Yemen’s economic programMany factors involved in economic health [Archives:2005/814/Business & Economy]
By Dr. Ali Abdurrahman Al-Bahre
For the Yemen Times
As defined by the International Monetary Fund, the economic reform program includes a number of economic criteria and values, the most important of which are:
1) The general budget of the state in terms of revenues, expenses, deficit and the budget surplus.
2) The payment balance, particularly the current balance in the payment balance and this is reflected in what is being produced by the country including commodities and services as well as what is imported and the surplus revenues of the capital and workforce.
3) The monetary policy, the price of exchange, stability of prices and interests, stability of currency power and the freedom of exchange prices.
4) Economic and entrepreneurial policies prepared for international and local investments
5) The annual economic growth rate scored by the country
6) The policy if subsidy offered by the government for commodities, services and the government-owned institutions.
Looking at the above list of criteria, we can assess the financial and economic reform implemented by the government.
Regarding the general budget, we find that the public expenses of the budget are estimated at YR70 billion per year. The total amount of public revenues, on the other hand, is estimated at YR 650 billion per year, resulting in a deficit worth of YR 50 billion a year.
According to the international criteria, the deficit of general budget could come at 3% to 5% of the total gross domestic product per year. If we considered that the gross domestic product in Yemen comes at YR 1.7-1.8 trillion, the warranted budget deficit should be YR 60-100 billion in the year.
Bajammal's cabinet could make the deficit stable in the acceptable prospective compared to that pursued in the European Union as it permits its member countries a 3% deficit out of the gross domestic production.
Part of such success can be attributed to international conditions resulting in the price increase of oil in the International Markets, which climbed up to $45-50 per barrel.
In our view, oil prices in the coming year will behave according to the following factors:
– The continuously raising demand for oil in the US Market, because of the US economic recovery as it reached, in the last fourth of 2004, 4% annual average. The US economic recovery is estimated to retain its power during 2005 and this helps raise the price of oil.
– The continuity of economic growth in China, which reaches an 8% annual average. China became the second importer of oil following the USA and it surpassed Japan in the rank of oil importers. Besides, the European and Chinese economies, experiencing miserable conditions, lead to an increase in the demand of oil.
– Security factors in the Middle East
– The halt of production at the Giant Russian Oil Company due to tax-related procedures as the company suffers a $3-billion debt to the Russian Government. Due to this, the International Market loses 700 thousand barrels of oil every day.
– The stability of political and workforce situations in Venezuela as well as the political situations in Nigeria and the syndicating and workforce situations in Yemen.
Mentioned earlier is the international aspect with respect to oil-related issues and there is a local aspect not less important than the international one which is the continuity of explorations of oil and gas wealth in the Yemeni lands to reinforce spares of this energy and its resources.
The domestic consumption of oil should be restricted because this aspect is one of the means that help enhance the effectiveness of oil wealth and develop the economy of the country.
Additionally, there are three other sectors not less important than oil and gas which are fisheries wealth, environment and water and their maintenance and sustainability, tourism, and workforce and its training.
There are several long-run factors to be prepared for from now so as to maintain the economic balance in the future, including the stability of the State's general budget.
Payments balance: we have so far discussed the current balance in the payment balance that consists of exported commodities and services plus the net revenues of capital and workforce. This balance consists of commodities imported by Yemen such as wheat cars, communication media and other commodities, subtracting from them oil fish and other commodities Yemen export to other countries.
The revenues of capital and foreign works in Yemen should be compared with what is attained by the Yemeni capital invested abroad, specifically, the credits of the Central Bank of Yemen and the other Yemeni commercial banks plus the revenues of the Yemeni workforce abroad. The resulting difference is due to give the net revenues of the capital and work either positively or negatively.
As remarked in the payments balance, more attention needs to be drawn towards oil exports as well as revenues of international and local capitals, and all of these are variables to be specified by the State's administration. But commodities and services are in the hands of the consumer and the commercial sector as well. There is a remarkable tendency toward the increase of imports but the declination of the average per capita income due to the population boom put real and practical restrictions that are difficult to overcome.
The deficit of payment balance compared to the international criteria, maximally 5% of the overall gross domestic production should be taken for granted in the implementation of effective economic strategy. If the deficit exceeded the just-mentioned rate, the warn is due to be followed by danger.
Looking at the world today, we find that the US economy tops the list of countries that suffer from permanent deficit in the commercial account of payment balance.
The 2004 deficit reaching $700 billion became a catastrophe for the industrial countries and developing countries as well. This deficit makes up 7% of the US gross domestic product, which amounted up to $20 trillion per year (30% of the world production). This deficit is the main reason behind the deterioration of the price of dollar that declined to 40% against other international powerful currencies such as Euro and Pound.
If we applied the criterion of deficit or surplus in the payment balance in the Yemeni economy, we find that the warranted deficit must be in the range of YR100-200 billion per year. The national economy can manipulate such deficit without harming the price of the YR.
Having a quick glance at the deficit of Yemen's payment balance, we find that the deficit over the last few years was in the warranted range.
The high prices of oil have the primary role in achieving stability in the current balance and prevent deficit from getting doubled to go beyond control. Nevertheless, we can say that the economic reform program is able to control the situations of payments balance.
If the deficits of the State's general budget and the payment balance were controlled, the price of YR for the dollar would be retained.