World - Middle East: Economic Cost in Yemen

Middle East: Economic Cost in Yemen
Peter Salisbury

Rumours surrounding the health of Yemeni President Ali Abdullah Saleh, reportedly recuperating in Saudi Arabia from injuries caused by a missile attack on his presidential compound, are now so numerous that it is impossible to know how ill he is. Nevertheless, it seems likely that his 32-year reign as the head of the state will soon be over.

Saleh may have almost perfected the art of brinkmanship during his time at the top, but whoever succeeds him will have to be a master to sort out the economic mess he leaves behind - and what a mess it is.

Decades of reliance on oil revenues (which make up seventy percent-plus of state income), weak taxation, and a lack of credible economic policy to create jobs for the country's blossoming population have all taken their toll, as have chronic corruption and a reliance on formal and informal networks of patronage to maintain the balance of power.

Today, the economy is at its lowest ebb since civil war almost tore the freshly-minted country apart in 1994, just a few years after an estimated one million Yemenis were deported from neighbouring Gulf states following Saleh's decision to support Iraq's invasion of Kuwait.

In March, an attack on a major oil pipeline in the central province of Marib by a tribal group cut off the better part of half of the country's oil output. Much of the sweet, light crude from the pipeline was earmarked for sale on international markets, and the government had been using the proceeds to buy heavier, cheaper oil for the country's main refinery at Aden, which also used some of the Marib oil.

After the attack, the government claimed that it did not have enough feedstock to keep the refinery running. Executives at two international institutions working with the government estimate that the situation is costing Sanaa around 400 million dollars a month - 150 million in lost revenues and 250 million in additional imports of gasoline, diesel and other fuels without which the economy would come to a grinding halt. An additional 100 million dollars-plus was already being spent, bringing the total cost of fuel imports - which the government subsidises heavily - up to 500 million a month.

Some foreign currency continues to flow into the country thanks to a liquefied natural gas (LNG) project run by an international consortium, although the impact of this scheme is likely to be extremely limited. The overall government take is little more than a fifth of the gas' export value, according to executives with intimate knowledge of the scheme.

The government has few other sources of income, particularly foreign currency. Yemen's taxation system is notoriously weak, and the recent unrest, coupled with the seizure of the economy, has cut off what little in the way of duties it was receiving. Meanwhile, the International Monetary Fund (IMF) will be wary to extend new lines of credit to Sanaa, given the government's decision earlier in 2011 to reverse policies designed to restructure the economy.

Sanaa had been moving towards reducing successive fiscal deficits and increasing its foreign currency reserves by cutting fuel subsidies, which accounted for more than 37 percent of government spending in 2008, and introducing a sales tax in return for support from the IMF. Both of these measures are now on hold. Economists with ties to the IMF say the fund estimates that the decision to halt reforms will cause an increase in the budget deficit of around 3.5 per cent of gross domestic product (GDP), and that economic output is likely to decline over 2011 as a result of the political crisis.

All of this leaves the Central Bank of Yemen in an impossible position. It controls around four billion dollars in foreign assets, around half of which can be mobilised in the near to medium term, while the remainder takes the form of equity stakes in investments at home and abroad which will be harder to access. Yemeni businessmen report that dollar reserves at the rest of the country's commercial banks have largely been exhausted.

With reserves in freefall and prices on the rise, the bank is faced with the rapid devaluation of the Yemeni rial and rampant inflation. The rial fell from around 213 against the dollar in January to more than 230 in May, effectively increasing the price of imports. Economists working with the government say that inflation has hit a twelve month average of sixteen percent. They predict that if a political solution cannot be brokered in the next few months, it could reach more than thirty percent by the end of the year.

If the bank were to underwrite oil imports alone, readily accessible reserves would be exhausted in four months, making it impossible to defend the price of the Rial, cutting off access to imports, and causing inflation to spiral out of control. Foreign currency is not just needed to cover the country's energy needs either. Yemen is heavily dependent on food imports. According to government sources, ninety percent of its wheat and all of its rice come from outside of the country.

