The deaths marked the collapse of the ceasefire brokered by Qatar in June 2007, ending six months of fighting between the army and followers of the rebel Zaydi sect of Shiite Islam led by Abdul-Malik al-Houthi.

The blast was the latest in a series of attacks, fuelled by political unrest and cultural divides, that continue to cloud the outlook for what remains one of the poorest countries in the region.

Declining production

While world oil prices hit historic highs in 2007, Yemen is one of the few countries in the region where crude production declined sharply, with a 12.5 per cent drop capping a 25 per cent fall over the past six years. The International Monetary Fund (IMF) predicts Yemen’s proven oil reserves could be depleted in just 10 years.

With inflation at 14 per cent and spending on fuel subsidies expected to cost $3.5bn in 2008, or 12 per cent of gross domestic product (GDP), the government, under President Ali Abdullah Salah has been forced to redraft its four-year development plan to 2010 to prioritise the investment climate and fiscal sustainability.

Adding to economic strains, attacks on oil installations, tankers and government compounds have further underlined the precarious peace that exists in the country.

Security has re-emerged as a key issue for Yemen’s ongoing economic development, according Ali Alabdulrazzaq, senior economist at the World Bank’s Sanaa base.

He cites a blast on 9 April near the headquarters of Canadian oil firm Nexen, which came just days after the US ordered non-essential embassy staff and family members to leave the country, as a sparking a fresh awareness among investors of the problems the country faces.

“The feeling is that from a financial perspective, private investors are being much more cautious,” says Alabdulrazzaq.

“Oil firms are cutting staff to the bare minimum and investors from the Gulf are doing the same.”

Plans to develop the country’s fledgling mining industry are moving slowly, while an ambitious $15bn scheme to develop its first nuclear power plant was scrapped after talks with the US’ Powered Corporation dissolved in November 2007.

Government efforts to decentralise offer the potential to improve governance and anti-corruption efforts, and diffuse the political tension.

The state has been handing more power to local councils in an effort to better reach the poorest rural areas in a bid to counter voter discontent over the sluggishness of central government.

“The main question that donors around the world ask is whether the political situation can be diffused,” says Alabdulrazzaq.

International aid to underpin the most basic economic reforms has been falling, with the IMF and the World Bank cutting aid by one-third from 2005 to 2008 because of Yemen’s failure to successfully implement reforms.

Despite its problems, Sanaa remains confident of joining the World Trade Organisation (WTO) by 2009 and continues to push its case for joining the GCC.

Yemen has been vying to become a WTO member since July 2000 but still has work to do on liberalising its economy and introducing trade laws to meet its membership requirements.

Regional integration

While the GCC seems to accept Yemen in principle as a candidate, its support is divided behind the scenes. Many of the smaller Gulf states are in no rush to accept a poor and populous new member state to the GCC.

Their position conflicts with Riyadh, which recognises the need to integrate the country into the regional economy to help solve profound socioeconomic problems that divide the north and south of the region.

Nicole Stracke, security and terrorism analyst at the Dubai-based Gulf Research Centre, says the government’s lack of authority in northern tribal areas is a cause for concern for the more stable Gulf states.

“There is a worry about the long-term strategy [of the government],” says Stracke. “It does not tackle the root causes, and that does not inspire any confidence in its long-term prospects.”

The lack of a clear investment strategy is blurring the roles of different government agencies.

“People are suspicious here of the government,” says Stracke.

“If you do increase fuel subsidies, there is no certainty it [the money] will go through the proper channels because of decades of mismanagement.”

One local oil and gas executive involved in the $4bn Yemen Liquefied Natural Gas (YLNG) consortium says such landmark projects will become more difficult given the security situation and competing investments elsewhere in the world.

“I do not think YLNG would get off the ground if it were proposed now,” says the executive.