Report No. 91 72-YEM Republic of Yemen A Medium-Term Econorklc Framework January 21, 1992 (ountr (r)perationst )ivision I j 1 1) C:otnirv 1)(partmient II I* N . Y f: r y ' i Europe, Middle East an( North Atri( Region )j\l A . . 41 'VIA 2 FOR OFFICIAL USE ONIY I. CKVcume of thewb W orl B Thies document has a restricted distribution and may be Used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (As of September 1991) US$1.00 - Yemeni Rials (YRlI) 12.00 YR1 1.00 - US$0.0833 Ycmeni Dinar (YD) 1 - YRls 26.00 FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY PREFACE A World Bank economic mission visited Yemen in May 1991. International Monetary Fund staff participated in the mission, which comprised Messrs. Sawai Boonma, Sanjay Dhar, Hideo Hashimoto, Adalbert Knobl, Colm McCarthy, Melhem Melhem and Khai Nguyen. Messrs. Ram Chopra, Director, EMENA Country Department III, and Isik Erim visited Yemen during that period and participated in wrap-up discussions with government officials. The mission worked with a counterpart team of government officials under the guidance of the Minister of Planning and Development. Unification has created a new economy that is not simply a linear combination of the previous two components and has created many issues relating to unification and transition. Government officials and the mission, however, agreed that since no economic surveys had been made on the Republic of Yemen and macroeconomic imbalances had been further aggravated by the consequences of the recent crisis in the region, the work of the mission .hould be most useful if it focuses on the issues relating to restoring economic stability and laying a foundation for resumption of economic growth in the medium-term. The scope of this Medium-Term Economic Framework paper is therefore limited to meeting these objectives. This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise he disclosed without World Bank authorization REPUBLIC OF YEMEN A MEDIUM-TERM ECONOMIC FRAMEWORK lable of Conterts Page No. Summary and Conclulsions i I. The Setting ................................................... 1 Background .......................................... 1 Political, Administrative, and Institutional Unification ................................... 4 II. Present Economic Position ........................... 5 Production and Distribution Structure .... ........... 5 Public Finances ..................................... 6 Monetary and Financial Sector ....................... 10 Trade and Balance of Payments ............. .......... 11 External Debt ....................................... 16 Employment, Wages and Prices ........................ 17 III. Macroeconomic Outlook ............................... 18 Oil Extraction and Exports .......................... 18 Other Exports ........... 19 Workers' Remittances ................................ 22 Foreign Investment ............. I ..... ............ 23 External Assistance ................................. 23 Needs for Policy Changes ............................ 24 IV. A Medium-Term Policy Framework ............... ....... 26 Elements of a Development Strategy: Preliminary Identification of Sources of Growth and Constraints ................................... 26 Stabilization Policies for 1991-92 and a Medium-Term Framework ......................... 29 Statistical Annex SUMMARY AND CONCLUSIONS 1. Republic of Yemen (Yemen) was formed on May 22, 1990, unifying the Yemen Arab Republic (YAR) and the People's Democratic Republic of Yemen (PDRY). The unified country's 1989 per capita income is estimated at $640.1 The economy of Yemen will be based largely on the market system, which was followed by YAR before unification. Unification has created greater potential for long-term development than if the two parts were to remain separate. The new country has modest oil and gas reserves, large fishery resources, unexploited tourism potential, a dynamic private sector, and a larger domestic market to achieve a higher degree of economies of scale. In the immediate future, however, prospects for achieving such potential are clouded by the seriousness of the present macroeconomic imbalances. 2. Prior to the unification, both YAR and PDRY faced similar economic problems. Growth was low; unemployment/underemployment was on the rise; budget and balance of payments deficits were large; bank credit was extensively used to finance the budget deficit; inflationary pressures were intense; domestic savings were negative; main sources of foreign exchange - workers' remittances and external aid - were on a sharp decline; external debt was heavy; and prospects for growth in the immediate future were not promising. The unified country has inherited all these problems and challenges, which have been further aggravated by transition difficulties and events in the region since August 1990. Transition has not only entailed additional expenses for the country already in dire need of reducing a high budget deficit, but also has caused delays in economic policy decisions required to address urgent issues. The problems are being exacerbated by administrative difficulties resulti.lg from amalgamation of two government administrations. The recent events in the Gulf have sent the majority of Yemeni workers home, causing substantial losses in remittances and aggravating the domestic unemployment situation; they have also reduced regional assistance to Yemen. 3. An apparent deterioration in the economic situation since unification is shown by the following preliminary indicators: (1) GDP declined in real terms by about 3 percent in 1990. (2) imports, at current prices, dropped by almost 17 percent in 1990, due mainly to shortages of foreign exchange; such a decline has adversely affected consumption, investment and output. (3) Monetary expansion continued at a rate higher than 20 percent in the first eleven months of 1990, reflecting partly the need for large bank credit to finance the budget deficit. (4) Inflationary pressures 1/ Due to the difficulties of combining the two systems of accounts, data for 1990 are being reassessed before GNP per capita can be estimated with a reasonable degree of certainty. i have further intensified, as the average consumer price index in Sana'a accelerated to 34 percent in 1990 and to nearly 50 percent during March 1990 to March 1991. (5) The gap between the official and the parallel market exchange rates has widened, with the parallel rate declining to about YRls 25/US$l in mid 1991 compared to about YRls 18/US.,1 at the end of 1990, w'ile the officiel rate remained at YRls 12/US$l. (6) 'lhe Government's inability to service fully its foreign debt obligations has created large arrears, especialiy on debt to the USSR. 4. Despite the present difficulties, the unification does present the Government with an opportunity to prepare and set in motion an integrated development strategy to realize the country's enhanced long-term potential. To be ready before the launching in 1993 of the development plan, formulation of such a strategy should begin shortly. As to the elements of the new strategy, the Government is fully aware that its options are unfortunately limited by the present economic problems and modest oil and gas reserves. This conclusion is supported by macroeconomic projections showing that, unless substantive policy measures - particularly in the areas of public finances and foreign exchange regime - are implemented, the levels of macroeconomic imbalances would continue to be unsustainably high. The budget deficit would continue to be in the order of 13-15 percent of GDP. With the declining trend in aid flows, most of the deficit would need to be financed by central bank credit. At the same time, continued excess domestic demand would put pressures on the exchange rate, which would further depreciate quickly. Projections also indicate that inflation is likely to accelerate. 5. With rapid population growth in excess of three percent annually, Yemen needs to achieve relatively high economic growth rates to prevent per capita income and the standard of living from declining. Because its limit:ed resource base dictates that it cannot be self-sufficient in most of its requirements, even at high costs, the high growth rates need to be accompanied by the ability to earn sufficient foreign exchange to pay for necessary imports. To achieve these objectives, the country's development strategy would prima facie need to be outward-looking, focussing on exports of labor- intensive products and services. For quite some time, rapid growthi and large labor requirements in the regional oil exporting countries provided opportunities for employment of Yemenis abroad. Slow economic growth in the area in recent years, however, has shut off much of such opportunities. At the same time, stagnation at home has limited growth of labor requirements in domestic markets, creating rising unemployment problems. These will be further aggravated by large numbers of returnees from the Gulf and of school leavers, resulting from past rapid population growth. 6. One major source of growth and foreign exchange earnings in recent years has been oil extraction and exports. Although exploration has increased, no substantial new discoveries have been made to augment the proven recoverable reserves of some 600 million barrels. At the present and projected rates of extraction, such reserves will be largely depleted by the end of this decade. While additioral discoveries are not ruled out, prudent development strategy *-Jould seem to call, for finding alternative sources of growth and foreign exchange to replace oil. Even if additional oil is ii discovered, it should not be extracted solely to meet the short-term financial needs. Part of the revenues should b saved and invested to optimize the long-term income flows, so that when .eserves are exhausted, income doec not drop drAstically. For this purpose, the idea of setting up an oil reserve fund that was once considered by YAR should be revived. Oil will help provide time to develop other sources, but it can not help absorb much labor. 7. Although land and water shortages will continue to severely constrain agriculture, the sector's potential to grow and save/earn foreign exchange remains considerable - through more efficient uses of factors of production and product diversification. With under-exploited resources, fisheries has great potential to grow both to satisfy a much larger domestic market and for export. 8. The role of manufacturing needs to be enhanced. Most of what has been achieved has focussed on satisfying domestic markets. Recent economic development history, especially in the small, newly industrialized countries, indicates that with appropriate outwarc-looking policies, this sector can become a dynamic engine of growth, earn large amounts of foreign exchange, and absorb a great deal of relatively low-skilled labor force. Some elements to vitalize this sector are already being made, such as the investment promotion law. 9. In services, tourisr and the Port of Aden stand out as potential growth and sources of foreign excnange. Tourism has been small so far, but with the right policy it should be. ble to grow, earn substantial foreign exchange, and absorb labor. With investment already made to lengthen the life of the Aden Refinery, to set up a free-trade zone around Aden, and to revitalize the Port of Aden, service industries should be able to contribute substantially. While workers' remittances have been very important until now, and potential employment for Yemenis in the Gulf remains good once the regional situation returns to normal, prudent planning wculd seem to call for reduced reliance on such a source. 10. A development strategy with the elements discussed above will come to fruition only with an appropriate policy environment. Under the present circumstances, the first order of business would be to reduce sharply the present macroeconomic imbalances and to restore macroeconomic stability. To address these problems, the Government has taken the following measures in 1991: (i) doubling gasoline prices and raisir.g by 50 percent the price of diesel fuel; (ii) withholding three days of civil servants pay; (iii) restraining expansion of 1991 budget expenditures; (iv) relaxing restrictions on the parallel foreign exchange market and legalizing exchange dealers; (v) liberalizing import licensing; and (vi) eliminating most of price controls, especially in the former PDRY. The Government realizes that additional measures are required and has started working on various policy options. While many options are being considered, a combination of measures indicated below has been found in simulations to be sufficient to pave the way for restoration of stability in the next couple of years. 11. In government exRenditures, the following measures would be the most effective: (i) adopting all the current proposals to reduce the 1991 ii.i budget expenditures by YRls 3 billion; (ii) maintaining at the 1991 budget level non-interest current and capital trarsfers and the non-wage portion of defense eypenditures for 1992; (iii) allowing the expenditures for wages and for services in 1992 to rise at about half of the rate of inflation in 1991; and (is' freezing recruitmenL ior the civil service except for exceptionally specialized skills. 12. The leading measures to increase government revenues. as far as it is practical, include the following; (i) converting specific customs duties to ad valorem; for goods remaining under specific duties, adjusting the rates periodically so that the rates in relation to import values remain approximately constant; (ii) applying a market-giided conversion rate to imported goods for the purpose of calculating import duties, beginning immediately with YRls 25/US$l, the exchange rate prevaUling in the parallel market, and adjusting it periodically; (iii) adjusting the rates of taxes on goods, services, zakat, and stamps so that revenue yields stay approximately constant in real terms; and (iv) adopting measures to keep the yields of non- tax reven"es constant in real terms. 13. Exchange rate measures include (i) applying the market-guided rate as the conversion rate to imports of the four essential commodities, beginning at YRls 18/US$l in 1991, gradually moving to a totally market-determined rate; (ii) adopting the market-guided rate for the official exchange rate; and (iii) allowing foreign exchange dealers to operate without administrative hindrance. 14. Unification of interest rates, which has begun with raising the rates applied in the southern governorate, would be completed in the near future; they would then be adjusted periodically with the view of pricing credit closer to its market value. In order to secure a sharp slow down in monetary expansion, government borrowing would be from the general public through the issuance of zero-coupon investment certificates, at the imputed rates of return sufficiently remunerative to attract buyers. iv REPUBLIC OF YEMEN A MEDIUM-TERM ECONOMIC FRAMEWORK I. The Setting Background 1.01 On May 22, 1990, the Yemen Arab Republic (YAR) and the People's Democratic Republic of Yemen (PDRY) were unified to form the Republic of Yemen (Yemen). The unification brought together two economies of different orientation. The economy of YAR was based largely on liberal market principles, with a dominant role played by the pri-7ate sector; that of PDRY, on the other hand, was organized on the socialist lines, with the government and public sector organizations playing the leading role. YAR, a much larger economy in terms -' population (about 9 million) and production base, had attained $670 per ..apita GNP in 1989, while PDRY, with 2.4 million population, had reached $530 GNP per head. The per capita GNP of the unified country is estimated at $640 for 1989 As an indicator of the level of development, this seemingly high per capita GNP, however, is tempered somewhat by other social indicators usually associated with a lower level of income: life expectancv of 50 years, primary school enrollment rate of 67 percent, adult literacy rate of 20 percent. These indicators reflect, to a great extent, Yemen's late start in modern development, and point to a rather difficult development task ahead for the country. 