Yemen - Economy

Economy

Yemen is one of the poorest and least developed countries in the Arab World, with a formal 35% employment rate, dwindling natural resources, a young population and increasing population growth. Yemen's economy is weak compared to most countries in the Middle-East, mainly because Yemen has very small oil reserves. Yemen's economy depends heavily on the oil it produces, and its government receives the vast majority of its revenue from oil taxes. But Yemen's oil reserves are expected to be depleted by 2017, possibly bringing on economic collapse. Yemen does have large proven reserves of natural gas. Yemen's first liquified natural gas (LNG) plant began production in October 2009.

Rampant corruption is a prime obstacle to development in the country, limiting local reinvestments and driving away regional and international capital. Foreign investments remain largely concentrated around the nation's hydrocarbon industry.

Beginning in the mid-1950s, the Soviet Union and China provided large-scale assistance. For example, China and the United States are involved with the expansion of the Sana'a International Airport. In the south, pre-independence economic activity was overwhelmingly concentrated in the port city of Aden. The seaborne transit trade, which the port relied upon, collapsed with the closure of the Suez Canal and Britain's withdrawal from Aden in 1967.

Since unification in 1990, the government has worked to integrate two relatively disparate economic systems. However, severe shocks, including the return in 1990 of approximately 850,000 Yemenis from the Persian Gulf states, a subsequent major reduction of aid flows, and internal political disputes culminating in the 1994 civil war hampered economic growth.

Since the conclusion of the war, the government made an agreement with the International Monetary Fund (IMF) to implement a structural adjustment program. Phase one of the program included major financial and monetary reforms, including floating the currency, reducing the budget deficit, and cutting subsidies. Phase two will address structural issues such as civil service reform.

In early 1995, the government of Yemen launched an economic, financial, and administrative reform program (EFARP) with the support of the World Bank and the IMF, as well as international donors. The First Five-Year Plan (FFYP) for the years 1996 to 2000 was introduced in 1996. The World Bank has focused on public sector management, including civil service reform, budget reform, and privatization. Additional priorities for the programs have become attracting diversified private investment, water management, and poverty-oriented social sector improvements. These programs had a positive impact on Yemen’s economy and led to the reduction of the budget deficit to less than 3% of gross domestic product (GDP) during the period 1995–1999 and the correction of macro-financial imbalances.

In 1997, IMF and the Yemeni government began medium-term economic reform programs under the Enhanced Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF). This program aimed to reduce dependence on the oil sector and to establish a market environment for real non-oil GDP growth and investment in the non-oil sector. Increasing the growth rate in the non-oil sector was one of the government's most important objectives. Programs also focused on reducing unemployment, strengthening the social safety net, and increasing financial stability. To achieve these reforms, the government and IMF implemented containment of government wages, improvements in revenue collection with the introduction of reforms in tax administration, and a sharp reduction in subsidies bills through increased prices on subsidized goods. As a result, the fiscal cash deficit was reduced from 16% of GDP in 1994 to 0.9% in 1997. This was supported by aid from oil-exporting countries, despite the wide-ranging fluctuations in world oil prices. The real growth rate in the non-oil sector rose by 5.6% from 1995 to 1997.