For much of the 20-year history of the Republic of Yemen, the government of Ali Abdullah Saleh has relied on oil revenues to maintain fragile unity of a country that is divided down tribal, religious, and political lines. Yet as revenues dry up, it is becoming increasingly important for Sanaa to diversify the economy and shore up its finances.

Lack of skilled technocrats and corruption make it extremely difficult to plan projects

These issues pose a much greater threat to Yemen’s security than the well-publicised growth of the extreme Islamist group Al-Qaeda in the Arabian peninsula, a secessionist movement in the south, or a six-year-old war with Houthi tribesmen in the north.

Gross domestic product (GDP) grew 3.9 per cent in 2009, according to the Washington-headquartered International Monetary Fund (IMF), but the government’s already fragile finances suffered significant blows.

Falling revenues

Last year, oil revenues – 76 per cent of the country’s overall export revenue earnings – fell by more than 50 per cent to $1.96bn, while the war with the Houthis in the province of Sadaa was at its peak costing the government up to $410m a day.

The World Bank says non-oil growth fell to 4.1 per cent in 2009 from 4.8 per cent the year before, a worrying development in a country where employment is largely supported by the agricultural sector.

With more than 20 per cent of the population unemployed, according to the World Bank, and government sources suggesting the real figure could be up to 35 per cent, job creation and economic diversification should be a crucial part of the government’s development programme, given that Yemen’s population is forecast to grow to 50 million in 2035, from 30 million currently.

Further impetus is given to the need for investment in the non-oil sector by as analysts believe the country could become a net importer of oil by around 2015, and that oil production may become unsustainable from 2021 onwards. Yet the government’s finances are in a dire state, and Sanaa is not in a good position to spend billions of dollars on new projects to help diversify the economy and create new jobs.

The government ran a current account deficit of 9.3 per cent of GDP in 2009 – around $2.2bn – and the Finance Ministry has forecast a 7.7 per cent deficit for 2010, likely to be a similar dollar figure, given the forecast economic growth of more than 7 per cent this year.

In the past, the government has raised debt in Yemen itself, largely through loans from the Central Bank of Yemen and sales of treasury bills. But both routes are now largely exhausted.

The central bank’s foreign currency reserves were $6.2bn in March 2010, their lowest in five years. And while in 2005, the bank’s reserves covered up to 14 months of imports, now they can only just cover seven. Imports remain a huge problem, as shown by Yemen’s trade deficit of 10.7 per cent of GDP. Yemen imports 90 per cent of its wheat and, according to senior government officials, 100 per cent of its rice – major staples in the national diet.

This dependence on imports is made more difficult by the value of the national currency, the riyal, which fell fromYR200 against the dollar to YR225 between October 2009 and April 2010, pushing up the price of imported goods. Sanaa sold more than $850m in US dollars between January and April 2010 to shore up the value of the currency, but this has left its foreign currency reserves even more depleted and has done little to increase the value of the riyal, which fell back to YR225 against the dollar on 22 May from YR217 four days earlier.

International aid has been promised to the country repeatedly, and the GCC planned to spend $3.7bn on a series of development projects in 2007-2010.

Lack of reform

While the government has recognised the need for economic diversification, diplomats, aid workers and even government officials tell MEED that a lack of skilled technocrats and widely perceived corruption within the government make it extremely difficult to plan projects and award contracts for management and construction services.

The GCC members were due to meet with the Yemeni government in June to discuss the best way to push ahead with the planned schemes, but sources on both sides say that even if more progress is seen, it will be several years before these projects have an impact on the economy.

With parliamentary elections due to be held in 2011 and Saleh set to step down from the presidency, further political instability is inevitable in the country. Beyond a liquefied natural gas project which came onstream in late 2009, large additions to government revenues are unlikely. Without the help of its   neighbours, the country could move a step closer to becoming a failed state.