1.02 YAR achieved rapid growth during the 1970s and early 1980s, thanks to large inflows of remittances of Yemenis working abroad and of external loans and grants. Growth of CDP averaged 8.7 percent per year during 1974- 81; the balance of payments was easily managed; and the external debt burden was light, with the debt service ratio remaining in the single digit range. Precipitated by a sharp drop in remittances and external assistance, :he economy encountered difficulties in the late 1970s and early 198Os, and by 1982 the large budget and balance of payments deficits could not be sustained. By sharply reducing expenditures, substantially devaluing the currency, and controlling imports, the Government was able to bring the economy back to health four years latar. 1.03 With earnings from oil exports starting in 1987, the tight budget policy was not maintained and the exchange rate, particularly vis-a-vis the Saudi currency in which most Yemeni migrant workers earned their incomes, was allowed to appreciate substantially in real terms (Table 1). As a result, there was a relapys of serious macroeconomic imbalances in 1987. LArge oil export earnings in 1988-89 helped reduce the budget and balance of payments current account deficits, in relation to GDP, during tb)se two years, end create positive domestic savings in 1989. In *bsolute terms, however, the deficits remained large and were financed mainly by borrowing from the Central Bank and by short-term loans. Inflationary pressures remained intense, which were reflected in continued high rates of inflation. Short-term external borrowing rapidly added to the external debt obligations. Short-term debt approached $900 million in 1989, in addition to $2.5 billion of medium- and long-term debt. The scheduled debt service ratio had risen sharply from only 9 percent in 1985 to 23 percent in 1989. The heavy repayment burden necessitated repeated rescheduling of debt to the USSR, which helped reduce the actual debt service ratio to 12 percent in 1989. In su'mary, at unification, YAR was faced with still unsustainable budget and balance of payments deficits, high rates of inflation, a heavy debt service burden, and the need to urgently adjust policies to stabilize the economy. Table 1: YAR - SELECTED INDICATORS, 1984-89 1984 1965 19" 196? 19U 19t°. Budget Deficit Ci of GOP) -21.7 -18.4 *15.2 23.8 -16.8 *9.2 Fi,nwtcee b ca sorramino C of Tot.Sud[ lt.) 74.2 72.4 58.0 64.0 61.7 62.4 chw" in mg wnd usi-maney e) .. 20.0 25.5 10.1 6.2 4.5 0ounr Price Inax Increae Ci) 12.6 27.4 29.4 21.7 16.4 20.0 Maimna Exo*ae Rate (YRlsis) 1/ 5.35 7.27 9.42 10.21 9.76 9.76 Real Ettfctive lxcifg Rate (19603100) 121.5 114.2 96.0 95.5 108.2 130.0 Retl lxchane Rate vise-via Saudi tRits (1980u100) 116.2 114.9 120.8 137.9 167.1 200.6 Current Account allame (C of GDP) -9.9 49.9 -8.9 -15.6 -14.3 -7.5 Imerst of GFS (US S Mitllion) 1687 134 i C.. 1565 1681 1621 Oil. Exwts cUS S milLion) 2/ .. .. . 18 398 539 worftes' tRittwtc (US S Miltion) 3/ 1067 809 669 762 343 344 Grants (US S MilLion) 143 103 241 160 91 108 LT Debt set-vice (US S Milltin) 68 72 104 179 186 160 Externa Deot OCO (US S MILLIon) 1871 2032 236 26 3034 3324 mediimLofng-tem 162 1842 2109 2294 2464 2445 Short tefr 4/ 269 191 257 342 570 S79 %c_stic Savings Ci of G(P) *14.0 -12.9 8.5 -15.1 -0.6 5.9 Nottonat Savinrs Ci of GOP) 8.0 5.1 6.6 1.6 3.3 8.5 Pubi IC -10.1 -10.4 -4.9 -11.6 *4.2 1.8 Private 18.0 15.5 11.5 13.2 7.5 6.7 Investmnt Ci of GDP) 17.4 14.4 13.3 14.6 13.8 12.2 "tic 10.6 9.2 8.1 8.7 8.8 5.6 Private - 6.8 5.2 5.2 5.9 5.0 6.6 MP (YR miliion) 247S6 30969 37505 43519 5376 66069 Sources: Central Plaring organization, nd World S staff estimtes. 1/ Conversion rates for 1965-1967. 2/ GoventvT share only. 3/ inrclues labe irce. 41 Includes IMF credits. 2 1.04 PR achieved relatively .ower growth, but made considerable progress in providing the pop-lation with basic needs - food supply, health services, and education. Substantial investment was made to expand infrastructure and production capacity. In the mid-1980s, however, PDRY wAs faced with a vory difficult economic situation, due to a sharp fall in iyorkers' remittances (Table 2). The Government responded by cutting imports, raising taxes, and freezing wages and salaries in the public sector, resulting in a sharp decline in output. From 1985 to 1988, despite a relatively high level of investment, real domestic output declined by about 3 percent per year. Real GNP fell even sharper because of the drop in workers' remittances, with the total contraction estimated at close to 20 percent during 1985-88, Small growth was indicated for 1989. 1.05 During~ this period, agg:egar3e demand policies continued to be highly expansionary. The budget deficit rose from 37 percent of CDP in 1985 to 45 percent in 1989. The deficit was financed by external borrowing and by bank credit, further expanding money supply despite the fall in GDP, Thle situation, however, was not reflected in the increases in prices, which were administratively suppressed. Mirroring the budget, the balance of payments curreL&t account deficit ro3e sharply from 23 percent of GDP to 41 percent during the same period. Thie deficit was financed by external loans and by drawdowns of reserves. As a result, external. debt increased from $1.4 billion in 1985 to $2.2 billion in 1989, and the reserves declined from $45 million to $34 mi'llion (1988). The accrued debt service burden substantially rose from 15 percent of foreign exchange earnings in 1985 to 56 percent in 1989. 1.06 The unificat! 'n brinigs together two s-:ts of resources that could probably be better develoned jointly rather than separately. The northern part has proven oil and gas deposits, with a favorable outlook for more discoverie , good tourism prospects; and a dynamic imarket system. The southern pait has large fishery resources; the port of Aden; modest proven oil reserves, with also good prospects for more discoveries. In addition, the former border area that is believed to have the greatest potential for further oil and gas discoveries can now be explored miore expeditiously. With - larger market, unification also offers potential gains from economies of scale in various industries. But before the potential can be realized, the country is going through a difficult tranisition period that has been aggravated by the effects of recent events in the Middle East. Furthermore, with both constituent parts facing difficult economic situations, unification clearly brings together two sets of macroeconomic imbalances that, as will be discussed below, need urgent adiustitents. 3 Table 2: PDRY - SELECTED INDICATORS, 1984-89 1984 1985 1986 1987 1988 1989 Budget Deficit (C ol COP) *32.2 -37.3 -41.4 *30.9 -43.7 .45.3 FtnMnse by CS C orroairw (2 of Tot.8wo.00f.) S3.9 60.c 58.3 37.3 43.6 34.8 Chjno in iUnV VWn QuOui-Mon@f (2) .. 8.0 4.4 7.6 6.0 4.7 Cowwior Prle InOox inerese (2) 1.2 5.1 0.9 2.5 0.3 1.6 Netna& Ixchiiw late (S/ID) 2.899 2.899 2.899 2.899 2.99 2.t9. Roi Effective exchange Rate ;1980J1OO) .. Reel Ixcbwe Alte vis-a-vis taii Rias& (1980 100) .. .. .. Current Accsait 8ainoe (I Of tDP) -25.0 -22.9 -21.1 16.5 -38.3 -40.5 In#Wts of ONFS (US * Mittion) 874.1 774.6 568.8 609.5 855.8 812.4 Oil txoo ta (us S MilLion) 1/ 3.3 9.7 3.5 34.2 48.5 53.1 Workter' RemittwnCv (US S Million) 2/ 501.0 426.0 293.3 303.7 254.2 161.0 Grants US S Mi*iton) i9.6 32.0 30.7 50.7 35.0 43.4 LT O6bt Service (US 5 MiLLion) 62.4 g4.5 105.4 129.5 '57.9 210.5 ExternaO Debt OCO (US S Million) .. .. .. MeO4UIVLo.i.terU 3/ 125I1.0 1417.8 1582.9 1604.t 18 8.4 2176.7 Short- term . ommetic Savinqs (2 of GOP) -30.6 -28.2 -21.4 -15.8 -22.7 *12.3 %ational Savings (2 of GOP) 15.7 11.6 9.3 14.0 3.5 4.9 Pubtic *3.4 *T.5 -13.5 *2.2 -3.4 -1.6 Pr1 vce 19.1 19.1 22.8 16.2 6.9 6.4 Invem tment ( of G0D) 40.7 34.5 30.3 30.5 41.8 '5..4 Pubtic 33.6 28.7 27.9 28.7 40.2 43.8 Privete 7.1 5.8 2.4 1.8 1.6 1.6 GOP (YI million) 389.7 382.3 339.2 376.4 395.6 412.0 Sources: Centrat Statistical Orgenization; snd World tank staff estimates. 1/ Petratmm wroducts; trom IMF RED 5/17/90, Table 10 OP. 2/ Inetl.0e tLabr inmce. 3/ 000 exctudes tiabiLities to the IMF mn AMF. Political. Administrative and Institutional Unification 1.07 The country has been under a provisional government since unification. Sana'a has been designated the national capital and Aden, the business and commercial capital. A nation-wide referendum was conduct?d it. May 1991 to approve the newly drafted Constitution. A general election for Parliament is scheduled for early 1992, after which a permanent government will be formed. 1.08 The Government's task over the past year of amalgamating the two former public administrations has been largely complete. To some extent, the task has been made more difficult by the differences in the two former systems. For example, PDRY had a large number of civil servants - double that of YAR - despite having a population of a littie over 20 percent of the 4 latter. There is a need to rationalize the public administration and public sector institutions. The issue of over-staffing, and its budget implications, will continue to be a major concern of the Government in the future. 1.09 From the perspective of the former YAR, the role of the state will not significantly change. While the Government will attempt to guide economic development along a strategy it considers most appropriate to achieve development objectives, it will limit the Government's role to creating a suitable environment for fostering growth of the private sector, relying on the market to allocate resources. This approach, of course, represents a radical change from the perspective of the former PDRY, which was run for a number of decades under the command economic ,rinciples. In April 1991, an investment promotion law was promulgated (Republican Decree-Law No. 22 of 1991). One of its main objectives is to attract private sector investment, both from domestic and from foreign sources. 1.10 Despite the expressed desire for the Government not to directly participate in economic activities, there remain important issues relating to state enterprises inherited from the former PDRY. The Government's expressed intentions are either to divest itself of these enterprises or to allow them complete autonomy. Little divestment has been made so far. The Government has indicated that the process of granting these enterprises autonomy has started. It is still too early to assess the prospects of these enterprises if, under the new setting, they receive no protection from the Government against competition. The Government could be cbligated to come to their rescue, should some of them find themselves unprepared for complete autonomy and are unable to compete in the market. It is conceivable that, being the owner of the enterprises, the Government remains the ultimate guarantor of their liabilities, which could have a substantial impact on the budget. II. Present Economic Position Production and Distribution Structure 2.01 Before unification, the economic structure of the northern part of Yemen was undergoing significant charnges as oil extraction became more substantial, reaching close to 180,000 b/d in 1989. Agriculture, however, remained the most dominant sector, accounting for about 24 percent of GDP during 1987-89, followed by manufacturing (12.8 percent) and government services (12.6 percent).' In the southern part, government services were by far the most important sector, accounting for almost one-third of output during 1987-89, followed by agriculture (14.4 percent). Industry, construction, trade and transport accounted for similar shares (about 10 percent each). In the combined setting, govermnent services would be the most l/YAR national account data do not include the share of the foreign oil companies in the oil sector. Adjustment has been made to include that part for the present calculation. 5 important sector, accounting for over 21 percent of GDP in 1990, followed by agriculture with almost 20 percent (Table 3). 2.02 Domestic production in both parts of the country has been totally consumed. Domestic savings have been negative, with the exception of 1989 in the former YAR, which had positive savings for the first time in many years due to a sharp increase in oil exports. At the same time, investment in the south, mainly by the public sector, has been exceptionally high, averaging over 39 percent of GDP during 1987-89. As mentioned above, growth in recent years has been largely negative. The fact that this high investment did not generate growth was a cause for concern. In the north, investment had been modest in the past few years, averaging less than 14 percent of GDP (1987- 89). Investment in both parts of the country has been financed from resources generated outside the country, either in the form of factor income (workers' remittances) or grants and loans. The unified national accounts of 1990 indicate that consumption exceeded output by some 4 percent and the resource balances were in the negative by almost 18 percent of GDP. Lack of domestic savings would be a major constraint for future development of the country. 2.03 Until the advent of oil, exports made up a very small share in GDP of the north, averaging 'Less than 4 percent during 1984-86; with oil, the share went up to 19 percent in 1989. In the south, the share had been in the range of 6-10 percent. In 1990, exports of goods and non-factor services accounted for just over 12 percent of GDP, while imports represented 30 percent. These low shares of exports in GDP partly reflected the limited resource base of Yemen, as well as past inward-looking development strategies in both parts of the country. With relatively low exports, but vcry high imports, the resource imbalance has been exceptionally high, as much as one- third of GDP in the north and over 70 percent of GDP in the south in recent years. Clearly an economy depending that much on imports would need a strategy with the focus of earning foreign exchange to pay for them. Public Finances 2.04 Both parts of the country experienced prolonged budget deficits. In 1989, the combined deficit was 16.5 percent of GDP (Table 4). Although restraints on some expendliture items and availability of oil revenues had brought down the deficit in the North to under 10 percent of GDP in 1989 (Table 1 and para. 1.03), the cumulative effects of continued large deficits and their financing, largely by borrowing from the Central Bank, have led to inflation, overvalued excshange rate, and balance of payments current account deficits. 