Content

SEND US FEEDBACK


We're always looking for ways to make Geoba.se better. Have an idea? See something that needs fixing? Let us know!

Yemen: Economy
Country Study > Economy

ECONOMY


Overview: At the time of unification, South Yemen and North Yemen had vastly different but equally struggling underdeveloped economic systems. Since unification, the economy has been forced to sustain the consequences of Yemen’s support for Iraq during the 1990–91 Gulf War: Saudi Arabia expelled almost 1 million Yemeni workers, and both Saudi Arabia and Kuwait significantly reduced economic aid to Yemen. The 1994 civil war further drained Yemen’s economy. As a consequence, since 1995 Yemen has relied heavily on aid from multilateral agencies to sustain its economy. In return, it has pledged to implement significant economic reforms. In 1997 the International Monetary Fund (IMF) approved two programs to increase Yemen’s credit significantly: the enhanced structural adjustment facility (now known as the poverty reduction and growth facility, or PRGF) and the extended funding facility (EFF). In the ensuing years, Yemen’s government attempted, with limited success, to implement recommended reforms—reducing the civil service payroll, eliminating diesel and other subsidies, lowering defense spending, introducing a general sales tax, and privatizing state-run industries. As a result, Yemen has received only a fraction of the aid initially allocated by bilateral and multilateral lenders.

In late 2005, the World Bank, which, together with other lenders, had extended Yemen a four-year US$2.3 billion economic support package in October 2002, announced that, as a consequence of Yemen’s failure to implement significant economic reforms and stem corruption, it would reduce financial aid by one-third, to US$280 million, over the period July 2005 through July 2008. Other funds pledged in the US$2.3 billion package were withheld as well. However, in May 2006 the World Bank adopted an assistance strategy for Yemen under which it will provide approximately US$400 million in International Development Association (IDA) credits over the period FY 2006 to FY 2009. In November 2006, Yemen’s development partners pledged a total of US$5 billion in grants and concessional loans for the period 2007–10 to finance projects outlined in Yemen’s five-year (2006–10) Development Plan for Poverty Reduction (DPPR). Recognizing that the country’s oil reserves are rapidly depleting, the DPPR focuses on the development of the country’s non-oil resources: natural gas, agriculture, fisheries, transshipment, and tourism. At a February 2008 meeting, international lenders in the Yemen Consultative Group announced that as of December 2007, 70 percent of the funds pledged (increased to US$5.3 billion) had been allocated. However, several attendees raised concerns about Yemen’s lack of economic expansion, high population growth, worsening water crisis, and inability to contain security threats, all of which threaten to diminish the efficacy of international financial support. Yemen remains one of the poorest of the world’s low-income countries; more than 45 percent of the population lives in poverty.

Gross Domestic Product (GDP): For 2006 Yemen’s GDP was estimated to be US$19 billion. GDP per capita was estimated to be in a range of only US$880–US$904. World Bank and other economists have calculated a real growth rate of 3.2–4.0 percent in 2006, decreasing to a range of 2.8–3.6 percent in 2007, and estimate that real GDP growth in 2008 will remain unchanged. The general decline in the GDP growth rate is attributed to decreased oil production, which has negatively affected exports of goods and services, coupled with increased demand for imports. In the period 2008–9, however, the financial support pledged by bilateral and multilateral donors in November 2006 and the construction of a liquefied natural gas plant (expected to begin exports in early 2009) should offset the anticipated sharp decline in oil revenue, enabling GDP growth to remain constant. All of the rates estimated and forecast by economists fall far short of Yemen’s five-year (2006–10) development plan, which calls for sustained average annual real GDP growth of 7 percent. The World Bank also has set a target of 7 percent GDP growth rate per year in order for Yemen to achieve sustained economic development.

