Yemen descends deeper into chaos

09 June 2011

Aside from its liquefied natural gas project, Sanaa has had few successes to boast of in recent years. Without foreign support, or GCC help, Yemen will struggle to stabilise its political and economic situation

Political instability and a lack of security have long prevented Yemen from attracting much-needed foreign investment. A secessionist movement in the south and tribal conflict in the north have occupied the government over the past decade, distracting it from the urgent task of developing an industrial base, tackling poverty and creating jobs.

Bleak prospects for Yemen’s economy

The Arab uprisings and the deterioration of the country’s political and security structures mean that an improvement in the fortunes of the Arabian peninsula’s most impoverished state are highly unlikely in the medium term. Since January, demonstrators have taken to the streets on a daily basis, protesting against corruption and unemployment. Over the past five months, violent clashes between the opposition and government loyalists have left hundreds dead. With the country teetering on the brink of civil war, the outlook for Yemen’s economy is bleak.

Ali Abdullah Saleh, who has been president since 1978, has repeatedly refused to sign a GCC-brokered deal for a peaceful transition of power, despite promises of immunity.

An attack on his Sanaa compound on 4 June may yet force Saleh’s hand. The president and members of his entourage suffered serious injury and were forced to seek medical treatment in Saudi Arabia. As MEED went to press, it was unclear whether Saleh would return to Yemen. There were scenes of celebration in the capital at his departure.

Yemen’s situation is …dire. There is a long way to go before [anyone] is going to say anything to the contrary

Samuel Ciszuk, IHS Global

Sanaa was relatively lucky in that it did not suffer too badly during the 2008-09 financial crisis because its underdeveloped banking system is isolated from the global economy. Yemen actually saw some of the strongest growth in the region, with its economy expanding 8 per cent in 2010 –  mainly due to the first full-year revenues from Yemen LNG, a liquefied natural gas export project completed in late 2009.

The state relies on hydrocarbons for about 70 per cent of its income, but the violent uprising has disrupted production and this will impact on Yemen’s economic performance this year.

Attacks on oil pipelines have been reported in several regions, most notably Marib. This has led to domestic fuel shortages, which are also stirring up discontent among the local population. To resolve the problem, Sanaa has turned to Saudi Arabia to buy 2 million barrels of crude oil that it will process at its Aden oil refinery.

Yemen GDP by sector, 2009
Power and water1
Trade, restaurants, hotels23
Transport & communication19
Finance, real estate and business services9
Government services9
GDP=Gross domestic product. Source: Central Bank of Yemen

Yemen’s minister of trade and industry Hisham Sharaf said in April that the country had lost an estimated $5bn due to attacks on the oil industry. This equates to about 17 per cent of the country’s GDP for 2010.

“Yemen’s current situation is pretty dire and there is a long way to go before any analyst or economist is going to say anything to the contrary,” says Samuel Ciszuk, Middle East Analyst at UK energy consultancy IHS Global Insight. “A smooth transition is essential if there is to be any chance of the country recovering in the medium term.”

Production has also been affected by the fact that some international oil firms have stopped work in the country and many local oil workers have gone on strike. The loss of oil revenues has led to a chronic cash-flow problem that could see Sanaa struggle to pay government workers – this would only add to the current turmoil.

So far, Yemen LNG, the biggest foreign investment ever made in the country, has reported no stoppages in production. The 6.7 million tonne-a-year scheme is one of Sanaa’s few success stories and the country was hoping to emulate its success with more foreign investment.

Hydrocarbon reserves and production in Yemen
Oil production (thousand barrels a day)298
Oil reserves* (billion barrels)2.7
Oil proven reserves* (share of world total)0.2
Gas proven reserves* (trillion cubic metres)0.49
Gas proven reserves* (share of world total)0.3
*At end of 2009. Source: BP Statistical Review of World Energy

That many projects were struggling to find finance even before the protests began illustrates Yemen’s dire situation. According to regional projects tracker MEED Projects, nearly every project in Yemen worth more than $300m in sectors including oil and gas, power, industry and construction is on hold. Several projects in the planning stage such as the $3bn expansion of the dilapidated Aden refinery are now not expected to happen until at least 2014-15.

Lost patience

Although it is difficult to make any assessment of Yemen’s economy, the Washington-based IMF is forecasting inflation of 13 per cent during 2011 and the country’s GDP growth to slow to 3.4 per cent, from 8 per cent in 2010.

Many observers believe that if the country is to move forward, it will need the help of the six GCC member states. A stable Yemen is in their best interest. A civil war would likely result in a flood of refugees across their borders, something governments will be keen to avoid given the region’s charged political atmosphere. But as it stands, even the GCC has lost its patience with Saleh.

It is unclear how the latest political crisis in Yemen will end, but the situation is likely to get far worse before it gets better.

A MEED Subscription...

Subscribe or upgrade your current 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.

Get Notifications