2.05 Until recently, the leading source of revenues in the North was customs duties. In 1988 and 1989, however, oil profits plus income taxes laid on oil companies, having generated almost one-third of total revenues for the two years, replaced customs duties. On the expenditure side, two major items stand out, i.e., expenditures for wages and for defense. The former has been gradually taking a larger share of the budget, from less than 23 percent of total expenditures in 1984 to about 29 percent in 1989. The current portion of defense expenditure had declined somewhat in terms of the share of total 6 Table 3: Major Components of National Accounts (As percent of CDP at current prfce) YAR PDRY YEMN 1]87 1i98 ill 1987 1988I 1990 Agriculture 27.4 23.0 20.3 13.7 14.5 15.0 19.6 Manufacturing 13.6 12.5 12.3 -- -- -- 10.8 Mining and quarrying 1.9 9.9 10.1 - 4.6 Trade 11.9 11.5 13.6 11.8 10.5 9.7 13.6 Transport and communication 11.9 11.0 12.7 10.4 10.5 9.2 11.7 Government services 13.0 13.0 11.9 26.4 27.1 27.4 21.4 LEports, GNFS 5.3 17.3 19.0 9.5 10.1 10.4 12.4 Imports, GNFS 38.1 30.8 23.9 55.8 74.6 68.0 30.0 Resource balances -32.8 -13.5 -4.6 -46.3 -64.5 -57.6 -17.6 Total consumption 115.1 100.6 94.1 115.8 122.7 112.3 104.0 Gross fixed investment 13.8 13.1 11.6 30.5 41.8 45.4 13.6 Gross domestic savings -15.1 -0.6 5.9 -15.8 -22.7 -12.3 -4.0 Gross national savings 1.6 3.3 8.5 14.0 3.5 4.9 6.1 Sources: Central Statistics Organization; World Bank Staff Estimates. expenditures, from over 24 percent in 1984 to less than 21 percent in 1989. The other part, capital and capital transfers, on the other hand, had gone up from 3.5 percent to almost '.O percent of total during this period. A smaller item that had gone up is expenditures for materials and services, from 4.4 percent share to 5.8 percent during 1984-89. At unification, the North was in urgent need of further reducing the deficit by cutting expenditures and/or increasing tax revenues. Options under consideration were freezing of wages and salaries, defense spending, expenditures for materials and services, and some other items; and raising of excise taxes on _qt, soft drinks, mineral water, and petroleum products. 2.06 In the southern part, the deficit level was even higher at 40 percent of GDP (1987-89 average). The largest source of revenues came from transfers from public enterprises, followed by taxes on goods and services. Transfers from public sector enterprises accounted for about 35 percent of total revenues in 1984, increasing to over 48 percent in 1987 and declining to about 44 percent in 1989. Large profits made by the Aden refinery, as a result of lower imported crude prices but high prices of products sold domestically, explains part of this substantial contribution. Customs duties accounted for about 26 percent of total in 1984, declining to less than 16 percent in 1989, due mainly to lower imports because of foreign exchange shortages. Current expenditures took between 54 and 62 percent of total expenditures during 1984-89, the largest item being wages and salaries taking between 29 and 35 percent of total. Being a centrally-planned economy, the south spent a considerably larger share for capital expenditures, which accounted for 37-46 percent of total in 1984-89. The large budget deficits were financed partly by external grants and partly by bank credit, creating a highly liquid situation in the economy whereby the GDP/money ratio declined to 0.6 in 1989. Due to price controls and a general lack of goods to buy, the increased liquicUlty in the economy did not show up in the price index. Budgetary Results for 1990 and Outlook for 1991 2.07 From the limited information available,2 the budget deficit appears to have increased by some 18 percent in nominal terms in 1990, despite substantially higher oil revenues reflecting higher prices (Table 4). Expenditures rose by 35 percent reflecting a 57 percent rise in current spending which was partially offset by a small decline in capital spending. With inflation estimated at about 34 percent, this implied a large increase in real current spending. The increase in current expenditures was largely owing to a sharp rise in wages and a substantial increase in interest payments. The increase in wages reflected mainly an average increase of 35 percent to workers in the former PDRY to bring the pay in line with that of the former YAR employees. The rise in interest payments was due largely to a 2/ As unification took place in the middle of 1990, there were two separate budgets in 1990. Data provided to the mission on fiscal developments in 1990 were limited to the financing of the deficit. The only actual data provided on the revenue and expenditure sides were for oil receipts. Some preliminary estimates for capital expenditure were also given. 3 Table 4 pubrlic Of ?*aMe Ptocal Andenea. 1987-1991 PeoL. PreIl. Cteae ls Est. 1/ Ikuget Eat. bAgo t L987 1988 1989 i990 T990 991 ('. adllions of Tenasi rgiala) f%raen rovwea 12 I98 !,183 !0,700 23,314 29,93 15,218 Tana. s,373 9,727 12,273 t4,907 16,440 L9,055 tndiruct 5,761 6,444 7,934 9,92 .942 10,124 Tame on inceruatlonal trade 2.839 3.403 4,04* 4,176 4,276 5,250 Saes on goed and aervicen 1,824 2.091 2,644 ) 3.2 3.242 3,341 Zab.. 4nd sesa1 nunA 1,097 1,171 1,103 1,424 1,424 1,532 DireC 51,562 3,041 4.439 5.945 7,478 S,931 S nes os oil cemanles tuseon - 1,404 2,410 2,202 I,735 2/ 4,2S3 Other dIrect taxes 1.452 1,455 2,029 3,743 3,743 4,644 Restax revemeas 4*,75 7,441 ,427 10.907 13,499 14,143 Oil profits 7Z5 2,921 3,315 4,471 7.245 9,770 Other ceatax rnvem.aa 4,150 4,540 5,042 4,234 4,234 4,391 odrrut s*nud4itsree 3/ 14 714 19 143 '1 485 33 990 33 9" 40 54 Interest poamts 4T *§2 'i7 'I2 S,222 -5!T t lltotoresc crrent efOeC ditnres 14,222 13,4S6 20,883 30,268 30,78 14,294 P4adefense current sepeuditures 9,491 L1.120 L2,452 is5,41 15,431 19,181 ego sad * alaries 6,765 7,911 9 .121 12,433 12,633 15,401 Noterials ad services 2,724 3,209 3,331 3,013 3,013 3,780 ODfense vsuatu are 3,400 4,071 4,958 11,819 11,819 12,423 Nsenteeest enrreat transfers 1,163 1.086 1,223 3,293 3.298 2,S90 Ocelnssifi*a 148 209 251 - - - CApical en1enditures sae craotofe S/ a 550 10,058 10,417 10 119 10,389 12,314 Dosslopesct enpad5itures t 9,184 9,409 `,q 8,537 10.,71 P?ftiona futnd by badgst 2,514 3,10 3, 45 8,567 s/ 2.957 4,491 Portion. tfuded by externl loeas 7/ 5,206 S,073 5,344 .. 5.8S0 3,80 8/ Casitnl tramatera 830 874 t,006 1,552 1,552 1,743 Iatrnbndgatary n"p.ditnre 2.77S 1.494 1,459 I99 Overall balance -13,843 -13J70S -12,8t2 -18,295 -15,235 -17,980 S/ ptiesufig 13,843 13,709 12 882 ,, 15 23. Ornsat 1,444 9 I9 9 70 I/ 904 i24) 7/ a ntear unt finane (net) 7/ 4,320 5,137 5,041 . 49,980 Projacc and coindtty Loana 5.204 6,078 5,844 . 5,880 Cash loeas 90 32 170 ... 420 Latst repayw st I/ -977 -1,293 -973 ... -1,320 tafrewtj from la"a (nOt) 7,880 7 ,572 6.331 ... 9,015 Contral usan 7,938 7,575 4,331 ... 9,015 t0/ ... Commrcial beas ts8 -1 - - Namraudun itesm lotal revessoe ntio to torta GDP 22.Z 26.S 26.8 29.5 23.4 %sa-oil revenue: Rtto to totel GDP 21.0 19.3 19.4 ... 18.6 14.0 Total enpeadictrs: hattO co total Cr 4*7.4 47.6 4S3.5 ... 44.5 35.3 Overall balance with oil rovemu: Ratio to total GOP -25.3 -21.4 -1I.5 ... -15.0 -11.9 Overall balance witk oil revume: lAtto to non-o_l GOP -25.5 -23.2 -IS.Z . -14.1 -14.0 OvuraLl belacse without oil reaumus Ratio to total CDP -24.S -28.1 -24.0 ... -25.8 -2 1,3 seraLi balance itEhout oiL ravems: Ratio to Uon-nAl CUP -24.9 -30.4 -26.3 1. -21.8 -24.9 Seeress: 8iliscry of Fisasce, Central SamIn of Tes, and staff astiaeses. 1/ Preiminary data Irom T.A.R. aod .0.1. of Tot were CoUolidated by the seaff. Ti lncludes lIUS I bilifon of fes for new conceastlos. 7/ W adjuted by the staff to ioclude all of defense snpeaditnres as currean sependlturs. La the otTIcial budget presentation. defee** Capital spfAadng in iaclu4d* with "budgat development assndlture,' sOls detense caotal trcasters are Included with other capital tranafers. 4/ Antual paymeta. Sam stream dlnght have occuta4. 7/ Otffar irom offictil budget prseatation ny sxcluAing defense capital spending and dfeass capitaL triafera ad tche iclsionR of astelaly financed esaital outlays. 6/ IncLudes eaternlly fti"aced capital ntclav tn the ftretr POt of Teue. 7, From balsae st pey_ta. Ti Differ* ros the auteritties' bget pres*statioa in that tt tclades en -tiaet_ of enpeaiucres fnd by external loam (aesent sinilar to 1490). I/ datual paymala. Arrears is 1990 nag 1991 are suatastlal. Laset ,f I are nt1 availble at thia 10f Otfers fre _otsrp eurwY as It mLldes see "*Itte of eaLir aasl rity edd p5wt. 1 _ uda. 9 depreciation of the rial, an increase in debt outstanding, and an increase in interest paid on government debt in the former PDRY. In relation to GDP, the deficit declined from 16.5 percent in 19S9 to 15 percent in 1990. (Excluding oil revenues, however, the deficit rose as a proportion of non-oil GDP from 26 percent in 1989 to 28 percent in 1990.) Expenditure remained at about 44 percent of GDP while revenue rose to 29 percent of GDP compared with 27 percent in 1989. Most of the deficit was financed by credit from the Central Bank. 2.08 The budget for 1991 fully integrates both parts of the country; it projects a deficit of YRls 18 billion3 compared with YRls 15.2 billion in 1990. In relation to GDP, the deficit is budgeted to decline from 15 percent in 1990 to some 12 percent in 1991. The improvement in the budget is mainly due to a decline in real spending in line with the Government intention of curtailing the deficit. 2.09 The projected improvement, however, may not materialize. First, oil revenues are likely to be lower than budgeted because oil prices used in the budget ($21/b average) are not likely to be achieved. Second, customs tariff revenues could be lower than budgeted due to falling imports. As a result, the Government again may have to resort to substantial borrowing from the Central Bank as foreign grants were expected to be minimal (less than YRls 90 million, compared to YRls 1.5 billion in 1989 and .Rls 1.2 billion in 1990). There is also another potential drain on the budget, now that the public sector enterprises have to compete with the private sector; little information is currently available on these enterprises. The effective devaluation of the dinar by some 23 percent at unification has a potential impact on the budget to the extent that the portion of their liabilities that are dominated in foreign currencies have increased, requiring higher debt service payments. The Government has recognized these potential adverse developments and plans to take some action to address them, including a cut in expenditures of YRls 3 billion (1.5 percent of GDP) and additional revenue measures to make up for the shortfall in oil receipts. Monetary and Financial Sector 2.10 In both parts of the country, monetary developments in the recent past have been dominated by the expansionary impact of central bank financing of the large budget deficits and the efforts to minimize the impact of such financing on domestic liquidity. In the North, the 1989 GDP/money (including quasi-money) ratio was 1.8; the same ratio in the South was 0.6. At the rate of exchange of YRls 26/YD1, fixed at unification, the GDP/money ratio for the unified economy was 1.3. The unified economy is therefore relatively more liquid than that of the former YAR but less liquid than that of the former PDRY. Because most prices that were once controlled in the South are now free to move, this high liquid situation will have a considerable influence on i/Includes externally financed development expenditures, estimated at YRls 5.9 billion (same as in 1990), which the Government does not include in the budget. 10 price movement. In the North, the principal anti-inflationary tools were raising of reserve requirements, adjusting of interest rates, and imposing direct credit ceilings. in the South, the main instrument were a reduction in credit to the public enterprises and the private sector. At unification, commercial banks in both parts of the country were in an excess reserve position with the central bank, partly reflecting high liquidity in the economy and a general lack of opportunities for sound lending. Due to a lack of lending opportunities, commercial banks were not willing to accept long- term, interest bearing, deposits. The Government intends to focus mainly on reducing the budget deficit, thus reducing the need for central bank financing, as a means to address this high liquidity situation. 2.11 In 1990, monetary growth accelerated to more than 20 percent in the first eleven months of the year (Table 5). The sharp rise in the broad money reflected the continued large recourse to central bank financing by the Government, but also a substantial increase in foreign assets (net) and a major rise in credit to non-government sector.4 The increase in foreign assets (net) was due mainly to the foreign assets brought back by returning workers and to the depreciation of the rial in the official market. The increase in credit to the non-government sector reflected the liberalization of the economy and a substantial amount of borrowing for foreign exchange speculation. This growth in liquidity thus facilitated a sharp depreciation of the parallel exchange rate -ihich, coupled with price liberalization, led to a drastic rise in inflation - close to 50 percent during March 1990-March 1991. 2.12 At the time of unification, the two parts of the country had two different interest rate structures. The interest rate structure in the North was last changed in February 1990 to reflect the rising inflation. However, with the consumer price index rising at a much higher rate, the real interest rates - with the maximum lending rate of 17 percent, the ceiling enforced by the Central Ba.,k - were strongly negative. Even at real negative interest rates, the (effective) demand for credit was lower than supply, reflecting various rigidities in the economy, the demand for collateral far in excess in value of the loan, and the difficulty to collect repayment arrears. In the South, the interest rate structure with the maximum lending rate of 8 percent, was last changed in January 1978. Since (administered) inflation has been lower, real interest rates were positive. The unification of rates, adopting the rate structure existing in the North, is ongoing. With the maximum rate rernaining unchanged, however, the real interest rates remain negative. Trade and Balance of Payments 2.13 With prolonged budget deficits significantly contributing to a persistent excess demand situation, the current account of the balance of payments in both parts of the country consistently had large gaps. In the North, until the advent of oil in 1987, merchandise exports were very small 4/Foreign assets are valued at the official rate. If the parallel market exchange rate was used, the monetary growth would be substantially higher. 