Economic Reforms of the 90s Background, Objectives and Outcomes [Archives:2000/22/Business & Economy]

Mahyoob Al-Kamali
In cooperation with the World Bank (WB) and International Monetary Fund (IMF) Yemen has embarked on implementation of the economic reform program since 1995. The government of Yemen claims that the benefits and positive results of this program, leading to an overall economic stability and facilitate implementation of structural policies as well. However, many opposition parties and organizations are still criticizing these reforms as the root cause for their suffering. This has consequently led to a big controversy among the political circles in the country, especially after lifting the government subsidy on food supplies which at the beginning of implementing reforms program, used to cost the state budget about YR 150 billion.
Why the Economic Reform
Since the unification on May 22, 1990 many political and economic problems have been facing the government. As a result foreign debts have mounted to approximately $10 billion.
In 1995, Yemen found its way to the WB and IMF seeking their help for reforming the unstable economic situation. During 1990-1994, the country witnessed a deterioration in economy with an inflation percentage of 71%, and a budget deficit 17 % of gross domestic product. Unemployment increased to 40%. The economic development, on the other hand, had also slumped 6% and to 0.8% by the end of 1994. The Yemeni currency ‘Riyal’ convertibility rate also crashed against other currencies. Consequently, foreign debts servicing rated 75% out of exports revenues.
The Yemeni government borrowed from the Central Bank to cover the budget deficit. However, the bank had granted loans by issuing new bank notes leading to an unbalanced development in money supply accelerating inflation by a staggering 105% at the beginning of 1995.
In such a dismal situation, Yemen fortunately managed to get promises from donor countries and international and regional funding organizations to support the economic reform program.
Leftist and national opposition parties used to demand for economic, financial and administrative reforms through stringent national policies. These policies involve maximizing tackling productive institutions’ conditions, enhancing non-oil exports and finding alternatives that ensure stability of the overall economy. The PGC government preferred to make use of experts from WB and IMF to solve the economic crisis.
Economic Reforms Stages:
The government of Yemen embarked upon gradual implementation of the economic reform program so as not to affect the living condition of the limited income class of the society. During March-December 1995, the government of Yemen started implementing a policy to stabilize the economy through lifting subsidy on some food supplies including rice, medicine, milk and sugar in addition to reducing its subsidy on flour and some oil products.
Exemption from customs duties were stopped. The national currency exchange price was unified. Trade Banks were allowed to start remittances abroad in foreign currencies. In addition, scholarships were stopped and the number of Yemenis working in Yemeni embassies was reduced. Moreover, the public spending on buying cars, furniture, etc. was reduced. Employment of graduates was also suspended.
Disputes between the two ruling parties, the PC and NCR ‘Islam’, intensified. However, the PC came out victorious as it enjoyed more votes in the Parliament. The implementation of the economic reform program had resulted in decreasing the inflation to 45%. The huge budget deficit was also reduced to 6%. On the other hand, the gross domestic product went up by 5.8%. Besides, the situation of trade balance against gross domestic product improved by 33% .
Despite all this people continued to suffer from heavy economic burdens due to price rise of foodstuffs and oil products. Moreover, the government failed to meet its commitments of by allocation of YR 3 billion to facilitate easy loans by specialized banks. Such conditions have trigerred a wave of violence in the society and concomitant demonstrations.
During 1996-97, the government of Yemen introduced the second price hike close on the heals of the reform program the prices of benzene went up by 60%, of diesel by 200% and fuel oil by 132%.
In the context of financial reforms, the government fixed the exchange price of the Yemeni currency by YR 100 against 1 US dollar. Water and electricity charges also shot up. The draft law of amendment of customs tariff system was approved. An amount of YR 41 billion was allocated to implement the investment program and YR 1 billion was allocated to improve the social security net and start issuance of long-term treasury bonds. It also streamlined banks’ dealings with the unified exchange market. Moreover, an amount of YR 5 billion was endorsed for the Retirement Fund.
All said and done, these procedures were marred by negative attitudes arising out of national anger manifest in massive demonstrations. When Islam party threatened to stall the implementation of these reforms, the government was forced to modify the prices of diesel. Therefore, there was a 100% increase instead of 200% in prices. In addition YR1 was diverted from diesel revenues for the Agricultural Development Fund. However, studies showed that poverty has increased and that a sizable segment in the society could hardly make both ends meet.
