Gulf investments in Yemen: Towards regional integration or economic isolation? [Archives:2007/1041/Business & Economy]

April 12 2007

By: Raidan A. Al-Saqqaf
[email protected]

Yemen's interest in joining the Gulf Cooperation Council dates back to the early 1980s; however, due to several economic and political obstacles, Yemen's accession into the GCC has been delayed time and again, despite the political signals from GCC countries, as well as Yemen favoring increased economic integration in the Arabian Peninsula, as evident by Yemen-GCC trade, which was YR 443 billion in 2006, indicating that more than one-third of all imports into Yemeni are from GCC countries.

Having indicated this, now more than ever, it's become more evident that the world's new global political economy rapidly is marching toward creating regional economic blocs, pioneered by the example of the European Union, and other examples, such as the Association of Southeast Asian Nations (ASEAN) and the North American Free Trade Area (NAFTA). Such regional economic blocs not only enhance value-added trade between member countries, they also spark increased market efficiency and a synergy between member countries' resources.

The same example could be drawn about the future of the Arabian Peninsula. With Yemen not being a full GCC member, regional trade and investment will have an indisputable positive impact on both Yemen and the GCC. For one, Yemen is the most populated nation in the region, with a population exceeding 30 million by 2015. It is a potential market for most GCC-based products and services, as well as a good commercial partner. Considering its diverse resources, from fisheries to tourism and human capital, Yemen's growth potential is undeniable.

Despite this, investment in Yemen has been shrinking. For example, the stock of foreign investments in Yemen dropped to $983 million in 2005 from $1,336 million in 2002. Coincidentally, this comes at a time when the Yemeni government has announced a strategy to promote investment in Yemen and become more investment-friendly, especially in order to attract the petro-dollars of neighboring GCC countries.

Ironically, intensifying official and business delegation visits from Yemen to the GCC have resulted in a reverse reaction, as compared to expectations. For example, in 2005, $266 million in previous investment simply packed up and left.

The United Nations Conference on Trade and Investment issued these sums based on official statistics and firsthand research. However, neither its report nor the Yemeni government explained why investment is decreasing despite expected increases foreseen by government reports and estimates. In this regard, the Yemen Times sought the answer from a number of officials and businessmen both in Yemen and abroad.

Abu Yasser, a Saudi investor of Yemeni origin, said that although Yemen is a very attractive investment destination, its business environment is highly problematic. He stated that corruption within the government and the legal system is enough to put off any investor.

He added that if local Yemeni businessmen, who know the market and environment very well, face severe difficulties and, consequently, resort to questionable business methods, then how is a foreign businessman with integrity going to survive – or grow – in Yemen?

Auditor Ramzy Al-Ariki indicated that with a few exceptions, Yemeni corporations are highly unorganized and follow a wide spectrum of rules when doing business. He revealed that many such corporations resort to corruption and fraud in order to win bids and avoid paying taxes, adding that many corporations survive and grow by feeding on the corruption they create with the government and other corporations.

Mahfoud Bashammakh of the Sana'a Chamber of Commerce commented that changing laws and regulations add to the risks of doing business in Yemen. He indicated that if a businessman is to invest in Yemen, he will carefully calculate his operating costs and profitability margin based on economic forecasts that deem investment and other regulations to be constant.

However, when faced with the prospect of a policy change, increased taxation or even unforeseeable additional overhead, this changes everything for the businessman and in many cases, causes him to regret the idea of investing in Yemen.

Ali Ahmed, an official within the General Investment Authority, indicated that the way the authority operates, in addition to its internal procedures, have remained the same since the early 1990s and thus, are old-fashioned and have become obsolete.

He explained that investors look at other investment options aside from Yemen, such as in Dubai, Egypt and other regional locales, comparing the opportunities with forecasted problems and profitability. With that comparison in mind, Yemen always comes out the worst, despite its numerous investment opportunities, due to the redundant government agency with which investors find they must deal.

Senior economist Abdulaziz Al-Tarib pointed out that Yemen has a serious marketing problem, both regionally and overseas. He notes that potential investors hear about failed investments in Yemen and learn about the complaints of foreign investment there; however, Yemeni authorities are doing nothing to improve their nation's image abroad, nor trying to show other potential investors that investing in Yemen is and can be very lucrative, despite the odds.

Yemeni businessman Sami Sabha notes that Yemen is a complicated market in which to do business. However, he states that Yemen's business environment is unique in the sense that if one has a thorough understanding of the local market and the context in which he may operate, he'll then be able to survive and grow. He indicated that this is why many investors continue to seek local partners with integrity and experience in the local market.

A Ministry of Planning official stated that Yemeni officials have a problem regarding hype, constantly stating over inflated figures and forecasts and then continuing to produce numbers that outshine the reality in order to attract investors, who are only disappointed later due to these inflated figures.

He asserted that if the Yemeni government would start doing some real research and publicize real numbers instead of asking researchers put forth overstated numbers, then the government might have some credibility and in turn, gain investors' trust.

The Upcoming Investment in Yemen conference may pose a real challenge for the Yemeni government, as the outcome may spark either a chain reaction among regional investors and boost Yemen's economy or be yet another disappointment labeling Yemen as a no-go investment destination for years to come.