Yemen’s economy in need of a boost [Archives:2004/796/Business & Economy]

December 6 2004

By Peter Willems
Yemen Times Staff

The World Bank's most recent report on Yemen's economy showed some disturbing indicators. The growth of the country's gross domestic product (GDP) slowed from 4.1% in 2001 to an estimated 3.1% in 2003 and is expected to drop to 2.5% this year. Oil production, which leveled off in the last few years, is down nearly 9% in 2004. Although growth in non-oil sectors should remain around 4%, it will fall short of the government's goal in the Poverty Reduction Strategy Paper – put together in 2002 – for the second year in a row. Inflationary pressure is also continuing: Inflation hit 12% last year and is expected to reach 13% in 2004.
Economists and analysts that spoke to Yemen Times stressed that the private sector needs to be the engine for economic growth and the country becomes less dependent on the public sector and oil which provides the government with revenue and takes up most of the country's exports.
“If you look at some places that flourish, like Japan, Singapore and Hong Kong, there is no oil,” said Mahfoodh Shammakh, Capital Secretariat at the Chamber of Commerce in Sana'a and Director of Salem Mohammed Shammakh & Co. “They flourish because they depend on the private sector, not the government or natural resources.”
Mohamed Al-Hawri, Professor of Economics at Sana'a University, pointed out that the private sector has a long way to develop and lead the growth of the economy. “Ninety-five percent of the private sector is made up of small enterprises,” said Al-Hawri. “A small company has one to four employees, medium-size businesses have five to nine, while a large company has 10 or more employees. The sector needs a lot of work to expand.”
Many think that the improvement of the investment climate is key. A better investment environment would encourage more foreign and domestic investment which would stimulate growth.
“A lot has been done in the last few years to improve the investment environment, but we still have a lot to do,” said Dawood Othman, Chairman of the Economics Department at Sana'a University. “We need to improve on the infrastructure and services, especially electricity and roads. The private sector can reach the energy sector to make it grow.”
Since the Yemeni government joined the United States on the war on terror in 2001, physical security has improved considerably. Although the judicial system is within the government's reform program, what analysts want to see is better financial security.
“There has been some judicial reform, but the country still needs to move faster to set up a system that protects investments and businesses,” said Shammakh. “If we have an independent, well-run judicial system, everything will be developed. It's 99% of the foundation that an economy should be operating on.”
Othman added that a developed justice system would help bring financial institutes into the process of growth in the private sector. At the end of 2003, the loan-to-deposit ratio for Yemen's banking sector amounted to 29%, a very low figure based on international standards, and banks have been dependent on letters of credit, letters of guarantee and buying Yemeni T-bills to make a profit.
“The financial sector can be involved much more than now,” said Othman. “There is plenty of money in the banks, but it is not borrowed and invested to help the private sector grow.”
There is also concern that Yemen Mobile entering the telecommunication sector may scare some investors away in the future.
“The government's responsibility is to create a business environment, regulate the economy and open the market to private companies,” said Othman. “Bringing its own telecommunication company into the market might hurt the idea of competition in the long run. Private investors might hesitate to enter the sector or the market, which will not help the growth of the economy over time.”
Mustapha Rouis, the new Country Manager of The World Bank based in Yemen, recently said that a country focusing on producing and exporting quality products to compete in the world market is an essential catalyst to growth. According to Othman, the government has plans to create industrial zones to encourage the growth of the industrial sector.
“The government is going to establish industrial zones to help investors focus on the sector. This needs to be accelerated to help attract investors and get Yemen to produce and compete in exports,” said Othman.
Othman added that to compete, attention should be given to the development of skills in Yemen's labor force. “Labor skills need to be developed. We need institutions to produce qualified people with skills for the private sector. We have an advantage of having cheap labor but do not have the skills needed in the private sector. We need to make the labor force as the real world requires with a very good education system at all levels,” said Othman.
Analysts also want to see government subsidies of diesel fuel removed and the money redirected to areas that would be more beneficial to the market. The World Bank report estimates that petroleum subsidies might reach $800 million this year, and it is believed that with diesel being cheaper than the prices in neighboring countries, some is smuggled out of the country.
“The subsidies on diesel is a waste of money,” said Shammakh. “It is important to lift the subsidies, which can be done in a gradual process, but it is just as important for the money to go to where it is needed, not into another black hole.”
Economists say that there is another worry that adds to the urgency of a boost in the economy: the population is growing faster than economic growth. According to the Population Reference Bureau (PRB), a private organization based in the United States, Yemen's population grows around 4% yearly. At this rate, the country's population, now estimated at 20 million today, will reach 71 million in 2050. Without the economy picking up the pace, it could add more to 42% of the Yemenis currently living below the poverty line and as many as 40% out of work.
“With population increasing at this rate, economic growth at this time is not enough,” said Othman. “Population growth is a real problem and can wipe out any economic growth. There is a correlation between development and population growth: When development gains full momentum, population growth slows down. This is the main challenge Yemen faces: Accelerate economic development to slow down population growth.”
Since economic reform began in the mid-nineties, the government has been successful in implementing the initial steps aimed at stabilizing the economy. It has been able to reduce its debt, stabilize its currency and has built up substantial foreign reserves. But with economic growth slowing down, more needs to be done.
“Economic reform up to now has created a better chance for us to improve on growth,” said Othman. “We have a long way to go and have to face a number of challenges, but we now have the opportunity to accelerate growth and diversify the economy.”