally, the analysis leading up to this report benefited from many discussions with Sana'a based staff of several external partners and NGOs. Their contributions are gratefully acknowledged. EXECUTIVE SUMMARY Rapid and sustained growth (in excess of 5% per annum) is critical for sustained poverty reduction in Yemen. This has been recognized by the go-er'nhent's second five-year plan (SFYP). The attainment of such target is, however, very challenging and will require extremely aggressive changes in both the overall business environment and the governance structure as well as the elimination of significant obstacles to growth in particular economic sectors: @ Unification of Yemen in 1990, subsequent political transformation towards a multi-party system, and building of democratic and civil institutions have put the country on the right track to accelerate economic development and growth. (u) Economic growth in the 1990s was impressive despite the impact of three major shocks in the early 1990s (drought, the Gulf war, and the civil war). During 1990-2000, real GDP growth averaged 5.5%, which translated into 1.5% increase in GDP per capita due to the high population growth rate. In the early 1990s, the external shocks led to an increase in financial imbalances and the GoY initially resorted to direct conttols restricting imports, investments and movements of the exchange and interest rates. In 1995, the GoY embarked on a program for economic reforms and stabilization with the aim of enhancing the foundations of a market-based and private sector-led economy. It focused on stabilization, price and trade liberalization, fiscal adjustments and reform of the exchange rate regime. Partly responding to the sttong stabilizatiori and reform outcomes, GDP growth picked up to 6.4% during 1995-2000. (in) GDP growth in Yemen was, however, driven mainly by factor accumulation (labor and capital) in the 1990s. Productivity growth was negative for most of the decade with only modest improvements after the implementation of economic reforms. This points to the substantial scope for deeper reforms to improve non-oil output oiv) During implementation of the First Five-Year Plan (1996-2000), the GoY decided to prepare the SFYP within a framework of a long-term strategy. For that purpose, the Strategic Vision 2025 was formulated. It plans for the achievement of an annual average GDP growth of 9% in the coming 25 years, reducing population growth rates and raising productivity. The Vision emphasizes strongly the importance of poverty reduction as well as the creation of a conducive environment for private sector development As the first plan within that long-term vision, the SFYP was prepared and it targets the achievement of an average GDP growth rate of 5.6% as well as raising the contribution of non-oil sectors in GDP from 71% to 75% by 2005; with an implied average annual growth rate of 8%. Ambitious targets for agriculture (6.7% per annum) and services (8%) were planned while the growth rate of industrial value-added was set at 3.0%. (v) The achievement of the targets of the SFYP and the long-term vision is a challenging task. Sustained and higher economic growth rates would require major improvements in the business environment and governance structure, enhancement to domestic security, maintenance of macro-economic stability, pursuit of structural reforms to raise productivity, and addressing a number of constrains in the various economic sectors (see sections below). Without addressing these obstacles, the medium and long-term growth targets are unlikely to be met. Furthermore, the investment levels (both private and public) i expected by the plan to achieve the GDP growth target appear too high and are inconsistent with expected improvements in the human resources base and productivity increases resulting from perusal of structural reforms. Economic growth will require significant increases in private investment, particularly in non-oil sectors. Without significant and notable improvements in the governance structure, regulatory environment and in the security situation with which property and contract rights are enforced, this investment is unlikely to be forthcoming: (i) Evidence suggests the need for improving total factor productivity in the Yemeni economy as an important source of economic growth. One of the primary drivers of productivity improvement and strong growth performance is the capability of firms, which is greatest when operating in a healthy investment climate. Well-functioning private markets are also a powerful way to help the poor catch-up by providing the opportunity to enhance living standards. (n) Both the Strategic Vision 2025 and the SFYP recognize the pivotal role of the private sector in achieving high and sustained rates of economic growth. They call for strengthening of the partnership between private and public sectors while according the private sector the leading role in realizing economic and social development. The SFYP aims to raise the share of the private sector in total GDP, and in non-oil GDP to 53.7% and 72.3% respectively by 2005. This would require a real growth in private sector output by an average annual rate of 10%. (iii) The Report analyses the private sector environment in Yemen, based on available literature and a private sector survey undertaken specifically for this study. The main findings include the following. (a) private sector firms are languishing in an environment characterized by weak governance and corruption, major administrative obstades, high taxes and inefficient tax administration and unfair business practices; (b) the majority of firms are small, service- oriented workshops operating in captured domestic markets with few opportunities for profitable expansion; (c) the investment climate is viewed as a high-risk and characterized by lack of a level playing field for foreign and domestic firms; (d) small firms face relatively minimal difficulties in entering a market, but face significant obstacles to growth in value- added and specialization as a result of high levels of risk and uncertainty in the general investmnent climate, unfair business practices, administrative obstacles and costly and uncompetitive infrastructure services; (e) access to electricity, land and legal services is difficult and costly, together with high transactions costs associated with incidences of crime and theft, insufficient intemal transport networks and others; and, (f) larger firms tend to do better because they are able to internalize the risks, in part through conglomeration and building up in-house capacity in critical inputs. Larger firms also tend to benefit from well-entrenched networks of influence as well as access to external markets and finance. (iv) The main challenge for Yemen is then how to attain a dynamic and broad-based growth in the private sector, given its two critical and inter-related factors: (1) the weak institutional environment for the private sector in terms of weak governance and few market- promoting institutions, and (ii) the small size of the manufacturing sector, and the persistently small size of most Yemeni firms. The Report recommends the focus on systemic approaches to issues but also fast track methods for addressing critical bottlenecks ii while providing important demonstration effects in the short run (enclaves in the form of industrial zones). Priorities for action include putting in order the governance structure, promoting macroeconomic stability and legal certainty, minimizing administrative regulations, addressing corruption and unfair business practices, and improving the quality of infrastructure services mainly by elirnination of excessive and arbitrary regulations. (v) Improving the investment climate will require greater attention to improving the functioning of markets and infrastructure networks. There are three required building blocks in this approach. First, there is a need to strengthen commitment to building an economy based on market disciplines and income incentives through prudent macroeconomic management, open trade policies and a competitive exchange rate. Second, priorities for action also indude developing formal market-based institutions induding a framework of commercial law and a workable legal system that support market-based transactions. Strengthening of public sector capacity in facilitating business entry and growth and tax administration is also an important component of developing effective agencies and institutions to support the development, of a market economy. Third, ensuring competitive access to infrastructure such as electricity, land, water and telecommunications as well as fair competition in product mnarkets is crucial for enhancing the profitable expansion of firms. (vi) Private investment is expected to increase by 21% per annum during the SFYP. This is unlikely to take place without marked improvements in the governance, business and investment environments. Public investments are also planned to increase by 13% per annumn during the plan. While there is an envisaged important role for public sector in Yemen during the plan, large fiscal spending may jeopardize the macroeconomic stability hardly achieved in the second half of the 1990s. And while government allocations planned during 2001-2005 accord higher allocations for the sodial and agricultural sectors, the allocations for transport and communications are projected to decline. This may be inconsistent with the sectoral growth targets of the plan particularly if private sector provision of these services remains weak. (vii) Reliance on domestic demand limits the prospects for faster and sustained GDP growth. Indeed, Yemen's merchandise exports performed considerably better in the late 1990s and have contributed much of the GDP growth. The impact of policy reforms (flexibility of the exchange rate and trade liberalization) made a significant impact on the competitiveness and good performance of exports. Such gains need to be preserved and enhanced further by deeper liberalization and improvements in trade-related infrastructure and services. Rapid employment-generating economic growth will only be possible if agriculture, fishing, tourism and manufacturing lead the way. Rising domestic security concems, excessive and arbitrary regulations in infrastructure and services, weak legal and judicial systems, and difficulties in securing land titles hamper output expansion in most of these sectors. In addition, each of these sectors confrontsI significant challenges that the government must resolve: (i) Achieving an average growth rate of 6.7% per annum in agricultural output during the SFYP appears to be an ambitious, though achievable, target. The major constraints in the sector include severe water shortages (due to rapid depletion of ground water), i.i vulnerability to fluctuations in rainfall, prevalence of traditional cultivation techniques and rapid expansion in Qat plantation. Water is apparently under-priced and water rights are heavily contested and insecure. Qat, the main cash crop, is certainly damnaging to other crops and to water sustainability. Nonetheless, given the substantial yield gap, huge post- harvest losses, value-added of most crops can grow faster than the plan's target if productivity is increased, cultivated area is expanded, Qat plantations are controlled in addition to improvement in irrigation management and extension services. Raising fisheries output by 13% annually could also be realized, as was the case in the FFYP with a high risk of collapse to the stock of fish. The current system of licensing is not based on reliable knowledge of standing stocks and requires the immediate attention of the government (ii) The SFYP projects an annual increase in industrial output by 3% only, although it predicts very high growth rates for manufacturing, construction and public utilities. The expected low contribution of the sector was based on the assumption of stagnation in oil value- added during 2001-2005. Oil production was the most significant contributor to GDP, economic growth, fiscal revenues, exports and foreign exchange earnings in the 1990s and is expected to decline in the short- and long-terms. Yemen's recoverable oil reserves currently stand at 2.8 billion barrels and unless new oil discoveries are made oil fields are expected to dry up in less than two decades at current production levels. The SFYP projects stagnation in oil value-added throughout 2001-2005 on the assumptions of annual decline in production from producing fields and annual increase from new fields. These estimates, however, need to be revised in the light of new projections of oil production with increased projected production levels during 2001-2003 and sharper declines during 2004-2005. More importantly, although oil is still a dorninant sector there is no evidence of a Dutch disease problemn but the GoY needs to cater for this expected decline in oil production in its fiscal targets and to ensure continuous reductions in non-oil fiscal deficits. (iii) Yemen's proven gas reserves are about 12-15 trillion cubic feet Currently only domestic consumption is met and the potentials of gas exports will remain unutilized during the SFYP. The Natural Gas Export project faces many constraints including lack of secured external markets and financial resources necessary for the infrastructure of the projects in addit4on to strong competition from other countries in the region. Similarly, the country has also huge mnining reserves (gold, platinum, titanium, gypsum, etc.). Exploration and production is mainly hampered by security concerns, conflicts over land ownership and poor infrastructure. Both gas and mining resources have great potentials in the medium- and long-run if the constraints facing them are addressed in a comprehensive manner. (iv) Manufacturing sector in Yemen -characterized by high degree - of industrial and geographical concentration, family ownership, and low value-added to inputs ratio- remains a small sector in comparison with other similar countries. It contributed only 9% of GDP in the 1990s and its contribution to merchandise exports has been even weaker less than 1%). The protectionist policies pursued until mid-1990s have contributed to the fragility and inefficiency of the sector. Macroeconomic stability, trade liberalization and reform of the exchange rate regime adopted since mid-1990s started to have a positive impact on manufacturing sector. The plan targets an annual rate of growth of manufacturing value-added of more than 9%. It also seeks to encourage exports of manufactures and to support the development of small-scale industries. The realization of these targets, however, largely depends on removal of the constraints in the sector (access to land, high production costs, poor infrastructure, lack of technical skills, smuggling and iv dumping, lack of access to credit, etc.), further trade liberalization, and strengthening the legal and judicial systems. The GoY may also be encouraged to pursue the policy of developing enclaves (industrial zones in Hodeidah-Lahj-Abyan as well as Aden free zone) in which most of these bottlenecks are removed. (v) Services remained by far the largest contributor to GDP; constituting 48% of GDP in the 1990s. Despite its dominance in total output, the growth rate of the services value-added lagged behind agriculture and industrial sector recording an average growth rate of 5.0% during 1990-2000 and its contribution to GDP growth was less commensurate to its relative size in GDP. The services sector is dominated by government services (45% of services value-added in the 1990s) followed by transportation and communications, wholesale and retail trade, and real estate sectors. Services value-added is projected to increase by 8% per annum and to raise its contribution in GDP from 39% in 2000 to 43% by 2005. The plan puts heavy emphasis on tourism, transport and communications, and financial services with 11%, 9% and 12% annual growth rate targets, respectively. (vi) Tourism has been identified by the SFYP as one of the most promising sectors to accelerate GDP growth and to increase rates of job creation. Yemen has huge potentials in tourism (e.g., historical, religious and archeological sites, coasts, islands, mountains and deserts). Including indirect related activities, tourism is estimated to have generated US$ 135 million and contributed slighdy less than 2% of GDP in 2000. While the SFYP strives to increase tourism value-added by 11% per annum, this Report postulates that attainment of this target may be difficult in the current circumstances and projects increases in international business traffic by slightly more than the GDP growth rate and international vacation tourism to increase by up to three folds if the constraints affecting the sector are removed (e.g., security concerns, poor infrastructure, low capacity in certain destinations, cultural and religious barriers). Domestic tourism is likely to pick up commensurately with GDP growth. (vii) The potentials for growth in the transport and communications sector are large and the current condition of the networks and the high cost of services represent major hindrances to economic activities and initiatives. Despite liberalization and deregulation efforts, the whole sector remained largely under control of state monopolies and the government also controls most of the tariffs and fares. Transport and communications services represent one-fifth of services value-added. Their share in GDP growth, however, continued to decline from about 15% in 1990 to 10% in 2000, and their contribution to GDP growth has been negative. The sub-sector recorded negative growth rates during 1993-1996 and only recovered in 1997-2000. The sector's value-added is projected to increase by 9.1% per annum over the SFYP in addition to specific targets for roads, telephones, air and freight traffic. This Report postulates that properly executed infrastructure investment (including by the Government) should be an important source of growth in Yemen and in particular the transport sector should be accorded a higher priority for its impact on other sectors. The main suggested policy reforms in the sector include: (i) sustained liberalization and deregulation, especially communications and air and land transport; (i) promotion of private provision of services; (iii) creation of regulatory agencies independent from service provision, and; (v) liberalization of tariffs and fares. Chapter 5 of the Report provides detailed analysis on potentials of each sector, major constraints, SFYP targets and their feasibility and proposes a set of policy actions and critical reforms to tap the potentials in these sectors. However, from the analysis, a number of constraints and obstacles cut across a number of sectors and those would require priority actions by the Government, specifically: ( Improving govemance and Sustained pursuit of policy reforms: Evidence suggests that weak governance remain the main obstade for rapid economic growth in Yemen and the GoY has to embark on a bold program to improve governance structures in the country. In addition, the perusal of structural reforms is a key requisite to achieve in the SFYP' GDP growth targets, particularly given the low productivity growth which characterizes most of the economic sectors. This would require mactoeconomic stability and marked improvements in the quality of human resources, further liberalization, deregulations and ptivatization, and marked improvements in the legal and judicial systems. Qi) Enhancing domestic security: lack of security hampers activity in almost all economic sectors and in particular the envisaged growth targets of the promising sectors such as tourism, mining and extractive industries as well as investment targets (FDI and private domestic investments) are unlikely to be met without concerted efforts by the government to enhance domestic security. Qii) Removing excessive and arbitraty regulations that resulted in weak infrastructures: Weak infrastructure and the implied high production costs seriously hamper private sector development, activity of most economic sectors and the competitiveness of Yemeni exports. Both public and private sectors should have complementary and important roles in increasing investments into the sector as well as in the provision of infrastructure itself. (iv) Reforms of the legal and judicial systems. Weak legal and judicial systems coupled with weak enforcement of rulings, lack of clarifications of property rights, conflicts over land ownership are impeding developments and investments in almost all sectors of the economy. A comprehensive program for Judicial and Legal Reforms with special focus on commercial and business sector and land registration is critical for investment and economic growth. (v) Reforms ofpublic adlinistration: Efficiency in the delivery of public services is low due to weakness in public administration and inflated civil services. The GoY should seek to imptove upon the delivery of government services by completion of the Civil Service Modernization Project and more efficient allocation of resources with more focus on the social sectors and maintenance and operations. vi PART I: ECONOMIC GROWTH: PERFORMANCE AND STRUCTURE CHAPTER 1: ECONOMIC GROWrH AND MACROECONOMIC PERFORMANCE I. INTRODUCTION AND CONTEXT 1.1. For the preparation of the Poverty Reduction Strategy Paper (PRSP), the Government of Yemen (GoY) requested the Bank for assistance in undertaking an in-depth examination of poverty and sources of, and constmaints to, economic growth. Thus, this Report is prepared specifically to provide an analysis to the sources of economic growth in Yemen with special emphasis on potential economic sectors as well as the private sector environment and governance issues. The main objective of the study is to identify major constraints to faster economic growth and to draw forward-looking agenda and policy reforms measures to remove constraints in these sectors. High and sustained rates of economic growth in Yemen, as recognized by the PRSP, are necessary for the reduction of the high levels of unemployment and poverty in the country. 1.2. The first part of the Report reviews economic performance in Yemen and assesses the government medium- and long-term development plans. It provides a detailed analysis of the major structural characteristics of the Yemeni economy and the main economic sectors with the aim of identifying their constraints and potentials. This chapter reviews political and economic developments in Yemen before the unification to provide a historical context for the analysis of economic growth in the 1990s, highlights the trends in economic growth over the last decade with a demand and factor decomposition of growth and the contribution, as well as developments, of the economic sectors during the same period. It also assesses the imnpact of economic reforns undertaken in the mid-1990s on the trends and the structure of economic growth and reviews the medium-term economic plan and the long-term strategy vision for social and economic development The Plan and the Strategy guide the GoY's future growth strategy and the PRSP is prepared within its framework. Chapter II analyzes in details the potentials and the constraints of the main economic sectors: agriculture, industry and services sectors. Three sub-sectors identified by the Second Five-Year Plan (SFYP) as "potential" and "promising" sectors for the attainment of growth targets are analyzed in depth (tourism, fisheries and manufacturing as well as the oil sector given its large impact on other sectors and total GDP. 1.3. Part II of the Report is devoted to the study of Yemen' private sector environment and external competitiveness given the importance accorded to the private sector and exports in the medium- and long-term development plans. Private sector development is necessary for increasing capital accumulation and raising productivity, which are essential for long-term economic growth, and export-orientation is key to rapid income, growth in small countties like Yemen. Chapter III attempts to investigate why private sector's response to stabilization and structural reforms in Yemen has been slow. It highlights the results of a survey that was undertaken specifically for this study for about 1,000 private entetprises in five govemorates in Yemen in November 2001. This chapter also provides important elements for future reform agenda for developing the private sector and improving governance in Yemen. Chapter IV focuses on external trade and export performance in the 1990s with special emphasis on external competitiveness, which underpins export growth. 1.4. Given the policy relevance of the analytical work undertaken for this study, Part III of the Report concludes with policy recommendations including a concise policy matrix for accelerating and sustaining economic growth in Yemen in the medium- and long-terms. The 1 recommended reforms take into consideration the existing potentials and constraints of the main econonic sectors, the objectives of the medium- and long-term development plans and the feasibility and sequencing of the policy reforms. This part of the Report is, therefore, intended to provide an input into the PRSP and into deliberations among the Bank, the GoY and stakeholders on future economic refotms in Yemen. 1.5. The review of the trends in economic growth in Yemen in the 1990s suggests that economic growth has been very volatile and the volatility has been driven mainly by exogenous factors. Major policy changes and debt reduction have made only a partial and small impact on economic growth. Services sector remained the largest contributor to total output and economic growth. The share of industial valued-added in total output is remarkably small in comparison with similar countries though it has been dynamic in the 1990s and contributed to GDP growth more than its commensurate size in total output Decomposition of Yemen's GDP to demand components in the 1990s reveals that domestic demand (and consumption in particular) contributed to most of the GDP growth in the early 1990s. External demand made a significant contribution to GDP growth after the implementation of trade and macroeconomic reforms in mid-1990s. In particular, most of the GDP growth is attributed to external demand in 1996, 1999 and 2000. Finally, GDP growth was primarily driven by factor accumulation (labor and capital) while TFP was negative for most of the 1990s pointing to substantial scope for structural reforms to improve non-oil output without necessatily higher levels of investment 1.6. The GoY sets ambitious targets for GDP growth in the medium- and long-terms. These targets are, however, far from the actual performance of total GDP and sector growth rates in the 1990s and unless deeper structural reforms at the macro-level and at sectoral levels, the challenge of meeting these growth targets will be difficult to achieve. The GoY is also counting on generating economic growth by increasing domestic demand in anticipation of weaker external demand (due to expected decline in oil production). This may set a limit to targeted growth potentials and more efforts to enhance non-oil exports are necessary for realization of high and sustained GDP growth in Yemen. Furthermore, the SFYP emphasis on public investment relative to private investment is quite high and may undermine macroeconomic stability and efficiency of investment in Yemen. II. PoLxricAL AND ECONOMIC DEVELOPMENTS BEFORE UNIFICATION A. Major Political and Economic Developments 1.7. The Republic of Yemen (RoY) Fig-ut 11.1 YCmn's Pt and Post- Unificaton GDP Gowth emerged in 1990, following the unification A of the Yemen Arab Republic (YAR) and R the People's Democratic Republic of 8V% AV\ A Yemen (PDRY). Unification was a long- standing aspiration of Yemen citizens, r though both countries wanted to achieve it ex Y . . . under their own political and ideological agenda. Relations between the two 4t republics were dominated by suspicions, political tension, and strains that resulted 4X t in several border clashes and two wars. In nzx O tl ROY) May 1990, following major political and 2 economic developments at the domestic and intemational leveis,1 unification became a reality and a new era of dramatic social and economic development started. 1.8. The two former republics followed completely different paths for their political and economic development and as a result achieved somewhat diverse outcomes and most of the current economic, social and political problems are partly attributed to those differences. North Yemen was ruled for decades by a feudal royalist system after the defeat of the Ottomans in 1919. The medieval rule of the Imam resulted in backward economic structure, primitive infrastructure and weak human resources because of isolationist policies and the absence of formal education. An army revolution overthrew the last Imam in 1962 and formed the YAR. Soon after, the new regime was trapped in a civil war with the royalists, which lasted for eight years. Since 1970, YAR adopted a market-based economic system though the government had played an important role in the economy through establishment of public enterprises and excessive regulations. External trade and private investment were allowed but were heavily regulated by protective trade policies. YAR achieved some progress in economic development and less so in the social sector. Workers' remittances2 and foreign assistance -as well as oil exports starting in 1987- were the main sources of foreign exchanges. 1.9. South Yemen was colonized by Britain for about a century and a half when the British took Aden by force from the Ottomans in 1839. The colonial rile was mostly concentrated in Aden, which gained prominence as a strategic transit port as well as a commercial center after the opening of the Suez Canal. Other provinces in the South were practically ruled by traditional feudal systems under the protection of the British ruler. During colonial rule, economic development took place only in Aden while the rest of the country was kept underdeveloped. The territory gained independence in 1967 when the nationalist forces took over the whole country, including the protectorates ruled by the monarchial syst,ems, and consequently declared the formation of the PDRY. In contrast with YAR, the PDRY's government inherited a well- developed Capital city with basic infrastructure, relatively well-organized public administration and well-developed human resources. 1.10. After independence, PDRY adopted the socialist comrnmand-and-control system. Every aspect of economic activity was totally controlled and managed by the government, which additionally confiscated and nationalized private enterprises that were established during the British rule. The government also redistributed half of the country's cultivated land among landless families and began investments in education and other social services. The policies pursued in PDRY, however, resulted in poor economic outcomes despite relative success in human resources development (health and education). Reforms of agriculture, fisheries and ports all failed to realize their objectives. Workers' remittances, which constituted about half of government revenues, declined in the late 1980s and, with the precipitous decline in the financial assistance from the Soviet Union, foreign debt reached 180% of'GDP by the late 1980s. These developments included, among others, the decline in foreign assistance (e.g., the collapse of the Soviet Union), discovery of oil in both countries, and the various economic difficulties encountered by both republics by the end of the 1980s. 2 A large part of the labor force (as high as 30% in YAR) were workers abroad, see World Bank (2001; 1). 3 B. Trends in Economic Growth in the Former Republics 1.11. The pre-unification trends in economic growth in the former republics are difficult to depict because of lack of detailed data, particularly in the former PDRY.3 Both countries experienced major fluctuations in GDP growth during 1970-1990 due to their dependence on workers' remittances and foreign aid. They enjoyed relatively high growth in the 1970s due to the oil boom in the Gulf States (Figure 1.1). By the mid-1970s both countries were growing at 7- 9% per annum. Following the decline in oil prices in the 1980s, both countries witnessed slowdown in economic growth as a result of drop-off in workers' remittances. Economic growth also declined because of the reduction in foreign aid, though each country used to receive foreign assistance from a different source.4 Although economic growth in YAR in the 1980s was lower than in the previous decade, the country managed to maintain positive and small GDP growth rates throughout the 1980s and the severity of the volattlity of growth was less in compatison with the PDRY. 1.12. Macroeconomic disequilibria characterized both economies in the 1980s, mainly due to increasing fiscal deficits. In the PDRY, government spending as a ratio of GDP increased from an average of 49% in the 1970s to 77% in the 1980s without corresponding increases in government revenues and consequently average fiscal deficit increased from 20% of GDP to 36% over the same period. Similary, government spending in YAR increased from 16% of GDP in the 1970s to 35% in the 1980s and the fiscal deficit increased from 3% of GDP to 13% over the same period. Most of the deficit in both countries was financed by the central banks, which kept inflation in double digits. External debt also increased in both countries to unsustainable levels. Furthermore, both countries had by the late 1980s, large civil service, loss- making public enterprisers, restrictive trade regimes and overvalued exchange rates. III. ECONOMIC GROwTrH IN THE 1990S 1.13. Based on the newly revised F national accounts in the RoY (see Annex A on national accounts data), GDP growth SDTAWGP GDP averaged 4.1% during 1991-1994, picked up *r to 8.3% during 1995-1997, and decelerated to 4.6% during 1998-2000. For the whole *__ decade, GDP increased by an annual average of 5.5%. This growth performance compares 2 U _ favorably with average growth rates for low- income countries and the countries in the Lo MENA region (Figure 1.2), although it lagged behind Egypt and Tunisia, the two best oo_ performers in the region. Moreover, despite Ye= Tuniii EpM Midœk Ent& owJame the good overall GDP growth, with the Nw*Ahica Cwntmin population growth rates of almost 4.0% during 1990-2000, GDP per capita increased by only 1.5% over the same period (box 1.1). 3 As in many other socialist centrally-planned economies, national accounts in the PDRY focused mainly on gross national income and net material product. GDP at current market prices was computed but there was no GDP deflator. The IMF and World Bank, however, had some estimates for real GDP growth for some years during 1970-1989. 4 YAR obtained most of its foreign aid from Saudi Arabia and Kuwait while PDRY got most of its economic and military aid from the former Soviet Union. 4 EOX1.1: PER CAPITA GRowTh i ppulatioi growth ate in Yemen meanft at re-a growti in GDP pr capita is quite s= in compadson with tAfll GDP grwthrate GDP grwth ra in Yemen has temiaied positive t6u0hout 1991-200t, but GDP per capita act4hlned ii 1991' (due also to re bof about Million Yeinenis from the Gulf), 1994 mad .2001. GNP per cmpiadeclined in MI, 1993, 194,1999'and 200J. .~ ~ ~ ~ ~~~~19 .99 1993.... .1 X 994 19 A-,9p 1997 199 1 C200 2001* GDt, taal grwth rameo () 20o . 83 4.1 22 10.9 5.9 S.l 49 3.6 51 -1.8 GMp?capita,lreanv, sateC/e) 9,7. 49 p.7. *1.1 ,5 Z9 , 51 ZO o.9 - Z4 -1.0 GNPprst*trnLgroWh efXA -114 5.9 44 417.t t4 . -7.8 v 6.7 -_2 26 -A' CSNP per mpbha. Pttl S .,thod 1188 390 37 .M 27 287 -332' LW ,9 *3 0 460 Sour: Wodd Ban,k LDt,* Es Actual per capita growth rutes, coul be low3r thaq t 0pave estirates if the GoYl population growth rates wee use Xh"efte grogwt performace of Yew ereJative to comparators looks worse if-undera on the-basis of per capita ineose (see Anne* B for discussio on difences in the estimates ofpopulation growth rate). A. The Early 1990s: Pre-Reforms Period and Macro-Shocks 1.14. Growth pattem in Yemen was not universal throughout the 1990s. The period 1990- 1994 witnessed several major shocks and as a result major fluctuations in annual GDP growth rates. First, a severe drought affected agricultural activity in 1990 and 1991. Second, a precipitous drop in workers' remittances and external aid followed the Gulf war in 1991 and about one million Yemenis returned from the Gulf States. Nonetheless, GDP growth recovered strongly by more than 8% in 1992. Third, and following the high initial costs of unification, political instability culminated into a civil war in 1994 with massive destruction to lives and property. Consequently, output growth decelerated to 2.2% in 1994 and inflation increased markedly. The current account deficit averaged 18.5% of GDP during 1991-1993, and by 1994, fiscal deficit was 15% of GDP, inflation rate was 71%, and external debt mounted. After initial price liberalization efforts in early 1990-1991, the GoY addressed the financial imbalances through direct controls of the economy restricting imports and investment and movements of the exchange and interest rates. In 1994, some steps were taken by the authorities to achieve positive real interest rates and more realistic exchange rates (Table 1.1). TABLE 1.1: MACROECONOMIC INDICATORS IN YEMEN, 1991-2000 IYear M1Growth, N-aMOiDF, Oil Vat.AxWed4, Ifjdos,t- VP, r'isoailiwim ~~~~~e.) . .-_f f -_... (,* . . !. Ho - . ./ H (&M. of-3 1991 2.0 3.2 -5.6 44.9 -3.5 1992 83 11.7 -15.4 50.6 -11.9 1993 4.1 4.0 4.2 54.8 -1I8 1994 22 -Z3 4Z7 71.3 -147 1995 10.9 9.4 19.9 6Z5 -5.2 1996 5.9 4.5 13.5 40.0 -0.9 1997 8 1 8.2 7.5 4.6 -1.5 1998 49 5.4 25 11.5 -7.9 1999 3.7 Z9 7.8 8.0 0.1 2000 5.1 4.7 7.2 8.5 7.9 Source: World Bank, LDB (2001). B. Economic Growth During the Period of Reforms, 1995-2000 1.15. The macroeconomic policy mix and outcomes differed radically between the first and the second halves of the 1990s. With the achievement of political stability in rnid-1990s, GoY started on an ambitious program for economic reforms and stabilization in early 1995. The program aimed to enhance the foundations of a market-based and private sector led economy. It focused on stabilization, price and ttade liberalization, fiscal adjustments and reform of the 5 exchange rate regime. Interest rates were liberalized and monetary policy was tightened. The Yemeni Rial (YR) was devalued substantially, a market exchange regime was introduced and a floating rate regime was adopted in 1996. A number of structural reforms were also implemented. Tariffs were reduced and their structure was simplified. Investment regulations were also streamlined and a privatization program for public enterprises and banks initiated. Stricter prudential regulations for banks were introduced. Furthermore, the period 1995-1997 witnessed significant reduction in external debt Following the rescheduling of Paris Club in 1996, external debt was reduced from 173% of GDP in 1996 to 80% by end-1999 and debt services declined from about 32% of exports earnings to 11%.5 1.16. Inflation rates continued to decline and reached a single digit in 1997 reflecting success in reducing the fiscal deficit (averaging 2.5% of GDP), which allowed for tight monetary growth (Figure 1.3).6 As a response to the stabilization and reforms measures and assisted by higher growth in oil value-added (averaging 14%), GDP growth recovered to an average of 8.3% during 1995-1997 and non-oil GDP picked up by 7.1% during the same period (see Figure 1.4). GDP growth then decelerated to 4.6% during 1998-2000 because of the collapse of oil prices in 1998 and the deceleration in the non-oil GDP growth in 1999. High oil prices in 2000 improved macroeconomic indicators and stabilization indicators continued to improve. In 2000, fiscal and current account balances maintained record surplus and inflation remained low at 10%. Figure 13: Yealn's Shiztionbcod, 1990X00 Fgute I4: Pte- and Post 4-abilization Gfowth, 1990-2000 tz~~~1A PAtlaxGimu 99 1o6 994 1 Ph- 8 >> GDP oaviVa ,d NmOl GDP C. Sectoral Contribution to GDP and Economic Growth, 1990-2000 1.17. There has not been much change in the relative importance of economic sectors in total output in the 1990s. Services remained by far the largest contributor to GDP; constituting 48% of GDP during 1990-2000. This relative importance of services to total GDP is relatively higher than the corresponding ratio in the group of low-income countries (42%) and the average for the MENA region (46%). It compares with the ratio of middle-income countries (51%) over the same period.7 Despite its dominance in total output, the growth rate of the services value-added lagged behind agriculture and industrial sector recording an average growth rate of 5.0% during S See also World Bank (2001) and IMF (2001; 28). 