Don’t blame us, says World BankWe’re the ones helping [Archives:2004/712/Front Page]

By Peter Willems
Yemen Times Staff
Yemenis continue to be fearful that economic reforms are causing their financial ruin.
As one Sana'a vendor put it, “The World Bank is here to destroy our country and culture. Prices going up is just one part of the big scheme of the World Bank pulling us down to live like dogs.”
But he, and others who share his fears, would be interested to know that recent price hikes may have very little to do with economic reform to be implemented by the Yemeni government, with the assistance of The World Bank and the International Monetary Fund (IMF).
And, according to Robert Hindle, Country Manager of The World Bank in Yemen, real economic reform is still to come.
“We at The World Bank very much look forward to the government taking reform steps for the acceleration of economic growth. That is the goal,” said Hindle.
“But up until now, the government of Yemen has not acted on the reform measures recommended by The World Bank in the last year-and-a-half to two years. They haven't been rejected, but the government hasn't acted on them either.”
Prices of consumer goods jumped up considerably in 2003. The inflation rate is expected to be over 12.5% for last year, up from 4.3% in 2002. Yemen's Consumer Price Index (CPI) rose mostly because prices of food products jumped, which make up 44% of the CPI.
Hindle told The Yemen Times that one of the major causes of the accelerated inflation rate came from the government pumping more money into the economy, a move to help generate economic growth.
“Those price increases are going on now as a result of the government loosening its fiscal policy, which is to ultimately put more money into the economy,” Hindle said.
Ahmed Ghaleb, Deputy Minister of the Ministry of Finance, also argues that economic reform is not behind Yemen's price hikes. He said that along with the government's monetary policy, price changes on the international market and currency fluctuations have made an impact on prices in the Yemeni market.
He also said that these factors should be considered as natural forces in an economy. “Commodity prices were liberalized in the late nineties, and we are operating in a free market,” said Ghaleb. “Therefore, the government and The World Bank have no control on prices.”
A number of key economic reform measures recommended by The World Bank have yet to be implemented by the government; the pace for reform has slowed down in the last two years. Important steps that need to be taken include the government privatizing state enterprises and reforming the salary structure of civil servants.
But there are other steps the government might take that can have an impact on prices: reducing subsidies on diesel fuel and implementing a sales tax.
Hindle believes that economic reform must get back on track and pick up the pace, including sales tax and reducing subsidies, because now is the best time. Yemen's income from oil and gas takes up 70% of domestic budget revenue and 85% of export earnings.
Oil is vulnerable to price fluctuations in the international market, and oil production in Yemen has been flat in the last three years and is expected to go down in the near future. “It's important that oil royalties will not only go down in the medium term but could drop significantly if oil prices go down,” said Hindle.
“It means that the government does need to think of alternative sources of revenue. We have suggested a general sales tax to replace oil royalties.”
According to Hindle, government subsidies for diesel fuel amount to approximately $600 million a year. “In our view, not only is this a significant distortion of the price of diesel, but given the demand on the Yemeni budget for schools, healthcare, roads, and so forth, we think the $600 million can be spent more effectively to reduce poverty,” he said.
“Therefore, we strongly recommend that the government reduces progressively the subsidies on diesel fuel.”
Still, the question remains: How much impact will a sales tax and reducing diesel fuel subsidies have on Yemeni consumers? Some economic indicators suggest that more price increases could send shockwaves through the poorest country in the Middle East.
According to the latest economic report from The World Bank, over 42% of the Yemeni population is below the poverty line. The GDP growth rate dropped from 4.7% in 2001 to 3.6% in 2002 and is expected to fall to 3.3% in 2004.
But Hindle believes the impact of price increases coming from economic reform measures will be minimal, especially for the poor.
First, subsidies for natural gas and gasoline are minor compared to the subsidies for diesel, so the price of diesel will be the one affected the most.
Second, the government will most likely reduce the subsidies on diesel fuel and implement a sales tax in a reform package that should help offset price increases, such as diesel and other products – including food items – that will be affected by the rise in transportation costs.
Expected in the package is a salary increase for government employees, such as civil servants, policemen and soldiers, a reduction in custom duties for specific imported items, and money taken out of subsidies to be put back into the economy through education, healthcare and projects.
“There will be an immediate transition, but it should be quite manageable,” said Hindle. “And the medium-term payoffs will be enormous. The money going into a subsidy will go into things that benefit the poor, especially through services.”

The ones being hit the most will probably be those who make money on smuggling diesel into neighboring countries. According to Hindle, subsidies keep the price of diesel in Yemen approximately 75% lower than in Saudi Arabia and Oman. “Subsidies don't support the poor,” said Ghaleb. “They support the people who smuggle diesel, and they will suffer the most because they will lose their incentive to sell. The poor will not be affected very much because what will be included in the reform package will offset a small increase on general products from the increase in transportation and the increase of prices from a sales tax.”
While Hindle believes that negative results on prices coming from a new sales tax and the reduction of subsidies will be minimal and can be easily absorbed by the Yemeni market, he is concerned about when the next big steps in economic reform will be implemented.
“Now is the best time,” said Hindle. “The government has a wonderful opportunity to restart economic reform. Security in the country has improved significantly, political reform is going well and civil service reform has already begun. It has financial strength and flexibility derived from strong oil royalties, and it has improved its reputation in the international community that can generate additional resources from donor countries. If the government acts now, it will be able to improve the lives of the Yemeni people. But the longer it waits, the more difficult it will become.”
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