Sanaa wants to raise around YR60bn ($275.9m) in debt by issuing an Islamic bond (sukuk) in the third quarter of 2010, according to sources close to the Yemeni government.

The Central Bank of Yemen is in talks with the Washington-headquartered International Monetary Fund (IMF) over the best way to structure the bond as part of a wider programme to raise finance and shorten the country’s budget deficit, which ran to 9.3 per cent of gross domestic product (GDP), or total economic output, in 2009.

“The IMF has been helping us with this since the end of 2009, and a team will be built up in the central bank soon to help with its issue,” says one senior government source. “It was meant to be around YR60bn, but that was if they issued it at the start of the year, so now it could be more.”

The bond would be collateralised against existing government assets or goods like oil, the source says. Pricing is yet to be set.

Sanaa ran a budget deficit of 9.3 per cent of GDP in 2009 and has budgeted for a deficit of 7.7 per cent for 2010. Where in the past it has been able to tap the central banks for funds, it now faces a cash crisis, with foreign currency reserves at a five-year low of $6.2bn.

The lower reserves means that the bank can now only cover seven months of imports at current levels, a record low as the country’s dependency on foreign goods has increased and the dollar has lost value since 2005. On average, the bank was in a position to cover 7.3 months of imports through its foreign currency reserves in 2009.

Further, the government sold around $850m of foreign currency and assets locally between January and April 2010 in attempt to prop up the Yemeni Rial, which fell from an average of around YR200 against the US dollar in 2009 to as low as YR225 in the first quarter of 2010. It was trading at around YR217 on 18 May.