11 Table 5. Republic of Yemn: lonetary Survey, 1987-1990 Dec. Dec. Dec. Nov. 1987 1988 1989 1990 (in millions of Temni rials) Money 37,492.2 30,965.5 43,954.4 50,967.1 Currency outside banks 27,955.6 29,086.7 30,327.3 36,814.7 0omand deposits 9,536.6 9,878.8 13,627.1 14,152.4 Quasi mseny 11,355.0 14,288.4 12,726.1 17,124.7 Broad money (M3) 48,847.2 53,253.9 56,680.5 68,091.8 foreign assets (net) 4,897.4 1,682.7 665.7 3,900.1 Do_ tic credit 50,270.6 59,525.3 66,813.5 77,574.7 Governm_nt (net) 43,819.1 52,530.6 58,861.7 66,632.5 &;agovernment sector 6,451.5 6,994.7 7,951.8 10,942.2 (Public enterprises) 1,989.9 1,913.8 2,214.3 2,943.2 (Private sector) 4,461.6 5,080.9 5,737.5 7,999.0 Other item (nret) -6,320.8 -7,954.1 -10,798.7 -13,383.0 (Changes in percent of broad money at beginnins of period) broad money 9.4 9.0 6.4 20.1 Foreign assets (net) 1.1 -6.6 -1.9 5.7 Do-estic credit 13.8 18.9 13.7 19.0 Government 17.3 17.8 11.9 13.7 Nomgoverumnt -3.4 1.1 1.8 5.3 Other item (net) -5.5 -3.3 -5.3 -4.6 Source: Central Bank of Yemn. 12 compared to the import needs and to CDP. The largest non-oil exports were the group of coffee, tea, cocoa anid spices, which earned less than $3 million in 1988, followed by fruits and vegetables ($1.7 million). Compared to the 1988 import bill of about $1.7 billion (goods and non-factor services), these exports were marginal. Limited resource endowment explains part of the low exports. But the main factors probably lay with development policies that were not conducive to export growth. Most investments were geared primarily toward the domestic market, and producers were heavily protected from competition from outside through import restrictions and exchange control. Imports were controlled by a system of import licensing. Having attained licenses, importers automatically received foreign exchange from the Central Bank. They could not go to private markets even if the Central Bank was short of foreign exchange. Commercial banks were allowed to act only as agents of the Central Bank in gathering and allocating foreign exchange. Money changers were outlawed, although they operated quite openly in the local markets (suks). Some imports were banned altogether. There was not a comprehensive policy to promote exports. Because the exchange rate changed only infrequently, not enough to reflect the differences in price changes between YAR and the trading partners, the overvaluation of the currency was a disincentive to exporters. A recent study clearly indicates the need to dismantle the import and foreign exchange controls to reduce the high level of effective protection.5 2.14 In the South, the story was much the same. The largest exports were from the oil refinery, which imported crude oil and exported refined products; such exports were about $49 million in 1988, followed by exports of fish and fish products of $13 million. The import bill (goods and non- factor services) for that same year was $856 million. As in other economies run on the socialist doc.rine, most economic activities were under control of the state. Imports were controlled through the import programs of government monopolies and public enterprises. Investments and production were also controlled. Exports were not promoted. The exchange rate did not change since 1973. All activities were geared toward satisfying basic needs of the population. In such a system, it is difficult to calculate the level of effective protection received by loca'l producers, but it was likely to be very high. 2.15 With such a small merchandise export base and persistent excess demand, both parts of Yemen had large trade deficits over the years. In the past, the gap was filled mostly by workers' remittances and foreign loans and grants. In the last couple of years (1988-89), oil exports earned almost $1 billion for the North. Despite a substantial increase in oil exports, the current account deficit was higher in 1989 than in 1987 (Table 6). This increase in the deficit reflected the sharp fall in workers' remittances and grants, and the increase in imports. .2/George Fane and Chris Jones, "The Manufacturing Sector of the Yemen Arab Republic: Effective Protection and Domestic Resource Costs", Final Report to the UNDP and World Bank, November 1989. 13 Table 6. Republic of Temwn: Salance of Paymoets, 1988-91 (In sillions of U.S. dollars) Prelim. Est. I/ Prol. 2/ 1988 1989 1990 1991 Current account balance -1,098.7 -1.009.3 -217 -709 Trade balance -1,449.1 -1,181.4 -1,045 -991 Exports 519.4 693.4 626 728 oil 397.9 538.9 515 528 Others 121.5 154.5 111 200 ImPor:.3 1,968.5 1,874.8 1,671 1,719 met services 350.4 172,1 829 280 Receipts 1,083.8 1,000.3 1,404 872 Service. 357.7 396.5 300 322 Private transfers 574.5 409,7 1,000 350 Official transfers (cash) 126.4 150.6 104 50 Official transfere (kind) 25.2 43.5 -- 150 Paymets 733.4 828.2 575 590 Servtcee 701 789.9 552 580 Privace transfers 31.5 38 23 10 Official transfers 0.9 0.3 - Capital account (net) 762.3 841.8 101 -5 Total capital inflow 1,075.5 1,086.2 674 838 Long-ters disbursemnt 670.9 618.2 525 602 Developments and a _omdity 614.2 600.8 489 602 Cash 56.7 17.4 36 Suppliers' credit 404.6 468 149 236 Portfolio - - - -- Other investment Principal repayment 313.2 244.4 574 843 Long-term 136.7 99.7 259 563 Short-tern 176.5 144.7 314 280 Errors and omissions 3/ -4.6 78.3 * Salance of payments position -341 -89.1 -116 -714 Exceptional financing (arrears) - 354 428 Ulance of paymeots position after exceptional financing -341 -89.1 238 -286 loentary movem_nt 4/ 341 89.1 -238 286 Central Bank 234.2 27.9 -16 ... Commercial banks 91.8 66.6 -264 .. Valuation adjustment 15 -5.4 42 ... Sources: Cantral Uank of Teown and staff estimates. 1/ Staff estimates. 2/ Projections provided by the authorities. 3/ Includes private capital movem_t (not). 4/Negative - increase in assts. 1.4 2.16 In 1990, the current account deficit declined sharply to $217 million from an average of over $1 billion in 1988-89 mainly due to a more than doubling of workers' remittances and a decline itl impcrts. The one-time increase in workers' remittances reflectea the repatriation of savings by workers returning from the Gulf, but also reflected the inclusion (for the first time) of an estimate of unrecorded transfers in this item. The compression of imports was largely due to the cessation of oil imports in the last five months of the year because of the situation in the region, and a decline in external project financinig 2.17 On February 19, 1990, the official rate of the Yemeni (YR1) was depreciated by 19 percent from YRls 9.76 - US$1 to YRls 12.01 - US$1, and on May 22, at the time of the unification of the two Yemens, the Yemeni dinar (YD) was depreciated by a similar percentage and a fixed exchange rate of YRls 26 - YD 1 was set between the two currencies. Restrictions on access to the parallel exchange market were relaxed in mid-1990, and all private foreign exchange earnings are now channeled through the parallel market. Moreover, all import financing with the exception of that for wheat, flour, rice, and LPG, which are mostly imported by the Government, was shifted to the parallel exchange market.6 Exclhange dealers have been allowed to operate legally. Imports of the aforemenitioned four commodities (about 15 percent of total imports in 1990) continued to be financed at the official rate from the proceeds of petroleum sales which were also valued at the official rate. Beginning in early 1991, however, a special fee has been levied on these commodities, making the effective exchange rate move to YRlsl6/US$1. 2.18 The outlook for 1991 is not very encouraging. The Government projects total cash remittances, both recorded and uLnrecorded, to decline from US$1,000 million in 1990 to just US$350 milliorn in 1991. Oil output is projected to increase from 189,000 b/d to 200,000 b/d, yielding revenues (Government's share) of US$528 million in 1991, compared to US$515 million in 1990.7 Even with the optimistic expectations over grants and external project financing, imports are expected to decline in real terms in 1991. The fall in imports, and the consequernt decline in investment and output, however, is 6/ The Yemeni rial stood at YRls 25-US$l in the parallel market in mid-May 1991 compared with YRls 14 in mid-1990 and YRls 17 at end-1990. Using the parallel market exchange rate, the Real Effective Exchange Rate index (base year 1980) of Yemen stood at 80. 7/This oil export receipt number differs significantly from the calculation based on data provided by the Ministry of Petroleum and Mineral Resources. The data from the Ministry indicates that oil export earnings in 1990 should be about $827 million, The mission was not able to reconcile this significant difference. For 1991, export earnings may not reach $528 million as projected because a good part of oil will need to be refined at the Aden Refinery for domestic use. On the basis of oil imports in 1990, the oil export receipt may only be about $400 million. 1.5 likely to be much larger than projected as grant3 and external financing expectations (US$802 million) are unlikely to materialize. Government officials acknowledged that their expectations were on the optimistic side and agreed that imports would be furthex .ut if projected grants and external financing did not materialize. External DebtJ 2.19 With a very small export base, Yemen has depended significantly on external borrowing. Until recently, borrowing had been on concessional terns, from both bilateral and multilateral sources. With projected availability of oil income, the former YAR, however, resorted to short-term borrowing in the last couple of years, leading to a substantial increase in short-term debt, which stood at about $900 million at the end of 1989. Medium- and long-term debt at the end of 1989 was about $2.5 billion (36 percent of GDP). Although most borrowings were on soft terms, grace periods of many loans had expired and the repayment burden had sharply increased - the debt service ratio, if all obligations were to be fully paid, is estimated have risen up to 23 percent in 1989 compared to 5 percent in 1984; due to rescheduling the actual ratio was lower. Scheduled interest payments rose to 6 percent of exports from 3 percent during the same period. Based on scheduled repayment obligations, the net transfers would have become negative in 1989. 2.20 The South had no short-term debt. But with a much smaller economy, the medium- and long-term debt of $2.2 billion or about 207 percent of GDP was a heavier burden than that of the North. The debt service ratio substantially went up from less than 10 percent in 1984 to over 53 percent in 1989; interest payments alone went up from 3 percent of foreign exchange earnings to about 18 percent during this period. Projected disbursements and repayments of debt in the pipeline show that there would still be some positive net transfers in the iiext few years. 2.21 The combined economy is heavily burdened with the existing debt obligations. Total debt outstanding at the end of 1990 stood at $6.1 billion or about 75 percent of GDP. uedium- and long-term debt amounted to $5.2 billion. Total scheduled medium- and long-term debt service for 1990 was over $400 million or some 20 percent of total foreign exchange earnings. Due to foreign exchange shortage, however, not all debt was serviced; only about $147 million was paid. Interest payments in 1990 were about $35 million or less than 2 percent of total foreign exchange earnings. The arrears are mainly for the debt owed to the USSR and other forme- socialist countries. The Government has indicated that arrears to other creditors have all been settled in early 1991 but those to the former socialist group would continue tu accumulate; it is hoping to negotiate with these creditors for a reduction of debt, mainly through the use of the market exchange rates.8 §/At the official exchange rate (US$1.76/Rublil), debt to the USSR stood at $2.9 billion at the end of 1990. However, if this debt is valued at the market rate of R27.6/US$1, it amounts to less than $60 million. 16 i EmploXment. Wages and Prices 2.22 Yemen is facing a serious unemployment/underemployment situation. As a result of past rapid population growth, the number of school leavers seeking employment continu'es to be large. In the 1970s and early 1980s, opportunities for employment in the regional oil exporting countries served as a large outlet, keeping unemployment at home at a low level. With stagnating opportunities in these counitries and returning migrants, unemployment and underemployment were estimated to have increased to around 400,000 or some 15 percent of the labor force. Returnees arriving from the Gulf in late 1990 have raised the rate of unemployment to some 25 percent. To some extent the non-formal sector has absorbed some of the unemployed. However, unless the economy can grow at a relatively high rate, especially in the labor-intensive sectors, unemployment and underemployment will continue to be a major problem. 2.23 Labor surplus centers cnly on the non-skilled or semi-skilled groups, while at the same time there are shortages in che skilled categories, which have been filled to some extent by expatriates. Unification has created economies of scale in government services. But it has also shut off employment opportunities for new entrants. At the same time some dislocation can be expected as the highly protected state-owned industries in the South are open to competition from private industries. These factors may aggravate the unemployment/underemployment situation. 2.24 Information on wages, especially in the private sector, is limited. At unification, public sector wages differed substanti.-lly - the average pay in the South was much less than that of the North. Pay rates have been equalized. The two, of course, cannot be truly compared because of lower (controlled) prices and subsidies in the South. The last general salary adjustments for YAR were made in May 1988. The 1991 budget does not contain any provision for wage rate adjustments. With limited information on wageL and less than fully reliable price indexes (below), it is not possible to calculate a meaningful movement of the real wage rates over time, 2.25 Inflation has accelerated in the past few years. Indicators of price movements, however, should be viewed with caution. In the North, information is zo.nfined to certain cities, with limited coverage and outdated weighting distribution. The Sana'a consumer price index indicates that inflation has been quite high, averaging over 19 percent during 1987-89, accelerating to 34 percent in 1990 and 47 percent from March 1990 to March 1991. In the South, since prices were mostly controlled and general shortage of goods existed, the price index did not reflect the inflationary pressures that, without controls, could rise at a much quicker rate. In 1986-88, the consumer price index rose at around 1.2 percent per year. Since the removal of controls, prices have increased sharply. For example, during March 1990 - March 1991, the consumer price index in Aden rose by more than 150 percent. 2.26 At present, except for a few commodities, prices are set by the market. Prices of the main petroleum products, which are produced and distributed by state enterprises, are set by the Government. These include products such as gasoline, diesel, fuel oil, and LPG. The Government's expressed policy is not to provide subsidies for the consumption of these 17 domestically produced commodities. Because their prices do not frequently change, however, an element of implicit subsidy/tax may occur at a given time due to fluctuations in the interutational prices of oil. The prices of those products also contain an element of cross subsidy on the rationale that LPG, for example, particularly benefit the relatively poor. In principle, the Covernmont will not subsidize any consunption out of state budget. For wheat, wheat flour, and rice, which are imported at a preferential exchange rate, the prices are controlled through fixed trade margirns. III. Macroeconomic Outlook 3.01 This chapter assesses the prospects of the economy on the basis of the present policy stance. Because Yemen is highly dependent on imports for most requirements, its macroeconomic outlook depends a great deal on its ability to pay for imports. Until the advent of oil exports in 1987, Yemen depended principally on workers' remittances, grants and external borrowing for its foreign exchange needs. Oil has reduced the importance of these traditional sources of foreign exchange. Workers' remittances have been further reduced by the recent regional events. The reduction of remittances significantly has lowered the country's ability to pay for imports while the needs, particularly for necessities such as food, have increased as the retu,.nees from the Gulf have added to the population by some nine percent. Increased foreign exchange allocation for necessities leads to a decline in the ability to pay for other goods - machinery, spare parts, intermediate inputs, etc. Oil Extraction and Exports. 3.02 Oil exports overtook workers' remittances as the most important source of foreign exchange since 1988 and accounted for 90 percent of merchandise exports in 1990. The fields in Marib have recoverable reserves of over 600 million barrels. By end 1990, about 199 million barrels were extracted, leaving in the reservoirs some 400 plus million barrels. Planned extraction rates for 1991 are to average about 208,000 b/d. At this average rate of extraction and without substantial new discoveries, the known recoverable reserves in Marib will be largely depleted in about six years. Projected extraction rates, however, will decline (Table 7) stretching the lives of the fields into the next century. In the Shabwa area, oil was discovered in 1987. Modest amounts were extracted in 1989-90. Due to difficulties arising from the changing of the oil contractors, extraction has stopped in 1991. Negotiations with new contractors are near completion. The field should be back to production shortly with the extraction rate in the range of 25,000 - 35,000 b/d beginning in 1992. 