An official report:Sudden rise in inflation rates [Archives:2003/695/Business & Economy]

December 18 2003

Mahyoub Al-Kamaly
An economic report issued recently by the Yemeni ministry of planning and international cooperation mentioned that the rate of inflation recorded at 4.3% in December 2002 resumed its rise again suddenly in January 2003 to reach 11.6% and then another rise in February of the same year to hit 15%.
The report has attributed the deterioration in inflation rate to four main factors altogether, namely, the increase in monetary supply due to rise in public spending because of an additional appropriation in the budget at the end of the fiscal year. That consequently had led to an increase in demand for commodities and services and also an increase in prices.
The second factor causing this deterioration of inflation rate is the emergence of a form of speculation on the dollar ascribed to government spending increase to pay government commitments that have been invested by beneficiaries benefiting from banking speculation instead of channeling them into actual and productive investments.
The third factor is the drop in the rate of foreign remittances by expatriates . As for the fourth factor it has been ascribed to impact of political and security developments on the Yemeni economy and economies of the Middle East region resulting from the war on Iraq.
The report has also mentioned that the Central Bank of Yemen has interfered this time by providing the foreign currency market with huge sums of dollars, not less than $80 million. The Yemeni Bank has also increased proportion of foreign currency reserve from 10% to 20%. Despite of that monetary rapid measure it has not been able to absorb local currency liquidity or covering the increasing demand for hard currencies.
June 2003 has witnessed a drop in inflation rate by 6.8% but to resume its rise to 10.5 last August. Among the most significant causes why the rate of inflation had fallen in the period February-June was the fall in prices of foodstuffs by 13%. As for the rise in the rate of inflation during the period June-August it could be attributed to the increase in rent prices of hotels and houses as a result of the return of large number of expatriates to spend summer vacation in Yemen and also to the increase in communication costs.
Exchange rate price is greatly affected by events and crises taking place in the Middle East and because Yemeni production industries depend by 80% on foreign requirements of production, therefore any deterioration in exchange price would produce a big increase in prices of local and imported products.
The report has expected that the economic circumstances during the coming months require direct coordination between monetary and financial policies. As the inflation rate continued its rise since its relative drop last June when it reached 10.5% in August, it is then expected that some seasonal inflationary pressures to happen that would impede realization of the least inflationary target at 10%.