Government Budget: In 1995, in order to comply with conditions stipulated by the International Monetary Fund, Yemen began an economic reform program, one component of which is fiscal policy reform aimed at reducing deficits and expanding the revenue base. However, the government has failed to significantly reduce its primary expenditure—subsidies, especially the fuel subsidy. Fuel subsidies accounted for an estimated 8.7 percent of gross domestic product (GDP) in 2007 and are forecast to rise to 11.8 percent of GDP in 2008. Coupled with the fuel subsidy, the government has continued to raise capital spending and increase civil service wages and pension benefits. Defense spending remains high, and in late 2007 the government adopted a supplementary US$1.3 billion budget to cover rising military costs stemming from internal security threats. Overall government spending is expected to increase by an annual average of approximately 14 percent in 2008–9. This trend has resulted in significant fiscal deficits—an estimated US$768 million in 2007 (3.7 percent of GDP) and US$1.2 billion in 2008 (4.9 percent of GDP); the deficit is forecast to reach US$2.3 billion in 2009.

Inflation: The implementation of economic reforms, including the cessation of Central Bank of Yemen financing of government budget deficits, reduced inflation from an average of 40 percent during the years immediately following unification (1990–96) to only 5.4 percent in 1997. High oil prices and cuts in the fuel subsidy brought the rate of inflation back up to an average of 11.4 percent from 2001 to 2004 and to 11.8 percent in 2005. Despite efforts by the Central Bank to contain the effects of both additional reductions in government fuel subsidies and the imposition of a general sales tax in 2005, the average annual inflation rate was 20.8 percent in 2006. Although inflation slowed sharply in the first half of 2007 as a result of lower prices for foodstuffs and intervention by the Central Bank, higher food prices in the latter part of 2007 pushed the annual average to 10 percent. Given increases in international non-oil commodity prices and strong domestic demand, economists project that the average inflation rate will reach

14.6 percent in 2008.

Agriculture, Forestry, and Fishing: Agriculture is the mainstay of Yemen’s economy, generating more than 20 percent of gross domestic product (GDP) since 1990 (20.4 percent in 2005 according to the Central Bank of Yemen) and employing more than half (54.2 percent in 2003) of the working population. However, a U.S. government estimate suggests that the sector accounted for only 12.4 percent of GDP in 2007. Numerous environmental problems hamper growth in this sector—soil erosion, sand dune encroachment, and deforestation—but the greatest problem by far is the scarcity of water. As a result of low levels of rainfall, agriculture in Yemen relies heavily on the extraction of groundwater, a resource that is being depleted. Yemen’s water tables are falling by approximately two meters a year. The use of irrigation has made fruit and vegetables Yemen’s primary cash crops. With the rise in the output of irrigated crops, the production of traditional rain-fed crops such as cereals has declined. According to the Central Bank of Yemen, in 2005 the production of qat, a mildly narcotic and heavily cultivated plant that produces natural stimulants when its leaves are chewed, rose 6.7 percent and accounted for 5.8 percent of GDP; its usage in Yemen is widespread. According to the World Bank and other economists, cultivation of this plant plays a dominant role in Yemen’s agricultural economy, constituting 10 percent of GDP and employing an estimated 150,000 persons while consuming an estimated 30 percent of irrigation water and displacing land areas that could otherwise be used for exportable coffee, fruits, and vegetables.

Although Yemen’s extensive territorial waters and marine resources reportedly have the potential to produce 350,000–400,000 metric tons of fish each year, actual production is estimated to total only about 290,000 metric tons per year. The fishing industry is relatively underdeveloped and consists largely of individual fishermen in small boats. In recent years, the government has lifted restrictions on fish exports, and production has increased, yielding revenues valued at US$256 million in 2005. Fish and fish products constitute only 1.7 percent of Yemen’s GDP but are the second largest export. In December 2005, the World Bank approved a US$25 million credit for a six-year Fisheries Management and Conservation Project to be launched in all coastal governorates along the Red Sea and the Gulf of Aden. This project is expected to improve fish landing and auction facilities, provide ice plants for fish preservation, and enable Yemen’s Ministry of Fisheries to undertake more effective research, resource management planning, and regulatory activities.

