IMF Executive Board’s Assessment of Yemen’s Economy during 1999-2000 [Archives:2001/12/Business & Economy]

March 19 2001

Executive Directors welcomed the marked improvement in Yemen’s macroeconomic balances in 1999-2000, resulting both from the recovery in oil prices and from the authorities’ efforts to restrain public expenditures in the face of rising pressures for a relaxation of the adjustment effort. The pick up in inflation during 2000, although partly attributable to drought conditions, was, however, a source of concern. Directors were disappointed that, apart from a number of recent measures, the implementation of the structural reform agenda had slowed since late-1999. While they appreciated the difficulty of building a consensus for difficult reforms in the present context of high oil prices, Directors emphasized that continued macroeconomic stability and sustained implementation of structural reforms will be the key to the expansion of the non-oil sector and a lasting and broad-based improvement in living standards. Directors endorsed the economic program planned for 2001 which aims to bring the inflation rate down to single digits, strengthen the external balance, and lay the basis for higher growth.
Directors particularly emphasized the need for current expenditure restraint in order to accommodate higher poverty-related social spending and save part of the oil windfall for leaner years ahead. They generally welcomed the planned reduction in energy-related subsidies as a share of GDP, and urged the authorities to adhere to the timetable for the diesel price increase. Directors expressed their concern regarding the budgeted increases in the civil service wage bill and defense outlays, as these could weaken the civil service reform and build in higher recurrent expenditures in later years when oil prices may be lower. They noted the authorities’ intention to implement the wage increase following the diesel price adjustment.
Directors highlighted the need for tax reforms in order to reduce the dependence on oil revenue and create a more investment-friendly environment. They sincerely appealed to the authorities to redouble their efforts to ensure the introduction of a modern general sales tax in value-added mode covering most goods and services based on a single rate structure.
Directors welcomed plans to tighten monetary policy in 2001 to prevent the reemergence of inflationary pressures. They observed that during 2000 one-sided intervention in the foreign exchange market, by contributing to real appreciation of the rial, has weakened incentives for tradable goods production and diversification away from oil, and advised the authorities to allow the exchange rate to be fully market determined.
Directors took note of the recent Financial System Stability Assessment and welcomed the progress in strengthening bank supervision and reforming the commercial codes. They urged the authorities to make further progress in strengthening governance and the rule of law in this area. Directors encouraged the central bank to rapidly develop indirect instruments such as certificates of deposit to allow a phasing out of the administratively set minimum benchmark saving deposit rate.
Directors expressed strong support for the government’s structural reform agenda as the key to increasing growth in the non-oil sector and reducing poverty. They stressed that this would require timely implementation of the planned structural reforms to address deep-rooted weaknesses in the business and investment environment. In this regard, they noted that the implementation of the privatization law should stimulate privatization efforts and contribute to private sector development.
Directors encouraged the authorities to pursue civil service reform with renewed vigor in order to achieve a leaner and better qualified civil service that will carry out the overall reform strategy and address the governance problems that are rooted, in part, in low salaries and insufficient links between merit and pay. They also underscored the importance of moving ahead with reforms to ensure the sustainability of the pension system, by establishing stronger links between benefits and contributions, and more clearly circumscribing survivor’s benefits.
Directors welcomed the authorities’ intention to step up efforts to mobilize public support for the reform program. The IPRSP is an important step in this regard, and provides a good basis for preparation of a full-fledged poverty reduction strategy with broad participation of the civil society. Directors felt that the establishment of local government offers scope for greater grassroots participation in formulating and implementing Yemen’s development and poverty reduction strategy, but stressed the need to put in place safeguards to preserve fiscal responsibility.
Directors noted improvements in the quality and availability of statistics, and urged the authorities to redouble efforts in this area, particularly to ensure more timely and comprehensive fiscal and balance of payments data in order to enhance program design and monitoring, as well as public understanding and support.