Meanwhile, the government has faced huge problems in providing water to its people over the past three decades, a period during which Yemen's population has doubled to 23 million. More water is now drawn from the ground than is replaced. Because some of the water produced from the country's 21 aquifers comes from incredibly deep wells, 800 - 1,000 metres underground, specialist pumping equipment is also required, making water supply expensive and a major source of diesel demand, which the government again underwrites through subsidies.

An increase in fuel prices means an increase in the cost of water, while constrained food supply and increasing transport costs - food, water, and fuel are all transported across Yemen by trucks - have also pushed up the cost of living, particularly in the remoter areas of the country.

Protests and violence in some of the major manufacturing areas of Yemen, particularly the biggest industrial city, Taiz, have also disrupted the production of basic commodities like flour and tinned food. In Hodeidah on the Red Sea coast, which is a major supply point for Sanaa, swathes of manufacturing capacity have been shut down because producers cannot get hold of diesel to run their plants.

Many manufacturers and other businesses have been forced to send their employees away on unpaid leave, says one Sanaa based politician. The lack of fuel and near-constant power outages, constrained money supply, and the risk of opening lines of credit to clients has reduced most firms' trade to deals with only their most trusted customers.

As a result, many itinerant Yemeni workers have returned to their tribal homelands because they can no longer afford the cost of living in cities like Taiz and Sanaa. They are unlikely to find much work in the villages either, and many have families who depended on their income before the current crisis.

In a country where, according to the World Bank, 45 percent of the population struggles to live on two dollars or less a day and twenty to forty percent of people were estimated to be unemployed in 2010 depending on region, this is all disastrous news. It means that the incomes of almost half the population are unlikely to even begin to meet their basic needs, if they have any income at all.

It is, says one non-governmental organisation official working in the country, a "humanitarian crisis in the making" for which there is no clear resolution and for which the most vulnerable people will pay the highest cost.

In particular, says Nabil Othman, the United Nations High Commission for Refugees' top representative in Yemen, refugees and internally displaced Yemenis are extremely vulnerable to the current situation. Approximately 200,000 Somali and Eritrean refugees, along with the 330,000 Yemenis displaced by long-running war between the government and northern tribesmen, depend on international institutions and the state for their welfare. A further 10,000 people have been displaced by the Islamist takeover of Abiyan province, a number which could rise to 30,000 across the country if violence between Saleh loyalists and opposition groups continues.

Geert Cappelaere, the United Nations Children's Fund representative in Yemen, points out that the country's limited welfare services are also on the verge of collapse. In 2009 and 2010, the government had worked with international institutions to set up a seventy million dollars a year social welfare fund to help out the country's neediest people during the economic restructuring. Systems to deliver basic social services in health, nutrition, education and water are strained countrywide for number of reasons, such as lack of staff, lack of commodities, and a lack of fuel.

Patronage networks, another source of social welfare, have also been hit, with payments from the Ministry of Tribal Affairs to tribal groups across the country also slowing to a trickle. Payments from Saudi Arabia to key tribal groups were reportedly halted in late 2010 and early 2011. Of all of Yemen's neighbours, the Saudis stand to lose the most if the country descends into civil war, or a humanitarian crisis creates an increase in economic migrants and refugees across its border.

In early June, Riyadh announced that it will give Yemen three million barrels of oil as a gift with the aim of halting its economic decline, and the first of five shipments of 600,000 barrels of oil was due to arrive at Aden on June 15. Sanaa has also negotiated shipments of the heavy oil it needs for the country's power plants, and the diesel needed to keep water pumps going and key manufacturing sites running. However, these measures are just plasters on a gaping wound which has been festering for years.

Without a swift resolution to the current political crisis the Marib pipeline is likely to remain broken, central bank reserves will continue to be depleted, inflation will rise and the economy, already incredibly fragile, will face total collapse, leaving many Yemenis unemployed, broke and starving.

(Peter Salisbury is a freelance journalist and contributor to MEED and The Ecologist.)