"Current Developments in Yemen"

Speech by Nadir Mohammed, Director of Strategy and Operations,
Middle East and North Africa Region, World Bank

US State Department and USAID Conference on "Current Developments in Yemen"

Carnegie Endowment for International Peace,

Washington, DC - August 25, 2008

Ladies and Gentlemen,

I am delighted to be given the opportunity to give a brief assessment of the recent developments in Yemen, particularly since 2006—the year when the government recommenced key economic and governance reforms. I lived and worked in Yemen for more than 3 years and I am pleased to see many friends and familiar faces in the room.

My main focus is on the challenges facing the country (particularly those relevant to the Economic Development and Reform Panels of the Conference), the actions that the Government is taking to address them; and the support that the World Bank Group is providing.

Overall, good progress has been made in the area of economic reform, but job creation, poverty alleviation and fiscal sustainability remain central concerns.

OVERALL PROGRESS

Since the unification in 1990 Yemen has achieved important successes in-spite of major adverse shocks–the return of hundreds of thousands of workers from the Gulf, a costly civil war and swings in oil prices. Throughout the 1990s, Yemen achieved an average growth rate of 5% a year—or a 2% per capita—led by private sector, largely as a result of significant reforms undertaken in the second half of the 1990s which controlled inflation, liberalized trade, reduced subsidies, unified the exchange rate and strengthened the financial sector. Yemen also improved significantly its human development outcomes, particularly in education (including increase in enrolment rates and reduction of the gender gap).  Though poverty remained high and widespread, social protection mechanisms have improved and both the Social Fund for Development and Public Works Programs have received recognition for their efficiency and development impact.   

The achievements of the 1990s were followed by a period of slow economic progress and reforms during 2000-2005, which is the period of Yemen’s second 5-year development plan and its first Poverty Reduction Strategy Program (PRSP).  The lack of progress and the factors behind it have been candidly acknowledged in the Government’s Progress Report for the First PRSP. During this period, the economy grew by 4.2% on average annually and most human development indicators showed little change.

The lack of progress in policy performance led to declining ratings in the World Bank Index – called Country Policy and Institutional Assessment (CPIA) – by which IDA resources are allocated. As a result, there was a sharp reduction (34%) in IDA allocations in FY2005.   Since then, the CPIA and consequently IDA allocations have improved thanks to the Authorities reform efforts. Important lessons were learned from this period and were incorporated into the design of Yemen’s 2006-2010 Third Socio-Economic Development Plan for Poverty Reduction Strategy as well as in the World Bank’s current Country Assistance Strategy (2006-2009).  

During the period 2006-2007, Yemen had mixed results.  The economy grew at slightly above the population rate, but less than half the development plan target (an annual average of 3.4% vs. a target 7%). Inflation remained high above target, at an average of 15.5%.  In-spite of the high oil prices, the fiscal and current account balances registered a deficit over the past two years, averaging 3.3% and 2.6% of GDP, respectively. The mixed economic performance during these two years is largely explained by the sharper than expected decline in oil production, the relatively lax fiscal and monetary policies, the high prices of commodities and the fragile security situation. While poverty rates showed some improvement, dropping from 42% in 1998 to 35% in 2005/6, they have worsened since then (by about 6 percentage points) as a result of the spike in food commodity prices (discussed this morning in the Economic Development Panel).

YEMEN’S DEVELOPMENT CHALLENGES

Yemen continues to confront four major challenges. These are declining oil production (and the resultant threat to fiscal sustainability; weak governance; water management; and population control.

The first challenge is to diversify its economy from a declining oil sector. Although more oil reserves could be found in the future and gas exports could partially offset the loss of oil revenues, non-oil and private sector- led growth will be crucial to generate employment and fiscal revenues. Unemployment is conservatively estimated at present by the government at 16% and non-oil fiscal imbalance at over 25% of GDP.

The second challenge is to improve governance as good governance and anti-corruption measures are key underpinnings both for improved public service delivery as well as for private sector development. 

The third challenge is the rapid depletion of water resources. The use of groundwater has been driving rural growth for the past 30 years, but the present rate of depletion is unsustainable.  Qat cultivation contributes greatly to the rapid depletion of water resources.

The fourth challenge is Yemen’s rate of population growth.  If it continues at its current rate of 3% annually, it will continue to constrain per capita income growth and impose additional costs on public service delivery at a time when fiscal resources are declining.

The Third Socio-Economic Development Plan for Poverty Reduction provides the Government’s vision for addressing these four inter-related challenges.  The DPPR is currently being revised based on the changing environment, notably the rapid drop in oil production and high energy and food prices.

IMPLEMENTATION OF THE REFORM PROGRAM

In late 2005 and more notably in 2006, the government defined and began implementing its National Reform Agenda.  Initially, several difficult decisions were taken to improve the fiscal management including: doubling administered prices of petroleum products to reduce the fiscal burden of subsidies; introducing in a phased manner a broad-based Value Added Tax (VAT) to improve fiscal revenues; adopting a comprehensive public finance management strategy; and implementing a civil service reform program particularly with regard to eliminating a substantial number of ghost workers and double-dippers.

