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By 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
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
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
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
Geert Cappelaere, the
Patronage networks, another source of social welfare, have also been hit, with payments from the
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.)
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World - Middle East: Economic Cost in Yemen | Global Viewpoint