In April 1997, the second Parliamentary elections were held and the PC got rid of Islam, its former partner. This victory pushed the PC to go ahead with the implementation of the third wave of price rise during July 1997 to May 1998. Prices of the subsidized supplies were amended; price of Benzene was increased by 27%, kerosene by 65%, fuel oil by 60% and wheat as well as flour by 15%. The price of aircraft fuel was exempted from a hike. Air fare were increased as well.
During this period, documents of the enhanced structural reform and financial sector reform program supported by the WB and IMF were also endorsed. Incidentally, the government launched floating of the national currency. It also started the application of a privatization project aiming at liquidating some of the crippled institutions, in addition to amending some laws. The most important aspect of this package involved levying tax stamp and canceling the duties used to be paid when opening customs specification.
Official statistics show that gross domestic product during this period went up by 5.2%. There was also a 1.5% decrease in budget deficit by the end of 1997. The inflation rate was also decreased to its minimum, 6%. Clients dealing with treasury bonds have also increased. Besides, there was also a 2.6% surplus in the balance of payments.
Price Reforms:
Despite the progress made in our country, opposition parties have not desisted from criticizing the economic reforms program. Labeled as price reforms, the measures in their view have in effect increased poverty rate and scapegoated public institutions without any critical analysis of the ramifications resulting from the steps.
In June 1998, the Yemeni government introduced a new economic measure involving rise of prices as envisaged in the economic reform program. The new 15%-40% price rise affected the following commodities: Benzene, kerosene, gas, wheat and flour. This triggered off a wave of demonstrations and violent protests in different governorates of the Republic. On the other hand, the opposition called for a comprehensive national review to deal with all forms of the disequilibrium in all sectors of the society.
The WB & Donor Countries Endorsement:
Throughout the first stages and so far, the WB has been providing Yemen with expertise and consultancy services. It has also offered Yemen loan facilities to support economic reforms and granted Yemen substantial foreign debts exemption.
The WB’s role was not only confined to sending delegations to conduct regular review of Yemen’s economic reform policy; it also contributed its support for the establishment of a Social Security Network. Moreover, it has pleaded with the donor countries to exempt Yemen from its foreign debts.
Reschedule Foreign Debts:
On September 24, 1996, Paris Club member states, except Russia, agreed in their meeting to reschedule $123 million and exempt Yemen from 67% of its foreign debts on condition that Yemen pays back $42 million over 40 years.
In November 1997, the donor countries including Russia met in Paris. The WB supported the resolution to reschedule Yemen’s uncommercial debts due to Russia amounting to $6,130 billion. Yemen was exempted 80% of these debts. Thus, the debts from Russia alone reached $426 million to be paid over 23 years on a 1.19% easy interest. Therefore, Yemen has to pay $27.19 million in the coming ten years. After November 2000, about $35 million of its debt will be rescheduled.
However, the commercial debts from Russia totaled $342 million after 80% discount to be paid by the WB as a grant from the International Development Organization out of which the WB would pay $10 million and the donor countries $5 million.
This is viewed as the most remarkable achievement of the economic reform program in Yemen. The foreign loans were reduced in comparison to the gross domestic product. The reduction was to the tune of 96% in 1997, instead of 148% in 1995. At the end of 2000, foreign debts are going to drop to $2.5 billion.
Donor Countries Support:
WB encouraged other donor countries to support Yemen’s economic reform program. In the Hague, Holland, donor countries agreed in 1996 to support Social Security Program and promised to provide Yemen with $35 million loan to be utilized to support the public labor. On the other hand, about $500 million was estimated as essential to support economic reform program. Donor countries had till the time of the summit had advanced $150 million.
In June 1997, a conference was held in Brussels attended by 13 advisory groups from donor countries, 12 organizations and regional establishments. In the conference, it was resolved to provide Yemen with $1,8 billion through mutual coordination between the donor countries and the Yemeni government. The coordination will continue till the end of implementation of the economic reform program.
The WB has done commendable services to Yemen in enlisting it among the developing countries benefiting from Naples and Paris club resolutions. Moreover, the bank sanctioned long-term loans amounting to $690 million to consolidate what remained of Yemen’s economic reform program, at the rate of $230 million each year. This support policy will end by 2002.
During 1997-1998, the IMF provided many facilities to Yemen to make the structural reform program a success. It provided Yemen with $371 million, in addition to another loan amounting to $148 million.
To further strengthen the financial sector, the WB provided Yemen with $80 million. Then, Central Bank proposed a package of banking reforms with a view to organizing the banking procedures and reconciling bad debts in specialized banks.
To be Continued Next Issue

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