WB warns of Yemen’s reform package collapse [Archives:2004/781/Front Page]

October 14 2004

Mohammed Al-Qadhi
The World Bank (WB) has warned against the collapse of the economic reform package Yemen has been implementing since 1995, painting an apocalyptic scenario of the situation if firm action is not taken immediately to improve government's performance in this respect. In a report released last September and distributed to high ranking officials, a copy of which the Yemen Times obtained, the WB said the country's economy is facing grave challenges but that the government should not expect further support with its crippled implementation of reform. “Yemeni authorities have not been able to seize the opportunity of a rise in oil prices to maintain macroeconomic stability, advance economic reform and lay foundations for strong non-oil based growth. Half way through the implementation of Country Assistance Strategy (2003-05), the signs are that Yemen is clearly slipping into a worst case scenario judging by three of the four CAS criterion,” the report said. “Implementation of PRSP is unsatisfactory, progress in governance reforms is tardy and the macroeconomic framework is unsatisfactory. Though the deterioration of portfolio (the fourth criterion) is noticeable, it is below the cut-off points as of August 2004,” it stressed.
The report pointed out that two political and economic internal events have constrained “the ability of the authorities to take advantage of strong gain in oil prices to advance reforms in 2004. Politically, the ongoing global war on terrorism fought in the Middle East has energized Yemeni militant groups opposed to the war. Simmering anti-government sentiment was brought to a head on June 28th in the form of an armed rebellion.
Though the rebellion was crushed decisively by early September, the durability of the success could remain an issue.” On the economic front, the report said that “unexpected declines in oil production, that came to light in February 2004, have triggered the fear that oil reserves may deplete sooner than expected. Unanticipated declines in oil production from key oil fields could diminish oil export revenues of the government and stress fiscal balance. The date of exhaustion of oil reserves has been advanced by nearly a decade to 2012 lending immediacy to the launching of a strategy to promote non-oil based growth.”
The report, which came days after a great criticism of the situation by the WB former country manager Robert Hindle, said that, “weak macroeconomic management, stalled reforms and the negative oil supply shock, have resulted in the deterioration of the near-term outlook for growth and stability. Compared to the projections in March 2004, projected GDP growth for 2004 is now estimated at 2.5 percent, a rate below the population growth of 3 percent. Outlook on inflation and fiscal deficit has also similarly worsened.”
The report said that the needs of the reform agenda have to be revived urgently through advancing some components of reform like that of Education for All, or customs procedures, which need to be spread to other areas fundamental to macroeconomic stability. “Restarting stalled reforms of civil service, introduction of GST, phasing out of petroleum subsidies are vital to restore macroeconomic stability. Though the authorities are convinced of the direction of reform in these areas, commitment to a clear and robust implementation strategy and calendar is lacking,” the report warned. The report further demanded that the authorities should take decisive action to restart stalled reforms, which can turn the economy around, release resources to the implementation of the PRSP strategy to make a difference to the country's 42% poor.
With regards to the development outlook, the report said that the GDP growth slows below the population growth with falling oil production. “Revenue augmenting tax reforms have been repeatedly postponed while expenditure increasing salary increases have been implemented. Subsidies on petroleum, well known to be regressive, have been growing to reach near 6 percent of GDP in 2004. A strong rise in oil prices has masked the underlying weakness of non-oil exports and helped build 15 months worth of imported international reserves. However, with no decisive action to move on fundamental reforms to restore prudent fiscal policy, downside risks to medium-term macro economic stability have increased,” the report illustrated.
Mr. Hindle, in an interview with the Yemen Times, repeatedly called for an aggressive reduction of the level of corruption, which is regarded as a major component hindering the reform package.