Mining and Minerals: Yemen is a small oil producer and does not belong to the Organization of the Petroleum Exporting Countries (OPEC). Unlike many regional oil producers, Yemen relies heavily on foreign oil companies that have production-sharing agreements with the government. Income from oil production constitutes 75 percent of government revenue and about 85 percent of exports. Yemen had proven crude oil reserves of more than 3 billion barrels in 2007, down from 4 billion in 2006, and these reserves are not expected to last beyond 2020; in addition, output from the country’s older fields is falling. According to statistics published by the U.S. Energy Information Administration, crude oil output averaged 380,000 barrels per day (bbl/d) in 2006, a reduction from 400,000 bbl/d in 2005. Crude oil output is projected to be 360,000 bbl/d in 2007 and to decrease to 350,000 bbl/d in 2008.

According to the Oil and Gas Journal, Yemen had 16.9 trillion cubic feet of proven natural gas reserves in 2007. Of this amount, 9 trillion cubic feet have been designated for the export of liquefied natural gas (LNG) by Yemen LNG (YLNG), which was formed in 1997 between Yemen Gas Company and various privately held companies. In July 2005, following years of setbacks, the government gave final approval to three LNG supply agreements, enabling YLNG to award a US$2.6 billion contract to an international consortium to build the country’s first liquefaction plant at Balhat on the Arabian Sea coast. The plant is expected to deliver a total of

6.8 million tons of LNG per year; initial shipments are expected by early 2009, two-thirds for export to the United States and the remainder to Asia.

Industry and Manufacturing: The U.S. government estimates that Yemen’s industrial sector constituted 40.9 percent of gross domestic product (GDP) in 2007. Together with services, construction, and commerce, industry accounts for less than 25 percent of the labor force. The largest contributor to the manufacturing sector’s output is oil refining, which generates roughly 40 percent of total revenue. The remainder of this sector consists of the production of consumer goods and construction materials. Manufacturing constituted approximately 9.9 percent of Yemen’s GDP in 2006. Almost all (95 percent) of the establishments are small businesses (one to four employees). Almost half of all industrial establishments are involved in processing food products and beverages; the production of flour and cooking oil has increased in recent years. Approximately 10 percent of the establishments are classified as manufacturing mixed metal products such as water-storage tanks, doors, and windows.

Energy: Yemen’s state-owned Public Corporation for Electricity (PEC) operates an estimated 80 percent of the country’s electricity generating capacity (1 gigawatt) as well as the national power grid. Over the past 10 years, the government has considered various means of alleviating the country’s significant electricity shortage, including restructuring the PEC, integrating the power sector through small-scale privatization of power stations, creating independent power projects (IPPs), and introducing gas-generated power plants to free up oil supplies for export. In March 2005, Siemens signed a US$160 million contract to build a 340-megawatt gas-fueled power plant at Marib, with the potential to generate 1,000 megawatts. In November 2007, the Saudi Arabian government agreed to provide a US$101 million grant for this project. In May 2006, the World Bank approved a US$50 million loan to help finance the five-year Power Sector Project, which is designed to relieve critical power-sector supply constraints, enhance electricity supply efficiency and quality, and improve the efficiency of the PEC. In 2007 France’s development financing agency, the Agence Française de Développement (AFD), gave Yemen a US$37 million concessional loan to help build capacity in the electricity sector.

In 2005 Yemen’s diesel-run power plants generated 4.1 billion kilowatt-hours of electricity, a level of production that is insufficient to maintain a consistent supply of electricity. Although demand for electricity remains high, it is estimated that only 42 percent of the total population has access to electricity from the national power grid, and supply is intermittent, with frequent blackouts. To meet this demand, the government plans to increase the country’s power generating capacity an additional 1,400 megawatts by 2010.