6 Inflation decined slowly at the beginning of the program because of adjustments in administered prices. 7 The large size of the rent economy (oiL workers remittances, etc.) is argued to have been a cause behind the large size of the services sector. 6 1991-2000 and its contribution to GDP growth was less than its relative size in total GDP (Table 1.2). TABLE 1.2: SECTORAL CONTRIBUTION TO GDP IN YEMEN, 1991-2000 Total GDP Growth Rate (%) 4.8 6.4 5.9 Agriculture Growth Rate (%) 6.3 5.8 5.9 Share in GDP (%) 22.1 17.8 19.0 Contribution to GDP Growth (0/o) 1.4 1.0 1.1 Share in GDP Growth (%) 28.9 16.0 19.3 Industry Growth Rate (%o) 4.4 8.8 7.3 Share in GDP (0/,) 23.3 37.6 33.3 Contribution to GDP Growth (%) 1.0 3.3 2.4 Share in GDP Growth (C/o) 21.0 51.9 41.4 Services Growth Rate (%o) 4.4 5.4 5.0 Share in GDP (%/6) 54.7 44.6 47.7 Contribution to GDP Growth (%/6) 24 2.4 Z4 Share in GDP Growth l/o) 50.1 37.3 41.0 Source: Computed by staff based on data from the World Bank, LDB. 1.18. The most striking feature of Yemen's output structure has been the relatively small contribution of the industrial sector to GDP. Despite being an oil exporting country throughout the 1990s, the share of the industrial sector in Yemen (32.7%'of GDP) lagged behind the averages for low-income countries, Sub-Saharan Africa and the MENA region.8 In particular, the share of manufacturing in total GDP in Yemen (9%) is about half of the sector's contribution in Sub-Saharan Africa. The rate of growth of manufacturing value-added in the 1990s, however, was higher in Yemen than in Sub-Saharan Africa and low-income countries (Table 1.3). TABLE 1.3: CONTRIBUTION OF INDUSTRY TO GDP, YEMEN AND COMPARATORS, 1990-1999 Yemenl 26.8 6.5 9.0 4.0 17.8 8.5 Low- Income 29.9 2.4 18.5 2.3 11.5 2.6 NMiddle- Income 36.1 4.1 24.5 6.0 11.6 0.8 Nfiddle East & North Afridca 40.9 Z6 * 12.9 3.4 t 28.0 2.3 Lower Mfiddle-Income 37.6 5.3 27.5 8.6 10.1 -1.5 Sub-Saharan Africa 29.7 1.2 15.7 1.1 14.0 1.3 Low--& Middle-Income 35.1 3.8 23.5 5.4 11.6 1.1 * = Average for 1991-1997 only; and Manuf. stands for manufacturing. Source: computed from data derived from the Wodd Bank, WDI, SIMA. 1.19. Industrial activity grew by 4.4% during 1991-1994, picked up in the post-civil war recording an average growth rate of 15% during 1995-1997, and decelerated to 5.5% during 1998-2000. For the whole decade, the industrial sector grew by an average rate of 7.3% and was very dynamic because its contribution to GDP growth was more than commensurate to its relative share in GDP especially in the late 1990s. Half of the industrial output in Yemen in the 1990s was constituted by oil and mining. 1.20. The share of agriculture value-added in Yemen's GDP averaged 19.5% during 1990- 2000. This was slightly lower than the corresponding share of low-income countries in the 1990s (27%) but is much higher than the average for the MENA water-constrained region (13.5%). a The share of the industrial sector was very high in 1999 and 2000, pushing the average share for the whole decade, the share during 1990-1998 was only 30%. 7 Although its contribution to GDP is relatively small, agriculture provides 58% of total employment and livelihood and income for about 77% of total population. The sector's contribution to GDP growth in the 1990s was in line with its relative share in total GDP. IV. DEMAND AND FACTOR DECOMPOSITION OF GDP GROWTH A. Demand Decomposition of GDP Growth 1.21. Decomposition of Yemen's GDP to demand components in the 1990s reveals that domestic demand (and consumption in particular) contributed to most of the GDP growth during 1991-1993. External demand contributed negatively to GDP growth during these years. External demand made a significant contribution to GDP growth after the implementation of trade and macroeconomic reforms in mid-1990s. In particular, most of the GDP growth is attributed to external demand in 1996, 1999 and 2000. The SFYP projects weaker external demand (due to expected decline in oil production) and strives to achieve the growth targets by solely depending on domestic demand (consumption and investment). This may set a limit to future growth prospects and efforts to enhance non-oil exports will be critical for the realization of high and sustained GDP growth. It seems also that the GoY is counting on a significantly reduced rate of import growth that may be inconsistent with high GDP growth targets in the medium-term (Table 1.4). TABLE 1.4: DEMAND DECOMPOSITION OF GDP GROWTH (%) A1,h49,-! .MaS84% E w19911992U1993I1994u1995m19,61I997ml499Us15999z20962001E2002u200332008200!| Actual .1 SFY1"Targets :. I NetExporn 165 .21 -77 80 -33 182 -OS .134 44 15 '-2.0. 17. -2Z. :2.0 Z1I Exports 03 .to7 2.5 06 lbr1 191) (Il .69 I100 I( -I5 --09 -.9 -12 -11 mpornts 162 14 I!I .83 133 0'8 06 66 16 o 0SA .08d 1.' 08. -. If Conswnpmion 197 56 13 7 9 .19 12 -16 3 8 168 128 13 ', 3.6. 431 - .44 ..341 4.! onvesrmenn 1 13 49 . 19 -17 22 4 38 48 16 26 .1 2 & 23.6. 41 4 3.3 ..341 3 Rea GDP Growth 1 2.0 8.3 4.1 2.2 10.9 5.9 8.1 4.9 3.7 5. - 4.4 5.5 . 5.-7 .5 .6 :.6.1 Souirce. Staff estrnates based on d3t3 t1om the CSC) and Ehe SFYP B. Factor Decomposition of GDP and TFP 1.22. Total factor ptoductivity estimates for Yemen are derived assuming a standard new- classical Cobb-Douglas Production function.9 While poor data and short time-series prevent making strong conclusions from the analysis, it is clear that GDP growth was primarily driven by factor accumulation (labor and capital) while TFP was negative for most of the 1990s pointing to substantial scope for structural reforms to improve non-oil output without necessarily higher levels of investment (Table 1.5). 1.23. The growth accounting exercise (Table 1.5) shows that TFP was substantially negative in the pre-reform period even under different assumptions on initial stock of capital and capital- output share. Productivity improved with the introduction of policy reforms as can be seen on TFP growth estimates for the period 1995-1997. These results are consistent with previous 9 The estimated Cobb-Douglas production function: Y = A La K(-'), where Y = total output, L = employment, K = capital, a = labor/output production share, and A = total factor productivity. Employment data are obtained from Ministry of Planning and Development for 1994-2000, estimates for 1990-1993 were extrapolated using CSO estimates for 1988. Capital stock is estimated as K, = (1-o) * K,- + FCA,, where 6 is depreciation and assumed at 3%, FCA is fixed capital fornation. Ko (for 1989) was assumned to be equal to 0.5*GDP, GDP, and 1.5*GDP, respectively. Given the short-time series for Yemen, a was not estimated but assumed to be in the range of 0.7 and 0.4. GDP figures and FCA are from the World Bank LDB. 8 estimates of TFP in Yemen and with the prevailing trends in TFP growth in the MENA region.10 TABLE 1.5: TOTAL FACTOR PRODUCTIVITY (TFP) ESTIMATES nlj8aRTial G o .lE FPI Efia t 'es, o W a` - GDP :l5~Ioymen: nveermean K~ KdGDP 1G'DPKA 1991 2.0 3.3 14.4 -8.9 -5.2 --3.9 -2.7 -2.0 -1.7 1992 8.3 3.4 4.3 -5.1 -0.1 0.5 2.7 2.8 3.9 1993 4.1 3.4 4.3 -5.4 -.4 -1.9 -0.6 -0.2 0.2 1994 Z2 3.4 4.6 -5.5 -3.4 -2.9 -2.1 -1.6 -1.4 1995 10.9 3.2 4.1 2.4 5.0 5.0 6.3 6.4 7.0 1996 5.9 2.9 2.9 -3.8 -0.4 -1.1 1.0 0.5 1.8 1997 8.1 5.0 29 -3.2 0.0 -0.6 1.2 1.0 2.0 1998 4.9 3.7 2.8 -6.4 -2.6 -4.0 -1.4 -Z5 -0.6 1999 3.7 Z9 Z7 -4.5 -1.8 -3.0 -1.1 -1.9 -0.5 2000 5.1 3.6 Z4 -3.5 -1.0 -21 -0.3 -1.1 0.2 1990-2000 5.5 3.5 3.5 -4.4 -1.2 -1.4 0.3 0.1 1.1 1.24. Total investment as ratio of GDP fluctuated considerably during the FFYP. It increased from 22.1% in 1995 until it peaked in 1998 at 32.6% and then continued to decline reaching only 19.2% in 2000. Private investment, which peaked at 20% in 1997, continued to decline in the subsequent three years reaching only 10% by the end of the FFYP (rable 1.6). The SFYP, nonetheless, puts more emphasis on public investmnent. For the period 2001-2005, the government's planned ratio of public to private investments is extra-ordinary high and ranges from 61% (in the last year) to 81% (in the first years). In 1998, 95% of countries in the world had ratios less than 38% and 99% had ratios less than 77%.11 Given the current levels of efficiency in public spending in Yemen and weak governance (chapter 3),12 this emphasis on public spending is likely to undermine macroeconomic stability and efficiency of total investments in the country. TABLE 1.6: TRENDS IN PRIVATE AND PUBLIC INVESTMENT, 1990-2005 GDI (oofGDP) 15 16 22 20 21 22 23 25 33 25 19 21 23 24 26 29 Total fixed investment 12 14 20 18 19 21 22 22 32 23 18 20 21 23 25 27 (/o of GDP) PrivateGDI(C/oofGDP) 6 13 20 17 19 19 16 20 16 14 10 11 13 14 16 18 PublicGDI(%ofGDP) 8 4 3 3 2 4 8 5 17 10 9 9 10 10 11 11 ICOR 7 1.6 4.1 6.5 1.1 2.2 2.0 3.9 5.4 3.4 6.3 5.6 4.8 4.6 4.4 Ratio of Private investment to GDI (%o) 43 77 87 85 90 84 67 80 49 58 53 55 57 58 60 62 Source: Data for 1990-1999 are from the World Bank LDB and for 2000-2005 are from the SFYP. The two series may not be compatible.13 V. GDP and Sectoral Growth Targets of the 2025 Vision and the SFYP 1.25. Regardless of the different systems adopted, the two former republics undertook development planning with a focus on building basic physical, social and institutional infrastructures. A Three-Year Plan (1971-1973) was adopted in the PYDR and a Three-Year Development Program (1973-1975) was implemented in the YAR. These plans were followed by five-year plans until the unification in 1990. Following this tradition, the RoY implemented 10 Similar results and conclusions were reached by the IMF (2001) study, which showed negative TFP for the whole 1990s, and improvements in the post-reform period. See also Dasgupta et al (2001) for TFP growth trends in the MENA region and the impact of structural reforms on TFP. 51 See World Bank, World Development Indicators (WDI). 12 See also World Bank (2001 b). 3 The SEYP had two inconsistent estimates for private sector investment. 9 the First Five-Year Plan (FFYP) during 1996-2000. Average annual GDP growth during the FFYP was 5.5% (the Plan's target was 7.2%) and translated into a 2.0% increase in GDP per capita. Non-oil GDP recorded a lower growth rate of 5.1%. The low performing sectors included transportation and storage and manufacturing. On the other hand, fisheries and construction sub-sectors outperformed all other sectors and grew by more than 12% during 1996-2000. 1.26. The inability to meet the targets of the FFYP were attributed by the GoY to: (i) stabilization measures of the Economic, Financial and Administrative Reform program (EFARP) which coincided with the plan, and (ii) weak performance of specific sectors (particularly, transportation and communications, manufacturing and oil refining and to some extent the agricultural sector) despite better than expected performance of other sectors such as oil, fisheries, public utilities and construction activities. However, it should be pointed that fiscal policy was not deflationary under the FFYP. The weakening of growth performance could be attributed also to the deterioration in the expenditure structure (with much public employment and subsidies and little public investment), deteriorating governance and slow structural change. A. Long- and Medium-Term Targets for Economic Growth in Yemen 1.27. During the implementation of the FFYP, the authorities decided to prepare the Second Five-Year Plan. (SFYP) within a long-term strategy. Thus, the Strategic Vision 2025 was formulated to serve three objectives: (a) development of long-term solutions to deal with chaUenges that require longer interventions and continuous revisions through medium-term plans; (b) mobilization of all social and economic resources to address difficulties and constraints; and, (c) combination of traditional and innovative interventions based on social and economic realities. The Vision Strategy aims to upgrade human resources and to improve the living standards through improvement in health services, eradication of illiteracy, increase in enrollment ratios for basic education, and raising income per capita to the levels of middle- income countries through diversification of the economy, export promotion and job creation. 1.28. Under the Vision 2025, real GDP per capita is planned to increase by an annual average of 9% in the coming 25 years and population growth to slow gradually. Foreign and domestic investments are projected to increase significantly to meet the growth targets in addition to productivity increase in non-oil sectors. The sources of growth and potential sectors for the realization of growth targets stated in the Vision Strategy indude the following (a) promotion of tourism, especially in coastal areas; (b) enhancement of manufacturing based on Yemen's competitive advantages and development of small- and medium-scale industries; (c) development of extractive industries (mainly oil, gas and minerals) and reliance on natural gas as a main source of energy; (d) development of the agricultural sector by raising irrigation efficiency, encouragement of off-farm activities, and reduction of Qat plantations; (e) sustainable utilization of fish resources; (f) promotion of exports and increased integration in the world economy by utilization of FTAs and attraction of FDI; and (g) exploitation of the strategic location of Yemen and promotion of Free Zones. 1.29. Four necessary conditions were singled out in the Vision Strategy for the attainment of the GDP growth targets: (a) effective partnership between private and public sectors and reliance on the private sector as the main engine of growth; (b) creation of a conducive environment for private sector development through civil service modernization, restructuring of the roles of government agencies, simplification of regulations, decentralization, and reform 10 of the legal and judicial systems; (c) poverty reduction by halving food poverty in 2015 and its complete eradication by 2025, reduction of upper poverty levels to 10% in 2025, expansion of the social safety net, job creation through micro-enterprises and community-driven development; and, (d) environmental protection through efficient management of natural resources, prevention of pollution of water basins, management of solid waste, and coastal protection. 1.30. The SFYP was prepared to be the first medium-term development plan within the framework of the Vision 2025 Strategy. Its main axes include the development of human resources, achieving economic stability and diversification, private sector development, export promotion, good governance and decentralization, and environmental sustainability. The targets of the plan include: (i) achieving real GDP growth of 5.6% per annum (8% for non-oil GDP); (ii) attracting private and foreign investment to raise total private investment to 58% of total investments, (iii) increasing the contribution of commodity sectors (between 6.1% to 13%); (iv) reducing underemployment to 22%; (v) reducing poverty to 21.7% by the end of the plan; (vi) achieving a balanced budget; and (vii) curbing inflationary pressures to an average rate of 4.9%. The SFYP seeks to achieve an increase in total investment from 19.2% of GDP in 2000, to 28.6% by the end of the Plan. This increase depends on the achievement of a high nominal growth in private investment of about 24%, and 15% for public sector investment (18% increase for Government investments and 10% for oil investments). Consequently, the share of private sector investment in total investment is expected to increase from 53.2% in 2000 to 61.8% by 2005 (Table 1.7). TABLE 1.7: TARGETS OF THE SECOND FIVE-YEAR PLAN (SFYP) (Billions of Constant Yemeni Rials unless otherwise stated) Total GDP 1,379 1,812 5.6 Non-Oil GDP 914 1,346 8.0 Oil GDP 465 465 0.0 Private Sector 15 73 9 1 Government Secror 38 73 3 9 Agriculture, Forestry & Fisheries, VA 195 263 6.1 O/w Fisheries 15 29 13.0 Services, VA 380 589 9.1 O/w Tourism 10 16 10.7 Manufacturing 67 108 10.0 Construction 58 98 11.0 Electricity, Water and Gas 9 14 9.2 Source: Derived from Table 2-5, page 140 of the SFYP (2001). 1.31. While the five-year Incremental Capital Output Ratio (ICOR) was 3.36 in 2000,14 the SFYP investment and growth figure imply an average ICOR of 5.2.15 Therefore, the investment levels envisaged under the plan may be very high to achieve the targeted GDP growth rate of 5.6%. Furthermore, in real terms these investment figures project increases in private investment by an annual average of 21% and public investment by 13% over the plan period.16 14 The five-year average ICOR in Yemen in 2000 was only 3.14. 15 This Report does not adopt the Harrod-Domar growth model. Easterly (1997) provided evidence on the lack of theoretical and empirical justification for assuming a short-run proportional relationship between investment and growth. Deverjan et. al (2000) also provided evidence that public investment is not correlated with growth in Africa. 16 In an attempt to calculate real growth rates projected for GDP and demand components (which were not available in the SFYP document), the constant prices series have been estimated based on the current prices data and using GDP deflator (for GDP and all demand components). It has been observed that the projected growth 11 B. Sectoral Composition and Growth Targets of the SFYP 1.32. The SFYP does not envisage major structural changes in the sectoral composition of GDP. It, nonetheless, plans to raise the contribution of non-oil sectors into the GDP from 71% in 2000 to 75% by the end of the plan. This is expected to take place as a result of an 8.0% average annual targeted growth rate of non-oil sectors while real oil value-added is expected to stagnate over the plan period. 1.33. Although the Strategic Vision 2025 strives to increase GDP growth in the next 25 years by an average rate of 9.0%, the SFYP targets an average growth rate of 5.6% which appears reasonable by Yemen's historical growth standards (5.5% actual rate achieved over the FFYP and 4.5% during 1990-1995). The plan, nonetheless, puts ambitious targets for agricultural and services sectors, which exceeded historical growth patterns of both sectors throughout the 1990s (Chapter 2). As targeted under the FFYP, the agricultural sector is planned to increase its output by an annual average of 6.7% while it only managed to grow by 5.5% over the FFYP. Similarly, services value-added is planned to increase by 8.0% per annum over the SFYP while the sector managed to grow by an annual average of 5.3% during the FFYP. Finally, the SFYP predicts a moderate growth of the industrial sector (3.0% per annum), mainly due to expected stagnation in oil value-added. It should be stated that the industrial sector was the only sector that managed to meet, and exceed over, planned targets during the FFYP again due to better than expected contribution of the oil sector (Table 1.8). TABLE 1.8: YEMEN GDP BY SECTOR, 1990-2005 Shar-ilr1~PI ..c' - AverS , Qhilt6r$;) l_-i = l ~~~~~~~Md2Jkf!7e WOMal~ Tr Acit!l Tr Agriculture, value-added 24.2 19.4 15.3 16.1 2.9 7.0 5.5 6.7 Industry, value-added 26.8 32.2 46.2 40.9 5.5 4.0 6.5 3.0 Services, value added 47.9 48.3 38.5 43.1 4.8 8.7 5.3 8.0 Non-Oil GDP 86.6 86.5 70.9 74.3 4.2 8.4 5.1 8.0 Total GDP 100.0 100.0 100.0 100.0 4.5 7.2 5.5 5.6 : Not available Sources: CSO for 1990-2000, FFYP for targets over 1996-2000, and the SFYP for 2001-2005. rates based on GDP deflator are different from the plan targets. It seems that instead the CPI inflation rates were used in the estimation. In both cases, real average growth rates for total investment under the plan are set at very high levels (between 14.3% to 15.5% depending on choice of deflator). Staff estimate from figures not published in the SFYP is that the GDP deflator used in projections is 4.8% in 2001, 5.8% in 2002, 6.6% in 2003, 7.3% in 2004, 7.7% in 2005 with an average of 6.4% over the plan and not 4% 12 CHAPTER 2: POTENTIALS AND CONSTRAINTS OF THE MAIN ECONOMIC SECTORS I. INTRODUCTION AND MAJOR FINDINGS 2.1. This chapter reviews the main economic sectors in Yemen, their contribution to GDP growth and their existing potentials and constraints. It also assesses the sectoral targets set in the SFYP and the Vision 2025 Strategy in the light of the observed constraints and potentials. The review gives special emphasis to the "potential sectors" identified by the GoY in the SFYP and the Strategy Vision 2025 (tourism, manufacturing, fisheries, and oil and gas). The assessment reveals that Yemen has good potentials in most economic sectors (particularly gas, mining, tourism and manufacturing), although it will face shortages in oil water and fish resources if no additional resources are discovered or existing resources are not managed in a sustainable way. This calls for efficient utilization of existing resources and addressing cross-sectoral constraints (e.g., insecurity, excessive regulation, difficult access to land, under-pricing of water and diesel etc.) as well as removal of constraints in specific sectors. 2.2. Yemen has huge potentials in the agricultural sector and achieving an average growth rate of 6.7% per annum during the SFYP appears to be an ambitious, though achievable, target for the sector. Excluding fisheries, agricultural output is planned to increase by 6.1% per annum and realizing this target is confronted with severe water shortages, vulnerability to fluctuations in rainfall, rapid deforestation and desertification, prevalence of traditional cultivation techniques and rapid expansion in Qat plantation. Nonetheless, given the substantial yield gap, huge post- harvest losses, value-added of most crops can grow faster than the plan's target if productivity is increased, cultivated area is expanded and Qat plantations are controlled. Raising fisheries output by 13% annually also appears to be a reasonable target because the sector managed to grow by even faster rates in the last couple of years. However, the projected utilization of fish resources could represent over-exploitation and risk the collapse of the fish stock because the current system of licensing is not based on reliable knowledge of existing stock. 2.3. The SFYP projects an annual increase in industrial output by 3% only, although it predicts very high growth rates for manufacturing, construction and public utilities. The expected low contribution of the sector was based on the assumption of stagnation in oil value- added during 2001-2005. This assumption, however, needs to be revised in the light of new projections of oil production with higher expected production levels during 2001-2003 and sharper declines during 2004-2005. Despite huge proven reserves ,of gas, the potentials of gas exports are unlikely to be tapped during the SFYP due to lack of secured external markets and financial resources. Similarly, the country's rich mining reserves are not expected to be fully utilized because of security concerns, conflicts over land ownership and poor infrastructure. While oil industry is still dominant, there is no evidence of a Dutch disease problem in Yemen but the GoY needs to be careful about the implications of decline in oil revenues in future. 2.4. Manufacturing in Yemen -characterized by high degree of industrial and geographical concentration, family ownership and low value-added to inputs ratio- remains a small sector. It contributed only 9% of GDP in the 1990s and its contribution to merchandise exports has been even weaker. The protectionist policies pursued until mid-1990s contributed to the fragility and inefficiency of the sector. However, macroeconomic stability, trade liberalization and reform of the exchange rate regime since mid-1990s started to have a positive impact on the sector. The SFYP targets an annual growth rate of manufacturing value-added of more than 9% and seeks 13 to encourage exports of manufactures and development of small-scale industries. The realization of these targets, however, largely depends on removal of the constraints in the sector (high production costs, lack of technical skills, smuggling and dumping, lack of access to credit, etc.), further trade liberalization, improvements in infrastructure and utilities and strengthening the legal and judicial systems. 2.5. Services remained by far the largest contributor to GDP; constituting half GDP in the 1990s. Despite its dominance in total output, the growth rate of the sector lagged behind other sectors recording an average growth rate of 5.0% and its conttibution to GDP growth was less commensurate to its relative size in GDP. Services are dominated by government services followed by transportation and communications, domestic trade, and real estate services. Services value-added is projected to increase by 8% per annum and to raise its contribution in GDP from 39% in 2000 to 43% by 2005. The plan puts heavy emphasis on tourism, transport and communications, and financial services. Yemen has huge potentials in tourism (e.g., historical, religious and archeological sites, coasts and islands, mountains and deserts) and tourism has been identified by the SFYP as one of the most promising sectors to accelerate GDP growth, increase tates of job creation and consequently assist in poverty alleviation efforts (targeted to grow annually by 11%0/). The attainment of this target may be difficult in the current circumstances and the increase in intemational business traffic is projected to rise by slightly more than the GDP growth rate and international vacation tourism to increase by up to three folds if the constraints affecting the sector are removed. 2.6. Properly executed infrastructure investment (including by the public sector) would be an important source of economic growth in Yemen, given the current weak state of basic infrastructure. In particular, the potentials for growth in the transport and communications sector are also large and the current condition of the networks and the high cost of services represent major hindrances to economic activities and initiatives. Despite liberalization and deregulation efforts, the whole sector remained largely under control of state (or private) monopolies and the govemment also controls most of the tariffs and fares. The sector should be accorded a higher priority because of its impact on other sectors. II. THE AGRICULTURAL SECTOR 2.7. In Yemen, agricultural output is derived from two main sub-sectors: (i) fisheries; and, (ii) other agricultural activities including farming, forestry, livestock and Qat farming.17 More than 93% of agriculture value added is contributed by the farming, forestry and livestock sub-sectors (of which about a third is Qat production) and the contribution of fishery to total agriculture value added was about 6.7% in the 1990s (1.3% of total GDP). Farming and fishing activities. are largely market-oriented, with production privately undertaken by farmers, though encouraged by the government and cooperatives in the provision of subsidized inputs. 2.8. The agricultural sector plays an important role in the Yemeni economy, not because of its contribution to GDP -though small and declining- but also because it provides employment to more than half of the labor force, livelihood to more than three quarters of population, and contributes about a third of total non-oil merchandize exports. The importance of the sector also stems from the fact that it utilizes between 90% and 93% of total water 17 Qat is a stimulant leaf chewed on a daily basis by most Yemeni adults. Qat leaves contain three alcoholides: cathine, cathinine and cathidine as well as sugars, tannins and Vitamin C. The WHO considers Qat to have amphetamine-like properties and categorizes it as a separate drug group in which it is the sole element. 14 resources in Yemen. The continuing discrepancy between the low contribution of agriculture to GDP and the percentage of those employed in the sector (54% of total employment), reflects seasonal employment, underemployment and the low productivity of workers and of the factors of production; thus resulting in low incomes and poor standard of living for workers employed in the sector. TABLE 2.1: AGRICULTURAL VALUE-ADDED, 1990-2005 . t1 iR%heo{lB# )2e, veU9ua ,r.tite(% - J _ ,,... .,.Ot,5S Zws E. 2 190195"1996-2000-19962000 2001-2005 Farming, Livestock & Forestry (incl. Qat) 23.6 17.7 14.2 14.5 3.0 7.0 5.4 6.1 Qat 8.5 5.4 4.2 .. 2.4 .. 2.3 FannsnLg, iwestock & Foreshy (exi .Qat) 15.1 12.3 10.0 .. 3.4 . 6.9 Fisheries 0.6 1.7 1.1 1.6 -1.6 7.0 12.3 13.0 Total Agricultural Value-Added 24.2 19.4 15.3 16.1 2.9 7.0 5.5 6.7 Sources: CSO for 1990-2000, FFYP for targets during 1996-2000, and the SFYP for 2001-2005. 2.9. As a whole, the agricultural sector was dynamic and contributed to GDP growth more than its relative share in GDP (especially in 1992, 1993 and 1998) but the sector's output has been very vulnerable to shortfalls in rainfall. Second, the relative importance of the agricultural sector in total output continued to decline in the 1990s from about a quarter in 1990 to about one-sixth of GDP by the 2000. This came about as a result of slow growth in the early 1990s following the 1990-1991 drought. Agticultural output declined by more than 7% in 1991 and recovered by 19% the folowing year due to exceptional rainfall. Agricultural output declined again in 1994 due to low precipitations. Third, agricultural value-added grew by 5.4% during the FFYP although the target growth rate of the plan was set at 7% per annum. Performance was assisted by the gradual removal of bans and controls, price liberalization, privatization of some agticultural units and improvements in storage and transportation facilities. Al agricultural activities (excluding Qat) also showed impressive growth rates during 1996-2000 (Table 2.1). 2.10. The SFYP sets ambitious growth targets for the agricultural sector with an average annual growth rate of 6.7%; to reach higher levels of food security and agricultural exports mainly through productivity increases. It also aims to increase income of farmers to improve living standards, reduce poverty and underemployment in the sector. Higher growth targets are planned for fisheries. The major policy problems in the agriculture sector include under-pricing of water and the rapid depletion of aquifers (also due to subsidies in diesel prices and electricity tariffs), lack of data and controls on the fish stocks and poor infrastructure resulting in low productivity in the sector. A. Fisheries i. Recent Developments and Contribution to GDP 2.11. Yemen is endowed with rich fish resources including surface and deep-water fish, shrimp and other sheDlfish. Due to the use of intensive labor in typical fishing activities, the availability of warm waters throughout the year, and the nutrient rich upwelling systems, fisheries are considered among the most promising sectors by the Strategic Vision 2025 and the SFYP for job creation, income generation and export potentials. The long coastal strip - extending over 2,000 km- the widespread islands and territorial waters in the Red and Arabian seas and the Gulf of Aden, provide significant fisheries resources and various forms of marine 15 life that will enable the sector to contribute effectively to the imnplementation of the Food Security Strategy of Yemen. 18 2.12. Fisheries sector developed differently in the two former republics before uinification. In the PDRY, the government focused on industrial foreign and state-owned fisheries in the Gulf of Aden while in the YAR the government gradually and successfully developed small-scale fisheries in the Red Sea. In the early 1990s, fishing was protected by import bans and controls on exports. Since 1994, the GoY has allowed large foreign industrial fleets to return to its water under bilateral agreements and individual licensing schemes. About 113 licensed foreign vessels and unknown numbers of unlicensed vessels are currently exploiting the fish stock and are increasing the risk of collapse of the entire stock while hampering the development of small- scale fishing. 2.13. The contribution of fisheries to total GDP was only 1.1% in 2000 and throughout the 1990s its impact on GDP growth was very weak.'9 Between 1990 and 1995, fisheries value- added declined by an annual average of 1.6%. Some of the controls were removed in mid-1990s and activity picked up. Value-added of the fisheries achieved an average gtowth rate of 12.3% during the FFYP (1.1% of GDP) versus a target of 7.0% per annum. However, the sub-sector has the potential to grow rapidly so as to increase its share up to 5% of GDP (provided that the stock remains sustainable), enhance protein consumption, promote agricultural exports, and raise personal income from small and medium-size fisheries.' The SFYP estimates that the fish reserves amount to 850,000 tons, which would allow for annual production ranging from 350,000-400,000 tons, as compared to 135,000 tons utilized in 2000. The sector is planned to grow at a faster rate of 13.0% during 2001-2005, raising the volume of output to 248,000 tons by 2005. The plan also targets an increase in fish exports by an annual average rate of 11.5% to reach 38,000 tons by 2005. i. Resources, Potentials and Constraints in the Fisheries Sub-Sector 2.14. Yemen has considerable demersal and pelagic fish resources. Annual fish catch was between 70,000 and 120,000 tons in the 1990s and is estimated to have reached 135,000 tons in 2000; of which 70% is by small-scale fisheries and the rest is high value fish by licensed and unlicensed industrial vessels. Yemen's most valuable fish stock (rock lobster, cuttlefish, shrimp and bottom-dwelling species) can potentially yield close to US$ 100 million annually of which about 50% could be exported. Cuttlefish exports could grow from the current 1,500 tons to a potential of 5,000-8,000 tons (US$ 15-25 million) annually. Shrimp resources could grow from the current 500-800 tons to a potential of 500-1,400 tons (US$ 6 million) annually. Rock lobster could contribute to 400-600 tons (US$ 5-9 million) annually, while current official exports are around US$ 1.5 million.21 2.15. The status of fisheries resources is unknown because of the absence of proper scientific research and lack of reliable statistics, especially for the stocks facing over-exploitation. Since 1991, no dependable fish landing statistics have been collected (specially for the small-scale fleet) and no reliable resource surveys, stock assessment and catch statistics are available. The current 18 For a detailed review of fish resources in Yemen, see World Bank (1999; 3-5). 19 Fisheties made a big irnpact on GDP growfth only in 1991 and 1994 when the sector gtew by more than 50% and 100%, respectively (see Annex Table 3). 20 World Bank (1999) and Barres (2001). 21 Barres (2001). 16 system of licensing is not based on reliable knowledge of standing stocks and, therefore, it may be dangerously contributing to the over-exploitation of the fish stocks. Although there is little disagreement between local and foreign scientists about the heavy exploitation of fish stocks, disagreement exists about the impact of current fishing levels on resources and the level of risk of stock collapses. Similarly, views differ about the desirability of the current licensing regime and its objectives. It is difficult to assess the political benefits of the bilateral agreements against their potential negative impact on small-scale fisheries. However, the concerns expressed by local and foreign scientists and fishery specialists about the state of the stocks should be taken very seriously and the "cautionary principle" developed by FAO should be applied. Although Yemen's own industrial fleet developed during the PDRY no longer functions for lack of maintenance and management, fish resources are heavily over-exploited by foreign licensed and unlicensed industrial fleets. 2.16. The key constraints that are currently inhibiting growth of the fisheries sector and its contribution to economic growth and job creation include: (i) poor fish resources management and the imbalances between industrial and small-scale fisheries; (ii) poor institutional performance; (iii) lack of critical infrastructure in selected areas; (iv) poor fish marketing and lack of effective quality controls; and (v) lack of institutional and physical infrastructure to support aquaculture development. B. Farming, Forestry, Livestock and Qat 2.17. Yemen is divided in four agro-ecological zones: the Highlands (44% of cultivated area and 61% of the farms), the Eastern Plateau (26% of the area, 19% of the farms), the Tihama (26% of the area, 10% of the farmns) and the Coastal Area (Gulf of Aden, with 4% of the area, 10% of the farms). About two thirds of cultivable land is currently under cultivation. Again, slightly less than two-thirds of cultivated land is cropped by cereals, 15% by fruits and vegetables, 10% by livestock grass and 9% by the Qat trees. About 53% of cultivated area is rain-fed, 30% is irrigated by ground water and streams and spate irrigation irrigate the rest. The livestock sector represents about a quarter of agriculture value-added and grew by an average rate of 4.8% during the FFYP. TABLE 2.2: AGRICuLTURAL LAND IN YEMEN BY MAJOR CROPS _iiiiiilllectaxes _ Total Cultivable Land 1,668,858 Cultivated Area 1,132,910 100 Total Cereals 675,394 60 Wheat 86,112 8 Other Cereals 589,480 52 Vegetables 62,498 6 Cash Crops (without Qat) 93,086 8 Fruit 88,104 8 Fodder Grass 114,197 10 Qat 99,631 9 Source: Computed from Table 1-3 in the SFYP 2.18. The main features of agriculture in Yemen are the low productivity and the substantial yield gap for most crops. For many crops the current yields are well below technical potential and actual farmers yield in comparable countries.2' Furthermore, post harvest losses are estimated to be quite high (20% for cereals, 45% for tomato, 60% for papaya, and 38% for 2 Barres (2001) shows that the yield gap can be as high as 40% for potato and tomato, 60% for banana, and 20% for oranges. 17 banana). The main causes are harvesting techniques, rough handling and poor packaging and weaknesses in transport networks. i. Qat and Water Resources: The Two Major Constraints in the Sector 2.19. In 2001, Qat contributed 4.2% of GDP, 28.7% of total agricultural value-added, and absorbed about a quarter of agricultural work-force and a tenth of household income. It is exclusively cultivated in the Highlands (73% of total Qat cultivations and 75% of cash crop area in the zone) and in the Eastern Plateau. Although Qat covers 9% of total cultivated area, its plantation is increasing rapidly (36% rise over cultivated area in 1989), particularly in Sana'a, Ibb, Hajjah and Dhamar governorates. It is more likely that Qat cultivation will continue to increase because it is more profitable in comparison with other crops under the same conditions and given the rise in the demand for Qat consumption. This will in turn exert more pressure on limited ground-water resources and increase rates of displacement of other crops such as grapes, coffee and cereals. Box 2.1: TOWARDS AN AGENDA FOR QAT The SFYP couragcously addxessed the Qat issue in Y'emen. The GoY also has recently carned out an extended study on Qat and.its tindings were discussed m a natonal conferenceinApnl2C02. The followung observations could be.among the agenda for funie discuisions on Qat issues: (i Although environmenEal, medical and social reasonts calls for a reduction in Qat production, tbe bigh profitability of Qat and tbe lack bf attractive alternative crops for rural small-scale farmers, makes the reducoon in Qar culnvated areas highy 'unrealisticIn the sbort-cerm; (ri Ln the short-term, the objective of the GoY sbould be to stabihze the area under Qat cultivation through. (a) increasing Qai 'viedd per hectare; (b) promoting water saving Trrigvaon techniques; tc) increasing the profirabilhcv of other competng crops ; grapes, vegLrables and fruits and coffee); and, (d) promoting public awareness on the heath and social impacts o( Qat, as a filoUow-up to the recent Qat Conlerence; - - uii Ln the medium-tet, public awareness on the negative effects of Qat should progressively reduce demand for Qar and profitmble alternatives will be developed; ! . . . (i) In the Highlands, Qat would ccontnue to play a major role in poverty Eeduction in the marginal upper c3tchments, where access is dLfficult and cosdy,.where land and ec6nomic opportunines are very liumted. and where Qar is eithLr rainfed or irrigated from thallow aquilers. -. . - . S -( - . - -: -- ' - . ' ' -; - ~~~~~~~~~~~ Source:BSaffes (2001 2.20. Limited water resources is the major constraint for expansion in agricultural production. Between 1970 and 2000, irrigated agriculture had tripled from 210,000 hectare to 630,000 hectare. Located within a- dry and semi-arid area, Yemen is among the world poorest countries in water resources. Per capita share of recoverable water resources amounts to 137 m3 in comparison with 1,250 m3 for the MENA region, 7,500 m3 world wide, while the water poverty line is estimated at 1,000 i3. Average annual rainfall ranges from 500-800 mm in the highlands, 50-100 mm in the coastal areas and less than 50 mm in eastern governorates. Water sustainability started to worsen in the 1970s with the digging of deep tube wells (about 50,000 wells) for both drinking and agricultural use, subsidization of diesel prices and water and electricity tariffs. These resulted in depletion of groundwater, particularly in basins of westem governorates (e.g., Sana'a, Sa'ada and Taiz basins). 