While IMF writes off debts Yemen awaits its turn [Archives:2005/906/Front Page]

December 26 2005

Nadia Al-Sakkaf
SANA’A, Dec. 24 – “This is an historic moment, which will allow these countries to increase spending in priority areas to reduce poverty, promote growth,” IMF Managing Director Rodrigo Rato said in the IMF press statement confirming the cancellation of debts.

Twenty of the poorest countries in the world Poor countries should receive IMF debt relief by early 2006 according to the IMF memo issued last week. Development activists had feared earlier this month that the IMF would back-out from its commitment and so they staged a rally outside the IMF Washington headquarters last week. Of course they have nothing to worry about now that the decision is confirmed. The final step is to obtain the approval of 43 of the world’s most rich countries, so far 37 countries have approved and the remaining six consents are thought to be on their way. This step would trigger the other monetary organisations such as the World Bank and African Development Bank, whose debts were also written off under the G8 deal to follow suit.

On the local level, Yemen is still struggling to get on the good books of the international monetary organisations such as the IMF and the World Bank. With the decline in the latter’s aid to Yemen it seems the job is even getting harder. The financial reports of the IMF Executive Directors issued on the 23rd of May this year considered that Yemen is at a crucial crossroads, facing the long-term challenges arising from the expected rapid decline in oil production. While noting the slow pace of reform in recent years, Directors welcomed the authorities’ plans to develop a comprehensive strategy aimed at promoting growth and diversifying the productive base. They also welcomed the authorities’ renewed efforts to mobilize public support for reforms-including through a public information campaign-and to make the reform package part of the 2005 budget. Directors underscored the importance of strengthening fiscal adjustment and deepening structural reforms to ensure fiscal and external sustainability, with macroeconomic policies guided by long-term considerations, as well as to strengthen the non-oil sector. The rapid decline in oil production poses serious long-term economic challenges for Yemen. The authorities have carried out a public information campaign to highlight the risks of inaction and to facilitate the political and public acceptance of reform measures, some of which are now part of the 2005 budget.

The IMF financial indicators report on 14th March 2005 indicated that economic growth slowed in 2004 due to a sharp contraction in the oil sector. Oil production declined by 5.9 percent, reflecting diminishing recovery from aging large oil fields as well as the absence of significant new discoveries. Given the slowdown in oil production, real GDP growth is estimated to have declined to 2.7 percent in 2004 compared with 3.1 percent in 2003. Non-oil GDP growth is estimated to have reached 4.1 percent in 2004, supported by stronger activity in the construction, transportation, and trade sectors, and fuelled by domestic demand stemming from continued fiscal expansion and higher public sector wages. The end-year core CPI inflation (excluding qat) increased from 12.1 percent in 2003 to 14.5 percent in 2004, owing largely to expansionary fiscal and monetary policies, as well as higher food prices caused by adverse weather conditions. The nominal exchange rate remained stable vis- vis the U.S. dollar in 2004, and the real effective exchange rate appreciated by 3.5 percent over the 11 months ending November 2004.

In its 2004 report on Yemen, the Country Commercial Guide (CCG) presented a comprehensive look at the Republic of Yemen’s commercial environment using economic, political, and market analysis. The 2004 report stated that the country still has an inefficient, overstaffed, and often-corrupt bureaucracy that must be streamlined, appropriately compensated and adequately trained. The government needs to take action to stem a current annual population growth of 3.5% that is consuming scarce renewable water resources at 140-150% of recharge rate. It must create a transparent legal environment that can objectively and independently resolve disputes, and a sound financial market. Finally, the government must also find a way to extend its authority appropriately throughout the entire country. Handling these issues will require a deft political touch. The tolerance level of Yemen’s public for further economic hardship brought by reform is wearing thin.

For more information on the Global Campaign Against Poverty and Yemen’s involvement refer to Yemen Times article on 30th June 2005.