Services: International economists have reported that Yemen’s services sector constituted 52.6 percent of gross domestic product (GDP) in 2004 and 53.1 percent of GDP in 2005. The U.S. government estimates that the services sector accounted for 46.7 percent of GDP in 2007.

Banking and Finance: Yemen’s financial services sector is underdeveloped and dominated by the banking system. Yemen has no public stock exchange, but the government wants to establish one by 2011. The banking system consists of the Central Bank of Yemen, 16 commercial banks (nine private domestic banks, four of which are Islamic banks; five private foreign banks; and two state-owned banks), and two specialized state-owned development banks. The Central Bank of Yemen controls monetary policy and oversees the transfer of currencies abroad. It is the lender of last resort, exercises supervisory authority over commercial banks, and serves as a banker to the government. The largest commercial bank, the National Bank of Yemen, which is fully state-owned, and the Yemen Bank for Reconstruction and Development, which is majority state-owned, are currently being restructured with the goal of eventual privatization. Because of fiscal difficulties in both banks, in 2004 Yemen’s government approved a plan to merge them, but no action has been taken.

The large volume of non-performing loans, low capitalization, and weak enforcement of regulatory standards hamper Yemen’s banking sector as a whole. Numerous banks are technically insolvent. Because many debtors are in default, Yemen’s banks limit their lending activities to a select group of consumers and businesses; as a result, the entire banking system holds less than 60 percent of the money supply. The bulk of the economy operates with cash. Legislation adopted in 2000 gave the Central Bank the authority to enforce tougher lending requirements, and in mid-2005 the Central Bank promulgated several new capital requirements for commercial banks aimed at curtailing currency speculation and protecting deposits. In 2007 Yemen’s banking law was amended to ease entry conditions for foreign banks and strengthen the oversight of Islamic banks. In March 2008, Yemen’s parliament approved legislation establishing an independent deposit insurance agency to protect depositors with assets of US$10,000 or less.

Tourism: Yemen’s tourism industry is hampered by limited infrastructure as well as serious security concerns. The country’s hotels and restaurants are below international standards, and air and road transportation is largely inadequate. Kidnappings of foreign tourists remain a threat, especially outside the main cities, and, coupled with attacks on foreigners in 2007 and early 2008, present a significant deterrent to tourism. In April 2008, the U.S. Department of State reiterated previous warnings to U.S. citizens, urging them to defer non-essential travel to Yemen because the security threat level remains high. In March 2008, Britain’s Foreign Office issued a similar advisory. Recent statistics for tourist arrivals in Yemen are not available, but in 2005 the number rose to 336,000 from 274,000 in 2004.

Labor: According to the U.S. government, the agriculture and herding sector employs the majority of Yemen’s working population (54.2 percent in 2003). Industry, together with services, construction, and commerce, accounts for less than 25 percent of the labor force. The country’s unemployment rate is estimated to be 35 percent.

According to the World Bank and other economists, Yemen’s civil service is characterized by a large, poorly paid workforce, multiple salary structures, and an absence of effective enforcement measures to counter fraud. As the government has sought to appease discontent over a stagnant economy, civil service salaries have increased dramatically—doubling between 2000 and 2005. The 2005 budget reduced economic subsidies but in exchange required the government to make various concessions, including increasing civil service wages another 10 to 15 percent by 2007 as part of a national wage strategy.

In 2006 the government provided across-the-board wage increases as the first phase of a four-phase Civil Service Modernization Project. The second phase was implemented in November 2007, providing an average 20 percent salary increase for all public-sector employees at an estimated cost of US$402 million. In March 2008, the government announced a US$15 per month increase in civil service and military personnel salaries. A major reform underway is the implementation of a biometric identification system for civilian and military personnel by September 2008; it is designed to eliminate the collection of multiple salaries by one employee. The Ministry of Civil Services is also developing other procedural reforms. The International Monetary Fund has stated that Yemen must reduce civil service salaries as a component of GDP, but this goal can be achieved only with continued reductions in the size of the civil service.