2.21. The gap between available water resources (2.5 billion m3) and the current water uses (estimated at 3.4 bilion m3) has increased from 400 million m3 in 1990 to 900 million rn3 in 2000 and is predicted to reach 1.0 billion m3 by 2010 (with the assumption of increased efficiency in water use). With this trend, it is expected that 12 billion m3 of the estimated 20 18 billion m3 of ground water reserves will be depleted by 2010.23 In addition to the depletion of groundwater resources (about 4 meters per annum), quality of water is also threatened by pollution, petroleum wastes, fertilizers and pesticides and rise in salinity, which makes it non- potable even for use in agriculture. Furthermore, returns on water are also very low due to low efficiency of irrigation systems. It is estimated that losses between the well and the field ranged from 9% to 78%, and in more than two thirds of cases, the losses exceeded 30%. Therefore, the growth prospects for crops, which rely on irrigation from ground water, would be seriously constrained by the sustainability of water resources. 2.22. Water sustainability in Yemen is affected mainly by inefficient pricing of water, electricity and diesel as well as acquiring pumps at concessional prices. This is partly due to lack of clarification on organization and ownership of water assets. For instance, Qat growers usually do not own the aquifers they use nor do they pay any fees or charges for such use. They pump water using subsidized electricity and diesel. As a result of this rapid mining, large parts of the rural economy could disappears within a generation. Public institutions dealing with water have not been efficient.24 A draft Water Law will be approved by the Parliament soon and is expected to play an important role in sustaining water uses and clarification of water rights and property. 2.23. Other constraints which hamper the development of the agricultural sector include; (i) high prices on niche markets and lack of quality controls which hamper competitiveness of agricultural exports, (ii) decline in traditional rain-fed agriculture and'livestock systems as a result of rapid growth of the irrigated sector, (iii) deterioration of the upper catchments which have been neglected by past infrastructure projects leading to degradation of age-old systems of terracing and water harvesting. i. Growth Potentials ofNon-FisheyAgricultural Sector 2.24.. The growth target for the agricultural sector of 6.7% over the SFYP seems rather high by historical trends and the experience of other countries. The target is high because of higher growth target set for fisheries. Excluding fisheries, the growth target for farming, livestock and Qat that is set at 6.1% during 2001-2005 and can be achieved if the constraints in the sector are addressed. Table 2.3 illustrates how this target can be achieved if the non-Qat cultivated areas are increased, increase in Qat plantations is arrested, and extension services and irrigation techniques are improved. TABLE 2.3: A SCENARIO FOR INCREASED AGRICULTURAL VALUE-ADDED _ M o in AIFIrMae ____ua sefin_ C uaicn-a-s'eiMinl:omStidA ,-~~~~~~~~2.. 1Sie _ iivtd ra a - YieldAm-.% Gowth.Rntes.t Cereals 169 0 5 5.0 Qat 636 0 3 3.0 Other Cash Crops 88 3 6 9.2 Vegetables & Fruits 513 3 6 9.2 Pulses 30 5 5 10.3 Total 1,425 6.0 Source: Barres (2001). 2.25. First, rain-fed cereals have the potential to grow by up to 12% per annum with improved quality of indigenous seeds and better crop husbandry. Second, irrigated crops (vegetables and fruits) have the potential to grow by up to 16% annually with improved extension services and 23 SFYP (2001; 26). 24 For water shortages, sustainability, and policy problems, see World Bank (1997). 19 better tnanagement of irigation (Box 2.2). Third, livestock has good potentials for growth with improved husbandry practices, cross breeding and improved management of rangelands.'s Box 2.2: EXPORTS OF COFFEE AND FRUrrS & VEGETABLES emen's coffee export Ls the third largest export stem and it toraled USS 343 nmilion in 1999 Accordingly, Yemen is ranked tb9 41st largest coffee exporter vith a 0.30/a share in the world coffee market, despite Yemen haviag a wodd famous coffee vanet (mocha). Coffee exports performed well in the 1 990s, thanks to lowei depreciation in price of Arabica coffee relative trspnce for other blends. Price of Arabica coffee deprecaaed by 42r/o less than the average coffee price,.whicb declined by 4.&% fter 1995 to 1999 Coffee exports grew faster during 1994-1999 with an annual average of 19/o, fsr faster than Brazil (8.5%3 at v,odd coffee market (7 6%/6) durng the same period. - r Cn&s coffee market LS highly concentrated with Saudi Arabi, representing 85% of total coffee exports (US 29 million in I1999). Although Yemen is a rap coffee exportet.to Saucli A ,ibia (satijsf.g 30%1/ of Saudi-damsi '¢aoffee market),.Xe-men'. share in the GCC coffee market is still the fourth (9.2% of market share) foillowing Etipia (37%), India (13%) and Spaid 12%,) Coffee exporns o the GCC have strbng potentiaLs in the-shdrt arnd medium-terms. ruts and vegetables are among the fastest gronng b 6rt item in Yemet- They increased fEoro USS 0.1 millHon7in 1994 to USX 2.3 million in 1999 Currendtli exporms of fruits and vegetables account for 0.5%,1 of rotal expomrs and 9vo of non-oil expor trradionally, the main export market for fruits and vegetable is SaudL Arabia t99.2%Xo of total exports of fruits aii4 vegetables {l 999) Yemen Ls raukcd the 17th largest fruir and vegetable exporrer to Saudi Arabia and rapidly improved its riarketpositio . audi's fruit and vegetable market frorm 0 01%,6 in 1991, to 02"% in 1995, and to 1 G' in 1999. Banana isihaAargestiteii Yemen's fruit and vegetable s"por to Saudi Arabia (ISS 4.5 minllion in 1999 and 7 2zO of Saudi's total banana imports). Source: Snmeya (2001) III. THE INDUSTRIAL SECTOR 2.26. 1.espi.L itz relatively small contribution to GDP, the performance of the industrial sector was very impressive throughout the 1990s. During 1990-1995, the sector managed to record a 5.5% average annual growth rate, mainly due to high growth rates of the oil and miining sectors (6.1%) while total manufacturing value-added grew by 5.0%, construction by 4.6% and utilities by 3.1%. During the FEYP, performance of the whole sector improved further with an annul growth rate of 6.5%. Again, oil and mining was among the fastest growing sub-sectors (7.6%), following the 12.7% growth rate of construction sub-sector, while manufacturing (excluding refining) grew by 3.1%, utilities by 6.0% and oil refining declined by an annul average rate of 1.4% (Table2.4). TABLE 2.4: INDUSTRIAL VALUE-ADDED, 1990-2005 (°/O) Share of GDP Growth Rate End- Target End- Actual Target Acuia Taget F;F SP.. FFYP FFYP SFYP . . .t1990 1995 2000 2003 19901995 1996-2000 1996-2000 2001-2005 1. Oil, Mining and Quarrying 13.6 13.8 33.8 25.8 6.1 0.6 7.6 0.04 Mining and Quarrying 0.2 0.3 0.1 0.1 3.3 .. 1.5 10.0 Oil & Gas 13.4 13.5 33.7 25.7 6.1 .. 7.7 0.0 2. Manufacturing 9.3 14.3 7.5 8.8 5.0 8.0 2.4 9.2 Manufacturing ex. Refining 7.3 12.6 4.9 6.0 6.2 .. 3.1 10.0 Oil Refining 2.0 1.7 2.6 2.8 0.0 .. -1.4 7.5 3. Water, Gas, Electricity 1.2 0.6 0.7 0.8 3.1 4.0 6.0 9.2 4. Construction & Building 2.7 3.5 4.2 5.5 4.6 8.0 12.7 11.0 Total Industrial Value Added 26.8 32.2 46.2 40.9 5.5 4.0 6.5 3.04 Not available Source: CSO for 1990-2000, FFYP for targets for 1996-2000, and the SFYP for 2001-2005. 2.27. The SFYP makes very conservative predictions for the growth of the industrial sector (3.0%) as a result of low targets set for the oil sector. However, the plan targets very high growth rates for mining (10%), manufacturing (100/a), utilities (9.2%) and construction (10%). 25 For details on the potential of various crops, see on Barres (2001) and FAO (2001). 20 Chapter 5 summarizes the constraints and potentials of these subs-sectors, the feasibility of these growth targets in the light of the identified constraints and potentials, and the suggested policies and reform measures to tap these potentials. The following sections provide a detailed review of the most important sub-sectors: gas, mining, and manufacturing which are identified by the SFYP as promising sectors in addition to the oil sector given its current relative importance and its impact on other economic sectors. A. The Oil Sector 1. Development and Contribution to GDP, 1990-2000 2.28. Yemen is a small player in the oil market with small proven reserves and production levels. Although exploration work started in the 1930s, it was not until 1970s that serious exploration work started and about 18 agreements were signed with oil companies for exploration and production.26 Actual oil production started in the mid-1980s and currently there are six producing blocks in Yemen (Shabwah, Marib, Masila, Jannah, Ayad and Hawarim). By the end of 2000, Yemen's remaining recoverable reserves stood at 2.8 billion barrels. Unless new discoveries are made, oil production is expected to decrease by an annual average of 3-5% because some oil fields started to dry up. 27 2.29. First, Total of France discovered oil in the Shabwah field (block 10) in 1986 and production was limited to 10,000 b/d due to uncompleted facilities. Oil was trucked from the field to the Aden refinery. Currently the field produces 285,000 b/d. Second, a major field in Marib (block 18) started production in 1987 and a pipeline exported most of its output. Production in Marib fields reached 112,000 b/d in 2001. Third, the Masila field (block 14) - operated by Canadian Occidental- started production in 1993 (40,000 b/d). A pipeline to the Indian Ocean was completed in 1994 when production increased to 150,000 b/d and production increased further to about 231,000 b/d in 2001. Fourth, another consortium of companies started exploration in Jannah block (block 5) in 1990. Production started in 1996 with 4,000 b/d and reached 58,000 in 2001. Fifth, Nimir Petroleum signed an exploration agreement for the Ayad block in 1991. Currently the field produces only 4,500 b/d. Finally, Hawarim (Block 36) field operated by the DNO of Norway came on stream in 2000 and its production reached 8,200 b/d in 2001. Furthermore, exploration blocks were awarded in the last four years and the financial incentives for oil companies were improved.28 2.30. Half of the industrial output in Yemen in the 1990s was constituted by oil and mining (averaging 13% of GDP during 1990-2000). The contribution of oil was, however, very volatile mainly due to changes in oil prices and to some extent due to fluctuations in annual production levels. Oil production increased steadily in the 1990s from 72 million barrels in 1990 (198,340 b/d) to 150 million barrels (410,452 b/d) in 2000. Oil value-added, however, fluctuated with changes in oil prices. It declined by 10% during 1991-1992, recovered to 4% in 1993, and then 26 IMF (2001; 11). Most agreements specified 20% share for cost oil and the profit sharing was on average 20% for the company and 80% for the government. 27 About 0.03 billion barrels in Hawarim, 0.11 billion barrels in Ayad, 0.18 billion barrels in Shabwah, 0.28 billion barrels in Jannah, 0.413 billion barrels in Marib, and 1.41 billion barrels in Masila. Other exploration blocks (SI, S2, 9 and 15) added about 0.38 billion barrels to recoverable reserves. These reserves can be exhausted in 18 years at current production levels. However, the SFYP estimates proven reserves at 5.7 billion barrels. According to most recent figures this could be overestimation of reserves or it did not take into account withdrawal from the reserves throughout the 1990s. 28 By 2000, more than 26 oil companies were conducting exploration work in 30 blocks [MF (2001: 8-16)1. 21 increased by more than 25% during 1994-1996. Collapse of oil prices in 1997-1998, led to a growth rate of less than 5% before the sector resumed its high growth in 1999-2000 averaging 7.5%. Figure 2.71 OH Sector, Oi Prices and GDP, 1991-2000 Figure 2.2: Oil Production in Yemen, 1990-2000 40% - a~~~~~~~2I4 Goveffmlent Sh2rt (ti Bsrre/Ye2f) 40% 140 --Toisi oil p.oducfion (tinl Burel/yeor) 30m. /5 12Diihid nXi - ;. l 4 4 400 .10% >'D6 15 60 __2_ __ __ __ __ 1990 199119921993 199419951961991998 1999 Wn TABLE 2.5: OIL FISCAL REVENUES, 1990-2000 rcaw~.-f' a |fi.oElss!Fis<3lSs3E99-s6C 1997 1998 1999 2000 Od and Gas Re enues R billions) 83 17 8 10 I1 28 135 19(0 118 206 446 As % of Total Revenues 34 44 23 26 26 31 61 66 52 61 76 As % ofGDP 6.6 11.0 4.0 4.0 3.5 5.5 18.1 21.4 13.8 18.2 32.3 Sources: Computed from Data from Ministry of Finance, 2001. 2.31. The impact of oil on economic growth, fiscal revenues and export proceedings continued to increase rapidly in the 1990s. The share of oil in GDP declined from 13% in 1990 to 5.4% in 1993. It then started to increase gradually in 1994 (6% of GDP) reaching 28% in 1997. A sharp decline occurred in 1998 (16.2%) but it then started to rise again reaching 29% in 1999 and peaking at 34% of GDP in 2000.9 Reliance on oil as the main source of fiscal revenues also increased in the late 1990s from 25% of fiscal revenues during 1992-1994 to 76% of fiscal revenues in 2000 (Table 2.5). The contribution of oil sector to total employment is very limited-in Yemen. Total Yemeni workers in the sector have reached 18,000 in 2002, of which more than 12,000 are employed in the Ministry of Oil and Minerals and its associated units. Employment in the oil companies is about 2,800 and in the oil services is about 2,800 (see Annex Table 17). 2.32. The government exports two-thirds of its oil share while companies export their entire share (averaged 43% of total production in the late 1990s). Oil exports increased from US$ 1.2 billion in 1990 (78% of merchandise exports) to US$ 2.3 billion in 1997 (90% of merchandise exports). It declined in 1998 to US$ 2.2 billion and recovered to US$ 2.7 billion in 1999 before peaking in 2000 at US$ 3.7 billion (96% of merchandise exports). In 1999, Yemen was ranked the 32nd largest oil exporter with 0.7% market share. Oil exports account for more than 90% of total exports, which is second highest, only next to Iraq, among 230 countries in the world.30 Yemen's oil export markets are also highly concentrated. The top five oil export markets account for 87% of Yemen's oil exports compared to 53% for Iran, 61% for Saudi Arabia, and 29 Yemen has also two refineries. Aden refinery was constructed in 1954 with an initial capacity of 150,000 b/d. Capacity declined to 110,000 b/d in 1990 and furthet to 70,000.after the damage caused by the war in 1994. Marib refinery was constructed in 1986 with a capacity of 10,000 b/d for domestic consumption. 30 This figure is extremely high in comparison with other oil exporters such as Saudi Arabia (12.5% of world oil exports and 80% oil export ratio) and Indonesia (1.6% world market share and oil export ratio of 9.5%). 22 73% for UAE and Nigeria. Moreover, all the top five destinations (Thailand, China, Korea, India and Singapore) are emerging markets. Being a new oil exporter, Yemen was targeted as a new source of oil supply by those rapidly growing Asian economies which had high demands for oil but faced an already established international oil supply system dominated by international oil cartel. As a consequence, East Asian countries are now major oil importers from Yemen. However, the heavy concentration of oil export markets and heavy dependence on emerging markets imply vulnerability to oil prices as well as external shocks. 2.33. Despite the dominance of the oil industry in Yemen's economy in the 1990s, there is no evidence that there is a Dutch-disease problem (see also Chapter 3) or that the oil dominance suppressed economic growth in the rest of the economy. Yemen is still very far from full employment and there are no indications that prices of non-tradables have risen excessively. Second, real wages declined significantly over the past decade. Third, the adoption of the floating exchange rate regime in 1996 resulted in a significant depreciation of the real effective exchange rate (REER) in 1996-97 and ensured its stability in the following four years. Finally, as shown in Chapter 1, non-oil GDP growth in the late 1990s was much better than in the early 1990s. ii. Implications ofExpected Decline in Production, 2001-2020 2.34. Oil production is expected to decline by an annual average of 11% during 2001-2010 if no new recoverable reserves are discovered, with sharper declines during 2005-2010. Total oil production reached 159 million barrels in 2000 with the government share reaching 61% of total production. With expected decline in oil prices in the short- and long-terms, government share of oil production is also expected to decline because of the treatment of "cost oil" in the agreements with oil companies. With falling oil prices, the share of companies increases to recover costs of exploration and production. TABLE 2.6: PROJECTED OIL PRODUCTION BY THE SFYP (Thousand Barrels Per Day) -'______________________ QNI f20012; P$t2V_ ;Z004c 2005 uction from Cuffent Recoverble and Confirmed 436,000 425,100 414,473 404,111 394,008 384,158 Reerves utput from the Expected New Discovenies 65,400 137,340 216,678 304,380 401,528 __tal 436,000 490,500 551,813 620,789 698,388 785,686 Source: Derived from data in the SFYP. 2.35. The SFYP aims to maintain the same level of real oil value-added by increasing production from new fields to compensate for the expected decline in production from existing fields. It assumes no real growth in oil output during 2000-2005 and as a result the share of oil in total GDP is predicted to decline from about a third to about one-fourth. This projection was based on two assumptions: (i) an annual decline in oil production from existing fields by 2.5%, and (ii) an increase in total oil production as a result of new discoveries amounting to an annual increase in oil production in 2000 by 12.5%.31 Therefore, the SFYP predicts an annual increase in total oil production of about 10% in the next five years.32 The SFYP predicts that oil prices during the last four years of the plan will be in the range of US$ 18-25 per barrel (Table 2.6). 31 For instance, oil production from sector 53 (east of Masar) is expected to start in 2002. 32 These forecasts are different from the conservative predictions of the FFYP, which forecasted an annual decline in oil production from 344,000 b/d in 1995 to 331,000 b/d in 2000. However, actual oil production increased by an average annual rate of 4.9% until it reached 436,000 b/d in 2000. 23 2.36. Revised estimates from the Ministry of Oil and Minerals indicate that the assumptions used by the SFYP were pessimistic with regard to production levels from existing oil fields. Based on these new estimates, oil production increased in 2001 (440,000 b/d) and is projected to increase further in 2002 (448,000,b/d). In the following years, unless production from new fields is added, oil production is projected to decline rapidly by 7% in 2003, and 9% in 2004 (378,00 b/d) and 2005 (343,000 b/d). Oil production from producing fields will decline more shatply during 2005-2010 (Table 2.7). Thus, it seems that the projections of the SPYP for oil value-added are on the low side for 2001-2003 and on the high side for 2004-2005. Assumingr. (i) oil production as predicted in Table 2.7; (ii) no additional production from new fields; (iii) GDP growth as envisaged by the plan at 5.6% per annum; (iv) oil prices as projected by the World Bank Global Economic Prospects; and, (v) exchange rates as projected by the World Bank LDB, the share of oil to total GDP is likely to continue to decline to 31% in 2001, 27% in 2002, 24% in 2003, 20% in 2004 and to 16% in 2005. Given the uncertainty about prospects of oil prices and oil production in these forecasts, these projections should be interpreted as preliminary and tentative. TABLE 2.7: REVISED PROJECTIONS FOR OIL PRODUCTION 2001-2010 2000 436 159 2001 440 161 0.9 2002 448 163 1.8 2003 417 152 -6.9 2004 378 138 -9.3 2005 343 125 -9.3 2006 290 106 -15.5 2007 238 87 -17.9 2008 198 72 -16.8 2009 170 62 -14.2 2010 143 52 -15.6 Source: Ministry of Oil and Mineral (December 2001). B. Gas and Mining 2.37. The gas sector in Yemen is estimated to have reserves of about 12-15 trillion cubic feet33 Currently, about 95% of the produced gas is re-injected into the ground because of the delay in the Natural Gas Export project, which is now expected to start in 2005. The inability to find external markets is one of the most significant problems facing the development and improvement of the gas sector, especially in light of strong competition from affluent countries in the Gulf and the scarce financing resources available for Yemen's gas export projects. However, gas production for domestic use is expected to increase, particularly for the Marib power station, which is expected to start its operations in 2003. Currently, domestic consumption is met with about 30,000 b/d equivalent of liquefied natural gas (ING) from the Marib block. In addition to the importance of gas as a clean source of energy, it can also be an important source of foreign currencies if Yemen manages to export it. Gas can also be an essential input for a number of petrochemical applications and industries. However, it is unlikely that natural gas will have a significant impact on economic growth during the course of implementing the SFYP. 2.38. Recent surveying, exploring and excavating for minerals have led to the discovery of promising reserves such as gold in Hajjah, platinum in Amran, titanium in Abyan, in addition to 33 IMF (2001; 22) shows that most of the proven reserves are in the Marib field (13.5 trillion cubic feet), 2 trillion cubic feet in Block Sl and the rest in the Jannah field. 24 other important mineral reserves such as limestone, gypsum, marble, rock salt, granite stone and basalt (Table 2.8). The SFYP aims to increase value-added of mining and quarrying by 100% per annum. This is unlikely to be met unless the GoY addresses four major constraints, namely: (i) security concerns in areas with mining reserves;34 (ii) poor infrastructure which makes some of the areas inaccessible; (iii) lack of incentives and promotions to attract FDI into the sector, and; (iv) ambiguity of laws and regulations with regard to land ownership and utilization of natural resources. TABLE 2.8: IMPORTANT FIELDS IN MINERAL EXPLORATIONS IN YEMEN Lime Stone and Dolomite 10 bilion m3 32 Gypse 160 milion ton 14 Marble 690 million m3 12 Volcanic Glass: 13 Bio-mass 34.5 million m3 Budit 300 milion m3 Granite 316 million m3 25 Building Stones: 15 Tuff 31 milion m3 Basalt 58 milion m3 Desert Salt 337 million ton 11 Glass Sand 157 miDion m3 11 Source: SFYP (2001). C. Manufacturing i. ManufacturngActivides in Pre-Unification Period 2.39. Manufacturing activities in Yemen expanded in the early 1970s as a result of the momentum demand for consumer goods (fueled mainly by workers' remittances from the Gulf and foreign aid) and the government policies for granting economic incentives for local manufacturers using import substitution policies including protective measure such as tariffs, quantitative restrictions, price controls, and later by encouraging manufacturers for export production [World Bank (1989)]. Despite differences in the political and economic systems in the formrer republics, the public sector took the lead in manufacturing activities in both countries. In the PDRY, the govermment pursued the creation of a strong public sector to carry out all economic activities and nationalized most of private sector manufacturing establishments. In the YAR, although the private sector (local and foreign) was allowed to invest in manufacturing and played an important role in its development, manufacturing investments were driven mainly by the public sector. 2.40. Import substitution policies, pursued in the 1970s and the 1980s provided the necessary impetus for producing manufactured goods such as food products, footwear, clothing, leather products, drugs, and construction materials. Public sector manufacturing activities focused on large-scale projects such as cement, cotton, tobacco, drugs, petroleum, textiles, printing and, to some extent, food processing. The private sector concentrated its activities on food and beverage processing, building materials, woodwork, leather, soap production and light engineering. 34 A number of companies pulled out of the sector because of increasing security threats, tribal conflicts, and lack of clear laws and regulations to organize land ownership and utilization of natural resources. 25 iiA Current Characteristics of ManufacturingActivities in Yemee9 2.41. Manufacturing sector is still a stnall part of the Yemeni economy despite Ff tY expansion in the 1990s and its contribution to GDP, economic growth, n \2. exports and employment remains tiny. The main characteristics of manufacturing LS% activities in Yemen include: (i) small size of enterprises; (ii) high degree of industrial _ _ _ _ (_ R_ _ _ __._ _ i and geographical concentration; (iii) family OA and private ownership; (iv) a very low ratio 4,.0 of value-added to inputs (40%); and, (v) M SuT self-financing of investment and activities. 2.42. Total number of industrial establishments, which was 33,284 in 1996, increased to 33,699 in 1999, and was estimated at 33,972 by the end of 2000.36 According to the 1999 Industrial Survey, the number of manufacturing establishments was 30,174. Of these, 1% were large establishments (more than 10 workers), 4% were medium-scale (4-9 workers) while the bulk (95%) of the manufacturing establishments were small-scale. In the second half of the 1990s, large and medium-scale establishments expanded more quickly than small-scale establishments (Figure 2.3). TABLE 2.9: MANUFACTURING ESTABLISHMENTS BY SIZE AND ACTIVITY, 1999 * ~ ~ r!~~' ~~ tM-0,e ~ N-kd U 9! asM II 1 ___ON_____ Food Processing 77 351 15,377 15,805 52.4 Textiles, Clothing & Leather 32 102 3,893 4,027 13.3 Wooden and Furniture 25 112 3,493 3,630 12.0 Miscellaneous Metal Products 45 189 3,238 3,472 11.5 Non-metallic (Construction) 34 271 2,748 3,053 10.1 Paper & Printing 31 36 29 96 0.3 Mechanisms and Equipment 7 18 21 46 0.2 Chemicals and Plastic 35 4 4 43 0.1 Oil Refinery 2 0 0 2 0.0 Source: CSO "Industrial Survey: 1999 Update". 2.43. Until 1999, more than half of all manufacturing establishments were in food processing. This was followed by textiles, clothing and leather (13%), woodwork and furniture (12%), non- metallic construction manufacturing (10%) and metal products. With regard to ownership of establishments, 99% of all manufacturing (and 67% of large) establishments were owned by private Yemeni citizens, 0.4% by the public sector (19% of large establishments), 0.3% by cooperatives, 0.4% were joint ventures and only 0.1% were owned by foreigners.3' Furthermore, manufacturing activities were concentrated in a few governorates.38 About a quarter of all manufacturing establishments were located in Sana'a, followed by Ibb (13%), Taiz (9%), Dhamar and Lahj (8% each) and Hodeidah (7%). These six governorates and the Capital secretariat hosted more than 71% of total manufacturing establishments in Yemen. Sana'a, Taiz 35 This section draws mainly on material in Al-Sabbry (2001) and Sherwood (2002). 36 CSO (2000) "Statistical Year Book". 37 For an extended review of manufacturing sector in Yemen, size, geographical disttibution, type of activity, type of ownership, legal status, investments and capital stock, see Al-Sabbry (2001). 38 Based on the 1996 Survey. The 1999 industrial survey did not have geographical distribution. 26 and Hodeidah had also the largest concentration of large and medium-scale manufacturing establishments (Table 2.9). 2.44. The manufacturing sector employed 95,413 workers in 1999 (2.5% of the 4.2 million total labor force),39 mainly in food processing (40% of total manufacturing work force), followed by textiles, clothing and leather (14%), construction materials (13%), wood furniture and metal products (with 11% each). About 36% of employment in the sector 4: sofF toMa actuingEstablshments (. takes place at large establishments, 7% at medium-scale establishments and 57% at MM UsD_ small enterprises. Financial institutions contribute only marginally to the financing of manufacturing activities in Yemen. According to the 1996 survey, l 99% of small and medium establishments were self-financed. For large 2* establishments, owners financed 61% of activities from owni resources, followed o by joint ventures financing (26%) and the stur CcWtmmint LOW iLa FartipnLoan Jjnt ventures govemment with 11% (Figure 2.4). 2.45. The total value added of manufacturing sector was YR 103 billion in 2000 (34% of which is oil refining), and mainly contributed by large establishments (67% of total manufacturing value-added), followed by small (29%) and medium (4%) establishments. The ratio of value-added to input is low and estimated at 40% in 1999 (with marked differences between large, medium and small establishments).Yo At the sectoral level, among the non-oil refining manufacturing, food products and beverages value-added was the highest (23% of total manufacturing value-added), followed by structural non-metallic products (130/%), tobacco (12%), wood products (3%), paper, printing and publishing (4%), wood work and furniture (3%), metal products (3%) while the share of textiles decliried to less than 1% of total manufacturing output. iii. Manufactudng Output, Contribution to Growth and Exports in the 1990s 2.46. The low contribution of manufacturing sector to the economy can be traced to geographical and historical factors in addition to the protectionist policies adopted until mid- 1990s and the small size of the domestic market. Poor infrastructure (mainly roads and communications), mountainous nature of the country and division of the country along tribal lines imposed additional costs on internal trade, thus limiting the possibilities for domestic development of manufacturing. In addition, lack of markets and non-development of a manufacturing base meant that a number of foundations of industrial economies did not develop. These include, among others, an independent commercially conversant judiciary and an enforcement system (see Chapter 3).41 39 Total employment in the sector is estimated by the CSO to have reached 96,673 in 2000. 40 About 32%, 78% and 110% for large, medium and small establishments respectively. The big differences are attributed to the low value-added of refining (a large establishment). For more details, see Al-Sabbry (2001). 41 Sherwood (2002). 27 2.47. In the 1990s, manufacturing contributed only one-third of industrial valued-added (9% of GDP). Activity was strong during 1990-1993 and declined by more than 5% in 1994. For the whole period of 1990-1994, growth of manufacturing value added averaged only 2.1% (3.0% excluding oil refining) and was still concentrated in oil refining and production of consumer goods. The good performance during 1990-1993 was due to the fact that the sector continued to work under the umbrella of the protection system and government subsidies. The decline in output in 1994 was attributed mainly to the civil war that year which caused enormous damage to life and property. After the civil war, activity picked up and certain activities managed to grow by more than 20% (e.g., food and tobacco, cement and non-metallic products and furniture). Trade liberalization measures also contributed to the recovery as the cost of imported inputs declined and the devaluation discouraged imports of manufactured goods (fable 2.10). TABLE 2.10: GROVrH OF MANUFACTURING SECTOR, 1990-2000 (°) ood and Tobacco -0.6 8.2 4.6 extiles, Clothing & Leather 5.6 -0.8 1.7 ooden and Furniture 6.3 2.1 3.7 aper, Printing and Publishing 6.3 1.5 3.4 Chemicals and Plastic Products -2.0 2.8 0.9 tructural Non-metallic (Construction) 5.7 12.8 9.9 etal Products, Machines and Equipment 8.9 1.6 4.5 Refinery -1.5 -0.5 -0.9 oial Manufacturing (including oil refining) 2.1 5.7 4.2 Manlufactuuing (excluding oil refining) 3.0 6.8 5.3, GDP 4.1 6.4 5.5 Source: CSO, National Accounts, 2000. 2.48. Manufacturing recovered strongly in 1995 by a growth rate of 24%, and during the period 1995-2000, it recorded an average annual growth of 5.7% (6.8% excluding oil refining) against the FFYP's planned target of 8.0% p. a. In particular, output grew by an average rate of 0.8% during 1996-1997 (1.3% excluding oil refining). A number of factors contributed to the sluggish growth during the two years. First, the impact of the civil war on Aden refiiiery greatly affected capacity of the refinery and output of oil refining declined by 10% in 1994, by 4% in 1996, stagnated in 1997 and declined by 7% in 1998. Second, the cost of production rose as a result of phasing out the government's implicit subsidies when tariffs for public utilities (water and electricity) were raised. Third, the stabilization program and tight growth in money and credit contributed to the slow demand for manufactured goods. Fourth, competition intensified as a result of removing all bans and quantitative restrictions on imports, elimination of import licensing, and lowering of custom tariffs. Manufacturing output started to recover in 1998 with a growth rate of 5.5% particularly in textiles, leather, chemical and plastic products. Output growth slowed in 1999rand recovered strongly in 2000 recording a 7% growth rate. Food and tobacco, cement and other non-metallic product outperformed other sub-sectors during the year. For the period 1998-2000, the sector managed to grow by an average rate of 4.3% (3.8% including refining) (Table 2.10 and Annex Table 8). 2.49. Despite expansion of the manufactuting sector in the 1990s, it is still oriented mainly to cover the domestic market and its contribution to total exports economy is still small, particularly when compared with other simnilar countries. While the total exports of Yernen reached 50% of GDP in 2000, manufactured exports represented less than 1% of metchandise export, 26% of non-oil merchandise exports and less than 0.5% of GDP (see Box 4.2, Chapter 28 4).42 The protectionist policies pursued until mid-1990s (subsidies, high tariffs and controlled exchange rate) were unsustainable and have contributed to the fragility and inefficiency of the sector with a great cost to the government budget and social welfare. They reserved the local markets for local production and subsidized imported raw materials and equipment. This indirectly discouraged the manufacturers from improving the quality of their products and management of their establishments. The removal of all bans on imports created a competitive market for local goods where local manufactures had to compete with imported goods, to improve their mediocre quality and to start reducing the high production costs under which they operate. After the reforms, and following a couple of years of sluggish growth, manufacturing activities started to recover in the late 1990s. 2.50. In addition to its contribution to GDP, the manufacturing sector has inportant fiscal contributions in the form of direct and indirect taxes (including income, production and consumption taxes as well as taxes on value-added and custom duties on imported raw material). The country's total indirect tax revenues were YR 55 billion in 1999. According to 1999 survey, the total indirect tax from the manufacturing sector was estimated at YR 10.1 billion representing about 18% of total indirect taxes. With custom duties, the contribution of manufacturing to total indirect taxes reached 21%. The large establishments contributed 98% of total indirect taxes while medium and small establishments contributed only 0.1% and 1.7% respectively. 2.51. In a survey of about 1,000 private enterprises in 2001 (see Chapter 3), manufacturing firms accounted for 23% of the sample and comprised mainly of "garment, consumer goods and other" manufacturing. The firms in the sample serve primarily the domestic market. Only 32 firms, or 3.5% of respondents are exporters. The majority of exporters are large firms and 23% are medium firms. Only size is a significant determinant of whether a firm exports confirming that larger firms are more export-oriented in Yemen. Location, age, sector and ownership type do not significantly increase the likelihood of exporting in multivariate analysis. More importantly, the survey reveals that manufacturing firms, as well as foreign-owned firms, are more likely to report violent incidents in their neighborhood. Lack of security appears to be a major constraint to manufacturing activities in Yemen. iv. Growth Prospects and Targets of the SFYP for the Manufactunng Sector 2.51. Manufacturing has been accorded a high priority by the SFYP as one of the potential engines for rapid economic growth, job creation, attraction of FDI and technical progress, and poverty reduction. The plan aims to: (i) achieve a real rate of growth of 9.2% in manufacturing output (7.5% for oil refining), which will raise the share of the sector to 9% of GDP by 2005; (ii) support the orientation towards exports, and; (iii) support and develop small-scale and traditional handicraft industries. It also hopes that the sector will make use of Yemen's comparative advantages in terms of natural resources, human resources, and the strategic location and its accessibility to major international markets. The plan also targets a big increase in exports of manufacturers, with special focus on small and medium scale industries for their ability to create job opportunities. The Plan also accords oil refining a priority and seeks to expand the refining capacities of Aden and Marib refineries and to encourage the involvement of the private sector involvement in refining. 42 Main manufactured export goods include household cleaning products. (5.1% of non-oil merchandise exports), beverage and tobacco products (4.4%) and machinery and transport equipment (7.90/6). 29 2.52. The realization of these targets largely depends on government removal of the constraints in the sector, further trade liberalization, improving infrastructure and utilities and improving the legal and judicial systems. There are good prospects for manufacturing of food and tobacco for exports to the GCC and African countries. There are also good prospects for manufacturing of textiles, garments, Figure 2.5: licensed Investment Projects by GIA construction materials, and furniture and 90 wood work because of the comparative so advantages of Yemen in such industries. 