Yemen’s Heading towards Market Economy, Marred By Lack of Organized Monetary Market [Archives:2000/14/Business & Economy]

April 3 2000

By: Mahyoob Al-Kamali
The first five-year plan of the Republic of Yemen ‘1996-2000’ is almost over without achieving its objective of creating policies and measures aimed at establishing a stock-exchange market organizing the movement of monetary circulation and encouraging local and foreign capitals to increase investments in a free money market. Such measures would help the government develop market economy and put forth a thorough plan to reform conditions of companies and institutions facing difficulties.
Bourse experts view that financial and monetary policies being implemented as part of the economic reform program do need the existence of this money market which will help ensure quick economic development. Besides, it will make use of savings and invest the financial gains in the productive sectors. It will also provide investors with easy loans opportunities.
Reforms Have not Created the Money Market:
Since 1995, policies of the Central Bank were focused on reforming conditions of the banking system, liberalizing interest rates, cancelling easy interests on loans, fixing rates of interests on deposits at 20% – 22%, subsequently raised to 25% – 27%, issuing month-long treasury bonds and introducing a payability periods for 91, 182, 364 days. To activate the role of banks in economic recovery, the Central Bank decreased interest rates on deposits from 27% to 10% and monetary reserves from 25% to 10%.
Since July 1997, the bank has started implementing a graded matrix of financial reforms and received from IAD an $ 80 million worth loan. This policy has led to an increase in money supply at a rate of 11% and rise in foreign assets to cover the costs of imports for five months. It has also increased foreign banks deposits to YR 150 billion. On the other hand, the private sector deposits increased by 54% while foreign loans decreased from 184 % in 1995 to 69 % in 1997. Eventually, two-thirds of Yemen’s foreign debts have been rescheduled and two thirds of those debts were written off following donors meetings at Paris Club in 1996.
Despite all these monetary policies and procedures, steps to establish a stock-exchange market in our country have been faltering so far.
Treasury Bonds:
Banking policies were focused on issuing the treasury bonds, usually considered as temporary solution for realizing monetary and economic-stability. However, the positive results of this measure were only confined in covering necessary expenditure of the government budget and funding a small number of important development projects out of local loan resources. This has made the Central Bank incapable of taking the initiative to establish the stock market.
It is rather fair to say that issuance of treasury bonds amounting to YR 41,5 billion at the beginning, has absorbed a big amount of monetary inflation in the market leading to relative constancy in exchange price of the riyal in against other currencies. However, financial transactions in equivalent market did not stop mainly because of the random action of private banks.
Experts assert that treasury bonds have added new passive impact on outputs of Yemen’s economic system, such as inflation rate increase in the state budget owing to interests charged on treasury bonds, as the bank did not invest them to achieve the profit to be paid to clients while the percentage of interests was raised to 27%.
The central Bank measures to decrease the ratio of savings and deposits have a good effect to relieve, though narrowly, the burdens of inflation.
Banks’ Slackness and Stock Companies Bankruptcy:
Reasons hindering establishing stock-exchange market in Yemen are attributed non-development of the market of general debt. This would activate and deepen the circulation of money in the free market. Another reason is the absence of a market regulating the relationship among banks, that is termed as “Inter Bank Market”. These conditions were associated with banking and investment slackness. Therefore, about 40 national factories declared bankruptcy and a number of investment companies were closed. All this has created new challenges before financial reforms.
The other blocking an early establishment of a stock market is the continuous problems of banks’ bad debts, though the Central Bank has issued clear instructions to classify these loans and allocations and to redeem them from debtors. Hence, policies of financial and bank reforms have failed to specify the companies and banks to establish the monetary market. It is so because of difficulties faced in choosing the speculators and merchants who are able to buy shares with put off cheques and for their turbulent conditions in the market.
Despite all that, the Arab Monetary Fund and World Monetary Fund have participated with a preliminary study pertaining to the requirements of establishing a financial market. An expedition from the Arab Monetary Fund has also conducted a comprehensive survey of the Yemeni market and prepared a capacious report for the very purpose. However, results of these studies did not see light mainly because of the deteriorated, worn out legislation and laws, those in authority have to re-consider to establish the stock market.
I assert that the government’s control over its expenses in the framework of active financial reforms will be of limited consequences unless an exchange, monetary circulation market is established this year. That is true because the success of structural reforms and tackling the consequences of unemployment require many financial resources to finance the development of the primary basis and achieve permanent development.
Savings and their Role in Establishing the Monetary Market:
It is quite clear that the direct and most effective means of increasing the volume of savings requires, at present, the increase the revenues of commercial and specialized banks. It also requires reforming conditions of stock companies and re-incorporate their allocations according to lawful bases that will help establish money market.
The question that pops up in businessmen’s minds is “What are the outcomes of the Central Bank’s policy as it stipulated that each bank has YR 1 billion as minimum to start its activities. This is believed to give the bank a financial strength so that it is able to compete financial transactions in the stock market.
Therefore, it seems urgent to issue accounting standards that organize the banks and stock companies’ action to improve conditions of banking-system. It will also activate banks’ role to carry out investment activities in productive sectors, besides their commercial activity.
A matter of fact, our country appears to be lagging behind many other countries in the region as it lacks a financial stock market. It is so because strong relations between local and foreign investors are enhanced by the existence of this market. Besides developing local production, preventing financial hazards and preserving the monetary stability of local currency in respect to other foreign currencies are all positively affected by the mechanism of organizing the financial market.
Thus, the government success in attracting big investment capitals for the Free Zone in Aden and developing Yemen’s exports will never be possible unless a money market, based upon scientific and practical grounds, is established as soon as possible. This is what we hope will happen before the end of this year, the last of the first five-year plan of the Republic of Yemen.