Foreign Economic Relations: During the 1990–91 Gulf War, Yemen supported Iraq in its invasion of Kuwait, thereby alienating Saudi Arabia and Kuwait, both of which had provided critical financial assistance to Yemen. In addition to withdrawing this aid, Saudi Arabia expelled almost 1 million Yemeni workers. The resultant fall in expatriate remittances had a disastrous impact on Yemen’s governmental budget. The civil war of 1994 further drained the economy, and in 1995 Yemen sought the aid of multilateral agencies. In 1996 the International Monetary Fund (IMF) granted Yemen a US$190 million stand-by credit facility, and the following year it approved two funding facilities that increased the country’s credit by approximately US$500 million. However, the funding was contingent on Yemen’s adoption of stringent economic reforms, a requirement that the country had limited success in fulfilling. As a result, the IMF suspended lending to Yemen from late 1999 until February 2001. In 2000 Kuwait and Saudi Arabia resumed financial aid to Yemen.

In October 2002, bilateral and multilateral lenders led by the World Bank agreed to give Yemen a four-year economic support package worth US$2.3 billion, 20 percent in grants and 80 percent in concessional loans. This funding is almost eight times the amount of financial support Yemen received from the IMF. However, in December 2005 the World Bank announced that because of the government’s continued inability to effect significant economic reforms and stem corruption, funding would be reduced by more than one-third, from US$420 million to US$280 million for the period July 2005–July 2008. In May 2006, the World Bank adopted a new Country Assistance Strategy (CAS) for Yemen for the period FY 2006 to FY 2009, providing a blueprint for fostering the country’s fiscal and human development improvement. The bank pledged to contribute approximately US$400 million in International Development Association (IDA) credits over the CAS time frame. In December 2005, the Japanese government pledged to write off US$17 million of the US$264 Yemen owes. That same month, Germany pledged to increase its annual aid to Yemen to US$83.6 million over the next two years; funding will go primarily to education and water improvement projects. In November 2006, the United Kingdom announced that aid to Yemen would increase 400 percent, to US$222 million through 2011. In June 2008, the Yemeni General Investment Authority and the Chinese Council for the Promotion of International Trade jointly convened a symposium to advance the already strong trade and investment relationship between the two countries. During this meeting, China announced that it would provide a US$12 million grant to support development projects in Yemen.

Yemen is a member of the Arab Fund for Economic and Social Development, which since 1974 has contributed to the financing of economic and social development in Arab states and countries through loans and guarantees. In March 2004, the Arab League provided US$136 million to Yemen to finance infrastructure improvements. At a mid-November 2006 meeting in London, a group of bilateral and multilateral donors pledged US$5 billion over four years (2007–10) to fund economic development in Yemen. The goal of the meeting, which was jointly chaired by the World Bank and the government of Yemen, was to provide sufficient economic aid to Yemen to enable it to qualify for future Gulf Cooperation Council (GCC) membership. More than 55 percent of the aid, which is primarily in the form of grants and has been increased to US$5.3 billion, will come from the GCC. In December 2007, the United Arab Emirates raised its pledge from US$500 million to US$650 million. Yemen was granted observer status at the World Trade Organization (WTO) in 1999, and its application for full membership is currently under negotiation.

Imports: Imports totaled US$4.7 billion in 2006, increased to an estimated US$6.7 billion in 2007, and are projected to increase to US$7.5 billion in 2008. This increase is due in part to Yemen’s reliance on foreign capital goods for its gas and infrastructure programs. Yemen is a net importer of all major categories of products except fuels. Principal imports are machinery and transport equipment, food and livestock, and processed materials. The principal source of Yemen’s imports in 2006 was the United Arab Emirates (15.8 percent of total imports); the bulk of these imports are actually re-exports from industrialized countries. Yemen received 12.3 percent of its total imports from China and 7.5 percent from Saudi Arabia.