70 Processing of agricultural products such as 60 coffee and fish could be promoted with m ~ 40 expansion of facilities and skills as well as 30 improvements in quality conttols and 20 marketing facilities. The prospects of 10 manufacturing are better with the 0 development of the free zone in Aden. 2.53. Boosting manufacturing activities in Yemen would require the removal or reduction of constraints that inhibit the growth and expansion of small enterprises. The inability to identify markets, insecurity and unenforceability of contracts, inability to access land for expansion and insecurity of land tenure, lack of skills, high cost of transportation and the high cost of licenses and permits represent major constraints for business expansion (Chapter 3). Enabling manufacturers to identify and reach domestic and foreign markets through reduction of transportation cost, development of marketing facilities, business training, and improving the reliability and enforceability of contracts are critical reforms for expansion of manufacturing activities. Access to land and secuting land titling is also important to attract foreign investors into the sector.43 D. Other Industrial Sub-Sectors (Construction, Water and Electricity) 2.54. Construction value-added averaged 3.9% of GDP (12% of industrial value-added) during the last decade. Construction activity boomed in the early 1990s following the return of immigrants from the Gulf States and recorded average annual growth rate of 12.0% during 1991-1992. Construction activity slowed in 1993 and declined by 17% in 1994. Post-war recovery boosted construction to an average growth rate of 26% during 1995-1997 befote decelerating to an average rate of 3.5% in the last three years. The construction and building sub-sector plays an important role in its contribution to GDP (4.2% in 2000) and its absotption of 6.6% of the total working manpower. The SFYP envisages an average annual increase in construction activities of 11% and as a result the sector's share in GDP is planned to increase from 4.2% in 2000 to 5.5% by the end of the plan. 2.55. Water and electricity (0.9% of GDP in the 1990s) grew weakly in the pre-civil war petiod, declined markedly in 1994 (by 14%) and recovered strongly during 1995-1996 (more than 12% annual growth). The sub-sector grew by 4.0% per annum in the last four years. The relative share of this sub-sector in the GDP continued to decline in the 1990s from 1.2% in 1990 to 0.8% in 2000. It is mainly composed of the electricity and water supplies. The sub- sector performed better during the FFYP in comparison with the early 1990s (Table 2.11). 43 Sherwood (2002). 30 TABLE 2.1t1 WATER AND ELECTcITrrY, VALUE-ADDED, 1990-2005 Electrtdq ~~~~0.4 0.2 0.4 .......................... 0.2 7.4 #. Water ~~~~~~0.8 0.4 0.4 .......................... 4.6 5.2 #. otlWater and Electrcity 1.2 0.6 0.8 0.8 3.1 6.0 9.2 () *: Target, (ii) ..: Not available, and (iii) # growth rate for the period 1995-1999. Source: CSO and SFYP. 2.56. The electricity sector witnessed noticeable progress over the FFYP. The installed capacity (generated power) and the sold energy increased by average annual growth rates of 5.0% and 6.4% respectively. As a result, the total electric output has reached 610 megawatt in 2000 up from 478 in 1995 and the number of subscribers increased from 524,000 to about 800,000 over the same period, which raises the number of beneficiaries from the national grid and independent systems to 5.3 million people (covering 29% of total population). In 2000, the capacity of the Public Electricity Corporation (PEC) reached 597 megawatt. Demand on the national grid was 518 megawatt and 92 megawatt on the independent systems. This resulted in a deficit of 49 megawatt in the national grid and a surplus of 36 megawatt in the independent systems. Energy losses in 2000 are estimated at 38% up from 34% in 1995. The sector suffers also from weak institutional technical, administrative and financial systems. As will be detailed in the next chapter, electricity shortages and disruptions are identified by private sector as a major impediment to business and growth; and the sector should be accorded a higher priority by the GoY by addressing the institutional framework (reform of PEC), reduction of energy losses, liberalization of tariffs, and inviting private sector in power generation particularly by utilizing the gas resources. 2.57. In urban areas, water consumption is estimated at 376 million m3 (64% coverage for urban population). The supply of water from the public water network rose from 76 million m3 in 1995 to 103 million m3 in 2000. In rural areas, water consumption is estimated at 306 million m3 in 2000 with a coverage rate of 59% of rural population (7.7 million persons), with piped water accounting for 27% of coverage, water wells for 44% and surface water for 29%. 2.58. The SFYP aims to increase the installed capacity to 1,266 megawatt by 2005 (7.4% average annual increase) and to increase electricity coverage to 40% of total population. To achieve these targets the plan considers conversion to gas turbines and reduction of electricity losses to 33%. It considers also private sector participation in power generation and distribution. It also targets increase in rural electrification to cover 22% of rural population by 2005 (up from 16% or 2.1 million people in 2000 and 1.7 million people in 1995). Furthermore, the SFYP aims to increase supply of water for household consumption in urban areas to 163 million ml by 2005 (9.5% average annual growth rate) to raise the average to 69%. It also targets increase in rural water consumption to 423 million m3 by 2005 (6.7% average annual increase) to raise the coverage rate to 65%. n. THE SERVICES SECTOR 2.59. Yemen's services sector is dominated by government services (representing 45% of total services and 23% of GDP during 1990-2000) followed by transportation and communications (10% of GDP in 2000) and the wholesale and retail trade (7% of GDP in 2000). The cumulative contribution of other services (except real estate) to GDP growth was negligible. The real estate sector has been very dynamic and grew by an average of 5.5% in the last decade, its share in total GDP increased from 5.5% in 1990 to 6.8% by 2000, and its contribution to GDP growth 31 has been about 7%. Other services (maintenance, social and personal services and private non- profit services) and financial institutions represented 7.3% and 4.2% of GDP respectively during 1990-2000 (see Annex Table 1). The following sections focus on tourism, transport and communications, government services and wholesale and retail trade given their current and potential impact of services value-added and GDP in generaL TABLE 2.12: SERVICES VALUE-ADDED, 1990-2005 1. Trade, Hotels and Restaurants & Maintenance t0.0 12.0 8.6 10.2 2.4 7.0 5.8 9.1 Wholesale and Retail Trade 8.3 9.7 7.2 8.4 2.2 .. 5.9 9.0 Hotels and Restgaurants 0.7 1.0 0.7 0.9 2.3 .. 7.9 10.7 Maintenance and Repairs 0.9 1.2 0.8 0.9 3.8 .. 3.7 8.3 2. Transportation, Communication & Storage 15.5 12.6 10.3 12.2 -4.8 10.0 2.2 9.1 3. Finance, Insurance and Real Estate 9.8 9.6 7.8 9.3 2.0 8.0 6.3 9.5 Finance and Insurance 3.7 3.7 2.9 3.8 -21 .. 6.6 12.0 Real Estate and Business Services 6.1 5.9 4.9 5.5 3.9 .. 6.2 8.0 4. Personal and Social Services 1.1 1.2 0.8 0.9 2.2 8.0 6.7 6.5 5. Government Services 16.9 12.9 10.8 10.4 13.0 10.0 5.7 4.7 6. NGOs 0.1 0.1 0.1 0.1 -0.7 .. 14.9 5.0 TOTAL SERVICES VALUE ADDED 47.9 48.3 38.5 43.1 4.8 8.7 5.3 8.0 Sources. CSO for 1990-2000, and the SFYP for 2001-2005. A. Tourism 2.60. The contribution of tourism to GDP and economic growth in Yemen has been insignificant. The actual contribution of tourism may have been slightly underestimated in the national accounts because the impact of the sector is measured by the contribution of hotels and restaurants only. It accounted for only 0.5% of GDP in the 1990s and its growth averaged 5.3% during the decade. Following the drop in the value-added of the sub-sector in 1994 by 12%, value added of hotels and restaurants increased by an average of 9% during 1995-2000. Nonetheless, the contribution of the sub-sector into GDP growth remained negligible. The SFYP 'considers the tourism sector as one of the leading and promising sectors for its ability to provide job opportunities, poverty reduction and foreign currencies given Yemen's potential in cultural, historical, environmental aestivation, coastal and island tourism in addition to mountain climbing and desert scouting. The Strategic Vision 2025 hopes to increase the number of tourists in Yemen from 73,000 in 2000 to 2 million visitors by the end of the Plan. i, Recent Trends and The Present Situation 2.61. With an estimated GDP contribution of 1.7% (hotels and restaurants contribute only 0.7% to GDP), tourism in Yemen represents a marginal economic sector. Gross receipts generated by tourism are estimated at about RY 23 billion or US$ 135 million in 2000." About 56% of the revenues are contributed by international tourists whose arrivals in 2000 totaled 72,836 (35% from the Middle East, 34% from Europe, 11% from Asia, 11% from the Americas, and 8% from Africa). With an average length of stay of 6.5 days and an average daily expenditure of US$ 160, these arrivals generated total gross foreign exchange revenues of US$ 76 million (see Annex Table 4-7).4 International vacation tourism was well below potential and 44 Including all expenditures, notably accommodation, food, transportation and purchases, Brrizi (2001) estimate the contribution of international tourism to GDP in 2000 at RY 13 billion or US$ 76 million. 45 The estimate can decline to US$ 61 million if daily spending average is estimated at US$ 130. 32 is estimated at 25% of the tourist arrivals (18,000 visitors) mainly culture and adventure tourism. The 5 and 4 stars hotels that account for 32% of total room capacity mainly caters for international tourism traffic. 2.62. After growing by some 35% from 1995 to 1998, tourist arrivals registered a sharp decline in 1999 (due to the negative impact of Abyan kidnapping) followed by a partial recovery in 2000 (Figure 2.6). Hotel capacity for international traffic (i.e., 5 and 4 stars) expanded from 1,072 to 2,589 rooms or 140% from 1995 to 2000 in anticipation of increased business and vacation traffic despite the fact that most hotels experienced unsustainably low annual occupancy rates (estimated at 30% over the last three years).' Figure 2.6: International Tourism Arrivals Into Yemen by Region 90.000 1*995 *1996 01997 01998 *1999 020oo!00 75000 60.000 45.000 30.000 15.000 Eiutope Middle East Americas Asia A&Ansralia Africa Total So,,, G#x*mn Twnw A4dxhan0y 2.63. Domestic tourism contributes 44% to total tourism receipts. It is mainly business oriented and small in size because of the absence of a vibrant modem economy. Domestic recreational and cultural tourism is insignificant because of social and behavioral factors as well as income constraints. Domestic tourism consists of business traffic which is in itself very limited and mainly related to visiting purposes rather than conventions, training or other business-related activities. Presently, expatriates living in Yemen are the main contributors to domestic tourism. The overall contribution of domestic tourism to GDP in 2000 is estimated at RY 10 billion or US$ 59 million. TABLE 2.13: VALUE ADDED AND EMPLOYMENT BY HOTELS AND RESTAURANTS, 1999 1-9g 1,115,490 353,397 Mediurn and Small 18,885,552 3,932,344 Total 20,000,042 4,285,741 Source: Central Statistical Office, Services Survey. B. Constraints and Chalenges to Development of Tourism in Yemen 2.64. Tourism in Yemen,. and international vacation tourism in particular, faces many constraints, the most notable are (i) poor and expensive transportation; (ii) difficult operating environment for tourism, (iii) weak promotion, (iv) lack of promotion activities, (v) insecurity, and (vi) the challenges of preserving cultural heritage. Tapping the identified potentials in the sector, therefore, requires concerted efforts by the authorities to remove these constraints. 46 Brizzi (2001) estimates that total revenues of these hotels about RY8 billion or US$ 48 million. 47 For estimates of tourism revenues, contribution to GDP, and estimates of international and domestic tourism, see Brizzi (2001). 2.65. Air accessibility to Yemen is limited and international and domestic airfares are high compared to other tourism destinations. Although Yemen's international vacation tourism clientele may be less price sensitive, because it comprises mainly relatively rich cultural and adventure tourists rather than mass tourists, its expansion requires a reassessment of present air policies. Internal air travel for international tourists is hampered by high fares, air schedules that do not fit tourist circuit needs, frequent flight delays and cancellations. Authorities should also look at ways to facilitate air access by foreign airlines and reduce air access costs. This may require liberalizing landing rights, reviewing landing fees, allowing charter flights, and opening to international traffic additional airports. Although entry visa requirements have been eased, their cost is still high. More importantly tourists who exit Yemen for visiting neighboring countries have to renew and pay for an additional visa at re-entry, a requirement that hampers the development of regional circuit tourism. 2.66. Public resources for tourism promotion are limited. These resources should be spent effectively on activities targeting the most promising demand segments and that can leverage private funding. Relevant ministries and agencies should develop coordinated strategies to use their available resources consonantly to the above objective. Considerable progress has been achieved recently in promoting tourism through exhibitions of Yemen's cultural heritage and archeological treasures. This could be expanded and be combined with well-targeted and effective tourism promotion campaigns by the specialized media and press. 2.67. Investment into tourism is negatively affected by most of the constraints that hamper business development in Yemen (see Chapter 3). Private investors interested in the development of tourism facilities find a difficult, if not hostile, investment environment. They cannot invest unless they associate with local partners who often have no financial capacity. Access to land, permit demands, connections to utilities often require lengthy procedures, murky processes and costly transactions. Even the choice of contractors and suppliers for the development of tourist facilities could be complicated by the demands of local officials and tribesmen in many locations. Furthermore, operating tourism facilities and services is as difficult as developing them. Owners and managers are often asked to provide free services and special favors; often subject to frequent harassment by customs and tax officials, and there are often requests of protection money. The weak judicial system and the public admninistration aggravate the situation. Lack of trained personnel has been cited as an important constraint by investors. 2.68. Yemen has experienced numerous cases of kidnapping. Though most of these ended without major consequences for the individuals concerned, the impact of kidnappings on vacation tourism has been severer. This can be measured by the scope of hotel cancellations following the announcement of a kidnapping. Based on the information provided by the largest tour operators, in some instances, these reached 60% of the acquired reservations. 2.69. Vacation tourists visit Yemen because of its pristine landscape of mountains, valleys uncontaminated by the signs of modern civilization and the beauty of its cities and villages whose harmonious urban fabric and architecture remains unspoiled from spurious urban development patterns, building types and material. Protecting the natural environmnent and cultural heritage of Yemen is a prerequisite for maintaining and enhancing vacation tourism arrivals. This calls for the establishment of effective environmental protection and cultural heritage preservation policies and laws and, more important, for ensuring that the agencies 34 responsible for their enforcement,' develop the necessary managerial and technical capability. Another challenge is preserving the traditional life of the dwellers of cities and villages while improving their living standards and their access to infrastructure services. This calls for the development of awareness on the values of traditional architecture, handicraft activities, and life styles among local government officials, local community organizations, and local civil society. iu. Growth Prospects of Tourism Activities 2.70. It is difficult to predict tourism growth in Yemen, particularly in the more distant future. Overall, international business traffic is projected to increase over the next five years by just slightly above GDP growth rates. In the long-run, business tourism is projected to grow at an accelerated pace as the modern sectors of the economy expand and Aden and other coastal cities establish themselves as major industrial and commercial centers. The activities generated by trade, oil industry, international relations, and development assistance are expected to remain major contributors to future growth, with the service and manufacturing industries gradually completing the picture. 2.71. Conversely, vacation tourism could possibly increase by up to three folds if the constraints in the sector are removed. Existing and under construction room capacity for international tourism should be able to accommodate much of such increase. The number of international arrivals for cultural and eco-tourism is well below potential. Even though the total demand associated to these segments represents a limited share of the broad international vacation market and therefore cannot count on a large number of potential clients, it is expanding worldwide and Yemen is well positioned to capture a much larger portion of it. Offering visitors a stay that can combine cultural and eco-tourism with beach tourism can facilitate such expansion. Yemen could also look at the possibility of being part of regional circuits combining its cultural and eco-tourism product with recreational or beach based tourism in the UAE, Oman and Djibouti. Tapping the vacation tourism potentials would, nonetheless, require the development of new capacity in selected destinations, including the creation of resort complexes at beach locations. Expectations for beach resort tourism development should be however realistic. It is unlikely that Yemen will be able to become a mass tourism destination. This will require competing with countries that are endowed with better assets and have already developed capacity and image. Scuba diving in Socotra and the Red Sea Islands also presents some potential but it is bound to be a niche market within the broader scuba diving market 2.72. A big segment of the international vacation tourism miirket is represented by visitors from the Gulf countries and Yemeni nationals living abroad. This market is very diversified and includes a variety of tourism motivations such as recreational facilities in specialized destinations (e.g., Aden, Yemen highlands, religious and therapeutic sites); Though there is no reliable information on this market, it appears that it is developing and presents considerable scope for growth. To tap it, it is however essential that Yemeni or foreign investors develop appropriate accommodation facilities, such as villa complexes, in resort areas endowed with recreational amenities. 2.73. The same expectations apply to domestic tourism. At least in the short-run, the growth pace of business tourism is likely to be the same as, or slightly exceed, GDP growth because of 48 These include the Environmental Protection Authority (EPA), the General Organization for the Protection of Cultural Heritage in Yemen (GOPHCY) and the General Organization for Antiquities, Manuscripts and Museums (GOAMM). 35 the progressive modernization of the economy. Recreational tourism would grow faster as it starts from a very low base and gradually develops into an established activity while the country urbanizes, personal income increases and social behaviors evolve. Again, existing capacity should be able to absorb the bulk of additional demand, though the development of recreational tourism calls for the establishment of appropriate accommodation and other tourism facilities in selected destinations. Coastal areas in the vicinity of Aden, Zabid and Mukalla as well as resort villages in the vicinity of Sana'a, Taiz and Seyoun appear to be the most likely candidates to attract this demand. 2.74. Consonant with the above expectations and provided that the international political and economic situation is stable and Yemen's economy grows at 5.6% on average during the next five years as foreseen by the SFYP, total tourism receipts could grow to reach some RY 37.5 billion or US$ 215 million by 2005.4' If this were to materialize, the contribution of the tourism sector to GDP would slightly increase from 1.7% in 2000 to 2.1% in 2005. B. Government Services 2.75. The services sector in Yemen is Firm :nEpe oCmmon getpYemenaoun dominated by government services 2S | G rGF.d C=pda mfilW.9 CAt GDP) (administration) representing 45% of total E1 services and 23% of GDP during 1990- _ ____ 2000. Not only government administration _ and services contributed about a quarter of 1__ GDP, they were very dynamic and s contributed about half of GDP growth. Government services increased by an S average of 15.3% during 1991-1995 before Em& SAM decelerating to an average of 5.6% during Nu&_ _ hi,_ __ the second half of the 1990s. Given the present large size of government in the economy (Figure 2.7) in comparison with other countries, this sector will continue to play an important role in economic development and growth. 2.76. During 2001-2005, government services are planned to increase by an annul average of 4.7% and their share in GDP will therefore decline slightly from 10.8% in 2000 to 10.4% by 2005. The priorities of the SFYP can be judged by the projected allocations of government spending. Spending on defense and law and order and spending on mining and oil are planned to receive the same share of total government spending (25% and 7%, respectively). Social services share will increase from 34% to 37%; the share of agriculture and fisheries will increase from 2.4% to 2.8%, while government spending on transport and communications is expected to decline from 0.4% to 0.3%. 49 Gianni (2001) projects that a reasonable objective for Yemen will be to triple within the next 5 years its present vacation tourism arrivals. As a result we can at best expect that, overall, international arrivals will grow from 73,000 in 2000 (with 18,000 vacation arrivals) to 127,000 in 2005 (with 54,000 vacation arrivals). Within this framework, international tourist receipts, could possibly increase from RY 13 billion or US$ 76 million in 2000 to over RY 23 billion or US$ 135 million in 2005. He also projects that it is unlikely that domestic vacation tourism can contribute more than 20% to the expansion of the overall domestic tourism during the next five years. As the result of the above assumptions, domestic tourism could grow from some RY 10 billion or USS 59 million in 2000 to YR 14 billion or US$ 80 million in 2005. 36 C. Transportation and Communications 2.77. Transport and storage represent one-fifth of services value-added. Their share in GDP growth, however, continued to decline from about 15% in 1990 to 10% in 2000, and their contribution to GDP growth has been negative. The sub-sector recorded negative growth rates throughout 1993-1996 and only recovered in 1997-2000. Therefore, the performance of the sub- sector was disappointing during the FFYP when the sector grew by an annual average of 2.2% against a target of 10%. Despite liberalization and deregulation efforts, the whole sector remained largely under control of state monopolies such as Yemen Navigation Line, Land Transport Company and Yemenia. The government also controls most of the tariffs and fares. 2.78. Road transportation is by far the most important transport sub-sector with the number of registered vehides in Yemen reaching 885,000 in 2000. The sector was liberalized in the 1990s and private sector participation has increased in road transport. Licenses were issued by the General Land Transport Authority (established in 1999) for private sector transport offices to enhance competition and reduce transport cost, in addition to issuance of licenses to private companies for mass transportation of passengers between cities and in tourism. The roads network, however, is still very weak despite expansion during the FFYP. Paved roads do not exceed 9% of total roads (11 km for every 1,000 kmi2. The trucking sector is still controlled by the private (Ferzah) cartel, which fixes prices and prevents entry thus raising transportation costs.50 More important, even in areas with available road networks, overland security is often limited by security concerns. TABLE 2.14: ROAD TRANSPORT NETWORK IN YEMEN Asphalt roads (kim) 5,052 6,586 10,947 Gravel roads (km) 2,360 3,915 6,109 Rural dirt roads (km) ..60,000 Source: Computed from the SFYP. (Not aailable. Surae: dirpte froad (k he ..P 60,000 aaiabe 2.79. Yemen has an advantageous position in the international shipping network and many regional and intemational shipping lines pass through its ports, especially Aden and Hodeidah. Consequently, the marine transport and seaport sector plays an important role in economic activity in Yemen and 68% of Yemen's non-oil exports and approximately 85% of the country's imports leave and enter through seaports, in addition to shipping services (e.g., agencies, cargo handling, forwarding) and ship maintenance and repairs. During the FFYP, marine transport witnessed significant expansion. In 1997, a new dock was constructed in Al-Salif seaport. A container seaport was constructed in Aden and an armlet was constructed in the island of Socotra. Work is currently underway for the construction of three new seaports in Hadhramout, Al-Mahra, and Abyan. The number of ships calling on Yemen's six ports increased from 2,407 in 1995 to 3,409 in 2000. The cargo handled also rose from about 4.2 million tons to 6.4 million over the same period. During the FFYP, private sector involvement in mnarine transportation and services increased particularly in handling cargo, supplying ships, and concessions to operate the new container port in Aden.51 2.80. Yemen has 14 airports, 6 of which are international. During the FFYP, many airports and facilities have been constructed or rehabilitated induding Aden, Ataq, Taiz, Al-Rayyan and Al-Ghaeidha and Socotra Airports. Airline fleet was also upgraded. Air traffic, however, 50 IMF (2001; 76). 51 SFYP (2001). 37 deckned significantly over the last few years. The number of incoming and departing passengers deckned to 1.1 million passengers in 2000 down from about 1.4 million passengers in 1995. Air-cargo, nonetheless, rose from 9,300 tons to 12,800 tons over the same period. The decline in air traffic led to the withdrawal of some international carrers, thus reducing the number of such carriers to 12 companies out of 38 companies that signed bilateral agreements with Yemen. Yemenia's (the national air carrier) share of the airline passengers reached 66% of total passenger traffic through the Yemeni airports in 2000 and 56% of the air cargo traffic. The decline in air traffic was caused partly by the decline in tourist arrivals into Yemen. 'Box 2:3: TELEc cA NS MARKET INYEMEr. ; 6A &pubhic.asuDe&&jgas,,isiue;d;in:99 creatmgn the WlicTdecomsnuhication Corpoi9ui6on (PT(), -. i3 % gov.=a i- ~owued corporadon~ It . oA ,'....sNb -it is thepoduct of am ger.beiwethe Nord.YemensPubhc Tlecom 'Corporaton (FTC) in1 S-uti YYemen a VemeneTelAb;t,he ti 'iiites-;tlat, pri& to unification, were in chateC bt rdecplmunlcadons. Th. hlinigsy a. Con4qiuSa,tons aiic4iisi4eMIaxlatlorymd stpervi$,v g f e te~cozup1catiMna sc-ct and its oa itnsw' Fi'TC stlic' eacjuve right to pmnde sed4oni.eidc tlec°mumnirani n services*Tbe iht to provide ianernndonal sunr6as ti beidted to TeieYemen oamvonop9ybasis b ti4l 2003. Intemai senicess' bave been provided also by TdeeYeiren, ..b,ut not gdber anS apeemnieanZrh,theforeS PTC.hns'tdcently'establishedts owkirn nt4knet.sqrvke (The Yemen lhm.ert .'way). Mobile (c.l.lula;r) aerices bavbe-en ti ib eralfied in 200' and twdpdvate eoinipaies (Sabafon rid SpwcrcD) rnow prtcWdeM;ShI' mobile *sirvzces.Hundredls of tdecormu'riwucation .wenten'.aiestabhshrd kahioughouthc country 7I ar.e stabe,nssSae.pt..itts dissolho ieg p nd usersf pay cash once.thiir calls,are,oinpletd.r The haanissuy o.' zConi6suniradis issues flasiin fior desescenteri iad the PtC ,pro*desthbe sewvtce. Ia iddition, p'y phones vitre also se; tbqustrtsa e hoqqgbouCtihe county 5bysapnvae ,ompany-(Yemen Payphon Company Ltd' Walcc-Up*calls. coa't,nCa cal and p4agui aalso oBi,t ces l- , ' , *.Y^. ''''. 'd ,72', '. '. g g ±aW*o e ;u'zsc' Jaiutee i 90.Ud *TeaeYemen,' aj. naxc En,,en Cauie.uE eeqs. nd PC, was 'by an 1990. Uealh l t. tees ofi a:10-yearagreemeht bet'weentCable'& Wieless and the Go men,,-te Cable & Wtrcess ao acquire att ,1rst, 6,5%:6- of thWc4iir 'of fTdoYeinme, '-hile FTC acquwred 350%. The shfreb tbt evo o,comip:nles w.ere Lo4nIgCe to 51%o or ,& &Wfrcr6i d; 49% fix PC,n Eo 35 % for Cable ,& ireless and 65°/ for ?TC ia fRltaeg¢t, yt'go ccidd t ,imit intqp3*ipa.tio.o 49% The Bo.rd 'consis1§.of a members, ' rzprnZ_iJg CZabi'e &Wirejss and. tlic 6&t{i.4 resentiig PTCi id the Criian bf theouard is the Minister of Coinmusicadons. Jni "a ir j d . Di.be a0iik d iegolaons for haStwaJlU itirtin 6c6bebr 2002: i: j ,,,,,,.,* *. ; -,S, .7,; ; i , 4*-.;* e H" " '' - - '''i *- ,.TdeYeen',hidbee.n efirstuensted in 1990.to provide interdmaL cils, tzdegram;.and telex smer-s. In 19', &e govedmeTtgat±boozed.TeleYeamen,ti'setupmoble services tlatcini1996 irtaqthdzed it:to.offer intect scKrvces. ,Wh Internet and intekinanonAl services were stil monopoilized b'ieleYnd'en,'the GSIvI mobile-kswvcerc ibeitizcc 1 /od, .4~d .Tw,'vare, companies Sabfon (ta venture 9f Egyjn's Qri sc4zn)'d Spa4'etei '( jpint pgentuLrt betdsjoe Laaaoni s N4;est mahd damd;n's h Zubeir Group) curreadyprovide,GSS seunics. Sabafon subscribers rtscbeo 100,03 G rr2a,. |All rcguatoy ow rexc tdN nt ns fte'4ster of Comunications, who is'also Chainm. of :rrc and ,lT,eleY,ea :Jceccpmmun ciganoo pr.,ccesarepsugily sbjded, av4 pmopqs,jtb) a ,coJnn±±¶,.oqaposed of, membets of "TC -,id 'shPieM4mtrF bn the Cabinelns the,rght to isue decisions on pde6.: Fqr iniqonal communLmcirions, tbe OCgemen'e petweenCacie anid W4lss ad ,the. Govempnent provimfts. torndpusents aimd :twnaianp pce-cqun'len m frc I.. o i .4, U .). \3 < a '' . " '. ' . I 2 , .' * ''''' P'- *:- . 2.81. The communications and postal services sub-sector in Yemen is shared by the public, mixed and private sectors. It witnessed significant expansion during the FFYP in addition to receiving increased government investments well in excess of what was targeted during the FFYP (Box 2.3). Fiber-optic connections between major cities, digital telephone exchange networks, introduction of mobile telephones and the internet services were the major achievements during the FFYP. Telephone capacity increased from 242,499 lines in 1995 to 460,736 in 2000. The installed lines almost doubled from 183,348 lines to 346,709 over the same period and accordingly telephone coverage in Yemen is now 2 telephone lines for every 100 persons. Similarly, the postal services also witnessed significant growth during the FFYP (reaching 42,229 post office boxes in 2000 from 8,120 boxes in 1995). About 59 postal service offices were established in a number of governorates, and the overland mail transport network was enhanced. The postal agency contracts now cover many rural remote areas. The express- 38 mail and courier service companies were also active over the last few years and 7 companies were licensed to operate in Yemen. 2.82. The GoY seeks to complete and update the domestic and international road networks during the SFYP to link all governorates with each other and to link Yemen with its neighboring countries. In addition to the new roads to be constructed (Table 2.14) the plan also aims to maintain about 5,000 km of asphalt roads and 2,500 km of gravel roads, to introduce local and foreign investors in the construction and operation of roads through BOT and BOO mechanisms, to strengthen road safety measures. Secondly, the SFYP aims to reduce the cost of marine transport and freight shipping by uplifting the capacities and capabilities of the seaports and upgrading the efficiency of their operations, and to introduce regular domestic marine transport within Yemeni seaports and with other regional and international seaports. Thirdly, the plan also targets doubling of telephone connections (1 million subscribers) so that the coverage will reach 4 telephone lines for every 100 persons (16.7% growth per annum), restructuring tariffs for services, increasing capacity of mobile phones by adding 400,000 new subscribers and extending the coverage to rural areas, expanding postal network by setting up 168 post office and granting addition postal agencies. Evidence now suggests that open competition in telecom markets, with no exclusivity for new entrants, is the fastest way to improve telecom access. D. Wholesale and Retail Trade 2.83. The trade sub-sector grew by an average of 4.3% in the 1990s and its contribution to GDP growth has been relatively weak. Trade activities declined by 13% in 1994 due to the civil war and picked up in 1995 at 15.5% mainly due to import and excise tax reforms. It recorded an average annul growth rate of 6.0% during 1996-2000, boosted by trade liberalization policies adopted since mid-1990s. The growth rate of wholesale and retail trade increased from 2.2% during 1990-1995 to 5.9% during the FFYP. The number of manpower involved in trade activities increased from 295,000 in 1992 to 407,000 in 2000 (11% of total labor force). 2.84. While the impact of external trade on economic growth and development is well documented from the experience of other countries, domestic trade can also play an important role in job creation and income generation in addition to its impact on other economic sectors and activities (e.g., agriculture and manufacturing). The SFYP aims to increase the share of trade in GDP (by one percentage point of GDP by 2005). 39 CHAPTER 3: DEVELOPING THE PRivATE SECTOR AND IMPROVING GOVERNANCE I. OVERVIEW AND MAJOR FINDINGS 3.1. The most sustainable way to alleviate poverty in Yemen is through the dynamic creation of latge numbers of well-paid jobs in the private sector. Over the last three decades, the experience of most other successful small countries has shown that poverty is best reduced thtough a combination of rising private sector employment, increased labor productivity and higher real wages. Market-based growth, encouraging firms and workers to invest in physical equipment as well as human capital (skills), has been demonstrated as the path to better living standards for all52 There is substantial evidence demonstrating the need for improving total factor productivity in the Yemeni economy as an important source of growth (Chapter 1). One of the primary drivers of productivity improvement and strong growth performance is the capability of firms, which is greatest when operating in a healthy investment climate. Well- functioning private markets are also a powerful way to help the poor catch-up by providing the opportunity to enhance living standards. 3.2. Both the Strategic Vision 2025 and the SFYP recognize the pivotal role of the private sector in achieving a high and sustained rate of economic growth. They call for strengthening of the partnership between ptivate and public sectors while according the private sector the leading role in realizing economic and social development. The SFYP aims to raise the share of the ptivate sector in total GDP, and in non-oil GDP to 53.7% and 72.3% respectively by 2005. This would require a real growth in private sector value-added by an average annual rate of 10%. The plan also recognizes the importance of legislative and institutional reforms, reinforcing competition and improved financial intermediation to ensure efficiency in the use of resources and creation of a conducive environment for ptivate activity. The state's role will be confined to ensuring a stable macroeconornic environment (e.g., low inflation and flexible exchange rate regime) and provision of sovereign functions and some limited economic activities and social services. The plan contains an ambitious privatization program and sees a role for the ptivate sector in the provision of infrastructure."3 3.3. This chapter assesses the current status in the development of the Yemeni private sector, its contribution to economic growth and highlights the major impediments in the current business environment It also points to a set of approaches that can be adopted by Yemen to achieve a more dynamic and job-creating private sector. In addition to available literature and studies, the analysis in this chapter relies mainly on the results of the private sector survey, which was undertaken in November 2001 specifically for the purpose of this study. The size of the sample was 947 private enterprises in 5 governorates in Yemen. 3.4. The main findings of this chapter include the following-. (i) private sector firms in Yemen are languishing in an environment characterized by weak governance and corruption, regulatory arbitrariness, high taxes and inefficient tax administration and unfair business 52 See, for example, World Bank (1995). While quality of human capital is an important ingredient for fitm productivity, it is not covered in details in this Report. 53 The privatization program under the plan seeks to prepare 61 PEs for privatization. These indude 5 PEs in the transport sector, 13 in manufacturing, 15 in agriculture, 8 in trade, 17 in fisheries in addition to the oil refinery and two public banks [See SFYP(2001)]. 40 practices; (ii) the mnajority of firns are small, service oriented workshops operating in captured domestic markets with few opportunities for profitable expansion; (iii) the investment climate is viewed as a high-risk and characterized by lack of a level playing field for foreign and domestic firms; (iv) small firms face relatively minimal difficulties in entering a market, but face significant obstacles to growth in value-added and specialization as a result, of high levels of risk and uncertainty in the general investment climate, unfair competition, administrative obstacles created by the lack of coordination among government departments, costly and uncompetitive infrastructure services; (v) access to electricity, land and legal services is difficult and costly, together with high transactions costs associated with incidences of crime, theft, insufficient internal transport networks and others; and, (vi) larger firms tend to do better because they are able to internalize the risks, in part through conglomeration and building up in-house capacity in critical inputs. Larger firms also tend to benefit from well-entrenched networks of influence, access to external markets and finance. 3.5. The main challenge for Yemen is then how to attain a dynamic and broad-based growth in the private sector, given its three critical and inter-related factors: (i) the weak institutional environment for the private sector in terms of weak governance and few market-promoting institutions; (ii) weak infrastructure; and, (iii) the small size of the mranufacturing sector, and the persistently small size of most Yemeni firms. Policy recommendations in this chapter focus on systemic approaches to issues but also fast track methods for addressing critical bottlenecks (enclaves or industrial zones) while providing important demonstration effects in the short run. Priorities for action explored in this chapter include promoting macroeconomic stability and legal certainty, minimizing administrative regulations, addressing corruption and unfair business practices (e.g., corruption), and improving the quality of infrastructure services. 