Country Brief

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Yemen is a country of deeply-rooted tradition endowed with limited resources notably scarce water, limited arable land and declining oil reserves. Its population is young, predominantly rural (73 per cent) and rapidly growing. Nearly 50 percent of the population is below 15 and total fertility rates remain among the highest in the world. Yemen’s GNI per capita stood at about $950 in 2008 and, despite some modest gains on urban poverty, about 40 percent of the population is poor.  Yemen remains one of the main development challenges in the Middle-East and North Africa region.

Yemen is facing daunting challenges in an uncertain global and regional environment. Significant progress has been made over the last few years, but living conditions for most of the 22 million Yemenis remain difficult. Yemen's governance structures are complex and recent events have heightened concerns over security issues. Yemen is unlikely to reach most Millennium Development Goals (MDGs) by 2015, and the situation is particularly dire for women.

The Government is implementing a program of economic and governance reforms, but time is of the essence as oil resources are rapidly depleting while the population continues to grow at a fast pace. The sharp fall in world oil prices, and the consequent shrinking in public expenditure, is depressing economic activity. Moreover, while the financial sector has remained relatively unscathed due to its relative insulation, the impact on the real sector is expected to be significant. The Government realizes the pressing need for a comprehensive fiscal adjustment, but the risks of a deterioration of the economic situation is high.

Yemen’s economy is dominated by the oil sector (27 per cent of GDP and 90 percent of merchandise exports). Over the last decades, Yemen's economy has been based on oil, with the redistribution of corresponding rents through civil service salaries and a generous subsidy system. Hydrocarbon output (oil and gas) represents about one third of Gross Domestic Product (GDP), almost three quarters of Government revenues, and 90 percent of exports.

Since the adoption of the 2006-2010 Third Development Plan for Poverty Reduction (DPPR), the Government has scaled up its efforts to spur non-oil growth and create jobs in sectors such as agriculture, fisheries, natural gas, urban manufacturing and services and the financial sector. Since 2004, the Government has taken measures to enhance the business environment and facilitate private sector-led economic diversification – and non-oil growth has reached 4.7 percent in 2006 and 5.5 percent in 2007.   Yemen was the top performer on the ease of starting a business in 2009, but is still ranked 99^th out of 183 countries in the 2010 Doing Business survey.

Economic Developments

The economy grew modestly in 2008 on the back of buoyant oil prices.  Preliminary estimates suggest a GDP growth rate of 4.4 percent compared to 4.2 percent the previous year.  Higher oil revenues and some progress in tax collections also helped to reduce the fiscal deficit to 4.3 percent of GDP and the current account deficit to around 2 percent of GDP.

Yemen was substantially affected by the food crisis in 2008.  The increase of food prices has had a direct impact on many households (food subsidies were removed several years ago), especially among the poor.

 

Yemen is now affected by the global economic crisis in spite of the financial sector’s relative insulation.  The impact on the real sector is significant through declines in FDI, remittances (especially from the Gulf), and external financing.  The sharp fall of oil revenues (75 percent decline between the first quarter of 2008 and the first quarter of 2009), and the consequent shrinking in public expenditure, is also depressing economic activity.  The crisis is expected to disproportionately affect the poorest and most vulnerable.

 

Fiscal sustainability is the foremost macroeconomic issue, as the reduction of oil revenues is not sufficiently compensated by increased revenues from other sources. The fall of oil revenues is due not only to global prices volatility but also to the gradual depletion of known reserves.  Reforms are needed to bring Government expenditure in line with revenues, which is likely to include civil service reform and a transformation of the social protection system from large-scale fuel subsidies to targeted cash transfers to the poorest. 

In the medium-term, Yemen has to address a number of issues that hamper its development prospects. These include the lack of infrastructure (in spite of the successful implementation of a road-building program at a pace of 900 km/year, much of the rural population continues to live in relative isolation; only about 40 percent of the total population has access to electricity, 20 percent in rural areas; 0.5 percent of the population uses internet), under-developed social services, and a difficult governance environment.  In addition, two issues which are largely specific to the country put a strain on development prospects:  the rapid depletion of water reserves (aquifers); and the widespread consumption of qat, which translates into a deteriorated health status, accelerated drawing on water resources (qat cultivation consumes one-third of the abstracted groundwater), and reduced productivity, which is a major source of concern. 

 

World Bank Group Assistance

 

The World Bank Group activities in Yemen are undertaken within the context of the World Bank Group Country Assistance Strategy (CAS) for FY10-FY13, a joint IDA/IFC document discussed by the Board in May 2009. The program outlined under the CAS aims to support the Government’s reform agenda and is articulated around four pillars: (i) accelerate and diversify economic growth (macroeconomic stability; private sector development; infrastructure; support to non-oil drivers of growth); (ii) enhance governance (transparency; public finance management; civil service); (iii) foster human and social development (cross sectoral issues such as gender, youth, and qat; education and health; community development and social protection); and (iv) manage natural resource scarcity and natural risks (water resources; natural disasters and climate change).  

 

The current IDA portfolio includes 21 active projects with a total net commitment value of about US$996 million, of which about $516 million are yet to be disbursed. The sectoral composition (by value) of the current portfolio is as follows: 55 percent for infrastructure, (of which about half for water infrastructure), 14 percent for agriculture, 21 percent for education/health/social protection and 5 percent for public sector governance. Overall implementation performance is satisfactory.

 

IDA projects are financed through grants.  Projects approved in FY09 are:

 

• Rural Energy Access ($25 million): The development objectives of the Project are to: (i) improve electricity access of rural populations in the selected project areas in a financially sustainable manner; and (ii) demonstrate the feasibility of increasing the access to electricity of rural households in off-grid areas through implementation of Solar Home Systems (SHS).
• Water Sector Support ($90 million): The objective of the Project is to support implementation of the National Water Sector Strategy and Investment Program (NWSSIP) to: (i) strengthen institutions for sustainable water resources management; (ii) improve community-based water resource management; (iii) increase access to water supply and sanitation services; (iv) increase returns to water use in agriculture; and (v) stabilize and reduce groundwater abstraction for agricultural use in critical water basins.
• Taiz Municipal Flood Protection ($20 million Additional Finance): This additional financing is an extension of the original project to new regions, in response to the October 2008 floods in the eastern part of the country. The project has three development objectives: (i) protecting residents, economic activities and infrastructure from destructive effects of seasonal flooding in Taiz, Hadramout and Al Mahra; (ii) restoring access to critical road infrastructure damaged by the floods; and (iii) strengthening the capacity of local governments and support decentralization.
• Groundwater and Soil Conservation ($15 million Additional Finance):  The additional financing for this project will "scale up" the ongoing project which seeks to conserve water in farming areas, especially groundwater, improve recharge and protect watersheds. 

 The International Finance Corporation’s total held portfolio in Yemen has increased to US$150 million from US$16 million in FY05 with a substantial impact on private sector development, accompanied by advisory services.

  

All dollar figures are in US dollar equivalents.  September 2009

For more information, please contact:
In Washington: Najat Yamouri , nyamouri@worldbank.org
Xavier Devictor, Phone: (202) 478-7237; Email: xdevictor@worldbank.org

In Sana’a:   Benson Ateng, Phone:  5392+237 or 011-967-141-3709; Email: bateng@worldbank.org