Another hard economic year for Yemen

26 July 2012

The events of 2011 made life in Yemen even harder for the country’s poor. Midway through 2012, there looks to be little respite as the economy continues its downward spiral

Key fact

Yemen’s economy shrank 10.5 per cent in 2011, while inflation reached 23.2 per cent

Source: Planning and International Cooperation Ministry

Shukri Mohammed Layfan tries to smile. One hand grips the stick he uses to support his emaciated legs, the other is draped around his son’s shoulder.

Layfan has lived in an improvised tent made of sticks and plastic sheeting in Hajjah, the dusty northwest province of Yemen that borders Saudi Arabia, for the past three years.

Before that, he lived in Malahit, in Saada province to the east, but he and his family were forced to leave in 2009 by fighting between Shia Houthi tribesmen, government forces and Salafist fighters. Struggling to cope with the tuberculosis he has had since his twenties he finds it difficult to provide for his family.

Development indicators

In Malahit, Layfan made ends meet by keeping livestock. “When the war started, we left with our clothes,” he says. “If we get food now, we get bread with nothing. Things like fruit, vegetables, meat, we just don’t eat. I have no work, just a few goats. A few days ago, we had no food for five days. We went to the neighbours and asked them to give what they could spare. But we have five children; with my wife, we are seven people.”

Layfan is one of a growing number of Yemenis who have no job, no home and little hope for the future. Even for those not displaced by conflicts in the north and the south, life is little better.

“Although the situation looks stable … that is not an accurate assumption if you take the Saudi oil away”

Source with ties to the Yemen Finance Ministry

Yemen has some of the worst development indicators in the region and, indeed, the world. Gross national product per capita was $2,500 in 2010, compared with almost $70,000 in nearby Qatar, while life expectancy is a little over 65 years on average, a good decade below the figure for the oil-rich Gulf states. The UN ranked Yemen at 154 of 187 countries in its 2011 Human Development Index - only Sudan featured lower among the states of the Middle East and North Africa region.

The country’s many problems - a lack of economic development, poor security, dwindling resources and poor public services, such as education, water and electricity - were only exacerbated in 2011, when a civil uprising threw its political system and economy into turmoil. As fighting broke out between elite military and tribal factions in the capital, Sanaa, the extremist group Al-Qaeda in the Arabian Peninsula (AQAP) took over swathes of land in the south. Meanwhile, a key pipeline linking the Marib oil field with export facilities at Ras Issa and the country’s main refinery at Aden, was bombed in March 2011.

The government estimates that the loss of the pipeline, a key source of domestic oil supply, cost up to $400m a month - $250m in imported fuel and subsidies and about $150m in revenues. Repairs of the line were only completed in July.

The decision was made to continue to pump oil to another export terminal and sell it on export markets rather than reroute it to Aden, leading to a fall in domestic supply and rapid inflation in the price of fuel. Given that most goods, including food and water (produced in Yemen using diesel-powered pumps) are transported by road, this led to higher prices and diminishing supplies. The lack of fuel and electricity, along with the deteriorating security environment, also led most businesses to shut their doors, laying off employees along the way.

Shrinking enconomy

The Planning and International Cooperation Ministry in Sanaa estimates that the economy shrank 10.5 per cent in 2011, while inflation hit 23.2 per cent. Foreign currency reserves at the Central Bank of Yemen dropped 24.4 per cent to $4.3bn.

With little business activity during the year, about half the country’s working-age population was unemployed by the beginning of 2012, while 53 per cent of 15-24 year-olds - the biggest and fastest-growing, demographic group - were jobless by the end of the year. Some 44.5 per cent of all Yemenis were food insecure by the end of 2011, according to the Washington-headquartered World Food Programme.

For people like Layfan, a bad situation - where people could just about rely on friends, family and neighbours for financial support - became even worse. Those who had managed to make ends meet in the past, and had enough food or money to help those around them, also began to struggle.