3.6. Improving the investment climate will require greater attention to improving the functioning of markets and infrastructure networks. There are three required building blocks in this approach. First, there is a need to strengthen commitment to building an economy based on market disciplines and income incentives through prudent macroeconomic management, open trade policies and a competitive exchange rate. Over the medium term, the diversification from oil will require policies to create a competitive industrial sector. Second, priorities for action also include developing formal, market-based institutions including a framework of commercial law and a workable legal system, which supports market-based transactions. Strengthening of public sector capacity in facilitating business entry and growth and tax administration is also an important component of developing effective agencies and institutions to support the development of a market economy. Third, ensuring competitive access to infrastructure such as electricity, land, water and telecommunications as well as fair competition in product markets is crucial for enhancing the profitable expansion of firms. II. CHARACTERISTICS OF THE PRIVATE SECTOR AND THE INVESTMENT CLIMATE A. Size and Structure of the Yemeni Private Sector 3.7. Yemen's private sector is small and its relative importance to GDP continued to decline in the late 1990s. Despite difficulties in obtaining accurate data on its size and contribution to GDP, available estimates show that the share of private sector value-added in total GDP was about 66% of GDP in 1995, but continued to decline during the FFYP. Private sector value- added declined to 58% during 1996-1997, rising to 66% in 1998 (reflecting collapse in oil prices) before starting its decline to 55% in 1999 and further to 44% in 2000. Private sector output as a 41 ratio of non-oil GDP, increased from 77% in 1995 to 80% in 1997 and remained at about 78% during 1998-1999 before declining to 66% in 2000 (rable 3.1). TABLE 3.1: GDP BY PRIVATE/PUBLIC SECTOR, 1995-2005 onE-Oil Sector 86.5 914,343 66.3 1,346,500 74.3 8.0 OlSector 13.5 465,469 33.7 465,500 25.7 0.0 PiaeSector 66.2 605,131 43.9 973,132 53.7 10.0 PUSCSector (mdL Oil) 33.8 1774,681 1 56.1 1838,868 I 46.3 1.6 Troud GDP 100.0 1,379,812 100.0 1,812,000 100.0 5.6 Source: SFYP and CSO. 3.8. Private investment (mainly domestic) also witnessed sharp increase during 1995-1997 and a sharp decline in 1998-1999 before modest recovery in 2000. This can bee seen also from the trend of new investment projects licensed by the GIA during 1992-2000 (Figure 3.1). Private foreign investment projects licensed by the GIA remained at about YR 6 billion during 1995- 1999 and jumped to YR 22 billion in 2000. FIGuRE 3.1: INVESTMENT PROjECTS LiCENSED BY THE GIA BY NATIONALITY, 1992-2000 (YR biDions) 140 | _ Foreigrn|- Yemnis _--TOTAI 100 60 40 20 0 1992 1993 1994 1995 1996 1997 1998 1999 200 Source: GIA (2002). 3.9. The smal size of the contribution of private sector in the economy as well as the rapid fluctuations in its conttibution are partly attributed to the dominance of the oil sector in the economy in the 1990s. The oil sector dominates Yemen's exports, with a relatively smal direct impact on employment and wages. As of 2000, Yemen was the 9bh largest exporter in the wotld, with US$ 3.7 billion a year in exports, with non-oil exports contributing a mere US$ 0.4 billion. Given the more capital-intensive and niche nature of the oil industry, such an industrial structure leaves relatively little scope for private sector job creation, and can contribute to uncertainties about fiscal policy. Although there is no evidence of a "Dutch Disease" problem in Yemen (chapter 2)4, with Yemen's relatively less-developed financial sector, there would also likely be an inefficient investment of resources by private sector beneficiaries of the oil revenue (Box 3.1). 54 The phenomenon is named-after the 1960s crisis in the Dutch manufacturing sector caused by the export boom in natural gas. The oil windfall, by generating an increase in export earnings, increases demand for non- traded goods and, because of higher non-tradable prices and wages, lowers the competitiveness of traded goods 42 f BOX 3UBIC uANI) PAIVATE SE QC R X A BOM Di ihan devetoptng 1ount*es, dependenct on mineral exports bas been associated with bhgz-bust MWg lnin fiscal spendin wnd volatility n the macro environment, a crowding out of the private sector and higher cost structu for pivte sector stow Tlhe fiscal eueam i And gas ptoduction ffW widescale public sector etnployment inceaX es +ah4 hh leevs,06 ~vestenwtin inrastructmre. ollowongan oil price decine, goverwments tend to cancel investment projes rather than 1a of ublc workers, I to 4 eniateof uncertainty foX ptivat sector firms. kiaddtion, as a result of unfavorabe movements in the real exchange rate associated with the Dutch Disas4 noo-qda rodwtive activities tend to disappear and the ptivate sectr is generally reduced to the construction sector and a nuimber- iervice ladustris that ry heaviy on government development ptojects. Both the expansion of public employment and thM ihrnkage in private sectoractividies tend to nae the economy more vulnerable to ol price fluctuans. Studies of resouzcq booms in many countnes have shown that, besides the Dutch Disease problem, poorly developed private sector institatiO da cause advetse consequeces to efient-production and growth in the pesence o£ i booms! Siply put in theabsence of good economic inonration, oil gains that flow to private sector 'aghts can p t myp responses lbo. them. 'This can have serious consequences if the economy does not bave developed financial maontsX ident fancial market does not provide sufflcieut in ams- ts to attact saylns fxom those who gain Aom the windfflJ teddiig to a .6ub-optimal alocation of resources in the economy *ost1 eveinvestment in boom-related sectors, about wh i~ benecaries of Xteresorces have tomre informatio). i .r.*-D o Z(ZOiZ; Geib (98) andBvwh andDuvaHenzandes (2) 3.10. Increasing the size and scope of the non-oil private sector is Yemen's primary challenge in terms of job-creation. Exduding oil, gas and refining, the industrial sector contributed less than 10% of GDP in 2000. Within this, the non-oil manufacturing sector was less than 5% of GDP in 2000 (down from 12.6% of GDP in 1995). The private service sector comprised 44% of GDP in 2000, but almost two-thirds of the sector was concentrated in trade, tourism and transportation, traditionally not sources of high productivity or wages. Given the higher productivity and wages in manufacturing (and thus better living standards that could result from more productive manufacturing jobs), the troubling statistic is that manufacturing employed only 2.5% of Yemen's work force in 2000. TABLE 3.2: INvESTMENT PROJECTS LICENSED BY THE GENERAL INVESTMENT AUTHORITY (GIA) (Nfillions of Yemeni Rials during March 1992 to September 2002) Sector Yemenis Arab Non-Arab Total _Foregnes Industrial 213,799 7,753 8,957 230,509 Agricultural Exc. Fisheries 23,558 580 - 24,139 Fisheries 10,185 510 1,712 12,406 Services exc. Tourism 216,823 16,474 17,145 250,423 Tourism 95,063 1,501 744 97,309 TOTAL 559,428 26,819 28,559 614,806 Source: GIA (2002). 3.11. The size of most private firms in Yemen is small, and remuneration in these small firns is low-and growth both in size and compensation is slow. This suggests the presence of substantial barriers to the growth of smaller firms. The Industrial Survey of 1999 showed that only 288 firms (less than 1% of manufacturing firms) had more than 10 employees. About 95% of firms had three or fewer employees and these numbers were virtually unchanged from 1996. Much of private manufacturing in Yemen is by one- and two-person firms, producing small amounts of the product, distributing/seling directly to customers, with little interaction with intermediaries. The resulting inability to achieve any economies of scale or scope, and the lack of specialization of skills, means that while new entry into the sector is always possible, most existing firms are not growing larger and more efficient. And compensation in these mostly smaller firms was over 50% lower than in larger firms. 43 3.12. Smallness is not a function of age, as the average age of firms is 14.2 years, based on a recent survey of 947 firms in 5 govemorates (Box 3.2). In addition to being small, the majority of firms have concentrated ownership (single proprietorship) and are engaged in simple, low value-added activities: shop keeping, hairdressing, plumbing, together with carpentry shops, car repair and welding workshops. Most firms are structured as limited partnerships and proprietorships with 12% of large companies being public shareholding firms, while 28% are government owned. Level of foreign ownership among firms is very low and most firms are directed towards production for the domestic market (see Annex Tables 11 and 12). BOX 3.20 YLsMEN PRIVATE SECTOR VNVIRONMW4T SVILMV2001 The 6uryvy of 947 firms, rarn_oa.-y selected within each of 5governorates in Yemei, was cared odtiti'Ndember 2001. The table belowsummarizes tbe samnple cha.-acterstics. Ile dissifications for size'follow theYemea lndusidal Survey, VWitisml firms definid as 3 or less totl employees, medium (4-9 total employees) and rge410 or more total employees). Thc casicaoion itself indicat=s the gneral lack of scale in the privat setoc in other countri6s the defniti for lrge finns id usually 100 plis ernployees, Only 30 firms in tie sample have ov& 50 tot* employees, and only 11,rep- over 100 total workers. The median numbber of employees is 2, but in reflectioo of the smaf number of very lagofirms the average is 10.5. Thbe majority of large fitme (6%3) are located in Sana'a, where the aveg rsumber of total workeris 25.3. Lre firml tend to, have marginally more enperience (mean is 15.7 years), although the difierence in av&wae age is not statistically sig nt. The sample averag age of finms is 14.2 years,'and the median age isO years. L4"tion No. Va1ij. Siz. (Total Eip,) No. VYAid LYCQ Ane No. VyawA Sa9Wa, 265 27.98 Small (<3 Employees) S68 665 Est 1991 &%rle 450 51.3i Aden 249 26.29 Mvdium (4-9 Eoyees) 165- 19.39 Est, 1992-1998 264 30.10 Tfiz 200 21.2 Large (> 10 Eployees) 118 13.87 Eu: 1999-200D 163 18.59 Hodeida 106 11.19 bd.aw= 127 1t3.41 NReponse1Caesn Sy 9 IontesnseCn'tS;v' 70 Toal' 947 100.00 Total 947 00.0M) Tobl 947 10.00, Single ptoprietorship is by fax the most common legal organiation fox firs (83 5%6), followed by partnership (10.70%).OqX 400% of respondents are incoxp.-mted. Partnerships and corporations are moelikely asfiram size increases. Themanjority (66%K) of corportions ure located in Sana'a with 12% i Aden, 7%Tgi sad the reainng 15% in Hodeidah. The majority (60.4%) of the firms in the sample operate in the setvices seetor, laigely the tade (9.323% aqd 'other pervices' (223%Y) categories Manufzct-e.7= firms account for 2.6%/ of the srnple, comprised mainly of 'otheu manufictutinf (01.6%), garments (4.4%) end consumet goods (3.6/%). Constructton (22%), electriy gas add wattr (.2%/o), and agricuttuie' (1.2%1,o) are the largest sub-sctoxs defined within the 'other sectoe category. -,e - 'finns In he sample ard almost entLrely rivate owned. Cuir 10t Etrs, or 1.4% of respondents teported any gove att omenersbip. TABLE 3.3: DISTRIBUTION OF RELOCATED FIRMS IN YEMEN Location of 37-ZZ1' LoEeaeon Now _______.________ -________. ____ Sana's Aden Tai 4odeidah Hadraoun TOtaW Dhamar, Ibb, Taiz, Hodeida , Mahweet 19 12 6 7 3 47 Sana'a, Sadda, Manb, Al-Jouf, Hajjah, Amran tl 7 7 9 2 36 Hadramout, Al-Mahra, Shabwah 1 2 1 4 Aden, Lahej, Al-Beida, Al-Dhaleh, Abyan 16 4 10 6 1 37 Total 47 25 23 22 7 124 Source: Wodd Bank, pnvate sector survey, Novemrber 2001. 3.13. Small and medium sized enterprises appear to be quite flexible and mobile geographically. This could be attributed to their response to changes in market opportunities or to the pressures that they face. In the later case, this mobility reduces their incentive to invest in workers training, fixed capital and market/customer development Roughly 14% of the sample of firms started operations in another governorate, with the majority of mobile firms locating in Sana'a, Aden and Taiz. A number of firms also have the capacity to adjust fixed assets, contracts with workers, locations and product lines as well as move back and forth across the boundaries of formality (fable 3.3). Firms now located in Hadramout are less likely to have started in a different govemnorate, whereas firms now located in Hodeidah are more likely to have started in 44 a different governorate.55 Furthermore, small firms in industry, on average, have less than one permanentpaid employee, with family members making up the bulk of the work effort. 3.14. The structure of private sector activity in Yemen suggests the presence of significant barriers to growth in value added and specialization of firms. The large number of very smaUll formal enterprises and very large firms Oow numbers of medium sized companies) combined with a more significant tendency for large firms to report barriers to growth suggest that while entry into the formnal sector may be relatively easy, profitable expansion may be limited by high levels of risk and uncertainty, administrative hurdles, infrastructure inadequacies, excessive competition and weak firm capacity. This is further underscored by the behavior of existing large firms, which are characterized by significant internalization of activities and services, namely electricity generation, transport, distribution and training as in the case of the largest firms. In other words, profitable market opportunities and services complementary with expanding production are either non-existent (missing) for SMEs or access is highly restricted and/or prohibitively costly. This effectively raises costs of production, and in effect the minimum efficient size for profitable firms in the private sector. High transaction costs related to insufficient mechanisms for contract enforcement, resolution of commercial disputes creates an environment of general legal uncertainty furthering limiting growth potential (Box 3.3). Box 3.3: LARGE FInRS IN l ErMEN INTERNAL1Z E RrSE: KCONGLONERATION) The Hayel Saned A'nam Croup in Yemen is one of the amost powberiul tradiag conglimeratn in S'emen witb sctivities snging frixm cr:apon co mqnufactring. TLe company it a pavatc ImLted ibibcy located ar Taiz vith roughly IS,000 workers and activitii' in dorces-ic and foreigo r muer"tT pumircaseT, anro 1OOd such ar oreameq bat.r, construor, ammnals, as wclH'as cosiVmer goods, iadustriaLl pr`ductiu-a 3Md bianl ,g sendict.s. Typrc.-1 of 13xg& fir:rs * Yemen, tht Saued'Group densonstes w,y efr ctrq e in-houwe nrgunIzation of sl.rmnspoYr? and di'nburinn oLds as welb ns L- -house tmining of woder 'the benkcfis ef cngioomeE.a inctide reduced instabiliy and unc.rtainy, nnrie1r the ability for finnm to dlversifyj pro6t (iovr, achieve cificicncy gaisU1 from synrgy u s brunc!b g lto t, :d producrcs winch may be distibuted or maeketed togeter wtd pew enry provided it is azluoved by in%dn:tioao l c rnsiai or a tmo hold acq htis. Fowevcrr 4Ieze frit di.:dojil CotmtkiS snggizts, that cogloatio'o ncdatues amorg Sfrs m3y hrve a4v es: J11 be; Era joE if you buy firom me. The effect of uis firm bfiavo: art-y also be to Lessea pric competitioc as non-paice factors b.coameco-ra"libp Cross mub&.cisztu ooay s!so ddsdvw Lge rivu.nio and diston cnmtal tiows.' B. Private Sector Environment and Governance 3.15. Governance problems are perhaps the most evident and important barrier to the development of the private sector, and an impediment to the growth of the size of firms. In general, Yemeni firms face a lack of profitable opportunities, and weak capacity for expansion in product markets. Yet, larger and older firms tend to be more successful, owning their own land and engaging in export activities. One reason for that appears to be the ability of these firms to use their own extensive informal networks. By bypassing fornal marketing institutions and creating integrated firm structures, they can bypass the governance and institutional failures in Yemen's business environment. However, these opportunities are restricted to a few groups in the country, and thus the poor functioning of formal market-supporting institutions is a barrier to the successful growth of many new entrants into Yemeni business."6 55 This was evident by multivariate logistic regression analysis [see Banerje and McLeish (2002)]. 56 "Market-supporting institutions" are rules, enforcement mechanisms and organizations promoting market transactions by transmitting information, enforcing contracts and managing the degree of competition. Formal institutions that perform these functions range from judicial systems and competition laws, to credit-rating agencies and land titles. See World Bank (2002). 45 3.16. As shown in a survey of Yemeni firms in late 2001, poor governance manifests itself in a number of ways in Yemen: (i) corruption and inefficiency in the interaction of public officials and private businesses; (ii) ineffective or absent market-promoting institutions, such as those enforcing contracts (courts, tribunals etc.) or regulating information flows (e.g., about creditworthiness), and (iii) poor performance of the public sector in terms of delivering essential services (]rable 3.4). But this suggests that there is considerable scope to remove the constraints to growth for new small and medium sized firms, by creating formal institutional alternatives to the infotmal arrangements possessed by the few successful firms. The keys to opening up small and medium firm growth in Yemen seems to lie in developing ways to allow smaller and newer firms access to formal alternatives to the informal and exdusionary mechanisms used by the older and larger firms. Figure 3.2: Aggregate Governance Indicators: Yemen Percentile Rankdngs _ U~~~~~~~56 I I Control of Corruption - I I _ I ~~~~~~~~~~I I I I I ~~~~~~~~~~~~~~~~~~~~~~~I I Rule of law _-e- *~ I., I I Regulatory Ptanmework - C_0 Government Enffectuveses 23_9 * 1 I Political Stability/Lack of 8 7 Violence _ I t | ~~~~~~~~~~~~~~~~~~~~~~~ I 38.4 Voice and Accountabiiity - I - I I I o 25 so 75 100 Note: Bars represent mean estimates for the percentile rank on each of the governance indicators. The thin vertical Unes reprent standad erons Percentage of Countries With Lower Score around these estes Source: "Kaufmann, Kraay and Zoido-Lobaton (1999). TABLE 3.4: EFFICIENcY OF BuREAUCRATIC TRANSACTIONS IN YEMEN (Number of days dday to get/deal with:) 0 tl 3.54 8 1.97 tO Z50 so 45.87 45 23.56 26 23.21 1-5days 87 27.97 t58 38.92 170 4Z50 7 6.42 77 40.31 15 13-39 6-10days 49 15.76 130 3Z02 77 19.25 7 6.42 43 22Z51 12 10.71 11-20days 28 9.00 SO 1232 38 9.50 12 11.01 14 7.33 7 6.25 21-50days 69 22.19 36 8.87 45 11.25 7 6.42 7 3.66 17 15.18 51-tOOdays 39 1Z54 15 3.69 35 8.75 18 16.51 3 1.57 20 17.86 >l00days 28 9.00 9 Z22 25 6.25 8 7.34 2 1.05 15 13.39 Total 311 100 406 100 400 100 109 100 191 100 112 100 Mean 30.28 12.62 21.52 26.23 6.30 30.50 Median is 7 7 2 3 10 Sources: World Bank Private Sector Survey, November 2001. 46 3.17. Governance has been shown, in a wide variety of studies, to significantly influence development outcomes. Corruption, in particular, has a destructive effect on investment and economic growth rates.5' By contrast, greater enforcement of property rights, stronger rule of law and efficient government service delivery promotes investment and economic growth.58 These links between governance measures and development hold not only for traditional economic indicators, but are also well recognized for other development outcomes, induding infant mortality, literacy and equality Figure 33: Governance Indicators: of income growth.59 In Yemen, Yemen, OECD and MENA Avetage governance performance is weak, and that would affect investment and growth. Figure 3.3 shows how, in a major international study, Yemen ranked compared with 188 countries on 6 dimensions of governance.6" In all but one of the categories, Yemen ranks in the bottom 25% of countries. On control of corruption, Yemen ranks only in the 15h percentile, and its rankings for rule of VA c C R P WRAA d Ef.6W ft law and political stability/lack of VW violence indicators are significantly S Z | .Aw UAw Y.a . | lower. Even relative to the 19 countries in the Middle East and North Africa region, Yemen's performance on governance indicators is poor.61 In political stability and lack of violence, only Iraq and Algeria rate lower than Yemen. Out of 19 countries, Yemen ranks 15dh in government effectiveness, 14,h in regulatory framework, and 16&' in both rule of law and corruption. Only in voice and accountability does Yemen perform relatively better, ranking 6dh out of the 19 MENA countries. 3.18. Within the Yemeni private sector as well, governance concerns are identified as extremely significant. In the recent private sector survey in Yemen, 82% of firms identified corruption as a major obstacle to the profitable expansion of Yemeni firms. And more than half identified constraints in the administrative, regulatory and legal frameworks in which firms operate, and current gaps in the physical infrastructure (electricity) upon which firms depend for production and distribution of goods and services (Figure 3.4 and Annex Table 13). 3.19. Overall, the greatest concerns in the Yemeni business sector seemed to be in two areas: institutional/administrative problems (corruption, taxes, smuggling/dumping, dispute settlement); and volatility/uncertainty (about macro and other policies, and about crime and disorder). To a slightly lesser extent infrastructure and input issues (electricity, access to land) are 57 For example: Tanzi and Davoodi (1997), Johnson, et. at (1999), Kaufinann et at (1999) and Kaufnann, ct aZ (1999 b). 58 Kaufmann, Kraay and Zoido-Lobaton (1999). 59 For example, Kaufmann, of al (1999). 60 Kaufmann, ct. al. (1999). Aggregate governance indicators are based upon over 300 individual indicators from two types of sources: expert polls, and cross country surveys of residents. The authors apply a latent variable model to estimate a common element in each of the 6 categories of governance. 61 Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, UAE, West Bank Gaza and Yemen. 47 also perceived to be problems. Relatively few firms, on the other hand, identified telecommunication problems or labor regulations as moderate to severe barriers to expansion.62 Figure 3.4: Obstacles to Business anid Profitable E:xpansion ('/o of firms indicating moderate to very severe constraints: valid responses) L M ,oan n...biUUy =6. 2. Co-qpd.n 82.1 4. El-.i poUcy 73ny 6. 5.-..g4 -d dopig 67.3 7. Cij.h. dft- od di-d - 67.1 S. E-ici-y s6k5 9. T- .ni1udonL, 1O. L.gs .yt19 & dl.psl.- -1-o 57.9 IL. A-o... o Lood 4a. U2. Cos- nf 45.5 53. Am.-. n flosodeg 33.9 14. r ..o d 0.dc cIodo 33.7 15. Rnd. od P.-e. 29.5 I& Skl. & 0 c...dm f-do. or0 24.4 17. toi- Ucicnlng od 0c .1,.d n 24.2 La. Teom nonidn _ 7.2 19. L6.gdd 35.6 3.20. Entry costs: According to the survey results, the median time to establish a new business is 3 months (mean 4.8 months). Each connection to infrastructure services and contact with licensing authorities takes a median of 1 month (mean between 1.6 and 2.2 months). Electricity connection emerges as a particularly large barrier in terms of time and costs. Firms report significant unofficial payments to establish a business. Median unofficial payments are between 12% and 60% of median official payments and are highest for licensing and permits (see Annex Table 15).63 TABLE 3.5: RANK 1 OBSTACLE BY FIRM SIZE _ ercenlt of Fims rankdin Obstade as No. 1). Rank Obstacle % Rank Obstacle % JRank Obstacle % I Electricity 19.3 1 Tax rates 17.4 1 SmugglinaJdumping 23.8 2 Tax rate 18.4 2 Electricity 15.5 2 Macroeconomic 129 ins7baifity 3 Macroeconomic instability 15.0 3 Macroeconomic instabiity 11.6 3 Corruption 11.9 4 Smuging/du&ping 9.6 4 Smuggling/dumping 10.3 4 Tax rates 8.9 5 Access to land 9.0 5 Cotrupion 7.1 5 Electricity 8.9 Source: Private Sector Survey (November 2001). 3.21. Delays and Informal Payments for Ongoing Operations: Bureaucratic interactions for ongoing operations also involve significant delays and informal payments (see Annex Table 16). Delays vary significantly by Governorate,.although the ranking of regions varies depending upon the question. Aden and Hadramout report greater delays in purchasing land and getting construction permits but fewer delays with tax collectors. For the case of government contracts, services and permits, delays also vary by firm size (with larger firtms teport greater delays). Of those who responded on informal payments for bureaucratic interaction, a significant majority 62 Similar trends emerge when considering the firms' perception of the ixportance of the problem. When asked to identify the most critical obstacle, most firms chose electricity and tax rates, followed by macroeconomic instability, smuggling and dumping, corruption and access to land. 63 For details, see Banerji and McLeish (2002). Furthermore, non-parametric tests indicate that these unofficial payments are statistically significant. 48 indicated the need to take informal payments for these interactions (Figure 3.5). The location of the firm matters; firms in Hodeidah are significantly more likely to make infornal payments for permits, tax and customs, whereas firms in Aden and Taiz are less likely to make informal paymnents for customs. Larger and older firms report a higher incidence of making informal payments than smaller firms. However, evidence suggests that corruption does not have an efficiency payoff. Firms making informal payment; do not experience fewer delays in bureaucratic transactions than firms who do not make such payments.' Therefore, the evidence that older and larger firms are more likely to make unofficial payments may be less a result of firm experience or ability in expediting services and more about prominent firms attractng unwanted attention from public officials. 3.22. Quality of Infrastructure Firms report that the average number of days of power disruption is as high as 75 (the median is 30 days). By comparison, in Morocco the average incidence of power disruption is 16 times per year with a median of 12. For water, on average Yemeni firms experience 82 days of inadequate supply (with a median of 6 days), whereas the frequency of telephone disruption is considerably lower, with an average of 4 days. Larger firms tend to report greater difficulties with nearly every aspect of the business environment with the exception of policy uncertainty. Larger firms view themselves as having more influence over policy formulation. Access to and cost of financing does not appear to be a significant barrier to firm expansion, similar to other MENA countries, but is a more important issue for new firms, in conjunction with access to legal and dispute settlement.65 Figure 3.5: Incidence of IrreguLlar Payments %/6 of Firns Indicating Infornal Payments (Valid Responses) 86.4 85.6 82.2_______________________ 68.5 Public Sertviea Licensce/ T~ Authaities GovtContrcte Cuwteom 0=73) Tad/ (M=174) Permits (=213) (N=208) (14=32) Conu t .Perrit (N=40) 3.23. Access to Land! Yemeni entrepreneurs and investors are inhibited in terms -of access to commercially viable and teasonably priced land due to shortages cteated by goveminment largesse and real estate speculation. According to the recent surv-ey, the majotity of firms rent land (68%), and inadequate access to land appears to be a significant obstacle to firm expansion in Aden, Taiz and Hadramout. The majotity of firms which own land are large firmns, although land ownership is not insurance against multiple claims: nearly 4% of the sample firms reported problems with multiple claitms on their land. Land disputes are also c ostly to revolve, on average 64 Banerj and McLeish (2002) provide such evidence using both t-test and non-parametric tests. 65 About 53% of all firms surveyed do not have a bank account. The provision of c'redit by banks is, therefore, very low. About 122% of valid responses (those who have bankEs account) received credit firom banks. Resources from within the firms are the most common source of both short-term and inve~stment finance. 49 firms spend more than one year resolving claims in court and the majority of land disputes are handled through formal channels as opposed to mediation.' 3.24. Security and Violence: About 28% of firms reported at least one violent incidence in their neighborhood during the previous three months: 9.4% of respondents reported one incident, 4.2% reported two incidents and 14.2% reported that violent incidents took place more than twice. The incidence of reported violence varies significantly cross regions Fitms in Taiz and Sana'a are significantly more likely to record violence in their neighborhood. Manufacturing and foreign owned firms are more likely also to report violent incidence in the neighborhood.67 Lack of security is a contributing factor in the segmentation of markets, the smallness of business and the dispersion of business across regions. 3.25. Regional Differences: However, within regions, there are some important differences in terms of where obstades are more severe. The severity of all major obstades appears to be fairly constant across Sana'a, Aden, Taiz, Hodeidah, Hadramout, but overall concentration of obstacles appears to be higher in Sana'a and Hodeidah.0 But access to electricity is a relatively more severe obstade in Aden, Hodeidah, and Taiz; legal and dispute settlement is more of a problem in Sana'a, Taiz, Hodeidah; while access to land and finance are more problematic in Aden, Hadramout and Sana'a, respectively. 3.25. Deeper analysis of the data indicates that governance issues may be one of the reasons Yemeni firms do not grow. In general, large firms (with 10 or more employees) tend to report greater barriers to operation and growth than medium or small finns, especially in the areas of taxes. Ongoing operations of private sector firms are also affected by governance problems, increasing their costs and decreasing efficiency. One dear example of this is the need for informal payments during interactions with the bureaucracy. Figure 3.6: Irnluelnce Oaver Policy Formulation irn Yemen (No624) Kay PS__ Pter (N- 622) . r S (NBi.... 3374 SOB. 30.8 Od... A-i- A.oci.do. 1 U L.bor U48 o.* 19.4 (N- 494) TAO Fl.. 14.9 (N- 350) 3.26. Yemeni firms' perception of policy uncertainty may be affected by the fact that they have relatively little voice in policy formulation. Well over 60% of responding firms identified social and tribal influences as a major influence on policy formulation, more than half identified 66 Overall, of all the firms that have invested outside Yemen, half of them did so because of more attractive foreign opportunities, while one-quarters of those firms said that they invested aboard due to obstacles in the domestic market. 67 For details, see Banerji and McLeish (2002). 6S Taiz and Hodeidah also tend to experience more frequent disruptions in electricity and water services. 50 "key private players" (Figure 3.6). Less than 15% of respondents identified their own firm as having a voice in the policy formulation process, with most of these being the larger firms (more than 100 employees). III. TOWARDS A REFORM AGENDA FOR PRIVATE SECTOR DEVELOPMENT 3.27. In Yemen, the largest sectors-food processing, oil-related, and construction related industries-exist because they either meet basic domestic needs or because they reflect other activities in the economy. So there is not much scope for picking winners and focusing on developing them. The best way to foster growth in the private sector is to create an environment where Yemeni (and foreign) investors can select their own areas of entry and then to allow their businesses to grow. The development of the private sector in Yemen is best achieved by reducing and eliminating the existing barriers to the growth of firms. While such a broad institutional development agenda is probably not going to be achieved within a very short time period, a focus on addressing the problems can yield results over the medium term. This is, for example, evidenced by the quick development of the successful countries in Central Europe, such as Slovenia, Hungary and Poland, which put a strong and credible emphasis on restoring and improving market institutions and governance during the 1990s. A slightly different approach, offering incentives and lowering regulatory barriers to all exporters, was successful in helping Mauritius grow rapidly (Box 3.4). W(iX 3.4: M&uurwUS: ENCLAvE M&NUPACURING AS AWAY OF DEVBLOPING AMANvFACr1JNG sroR Otte, approach towards diversi4ing away from oil has been to promote open trade policies on the ground by developing a compeitive, expott-oriented enclave manufasturing sector. Since 1970, Mautinus has built a large and competitive dpthing. iustry vithin its Export Procesing Zone (`PZ). The Mauntius EPZ regime diffe-s from other LDC Free Trade Zonesin that it is not a 'one' physi6ally,separated from the rest of the economy, but a system of incentives granted to &nis exporting 100%/e of their out (with certain minor exceptions). Fims anyuere on the island enjoy equal footing export policies incltiding iree tade status based on the duty (and tadirect tax) cxemption system. Integrted strategies guararteed equal footing export poicies and infrastructure for all export activities. These were implemented through the Mauritius Export Development and Investment Authority, the Development Bank of Mauritius, the Export Credit Guarantee Scheme, and the Export Credit Insurance Scheme. The govrnmet also encouraged private sector initiatives in FrZ development and management through measures such as the Industrial Building Investmeat Scheme. Attempts were made to maximize the gains from foreign collaboration and upgrade the industrial structure in a diversifed and more sldll-intensive direction. For example, the Export Services Zone Schemne of 1981 and a recent offshore banking center were designed to diversify FIZ export industries. Tbe new Industial Traiing Stmategy aims at speeding up industral sll 3.28. In Yemen, many of the reforms needed have already begun. Key among these are the reform of the civil service and judicial reform initiatives. Over the medium term, the agenda for the private sector has to include a broad array of actions that address the four major areas of problems identified by Yemeni firms: policy uncertainty, the lack of governance/market institutions, poor public service provision, and inadequate financial intermediation. A. Reducing Policy Uncertainty 3.29. There are three levels of uncertainty for firms, especially small and medium firms, in Yemen: uncertainty about the macro-fiscal environment, uncertainty about the course and sequence of structural policies, and uncertainty due to the lack of market information. Separate sets of practices will need to be adopted to address each of these. 3.30. Macroeconomic policies influence private sector activity through the level and prices of firms' outputs, the prices of inputs, the interest firms pay on debt, wages paid and exchange 51 rates under which firms operate. When prices are stable and external payments are sustainable, the private sector can more easily plan future output, levels and investment In the case of Yemen, the perception of private sector firms about macroeconomic instability may be at odds with reality. AU macroeconomic indicators are more stable now than 5 years ago although inflation remains quite volatile. The held perception may be due to lack of transparency Cm terms of budget and policies), lack of medium-term orientation in policies and unreliable statistics. Moreover, a major source of macro-fiscal uncertainty appears to be volatility in government revenues due to commodity price fluctuations and patterns of fiscal spending. Private sector agents in turn are wary of the government's ability to finance its deficit, and tend to defer longer term capital investment decisions or engage in short term, lower risk activities at the expense of more productive investments. What is needed at the macroeconomic level is to continue Yemen's concentrated and sustained effort toward prudent macroeconomic management, promoting open trade policies and a competitive exchange rate. This would be especially important in times of lower oil prices. Countries such as Indonesia and Chile were able to curb the deleterious effects of oil rent by retaining relatively open trade policies and market incentives for most investmaent allocation.69 3.31. Structural policy uncertainty can be reduced, in turn, by a more transparent, indusive and open policymaking process as a means to reduce the uncertainties faced by the private sector in Yemen. In Singapore, for example, private citizens serve as directors on government statutory boards and as members of ad hoc advisory committees. They review policies and programs, making recommendations for official consideration. In addition, the government regularly invites chambers of commerce, trade associations and professional societies to submit their views on specific issues. Transparency as to the government's plans also helps. In Yemen, one initiative that points the way is the steering committee, formed in early 1999, that is bringing private firms and government officials together to review legal obstacles to private investment, and to recommend changes to the regulatory structure and administrative procedures for trade and investment. Again, the prompt and wide publication and publicizing of the government's reform agenda, as for example embodied in the PRSP, can also greatly help the process. 3.32. Finally, because of Yemen's less-developed market institutions, firms face specific uncertainties due to lack of information. These indude the inability to identify markets; insecurity and unenforceability of contracts; and the lack of specialized business skills, such as accounting and bookkeeping, marketing, exporting. Such factors increase the uncertainty faced by the fitms about its future earnings and prospects, and once again induce them to indulge in low-risk, short-term activities.70 Reducing such firm-specific uncertainties would require a range of institution-building, and the need to make available planning and business resources to the firms. Institutionalizing firm linkages in the form of subcontracting and franchising can provide additional mechanisms for knowledge and technology transfer, as well as for improving product quality and introducing new products to the local market The experience of the East Asian countries suggests that subcontracting from large firms to first and second tier SMEs provided opportunities for information sharing, technology transfer and coordination of management and marketing skills in a mentoring environment 69 Auty (2002). 70 Foreign firms tend to locate in particular countries on the basis of factors such as proximity to input and output markets, quality of infrastructure, low labor costs, fiscal incentives and a quaLified workforce. In the case of Yemen, recent surveys of foreign investors indicate that location for example, is an important asset for the Yemeni economy but enthusiasm to invest is tempered by a lack of certainty with regard to property rights, and commercial dispute settlement procedures (see FIAS (1997)]. 52 B. Improving Governance and Market Institutions 3.33. In Yemen, private sector development can be greatly helped by improved governance (especially in bureaucratic-private sector interactions) as well as the development of formal, market-based institutions. Among the many areas in which action is needed, three are paramount enhanced accountability of the government and the civil service, better legal and contract-enforcement systems, and reduced regulatory barriers. 3.34. Strengthening the accountability of the public sector in its role in regulating private activity is one of the most important steps in allowing Yemeni firns, especially those that are small, to grow. In the 2001 survey of private firms, more than 80% of all firms responded that corruption was a significant problem, with firms in Sana'a and Hodeidah being the most concerned about the issue (Figure 3.7). As reported by the firms, informal payments are almost essential to obtain public services, licenses and permits, and when dealing with the tax authorities. To a lesser extent, informal payments were reported as needed for customs and land/construction permits. Figure 3.7: Percentage of Firms Identifying Figure 3.8: Percentage of Firms Identifying Cotruption as a Moderate to Ssevere Obstacle Tax Administration as a Moderate to Severe Obstacle 100 8 8 76 8 100 80 * 80 68 68 62 59 61 60 - 60- 48 40 ! ,!,1 40 - 1 ,,,1 20 1!