Current Yemeni economy overview [Archives:2005/885/Viewpoint]

October 13 2005

Yemen Economic Update is a quarterly report published by the World Bank discussing economic and policy developments in Yemen quarterly. The update also discusses the World Bank's projects in Yemen as well as new legislation, publications, data, conferences or donor activities taking place in Yemen. It is a good reference in evaluating the economic and development progress in Yemen, especially from a donor point of view. The latest Update of Spring 2005 highlighted the fact that Yemen's macroeconomic outcomes show increasing fragility, deterioration in the policy and institutional environment and continued delay in implementing reform proposals in the 2005 budget raises concern.

The report identified the weaknesses in the Yemeni economy through the decelerating GDP growth, widening primary non-oil fiscal deficit, persisting double-digit inflation and the rapidly dwindling of the current account surpluses.

In the context of increasing fragility of macroeconomic outcomes, Yemen's overall institutional and policy environment has slightly deteriorated in 2004 according to the World Bank. Policy and institutional environment in all the four clusters – economic management, structural policies, social inclusion and equity, and public sector management – witnessed some deterioration. The weakness in economic management is seen mainly in limited use of monetary policy to contain inflation and insufficient efforts to rein in fiscal deficit. In the structural area, though Yemen's trade policy is not restrictive, underdeveloped financial system and stifling business regulatory environment are the problem areas. In the social inclusion and equity cluster, Yemen's weak record in promoting gender equality, and unaddressed agenda of reforms in the health sector weigh down on ratings. Finally, in the public sector management and institutions cluster, stalled and slow reforms of budgetary and financial management and the need to improve transparency, accountability and integrity call for lowered rating.

The alarming point raised in the report was that even if reforms in budget 2005 are implemented, the challenge of long-term growth will remain. Through the fiscal reforms in budget proposal for 2005 are badly needed, these will not be enough to face up to the medium-term challenges of growth. The looming crises of decline in oil production is a very big challenge facing the Yemeni economy. By most counts, according to the report, removing petroleum subsidies and introducing general sales tax would yet leave a large fiscal and BOP gap un-bridged. This would call for more determined efforts to identify and sequence reforms in the areas of governance and investment climate to reap the potential for growth on sectors such as fisheries, tourism and possibly gas exports.