“If [security] here were to get better, we could produce more oil and gas and businesses would be encouraged”

Mohamed al-Maitami, International University of Technology

The situation has improved marginally in 2012. The Washington-headquartered IMF forecasts that the economy will contract 0.9 per cent in 2012 before bouncing back to growth in 2013. Inflation fell to about 8 per cent in during the first six months of the year and so far the government has been able to keep the budget deficit to within forecast levels.

In April, a YR50bn ($234m) government-issued sukuk (Islamic bond) was fully subscribed by local Islamic banks. Foreign currency reserves at the central bank have also been rising slowly, reaching $4.4bn in May.

Fuel donations

But many problems lie ahead for the economy and the government. The budget for the year was propped up in the first half by grants of oil products made by Saudi Arabia, worth an estimated $1bn. These reduced the cost of procuring fuel on international markets and even created some new government revenues.

Riyadh announced in May that the fuel donations, which were made in addition to a similar pledge in the second half of 2011, would not be continued after a final shipment, which sources in Sanaa say will be exhausted by mid-July.

“Although the situation looks stable for the first half of the year, that is not an accurate assumption if you take the Saudi oil away,” says a source with close ties to the Finance Ministry.

The money raised by the April sukuk, which was explicitly linked to commodity imports, should have covered the difference.

Even with the pipeline back up and running, a pressing issue for the finance ministry will be raising finance to bridge the gap in the budget and any unforeseen future expenses. The IMF has made a $93m credit line available to Sanaa, and is in talks over another, bigger, loan, but nothing like the billions of dollars the state will need in the coming years.

The government could try raising more finance through local markets, but this would serve to exacerbate another issue - that of a banking sector that only really buys government debt and charges above the 22 per cent it costs to take out a loan from the central bank.

“The government pays 20-plus per cent for any debt it raises, but also charges 22 per cent for credit facilities to local banks,” says a source at an international financial institution. “That means that the banks will only extend credit at above 22 per cent, often 24-25 per cent, to the private sector, let alone private clients. In effect, it makes the government the only game in town - the risk is too high of a default from private clients at those rates, and you can make plenty just by buying government debt.”

Not surprisingly, a 2010 review of the country’s banking system by the Riyadh-headquartered Arab Credit Reporting Initiative found that just 4 per cent of Yemenis had bank accounts and just 0.6 per cent had access to credit. About 70 per cent of local banks’ capital was invested in government debt, 20 per cent with local businesses and the remaining 10 per cent was placed in foreign banks.

Yemeni economists see the current system as untenable and have called for a decrease in the interest rate, which is stunting private enterprise.

“There is no way the government can provide jobs for all Yemeni people,” says Mohamed al-Maitami, a professor at Sanaa’s International University of Technology and an expert on the Yemeni economy. “The other option is to boost the private sector through credit and microfinance, but that would mean cutting the interest rate. We have suggested a maximum interest rate of 5 per cent.”

Al-Maitami wants foreign donors to set up a special fund to help the poorest people in Yemen, and says that construction projects to help rebuild parts of the country left devastated by violence in 2010 and the AQAP takeover of territory in the south would be a great way of getting the economy moving while serving a useful long-term purpose. “But for the time being, we are unable to mobilise resources,” he says.

A donor conference scheduled for June in Riyadh was postponed until September following the death of Crown Prince Nayef bin Abdulaziz al-Saud, who oversaw Saudi Arabia’s work in Yemen.

Riyadh is expected to be a major donor in the coming years and said in May that it planned to give Sanaa $3.25bn in development aid.

Security situation

“The postponement of the conference was really bad news,” says a senior official at a large aid organisation working in Yemen. “They need to get the money ready and mobilised as soon as possible, but it seems like aid and development aren’t as big priorities as security.”

Al-Maitami, who maintains that Yemen should not become too dependent on aid, says that without a better security situation it will be impossible to sort out the economy. “If the security situation here were to improve, we could produce more oil and gas and businesses would be encouraged,” he says.

Layfan does not know much about the events of 2011, nor the political transition currently taking place in Sanaa. His needs are few, but they are unlikely to be met any time soon. “I just want the necessary things for my children,” he says. “Like food, and enough education to secure their future.”

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.