The World Bank’s Vice President: We are happy with the progress of Yemen’s economic reform. [Archives:1997/45/Business & Economy]

November 10 1997

By: Abdulaziz Al-Saqqaf, Professor of Economics, Sanaa University.
Dr. Kamal Darwish, The World Bank’s Vice President for the Middle East and North Africa, concluded a five-day visit to the Republic of Yemen, his first. During the trip, he met with President Ali Abdullah Saleh, Prime Minister Faraj Bin Ghanim, several ministers and governors and other senior officials. He was briefed on the progress of the implementation of the economic reform program, and on the pace of implementation of World Bank financed and co-financed projects. On both counts, he was fully satisfied. In an interview with the Yemen Times, he indicated that the World Bank was financing or co-financing 12 different projects in Yemen at a total cost of nearly half a billion US dollars over the three years left of the present five-year plan period (1998-2000). He said that although there is a backlog of US$120 million in undisbursed funds at any moment, the pace of implementation has dramatically improved.
Mr. Darwish then signed two additional agreements according to which the World Bank will provide US$ 105 million to two projects. The first loan goes to a project, valued at SDR 58.9 million (US$ 80 million), is a financial sector adjustment credit. The money will be used to: a) improve the enabling of the legal and regulatory framework for the banking sector; b) increase compliance with international standards of capital adequacy and loan loss provisioning; c) strengthen the monitoring, supervision, and enforcement functions of the Central Bank of Yemen; d) improve the accounting and auditing standards of banks; e) improve the governance of banks and accountability of their boards of directors; f) introduce measures to improve bank loan recovery; g) undertake diagnostic reviews of public sector banks to enable the Government to decide on their future; h) take urgent steps to reduce the risk exposure of two main public sector banks and privatize one of them; i) establish an Accounting Standards Boards to improve the timeliness and quality of financial statements of borrowers; and j) develop a legal and regulatory framework for financial leasing. The scond loan goes to a project, valued at SDR 17.7 million (US$ 24.7 million), focuses on rural development in the southern governorates. The project components are: a) loan allocation and development or rehabilitation on about 3,900 hectares; b) off-farm income development activities; c) economic and social development activities in approximately 40 extended communities; d) preparation of future projects in the sector; e) operation of a project manage-ment unit. Both loans are highly concessionery, carrying the standard IDA terms. Specifically, the conditions are a 40-year maturity, starting with a 10-year grace period. At another level, the World Bank official expressed satisfaction with the progress of the reform package. “The Republic of Yemen has done exceptionally well, and the economic environment has improved visibly,” he said. He was pointing to the improvements in fiscal policy (leading to a negligible budget deficit), low level inflation, stable exchange rate, and increasingly market-based economics.
“Look at the inflation rate. If you take out the inflation resulting from administrative pricing of goods and services, the core inflation rate of Yemen today is around 7%. The overall or total inflation rate is around 20%,” he disclosed. He also pointed to the less than 5% budget deficit. The Republic of Yemen embarked on the World Bank/IMF-supported reform program in March 1995. Since then, it has carried out the stabilization phase of the effort, and is now pursuing structural reforms. The stabilization phase called for corrective measures in the fiscal and monetary policies. This phase is now considered completed. The structural adjustment intends to improve the economic environment in order to attract more investments – local and external. Thus it calls for major changes in the legal framework, bureaucratic changes, privatization of public sector activites, removal of subsidies, introducing measures that will liberalize trade and investment, and other steps. Dr. Darwish also visited the Aden Free Zone in order to assess the situation, study the plans ahead, and discuss the possible World Bank input. “The World Bank is already involved in a number of projects related to Aden proper. We are eager to assist in the Free Zone area,” he said. At another level, Dr. Faraj Bin Ghanim, the Prime Minister, said that his government is extremely happy with the cooperation and assistance of the World Bank. Speaking in a joint press conference with the Vice President of the World Bank, Dr. Bin Ghanim indicated the two sides are in full agreement regarding the future steps which aim to strengthen past achievements and increase confidence in the economy. The Prime Minister disclosed that his government now seeks World Bank guarantees for private sector loans in order to encourage investments, especially with foreign partners. “The support the government gets from the World Bank is excellent. I can describe our 30-year partnership with the Bank as exemplary. But we now want direct partnership between the Bank and the Yemeni private sector. It is our job to support the operations and investments that private entreneurs would like to undertake,” he said. Notwithstanding the glowing picture presented, there are two issues facing the reform program. These is the deteriorating conditions of the vulnerable and poor segment of society. The social safety net program has yet to make a real impact. The second issue is the administrative reform, which many observers believe will make or break the whole effort. Both the government and World Bank still shy away from this undertaking. Those two issues will determine the ultimate success of the reform program.