~~~~~~~~~2 20. ~ ~ ~ ~ ~ ~ ~ ~~2 ~ 04 ?lA 4> 3.35. Again, for example, the Yemeni tax administration has been singled out by investors and firms as creating a substantial obstacle to growth. In the survey, over three out of five firms identified tax administration as a major barrier to growth (Figure 3.8). There are dear regional differences, with, once again, the extent of the problem being highest in Sana'a and Hodeidah, and the lowest in Hadramout. In addition, foreign investors have traditionally described the tax system as highly complicated and corrupt, demonstrated by anecdotal evidence that different tax officers frequently visit a firm to collect the same tax (sometimes even on the same day), leaving investors with little choice but to pay the tax again or to bribe the tax collector. Delay is another form of soliciting bribes, as tax collectors can delay in examining the accounting files of the firm for up to 2 years if investors refuse to offer bribes. 3.36. Addressing these issues would require extensive civil service reform and administrative accountability measures, some of which have already been initiated by the government. A drastic reduction in the number of civil servants overseeing the private sector, and clarification of their roles and responsibilities, is a dear need. At the same time, there is a need for increased administrative accountability mechanisms, induding procurement reform and better auditing and oversight Finally, as the total wage bill decreases due to a decreasing number of civil servants, civil service pay has to be increased to lower the incentives to be corrupt, while better monitoring and punishment of offenders also serves the same purpose. 53 3.37. Recent studies from other developed and developing countries Figure 3.9: Percentage of Firms Identifying suggest that new, small private firms are Legal System and Dispute Resolution as a suggest ~~~~~~~~~~~~Moderate to Severe Obstacle more dependent on the functioning of lo0 76 formal legal systems in commercial 80 65 litigation. Yet, a surprisingly large number 60 48 54 51 58 of firms in Yemen rely on informal 40 mediation to resolve payment disputes, 20 - which while more expedient, is not ° necessarily more efficient or predictable than formal court appeals. In the survey, , 58% of them cite it as a major obstacle to c business (Figure 3.9). Thus, better formal legal and contract-enforcement systems are needed to reduce the high cost and uncertainty associated with informal dispute resolution in Yemen. 3.38. Problems are particularly acute in land disputes (Annex Table 14). Land disputes are also costly to resolve, on average firms can spend more than one year resolving claims in court and the majority of land disputes are handled through formal channels as opposed to mediation. The existing system of land registration and proof of ownership is highly ineffective and most of the litigation cases in Yemen are related to land ownership disputes. Land registration is governed by Law No. 12 of 1976 which is considered to be ambiguous and ineffective, contributing to the existing system in which registration of deeds by a registered public officer and notification to the registry testifies to land ownership. 3.39. There are two areas of problems in terms of dispute resolution in Yemen-first, with the judicial administrative and institutional process itself, and second, with outmoded and insufficient laws. In particular, the main problems currently facing the Yemeni judiciary include: (i) poor legal and administrative performance of the judiciary and adniinisttative personnel due to lack of motivation and/or lack of requisite education and skills; (ii) absence of proper administrative systems (file keeping, registration of contracts, regulation of fees, etc.); (iii) dilapidated court buildings; and, above all (iv) a lack of probity at all levels. 3.40. In 1997, the government implemented a strategy for legal and judicial reform that called for an increase in judicial independence, an emphasis on probity and integrity of the judicial body, an enhanced role for judicial oversight bodies such as the Supreme Judiciary Council and the Judicial Inspection Board, improved court facilities, improved court administration, and a training program for judges. The success of these efforts would determine to a large extent whether the formal system dispute resolution would see improved use. In the mean time, Yemen could experiment with alternative dispute resolution mechanisms, which have been successful in many developing countries (Box 3.5). 3.41. In terms of legislation, new laws, particularly modemn comtnercial codes, will be required as part of the development of a workable legal system and to support a market based economy. Specific areas include the financial sector (secured transactions and real and personal property registers), insolvency, bankruptcy and others. The Government is already tacking several under- served areas, such as privatization and banking regulations. Current reforms to address the shortcomings in the Land law indude formation of an inter-ministerial committee, which is 54 working on streamlining procedures for proving dear title and registration for all properties to be pnvatized. Box 35;t FUAs' ixcK iNsTmrrtOAL ME aANuS FoR LEiGAL RE1ORm (TANzANU AND BANCIA=H) in Tanzani a wcommercial court wvas estabshed with support from government, private business and intt 'doaos as a spiaTized division of the Hih Court to ascIerate the p'roxess of building a legal and judicial.systemin suppot makrrefcnns Bys iznpoisin greater selectivity ard simplillcd procedure.s, the court has effectivdly cut thc avrre tit~ t9 digposiuon from 22-to 3 month Tbe Commercial Court has jurisdiction over cases involving amrounts grpattr thaI6Ot l12,500 and has a htgher fee sruce tbiic n the general dvision of the Iligh Ccrt This discourages frivolous litigation and prnvents appeals, a conumon source of addtional cost and'delay. in iingbdesh,-the adwrpur:4.lAid Assocation (IAA) i gasgladef4i NGO has established a m4ediation .ustre in ruril areaq to deliver diLpute serdemnent services for women. The local MLA.A meet twice a month to hear e ,isp, pnrvide medi.tioa ouLside the Court zvstem, free of charge. Nearly 15% of disput"s deal with popert and land dispuieskiad pIniiffs ptf4er the mediawio sytems since it is locally administered, transparent to th: commurty and quck to reader ie m atiehistotypiWrc y iade wihin,45 days of the fiing. Sowe: Wodd Bark (209) 3.42. Private sector firms tend to face burdensome regulatory and administrative hurdles procedures-in setting up businesses, and in commencing/expanding business operations. A number of entrepreneurs cite the licensing process and procedures as a major hindrance to firm establishment and growth, and may abandon the process halfway or simply neglect to have their license renewed on any annual basis. Furthermore, this licensing procedure does not prevent the need for dealing with individual government departments and ministries with regard to infrastructure access. Business facilitating entities such as the GIA effectively act as a port of entry for investors, but are not actively engaged as a one stop shop for facilitating the investment process and can provide no guarantees that firms will have accelerated or friendly dealings with other government agencies responsible for the nature of their activities. 3.43. Thus, improved coordination among government agencies, perhaps aided by the elimination of investment licensing, is an imnportant step towards the development of private sector activity. Another way to achieve this is to create a 'one stop' or 'first stop' shop for potential entrepreneurs and business owners. The GIA could effectively serve as the first stop shop for potential and current business owners, being the single portal for information on licensing and permits required to start and expand a business in Yemen. Formal complaint and appeals procedures attached to this regulatory administration would also provide a mechanism for the transmission of vital information and feedback about the impact of government policies. C. Improving the Quality of Public Services 3.44. Yemeni firms are also hampered by Figure 3.10: Percentage of Firms Identifying relatively poor access to infrastructure, Electricity Supply as a Moderate to Severe including electricity and transportation. Obstacle Promoting greater competition and efficiency 100 76 78 in these areas would, therefore, facilitate 80 65 63 private sector growth. Yemen's electricity 60 38 generating capacity is inadequate for the 40 country's needs-as is evident from the 20 number of firms citing it as a significant _ problem (Figure 3.10). In addition to the cities surveyed, there are large areas of the country such as Mukalla, which are not 55 connected to the national grid serving Aden, Sana'a and the northern cities. Service is characterized by fluctuating voltage supplies and constant blackouts, with adverse consequences for production and investment. The majority of medium and large firms have back-up generators, which adds significantly to production costs. Larger firms frequently have to assume the cost of installing electrical lines to their project sites, a process that can take up to 12 months. Clearly, there is a need to accelerate the ongoing efforts by the government to introduce greater competition for the electricity market. 3.45. The road transport system in Yemen is limited (Chapter 2), critically affecting the internal distribution of goods and inhibiting the development of markets for local products. Incomplete connections to ports and airports affect the ability of industries to export, and itnpede the movement of people. In addition, the continued division of most of the country along tribal lines imposes additional costs on internal trade. 3.46. The trucking sector, in particular, has been controlled by a private cartel, which keeps transport costs high through price fixing and barriers to entry as well as by preventing private firms and traders from providing their own transport. A draft Surface Transportation Law approved by the cabinet in 1999 calls for establishment of the General Land Transport Authority to be put in charge of granting trucking licenses and posting suggested tariffs. In addition, by-laws, which superficially regulate the trucling sector, have been issued allowing any trucker to obtain a license for operation valid anywhere in Yemen. D. Improving Financial Intermediation 3.47. The financial system in Figure 3.11: Sources of Finance Yemen is weaker than in most other %des MENA countries. Its structural r6 1.2 weaknesses and inefficiencies are reflected in low intermediation ooa ratios, high interest rate spreads, and a9F^nO.O Resour es the prevalence of cash as the . principal medium of exchange. Wide LI I spreads between lending and deposit + _ L. .. rates, and- low profitability among banks, reflect a lack of interest of banks to grant credit or mobilize (N) (Ns=832 deposits. Large non-performing portfolios worsen the situation. The 2001 private sector survey found that a large number of firms (481 or 53% of the total respondents) did not have a bank account Essentially, the Yemeni banking sector is characterized by high concentration of credit to a small number of companies and groups, insider lending, and prevalent use of overdraft facilities. The survey found considerable variation among the firms: firms in Sana'a and Hodeidah, large firms, and older firms were all significantly more likely to have a bank account In the absence of formal credit, private and informal sources of credit are the only recourse for most Yerneni firms. Resources from within the firm are the most common source of both short term and investment finance (Figure 3.11), followed by suppliers, the family and friends and lastly commercial banks. 56 3.48. One reason why banks have been reluctant to lend to smaller firms is the absence of information about their credit history and business prospects. Recent financial sector reforms have helped change the incentives for the banks, by removing Governent controls on lending and strengthening banking supervision at the CBY. The banking law of 1998, implemented from 1999, established a solid legal basis for the CBY to set limits on credit concentration and insider lending. With regard to overdraft facilities, which account for roughly 90% of bank credits, the CBY introduced a new system of classifying exposures, with the intent of helping banks to identify and remedy weak credit facilities at an early stage. The CBY has also instituted a notification system, under which banks are notified whether loan applicants are delinquent to other banks. However, despite these positive changes in the legal and regulatory framework for banking, implementation and enforcement remain weak. Furthermore, regulatory strengthening and liberalization of interest rate regulations have not resulted in an increase in lending to the private sector. 3.49. The continued small size of the banking sector reflects far deeper structural and institutional obstacles.7' Weaknesses in the legal and judicial framework, lack of proper accounting and auditing standards and disclosure practices, and a scarcity of banking and financial skills remain significant impediments. In particular, there is pressing need to imnprove the functioning of cornrmercial courts and the judicial processes for recovery of bank and other debts. Accounting and auditing practices-for which no standards have been set in Yernen-are urgently needed both in order to allow creditors some measure of confidence in clients' financial positions and to provide the entire private sector some measure of protection from the widely reported corruption in the tax authority. Thus, improved financial internediation will only accompany the governance and institutional reforms outlined earlier, which are central to creating an improved climate for business to flourish in Yemen. lOX 3A.6 YV404N' PIVAnVATION PROGRAM Ymen's pivateizaion proggam was inidiated it ea4y 1995 and contributed to the privanaotio of mote than 60 smali enttip6ses between 1994 and t§97. The nlementatioa of the pogre has been conducted in.a sowewhat ad hoc mnart, with t invob-et of mntcies each of wich. estibtished W ei$tees to pxivao loquidate enterpies txer thiwudid. Aftau the Ptivatization I5r was jpassed in 1959, pvization ptocedures were oqranizd vad unfied and -&Technical Privation OffEce w estWished to ensure ip etttn of standardimed and ansparait pivazatin tatsadons adpe However at present tpxii progam has been stalled, as in nuy ou=triea by far -fp repdsal ard atAoyret lkas. 71 Most Yemeni banks are owner by a few large groups that axe not only the main borrowers from their respective banks but also many of the wieners are directly involved in the operations of these banks. Some of these groups are not profitable and they are largely responsible for the high ratio of non-performing to total loans in the privately owned Yemeni commercial banks. This practice has the effect of crowding out lending opportunities to other potential borrowers. 57 CHAPTER 4: EXrERNAL TRADE SECTOR AND EXPORT COMPETITIVENESS I. INTRODUCTION AND SUMMARY OF FINDINGS 4.1. Given Yemen's small internal market, exports have to be the major source of rapid job and income growth. The GoY recognizes the importance of the external sector in its development plans and has made good progress in reforming the trade regime. Yemen is now classified arnong the most open and trade liberalized countries in the MENA region. Nonetheless, most of Yemen's current non-oil exports remain primary, low value-added products, which also makes economic growth more vulnerable to volatility in price and demand. Yet Yemen has considerable room to improve its export performance, and especially non-oil merchandise exports as well as export of services. While import substitution had provided the initial impetus to Yemen's industrial sector in the 1970s and 1980s, the low incomes of Yemen's relatively small population mean that such a strategy is unlikely to be sustainable in the decade of the 2000s. At the same time, Yemen has the major advantage of location. It is in close proximity to potential markets: the high-income GCC countries, other Arab countries, and the underserved economies in the Horn of Africa. For the last group of countries, Yemen had significant "revealed comparative advantages" in several products. 4.2. This Chapter reviews recent developments in the product composition of Yemeni exports, direction of trade and the underlying factors behind the performance of Yemeni exports. It also attempts to ascertain whether export performance could be attributed to developments in world trade, changes in product composition of commodities or to changes in the competitiveness of exports. In addition, the Chapter also analyses the product categories and export markets that have driven export development in Yeraen. The analysis in this Chapter is based on UNComTrade data.72 4.3. The main findings of the chapter are that (i) despite its low volumes, Yemen's export performance has been relatively good in the post civil war period; (ii) exports are dominated by oil exports with more than 90% of total merchandise exports; (iii) exports have been characterized by significant fluctuations in the 1990's because of heavy dependence on oil exports to concentrated markets, and the base for non-oil exports is very narrow with a few items (e.g., fish and coffee) accounting for the bulk of non-oil exports; (iv) value-added in fish exports is very small in comparison with other fish exporters while coffee export market is dominated by a single country, Saudi Arabia; (v) manufacturing exports are still very small in comparison with similar low income countries and the country's manufacturing export capacity is not fully exploited yet even after substantial reforms to the trade and foreign exchange regimes; and, (vi) constant market share analysis reveals that the growth of Yemen's total exports, and manufacturing exports, in the post civil war period has been mainly driven by growth in world trade while improvements in international competitiveness has been a factor for non-oil commodity export growth. I. EXPORT PERFORMANCE, DIVERSIFICATION AND DIRECTION OF TRADE 4.4. Export of merchandise goods has been one of the driving forces for Yemen's economic growth, particularly in the second half of 1990s. In fact, more than half of GDP growth was 72 For more detail on the competitiveness analysis in this Chapter, see Someya (2001). 58 attributed to exports during this period. Yemen's total merchandized exports increased from US$ 2.5 bilion in 1999 to US$ 4.1 billion in 2000 making Yemen the 90'h largest exporter among 231 countres in the world and one of the largest exporters among low-income countries. Yemen's export performance was impressive with an average growth rate of 5.0% during 1995- 1999 (6.3% for 1995-2000), better than the world export growth, which was 4.5% over the same period. 4.5. Merchandise exports, however, have been characterized by significant fluctuations, dominance of oil exports, and market concentration. The coefficient of variation of Yemen export growth during 1992-1999 is 1.7; more than twice the corresponding figure of the world export growth of 0.8. On the other hand, oil exports represented more than 95% of total merchandise exports in 2000. Non-oil exports, which accounted for less than 10% of total exports in the 1990s, are dominated by three commodities: fish, coffee, and fruits and vegetables (accounting for more than half of non-oil exports). Fruits and vegetables for regional markets have increased rapidly in the late 1990s, jumping up from US$ 1.5 million in 1995 to US$ 12.3 million in 2000. Manufactured exports account for only 1.1% of total merchandise exports. BOX 4.1: FISH EXPORTS Fish is .the secondw H st- export item in Yemen generting US$4 9 mlln In 1999 (24 % of total etporis and 35% of nonnpil exports). Duig 1994-1995, fish exp6rts 4oed as a tesult of the tempoary export ban and-weak demand in neighboring ocAutres. During 19954999, fish exports grew by an iT &esviv amnual average of 19% versus a 1.4% grwth in total wodd ,flsh trade.his took place despite te appredation of fish prices in 1994.199kYemen's fish export market is concentrted it Otree countuies: Saudi AmWbi, Hoog Kong and Thand (absorbing 74% of total fish exports. Exports to the EU, USA and Japan were liuited because.Yemen does not meet the sanita standads requested by thcse countriea;Therot6e, most of the- >sh exports wre firstg cportedg or smugled, to Saudi Arabia, Omanw or VAl for re-export to the westen 'o,untries, Exports to Thailand are.rwiug because .of existing and large processing fadlities bfiote re-direpting processed fish to. Japan, EU and the US. TherefoFe~ the dbsemived concentratich of fish exports does not mean at the finasl destinations are concentrted in these, Ycten's fsh expoxss aeenxely low vAle-added. The tatio of prsed matine resources in total fish expottsrfov YemeWi'i &i4% he ' orone"ding fgUres for other fish exportrs such as Thailand, China, Morocco id Seudi Arabi a e 44%, 34%, M6c a 26%l xespecively. The world aveta is 173W/o 4y. iraing the value added on fish exports thogh procemssig and by improvng sanita standards requred by lage fish emrkett wudi as ES, Japan and USA, there ae huge prosects for 'Yemen to bolster -ish exports much more rapidly. Por WtaAce4 TbAl which itself is endowed with abundant madne rescurces, actuay imports US$ 767 ,mMllid of raw fsh (n widch , inenlh exports accouni for 1.1%) and exports US$ 2 billicn of prepared fish products mainly to Tannese and US makdt. Tbe hi fish expot is conmpetitie not oly becuse of comparative advtage inre traditional sense based an facto endowmet but also becausie of the created comparative advantage of kwrge scale fish pocessing facilties. Yemea, cag aso'inte fish pioducdou by fish farming whi Is curetlylaclang 2W,23/ of world fish production Va poduced through' fish fiming (28 gniUlioh toos out of 122) mlion tons of tdt wodd fish production). Even iadustialize c6unries as USA and Canada are engAged ia fish farning for luxdous fish such -s tuma. Thailand sad Philippines also speialize in shrp farming, aiming at the Chinese and Japanese markets, in which shrimp accounts for a laV share The dvantage of-fish farmng lies ia its capability to adjust to market demanLd. It gives coatro ovex X timing to market fish and to, mitignte the nuctatons stming from price charges. Sow: Soey 701 4.6. Yemen's exports are dominated not only by a few export items such as petroleum, fish and coffee, but also by a few export markets. The top five countries account for more than two thirds of total exports during the 1990s. The degree of market domination by five countries has even worsened from 70% in 1991 to 83% in 1999. Despite market concentration, Yemen' export partners have changed in last ten years. In 1991, four out of five top destinations of Yemen's exports were Western countries. However, all the five largest export destinations in 1999 were emerging Asian countries. This increasing market concentration towards emerging 59 Asian countries reflects the high degree of vulnerability of exports to the outlook in these emerging markets (rable 4.1). TABLE 4.1: YEMEN MAIN EXPORT MARKETS % Germany 30.8 Korea, Rep 23.9 Thailand 27.1 2 United States 14.2 China 17.8 China 23.5 3 France 11.8 Japan 17.2 Korea, Rep. 13.0 4 Austria 7.8 Singapore 12.1 India 11.0 5 Taiwan 5.6 Brazil 7.0 Singapore 8.3 Total 70.2 78.1 92.9 Source: Someya (2001). 4.7. The direction of trade for non-oil exports is quite different from total metchandise exports. The GCC, and Saudi Arabia in particular, remain the major destination to Yeraen non- oil exports. In addition, a few other non-GCC countries (such as Jordan and Egypt) were among Yemen largest importers for non-oil exports together with a few countries in East Africa such as Ethiopia (Table 4.2). For individual non-oil exports items, Saudi Arabia imported 75% of Yemen coffee exports between 1991-1999, 42% of fish exports in 1999. Similarly, Jordan imported 12.3% of Yemen's fish exports in 1995 and 4.1% in 1999; Oman imported 6% of Yemen fish exports in 1995 and 2% in 1999. For manufactured exports, Ethiopia imported about 15% of Yemen total merchandise exports during 1995-1999, Egypt imported 5% of total manufactured exports in 1995 and Djibouti imported about 3% of total manufactured exports in 1991. TABLE 4.2: YEMEN MAJOR EXPORT MARKETS FOR NON-OIL EXPORTS, 1991-1998 -Li 1 audi Arabia 19 audi Arabia 36 audi Arabia 26 2 nited Kingdom 11 taly 7 nited States 8 3 France 11 nited Kingdom 7 India 7 4 taly 10 nited States 5 thlopla 6 5 elgium-Luxembourg 9 Singapore 5 ong Kong, Chin 6 6 Malaysia 7 apan 4 apan 5 7 ingapore 6 ordan 4 taly 4 8 apan 6 ong Kong, Chin 3 nited Kingdom 4 9 Korea, Rep. 4 India 3 Germany 4 10 United States 2 Korea, Rep. 3 ordan 3 Total 61 59 53 Source: UNCOMTRADE database. 4.8. Relative to other developing countries in the MENA tegion, competitiveness in the form of export potential is also concentrated in large, older firms, predominantly located in Sana'a, Aden and Hodeidah. Only 3.5% of firms sampled (Chapter 3) are engaged in export activities relative to 56% firms in Morocco where exporters are predominantly new firms entering the market (42% of firms begin exporting after one year) with a clear export focus and new product lines. III. EXCHANGE RATE POLICY REFORMS AND COMPETffrVENESS7 4.9. In July 1990, the exchange rate and trade systems of the fotmer Yemeni republics were unified using the system of the former YAR. To contain the spillover of the growing financial imbalances to the external accounts, a complex system of "hybtid" segmented foreign exchange 73 This section draws heavily on IMF (2001). 60 markets was devised in addition to the adoption of a number of ad hoc administrative measures to curb "speculative" activity and wide-ranging trade restrictions. The forging exchange market was comprised of official and parallel markets. The official market was limited to government external transactions and covered crude oil and petroleum products, official receipts and payments and external debt service payments. It also applied to the allocations of foreign exchange by the CBY to the private sector for imports of wheat, flour, rice and LPG as well as for special purposes such as medical treatment or study aboard. All other external transactions occurred through the parallel market, which was operated by moneychangers and did not have a legal status until January 1993. At that time a law was enacted to establishing regulations for money changing operations induding licensing, capital and reporting requirements and which assigned oversight powers to the CBY. 4.10. The attempt to defend nominal exchange rates led to shatp appreciation of the real effective exchange rate (REER) in the first half of the 1990s undercutting efforts to contain fiscal and external balances (see Figure 3.4). It became increasingly dear that multiple exchange rates and foreign exchange controls exacerbated the negative impact of external shocks, and in 1993-1994 the authorities took some partial steps to achieve the positive real interest rates and more realistic exchange rates. Faced with a growing gap between the free markers parallel rate and the various official rates in November 1994, the authorities introduced a managed "official parallel market" rate at YR 84 per US dollar, to be guided by an oversight committee of moneychangers and commercial bank representatives under the supervision of the CBY taking into account market indicators. The CBY enforced the offal parallel markets rate by mandating that commercial banks could open letters of credit only of the importer provided documentary evidence that the foreign exchange was purchased at the official parallel rate. This attempt to manage the parallel market failed, however, and by end-1994, the unofficial parallel market rate depreciated to YR 103 per US dollar. 4.11. In early 1995, the main official exchange rate was devalued to YR 50 (from YR 12) while the free market rate depreciated further to around YR 125. This led to sharp real exchange depreciation. To limit the depreciation of the free market rate the CBY form time-to-time suspended the operations of moneychangers, pushing foreign exchange transactions in the parallel market underground. Figure 4.1: Trends in REER, 1990-2001 400 300 200 10 jaz-90 Jan.91 Jaz-92 Jan-93 Jan-94 Jan-9S Jo-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Source: IMF data updated in May 2002. 61 4.12. In January 1996, the authorities began a two-staged process of unification and liberalization of the foreign exchange market. In the first stage, the official exchange rate was devalued from YR 50 to YR 100 per US dollar and all other official rates were eliminated. This rate continued to apply only to budget accounting, customs valuations and transactions, the CBY and the Ministry of Finance. After a short period under a dual rate system, full exchange market unification was implemented in July 1996, and an independently floating exchange rate regime was adopted. All government and CBY transactions, including customs valuations, began to use the unified market rate thus completing the second liberalization stage in August 1996. Finally, in December 1996, Yemen formally accepted the obligations under Article VIII (sections 2, 3 and 4) of the Fund's Articles of Agreements, and since then has maintained an exchange system free of exchange restrictions on current or capital account transactions. Again the nominal depreciation that occurred at the time of the unification of the exchange rates led to a sharp depreciation to the REER 4.13. With the authorities move to a floating exchange rate system throughout the second half of the 1990s (Figure 4.1), the Rial broadly stabilized in real effective terms, some small appreciation in real terms between end-1996 and end-1999 partly reflected a reluctance to tolerate substantial variability in the exchange rate. Through interest rate policy, moral suasion, and the regular auctioning of foreign exchange to moneychangers and banks, the CBY attempted to stabilize the exchange rate in times of turmoil. In part, interventions reflected also an attempt to smooth sharp seasonal peaks in demand for foreign exchange (specially around the Ramadan and Hajj seasons), given the limited depth of the private market. For example, in 1998 the CBY employed its limited monetary tools to ease the pressure on the exchange rate. It raised the official benchmark interest rate (up to 3.5 % in real terms) and removed remuneration on foreign currency deposits at the CBY and spent half of its reserves to limit exchange rate depreciation during 1998 to7% against the US dollar. In 1999 and 2001, the authorities allowed a faster rate of depreciation coupled with further interest rate tightening. The REER has remained at the same level during 1998-2001. IV. CONSTANT MARKET SHARE ANALYSIS (CMSA) 4.14. While Yemen's export performnance in the late 1990s has been very good, manufacturing exports have been stagnant. What factors have driven successful total export performance on one hand and stagnant manufacturing exports on the other hand and what policies were behind them? To address this question, the constant market share analysis (CMSA) was undertaken. It decomposes trade growth into three factors: (i) world trade effect representing the growth in Yemeni exports due to the growth of world imports: (ii) composition effect '(demand structure effect) which measures the changes in Yemen' exports due to the fact that world consumption for the various products exported by Yemen is growing at a different rate, and (iii) competitiveness effect representing the growth of Yemen' exports due to a change in Yemen's market share. CMSA is applied to Yemen's manufactured, oil and total merchandise exports (Table 4.3). TABLE 4.3: YEMEN: CONSTANT MARKET SHARE ANALYSIS (°/) Wortd Trade Effect 214.8 97.1 35.5 5.0 8t.8 80.9 Composition Effect 26.6 4.2 -0.7 -2.0 -10.7.6 -27.3 Competitiveness -141.4 -1.3 65.2 96.9 125.8 46.5 Total 100 100 100 100 100 100 Source: Someya (2001). 62 4.15. For total exports, much of the export growth in the 1990s was attributed to world trade effect. Competitiveness effect was strong and positive although it deteriorated in the late 1990s. However, the compositional effect was negative suggesting that Yemen's export structure has gone against the structural change in world demand. For non-oil exports, 97% of export growth can be attributed to improved competitiveness with small assistance from world market expansion (particularly for commodities such as coffee and fish). The picture is totally different in manufacturing exports whereas world trade effect dominated 97% of growth in the late 1990s. Competitiveness effect was behind poor performance particularly in the early 1990s. BtOX 4.2: YEME . EXPORTS OF MANvWAcrLR ED GOODS 'Yemen's timufActu.-iag eports ireahed US$ 23 nmiodiia U be. *owuitr1's zrnauufin g export ratio (1t % of fwl sntrehandac eots) ts the. second lowest amtong 230 countries in th:t. orkd, only next ro lrtaq le low levetl od ;inanufacmirg oeportS is not comienergrate with the level of mAnutaicring OuJrput inldomiestc production (7-i/o of GDP IG 200) In aa.:tion t;o their stall .e. YLmea's mannftufidg expu-a b-ve been ttagaanr in ffe late 1990s The sxetpW export grt. th r4t. frm 1 996 to 213t(0 wzas -1.4%6 ooipredWt with f% (.r wd mu g eroex , and 2.17 for th¢ 4t, flwicome oe0it,tts, VesneaIs tsade ptrtaceS n manufacwred exports are OECD, South Asia and East Afnca (accounung for more than,90% 6ol ::nmufjctiri1g exfort4s) n terms of individual countrie's JIod Uk' and Ertiopit ar the steadv trade p Mtn&ts in anuamncrurtiit: exportm lle linlge with neighboring countries has becn very weak indicting that Ycernen ist nibe *tirt frnngr pT .raphicl %gglouiz.ttic7n eflixt in mtanuctuf yiog industry. The naniie znia tuonrmg cxport. arc petroleum pdxts,' bousehold deanig prestos, .- vcf1g and tobacco prMducts. -tetli and. ),adher mtchinery. Wno*ettri parts ap ys ra(2LI) attempwd to in-. arigAre. Cs) if Yemien's manufarrunng upa:bi1ity is fuly e4ploitedl and (ii) ay the sbare af anufacwitud exportS in total epots latged behinti"the share of manuflactuing vqJue-added into rotdl GDP? Accordingly, the opmarnm level of rmtnuacring prdctinand eport were estimated by runang wao cross seceo'ai rl ions with -,de dent vaUiables (lanaufttctedug exports and nmaniucTrug 'alue- idded) agamst Gros Nato Income-per tai terdajy cnr'-dltsetit cati popu.tbn, squared urbani opuhncn k. total FP,IlIab o ratios and forign direct ivetnen'usmg daafi>r 198. The reression rults show that arlthe variables are sriwscaiv sitgnificant omd that the si7e of coefficicsta of fl14#and 0.06) {ornanufor u is g orats. This tnwcates that poLiciqts red n tto teqrary elucation and FIDI liberaizarion are im-offecrure a prtrrnutink nraanufactarini exports tI r vari;ablcs are robusr nd coosisrendy dernotistratw stati5s6ca tance in different fornlulat*o &eJoxrnola estiirated in the regressio aboire, the opdrnusn lkl. of' uwufactung exports as m el S ong 3 lii add.ed are tilitd. Simultred optirnum level of rnunuficauing vilCo added is USS 860 milLton while f.vlue ts USS i73 iltlin. 'The creesp onding figure for mnnufactuwug export ii. USS "9,sinllion far Wpeaier than actual A WUSS 3 mniTl.n 'ATen, the maxnf.wtuing cspaev uilizaun rate3 are calculited bry dividing actl figures bv eitirnatcd u led W'ik nf 'it or i,i -arinng pmrouction capabilitn is uiliad, bnl)ar i7% of export capabilrv is utilzd Thus, xeoanX g nr3ul , r ar' rdJO,t-. tl;U3 LON b,(ti t&N CIplrOCIC 4.16. Reforns of the foreign exchange regime implemented during 1991-1996 and trade liberalization measures adopted since early 1990s were the two most important factors behind improved competitiveness of Yemen exports.'4 All foreign exchange restrictions on the current account transactions were removed and the exchange rate was floated in 1996. This resulted in amelioration in price competitiveness of commodity exports because the real effective exchange rate (REER) of the Rial improved considerably creating a congenial environment for export boom in the late 1990s (Figure 4.1): Trade liberalization policies also played an important role in improved competitiveness.7" In 1991, the 100% import deposit requirement was abolished and the positive list was replaced by a negative list in 1993. A comprehensive reform of the tariff and 74 Upon the unification in 1990, there existed multi-exchange systems as wel as many restrictions on foreign exchange transactions in Yemen. 75 Before reforms, there was a positive list on imports and almnost all the imports required licenses or official permission from government agencies. In addition, imports were also subject to a customs duty under a tariff structure, which was constituted of 15 bands with tariff rates ranging from 5 to 200%. Moreover, the 100% import deposit was required to the commercial banks to obtain letters of credit for imports. 63 trade system was initiated in 1996.76 The maximum tariff was reduced to 25%, and the tariff rate for imported inputs was reduced to 5%. In 1998, non-tariff barriers such as import bans were tarifficated or removed. Currently, Yemen is one of the most trade-liberalized countries in the MENA region. Its ratio of tax revenues on international trade to total imports as a proxy for a norninal effective mean tariff is 5.2%, far lower than MENA' reformers such as Jordan (6.5%), Tunisia (5.9%), and Egypt (12.2%). TABLE 4.4: TREND AND COMPOSITION OF YEMEN'S IMPORTS, 1994-2000 Pood and live animals 450.3 542.8 94L3 802.0 776.2 663.9 687.2 Meat and live animals 70.9 48.8 39.5 48.8 80.0 83.3 89.3 Dairy products and eggs 50.3 36.2 61.3 75.3 83.9 71.3 86. Cereals and their products 198.5 315.2 648.7 445.9 414.5 338.8 312.8 Vegetables and fruits 29.4 26.8 40.0 41.0 50.5 41.3 51.4 Sugaranditsproducts,andhoney 59.1 80.1 111.9 137.4 98.6 93.9 107.9 Coffee, tea, and spices 20.7 20.5 19.1 18.3 18.2 16.3 13.6 Other 21.3 15.2 20.8 35.3 30.5 19.1 25.7 Beverages and Tobacco 32.7 32.4 33.2 35.8 43.6 40.5 38.9 Raw materials 4L4 43.8 45.4 51.7 4&6 42.3 50.6 Ollseeds 7.1 4.3 7.1 15.5 11.4 10.4 11.6 Wood and cork 26.7 30.4 26.0 24.7 26.7 22.0 27.7 Other 7.6 9.2 12.3 11.5 10.5 9.9 11.3 Minerals, fudes, and lubricants 236.3 1213 165.8 223.4 139.4 161.6 277.8 Animal and vegetable oils 26.4 66.7 50.8 73.1 83 67.0 90.3 Chemicals 107.8 126.3 136.2 166.5 21L1 187.0 225. Manufactured goods, classified by materials 296.3 353.3 298.8 353.1 374.9 307.2 341- Rubber manufactures 28.9 3Z9 32.5 38.3 33.5 26.8 28.4 Wood and cork 14.0 11.4 10.5 16.4 18.6 8.2 .IZI Paper manufactures 27.6 4Z3 34.6 34.5 48.6 43.9 54.3 Textiles 33.6 37.2 33.8 37.2 38.1 35.2 33.3 Nonmetallic mineral manufactures 39.0 39.7 45.7 44.4 44.1 38.1 47.7 Ironandsteel 96.7 117.1 83.0 107.0 115.8 96.2 100.1 Metal manufactures 34.0 52.4 40.8 48.9 48.4 36.5 41.9 Other 22.5 20.3 17.8 26.4 27.8 22.3 23.4 Machinery and transport equipment 285.5 355.2 373.1 424.9 525.1 431.8 484.3 Machinery 192.9 245.3 244.1 316.7 396.6 105.8 87.8 Road vehicles 87.1 101.8 120.7 103.0 106.5 96.0 173.6 Other transport equipment 5.5 8.1 &3 5.3 22 8.4 7.8 Other 0.0 0.0 0.0 0 0 221.6 215.2 Miscellaneous manufactured artides 80.0 96.7 83.8 96.9 14.4 106.1 104.4 Fumiture 3.7 7.4 8.5 6.8 8.6 8.3 8.2 Clothing and footwear 36.2 3Z2 23.37 30.6 37.19 25.6 27.2 Professional and scientific instruments 9.4 82 9.4 1Z8 24.1 36.3 26.4 Other 30.7 48.9 42.6 46.7 44.6 35.9 426 Other commodities 0.1 0.4 1.0 4.4 11.3 1.0 24.0 Total imports, c.if. 1,556.9 1,739.0 2,129.4 2,,23L8 2,327.6 2,0083 2323.9 Source: Data between 1994-1998 are IMF estimates and data for 1999 and 2000 are from CSO converted using average exchange rate. 4.17. Why did improvement in international competitiveness boosted commodity exports but not manufacturing exports? One reason lies in the competitive edge. The quality of the commodities such as coffee is not very much different by location of production and, thus, the price competitiveness is often a unique edge in international markets. However, price is not a unique edge for competitiveness in manufacturing products. Quality is often more important than price effects. Another possible reason is gestation period, i.e., the time-lag after which reduced priced inputs penetrate into manufacturing production and production efficiency starts to improve. Liberalization of foreign exchange transactions and other trade liberalization measures benefited both manufacturing and non-manufacturing exports by drastically reducing imports prices and facilitating access to international markets for cheap intermediate and capital goods. In fact, capital goods imports, which were falling even in nominal terms in the first half 76 Under the reformed tariff structure, the mean tariff was reduced from 27% to 12%/o. 64 of the 1990s, jumped up with nominal growth rate, 39.3% and 58.9% in 1996 and 1997 while the corresponding figures of the world import were rather moderate, 5.8% and 6.3%, respectively. Table 4.4 below shows that after trade liberalization there was a surge in consumer goods (food, beverages and tobacco, etc.). There was also a rapid increase in capital goods, particularly, machinery and transport equipment. 