As Yemen rebuilds, policy paralysis drags on economy

Wednesday 18th, December 2013 / 20:52 Written by

Economic reforms that would make the recovery sustainable and spread wealth more widely are on hold, and there is little sign of the political will to revive them, writes Peter Salisbury

Abdulkhaleq, a 28-year-old Yemeni who worked in Saudi Arabia for five years, returned to his country last month because of a crackdown by Saudi visa authorities. He aims to leave Yemen again as soon as possible.
“Here in Yemen it is worse than ever,” Abdulkhaleq said in the old quarter of the capital Sanaa. “People have no jobs, there is no security. There is nothing for me here. I would rather go to China, or Somalia even.”
Yemen’s economy is recovering from the political turmoil. The currency has stabilised, inflation has dropped and some businessmen have resumed investing.
But to Abdulkhaleq, the recovery seems far too slow to generate jobs or raise living standards for many of the country’s 27 million people. Tribal violence and militancy still weigh heavily on business activity.
Worse, the economic improvement has shaky foundations: a big rise in state spending that depends on borrowing on local capital markets. Economic reforms that would make the recovery sustainable and spread wealth more widely are on hold, and there is little sign of the political will to revive them.
Tense negotiations over democratic reforms are “sucking the oxygen out of the political space, leaving very little bandwidth to deal with other urgent needs, especially related to economic issues,” said Danya Greenfield, expert on regional politics and economics at the Atlantic Council, a US think-tank.
“There is a complete lack of leadership or vision within the transitional government on economic policymaking, and this comes at a very high cost.”
The economy of Yemen shrank 12.7 per cent in 2011, according to the International Monetary Fund. Gross domestic product rebounded 2.4 per cent last year and the IMF thinks it will grow 6 per cent this year. But those figures hide worrying trends.
Most of the growth is due to a jump in state spending, which soared 32 per cent in 2012. To sustain this spending, the government has increasingly turned to local debt markets, issuing a flurry of Treasury bills and, in November and December, Islamic bonds to local Islamic banks.
In the year to October 2013, T-bills in circulation jumped 38 per cent to $6.4 billion, officials said. The IMF has forecast a budget deficit of 5.8 per cent of GDP for 2013, but government officials now project a wider shortfall, of 6 to 7 per cent.
Ibrahim al Nahari, Yemen’s central bank sub-governor for foreign operations and research, said it should be possible to continue financing the budget using local markets. He estimated the Islamic banks alone could provide a further $500 million.
But he conceded that rising spending and debt payments were a source of concern. Meanwhile, much state spending does not go towards job generation or investment in infrastructure that would make the economy more productive. Instead, it goes to the public wage bill and fuel subsidies — buying political peace in the short term while neglecting the long-term economic outlook. Since 2011, attacks on an oil pipeline have cut supplies to Yemen’s main refinery at Aden. This forces the government to import fuel which it sells at subsidised prices, making losses; fuel subsidies cost Sanaa $3 billion in 2012. Corruption adds to the pressure on finances.
“It has got worse since 2011,” said Mohammed al Absi, a local journalist who made his name fighting corruption. The state wage bill contains tens of thousands of fraudulent “ghost” employees, he said.
Foreign assistance has helped to stabilise Yemen’s balance of payments. In 2012 Sanaa obtained promises of about $7.9 billion over the next few years from foreign donors including the United States and Saudi Arabia. But much of the money goes to aid projects in the country rather than government coffers.
“Yemen cannot afford to wait much longer on implementing essential reforms,” said Gazi Shbaikat, the IMF’s representative in Yemen, who is negotiating a $550 million with Sanaa. The IMF is pressing for reforms including cuts to the public wage bill and subsidies; savings would be redirected towards social welfare and spending on infrastructure. It also wants Sanaa to improve tax collection and business regulation.
Postponing reform would mean waiting to implement poverty reduction and job schemes that are essential for political stability, Shbaikat said.

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