18 Table 7: Projected Oil Extraction (In '000 b,/d) 1991 1992 1993 1994 1995 Without additional investment Alif/Azal 150 119 75 48 30 Asa Al Kamil and others 58 45 35 30 30 Shabwa Block 4 - 25 30 35 35 Total 208 189 140 113 95 With planned additional investment Alif/Azal and others 208 195 182 169 156 Shabwa Block 4 - 25 30 35 35 Total 208 220 212 204 191 3.03 At present, proposals are being made to increase recoveries in the Marib fields; these proposals amount to $820 million for 1991-95. It is expected that this additional investment will lead to enhanced recovery and increased extraction from the existing fields. As a result, the decline in output will be much less than what had been once expected. 3.04 Exploration activities in various parts of the country have intensified after unification, Additional discoveries have been made recently, but the size of reserves has not beer, ascertained, Based on limited data available, the reser.-es may be quite subsrtianzial and could support an extraction rate of some 300,000 b/d. It would T. ke some time, however, to develop the fields. This level of extraction. '.I.refore, is not expected to materialize until after 1995. 3.05 It may be noted th:t. even without _it:', -ional substantial reserves, oil will continue to play an ilr.portant role in :i, next development plan, due to be launched in 199., Tie known limited rLse rt:, if used prudently, would last Long enough for the counrry to lay a founda; -n for future developrnent. The depletion date can be further postponed if ga an be developed quickly to substitute for oil, e.g., in nower generation. Sl, Id additional large reserves be confirmed, oil will of course be the le -Jing impetus for growth well into the next century. Other exports. 3.06 Out of non-oil exports of about $100 milli.on in 1989, about two- thirds are from four commodities which are agriculture- and fishing-based. SMn Coffee, tea, cocoa, spices 21,7 Fruits and vegetables 20.5 Fish 13.1 Raw hides and skins 11.5 Sub-total 66.8 Others 33.8 Total 100.6 19 3.07 The country has some potential to increase exports, provided that appropriate policies are adopted to replace past, basically inward-looking, development strategy. Since unification, changes have been made on the exchange rate whereby most trade has been allowed at the parallel exchange rate. This represents a marked improvement ov - the fixed exchange regime, with generally overvalued exchange rates, pursued previously in both YAR and PDRY. The country, however, has not yet drawn up an export promotion strategy, which should be an integral part of the next development plan. In terms of potential to earn foreign exchange, the following sectors appear promising. Agriculture 3.08 As indicated above, agriculture will continue to be the most important productive sector in the economy despite well known constrainlts of limited arable land and shortages of water. Total cultivated land is only 1.4 million hectares, or less than 3 percent of the total land mass. Out of these cultivated areas, about 20 percent is irrigated; the rest depends Oil the unpredictable rainfall which regularly alternates between long spells of drought and heavy deluges causing damaging floods. A larger area of pasture exists; most of which, however, is scrub land, supporting sheep, goats, camels, and cattle. Although the pasture remains the most important factor for animal husbandry industry, an increasing number of the animals is being raised on cultivated and commercial fodder - creating competition with food crops for the same resources. 3.09 Due to rising incomes and changing demand patterns, the traditional crops such as cotton, cof'fee and coarse grains have been replaced by cash crops such as fruits and vegetables, fodder and qat. Although data on qat are not collected, it is generally believed that a large portion of resources in terms of land and water has gone into its production. Some may also be exported,9 In the past, both parts of the country were heavily promoting agriculture to produce for home consumption by banning some imports, price supports, etc. Traditional. exports such as cotton and coffee have suffered by such a policy and by the competition from _at. 3.10 An assessment of export prospects itn this sector is complicated by the fact that the two parts of the country had been run on very different principles. In the North, agriculture is in the hands of the private sector. Although the Government provided a lot of supports, it did not get directly involved except in a couple of state farms; no direct subsidies were provided, and the market determined farm gate prices. In the South, the Government directly participated, through state farms, cooperatives, support prices, price controls and subsidies; private farmers owned a smaller share of land. 9/The position of qat as an export crop remains a problem. Even if the Government were to recognize it as a cash crop and a legitimate part of national income, it could not openly promote the cultivation for export because other countries do not allow i.t to be imported legally. 20 The South had taken some liberalization measures before unification. This process continues in the new setting as state farms and state enterprises have become autonomous, running on the market principles, and as the Government has begun to distribute land to private holders/cultivators. 3.11 It may be noted that, with the lack of water, it would be difficult for agriculture to become the main engine of growth in the future, and the country cannot expect to be self-sufficient in many agricultural products. The sector, however, has potential to substantially grow, by more efficient uses of resources through modernization. Fisheries 3.12 Most of fisheries resources are along the 1,400 km. coastline and 22,000 sq.kmn. continental shelf on the Gulf of Aden and the Arabian Sea; resources along the Red Sea are limited. Fish stocks are large and capable of supporting a much larger annual catch than the current level of some 65,000- 90,000 tons. With a domestic market expanding from 2.4 million to over 11 million consumers, however, the increased domestic demand, while providing a boost for output growth, could very well lead to lower exports. In the past, many constraints have prevented the sector from realizing its potential. A lack of suitable technology, inadequate infrastructure, outmoded fishing methods/tools, poor pricing policy, inadequate institutional set-up and operations are key constraints which are being addressed in on-going IDA- financed projects. Manufactur in 3.13 Except for the oil refinery at Aden, the manufacturing sector focuses oni supplying domestic markets, with food processing, construction materials and light consumer goods dominating.'° Except for selected food processing and construction materials - activities based on local raw materials - the sector generally impe-ts inputs, performs mostly simple manufacturing, provides little value-added, and depends on a system of protection for survival.. Until unification, the government in the southern part of the country directly participated in the sector through public sector enterprises and through other direct controls. Most of these enterprises have recently been granted autonomy. In the northern part, except for very few large enterprises, including the 10,000 b/d oil refinery at Marib, the private sector is dominant. 3.14 Due to shortages of imported raw materials resulting from the foreign exchange constraint, the sector has been operating at far below capacity in recent years. And in the immediate future, lack of foreign 10/A recent examination of the constraints to expandintg industrial production is contained in World Bank, Republic of Yemen: Institutional and Policy Framework for Industrial Development. October 31, 1990. (Report No. 9008- ROY). 21 exchange will continue to be a major constraining factor. To some extent, a lack of local raw materials will be a major hindrance for the development of manufacturing in the longer-run. A more serious constraint, however, is the lack of skills and industrial organization to transform imported raw materials into exportable products. With a projected rapid increase in the labor force in the coming years, it would seem that this sector has a potential to grow if it were to concentrate on labor-intensive export-oriented industries. Touism 3.15 Tourism in Yemen has played a small role, earning some $40-50 million per yebr in recent years. It can conceivably be developed along two lines, although they are not necessarily mutually exclusive. First, establish facilities and provide services for tourists who normally spend time at resorts. There are areas that offer sites for holiday villages, especi.ally for those seeking warm climate during the winter months In the northern hemisphere. Some basic infrastructure already exists, such as the airports at Hodiedah and Aden, around which developments can be placed. Second, with a rich regional history dating back to antiquity and an exotic setting, development can be targeted at educational tourists. Some facilities already exist for this line of development, including hotels and good paved roads. 3.16 Constraints to development of tourism, however, remain challenging. Even with some basic infrastructure already in place, there remains a need for substantial additional investment for water, sewerage, etc. and for the facilities proper. The present financial constraints would make such investment difficult. To a great extent, the country as a tourist destination is relatively unknown and competition for tourists is intense. The Government has expressed the wish for greater participation of private sector capital, both domestic and foreign, and is ready to provide promotional incentives. The investment law referred to above applies also to investment in tourism. Other Services 3.17 The main potential in this sector lies with the revival of the Port of Aden. Due to the change in shipping patterns, the importance of Aden as a bunkering port has declined. The port, however, continues to generate substantial sums of foreign exchange for the country. During 1987-89, revenues generated by the port averaged about YDll million or $32 million. This is as much as total merchandise exports of PDRY, excluding exports from the refinery. Currently, the Port is in the process of being rehabilitated. The aim is to compete with other ports in the region and to attract additional bunLkering activities. A plan is also afoot to make the areas around the Port a free trade zone. Workers' remittances. 3.18 In the northern part, recorded workers' remittances (including labor income) substantially declined in recent years, from $1.1 billion in 1984 to $340 million in 1989. The decline, however, could not be explained by 22 the numbers of workers abroad, which until the Gulf crisis, were estimated to have decreased only slightly, and by the wage rates in the employing countries. The most important contributing factor was the sharp real appreciation of the Yemeni riyal vis-a-vis the Saudi currency, in which most Yemenis earned their incomes. This gives credence to the contention that with the appreciating rial, workers found it more advantageous to remit incomes through the unofficial channels and in the form of goods. As a result, total remittances - in cash and in kind - could be much larger than the amounts recorded in official statistics. Estimates on the basis of numbers of workers, wage rates, and exchange rate developments, indicate that the 1989 remittances could have been close to $1 billion. 3.19 For the southern part, workers' remittances were also the most important source of foreign exchange Dut was surpassed in the last couple of years by foreign aid. A similar decline of remittances was experienced in recent years, from $500 million in 1984 to $160 in 1989. Because the price index in that part was based on official fixed prices, with little inflation resulting, the change in the indicator for real effective exchange rate could not explain the decline in remittances. Because there was a general shortage of goods in the southern part and a lack of private investment opportunities, workers had an additional incentive to remit earnings in goods; they could also have reduced remittances to the minimum required to maintain the families. 3.20 The prospects of remittances have been complicated by the present uncertainty in the region. It is expected that with the settlement of the conflict, demand for Yemeni workers would again go up, though not to the same extent as before. Whether the workers will remit their wages, keep most abroad, or remit mostly through unofficial channels, depends a great deal on an appropriate exchange rate policy and on an improved business environment. Foreign investment. 3.21 Foreign direct investment has never played a significant role in Yemen, except for oil development in the past few years. Before unification, both parts of the country were in the process of attracting foreign capital; the South had enacted a new investment law, while the North was in the final stage of doing the same, Thc Government has recently issued a new Investment Law that it hopes will attract foreign capital through a more comprehensive set of guidelines and a much more liberal attitude. Disposal of state enterprises and property could also attract some foreign capital. Until recently, interest had been expressed by Yemenis settled abroad and by regional investors to invest in Yemen. The Gulf crisis, however, has significantly reduced prospects of inflows for the time being. External Assistance. 3.22 Yemen received considerable grants, averaging $190 million p-r year during 1986-89. Due partly to economic difficulties faced by the donor countries, grants have been declining from $272 million in 1986 to $151 23 million in 1989. Prospects for the future are uncertain because of the recent events in the Middle-East and economic and political restructuring going on in much of the traditional donors in the former socialist world. Government projections indicate only $50 million of cash grants for 1991. 3.23 As regards concessional loans, before unification the northern part expected to receive only small net transfers because of the ending of grace periods of many of the loans contracted in the past. In fact if it were to repay all scheduled debt service, the net transfers would be negative. The southern part had a much better picture in terms of the projected net transfers based on the committed loans. When combined, the net transfers would be positive but continue the declining trend from $358 million in 1988 to $104 million in 1990 unless substantial new commitments are received in the near future. (New commitments were only $134 million in 1990, compared to the peak of $1.2 billion in 1988.) Major donors have indicated that assistance for Yemen's development efforts will continue. Some, however, still await the Government's economic policy direction. Adoption of appropriate changes in policies could, therefore, lead to substantial new commitments, including quick-disbursing operations, from these donors. Needs for Further Policy Changes 3.24 Based on factors described above, the economic outlook, while promising in the long term, appears unfavorable in the short term. The Government is fully aware of the situation and that the policies adopted so far are unlikely to be sufficient to address the problem. This Government's mainly qualitative assessment is supported by macroeconomic projections up to 1992, using a macroeconomic model of Yemen." (This model will also be used to simulate a set of policy measures that will lead to restoration of economic sLability as detailed in Chapter IV). Salient assumptions and conclusions of these projections are as follows: Asstmptions. 