Global crises, natural disaster shake Yemen’s economy [Archives:2008/1212/Front Page]

December 1 2008

Jane Novak
For the Yemen Times

SANA'A, Nov. 29 ) Yemen's oil-reliant economy is in trouble. Known oil reserves are depleting. Low global oil prices make economic diversification and budgetary rationalization urgent concerns. The outbreak of piracy in the Gulf of Aden harms potential growth sectors including Aden port, off-shore oil blocks and Yemen's LNG project. Swelling numbers of Somali refugees, as well as Somali pirates, burden the economy. The struggling non-oil economy was dealt a blow from devastating floods in October. These factors combine to create an economic storm brewing on the horizon of 2009.

Dwindling oil supports irrational spending

Oil revenues fund over seventy per cent of state spending. Confirmed deposits are dwindling and will be largely exhausted within a decade. Production decreased from the 2002 high of 460,000 bbd to about 300,000 bbd in 2008 as blocks 14 and 35 begin to bottom out. High oil prices previously offset production declines, but oil prices dropped from over USD 120 in July to under USD 50 in November. The 2009 state budget is based on the expectation of higher sale prices and includes a deficit of seven percent of GDP.

Efforts at fiscal rationalization and budgetary restraint have been weak and inconsistent. Oil subsidies account for a third of spending and benefit large scale oil smugglers as well as the poor. About a quarter of the budget is lost to corruption, but few high officials face legal proceedings. In November, the Al-Saleh Mosque opened in Sana'a at a cost of USD 60 million amid concerns development programs are underfunded.

Yemen is in a water crisis; 2007 spending on the water sector was 1.1% of GDP. With unemployment estimated at 40%, social security funding totaled 1.1%. Health care services cover only half the nation. Health sector spending was 3.1%. Military spending consumes about 7% of GDP, among the highest in the world.

Expenditures for the Sa'ada war (2004-2008) are estimated at over YR one billion. Although a truce has been reached with the rebels, the state is in negotiations with the Chinese firm Chin Shida on new weapons purchases. It also contracted with the Ukrainian defense ministry (Odesaremservis) to upgrade Yemen's fleet of 47 RSK Mig-21's at a cost of several million dollars each. The work will enable the Migs and Yemen's L-39 trainers to deploy precision guided weapons. With the anticipated drop in oil revenue, unabated high military spending will undermine already meager basic services. Transition to a non-oil economy is another urgent concern that faces an array of challenges.

Somalia launches pirates and refugees

Yemen's coastal location is a foundation of its economic growth strategy. However, instability in Somalia triggered a spike in piracy that is disrupting maritime shipping in the Gulf of Aden. The fourth bidding round for Yemen's eleven off shore oil blocks was postponed in August in part due to international concerns about security and sky rocketing insurance rates.

High insurance costs also negatively impact Yemen's USD 4 billion liquefied natural gas project scheduled to come on line in May 2009. Yemen LNG, a consortium led by TOTAL, will have a capacity of 6.7 million tons per year and ship from Bal Haf Harbor, about 75 km from the epicenter of piracy. Likewise the renovation of Port Aden by Dubai Ports World is a linchpin of Yemen's economic diversification efforts. Security concerns led Norwegian shipping group Odfjell to discontinue sailing through the Gulf of Aden, and others may follow suit.

Chaos in Somalia means Yemen has to deal with refugees as well as pirates. A signatory of the 1951 Refugee Convention and its 1967 Protocol, Yemen provides automatic refugee status to those fleeing war. About 38,000 Somali migrants crossed the Bab al Mendab this year, and Somali refugees in Yemen are estimated to exceed a quarter million. Already burdened with a 43% poverty rate and 46% child malnutrition, the state has little to offer refugees in terms of immediate assistance or economic opportunities. Concrete international aid for Somalis in Yemen is slight.

Floods wash away non-oil industries

In Yemen's worst natural disaster in recent history, flash floods in October killed 90, damaged over 3000 houses and affected over 650,000 people according to international estimates. The massive flooding in Hadramout and al-Mahara left 30,000 in need of permanent shelter.

Infrastructure damage includes roads, schools, telephone pylons, bridges, health centers and water facilities. Relief efforts focused on humanitarian concerns of food and shelter. Environmental issues were largely unaddressed the first weeks. Consequently, the region is at risk for the outbreak of contagious diseases.

The natural disaster hit the fledgling non-oil sector of the economy. Thousands of farmers, bee-keepers and fishermen lost their livelihood and need both immediate and long term assistance. International agencies estimate damages and loss of income will exceed USD one billion.

The financial shock of the floods by itself would be difficult to absorb, even with generous international aid. The simultaneous occurrences of three shocks – the global financial crisis, piracy and the floods – magnifies their impact, and combined, threaten fiscal sustainability. Immediate and robust action on the part of the state is required to address the looming economic challenge.