Obstacles to investment in Yemen [Archives:2007/1079/Business & Economy]

August 23 2007

By: Anwar Mughram
For Yemen times

Undoubtedly, the attractiveness of the business environment is a fundamental concern for the private sector, as its operations and growth will lead national macroeconomic growth towards more trade, income and more job opportunities in turn reducing poverty and spreading prosperity.

A recent study by a local think tank has asserted this fact, indicating that the study of obstacles to business investment as well as the need to gain information and analysis is critical for decision makers inside and outside the government, in order to allow them to formulate certain pro-investment policies.

The study has exhibited a very important point which was noted by one of the interviewed investors, he said that Yemen is not among countries which have a secure banking industry, he pointed out that foreign banks do not accept issued guaranties by Yemeni banks, not even letters of credit issued from several banks operating in Yemen. He added that he, as an investor, intended to establish a large manufacturing project in Yemen but needed additional financing from an international bank. For his surprise, all regional and international banks declined his loan application in spite of providing the required documentation, indicating that documentation from Yemen is invalid, in addition to Yemen's being a high-risk country.

The report stated that problem as one of genuine concern, as it is limited to Yemen and the negative and untrustworthy image it has in the region.

The report classified the obstacles hindering investment in Yemen to several categories, starting from legal and administrative obstacles, to structural and technical obstacles as well as documenting several case studies from the survey which explain a number of these obstacles.

Administrative obstacles

These obstacles include the corrupting bureaucratic system which consumes the energy of investors and wastes their time, money in the governmental offices when starting taking the preliminary procedures prior to staging any project. Additionally, the lack of measures and standards while appointing the administrative leaders. There are so many corrupt officials supposed to be before prosecution accused of embezzling public money. Instead of prosecuting these corrupt, they are exalted to a higher position, resulting in negative impacts at the level of performance. Consequently, they can not deal with different problems forming a dismissal factor for the local and foreign investments.

Lack of qualified human manpower

The lack of adequately qualified local human elements to deal with foreign investors is considered one of the prime investment obstacles, graduate accountants are unable to do proper book keeping, engineers do not understand the basic maintenance operations, and administrative staff who suffer from inefficiency and redundancy. Even the relatively more qualified staff is unable to use computers and can not speak English and need intensive and expansive training in order to qualify them for the job, after which they tend to ask for more salary and threaten to leave the job regardless of their employment contracts.

Structural obstacles

The weak infrastructure such as the underpowered electricity grid, poor roads and transport facilities, poor Internet and communication networks and other infrastructure issues discourage investors, knowing that they cannot outsource any of their activities and that they must establish a complete operation, which means a substantial investment which increases the risk.

Financial obstacles

Duties, taxes and other fees are another obstacle, in spite of being regulated by the law, there is an inefficient system to gather data and impose such fees, in addition to the handicapped mechanism in place which is a hustle to too many investors, according to the survey.

Technical obstacles

For a business enterprise to grow and prosper in Yemen it needs all sort of technical assistance from other supplementary bodies, such as the chamber of commerce, the board of audits, market research agencies, ministry of trade, the banking industry, and many other bodies which facilitate the growth of any enterprise. Other weaknesses include the weakness of the institutions of technical education and vocational training in providing labor market with the technical and vocational cadre. The private sector is the third side in the partnership with the country as well as the civil society organizations.

Judicial obstacles:

Local and foreign investors have been shocked time and again by the Yemeni judiciary in general and by the commercial judiciary in particular, as the later is specialized in adjudicating business and investment issues, such as the fact that judges in these courts do not know the rules of the international law, are unfamiliar with international commercial agreements, do not wish to address violations of several Yemeni laws such as Intellectual property law among others, coupled with the slow legal procedures which result in substantial damage to business operation, in addition to the fact that corruption is evident within the legal system.

Survey Results:

The study quoted a number of obstacles faced by financial and business institutions in the public, mixed and private sectors, focusing primarily on the private sector and contacted some 686 local and foreign business ventures in Sana'a, Taiz, Aden, Hodaidah and Hadhramout.