3.25 Assumptions on the country's ability to earn foreign exchange and pay for imports are in line with the assessment of each sector discussed above. Some of the leading assumptions are the following. (i) Regarding oil, it is assumed that proposals for additional investment by oil companies will be approved and will result in some increase in output. As a result, oil extraction rates will not decline as projected in the first part of Table 7 under the assumption of no additional investment. It is assumed that the decline in the next few years will be much more gradual, as indicated in the second part of the same Table 7. The prices of oil exports are assumed to be in the range of $18.5/b and $23.8/b, as currently projected by the World Bank. ll/Detailed discussions of the model structure and its various characteristics are contained in Annex IT, A Macro-Economic Model for Yemen, of the draft paper Republic of Yemen: A Medium-Term Policy Framework sent to the Minister of Planning and Development on February 21, 1991. 24 3.26 (ii) Workers' remittances are assumed to be significantly affected by che Gulf crisis. A gradual recovery of remittances after 1990-91 is assumed, the actual amount depending greatly on the real effective exchange rates between the Yemeni currencies and the Saudi rial, as it was the case in YAR before unification. The exchange rate is assumed to be maintained at the present RY12/US$l. 3.27 (iii) In government finance, besides the recent changes such as the doubling of gasoline prices, no other policy changes are a;sumed regarding revenue generation and expenditure restraints. It is assumed chat non-oil revenues will go up at the same rate as nominal GDP. On the expenditure side, the unification and the Gulf crisis would significantly add to the expenditures - for transition expenses, for returnees assistance, and for security. These expenditures will more than absorb what would be generated by increased gasoline prices. Other major expenditures are not assumed to rise beyond growth in GDP. Conclusions 3.28 The projections are summarized in Table 8. The following salient points can be inferred from the projections: First, the budget deficit would continue to be large, YRls 18.8 billion in 1991 increasing to YRls 27.6 billion in 1992. In relation to GDP the declining trend would be reversed, from 13.3 percent in 1991 to 14 percent in 1992. Second, with limited availability of external financing from grants and loans, a large part of the deficit would need tc be financed by central bank credit. Third, the limited availability of foreign exchange and the continued excess demand would result in rapid depreciation of the free market exchange rate, reaching YRls 55/US$l by 1992. Fourth, the monetary expansion and depreciation of the exchange rate would continue to fuel inflationary pressures. The inflation rate would accelerate to average around 46 percent in 1991-92. 3.29 These trends are indicative of the non-sustainability of the present policy stance. For this reason, the Government has set up a high level committee charged with formulating policy measures needed to reverse these trends. Table 8: Selected Indicators - No Policy Changes Estimated Projected 1990 1991 1992 Budget deficit (YRls billion) 15.2 18.8 27.6 As % of GDP 15.0 13.3 14.0 Financed by bank credit (%) 59.2 84.4 91.3 Banking system claims on gov't (% rise) 15.9 22.9 30.7 Official exchange rate (YRls/US$1) 12 12 12 Parallel market rate (YRls/US$1) 15 34 55 Sana'a CPI increase (%) 34 46 45 25 IV. A Medium-Term Policy Framework 4.01 As indicated above, unification has created for Yemen greater development potential than if the two parts of the country were to remain separate. Obviously this long-run potential can only be realized under an appropriate policy environment. In the present circumstances, it would seem that the country needs a two-pronged strategy to achieve its development potential. (i) Although the development strategy will not be spelled out until the launching of the development plan in 1993, it is not too early to start delineating some major elements of the new long-term development strategy for the unified country. (ii) Because the country is currently facing serious macroeconomic imbalances and high inflation, a program for economic stabilization should be implemented. Elements of a Development Strategv: Preliminary Identification of Sources of Growth and Constraints 4.02 With rapid population growth and a limited natural resource base, Yemen would need to (i) achieve a relatively high economic growth rate to prevent real per capita income from falling, and (ii) generate sufficient foreign exchange to pay for what it cannot produce at home. It is of paramount importance, therefore, that the next development plan provide an adequate framework for growth and foreign exchange earnings, especially under the prudent assumption that no substantial additional oil reserves will be found. The following paragraphs put forward some preliminary ideas as to what prima facie seem promnising; further in-depth analyses should be focussed in these areas in order to come up with specific policy recommendations. 4.03 Although government statistics have all indicated the dire financial difficulties that have befallen the economy, casual ubservations indicate a somewhat contradictory picture at least until the recent Middle East crisis. In the North especially, brisk private economic activities were observed to be taking place. These activities cannot be quantified partly because the Government does not recognize them. For example, the production of qat is not recorded in the national income account statistics, although it is recognized that gat commands a substantial portion of incomes of households, is traded openly and taxed by the Government. Qat brings handsome incomes to growers and is a basis for substantial economic activities. Recorded remittances, which now stands at less than one-third of the peak level of the early 1980s, are widely believed to be significantly underestimated. Large unrecorded inflows, some are in the form of goods, are believed to take place and play a crucial role in the thriving private activities. At the same time, substantial transit trade between Africa and Arabia is believed to go through Yemen, providing a source of income that is not recorded. The Government has expressed the intention to let the private sector participate fully in its development efforts, including abolishing pervasive controls that were once imposed in the South. One primary objective to keep in mind when designing strategy for the next plan, therefore, is to provide an environment that will minimize the premium for the parallel market and to allow the private sector to openly engage in normal activities. With 26 the private sector's open participation, the government, has a better chance of effecting the desired economic policies. 4.04 With a limited resource base, Yemen cannot hope to become self sufficient, even at relatively high costs, in iimost products. Recent development history, particularly of the newly industrialized economies (NIEs) of East Asia, indicates thiat to achieve rapid growth and raise the standard of living in such setting, the development strategy needs to be outward-lookilng. Exports are the principal vehicle for growth and trade is the most etficient tool to acquire the needed goods that cannot be produced at home, 4.05 As discussed earlier, Yemen has a young population. The labor force, especially of low-skilled category, is expected to increase rapidly. The situation will be further aggravated as more women are willing to work outside traditional occupations, and by the large influx of returnees from abroad. To absorb these workers, the new development strategy would need to focus on labor-intensive activities. Again experiences of East Asia NIEs indicate that rapid growth i.n the labor force can successfully be absorbed with appropriate policies. The above factors would seem to indicate, therefore, that the new development strategy for Yemen needs to be private- sector oriented, outward-looking, focussing on labor-intensive export industries. The role of the Government would be focussed on providing a policy environment conducive to fostering private sector activities and export growth, orienting its investment to physical infrastucture and the development of human resources through increased emphasis on health, education and technical training. 4.06 Despite facing serious cultural difficulties, the government has reexamined its population policies and the implications of rapid population growth on the country's limited resource base. However, even if an effective program to slow down populat. ion growth were adopted in the near future, the efforts needed to provide the young population with basic education, health care, skill training, and productive emnployment will be taxing on t:he country's already stretched finanicial and technical resources. An effective population policy and a nationi-wide program to slow down the birth rate should be adopted in the next development plan, if not sooner. In this regard, it is important to include the role of women in developmernt and population policies; with increased sound knowledge through both formal and non-formal education, they will play a critical role in the success/failure of not only population but also health, nutrition, and other social policies. Potential Sources of Growth and Foreign Exchange 4.07 As discussed under production and distribution structure above, despite recent emergence of oil, government. services and agriculture remain the most dominant in the output structure. Obviously, the government services cannot be a lasting source of growth for the future. Despite serious constraints imposed by shortages of arable land and water, agriculture still 27 holds potential for further expansion.'2 Its largest potential may lie in fruits and vegetables, both for efficient import substitution and for exports. With large resources that are not yet fully exploited and a much larger domestic market, fisheries should be able to expand substantially to satisfy home consumption as well as for exports."3 4.08 Oil has provided a major stimulus for growth both in terms of output and foreign exchange earnings in the last few years. Although its long-term contribution needs to be further assessed, in the medium-term it will continue to be the most important source of foreign exchange. At the current and projected rates of extraction, the known reserves will be virtually depleted by the end of the 1990s. Since oil is a non-renewable resource, consideration needs to be given to save part of oil revenues in the form of income-generating reserves so that when oil is depleted, income will not sharply drop. The idea of setting up an oil reserve fund is not new in Yemen. Prior to unification, the YAR Governiment decided to set up such a fund. The onset of financial difficulties, however, necessitated a postponement of its operations. Alternatively, extraction rates may be kept at a low level, thus stretching out the oil era well into the next century. With large untapped reserves, gas offers great potential for contribution, not necessarily in earning foreign exchange but for domestic use so that more oil can be exported. 4.09 So far the role of manufacturing has been limited. Experiences of NIEs indicate that, under an appropriate policy environment, this sector offers considerable potential for growth by absorbing new workers, both in efficient import substitution and in export of relatively labor-intensive products. Before unification, both parts of Yemen launched investment promotion programs aimed largely at promoting investment in this sector. It would seem appropriate for such promotion to intensify under the recently promulgated Investment Law. 4.10 In the service sectors, potential lies with tourism and the Port of Aden. Despite having considerable potential for development, tourism has not been promoted. There are legitimate social and cultural reasons for the Government's reluctance. In order to minimize the degree of cultural impact that tourism could bring, the initial development could start with expansion of group tours that have been ongoing for some time, and with enclave villages. With already existing airports, infrastructure costs could be minimized for tourism villages along the Red Sea. Besides providing a good source of foreign exchange, tourism could help absorb a large share of rew graduates who are expected to join the labor force in large numbers as the young population matures. 12/Discussions on the role of agriculture are contained in Staff Appraisal Report, Agriculture Sector Management Support Project August 14, 1991 (Report No. 8432-YEM). 13/Discussions on this sector can be found in Staff Appraisal Report, Fourth Fisheries Development Project, May 20, 1991 (Report No. 8429-YEM). 28 4.11 Although it may be difficult to restore the Port of Aden to its former position, the low level of operations that the port has declined to would seem to indicate that an increased role of the port can be made. The government has already made some investment to revitalize it. A free-trade zone is also being considered for the areas around the Port, whose prospects would be considerably enhanced by activities in the free-trade zone. 4.12 Another source of foreign exchange has been workers' remittances. The present situation in the Gulf has significantly clouded the prospects of workers' remittances, at least for the immediate future. In the past, recorded remittances were highly affected by the change in real effective exchange rates between the Yemeni currencies and the Saudi riyal. If the Government is successful in preventing the real effective exchange rate from appreciating, workers' remittances should continue to be an important source of foreign exchange. Stabilization Policies for 1991-92 and a Medium-term Framework 4.13 Under the present circumstances, the prerequisite to realizing future growth potential is restoration of macroeconomic balances and stability. Various options are open to the Government. With additional expenses being incurred during the transition and to assist returnees, the Government may be tempted to further resort to bank credit and short-term external borrowing. Such a policy will clearly exacerbate the inflationary pressures that are already intensified by an overly liquid situation in the economy. Because the external debt situation is already precarious, adding to the short-term debt would make the situation more difficult. 4.14 Generally, economies facing serious macroeconomic imbalances similar to those of Yemen focus on reducing che budget and balance of payments deficits through such measures as expenditure cuts, tax increases, exchange rate adjustments, import restraints, etc. The Government has been discussing the measures in these areas in the past few months, has adopted some measures and is in the process of implementing additional ones. While many options are open, one set of measures has been found to achieve the goal, based on simulations using the macroeconomic model of Yemen. 