Exports: In 2006 Yemen’s exports totaled US$7.3 billion. Crude oil is Yemen’s main export, accounting for 85 percent of total exports in 2006. Yemen’s non-oil exports are primarily agricultural products, mainly fish and fish products and coffee. In 2006 Asia remained the most important market for Yemen’s exports, primarily China (29.9 percent of total exports), India, Thailand, and South Korea. Trade Balance: Yemen’s import and export values have increased and decreased dramatically in the past 10 years owing to shifts in global oil prices. As a result, the country’s trade balance has fluctuated significantly from a deficit of almost US$800 million in 1998 to a surplus of US$1 billion in 2000. Rising oil prices resulted in a surplus of US$1.7 billion in 2005. The Central Bank of Yemen estimates that the trade surplus reached US$2.6 billion (about 13.3 percent of gross domestic product) in 2006.

Balance of Payments: In recent years, Yemen’s large non-merchandise deficits have contributed to a decline in its current-account position. Up until 2007, these deficits were offset by record export earnings, which resulted in large enough trade surpluses to keep the current account in surplus—US$633.2 million in 2005 and US$1.8 billion in 2006. In 2007, however, the rise in import spending resulted in an estimated current-account deficit of US$519 million, the first such deficit for Yemen since 1998. This deficit is projected to increase to US$660 million in 2008.

External Debt: In 1990 the newly unified Republic of Yemen inherited an unsustainable debt burden amounting to roughly 106 percent of gross domestic product. Debt rescheduling by the Paris Club creditor countries in the 1990s, coupled with assistance from the World Bank’s International Development Agency, resulted in a drop in Yemen’s debt stock to US$5.4 billion in 2006. According to the Central Bank of Yemen, Yemen’s debt stock was US$5.8 billion (more than 25 percent of gross domestic product) by year-end 2007. According to the U.S. government, Yemen’s reserves of foreign exchange and gold were US$7.9 billion in 2007.

Foreign Investment: Yemen does not have a stock exchange, therefore limiting inward portfolio investment. Portfolio investment abroad is also very limited, with the result that portfolio flows are largely unrecorded by authorities. In the early 1990s, net direct investment was at its peak as foreign investors tapped Yemeni oil reserves, but since 1995 net direct investment flows have been negative because cost recovery for foreign oil companies has exceeded new direct investment. A US$3 billion liquid natural gas (LNG) construction project involving a consortium of foreign companies is underway following government approval in August 2005, with initial exports expected in early 2009. Such a project raises the prospect of increased foreign investment in the future as LNG facilities are built.

Currency and Exchange Rate: Yemen’s currency is the Yemeni riyal (YR), which was floated on the open market in July 1996. Periodic intervention by the Central Bank of Yemen enabled the riyal to gradually depreciate approximately 4.2 percent per year from 1999 to 2003, and in varying amounts in subsequent years. However, in light of the weakening U.S. dollar, and in an effort to stem inflation, in 2007 the Central Bank of Yemen halted the riyal’s depreciation. Its value averaged YR191.5 per US$1 in 2005, YR197 per US$1 in 2006, and YR 199 per US$1 in 2007. The exchange rate is expected to continue to average YR 199 per US$1 in 2008. In mid-August 2008, the exchange rate was nearly YR 200 per US$1. (EIU 2007, April 2008; Central Bank of Yemen))

Fiscal Year: Yemen’s fiscal year coincides with the calendar year.




Last Updated: August 2008


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Yemen was first published in 2008. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

Yemen Main Page Country Studies Main Page




Section 6 of 9






IMAGES


Click any image to enlarge.


National Flag



(﷼) Yemen Riyal (YER)
Convert to Any Currency



Map



Locator Map