Smuggling phenomenon

The study showed that 96,6 percent of the respondents affirmed that the phenomenon of smuggling is a very important obstacle of the investment in Yemen. This factor leads substantial damage in the local economy due to smuggling goods and commodities, These goods are not exposed to taxes or customs, they are cheaper than goods which entered the country legally, and flood the market forcing businessmen into a position where they cannot compete with smugglers, most respondents were in the vehicle, electronics, mobile phones, computers and technology segments.

Security situations

The study stated that 89,5 percent of the respondents said that the security situations and the lack of stability obstruct investment in Yemen, this makes investors worried;

In the tourism sector, 94,6 percent of the respondents see kidnapping and terrorism as one of the prime obstacles for investment in the tourism and hospital sector.

Other respondants said that this problem of lack of security jeopardized themselves as well, on several occasions, businessmen or members of their families have been kidnapped for a random or even to settle scores between competing businessmen, even when entering into commercial disputes with other persons instead of resorting to judiciary.

Insufficiency of power

The study showed the 95.4 percent of the sample mentioned that the insufficiency of power supply and power interruptions as an obstruct investment and expansion, electricity power covers only 30 percent of the republic areas. While existing power supply is subjected to interruptions causing damage to machinery and frozen foodstuff, thereby increasing overhead and making business operations more expensive than it should be

Weak and inadequate transportation

The study mentioned that 67.1 percent of the sample individuals stated that the weakness and insufficiency of transportation system is an obstacle to investment, paved road links do not connect the whole country, on several occasions several inter-city roads are blocked either by tribes, poor road infrastructure or other reasons, there is also an underdeveloped cargo transportation facilities in the country.

Fiscal obstacles

The study showed that 98.1 percent of the sample individuals stated that the instability of the value of the local currency is another obstacle for investment as dealings in Riyals usually depreciate faster than any other currently resulting in a capital loss. However, 94.7 of the sample said that price hikes, inflation and declining purchasing power also limit the growth of their business.

Obstacles related to economic policies

86.1 percent considered the absence of economic stability one of the investment obstacles. Whereas, 70.6 percent said that the economic growth hinders investment in Yemen. However, 81.7 percent of the study sample mentioned that the containing inflation as well as treating unemployment obstructs investment. Moreover, 86.1 percent of respondents agreed that the failure of the economic policies related to distributing income equally and connecting the financial reform.

70.8 percent stated that the financial and administrative reforms program did more harm that good and obstructs further investment in Yemen. Moreover, 88.5 percent of the study sample indicated that the weak demand as well as the smallness of market size is considered one of the investment obstacles.

Legislative and legal obstacles

Respondents said that there are a group of legal and legislative obstacles for investment in Yemen. 90.4 percent of respondents said that the income tax law is a legal obstacle, while 87.4 percent said that labor tax obstructs investment. Whereas, 88.8 percent confirmed customs law one of the legal obstacles.

Administrative bodies

61.4 percent of the respondents considered current measures relating to investment complicated, however, 96.5 percent of the businessmen said that the law of tenders as well as the current mechanism of winning government contracts hinders investment in Yemen. Bribery is one of the investment obstacles related to administrative bodies, according to 99.5 percent of the respondents. Furthermore, 97.6 percent of the respondents considered financial and administrative corruption one of the obstacles.

Customs and taxes exemptions positively affect investment, according to the survey, however, around 47.7 percent of investors do not consider tax exemptions to encourage investments.

Recommendations of the study

– The study stressed the importance of selecting right leaders and competent administrative and technical cadre according to vocational measures. It also emphasized the necessity of following up all aspects of corruption and administrative deviation.

– The study also mentioned that the stability and unifying principles ruling the processes of investment as well as updating laws facilitating measures are the primary approach to providing appropriate investment climate.

– It also recommended providing good infrastructure in order to attract investments concerning infrastructure.

– It went on to say that projects in need of loans must work on achieving proper balance between the capital of project and obtained loans. So loans will not exceed the acceptable limits financially and commercially.

– The study mentioned that there is a pressing need for knowing the consumers' requirements and their desires. There must be some kind of cooperation between national and international insurance institutions to provide insurance cover of the marketing activities with proper conditions and costs.