4.18. However, availability of capital goods does not necessarily lead to efficiency improvements, which require many other inputs such as human resources. In fact, subsequent to trade and exchange liberalization, manufactwring intermediate goods imports did not increase as much as imports of capital goods. Imports of raw material, chemicals, minerals and lubricants and other animal and vegetable oils did not witness significant increases. This may be why competitiveness in commnodity export improved after adoption of the floating exchange regime in 1996 while that in manufacturing exports did not as we have seen from the CMSA. V. REVEALED COMPARATIVE ADVANTAGE (RCA) ANALYSIS77 4.19. Aggregated macro-analysis shows that Yemen generally demonstrated a good performance in commodity exports while manufacturing exports were stagnant in the late 1990s even after exchange rate regime and trade reforms. For this purpose, RCA was calculated for detailed export items. RCA was calculated at two levels, one against world export and another against GCC and East Africa.78 4.20. Yemen did not have many commodities that are comparatively advantageous in the international market while Yemen improved its competitiveness in many items and even in manufacturing products in neighboring markets. Yemen's RCA against the world export shows that there are only 10 commodities (9 commodities in 1995) which have RCA greater than unity in 2000 (Table 4.5). In terms of improved RCA, Yemen has diree export items with improved RCA between 1995 and 2000 (ive animals, animals for pets and coins) in addition to the three products that did not have export data in 1995 (fish, margarine, and silver and platinum ores). It should be noted that (i) oil export and coffee aggravated RCA from 1995 to 2000 and ui) Yemen did not have any manufacturing items which have RCA greater than unity. TABLE 4.5: RCA AGAINST THE WORLD Live anidala 001 Z02 2.80 0.78 Fish (fresh and sirply preserved) 031 1.7 .0 2.57 Rice 042 1.10 Coffee 071 3.13 3.0 2.14 4.-13 40.86 Margarine and shortening 091 2.39 Hides and skins (exc. Fur skins) 211 3.67 3.46 2.04 0.31 -1.42 Nonferrous metal scrap 284 1.75 Silver and Platinurn ores 285 2.01 Petroleum (crude and pardy refined) 331 13.78 19.03 12.58 5.25 -6.45 Petroleum products 332 5.32 6.59 5.16 1.27 -1.43 Leather 611 1.13 Animals, for pets and zoo 941 1.35 - 1.89 0.54 Coins- other than gold, not legal tender 1961 Z 287 4A41 t 154 Source: Someya (2001). 77 RCAij =(Xij/Xj)/(Xi./X..): RCAij is Revealed comparative advantage of industry iin country j,YXij: export of industry i in country j, Xj: total export in country j, Xi: world export in industry i and X.: world total export. 78 GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. East Africa includes Djibouti, Eritrea, Ethiopia, Somali and Sudan. 65 4.21. The picture is better in RCA analysis against the GCC and East African countries than that against total world exports. The number of items, which have RCA greater than unity, increases from 18 in 1995 to 27 in 2000. Out of 27 products, five products even improved RCA such as live animals, raw fish, maize, dried fruits, and coins. In addition, 17 products, which had no export in 1995, became competitive with RCA greater than unity in 2000. Apart from the above-mentioned items, major items, which have high RCA, are fresh fruits and nuts, fresh or dried vegetables, margarine and shortening, tobacco products, and silver and platinum ores [Sorneya (2001)]. There are many products which grew rapidly in the late 1990s such as footwear, travel goods, handbags and similar articles, wood and cork manufactures (excluding furniture and non-manufactured textile fibers), and waste. However, world market grew much faster than Yemen's export in those items. As a result, Yemen's RCA for those items are not greater than unity. VI. MARKET POSITIONING (RISING AND FALLING STARS)79 4.22. Has Yemen been taking the right market strategy? Or, has Yemen been operating in expanding markets or contracting markets? As we have seen in CMSA, Yemen's export composition had a negative impact on Yemen's export growth in the late 1990s. For that purpose, Yemen's market positioning analysis is undertaken (Figure 4.2). Those products classified under Rising Stars in year 2000 account for 61.5% of total non-oil exports, which accounted only 6.6% in 1995. This figure is very high even compared with other middle-income countties. The corresponding figures for Tunisia, Morocco, Jordan, Egypt and Chile are 41%, 30%, 16%, 19% and 9% during 1990-1998. Figure 4.2:7Yemnen's Market Strategy in the 1990s (%/ of Product under each Category) 70 - 60 - I I 40 *1995 $30 - 20 10 0 _ Rising Stars Failing Stars Missed Retreats Opportunities 4.23. In terms of products, a considerable number of products categorized under Rising Stars are actually manufacturing sectors. In fact, out of 53 products classified under Rising Stars, 47 products are manufacturing products. This indicates that Yemen has been expanding exports in the international markets that have also been expanding for the same period. Therefore, Yemen exports are competitive in regional markets, Yemen has been operating in expanding international markets and Yemen's industrial composition is better than other MENA countries. 79 Rising Stars indudes those products in which both Yemen as well as world exports-increased over the period. Falling Stars includes those products in which Yemeni export increased while world decreased. Missing Opportunity indudes those products in which Yerneni export decreased while world export increased. Retreat includes those products in which both Yemeni and world exports decreased. 66 CHAPTER 5: HIGH AND SUSTAINED GDP GROwTrH IN YEMEN: THE WAY FORWARD 5.1. High and sustained rate of economic growth in Yemen is a necessary, though not sufficient, condition for reduction of high incidence of poverty (estimated at more than 40% in 1998) and raising the living standards of the Yemeni citizens, particularly given the prevailing high population growth rates (estimated by the GoY at 3.5% and by the Bank at 2.7%). The current plans and strategies of the GoY (the Strategy Vision 2025, the SFYP, the I-PRSP and the PRSP) recognize the importance of economic growth to meet the socio-economic development goals and for effective poverty reduction in Yemen. 5.2. The necessary conditions for rapid economic growth are now better in Yemen than they were at any time in the past. Yemen is endowed with rich natural resources (fisheries, gas, oil and mineral reserves, fertile land, etc.); the country has a strategic location and natural endowments for services (e.g., trade, transport and tourism); young and dynamic labor force with abundance of entrepreneurial skills. In addition, Yemen currently enjoys political stability, macroeconomic stability, and improved foreign relations. It also built democratic institutions and created an open trade regime. Furthermore, the GoY embarked since mid-1990s on implementation of stabilization and structural reform programs and has since then made good progress on both fronts. 5.3. Nonetheless, achieving high and sustained GDP growth rates in the short- and long- terms is still a daunting challenge. Evidence in this Report suggests that the main obstacle to rapid and sustained economic growth is the weak govemance that characterizes Yemen in addition to the weaknesses in domestic security, property rights and rule of law systems. Weak governance in Yemen is manifested by widespread corruption, lack of transparency and accountability, inefficiency in the interaction of public officials and private business, ineffective or absent market promoting institutions such as those enforcing contracts (courts, tribunals, etc.), poor perfornance of the public sector in terms of delivering essential goods and implementing programs, associated lack of incentives and skills in the civil service, weak enforceability of contracts and rulings. 5.4. In addition to putting in order the governance situation, there are areas that should receive government priority in the short and medium terms including: (i) enhancing domestic security to boost economic activity in all economic sectors, and particularly the "promising" sectors such as tourism, mining and extractive industries, as well as attracting FDI; both are currently hampered by the security conditions; (ii) removing excessive and arbitrary regulations to strengthen basic infrastructure and other services and to attract private investment into these sectors; (iii) reform of the legal and judicial systems and strengthening the enforcement of rulings and clarification of property rights and resolution of confficts over land ownership; and (iv) sustained implementation of civil service reforms to improve delivery of public services. In terms of sequencing of reforms, it is important again to give higher priority to putting into place governance structures before embarking on other reforms. It will be extremely difficult for Yemen to build market-promoting institutions, such as well-functioning judiciary, before to addressing governance problems because the impact of a well-functioning judiciary in an environment where overall governance is weak is likely to be negligible. Improving the domestic security situation should be the second highest priority. 67 5.5. Given the strong emphasis on the private sector for meeting the economic targets of the SFYP and the Vision 2025, a private sector survey was conducted for this study. Based on firm's perceptions as well as their actual experience, there are five main areas of impediments to growth and productivity: (i) poor governance especially corruption; Cii) lack of security and rule of law (violence, smuggling and lengthy dispute settlement); (iii) macroeconomic and policy instability; (iv) problems with tax rates and administration and (v) inadequate infrastructure especially electricity services. 5.6. Good governance in Yemen would be ensured if the GoY put in place mechanisms and measures to ensure efficient allocation of public resources, effective provision of public services, accountability, transparency and minimal cotruption. Among the many areas in which action is needed, three are paramount: enhanced accountability of the government and the civil service, better legal and contract-enforcement systemns, and reduced regulatory barriers. Strengthening the accountability of the public sector in its role in regulating private activity would require extensive civil service reform and administrative accountability measures, some of which have already been initiated by the government. Reduction in the number of civil servants overseeing the private sector, and clarification of their roles and responsibilities, is a clear need. At the same time, there is a need for increased administrative accountability mechanisms, including procurement reform and better auditing and oversight. Better formal legal and contract- enforcement systems are needed to reduce the high cost and uncertainty associated with informal dispute resolution in Yemen. In terms of legislation, new laws, particularly modern commercial codes, will be required as part of the development of a workable legal system and to support a market based economy. Specific areas indude the financial sector (secured transactions and real and personal property registers), insolvency, bankruptcy and others. Private sector firms tend to face burdensome regulatory and administrative hurdles procedures in setting up businesses, and in commencing/expanding business operations. Thus, improved coordination among government agencies, perhaps aided by the elimination of investment licensing, is an important step towards the development of private sector activity. Another way to achieve this is to create a 'one stop' or 'first stop' shop for potential entrepreneurs and business owners (such as the GIA). Formal complaint and appeals procedures attached to this regulatory administration would also provide a mechanism for the transmission of vital information and feedback about the impact of government policies. 5.7. There are three levels of uncertainty for firms in Yemen: uncertainty about the macro- fiscal environment, uncertainty about the course and sequence of structural policies, and uncertainty due to the lack of market information. Separate sets of practices will need'to be adopted to address each of these. What is needed at the macroeconomic level is to continue Yemen's concentrated and sustained effort toward prudent macroeconomic management, promoting open trade policies and a competitive exchange rate. This would be especially important in times of lower oil prices. A more transparent, indusive and open policymaking process can reduce structural policy uncertainty, in turn. Reducing such firm-specific uncertainties would require a range of institution-building, and the need to make available planning and business resources to the firms. 5.8. To tap on the big potentials of Yemen's economic sectors, there are also a few but daunting policy obstacles that confront all sectors as well specific problems to individual sectors. Poor access to infrastructure (including electricity and transportation), insecurity, and weakness in the financial system are among the most important barriers. Therefore, promoting greater competition and efficiency in these areas would facilitate economic growth. The following 68 Matrix provides a list of recommended policy reforms and measures needed in the various economic sectors in the light of the findings of the previous chapters. While the list of suggested reforms and measures is quite long and its full implementation may not be feasible in the short and medium terms, the Matrix singled priory reforms that warrant immediate government attention and their pursuit should precede all other suggested reforms. 5.9. Fortunately, the GoY recognizes also the importance of the suggested key reforms and have already embarked on addressing some of them. However, given the nature of the existing _onstraints, the envisaged reforms are expected to take longer time and would require strong political commitment and systematic and persistent purist of reforms in the short- and long- terms. 69 PLAN OF ACTION FOR REDUCTION OF CONSTRAINTS iN ECONOMIC SECTORS MMN OBJECzIVE: ENSURINGA HIGHAND SUSTAINED GDP GROWTHFOR SUSTANED POVERTYREDUCTION (i) huge f6hery resources (see (O substantial yield gap (up to 60ff foi The plan trgets an umual Thc SPYP growth arget for @i) tncrease urganon effic.en.y from the current 40W Change the 21 below); (u) suitable weather some crops); (u) limited witer resounces; growth rate of 6.7% during agricultura valuc-added seems high by rste; (u) enhance non-farm acdvities and rin-fed crops; incentive for many crops; (uu) one thirtd of (iii) half of cultivated area is rainfed and 2001-2005, to ensure food historical trends and the experience of (iu) develop water resources and impove water recovery- structure cultivable land is curtly vulnerable to shortfads in ranofall (iv) secunty. The Plan also other countries maily because of high techniques, recharging underground water basins, resort resulting from unutilized; (tv) good export limited srabl land for culivaton aims to increase target for fisheries sub-sector. Targets to water harvestig techniques that are economically ptice distortions potentials due to proximity to exacerbated by deforestation, ag2icultutal exports, for non-fisheries agricutural output of feasible; (tv) construict more small water dams, dikes and (eg, low cost of the Gulf markrts; (v) huge desertification and fragmnentation of farmers' income and 6.1% can be achieved if the constraints canals to improve the efficiency and conservation of water abstraction potential for increasing holdings; (v) increased plantatin of Qat; reduce underemployrnecn in the sector are removed, non-Qar water, (v) accelrate development in the coastal areas to due to diesel productivity from cultivated area (vi) high population growth and rapid in the sector. cultivated areas and yields are encourage relocation of popuation from areas waith low subsidy and low given current low yields for most urbanization; (vii) prevalence of increased, Qat plantation is controLed, water resources; (vi) improve agdcultural and veterinary tariffs for crops in most areas; (vi) world traditional cultivtion methods; (viii) and ingation management is extension servkce and their coverage (e.g. seed varieties, electricity). famous varieties of crops (e.g., high post-harve losses; and, Ci) improved- and fertiuiaon techniques,) to ensure increase in Arabica coffee). agriculmtul exports are hampered by agrcultual productivity- (vii reduce post-harvest losses; high prices on niche marktes and lick of and,(viii) promote terace rehabilitation and improve quality contoL watershed and range management ,4,wi~~~________________ ______________ A,, t.*- "- t'i.'~* . ' ,. t,.- t'. : -'J r . i. ; , { C,;. ': ; _ (i) Fish reserves are estimated at i limited infrastructure (landing centers, SEYP considers fisheties as The objectives appear realistic, @ improve fisheies reource management and Undertake a 850,000 tons; (i) warmn waters jettie, ice plants, chili rooms, and potential and promising provided that they wil be reached by development of smal scale fisheries; (u) enhance fish stock evahltion throughout the year; Ci) auction sites) and basic services sector for achieving high anincrease in prices through improved marketing and strengthen export markting networks; (in) study and assess considerable demnerial and accessble to fishermen; (u) lack of basic GDP growth and targets quality and marketing mechanisms and improve the perfornance of the institutions and research the feasibility of pelagic fish resources; (Qv) high data, statistics and information on an average annual 13% reduction of un-controlled production centers in devdoping modem breeding and culture cuttent licensing value fish stocks (rock lobster, resources in the fisheries sector, ihi) growth in its output during rather than only increases in volune of farms; (iv) improve management, control and evaluation schemes in the cuttlefish, shrimp and bottom- inefficiency in the management of 2001-2005. Annual output landing. A stock assessment and a of fishing activities, their proper exploitation, and light of the study. dweling species), and, (v) there fisheries and marine life; (iv) incomplete is targeted to increase from utilization plan are high priority. protection firom polution and over-exploitationn (v) is scope for fish production legislation, regulations to regulate coasta 135,000 tons in 2000 to remove constrints to private sector provision of basic from aquaculmre and mau- and commercial fishing, which expose 248,000 and the sector's infrastructure and facilites (eg., refrigeration, storage, culaure the fish wealth to overexploitation and contrbution to GDP is transportaton); (v) revise legislation, procedures, and illegitimate fishig (v) lack of quality planned to increase from regulations related to traditional and commercial fishing controls in the fishing arcvities; (vi) 1% in 2000 to 1.6% by (viu) establish quality control laboratories in the main current licensing is not based on rellable 2005. ports and fishig centers to cnsurc intetnadonal qualiq staistics of standing stocks; andt (vii) stadards, and (vi4 improve capacide of the Coast poor performance of institutions. Guards in marin control and inspecdon to p=t (i) potentals for new oil and gas f financing constraints to cap gas SPYP aims to increase The target set by the SiYP for growth Main reforms to tap the potendals in this sector arc See sections below discoveries; (i) large mining resources; (i) poor incentve fiamework industrial activities by 3.0% in industrial value added is very low outlined below. potendals; (iii potentials in and weak insttutions hamper on average between 2001- although it masks very high growth manufacturing activities (e.g, manufacturing activities; (ii security 2005. rates planned for some sub-sectors garment) given availability of situation deters mining activities; Qiv) (manufacturing onstuction and water nanural resources, cheap and weak infrastructure and high production and electricit). 'Me predicted abundant manpower, and costs, and, (iv) weak legal andludicial stagnadon in real value added of the accessihility to regional and. systems do not encourage industral oil sector is an underestimaton of international markets. Iacvitie- r_ recent discoveries. _ 70 banrrls. However, prospecs for newer ooes; CHt3 high volatity in oil stbagnmt duriog the plhn as on oil production as well as the Bodrareetwith Sauidi Arabia; (st3 enhbance shang new disooveries are promising prices particulirly after the events of aLresult of expected deEme. oudook for oil pncm a; ) vt oerih,reguhtory and control capaltisis in the agreernents in particularly after signing the September Il1b; itt) lack of domestic in production from expected high volatirity of oil ptices mawegment and production of oil; otat3 encourage dic dthe ligiht of past Border agreement with Saudi capacities for surveys and esploration; producing fields (2.5% and decline in oil production levels, oil local privare sector to invest in the sector particularly in experience and Arabia. The country has still (iv) dominance of foreign oil companies annually), additional revenues need to be saved or invested service provision to the oil fields, (tv) develop and experience of unexploited territory and future in exploration and production; (v) production from new gradually in long-term high-retumn improve the capacities for marketing oil in the external oher countries to technologies may permit secuity concems impact production discovesies (12.5% of 2000 activities, and (in) the expected decline markets; (v) ration local denand for oil products and increase the utlization of currently levels, the pipelnes, and detract foreign levels annually) and oil in oil value-added will affect incomes improve the efficiency of their use by eliminating the attractiveness of inaccessible reserves of oil and companies from investing in the oil prices at US$ 18-22 per negatively but may also have some subsides; and (vi) promote the establshment of investment in the gas. sector in Yemen; and, (vn market barrel, positive effects on substitution to non industties that rely on oil derivative products as primary oil sector and to concentration in oil exports to emerging oil activities (due to low oil prices and or intermediary inputs with a view towards increasing the attract foreign Asian countries. reduced Dutch disease); economic benefit and achievng economic savings with companies. *'2.2f 'i>, ^; >'-<' ^ i'"-.'"X>'~~~~~~~~~~~~~ 8',s',S f >~~th -. s ector suc .Aste manufacurng Gas proven reserves are (i3 compention from MENA countnes The SFNP Rims to secure Given the exisong constraints, it is (I) encowiage power smatons, facrones, producnon unuts Intensify efforts estimated at 12 - 15 bilion cubic with developed infrastructure (e.g., financial resources for the unlikely that the gas sub-sector will and motor vehides to convert from the use of diesel and to promote and feet. Qatar and Oman); (t) Gas Export Gas Export Project, have a tangible impact on economic heavy fuels to the use of natural gas instead, market natural project requires lrge financial resources increase domestic gas grwth during the implementation of gas and revnew (about US$ S bilCon), and; iii) lack of consumption in electriity die SFYP. cunlent secured markets for the sale of a. generation and industr. affans_ Prorrusing reserves of gold, (i) dLsputes in property oghts and SPYP aims to ncrease the The plan tamrges are unlikely to be met (i) complete geological surveys, minig maps and Enhance platinum, titanium and other ambiguity of lws and regulations share of mining to 0.1% of unless concerted efforts are exerted to assessments of mineral reserves and the potential for domestic security mineral reserves (e.g., gypsum, organizing and ownership and utilzation GDP, to enhance its remove the identified constrints that commercial exploitation of the minerals and mineral ores; (eg., Marib and marble, basalt, etc.). Many of natural resources; (ua) poor contribution in the hamper mining activities such as (u) upgrade the legslative and institutional framework for At-Jawf terrtories are yet to be explored. transportation network to link potential development of the security concems, transport networks, regulting the exploration and exploitation of industrial govwrnorates). productive areas to seaports and other regions where minerals are and clarification of property tghts and and constcuction minerals and resources; (im) prepare the outles, in addition to high cost of discovered and in the land issues. essential basic infrastructure, especially in the areas of transportation; (i security concems and creation of more jobs. The promising reserves of mineral resources, with a view tribal conflicts over land and resources, plan targets an annual rate towards improving their extracton, exploitation and and (iv) weak promotion activities to of- -growth- of mining- of transport domestically-and to overseas msrkets; and lv) - attract FDI into miing activiti.- t0/%. implement an intensive promotional prngram on the ________________________ ____________________________ i~~~~~~~~~~~~nsestm eni opportuLnities in die miningu sect r. -.'4.8 Wisr sdE hi''R r,;r* - -,,r:ic;4- .!. -- 'ts - ~ K ''~r ~ -. S There ire enormous gas ( huge energy losses (380, in 2000), (u) SIYP aims to raise output These sectoral targets depend largely (i) attract pnvaLe secmr invesunenEs Lnto power Reformn of PEC potentials that can be used in weak administrative and financal of the sector by 7.5% per on government investments because generation and distribution as well as water supply; (a) to ensure its electrity generaton by capdties in the sector, (Wi)l high cost of annuin. It plns to raise the acivities are mainly driven by the give more attention to rehabiltation of existing networks; financial conversion of stations to gas operations and inability to collect eetridty coverage to 40'/Y, public sector. . Private sector Cmi) introduce cost recovery in water supply, (rv) give high austainability and turbines. enough revenues; and- (iv) rural and reduce losse to 33%. involvement in generation, supply and prtiority to densdy populated areas in rural electrification; review tariffs for dectification is difficult because of It also plans raising water distribution of water and electricity will and, (v) strengthen administrative and financial capacities public utilities. dispersion of populaitn in smaller supply for households use faclitate the realization of the plan of publc authorities to ensure their fuore susainabiiy. commnunities. by 9.5% annually. targets. 71 fritts, fish, numineas); () larg watat and sewaage) and high cost of m2nufacomng value-idded the cDnstr2ints in the sector, fiurther finrriwork to encourage Wabor-intensive industries (eg, and essential population compared with othba tansportllion due to weak networks, of mnore than 90% (t1O% for tradc liberalization, itnprovements in die investment Istw); (iii review, streanmGe and simphfy utdudes required Gulf countries; (4u availbility of poor roads, and monopolies in thic non-refining infras=utre and utilities, the laws and regulations related to industry activirics; (Iv) for labor with law cost; (1v) strategic sector, .(u) low productivity for low manufactring and 7.5% improvements in the legal and judicial improve capacites for monitoring and implementing manufacturing transit location between South technical and professional caliber (ui) for oil rcfinin). It aims to systems. There are good prospects for industrial standards and controls to cnsurec quality (e.g, East Asia and Europe, the Gulf dumping and smuggling and unfair incrtase the share of the manufacturing of food and tobacco improvements and to protect consumers; (v) simplfy transportation and the Hom of Africa; (v) the competition; Civ) weak legislative, manufacturing sector in for exports to the GCC and African export procedures; remove administrative constraints and and electricity); establishment of Aden Free judicial, administrative and enforcement the GDP from 7.5% in countries. ITere are also good improve the incentive framework facing exporters; (vi) Zone (with the necessary systems; (v) security concems; (vi) low 2000 to 8.8% 2005. The prospects for manufacturing of textiles assist small industres and the handicraft enterprises by infrastructures). level of domestic demand; (vii) lack of plan also seeks to and gaments, construction materials, training programs, promotion and marketing their skilled manpower and high cost of encourage and give and fariture and wood work because products and easy access to credit (vii) reorient the foreign skilled workers; (vii) difficult incentives to promising of the comparatve advantages of outcomes of the education system to the demand of the access to credit; lack of tem financng export manufactures, and Yemen in such industry. The private sector for specialzations, skills and qualifications and high interest changes; (tx) high taxes to support the prospects of manufactuing are bette as well as increase coordination between manufactures rates; and (x) hassle by government development of small-scale with the development of the free zone and local vocational training institutes; (viit) attract and bureaucrats. and traditional handicraft in Aden. Finaly, Yemen has not yet encourage FDI and encourage joint investments industries to create job utiized its capcity for exports of opportunities to enhance technology transfers and to opportunities and to manufacturers. ease credit constraints; and (ix) enforce intenational aleviate poverty. standards and measures for consumer and environmental protection and giftsn the con edtivenless of industris. (i Good quality and relaively (i lack of regulitions in property ights, SFYP targets average rise Although there are good potentials Reform of the legal and judicial systems and strengthen Formulate a cheap building materials; (it) land ownership, tenure, tides and in construction value- and enormous needs for construcion the enforcement of their rules. comprehensive high skiDs in construction and registration as well as difficulties in added of 11% per annum and bulldings, achieving the plan program to building; (ii) expanding enforcing laws and regulations; and raising its contabution targets appears challenging without address land manufacturing activities in in GDP from 4.2r/a in 2000 addressing land and property rights ownership, titles construcrion matenals. to____________________ _ b.5% by2005. issues, _ _______________________t _ _205_ a snd Yemen his good potenials m (i) weak lel and judicaal systems, (u) Services value-added IS Th target growth rare ol servces SeeJ.1to3.4 be1ow Improve tourism, and its location despite hlberalization and deregulation, projected to increase by seems rather ambitious and its regulatory provides good prospects for monopolies in the sector detae private 8% per annum by the attainment critically depends on a environment for trade and transport services. sector involvement; Cm) weak financial SPYP and to raise its number of reforms in the business and service delivey. There is also wide scope for system and low levels of financial contribution in GDP from investment environment increasing the contdbution of intermediaton; (Iv) lack of technical 39% in 2000 to 43% by financial services in tota GDP skills for high quality sevices; and (v) 2005. (b%rLkinR and insurance) sirgnl concems in mny govemoraLes, _________________ E ,*,& 5 "' .*,. :,, ,. . j . -,-. ..-- , t 'a , ~ *- ,-'Y '.-: -.-s-.t-r " ,:,- ki) artAcnre uncontaminated (i) strcturaJ impedLments such as ( The SFYP argecs an (i) overall, the SEP tamrgts can be (i) improve Supporting mfrastrucnLre and relted services, Improve travel natural environment and unique security concemas (itdnapping and annual average growth rate achieved if the constrains in the sector (u) reassess air transport polices and faclitate access by security, cukural heritage (historical cities prolifation of arms) and lack of of tourism (hotels and are removed; (a) the targets for foreign airines to reduce air tavel costs (Liberalize particulary in of Sana'a, Shibam, and Zabid are necessary infrastruncture; (i) tnavel staurants) at It%; (i) it intrnational tourism activities may be landing rights, review landing fees, allow charter flights, tourism- part of UNESCO's Worid waroinga to Yemen by many Westem also seeks to improve and high given the existing constraints; and open more atrports to intemational traffic); (i) designated areas Cultural Heritage); (ua 2,000 kms govemments; (ui) lack of legal protection modemize tourist facilities avcrage annual growth rate of tourism continue exhibitions of Yemen's cultural heritage and and tackle the of coisdine and more than 100 for investors and bureaucratic hurdles to create a more balanced, in the 1990s has been about 5% onrl, archeological treasures and combine them with well tcdnapping 72 (e.g., Socata island); (IV) hostili investmnt environerent (neld of accommodauon capacty (thougb itindica cxpected increase i about the valuts of traditional tausk eii hfndktft mountains in th a Noll, stone a local pannr, dsaficult acicss to lnd required to meet doe firc ttel o share of GDP). actiitics, d Efe styles; (vin estaions effvcsiv villaut, uld slopes sculpted oy permits ad uteity connection); (v) high tourism demand. visonittntsl protostion and cultural hcecngc famets, cuinan acin dnto cost of hotel opactions nd air atccess ptrestrvaaion potias ond lar ea and esuc trat the spectal ular t vraces; (v) cianyons r mduce th b matgin of tour opfactrs; (m) agencids iysponsibt for adiir enforcimrent, such as EPA, in the South with green strctchc pubhEc rcoummc for tourism promotion GOPHCY, GOAMM develop the m=nagl -and of llailand suinhunded by arc nimiteds (vfos inexpgs enced hotrl tochnical capaby ity to handle tbis taskn (vul foster the tolora d i ocky woatos wnd mantagent and staff resulta in poor cxtension of the agth of sthay of intoursaional visitors by sepamtecd by dcwrted highlandas setvices compared to Prices; (vih offcring thern the oppornunay tD combine their business (vi) beautai vilhges are ncstled occupanqy rates in beach destinations visits vith visits to sites of culturaL, scenic and ecological in thc mountains facing dcnse are negwatvely affected by seasonaltty intcrct (main motividon) or beach and resort arcas palm grows, (viil CiutiS and detcmined by climatic 'ctfwms; () (subsidiary product); and (viii) improve the rectums of vilages are inhabited by concerns of losig historical and culoaml touds by Emiuting fo-cig cxchage Ickag-s by traditional population whiosc hentite aLnd environnnental degmodanon, incrcasing die nadonal share of tourism iovestemcnt and lifestyle echoes centuries of and (mx) cultural and religious values may promoting the use of domestic inputs and materials, and civilization making Ycmen an inhibit some fomrs of leisure and beach national management and labor, all without appeairng destination for cultural tourism (gambling, alcohols, Oe). compromising the quality of services. and eco-wurism. I I I _ _ _ _ _ _ _ _ _d _ _ _ _ _. _Q _ _ _ . ; *r.., -,lA'o`2. .'tS- . 2 - ` , ; .. i - . - S- - . ; Yenmen has advanageous (i) technical specificanons and sndasrds (i) Transport and Hgh transporranon coSt and pOOrF () ensure pm-ace promson of ransport and Furnber location in the internadonal for roads are not consistent and load communications valuc- nctworks is one of the major communications by schemes such as BOT, BOO, etc.; liberalization of shipping networks. A new lmits are not enforced; Cu) lack of added is projected to constrints to economic growth and (n) create reguaLory cies independent from provision the sector, container port was conaucted regular maintenance to roads; (iii) incrcase by 9.1% per private sector development in Yemen. of services; (iii) liberaliz tariffs and fares in the sector, particularly in in Aden and work is underway duplidty of agencies in lend-transport annum over the SFYP and Thereforc, this sector should receive (iv) privatizanon of public enterprises into the transport telecommunicati in three additional seaports. sector, (iv) monopoly of transport the sector's sharc in GDP higher ptiority in the short and long- and communications sector; (v) assess the feasbility of ons and air and Yemen has also 14 aiports (6 of offices (eg, Ferzah); (v) high cost of is expected to increase terms. Deregulation, liberalzation of cstablishing a rall (train) networks, particulady to link land transport which re internationas. Asphalt freight and containertrans-shipment due from 10% to I12% by prices, tariffs and fares, encouraging areas of rich mineral reserves with seaports; and, (vn) sectors. roads reached 6,586 km in 2000. to the limited nmnber of regular 2005; Cu) the plan also aims privmae sector provision of services, complete and maintain existng roads before embarking There is scope for shipping lines; (vi) old fleet of ships and to increase passenger privatizaton of government on construction of new ones. communication services (eg., port equipment; (vii) lack of storage and transport on domestic and monopolies are arnong the most telephone coverage is now 2 refrigeration services; (viu3) weak international routes by an critical reforms to achieve the SFYP lines for every 100 persons). organiation, managemenst and average of 4% annually and growth targets. regulatory gudelines in the pore and increase air cargo by an marine sector-, Qx) monopoly of avercge of 10%/a per telephonc services; (x) concentrmaion of annum; (ii) the plan trgets communication and postal services in building some 4,500 km of urban areas; (Xi) high cost of asphalt roads and doubling communicatons especially internet, telephone line connections cellular and international services; and, by the end of the plan. (xii) dispersion of populaton in smaller I communites in the rural ares. 3;3 S sthI'rae-: w Air d.,At i;. ,-. - . ,. n ... * ;?K:, .;__;r ;____;___;___ Ymcren's urge ares, diTeren I ) weaknesses in the mn-ururonal and IValue-added of wholesale The trgets can be aclerved if mon ctf 0 ( establish and enforce regulanons for consumer Reinforce the pattern of economic activies regulatory frameworks; (ii monopolies and retail trade is planned the constraints in the sector arc protecton and safeguards for intellectual gnd property legal and judicial among 2overnorates, hfrRC on certain activities; CAii smuggling and to increase by 9% per addressed. tights, (i end monopolies and unfair compettion in the frareworks. 