Government just as fearful as publicPerception shapes economic reform . . . or lack of [Archives:2004/718/Business & Economy]

March 8 2004

By Peter Willems
Yemen Times Staff

In a world of perceptions, the fear of economic reform in Yemen has turned the term into a taboo.
Many have lashed out at the government and The World Bank for its plans to spur economic growth.
Shots were taken at economic reform when inflation went on a tear last year, and fear is now looming that further steps, might bring further hardship rather than prosperity.
Ironically, the Yemeni government might be just as nervous as the Yemeni people, which could explain why economic reform has stalled.
“Fear of the public feeds into the fear of decision makers,” said Yahya Al-Mutawakel, Advisor to the Minister of Planning and International Cooperation. “It's a cycle. The decision makers have to take into consideration repercussions following economic reform measures.”
And according to Ahmed Ghaleb, Deputy Minister at the Ministry of Finance, economic reform being looked at unfavorably has come from the plan being misunderstood.
“The public does not understand economic reform completely,” said Ghaleb. “The media has sometimes passed on wrong information and those with vested interests may have been able to mobilize the public against reform.”
The government has been successful implementing the initial steps geared towards stabilizing the economy. It has been able to reduce its debt and stabilize its currency. In 2003, foreign reserves surpassed $5 billion for the first time, and last January Capital Intelligence, an international emerging markets rating agency, raised Yemen's long-term foreign currency rating.
“The government has achieved a lot of things since economic reform started in 1995,” said Ahmed Ghaleb. “It has stabilized the economy, which means that the foundation of economic growth has been put in place.”
But now economic conditions are far from pretty. Economic growth is not keeping up with the rise in population. The population growth rate is estimated to be as high as 3.6% annually, while the GDP growth rate probably fell below 3.6% last year and may not exceed 3.3% in 2004.
Even though there are different figures on unemployment, some have calculated that between 25% and 30% of the Yemeni population is out of work. According to a recent Arab League survey, Yemen remains the poorest country in the Middle East as the average annual income per capita stands at $508.
Economic growth is key, and important decisions made by the government are needed to take the economy forward.
“We are recommending that the government comes back on the reform path across the board,” said Robert Hindle, Country Manager of The World Bank based in Yemen. “We are urging the government strongly to get back on track for economic reform. It's the only way to be able to improve the lives of people in Yemen.”
The economic reform plan touches on every sector of the Yemeni economy, but in the big picture, privatization, reducing subsidies on diesel fuel, civil service reform and upgrading the judicial system are priorities.
One explanation for the government balking to push reform through is that it has had to focus most of its energy on security.
“All the plans are in place, but after the attack on USS Cole and Limburg, the government has had to direct its attention toward security,” said one government official. “What's the point of trying to build an economy when security is at risk?”
Even though The World Bank argues that the strength of oil revenue coming from high oil prices should encourage the government to implement key reform, others say that the luxury of better oil royalties has given the government more time to reevaluate the situation before taking action.
“World oil prices and oil revenue in Yemen have been favorable,” noted Al-Mutawakel. “This could be used in two ways: Speed up economic reform or use more time to take steps more wisely.”
Another argument as to why the government has hesitated is that major changes would affect those with vested interests.
“Political groups and influential people try to satisfy their vested interests,” said Ali Abdul Rahman Al-Bahr, former Minister of Oil and Chairman of Housing Credit Bank in Yemen. “They are trying to impose their own interests and are putting down their own conditions before anything happens.”
According to Al-Mutawakel, reducing subsidies on diesel fuel is a good example of those with vested interests being affected. The plan is to redirect $600 million a year in subsidies into more useful purposes, like education and healthcare.
But while the general public is afraid of price increases on consumer goods after the price of diesel shoots up, those making money smuggling fuel to neighboring countries will probably get hurt the most.
“Lifting the subsidies on diesel fuel is a major element for reform because it has been a misuse of funds,” said Al-Mutawakel. “The reaction against price increases is not just among the people; it is also those with vested interests who will get hurt when subsidies are reduced.”
But to represent the people, politicians may take a second look at making changes the public views negatively.
There is also concern that if reform is unpopular, only partial steps might be taken which could leave the economy struggling. Part of the plan, for example, is to let the government pass more responsibility on to the private sector.
More local and foreign investment would help boost economic growth and generate more jobs. According to Al-Mutawakel, the government has been successful in improving the business environment in Yemen by increasing security, but what is needed is improving financial security by making adequate changes in the judicial system. Progress has been made in judicial reform, but there is more to be done.
“Without an independent judicial system running properly, we may never see the investments needed to create a thriving economy,” said one chairman of a local bank.
But the first obstacle that needs to be overcome might be fear of reform that appears to be shared by both the public and the government.