The National Reform Agenda covers four major reform areas of anti-corruption, rule of law, improving the investment climate and enhancing political participation. The Government has completed many of the key upfront actions – either legislative or policy and institutional. More specifically, the government adopted a new public procurement law, a new financial disclosure law for all public servants and a new anti-corruption law. The separation of power between the executive and the judiciary has been achieved by making the head of the Supreme Court as the head of the Supreme Judicial Council.  Many personnel related actions (hiring, firing and training) have also been taken to improve court performance in addition to actions to improve the court information infrastructure

To display commitment to reforms, a new pro-reform Cabinet was formed in Yemen in April 2007, with the objective of accelerating and deepening reforms.  At present the government is finalizing, in consultation with donors, its second phase of reform program covering the period 2008-2010. The intention through this phase is to consolidate existing achievements and deepen further the reform agenda.

During this phase, we expect the government to pay attention to the following areas:

Implementing the new laws that were passed.

Continuing to deepen reforms in public financial management, regulatory business environment and competition, civil service and fiscal policy.

Strengthening anti-corruption institutions and raising awareness of ethics and corruption issues.

Overseas Development Assistance (ODA) to Yemen remains low by international standards. In 2006, Yemen received only $13 per capital in ODA. The good news is that donors have substantially increased their aid commitment to Yemen in response to initial success in reform implementation.  At the 2006 Consultative Group (CG) meeting in London, which was co-chaired by the World Bank, and subsequent follow up meetings in Sana’a, the government was able to mobilize $5.3 billion in new commitments, largely from GCC donor countries and agencies. Furthermore, at the Investors Conference, held in Yemen in April 2007, was also able to attract significant interest from regional private investors.

WORLD BANK GROUP SUPPORT

IDA Assistance

The World Bank has supported Yemen through projects and non-lending advisory services for an extended period of time.  The World Bank is currently financing 20 projects in Yemen, with a total commitment of $851 million. An additional $76 million in grants were committed by the Bank through 29 separate Trust Funds, half of which is government-administered. Most of the 20 lending operations are investment projects, covering a broad range of economic and social sectors, including education, health and social protection, infrastructure (energy, transport, water, and irrigation), urban development, agriculture and fisheries, environment, and public sector governance.

Two projects are worth highlighting. First, the Institutional Reform Grant ($50 million), which is a quick disbursing policy operation in support of the state budget. It has five components aimed at improving public administration and enhancing the climate for private sector development. These components are: public financial management and public procurement, public administration, hydrocarbon revenue transparency, income taxation, and land titling and registration. The first of two tranches was already disbursed.

The second project supports the government in dealing with the recent food crisis. The Bank approved in June this year a $10 m grant out of the recently established $1.2 billion Fast-Track Facility for Food Crisis. Yemen was the 4th country to receive such assistance. The grant is being used for two activities: (a) community-based labor-intensive works which is implemented by the Social Fund for Development.  This component is expected to transfer cash to help mitigate the impact of increased food prices through temporary work opportunities; and (b) capacity building of the Social Welfare Fund.  This component will support a national survey to identify the poorest and most vulnerable in the society in order to improve targeting and expand the program; and complete a revised targeting system increasing the share of cash transfers received by the poorest beneficiaries to improve the ability of the program. 

In addition to this grant, the Bank intends to promote agriculture production through further lending to be identified in the forthcoming Country Assistance Strategy (CAS). Furthermore, the Bank agreed to assist the government in the preparation of a food security strategy for Yemen in collaboration with relevant UN agencies and key development partners. The Bank will remain heavily involved in the water sector and is preparing a new population project to help the Government in these two key sectors.

I am glad to report that the performance of the IDA-funded portfolio has overall improved significantly since the 2005 Country Portfolio Performance Review. There are currently no long-term problem projects and disbursement has increased significantly. Both the level and ratio of disbursements in Yemen are high by MENA and overall WBG standards. 

As a result of this improved performance, Yemen’s IDA allocation continued to increase since the drop in FY2005. In the next three years, all IDA support to Yemen will be in form of grants. We plan to prepare a new 4-year CAS for Yemen in this fiscal year. 

The World Bank is also actively engagement with Yemen in non-lending Advisory and analytical services. The current CAS contains reasonable Economic Sector Work (ESW) activities, including investment climate assessment, poverty assessment, country social analysis, gas incentives framework policy, overall education strategy, rural and land tenure study, public expenditure review, and Qat survey and policy note. In addition, the Bank is currently assisting the government with an in-depth analysis on how to reduce the huge fuel subsidy, which reached $2.0 billion or 9.3% of GDP in 2007. For the current year, the figure is expected to be much higher.

IFC Assistance

IFC – the private sector arm of the World Bank Group- has dramatically increased its investments over the last few years.  It is helping Yemen attract sophisticated new investors from Saudi Arabia, as well as financing a series of projects in key sectors vital for economic growth (Yemen has traditionally received little foreign investment outside the oil and gas sectors).  IFC total held portfolio has increased from $16 million in FY05 to $134 million at present.  IFC committed $60 million and $91 million in FY06 and FY07, respectively.  IFC has also been providing substantial advisory services since FY05, in partnership with other donors (including DFID, Germany, etc.), and is now engaged in several areas: e.g., Business enabling environment / investment climate: Small and Medium Enterprises (SMEs) development: Financial markets and Public Private Partnerships:

IN CLOSING, I would like to emphasize that the challenges facing Yemen are huge and require increased and concerted donor support. We commend the Government for the reform achievements so far and would encourage it to stay the course in widening and deepening the reform agenda.

Thank you very much