73 gmrovth e important factors n communication, credit); and, (v) h ank of l o accdeJaRdomesiic trde. _ qu#ali controls and stendards. I Giv-en the Lnfancy of the private () Lmeffident and inflted civol semvces, Dursg SFNP5, govemmnent (0 real publlc nvcsfrnent Ls planned so Ok ,ncre2 effiaency Ln the delivery of pubbc sennces, (u) Avoid sector in Yemen and high (ii) inefficiet allocation of pubLic semvies are planned to increase by IZ70/o during the phnm; (u) redirect resurce towards social sectors and unsustanlable poverty levels, therc is a need reources Quo current spending at the increas by an 2annul the tatrget of raising die shirc of infrastructure and away from production rand increases in aLnd scope for increased and expense of maintenance snd operatons average of 4.70% and their investrnent spendLng in total spending distnibution; (1u) complete vigorously and systemnatLcaLIy govemrnent improved govanmment servces and investmnent spenduW; and, Ciu) high share in GDP wiil from tS% to tD 8%/ by 2005 and the implrnetatLon of the Civi Servces Modernization spendingr which patticularly in the social sectors cost of contracts and procufremnt and therefore decline slightiy increasing the relative aDocation of Project; and (iv) accord higher prioity to uncompleted has been the and some economic sectors. weak financial management. from 10.8% in 2000 to govemment spending on the social projects and to maintenance and operations. cause of 10.4% by 2005. sectors are commended; and (ii) the unsustainable expected decline in the relative fiscal deficits in allocations on transport is inconsistent the past with piorities set for the sector. (Q there Ls a Wide scope fOr (i) Tm was negative for most of the SFYP seeks to aceve an Ci) negative or low TFP chaicrenzes (j) improve the business and nvestment envimonment. Enhance raising productivity by pursuing l99Os; (u) decline in investment tatios to increase in total investment most of the economic sectors; (i and -(u) improve the outcomes of tde educational and productivity structaual reforns and even GDP in the late 1990s, and; (Lii) the from 19.2% of GDP to there are inconsistencies in dte aining systems. increase by without additional investents; business and investment environment is 290/0 by 2005. This will constant price data for investment further (u) there are good potentials to not conducive to attract prvate (ocal depend on achieving a high levels under the plan; (il) the plan liberalization and attract FDI I oil, gas, minin, and foreign) investors. nominal growth in private envisages at least an annual increase in deregulations, manufacturing and into Aden investment reaching total investment by 14.3%i v) privatization of free zones; and (im) political 23.5%, and 15.1% for sustained improvement in productivity public reLations with the GCC publc investments (18% performance depends on success in enterpises. countees improved. for Govt. and 10% for oil rspid diversification in economic sector). Thus, the share of activity over time, in trade goods and private investment in total services and away from excessive investment is expected to dependence on resources and rise from 53% in 2000 to comrmodities such as oil. 62% b 2005.. .lruvzssm .'a; i. ~ . "tr X :., ;; : : .;e . s - *.., :;. .,: ,.-.. :. (i) Yemenis sbroad have (i) inadequate access to high qualty, The SFYP aims to rse he (i) in real terms, pnvate inteimient is (l) reduce policy uncertanry (macro-fiscal, scrucrtral and - Wmprove govem- considerable wealth and competitive prices infrastructure (roads, share of the private sector projected to increase by an annual firn specific unecrtainties); (i) improve the quallty of asne and mrnket investment, good telecoms and electricity) (u) shortage of in total GDP, and in non- average of 21%. This seems uneeaEstic public services (roads, electrcity, ce and (ii) improve inssitudons by entrepreneurial skills dtat can be lnd (ii) regulatory and administrative oil GDP to 53.70/o and in the current business and investmnent financid intermediation (see Chapter 3 for detass). strengthening attracted to invest in Yemen; (ii) hurdles (iv) costly oansportation; (v) 72.3% respectively by 2005 environment; (a) value-added of the accountability of ongoing reforms in smugoing and dumping, (vi) marketing or a real growth in pivate private sector continued to decline as a the public sector, microeconomic policy and transportation difficulties; (viu) sector value-added by an share of GDP and non-oil GDP in the better formal framework and international linited access to credit and high cost of average annual rate of 10% late 1990s there are no indications in legal and trade regime are making an financing; (viii) high levels of risk and over the coming five yeas. the SFYP about sources to finance the contract enforce- impact on the private sector uncertainty in the general investment envisaged addiional investment; and; ment Bsstems, environment; uii) Aden port and clmate, (ix) highly complcated and (iii) pcivate investment which peaked and reduction of free zone have promising corrupt tax system, and, (x) weak judicial at 20%/o in 1997 condtnued to decline in regulatory and potentidals to atta pdvate and legal system and law enforcement. the subsequent three yeas reaching administmtier sector investments. only O1% by 2000. hurdles. 74 economics in MENA. (a) major (u) non-oil exports depend on a Gmnited merchandise exprts by annual decline in merchandise exports (transport access tO credit, promotion, e*.); Ciu) enhance fiberaizgaion unprovemnents in compet- number of cormmoditie; (iii) high degree 2.5%/ in the corniing five is based on the assumption of annual qualiqy of pzoducts and enforce sanitary and othet qualiq polices. iidvcenas gnd performance of of mnarket conceuatiaon and high degree yemdecline in oil exporm s standards; and (Iv) increase processing of rawv agricultural non-oil exports in the 1990s; (it) of vulnerability of exports to the oudook commodides to increase value added (fish, coffee, e). improved poGtical relations witb in emerging markets; (iv) poor quality the GCC countries; and (iv) and sanitary standards; (v) low value of manufa*turing export capacity is exports of primary commodities. Inot fily utilized. 75 BIBLIOGRAPHY Al-Sabbry, Mohammed "Development of Manufacturing in Yemen" Background paper prepared for the Study and the PRSP, World Bank Office in Sana'a, December 2001. Auty, Richard (2002) "Best Practices in Diversification for Mineral Exporting Countries' World Bank Managing Volatility Thematic Group Presentation. Banerji, Arup and McLiesh, Caralee (2002) "Sizing Up: Governance and the Business Environmentin Yeme.d' Draft Report on the 2001 Private Sector Survey in Yemen, the World Bank, March 2002. Barris, Jean-Fran,ois (2001) "Sources of Growth in Agriculture and Fisheries" Background paper prepared for the Study and the PRSP, World Bank Office in Sana'a, December 2001. Brizzi, Gianni (2001) "Tourism Development in Yemen" Background paper prepared for the Study and the PRSP, World Bank Office in Sana'a, December 2001. Dasgupta, Dipak, Keller, Jennifer and Sirivasan, T. G. 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World Bank (1997) "Yemen: Towards A Water Strategy: An Agenda for Actiod' 13 August 1997; Report No. 15718-YEM. World Bank (1999) "Republic of Yemen: Fisheries Sector Strategy Note", Report No. 19288-YEM, Middle East and North Africa Region, the World Bank: 14 June 1999. World Bank (2000) "WorldDevelopmentReport2000/2001: AttackingPoverty', OUP. World Bank (2001) " Yemen: Country Assistance Evaluatiod' WashinQton DC; January 29, 2001; Operations Evaluation Department, Report No. 21787. World Bank (2001 b) "Yemen's Budget and Institutional Reform: Public Expenditure Review in Support of the Five-Year Plad' Technical Report, the World Bank, Middle East and North Africa Region, April 2001. World Bank (2002) "World Development Report 2002: Building Institutions for Markets", OUP. 77 ANNExES Annex Table 1: Share of Services Sector in Yemen's GDP and Its Contribution to GDP Growth, 1991-2000 (%/ 19" 7.8 54.2 3.8 193.5 18.8 16.7 2.9 147.6 4.8 8.2 0.3 16.4 -6.0 14.8 -0.9 -44.9 5.5 5.9 0.3 14.9 2.3 4.5 0.1 3.4 1992 9.9 54.3 5.4 64.6 20.8 16.9 3.5 41.7 1.7 8.3 0.1 1.6 17.4 15.5 2.6 31.1 3.3 6.1 0.2 2.4 -1Z9 3.7 -0.6 -6.9 1993 3.7 56.8 2.0 49.6 13.2 17.2 2.2 54.9 6.9 9.1 0.6 14.0 -13.9 16.7 -2.2 -53.0 5.4 6.3 0.3 & 0.3 3.8 0.0 0.3 1994 -0.2 53.4 -0.1 -4.0 13.6 15.9 2.3 108.0 -13.2 9.8 -1.2 -55.5 -19.2 14.6 -3.2 -148.5 4.3 6.1 0.3 1Z4 8.6 4.5 0.3 15.0 199S 7.4 48.4 3.9 36.3 12.7 129 2.0 18.5 15.5 9.7 1.5 14.0 -28 126 -0.4 -3.8 5.1 5.9 0.3 Z9 -9.0 3.7 -0.4 -3.8 1996 5.0 41.9 Z4 41.4 8.0 10.0 1.0 t7.6 8.2 8.0 0.8 13.5 -14.0 11.3 -1.8 -30.1 5.7 5.9 0.3 5.7 -24.1 2.3 -0.9 -15.1 1997 8.1 40.9 3.4 41.9 7.7 9.2 0.8 9.6 6.6 8.2 0.5 6.6 18.3 11.9 2.1 25.5 6.2 5.3 0.4 4.6 -1.0 2.0 0.0 -0.3 1998 Z4 47.9 1.0 19.8 0.9 11.0 0.1 1.7 8.2 9.2 0.7 13.7 6.3 14.3 0.7 15.2 6.4 6.4 0.3 7.0 61.8 3.6 1.2 24.8 1999 4.8 41.1 2.3 61.6 5.9 10.5 0.6 17.6 -2.2 7.4 40.2 -5.5 2.0 11.6 0.3 7.8 6.3 5.6 0.4 10.9 24.1 3.4 0.9 23.6 2000 4.7 38.4 1.9 37.4 5.9 10.8 0.6. 12.1 9.2 7.2 0.7 13.3 1.0 10.3 0.1 0.0 6.4 4.9 0.4 6.9 -8.6 2.9 -0.3 -5.8 Annex Table 2: Share of Industrial Sector in Yemen's GDP and Its Contribution to GDP Growth, 1991-2000 % 1991 4-02 24.5 0.0 -2.2 -5.6 10.0 -0.8 -386 13.9 1.2 0.2 8.2 8.1 3.2 0.2 11.1 3.6 10.1 0.3 17.0 1992 -3.9 22.7 .0.9 -11.4 -15.4 7.1 -1.5 -18.6 1.9 1.0 0.0 0.3 17.0 3.6 0.5 6.4 4.4 11.0 0.4 5.4 1993 4.5 21.8 1.0 25.0 4.2 5.6 0.3 7.4 1.8 0.9 0.0 0.4 1.7 3.4 0.1 1.5 6.0 1Z0 0.7 16.2 1994 13.1 24.0 2.9 132.6 427 6.1 2.4 110.6 -10.3 0.7 -0.1 -4.2 -17.2 3.7 40.6 -26.8 -5.3 13.6 -0.6 -29.5 1995 21.2 32.2 5.1 47.0 19.9 13.8 1.2 11.2 13.6 0.6 0.1 0.8 23.1 3.5 0.9 7.8 23.7 14.3 3.2 29.8 199 10.5 41.9 3.4 57.6 13.5 26.3 1.9 31.8 1Z3 0.7 0.1 1.3 28.2 3.9 1.0 16.8 0.6 10.9 0.1 1.5 1S 7.6 43.6 3.2 39.4 7.5 27.8 z0 24.3 20 0.8 0.0 0.2 28.4 4.6 1.1 13.9 1.1 10.4 0.1 1.4 1998 2.7 3Z8 1.2 24.1 2.5 16.4 0.7 14.1 Z4 0.9 0.0 0.4 1.4 5.2 0.1 1.4 3.8 10.2 0.4 8.0 1999 4.8 4Z8 1.6 423 7.8 29.2 1.3 34.7 7.2 0.7 0.1 1.8 0.7 4.7 0.0 1.0 0.7 8.2 0.1 1.9 2000 , 7.0 46.2 3.0 58.4 7.2 33.8 2.1 41.0 6.5 0.7 0.0 0.9 8.2 4.2 0.4 7.5 6.1 7.5 0.5 9.8 78 ANNEX TABLE 3: SHARE OF AGRICULTURAL SECTOR IN YEMEN'S GDP AND ITS CONTRIBUTION TO GDP GROWTH, 1991-2000 (°/O 199t -7.4 21.3 -t.8 -91L2 -9.0 20.4 -2 t -to8.t 0.4 8.t 0.0 t.8 5Z8 0.9 0.3 16.9 1992 19.1 23.0 41 48.9 19.1 22.1 3.9 46.8 0.7 7.4 o.t 0.7 t9.0 t.o 0.2 2.1 1993 4.4 21.4 1.0 25.2 4.7 20.5 t.0 25.5 t t.9 7.4 0.9 21.7 -1.4 0.9 Q.0 -0.3 1994 -3.4 22.6 -0.7 -33.7 -7.8 20.7 -1.6 -73.8 -12.4 7.1 40.9 -42.3 100.2 t.9 0.9 40.1 1995 6.9 19.4 1.6 14.4 6.3 17.7 1.3 1tz -4.9 5A -0.3 -3.2 13.3 1.7 0.3 2.3 1996 1.9 16.2 0.4 6.1 1.8 14.7 0.3 5.4 7.0 4.7 0.4 6.4 2.6 1.5 0.0 0.8 1997 8.8 15.5 1.4 17.6 8.0 14.0 1.2 14.6 6.0 4.4 0.3 3.5 16.4 1.5 0o2 3.0 1998 13.7 19.4 2.1 43.5 14.6 17.7 2.1 41.9 7.4 5.2 0.3 6.7 5.2 1.7 0.1 1.6 1999 0.2 16.1 0.0 0.9 1.7 14.9 0.3 7.9 1.8 4.4 0.1 2.6 -15.1 1.2 -0.3 -7.0 2000 3.7 15.3 0.6 11.6 3.7 14.2 0.6 10.9 4.1 4.2 0.2 3.5 3.0 1.1 0.0 0.7 ANNEX TABLE 4: INTERNATIONAL AND DOMESTIC BED-NIGHTS IN 3,4 AND 5 STAR HOTELS, 1995-2000 1995 306,755 627,525 934,280 1996 365,830 634,320 1,000,150 1997 482,706 829,894 1,312,600 1998 525,762 904,45i 1,430,220 1999 379,405 943,10' 1,322,510 2000 473,434 1,169,876 1,643,310 Source: General Tourism Authority ANNEX TABLE 5: TOURIST ARRIVALS BY AVERAGE LENGTH OF STAY AND DAILY EXPENDITURES, 1995-2000 1995 6135 6_ 0,5 S 6 6,250 50 1996 74,476 5.0 365j830- US$-I50 6,870 55 1997 80,451 6.0 482,706 US$ 145 8,970 69 1998 87,627 6.0 525,762 US$ 160 11,729 84 1999 58,370 6.5 379,405 US$0 160 9,774 61 2000 73,836 6.5 473,434 US$ 160 12,540 76 Source: General Tourism Authority 79 ANNEX TABLE 6: HOTEL ROOMS BY CLASS, 1995-2000 1995 656 416 1691 1500 1863 393 6519 1996 646 418 1808 1495 2147 463 6977 1997 646 458 1928 1675 2467 523 7696 1998 646 828 2105 1893 2719 608 8799 1999 842 1275 2037 1903 2754 934 9765 2000 1056 1533 1998 1972 2307 1574 10440 Source: General Tourism Authority ANNEX TABLE 7: TOURISM ESTABLISHMENTS BY TYPE AND GOVERNORATE Capital City 309 t80 15 135 639 Aden 88 82 19 47 236 Taiz 130 337 2 9 478 Hadramout 76 43 11 23 153 Hodeidah 65 63 4 8 140 Iahej 25 46 1 1 73 Ibb 1 6 70 1 3 90 Abyan 12 4 - 4 20 Hajjah 31 33 1 - 65 Sadah 37 38 4 - 79 Marib 3 10 I 1 15 Shabwah 9 21 - 3 33 Al-Mahweet 1 7 2 3 13 Sana'a 13 3 2 12 30 Dhamar 12 14 1 3 30 Amran 9 3 -t2 Al-Mahrah 8 3 I 1 Al-Baidha 12 3 - 15 Al-Dhala 27 7 2 1 37 Total 863 987 66 253 2169 Source: General Tourism Authority 1 = hotels and other accommodation facilities 3 = clubs and amusement parks 2 = restaurants and similar establishments. 4 = tour operators and travel agencies 80 ANNEX TABLE 8: GROwTH OF MANUFACTURING SUB-SECTORS 1990-2000 (°/0) Food Processing 1.3 1.3 1.9 -6.6 37.6 5.4 -2.2 8.3 -1.7 6.3 Textiles, Clothing & Leather 3.1 9.4 11.9 -1.5 14.3 -34.9 -8.8 35.4 0.2 3.3 Wooden and Furniture 8.2 11.4 7.3 -1.4 17.7 -11.5 2.4 Z6 0.6 2.8 Paper & Printing 0.2 9.6 21.6 -4.4 9.0 -17.6 6.4 6.5 5.2 2.0 Chemicals and Plastic 0.1 0.2 0.8 -8.7 9.1 -5.1 -6.7 17.1 1.2 3.4 Non-metallic (Construction) 6.1 7.6 13.4 -3.7 38.1 13.5 8.4 6.0 2.8 11.4 Metal Products, Machinery and Equipment 12.0 13.8 10.1 0.3 17.5 7.7 2.9 -19.0 0.8 3.5 Oil Refining 3.2 0.3 0.3 -9.5 6.4 -3.8 0.4 -6.4 1.5 -0.4 otal Manufacturing (including Oil Refining) 3.6 4.4 6.0 -5.3 23.7 0.6 1.1 3.8 0.7 5.8 Manufacturing (excluding oil refining) 3.7 5.5 7.4 4.4 27.6 1.4 1.2 5.5 0.6 6.8 GDP 2.0 8.3 4.1 2.2 10.9 5.9 8.1 4.9 3.7 5.1 Source: CSO, National Accounts, 2000. ANNEX TABLE 9: PROJECTED OIL PRODUCTION LEVEiLS, 2001-2010 FROM EXISTING FIELDS 2001 12 09 206 8. 285 _1t0.4 s8 2t1.2 8.2 3 tis 0.6054 0.2640 5 A P3 t o 31 i 2fu 83.6a 3io s r ls e d 6 a g 8 7 ar 6 i n.3 4o n 0d5 of b e 4p7 1d 204 69 25.2 229 83.6 - 208 7.6 46.7 17 5.5 2 6.7 2.4 0.5 02 378 13 200 55 20.1 2 28 83.2 t127 1 4.6 37.5 t13.7 1 4.3 t1.6 4.8 t .8 0.5 0.2 343 12L 206- _44 16.1 198 72.3 10.12 3.7 30.1 tt.o -3.3 1.2 -3.6 1.3 0.s 0.2 286 107 207 35 1t 8 164 59.9 - 8.55 3.1 24.1 8.8 V7 t.0 2.9 t.t 0.5 0O.2 _ 238 86. 208 28 10.2 139 sQ07 6.66 2.4 19.4 7.1 2.2 0.8 2.4 0.9 0.5 0.2 -198 77 209 23 18.4 t 21 44.2 5.20 1ts 15.S 5.7 t.8 0.7 z0 0s 0.5 0.2 1 169 200 _8 6.6 t 0s 38.3 4.23 t.s tzs 4.6 t.s 0.s t .7 1 0.6 o.s 0.2 1 43 52. Totl 208.9 1684.0 57.7 128.7 t 6.7 1 20.7 2.0 I_11. Annual Production figures are in rnillions of barrels per day and average daily production arc in thousands of barrels per day. Source: Ministry of Oil and Minerals (December 2001). 81 ANNEX TABLE 10: TARGETS FOR GDP AND DEMAND COMPONENTS OF THE SPYP (Billions of Yemeni Rials, unless otherwise stated) At Currenkt Pdsies GPat PariePces 1,512 1,660 1,836 2,050 2,285 10.6 motof Goods and Services . 618 664 711 757 802 7.0 otal Final Consunption I 1 99 1,106 1,230 1,363 1,503 1,65 10.8 Public Consumption 6 1 219 247 276 308 342 1.0 Total Private Consumption 7 887 983 96 1,095 1,31 10.3 Total Investrnent 141 339 407 480 570 65 19.9 Formnation of Fixed Capital 1 2 309 388 458 543 651 19.9 Changes in Stock Difference 1 16 19 23 23 3 20.0 of Good s a td Seri 6 685 688 703 734 776 2-13 ________________ At Constant 2000 Prices usinPg Infacted n GD Dfater DP at Market Prices 1 1,3 1,445 1,529 1,635 1,749 1,879 6.4 and Services Imports 445 5 591 612 63 1 646 663 2.9 ral Final Consumption 1: 24 . 9 1,058 1,133 1,210 1,283 1,36 6.6 bEc Consumption 166 19 210 227 246 263 28 7.8 omal Private Consunption 99 79' 83 06 965 1,020 1,083 6.3 oralInvestrnent 141 26 324 374 427 486 535 14.3 Formation of Fixed Capital : -33 . 309 357 40 6 463 St 15.3 hngesin Stock Difference ' 8 1 15 18 20 23 25 15.5 oos and Services Exports 6 648 60 6625 626 641 -2.4 GDP_Deflator 5 4.6 3.8 3.7 4 .1 3.5 3.9 SAt Constnt 2000 P 1)es using cs Inflastion Rate GPat Ntarket Pnces 1,054 1,381 1,430 1,496 1,582 1,683 1,799 5.5 Gosand Services Imports 445 57 5&4 598 612 621 632 2.0 rooFmL"Consumnption 1,124 991 1,047 1,108 1,174 1,234 1.30 5.6 Publc ConsurnptAon 166 19T 208 222 238 253 2RI 6.8 rotl Povate Consmperon 959 s 797 839 886 936 981 1.034 5.3 rotl InvestraenE 141 264 321 366 414 468 51. 1473 Fotmation of F red Capoti n :133 252 306 349 394 441 4 14.3 Changes Ln Stock DiffEerence a 1 1 5 1 7 20 22 14.4 Good.nd Services fpirtm 235 . 69 648 620 606 602 61 -2.3 ICPI') 5.7 5 0 4 6 4 9 -4u - 4.9 Sources: SE;YP (2001) and staff estimates. ANNEX TABLE 11: LEGAL ORGANIZATION OF FIRMS Single Proprietorshlip 777 83.46 Partnetship 100 10.74| Corporation 41 4.40 Cooperative 3 0.32 Other 10 1.07 No response/can't answer 16 Total 947 100.00 Source: Private Sector Survey, November 2001, the World Bank. 82 ANNEx TABLE 12: SECrOR OF ACTIrY, PRIVATE SECrORTFIRMS, 2001 Manufacturing 209 22.59 Services 559 60.43 Other 84 9.08 Conglomerate (>1 answer) 73 7.89 No response 22 Total 947 100.00 W2"L2Ld4MMN ""°a., 4& Heavy Industry 4 0.43 Consumer Goods 31 3.35 Garments 41 4.43 Food and Beverages 25 2.70 Leather & Shoes 3 0.32 Other Manufacturing 105 11.35 ourism, hotels, restaurants 27 2.92 Trade: retail/wholesale 271 29.30 Transport and storage 9 0.97 Finance and banking 13 1.41 Personal services 33 3.57 Other Services 206 22.27 Agticulture 11 1.19 Fishing 1 0.11 Extraction (mining, oi]9 3 0.32 Construction 20 2.16 Electricity, gas, water 11 1.19 Other 38 4.11 Conglomerate (>1 answer) 73 7.89 No response 22 Total 947 100.00 Source: Private Sector Surve, November 2001, the World Bank ANNMEX TABLE 13: PRIVATE SECTOR'S ASSESSMENT OF EFFICIENCY OF GOVERNMENT SERVICES er efficient/Efficient No. 34 37 31 8 23 % 14.0 15.9 16.7 8.1 19.0 Somewhat efficient No. 117 62 83 47 65 % 48.3 26.7 44.6 47.5 53.7 Somewhat inefficient No. 54 52 18 25 16 % 22.3 22.4 9.7 25.3 13.2 Inefficient/Very Inefficient No. 37 81 54 19 17 1- % 15.3 34.9 29.0 19.2 14.0 Source: Private Sector Survey, November 2001, the World Bank. 83 ANNEx TABLE 14: OWNERSHIP OF LAND, PRIVATE SECrOR SURVEY Yes No No responset/can't Total- say Sana'a 99 157 9 265 Hodeidah 42 64 106 Aden 84 163 2 249 Taiz 46 146 8 200 Hadramout 16 110 1 127 Total 287 640 20 947 Source: Private Sector Survey, November 2001, the World Bank ANNEX TABLE 15: ENTRY COSTS Time, Official and Unofficial Costs of Establishing Business in Yemen Time (montha) Electricity 'tekphone Water Co nection Business Municipal ToW Start Counection Connection Licenst Permits Up N 43 37 26 60 42 49 Minimim 0 0 0 0 0 0 Maximum 12 12 12 10 to 24 Median 1 1 1 1 1 3 Mean Z16 Z19 Z19 1.57 1.9 4.78 Std Dev. 3.09 Z78 3.37 1.54 z47 4.88 Ofrlimal Costs (Rials) Electricity Telephone Wateri Cmecl tin Bismness Municipal TotalStart Connection Connection Lkense Permius Up N 37 38 20 60 42 28 nimnum 0 0 0 0 0 5000 Maximumn 500,000 255,000 100,000 200,000 50,000 3,000,000 Median 20,000 26,000 10,000 5,000 5,000 450,000 Mean 55,473 44,453 16,583 11,635 8,429 639,500 Std. Dev. 99,868 48,379 24,303 26,273 9,244 667,945 LInoB.Icial Costs (lUalss) Elctricity Telephone WatCr Connection Business Muncipal Totl Stat Connection Connction Litcnse Permits UP N 27 19 10 35 25 11 Mininum 0 0 0 0 0 0 Maxinum 70,000 30,000 20,000 50,000 20,000 400,000 Median 5,000 3,000 1,500 2,000 3,000 2,000 Mean 12,333 5,632 5,300 6,623 4,314 57,818 Std. Dev. 18,833 7,253 6,865 12,099 5,054 121,305 Source: Private Sector Survey, November 2001, the World Bank 84 ANNEX TABLE 16: DELAYS IN BUREAUCRATIC INTERACTIONS (Number of day's delays to get/deal with) _ i tatO PubliC GetLicens and De .whTax Get 4Gvoernznar C rustiss Buy SemCe87 Permit* Authorites Contracts Land/Cont. piyo N Va]d % N Vd id% N Valid% N Vaid % ?s Vsld N Vaid% 11 3.54 8 1 97 10 2S 50 45.87 45 23.56 26 23.21 -5 days 87 27.97 158 38.92 170 425 7 6.42 77 40.31 15 13.39 0 days 49 15.76 130 3ZO2 77 19.25 7 6.42 43 22.51 12 10.71 1-2oday 28 9 50 1Z32 38 9.5 12 11.01 14 7.33 7 6.25 1-5 days 69 22.19 36 8.87 45 11.25 7 6.42 7 3.66 17 15.18 1-100 dap 39 12.54 15 3.69 35 &75 18 16.51 3 1.57 20 17.86 ioo days 28 9 9 Z22 25 6.25 8 7.34 2 1.05 15 13.39 rOS 311 100 406 100.01 400 100 109 99.99 191 99.99 112 99.99 M 0.28 12.62 21.25 2.23 6.3 30.5 15 7 7 2 3 10 ANNEx TABLE 17: EMPLOYMENT IN THE OIL SECrOR Units Yexeati Emaployes NoQ-Yenlei RnpmIoyees il Companies in Production Stages 7 2,426 514 Companies in Exploration Stages 20 346 55 Subcontractors & Companies in Oil Services 42 2,814 777 M stry of Oiland Minerals & Associated Units 10 12,213 0 Total 79 17,799 1,346 Source: Ministry of Oil and Minerals, 22 April 2002 85 ANNEX A NATIONAL AccouNTs DATA A. NATIONAL ACCOUNTS STATISTICS IN YEMEN0 The National Accounts Division of the Central Statistics Organization (CSO) compiles national accounts statistics in Yemen. The estimates are based on the concepts and classifications of the System of National Accounts 1968. The CSO produces and disseminates the following data on an annual basis covering the calendar year: (i) GDP at current market ptces by 11 major industrial activities and 17 sub-activities; (iii) GDP at current prices by the following expenditure categories (private and public final consumption expenditures, gross capital formation (no distinction between private and government components), changes in inventory for the total economy, exports and imports; (iii) GDP at constant prices (base year 1990) by 11 major industrial activities and 17 sub-activities without expenditure categories. In addition, data are also produced and disseminated on gross national income, gross disposable income and domestic and national saving. GDP estimates are also complied annually for the whole economy using the production approach at current and constant prices following the same industrial classification. The definition and concepts of the Yemen national accounts follow primarily the 1968 SNA, but a number of features of the 1993 SNA are being implemented whenever possible. Value- added by industrial activity is calculated on gross production less intermediate consummation. GDP by expenditure category is calculated as the sum of the final use of goods and services through final consumption, gross capital formation and exports less imports. Industrial activity is classified and estimates published according to the International Standard Industrial Classification (ISIC of all Economic Activities, Revision 3) except for services and government activities. The 15 ISIC categories are used with sub-activities as follows: agriculture, hunting and forestry (excluding Qat); fishing; other agriculture, hunting and forestry Cmduding Qat); mining and quarrying; crude oil and gas; other mining and quarrying; manufacturing, oil refining; other manufacturing; electricity, gas and water supply; buildings and construction; wholesale and retile trade; hotels and restaurants; transport, storage and communication; financial intermediation; real estate and business services; community, social and personal services; producers of government services, and private non- profit institutions serving households. B. SOURCES OF DATA ON NATIONAL ACCOUNTS USED IN THIS REPORT: This Report utilizes mainly the new set of revised national accounts prepared by the Central Statistical Organization (CSO). The new set of national accounts, which was released in September 2000 (again updated in March 2001 and March 2002), updated national accounts in the old set, which was released in October 1999. The major differences have been: (i) an increase in the estimates of construction activity by an annual average of 8%; (ii) addition of maintenance to the national accounts and higher estimates for restaurant and hotels (as a result wholesale and retail trade estimates increased); (iii) slight revision in the estimates for 80 This section draws on the IMF, Statistical Department, National Accounts Draft List of Prompt Points Reports, 23 October 1999. 86 transport, communication and storage in 1997 and 1998; (iv) major revision in the estimation of financial institutions and real estate; (v) reduction in the estimates of community and social services; (vi) major changes in the estimation of government services particularly in the late 1990s; (vii) and higher estimates for private non-profit services. As a result of these revisions, real GDP estimates were increased by about 19% on average (and higher in the late 1990s). Most of the revisions resulted in higher estimates of non-oil GDP. The Table below provides annual percentage changes in the estimates of national accounts between the new set and the old set. PERCENTAGE CHANGES BETWEEN NEW AND OLD SETS OF NATIONAL AccouNTs Item 199 1 :I 1992- 1993-" ' 994 1995. 9 -1997 -1998 Construction 4% 6%/o 70/o 6% 8% 7% 13% 10% 11% Wholesale and Retail Trade 14% 14% 14% 14% 17/o 15% 15% 14% 15% Restaurants and Hotels 44% 51% 50%/0 51% 53% 53% 53% 46% 47/o Maintenance N/A N/A N/A N/A N/A N/A N/A N/A N/A Transport, Storage & Comnmnications 0%/0 0%/0 0%/0 0%/0 0%/0 0%/0 0/0 2% 12% Financial Institutions & Real Estate 51% 50% 53% 54% 51% 53% 62% 62% 52% Real Estate & Business Services 111% 104% 101% 100% 97/o 93% 95% 93% 92% Corntnunity Socid & Personal services -320/o -29% -31% -31% -32/ -34% -30%o -32% -30% Govemment Services 0%/o 26% 52% 84% 156% 233% 316% 325% 3070/c Private Non -Profit services 105% 1600/0 115% 300%0 453% 1880/o 3970/ 416% 463% GDP at Macket Prices 4% 8°/ 11% 16% 22% 26% 290/ 29%/ 29%/ Non -Oil GDP 4% 90/0 13% 18% 27%0o 32% 37Vo 3r/o 37/o On the demand side, the revisions in the national accounts provides for higher estimates in the final consumption and expenditures, in particular in private consumption. Gross domestic investments were also revised upwards in the late 1990s. C. RELIABILITy OF THE DATA Although significant progress has been made in revising national accounts in Yemen, there is still a long way to go until the country adopts the 1993 SNA. The current system suffers from a number of deficiencies in terms of coverage, estimation, reconciliation, compilation and classification. Currently, the national accounts cover the whole territory of Yemen and cover, in principle, the economic activities of all Yemen residents in conformity of the 1968 SNA. However, no adjustment is made to impute the value of informal activities. With regard to transaction coverage, at present estimates are limited to value added by economic activity in current and constant prices and expenditure in current prices for the total economy. Estimates are produced for GNP, gross disposable income, gross domestic saving and gross national saving. Fixed capital formation indudes construction, machinery and equipment There are no separate accounts showing instructional or consolidated transactions on income and outlay and capital finance. Most transactions are recorded on the accrual basis in conformity with the 1968 SNA but government and financial sector transactions are largely on a cash basis. Output is valued at producers' prices and domestic uses are valued at purchasers' prices. Imports are valued c.if and exports are valued fo.b. GDP by production approach is based on a variety of sources, censuses surveys and administrative records that are available annually or at some periodic intervals. Ad hoc data sources through surveys or special studies are also used as benchmark estimate or as basis for deriving estimation parameters for indirect estimation. 87 The CSO has an ambitious program to address the current deficiencies in the system of national accounts A project for improving national accounts of Yemen (during 1999-2003) was developed in collaboration with the IMF Statistics Departments. The Dutch government is also providing assistance in data sources and training though the project of "Strengthening the Institutional Structure and Capacity of the CSO". In the short-term, the CSO hopes to rebase the CPI using the 1998 HBS weights and revise the coverage of the index, revise the national accounts and rebase them to 1998 or a more recent year, improve the coverage of GDP, initiate work on intuitional sector accounts and use international classification, focusing on the household, government and financial corporation, enhance computerization and develop constant estimates for GDP by expenditures. In the medium term, the CSO plans to develop a producer price index and foreign trade indices, improve the methodology to estimate gross capital formation and restructure production sector according to ISIC Revision 3 as recommended in the 1993 SNA, conduct new surveys to enhance use of direct methods for GDP estimation, and start the implementation of the 1993 SNA. D. DIVERGENCE IN THE ESTIMATES OF PRIVATE CONSUMPTION As an example for the reliability of the national accounts, there has been a big difference in the estimates for private consumption expenditures in the national accounts and the 1998 HBS. In Yemen's national accounts, private consumption expenditure consists of the value of final consumption expenditures on goods ad services by households and private non-profit institutions serving households. Private consumption is first estimated as the residual taking GDP by production as control total separate direct estimates are made using data from the 1992 household budget survey. Furthermore, as private consumption is determined as a residual in the cutrent and constant price accounts; the estimates from the production and expenditures approaches are not independently determined and reconciled by definition. Therefore, any underestimation in the national accounts will undoubtedly be reflected in low private consumption expenditures levels. Taking 1998 for comparison, the HBS reveals that per capita expenditures in Yemen were about YR 4,436 (YR 5,396 for urban population and YR 4,148 for rural population). Estimates of the national accounts for the same year show per capita private consumption expenditure about YR 3,201. There could be different reasons for the variation but the underestimation of national accounts for GDP (e.g., due to exclusion of informal activities) would be one of the most important factors (see the forthcoming World Bank Poverty Update for Yemen). 88 ANNEx B: POPULATION GROWTH ESTIMATES IN YEMEN 1. Big Differences in Estimates of Population Growth Rate in Yemen in the 1990 Population estimates for Yemen nade by the government and other international agencies vary substantially. The government uses a high population growth rate of 3.7% in the 1990s based on UN calculations (e.g., UN Population Division's 1996 version) while the World Bank uses a much lower population growth rate of 2.7%. The difference is largely due to the use of lower total fertility rate (TFR) by the Bank and not to differences in projection models. In general, the World Bank estimates of population growth rates in member countries rely on UN estimates when reliable country estimates are not available. When there are reliable country estimates, the Bank uses the country data. In countties where new censuses or demographic surveys are available that have not been used in the UN calculations, the Bank updates the UN baseline estimates. Examples in the MENA region where the Bank has different figures from the UN because of utilization of later census data are Egypt, Iran, and Yemen. According to the World Bank population estimates and projections, based on the 1994 census and the 1997 Demographic Household Survey (DHS), the rate of population growth in the late 1990s was far below the estimates of the UN and the GoY. The 1997 DHS gives a TFR of 6.7 births per womnan and the Bank projections assume that the TFR will continue to fall (to 5.55 -the SFYP uses a TFR of 5.9 for 2001). The result is a natural population growth rate of 2.78%, and a total population growth rate (net of assumed emigration of 0.08%) of 2.7% p. a. However, GoY uses the constant TFR of 7.6 and the resulting estimate of population growth rate is 3.7%. 2. Methodologies for Estimation TFR and Population Growth Generally, data of the 1994 census are thought to be accurate after adjustment for age heaping. However, the census does do not provide estimates about the current growth rate; it can provide an average intercensal (e.g., 1986-1994) growth rate, but no growth rates in any of the intercensal years (which was highly irregular because of migration). Therefore, projection models use estimates of fertility and mortality and apply them to the census age structure to obtain population growth rates for intercensal years, as well as for years after the most recent census. There are no differences in the models for projecting population growth rates. These models use population by age and sex, age-specific fertility and mortality schedules, and net migration. The age-specific fertility rates are usually derived from surveys and then applied to the estimated number of women of reproductive age to give the number of births at each age. Similarly, mortality rates at each age are multiplied with the population at each age (induding males this time) to calculate the number of deaths. The estimated number of births is divided by the mid-year population to give the crude birth rate; the same calculation for deaths gives the crude death rate. The difference between the two is the rate of natural increase, which, in the absence of migration, equals the population growth rate. If estimates for these inputs are the same, all models will produce the same population growth rate. 89 Therefore, the differences in estimating TFR, or to a lesser extent, differences in the size of baseline age groups, are responsible for variations in the population growth estimates. 2.1. TFREstimates Fertlity trends in al countries are assumed to continue to fal (because of delays in the age at marriage, education, family planning, etc.) until they reach a replacement level in the future *(of about 2). The year of reaching the replacement level is not an arbitrary decision, but the result of applying the rate of change in the fertility rate to future ferdlity (i.e., an outcome of the extrapolated trend). For Yemen, the choice of the year has no effect on the 1997 growth rate. The GoY (based on the UN calculations) uses a constant TFR of 7.6 for 1990-2000 that was obtained from the 1991-92 DHS. The GoY estimates do not include the findings from the 1997 DHS. Only after 2005 does the UN show a decline, and then only to 7.35 for the period 2005-10, while the 1997 DHS already shows a TFR of 6.7 for 1992-97. The UN did not have the 1994 census data available for its 1996 version and uses instead projections from the 1986 census and other old sources, which were quite different from the 1994 count. The Bank, on the other hand, uses a lower TFR of 6.7 for the 1990s based on the findings of the 1997 DHS. In the long run, the impact of using very high fertility rates in demographic projections leads to itnplausible results: recent UN projections for 2050 show the total population for Yemen at 102.3 million. 2.2. Censds Age Stctun The 1994 census age structure reflects some inaccuracy in age reporting and is greatly different from the one used by the UN and previously by the Bank. The tendency to report age as ending on zero or 5 is stronger in Yemen than in many other countries. Therefore, there is a need to adjust this age structure, reallocating the excesses from ages ending in 0 and 5 to adjoining years in which there are deficits. There are various ways to do this (e.g., using annual growth rates for single year cohorts, and/or by using moving averages); the exact way is not crucial for the purpose of estimating growth rates. Once the single year age structure has been adjusted, 5-year age groups are obtained by aggregation. There are several irregularities in this age structure and it does not look like a smooth population pyramid. The CSO realized the need to smooth the age groups, before using it as a baseline age structure for projections. In particular, the 5-9 age group was considered to be too large, relatively to the 0-4 and 10-14 year olds. There is, however, no basis for reducing the 5-9 year olds, as the ad joining ages show no evidence of age misplacement into the 5-9 year age group: I W. 60q 7A~~~~2R 010 264S9q 4 565,701 287,662 278,039 5 585,610 297,917 287,693 6 539,060 275,473 263,587 7 551,677 283,488 268,189 8 597,844 306,275 291,569 9 461,659 241,264 220,395 10 550,412 288,878 261,534 11 331,852 179,463 152,389 12 545,417 299,631 245,786 90 There is also evidence for undercounts among the 0-4 year olds (especially 1 year olds). However, the adjustments needed are not nearly as large as produced by the smoothing procedure used by the CSO, which produced a 0-4 year old cohort that is larger than the 5-9 year cohort. The data published in the CSO census report and in the Statistical Yearbooks did not adjust the single year age structure first, but created five-year age groups by adding up single years without adjustments. That is a relatively minor error, as preference for ages ending in 5 is about the same as preference for ages ending in 0. If preference for ages ending in 0 is greater than for ages ending in 5, this approach would cause more serious errors. The resulting age structure is below: Total 14,587,807 7,473,54 7,114,267 0-4 2,394,972 1,215,809 1,179,163 5-9 2,735,850 1,404,417 1,331,433 10-14 2,202,884 1,186,231 1,016,653 15-19 1,486,755 785,127 701,628 20-24 990,006 514,157 475,849 25-29 914,142 433,650 480,492 30-34 780,524 370,666 409,858 35-39 739,189 357,761 381,428 40-44 534,930 267,057 267,873 45-49 414,427 212,507 201,920 50-54 383,799 193,636 190,163 55-59 207,589 109,372 98,217 60-64 284,731 149,934 134,797 65-69 134,878 72,661 62,217 70-74 171,999 89,830 82,169 75-79 63,288 34,421 28,867 80-84 80,755 40,421 40,334 85+ 66,040 35,095 30,945 The World Bank population estimates and projections utilize data from the 1997 DHS. The change in fertility measured in the DHS is consistent with the increase in contraceptive use, and given the size of the sample (over 14,000 women, twice the size of the previous survey) is therefore likely to be reliable. There is always a possibility that the 1997 survey results were not correct due to errors in sampling or processing. No more information about this issue is available and internally the data are consistent (for example, the increase in contraceptive use and the decline in fertility). The change -in the age pattern of fertility is also consistent with typical onset of the trnsition to lower fertility. The 1997 DHS; measured an average fertility for the period 1992-97 that was about 1.0 child below the 1992 DHS. The assumption made in demographic projections is generally that such a trend continues in the future. The Bank's projection below is a standard "cohort-component" projection as described above. The main assumptions are that fertility will continue to decline, and eventually reach "replacement level" of about 2 (when this is assumed to happen has no effect on the projection for several decades), and a continued decline in mortality. The assumed patterns in fertility and mortality, which are derived from model patterns, are shown at the bottom of Table B.1. While there have been discussions among the Bank and the GoY (particularly MoPD and MoPH) on the differences in the estimates for population growth rate, these discussion did not lead to consensus so far. However, the issue will be addressed in the future and the Bank 91 will collaborate with the GoY in conducting the next rounds of the population census and the DHS. These forthcoming surveys will help reaching consensus on the estimates in the future. The GoY continues to accord high population growth rates a priority in its development plans and would like to attract greater support for family planning efforts. The decline in fertility to 6.7 during 1992-97 (and likely lower now), however, does not mean less emphasis on the importance of reproductive health. A population growth rate of 2.7% is still very high by all standards, implying a doubling of the population in about 25 years. Improving access to reproductive health therefore remains a critically important development issue in Yemen. ANNEx TABLE B.1 AGE-GROUP, 1995 2000. 2005 2010 2015 2020 Total Males and 15272 17351 19858 22644 5514 28281 Females Males 7821 8851 10107 11510 12957 14355 0-4 1281 1464 1653 1803 1870 1847 5-9 1478 1226 1413 1605 1761 1831 10-14 1249 1457 1211 1399 1591 1747 15-19 855 1228 1436 1196 1383 1575 20-24 549 826 1199 1408 1173 1360 25-29 454 518 798 1168 1374 1148 0-34 395 425 496 774 1138 1343 35-39 367 371 407 479 751 1107 40 44 269 346 354 390 461 725 45-49 221 252 327 336 372 441 50-54 180 204 235 306 315 349 55-59 127 163 186 214 279 289 60-64 136 111 142 163 187 246 65-69 80 112 91 117 134 155 70-74 78 60 84 68 88 101 75+ 102 88 75 84 80 91 Females 7449 8500 9750 11133 12555 13926 0-4 1240 1420 1601 1745 1808 1785 5-9 1409 1189 1374 1559 1709 1775 10-14 1069 1388 1174 1360 1546 1697 15-19 777 1049 1366 1159 1344 1530 20-24 509 752 1023 1338 1137 1322 25-29 500 486 729 996 1306 1112 0-34 436 478 469 707 969 1274 35-39 386 416 459 453 685 942 40-44 268 368 399 442 437 663 45-49 211 254 352 382 424 420 50-54 175 198 240 333 362 403 55-59 114 161 183 222 309 338 60-64 121 102 144 164 200 279 65-69 70 102 86 122 140 172 70-74 70 54 79 67 95 111 75+ 94 83 72 84 84 103 Birth Rate 40 367 3Al1 7.91 Death Rate 1Z6 11.2 10.1 9.1 8.4 te of Natural Increase. 2.74 2.78 2.66 Z4 2.07 et Migration Rate -1.8 -0.8 -0.4 -0.2 -0.1 rowtb Rate 2.55 2.7 2.63 2.39 2.06 Fotal ertility 6.400 5.550 4.700 3.988 3.434 92 WMAGING Report No.: 24514 YEM Type: ER