The Economic Scenario in Yemen

The North and the South Yemen before their unification in 1990 were classified among the poorest and least developed countries of the world as they had been heavily in economic debt.

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The North and the South Yemen before their unification in 1990 were classified among the poorest and least developed countries of the world as they had been heavily in economic debt. The unity held great hopes for improving this situation, which was pathetic to say the least. Although, informal orientation was on the overall development of production sectors, such as agriculture, fisheries and tourism that would open new opportunities, but the plans were focused on the formal sector of crude oil, which increased the degree of optimism with official and public discovery of a new reserve of crude oil and natural gas, particularly in Macedonia, the border area before the unity. Many feel that the liberalisation of the economy has facilitated the search for oil in land and sea in Yemen.
There is no doubt that the end of the rivalry between the two halves of Yemen, their subsequent unity and the new environment that created a great deal of stability has led to growth of confidence among the major industrial countries, which are eager to invest in Yemen and have large investment companies. The first few months of the signing of the Unity Treaty saw a surge in contracts for exploration and production of crude oil and natural gas. As such, oil production reached around 220,000 barrels a day by 1991. The revenues of oil, essential to support the government’s budget, however, led to a situation where there was no room for supporting development projects.
The Yemeni Unity is based on the principle of maintaining the infrastructure in the former two halves during the transitional period of one year. But, this strategy did not lead to the desired integration. Divergent views on the public sector and malfunctioning of the administration hampered effective integration between the institutions, which were separately running in the former two halves of Yemen.
Sana’a is the new Capital from where the government functions. Aden has once again become a free commercial port that competes with Hong Kong with new incentives for investors. Distribution of land holdings in the South and establishing a stock market has taken a lot of time. Articles 8-7 of the Unity Constitution expects that the State would have mixed economy based on the Islamic social justice, production and social relations, and a public sector that is capable of evolving ownership on the basic means of production while maintaining the private property and scientific planning, leading to the building of State institutions and positive use of the national public resources, besides providing opportunities for public, private and mixed sector.
The repercussions of the Gulf crisis had cut off the flow of aid and remittances from Kuwait, Iraq and Saudi Arabia. The number of the unemployed and their dependent families rose to about one million, in the beginning of 1991. The exchange rate of Yemeni Riyal reduced to 26 as against the US Dollar, forcing the government to freeze staff salaries so as to cover the expenses of vital activities and to support the national currency Revenue from oil was not enough to cover external debt. Also changes in international economy adversely affected development plans in Yemen because external funds were not coming its way.
The Yemeni Unity coincided with violent shocks that left large cracks in economic conditions. Huge political and economic expectations from the unification of two distinctively different systems, the collapse of the then Soviet Union that financially supported the South, the second Gulf crisis and the civil war in the summer of 1994 put a lot of burden on the economy of Yemen, which it found hard to resolve. As a result, financial indicators showed steep decline during the period 1990-1994, for instance gross national product (GNP) in 1994 was just equivalent to 54 per cent of its value during the year 1990, per capita income decreased by 53 per cent and the budget deficit of 10 per cent of the value of GDP in the year 1991 rose to 17per cent in 1994.
There was a shortfall of 12 per cent to 16 per cent of GDP in current account and balance of payments, inflation reached 75 per cent by the end of 1994 and external debt accumulated to more than 150 of the GDP value in the year 1995. In the same vein of economic collapse, unemployment rate and poverty figures gave a pathetic picture. About 25 per cent of the total labour force in the country was unemployed and the percentage of people below the poverty line reached 21 per cent of the total population.
The Yemeni economy was adversely affected during 2001-2005 due to local, regional and international developments topped by the tragic event of 9/11 and the invasion of Iraq. These factors have had an impact on economic performance. GDP grew by an average of 4.2% during the period 2001-2004, where average non-oil growth was 4.9%. The Government was able to achieve a budget surplus of 2.4% in 2001 and control the deficit at safe levels of no more than 3% of GDP in other years.
The fiscal policy meanwhile focused on reinforcing decentralisation in the governorates and districts as part of the implementation of local authority budgets and adherence to the principles and rules of financial and accounting system, and in keeping with provisions under the Local Authority Law and bylaws. The completion of setting up accounting units at the district level and the rehabilitation of their staff to ensure the enhancement of performance and efficiency of the local authorities were an integral part. In addition, computerisation of the financial system and the implementation of the ESCUDA Customs System and the DEMFAS System for External Debt Management and Accounting took place, with a view towards establishing data bases and increasing transparency.
On the legislative side, the government referred proposed amendments to the General Sales Tax to Parliament. This tax aims to remove distortions in early legal texts and to achieve tax equity. It will also replace the Law for the Production and Consumption Tax. The government also approved the proposed new Customs Tariff Law, which was prepared in light of the principles and objectives of EFARP.
During this period, the Central Bank of Yemen maintained stability in the exchange rate by means of imposing controls, and increasing transparency in setting the rates in accordance with market mechanisms in order to ensure a real exchange rate based on competition. The monetary policy was able to confine the growth of money supply at 16% and inflation at 10% in 2004. Money in circulation outside the banking system was reduced from 37% in 2001 to 32% in 2004. This reinforces the confidence of banks and their ability to attract deposits and savings, and re-lend them to sectors and development projects. Foreign currency reserves rose to $ 5.7 billion by the end of 2004 covering about 17 months of imports.
Surplus in external balances fluctuated according to oil prices movement in the international market. The trade balance maintained a surplus ranging between $ 766.5 million and $ 936.8 million during 2001-2004. The gross balance of payments fluctuated between $ 653.2 million and $ 532.3 million during the same period. Outstanding external debt went down to 42% of GDP by the end of 2006.
Political and internal stability depends upon economic conditions. Better economic condition means more stability. The oil sector, the free zones and tourism are keys to improve economic conditions, but first corruption has to be arrested rather eradicated by strengthening and justly implementing laws and also making people in power more accountable for their misdeeds, if any. Second, work on the creation of a civil society that actively and effectively contributes in improving the public sector and makes foreign aid more meaningful. Third, reform economic institutions and improve their performances and associated policies so as to reduce poverty. And last, hard work is required to develop good and solid economic management, which can attract investments for economic growth and thereby reduce poverty so as to achieve social goals.
[Extracted from the writer’s doctoral thesis on Indo-Yemen Trade Since 1990 submitted to C.C.S. University, Meerut, under the supervision of Dr. Jas Vir Singh , Reader in Economics, Krishak (P.G) College Mawana]