4.15 In, government expenditures the following measures would be the most effective: (i) adopting all the currenc proposals to reduce the 1991 budget expenditures by YRls 3 billion; (ii) maintaining at the 1991 budget level non-iaiterest current and capital transfers and the non-wage portion of defense expenditures for 1992; (iii) allowing the expenditures for wages and for services in 1992 to rise at about half of the rate of inflation in 1991; and (iv) freezing recruitment for the civil service except for exceptionally specialized skills. 4.16 These expenditure measures should be complemented by revenue measures which include the following as far as it is practical: (i) Convert specific customs duties to ad valorem; for goods remaining under specific duties, adjust the rates periodically so that the rates in relation to import values remain approximately constant. (ii) Apply a market-guided conversion 29 rate to imported goods for the purpose of calculating import duties, beginning immediately with YRls 25/US$l, the prevailing rate in the parallel market (vis-a-vis the official rate of YRls 12/US$l being used at present), and adjust this rate periodically. As the foreign exclhange for most import:s is already obtained at the parallel rate, valuing imports at this rate will restore the tariff rates, which are effectively declining in relation to the values of imports, to their intended level, It should be noted that: the parallel rate is likely to be more realistic than the official rate because the former is obtained in the market and applies to about 80 percent of trade. (iii) Adjust the rates of taxes on goods, s- ;ices, zakat, and stamps so that revenue yields stay approximately constant in, real. terms. And (iv) adopt measures to keep the yields of non-tax revenues constant in real terms. 4.17 Exchange rate measures include (i) adopting the market-guided rate as the conversion rate to imports of the four essential commodities, beginning at YRls 18/US$l in 1991, gradually moving to a totally market-determnined rate; (ii) adopting the market-guided rate for the official exchange rate; and (iii) allowing foreign exchange dealers to operate without administrative hindrance. 4.18 Interest rates which are being unified by raising the rates applied in the Southern Governorate to those of the North, ought to be adjusted with the view of pricing credit closer to its market value. In order to secure a sharp slow down in monetary expansion, government borrowing ought to be from the general public through the issuance of zero-coupon investment certificates, at the imputed rates of return sufficiently remunerative to attract buyers. 4.19 Adopting these measures should reverse the trends of the past few years. As indicated in Table 9, the budget deficit would decline both in absolute terms and in relation to GDP starting in 1991. Inflation would peak in 1991 and sharply decline in 1992. 4.20 These trends toward stability can be further enforced in the medium-term by continuation of restraining fiscal and monetary policies as well as by the market-guided exchange rate and interest rate policy. Ihe projections in Table 9 assume that three major expenditure items, namely, wages, materials and services, and defense will be allowed Lo grow about 25 percent less than the growth in nominal GDP in 1993, and at the same rate of nominal GDP thereafter. Other current expenditures, excluding for interest and for investment (most of which is foreign-financed), will also grow no more than nominal GDP in 1993-95. 4.21 The seriousness of the difficulties facing Yemen and the urgency of adopting an adjustment program would seem to indicate that the country would go through a difficult period for the next 2-3 years before the turn around. Again it should be emphasized that these projections are carried out purely for illustrative purposes. Simulations carried out within the framework of the model used here could be a valuable tool for assessing implications of various options under consideration by the Governmenlt. 30 Table 9: Selected Indicators - With Policy Adjustments 1991 1992 1993 1994 1995 Budget deficit (YRIs billiorn) 13.3 8.1 8.5 5.0 3.4 As % of GDP 9.9 4.9 4.5 2.4 1.5 Financed by bank credit (%) 77.9 10.3 - - - Velocity of money 1.75 2.05 2.26 2.44 2.64 Balance of payments deficit ($MN) 703.5 352.3 303.2 274.3 263.7 Official exchange rate (YRIs/US$) 12 30 45 50 55 Parallel market rate (YRls/US$) 32 40 45 50 55 Sana'a CPI increase (x) 38 15.3 11.5 7.3 5.4 31 Statistical Anneg Table 1.1 Population 1.2 Population in Major Cities in 1986 1.3 Labor Force by Economic Sector, Sex and Rural/Urban Area, 1990 2.1 National Accounts 2.2 Production of Major Crops 2.3 Total Cropped Area of Major Crops 2.4 Yield of Major Crops 2.5 Industrial Production by Sector, 1987-89 2.6 Number of Industrial Establishments by Sector, 1987-89 2.7 Average Number of Employees in Organized Industrial Establishments, 1987-89 3.1 Balance of Payments 3,2 External Trade by Commodities 3.3 External Debt 3.4 External Debt (as of end-1990) 4.1 Money and Credit 4.2 Central Government Budget 5.1 Exchange Rates 5.2 Consumer Price Index in Major Cities by Commodities & Services, 1988-89 5.3 Consumer Price Index by Cities, 1985-90 5.4 Consumer Price Index by Cities 5.6 Weighted CPI for Urban Area 0: \Stat. ann 32 TAKEg 1.1 : PCPUAUTICh .....,....._.. 19B5 1986 1987 1968 1969 1990 Total 9,811 10,135 10,475 10,830 11,200 11,5W8 North 7,661 7,919 8,190 8,474 8,771 9,083 South 2,150 2,216 2,255 2,356 2,429 2,50 Source : orld Bank (PHRIO). TALE 1.2 : POPLLATION IN OAJCR CITIES in 1986 .............................................. (thourds) PopuiLtion Share (000) (M) Same' 427 49.8 Teiz 17E 20.8 :obfdah 155 18.1 Ibb 49 5.7 Ohmnr 48 5.6 Total 5 Cities 857 100.0 Total Pcp in 5 Cities in the Worth 857 67.8 Total Pop in Major Cities in the South 407 32.2 Total Population in Major Cities in Yae 126 100.0 Source : Ministry of Plsnning nd Develtopnt ard Central Statistical Orgenization 33 TAKE. 1.3 : LA8C FOIC BY ECOOIC SECTUR, SEX, AND RtALAURM AREA, 1990 ................. ................................ .,,,,,,.............................. ................... Total Nale Fmamle Fenile Workers as X Nudbr X Nu,b r X Nuner X of Total Labor Force APrlculture 1615320 62.0 958692 50.2 656628 94.4 40.7 ini,u & ousrryiru 7?3f 0.3 729 0.4 64 0.0 0.9 Mnum,ectLrrir 1054 4.0 89291 4.7 16191 2.3 15.3 Et ctricity & Cam & h ter 17663 0.7 17110 0.9 5 3 0.1 3.1 Contructicn 144941 5.6 144129 7.5 812 0.1 0.6 WiFcemle 4 Retail Trade 18491S 7.1 178110 9.3 6905 1.0 3.7 Tru port & Ccm.aication 10,459 4.0 103790 5.4 669 0.1 0.6 Finwnec & Businea 10196 0.4 9193 0.5 1005 0.1 9.9 Social & Persor al Servicaa 414621 15.9 401560 21.0 13061 1.9 3.2 Total 26049Z2 100.0 1909134 100.0 695788 100.0 26.7 Total Rural Urban Urban Workers as X "LAW r X Number X umber X of lotal Labor Force Agriculture 1615320 62.0 15J5275 74.2 30045 6.4 1.9 Mining & 4Ourryirg 7323 0.3 6186 0.3 1137 0.2 15.5 Ma ufacturing 10542 4.0 60557 2.8 44925 9.6 42.6 ELectricity & Gm L water 17663 0.7 638S 0.3 11278 2.4 63.9 Construction 144941 5.6 102ODT 4.8 42134 9.0 29.1 %holmsae 4 Retail Trade 184915 7.1 919 4.6 86096 18.4 46.6 Trwuport & Comnnicatirn 104459 4.0 649B4 3.0 39475 8.4 37.8 Firnce B uiness 10196 0.4 1517 0.1 8681 1.9 85.1 Social L Personal Services 414621 15.9 210236 9.8 204385 43.7 49.3 Total 2604922 100.0 2136766 100.0 468156 100.0 18.0 Soumes Ministry of Plamirf & Develpiment and Central Statistics Orgnization. 34 TABLE 2.1: ATIONAL ACW.8TS ............................. (mitliam of ourrmnt YR) 1 ff5 1966 198r 19e8 1909 1990 .................................................................................... DP at morket prices 399C5 46436 53572 62010 74068 98124 GDP at factor cost 35389 41219 489Z3 56525 67371 91002 A@raJultwre 9161 12337 13235 13882 15081 19191 Ircatry 7553 8296 IO2 13799 16315 19162 Minfng and cu rryirg 241 382 580 2941 3676 4502 mrtifacturitr 4352 534 6440 7239 8713 10565 Services, etc. 18675 2C5C6 25460 2E047 35975 51949 I Wts of 0G 17158 15112 21079 24114 24514 29485 Eaports of CS 2526 2263 3429 8053 10148 12186 RCmcue balm"e -14632 -1249 -17660 -16361 -14366 -17299 Total Exjpondturms 55401 59453 71353 7es29 MU842 115422 Total conuuticn, etc 474ft 52004 62178 67076 77178 102043 Genral gwnrit 92l 9554 12039 153I 2 16159 24216 Private, etc 38Z77 42450 50139 51694 61019 7727 Gross kc ustic invastmtn 7915 7419 9175 11753 1664 13379 IFI 7972 7623 9030 1132 11511 13322 Nanfinrcal Pa h Sector Geeal C mwn . . .. . .. .. Contral Govt. State ad Locat Govt. Monfinarcial Pit. Enterp. Private Sector Chn- in Stocks -57 174 145 411 153 57 Statistical discrepoecy -864 -168 -131 388 -408 1 Gross dawutic sving -7581 5568 -86 -4996 3110 -3919 Net factor irnam 9481 849 993 4635 3368 8457 Net current trnefers 944 2115 191S 1314 1606 1417 Gros natiorel saving 2844 4596 3202 953 1864 5955 !t Indirect Taxm 4516 5217 4649 5552 6697 7122 Indirect Taxe SLhaidies Gross nationai prodt 49386 54485 63465 66715 77436 106581 IFS corwi-n factor 7.3633 9.6392 10.3417 9.717 9.7600 IEC caonrsion factor GOP at np (aur. mil . USS) 6225 6267 5959 6400 7581 8305 Av Exch Rate (RialsAJSS) 6.4100 7.4100 8.9900 9.700 9.7700 11.8150 ...... ................ ............................... ........................................ Note a/ Data for 1905-89 result from adding notiorul ircam ac.rwt data of Yom. Arab Relic ard the People's Dacratic Rtplic of Yome, at the official ex owa rate. The two were unified in 1990 ad the 1990 cdta represent a nr series that nay not be strictly caoperable to dota of earlier years. Source Ministry of Planira * Deslopnent ard Central Statistics organizatin. 35 TABLE 2.2 : PRSUCTIOd OF MAJC COPR ..................................... (thowun mtric tam) tX change p.a.) 1937 1985 1989 1990 1988 1989 1990 Soegh V W s illet 508.8 594.1 574.4 491.3 16.8 -3.3 -14.5 "size 54.0 57.5 68.5 65.6 6.5 19.1 -4.2 Whoot 112.0 142.0 162.6 155.0 26.8 14.5 -4.7 8lrley 40.6 48.6 58.6 55.0 19.7 20.6 -6.1 Total Cwreals 715.4 842.2 84.1 766.9 17.7 2.6 -11.2 Dry legLxe 39.5 46.2 73.6 75.8 17.0 59.3 3.0 Selem 5.0 6.0 8.1 9.4 20.0 35.0 16.0 Potato" 119.2 127.6 141.0 160.0 7.0 10.5 13.5 Veat bles 433.1 511.0 441.5 375.8 18.0 -13.6 -14.9 Fruits 294.9 347.0 313.1 313.1 17.7 -9.8 0.0 Grqie 129.2 133.4 134.7 142.9 3.3 1.0 6.1 Dates 34.7 33.0 25.0 20.7 -4.9 -24.2 -17.2 Coffee 3.1 6.5 7.8 7.4 109.7 20.0 -5.1 Total Fruits & VeOptSlbe 1058.7 1210.7 1144.8 1105.1 14.4 *5.4 3.5 Tobro 5.3 6.4 4.4 6.8 20.8 *31.3 54.5 Cotton 6.6 7.8 13.0 7.8 18.2 66.7 *40.0 Alfifa (F^d r) me no 120.2 119.0 re na -1.0 Total Wn-Food Agriculture na re 137.6 133.6 me na -2.9 "eMt 35.2 36.4 37.5 37.7 3.4 3.0 0.5 Poultry Meet 54.6 77.3 60.0 39.0 41.6 -22.4 -35.0 Milk 140.6 147.6 152.2 153.7 5.0 3.1 1.0 Eg (millton eggs) 293.0 318.0 338.0 335.0 8.5 6.3 -0.9 Total Nest & Milk & Eggs 523.4 579.3 587.7 565.4 10.7 1.5 -3.8 Surface Water Fish 55.7 57.8 58.1 no 3.8 0.5 no Deep Water Fish 52.3 41.7 43.1 re -20.3 3.4 na Other AqAtic Catch 4.2 3.5 5.1 no -16.7 45.7 na Total Fish 112.2 103.0 106.3 re -8.2 3.2 na Source : Ministry of Planirn & C4ntral Statistics Orgvrizatian 36 TAILE 2.3: TOTAL cP3 AMt OF MAjo P ............................................. (tuard hactrm) (X dwws p. a.) 1907 1905 1909 1990 19e8 19e9 1990 SorVhLu atd millet 687.5 696.8 681.0 643.0 1.4 -2.3 -5.6 Hein 43.4 45.2 51.6 51.5 4.1 14.2 -0.2 Wheat 74.1 82.1 94.4 90.0 10.8 15.0 3.8 liwisy 47.0 44.9 53.0 52.0 4.5 18.0 -1.9 Total Ceels 852.0 869.0 880.0 844.5 2.0 1.3 -4.0 Dry logo" 27.4 30.6 46.1 49.3 11.7 50.7 6.9 See 15.7 15.6 22.0 18.6 -0.6 41.0 -15.5 Potatos 9.6 10.0 11.5 13.6 4.2 15.0 18.3 Vageti" a r re re no na n Fruits no re 54.5 56.5 rn no 3.7 Grqs 14.7 15.0 15.3 17.1 2.0 2.0 11.8 Date 16.0 16.2 16.5 15.3 1.2 1.9 -7.3 Coffe 18.0 14.5 27.2 24.8 -19.4 87.6 -8.8 Total Fruits & Vetbtab noa rn 193.1 195.2 r n 1.1 Tobcco 3.3 4.0 2.8 3.7 21.2 -30.0 32.1 CottCn 9.5 9.6 15.8 10.4 1.1 64.6 -34.2 Alfalfa (Fod*r) 14.8 15.0 16.7 16.6 1.4 11.3 -0.6 Total Man-Food Agriculture 27.6 28.6 35.3 30.7 3.6 23.4 -13.0 Total Agriculture r r 1108.4 1070.4 na na -3.4 Source : Ministry of Pltamirg & Central Statistics orgwization 37 TAKU 2.4 X YIELD Of MUM CM .............................................................. " (mtric t per hetar.) 196 19 1969 19o ........................................... .................................................................... Ceels so,W,d of iltet 0.74 0.5 0.8 0.76 Hein i.24 1.2t 1.33 1.2t West 1.51 1.73 1.72 1.56 betsy 0.M 1.011 1.11 1.06 Fruits & Vagate" WY teu.ms 1.4" 1.51 1.60 '- sum 0.32 0.311 0.37 1 Potatoes 12.42 12.76 12.26 11.76 Veetdab no no nc no Fruits re ro 5.74 5.54 Oea 8.79 8.89 6.80 8.36 Dates 2.17 2.0f 1.52 1.35 Coffee 0.17 0.45 0.29 0.30 .................................................................. Saourc : Ministry of Pltmire & Cantrai Statistics Organization 38 TAKEL 2.5 : INTRIAL PRGWUCTIIO BY SECTOR, 197-89 */ .................................................... (thou' nc of Yant Riats) 1967 1968 1989 Sector Total South b/ North Total South b/ North Total South b/ North Puttic Seactor 3041640 99I.°2 2047348 3256517 1021322 2235195 15166551 1122569 14043962 Co-operitiwe Sector 65116 64662 464 6S309 61706 603 69787 69742 45 Nixod Sector 939318 268791 670527 103427 272425 761847 987171 265541 721630 Private Sector 56^i65 90493 5596162 6561211 94700 6466511 7275181 92687 7182494 ..................................................................................................................... Total 9732728 1418U7 8314501 10914309 1450153 9464156 234960 1550539 21948151 1967 1988 1989 Irckstriat Brarch Total South b/ North Total South b/ North Totat South b/ North ..................................................................................................................... Extraction Inckstry 97660 48812 48848 106281 63482 42799 11820781 79479 11741302 Food 5238503 471952 '766551 5795864 468187.2 5327677 6194634 532870 5661764 Textiles, Clothing, e Prodxtts 343777 132506 211271 417055 133416 283639 449061 161062 287999 Wood & Wood ProdLcts 65660 61508 4152 109.16 62297 46272 111574 69537 42037 Paper, Printing, & Rbt ications 275830 50825 225405 368450 69696 298554 446121 60177 385944 Ohemicals & Oil Refining 277S957 495204 2278753 3005546 510214 2495332 3478360 496649 2979711 Building Materiats 690003 34185 655818 840918 28943 811975 698357 31174 667183 Metellic Proc*xts 233408 123235 110173 259588 113118 146470 299s02 117590 182212 Total 9718798 1418227 8300571 10902871 1450153 9452718 23498691 1550539 21948152 Notes :/ The total procxtion of irdLstrial sectors mey slightly differ fran that of indrstrial branches. bl Values of prodLtion in emeni Dinars were corwerted into Yorni RiaLs at the 26 YR/YD rate. Source Ministry of PLamning & Developmnt 39 TABE 2.6: WAS OF 0IIWU5IAL ESTAaLISWETS BY SECTO, 197*89 a/ ................................. ......................................... 1987 1988 1989 Sector Total South orth Total South North TotaL South North ...................................,,,,,,,,,.............................,,,......,,,...... .. ..,,,............ * ................................... .................................. Put41c Sctor 47 32 15 48 33 15 47 33 14 Coqpreti sector 9 8 1 9 8 1 9 8 1 Mixed Sector 12 10 2 13 11 2 13 11 2 Private Sector 120 21 99 132 23 109 137 23 114 ............................................... ..................................................................... Total 188 71 117 202 75 127 206 75 131 1987 1988 1989 ................................................................. ................................................... ................................. ................................. Irdstrial Brarch Total South North Total South North Total South North Extrwction Irdustry 9 2 7 9 2 7 8 2 6 Food 55 17 38 58 19 39 61 19 42 Textiles, Clothing, & Prodcts 26 19 7 28 20 8 29 20 9 Wood & Wod Procticts 5 4 1 6 4 2 6 4 2 Papr, Printing, & Pub li cations 8 4 4 9 4 5 9 4 5 Chmaicals & Oil Refining 38 12 26 42 12 30 47 12 35 Building Materials 21 3 18 20 3 17 19 3 16 Metallic Prodicts 26 10 16 30 11 19 27 11 16 ............................................... ...................................................................... Total 18 71 117 202 75 127 206 75 131 ............................................... ..................................................................... Mote : a/ Excluding mIl ccnpaies Widh had tau than 10 eployee. Source Ministry of PLn ning & Developant 40 TA4E 2.7 AVERAE KIER Of EHPLCYS IN ORGANIZED ISDUTRIAL ESTABLISHEMETS, 1987-89 a/ (excludinrg uploy.ee in the oil extrectien irdstry) 1987 1988 1989 Sector South North South North South North Public Sector 8245 36SZ 8C34 3836 8277 4045 Co-cp rative Sector 442 11 935 12 915 7 MHixed Sector 1217 429 1279 499 1277 474 Private Sector 365 10445 389 10432 370 10541 1987 1988 1989 ................................................................................... ........ ....................... ................................... ............ InduBtrial SBarch South North South North South North Extraction Irdustry 492 271 515 281 508 235 Food 1979 7415 2200 7253 2256 7761 Textiles, Clothing, & Products 1899 2111 1889 2274 1885 2259 Wood & Wood Prockts 787 24 812 259 798 246 Paper, Printing, & Publicatiors 620 145 567 209 574 231 Chemicals & Oil Refining 3140 2189 3215 2217 3346 2484 Building materials 280 1612 302 1540 291 1571 Metabic Products 1072 780 1137 746 1181 598 Note a/ inciuding swalt corpdWies which had less than 10 eiLoyesa. Source Ministry of PLarnirV & Devetopmo t 41 TABLU 3.1 ALANCE OF PAtiENTS s/ ....................... .......................... .. (million of ourrwnt LUS) 1988 1989 1990 p/ 1991 g1 ...................................................... ............................. Exports of GS b 877.1 1089.9 926.0 1050.0 4rshardsdi (FCS) 519.4 693.4 626.0 728.0 ONw OiL 397.9 538.9 515.0 528.0 Servica 357.7 396.5 300.0 322.0 leparts of GS b/ 2669.5 2664.7 2223.0 229e.8 NeMrdwidi (CIF) 1968.5 1874.8 1671.0 1719.0 Services 7D1.0 789.9 552.0 579.8 Rocurce balm" 1792.4 1574.8 -1297.0 -1248.8 Net factor ir c/ .. Factor receipts .. Factor p yn ts .. Total inteest paid (DRS) .. Intoert dui bit not paid .. Other Factor Pw ymmta & disc. Not ewrrgnt trwnfers 543.0 371.7 977.0 340.0 Current Roeipts 574.5 409.7 1000.0 350.0 Workari ramittgce 574.5 409.7 1000.0 350.0 Other eur. trwfnrs .. . Current Peornmts 31.5 38.0 23.0 10.0 Curr.A/C Bal bufor Off. Trarufer -1249.4 -1203.1 320.0 -908.8 Not All Off. Trrnsfer 150.7 193.8 104.0 200.0 Curr.A/C Bal after Off. Trarsfer -1098.7 -1009.3 -216.0 -708.8 LT Cqpital Inflows 762.3 841.8 100.4 -5.0 Direct itweso rt .. Net LT BOrrowing (DRS) 762.3 841.8 100.4 -5.0 Difbursuiwvts (inmd SC) 1075.5 1086.2 674.0 838.0 Rapoyment (incL short-tenm) 313.2 244.4 573.6 843.0 Other LT Infloig (net) 0.0 0.0 0.0 0.0 Total Other itame (Not) .. Net short-ten capital .. Change in Int. Arrears (Net) .. Other Net ST Capital .. C pital flou n.e.i... . .. . Errors wnd anissioms 4.6 78.3 0.0 0.0 Charles in net reseres .. Net credit frosm IMF .. RAee, oheqna n.e.i. .. Gross Reserse exc Gold (IFS) 365.0 324.4 . Gross Resrvwe irc GoLd (IFS) 367.3 326.7 ............................................................................................................ ...................... Notes : a/ Data for 1990 and thereafter represent a new series. They ae not stricly ccnprable to data for earlier years. bl Ircltuding factor irrome. c/ Date are not iailbLe separately. g/ Gov mrn nt projectioa. p/ Preliminary estimates by the mission. Source : Cntral Bank of Yemen and the mission. 42 TOLE 3.2: 0CTML TRADE BY ITIES ............ ...................... _.. (millifom of current YR) 1967 1986 19W9 ........................................................................... EXPtTS: Food an Live A/nisl 413 686 766 kaea and Td eco 74 89 95 Raw "Mteials 124 179 23 Minrals, Fuets, Lbricwnts 308 4,AM 6165 Anfial Veetable Oils & Fats 0 2 Z ahmicals 2 10 38 Nwsjfac ttd Goads 19 35 42 Pachifery & Trwuort Equip. 6 9 2 Misc. amfactured Article 5 5 10 lbtiwafafed 0 1 0 Total 950 5338 7372 IWTS Food sid Live Anials 4003 57M 5W evra_ ard Tdsoo 269 363 290 Ra MteriaLs 196 466 512 Minrals, Fuels, Lubricmts 1133 2946 3043 Animil & Vegetadl Oils & Fats 295 356 416 Chutlcals 1076 1637 1181 Mufactured Goods 26 3892 3188 Machinery & Tr port Eq.jip. 3013 3084 3516 Misc. Marufaetured Articles 719 911 891 Lti.muified 6 30 7 Total 13589 19390 18928 .......................................................... ..................................................................... Note: a/ Values of extenml trad in Yeni Diners from the south were can - verted into Ywemni Rials at the 26 YR/YD rate. Source Ministry of Plamnirn & Development wd Central Statistics Orguizatian. 43 TAKLE 3.3 : EXTERNAL DEBT (m of erli-1990) .......................................... CUSS milLiors at Curr nt Prices) 1985 1986 1987 1988 1989 1990 ............................................................. ........................................................................... DIaSMDSDENT P.blic & P.blicly Gusr. LT 278.6 351.4 389.6 637.5 504.2 265.8 1. Official Creditors 2, .8 281.4 389.6 555.7 466.0 265.8 a. W.ttilateral 115.6 102.8 95.5 125.0 92.4 58.0 Corcesaiaul, 87.1 88.4 85.7 88.2 91.5 57.1 Of Which IDA 45.1 46.7 40.9 49.2 43.7 28.3 Ncanrsaiornl, 28.5 14.4 9.8 36.8 0.9 1.0 of which IBR 0.0 0.0 0.0 0.0 0.0 0.0 b. Bilateral 162.1 178.6 294.0 430.7 373.6 207.7 Ccreesicna 138.4 140.2 293.3 430.7 373.6 207.7 Norcncei am l 23.7 38.4 0.7 -0.0 -0.0 0.0 2. Private Creditors 0.9 70.0 0.0 81.8 38.2 0.0 a. Smp.lers' Credits 0.0 0.0 0.0 0.0 0.0 0.0 b. Ca,wmcial Barns 0.0 70.0 0.0 81.8 38.2 0.0 c. Other Private 0.9 0.0 0.0 0.0 0.0 0.0 Private Nan-Cueranteed LT 0.0 0.0 0.0 0.0 0.0 0.0 Total LT Disbursements 278.6 351.4 389.6 637.5 504.2 265.8 IMF PurchdA 0.0 0.0 0.0 0.0 0.0 0.0 Net Short-Term Capitrl .. .. .. Total Disbursaimnts 278.6 351.4 389.6 637.5 504.2 265.8 REPAYMNT (actual) Public & Publicly Guar. LT 68.3 76.8 145.6 161.2 126.7 111.9 1. Official Creditors 64.3 71.9 115.2 130.9 63.6 71.9 a. Aultilateral 22.4 27.3 65.1 65.7 21.8 26.4 Cccessiaul, 14.0 19.5 22.2 26.7 20.9 25.5 of which IDA 0.8 1.3 1.5 1.7 2.2 2.3 Ncrccre,iorel, 8.4 7.8 42.8 39.0 0.9 1.0 of bhich IBRD 0.0 0.0 0.0 0.0 0.0 0.0 b. Bilateral 41.9 44.6 50.1 65.2 41.7 45.5 CorressiJnat 37.8 43.0 47.7 62.8 40.9 45.5 NonroAcessionml 4.1 1.6 2.4 2.4 0.8 -0.0 2. Private Creditors 4.0 4.9 30.5 30.3 63.1 40.0 a. Suppliers' Credits 1.5 1.9 2.3 2.2 1.0 0.0 b. Camercial Sarks 0.0 0.0 24.7 24.7 60.7 40.0 c. Other Private 2.5 3.0 3.5 3.4 1.4 0.0 Private Non-.rwnteed LT 0.0 0.0 0.0 0.0 0.0 0.0 Total LT Repeymets 68.3 76.8 145.6 161.2 126.7 111.9 IMF Repurchaes 6.8 19.9 21.0 8.3 4.2 1.2 Total LT Repay + IMF Rep.ur. 75.1 96.7 166.6 169.6 130.9 113.1 Momrae.ni I tern: Stock of Arrecr (prircipal) 164.7 230.3 334.0 433.9 537.6 789.7 aI TMENT IBR commitments 0.0 0.0 0.0 0.0 0.0 0.0 of hhich fast Disb.rsirn 0.0 0.0 0.0 0.0 0.0 0.0 IDA camitnents 43.6 47.2 66.0 43.2 30.5 57.8 of which fast Disbursirg 0.0 0.0 0.0 0.0 0.0 0.0 ........... ................... .... .. . . .. .. . . . . .. .. . . . . . . . Source : IECDI. 44 TABLE 3.4 : EXTERNAL DEBT (as of erd-1990) .......................................... (USP milLiom at Current Prices) 19S 19%6 1967 1983 1969 1990 .................................................................................... INTEtEST PAYMEWTS (actual) Public & PbLicty Guar. LT 26.1 51.6 62.3 62.6 53.1 35.0 1. Official Creditors 24.7 4A.4 57.8 59.7 40.0 28.1 a. uiltilaterat 12.5 15.8 18.7 16.5 12.4 14.3 cns eicnm , 10.1 11.8 13.0 1X.1 10.2 11.9 of ,hich IDA 3.1 3.6 4.1 4.6 3.9 3.5 Nwunnc ssior, 2.4 3.9 5.7 2.3 2.2 2.4 of Which I8RD 0.0 0.0 0.0 0.0 0.0 0.0 b. Bilsatera 12.2 32.6 39.2 43.3 27.6 13.8 Cortmasinal 10.6 28.5 29.6 29.9 27.2 13.8 Nornooasaioral 1.6 4.1 9.6 13.4 0.4 0.0 2. Private Cr ditors 1.4 3.1 4.5 2.9 13.1 6.9 a. SuLpiiers' Credits 0.6 0.7 0.6 0.4 0.1 0.0 b. Camarciael %a*s 0.0 1.8 3.3 2.1 12.8 6.9 c. Other Private 0.8 0.6 0.6 0.7 0.1 0.0 Private Won-Oarwntead LT 0.0 0.0 0.0 0.0 0.0 0.0 Total LT Interest 26.1 51.6 62.3 62.6 53.1 35.0 IMF Service Charge 1.9 1.7 0.7 0.1 0.0 0.0 Inteoe t Paid on ST Debt 28.2 22.6 30.8 47.0 50.2 28.0 Total Interest Paid 56.2 75.8 93.8 109.7 103.3 63.0 MrarwA Item: Stock of Arrear (interest) 20.0 31.5 47.7 63.5 115.7 205.6 DEBT OUTSTANDING & DISS. PLblic & Publicly Guar. LT 2960.0 3433.9 4023.0 4440.0 4700.2 5155.2 1. Official Creditors 2961.9 3348.5 3965.3 4331.9 4617.2 5111.7 a. multilateral 695.0 793.8 885.8 917.3 970.7 1038.3 Comesaionsl, 629.3 713.9 829.0 865.5 923.5 1002.0 of bhich IDA 348.1 406.6 473.4 509.8 546.5 602.4 Iorsaoessione, 65.7 79.9 56.9 51.7 47.2 36.4 of khiich IBRD 0.0 0.0 0.0 0.0 0.0 0.0 b. Bilateral 2266.9 2554.7 3079.5 3414.6 3646.4 4073.4 Coressiona 2175.9 23.41.6 2754.6 3012.2 3335.8 3819.7 %oncancessionaL 91.0 213.1 324.9 402.4 310.6 253.7 2. Private Creditors 18.1 85.4 57.7 108.1 83.1 43.5 a. SuLpiers' Credits 7.9 7.2 6.2 3.3 2.3 2.6 b. Ccmmrcial Banks 0.0 70.0 45.3 102.5 80.0 40.0 c. Other Private 10.2 8.1 6.2 2.3 0.8 0.9 Privste Non-Guaranteed LT 0.0 0.0 0.0 0.0 0.0 0.0 Total LT O3D 2960.0 3433.9 4023.0 4440.0 4700.2 5155.2 Us. of IMF Credit 47.7 32.4 14.8 5.7 1.3 0.1 Short-Tenm Debt 301.0 374.2 458.4 68.0 909.0 957.0 Total Exterrul Debt 3328.7 3840.5 4496.2 5133.7 5610.5 6112.3 Principal Redcxticn Due to: 1. Debt,Equity Sbmps46uybtcks .. .. .. 2. Debt Excdhnge .. .. .. . 3. Debt Forgiveness .. .. .. MeOrN rum Iten: X Debt an Cacessional Terma 84.3 79.6 79.7 75.5 75.9 78.9 X Debt at Veriable Int. Rates 0.3 2.0 1.1 2.0 1.4 0.7 Preferred Creditor OS .. .. .. Shre of IERD Portfolio 0.0 0.0 0.0 0.0 0.0 0.0 .............................. .................................................................................... Surce : IECDI. 4 5 TABU 4.1: NOY nd CEWIT (millIom o aurrsnt Yr) 1905 1986 1ser 19as 19a9 1990 Aml Ow^es: Not Daometic Credit 6319 11046 6653 6040 6271 1399 To Govmrvn nt .doet 6440 8016 7709 8712 6331 7771 To Priv Sect & PUb Enter. 905 282 -1539 5 9s57 2990 Foreign Aaaets *1027 2748 483 -3215 1017 3234 Totol As tt 4 LiabiUti1 6319 11046 6663 6040 6271 13996 Mwu and Cui mnm" S699 l¢S4 4216 4407 342? 11411 Net Other Liabilltlto 620 683 2437 1633 2845 2584 Etl-of-etor Stocks: Net Omotic Credit 37469 48515 55168 61206 67479 81475 To Gtwvt Budget 26004 36110 43819 52531 58862 6663 To Priv Sect 4 Pub Enter. 77VS 7991 6452 6Q95 79S2 10942 Foreign Asetr 1667 4414 4897 1683 666 3900 Total Asets & Liabilitlet 37469 4851 55168 61208 67479 81475 Nwuy and Qo i mney 34268 44631 4E847 53254 56681 68092 Not Other Liabititi n 3201 3884 6321 7954 10799 13383 Mrnar I tuo: Internrtiaal GCies Reserves (mi l US) ChJwe" crirV th year 86 67 -272 -41 Stock at end of yesr(D.c 31) 486 572 639 367 327 417 Source : Central Bank of Yemwe. 46 TSU S.4 a a CSU PICE 101 BY CITMI2 ^@*e@@w..................... Z ........ w9@....... (hnM1 psVmtq dwes) 196 137 19 198 19910 Saw. U.5 21.3 16.4 20.1 Tell 5.1 20.5 9.3 18.9 Noekth 2V.S 17. 11.4 17.5 1*b b3.2 a2. 12.1 18.3 Dhawr 32.6 20.4 14.9 21.1 0.9 2.5 0.3 ^.0 34.2 Iares: Ministry of Pltwviu & Di vE TAU 5.5 I W1IJ11 CMaS PRICE INWi. FULM ANA IN TNE NUTN ..................................................................... (15*100.0) Pqjtatiai City owre 195 19U6 7 19 ¶96 1990 Mm's 49.8 49.8 66.S $1.0 94.3 113.3 Tail 20.8 20.6 26.4 32.1 35.0 41.6 Noibidsh 18.1 18.1 23.1 27.1 70.2 35.5 lbb 5.7 5.? 7.1 8.? 9.8 11.6 Ohmr 5.6 5.6 7.4 9.0 10.3 12.5 (Jrtn ArP 100.0 100.0 130.7 157.9 179.6 214.5 287.9 Growth rate no 30.7 20.6 13.8 19.4 34.2 Swre : mini stry of Pwalirn L Dowl,t TAMU 5.6: WIUOt CPT LW. UWN IA ....................................... (195 * 100.0) lure 195 113 1W 19 1969 1990 mm ( Cftiii) 67.8 67.8 a.6 107.0 121.8 145.4 195.2 M (An) 32.2 32.2 32.5 3.3 35.4 35.4 44.8 ALL UVN AMA 100.0 100.0 121.1 140.3 155.2 173.8 240.0 Gramth t no 21.1 15.9 10.6 1S.2 34.2 Sae a lMinistry of PtInayn & D s"em 50 TABLE 5.3: CRSL# PRICE IDiEX SY CITIES, 1905-90 ................... ............................................................... Su er a 1969 (Aen), 1977/78 (other) 1965 1986 1997 198 1969 19S0 Sar's 220.8 294.8 359.0 418.0 502.0 Taiz 217.0 27B.0 335.0 366.0 435.0 Haoeidsh 222.0 283.0 333.0 371.0 436.0 Ikb 227.0 282.0 340.0 3M.M 459.0 Dhgir 222.0 294.8 355.0 408.0 494.0 Adn 353.0 356.0 365.0 366.0 366.0 491.2 (Sageymir * 1985) 1965 196 19 191X 1969 1990 Sa.'a 100.0 133.5 162.6 189.3 227.4 Taiz 100.0 128.1 154.4 168.7 200.5 Hadaidsh 100.0 127.5 150.0 167.1 196.4 bb 100.0 124.2 152.5 170.9 202.2 Dhamar 100.0 132.8 159.9 183.8 222.5 Adon 100.0 100.9 103.4 103.7 103.7 139.2 Sa.rce: Ministry of Plarinr & Dlwpimnt 49 TABLE 4.2 : lElThL OM/OIT UDLT .............. ....................... (milieam of ajrwnt Yrwi Rits) 1937 19K 1S5 p 1990 p 1991 b Df rect Tauo 1562 3061 4439 747 m31 ndirwect Tum 5761 6666 1 am2 10121 Whntax Reips 4675 7461 8427 1399 16163 Total Orrot Revne 12198 17186 207 299 35216 intest Pa)ugnts 492 657 a0 322 6590 Ibn-Int st Curront Expenidtures 14222 166 20t 307N6 342 M ansa £zEr iture 9191 11120 12452 15451 19181 Oef t Expenditures 3400 671 6A 11619 12IW Noi-Intest Ourrwit Trnsfer 1163 1016 12Z8 32 2690 UelTimf led 165 209 251 Totat Curwot ExpsI twos 14711 19143 21685 33990 4c5e f&dJtary Svings -2516 -1955 905 -4051 -56b Vital RAsue .. ;ital Tranfhrs MD30 674 . 100 1552 1743 budgetarv Inrsotnt c/ 7720 9161 9409 867 9491 Total Cpitat Exp ; itures 8550 10008 10417 10369 11234 Extra budgetary Exponditure Z775 1696 1459 ?9 0 Ovrall galent -1341 *13709 -12561 -15239 16900 Total Deficit Flrumirg 13511 13706 12662 152S External Capital Grants 1644 999 1470 1243 88 External Borrioing (nwt) 4320 5137 5061 49. Mastery Syste Credit (net) 7U0 7572 6331 9015 Oth OaDec. Borrowing (nt) 0 0 0 0 DObt (at sr of War) Extoeril Debt (in mlLiLons of LCUs) (in million of USS) 4496 5134 5611 6112 Datic Debt To Cwmtral Ban 7VS 7575 6331 9015 To Cmmrcial Bats -56 3 0 0 ... ... ... ... ... ... ... ... ... ... ... ... ... .... ... .. . ..... . . . . Notes / Ceitral govnrImnt. p/ Preliminary estimntes bV the mision. b/ Budet. c/ IncIuding portian furded by externaL lows astifsted by the mission. Source Miniftry of Firstce nd the mision. 47 TABLE 5.1 : EXCIWIGE RATES , ......... ....... (Y~i RlalstUS) 1988 1986 1987 1988 1989 1990 Av Exch Rate 6.4100 7.4100 8.9900 9.7000 9.7700 11.8150 Ae Official Exch Rate (IFS) 7.3633 9.6392 10.3417 9.7717 9.7600 End of Year Off Rate (IFS) 8.1000 1.2500 9.9000 9.7600 9.7600 Source Central BUnk of Yemen ard IMF. TABLE 5.2 C4N9U.ER PRICE INDEX IN MAJOR CITIES BY COCM9DITIES & SERVICES, 1988-89 (1969-100 for Aden, 1977-78&100 for other cities) Dhmar Ibb Hodeidah Taiz Aden Sana'a ........ ............. ......................................... ......................................................................... ... .............. ... i1988 1989 19 198 1988 198 1g 1989 1968 198 198 1989 ......................................................................................................................... Overali index 408 494 388 459 371 436 366 435 366 366 418 502 ............. Food stuffs 357 433 319 378 315 372 310 371 401 401 346 415 Cereals 352 457 318 396 329 415 280 348 271 271 379 485 Le.ume 501 606 544 632 450 530 554 655 363 363 556 666 m4t 238 287 214 251 253 300 220 265 257 257 230 230 Vegetabies 341 395 239 265 201 223 196 233 289 298 352 405 Milk & Eggs & Cheese 62B 770 563 672 368 429 470 556 237 237 525 638 Edible oil and fats 289 357 285 344 224 266 264 320 397 397 390 485 Fruits 295 370 402 490 459 547 490 596 252 276 517 650 Supr 284 348 275 331 339 287 244 294 600 600 315 384 Soft drir*s 283 393 263 404 240 320 180 231 270 270 248 350 T cco 465 557 376 432 390 456 400 472 818 818 340 400 sewrages 359 432 345 410 301 352 263 310 250 250 461 551 Canred & Dried Fruits 358 415 275 305 271 301 300 346 406 406 320 366 Clothing 865 1023 689 785 787 88o 822 938 554 554 966 1123 Clothes 869 1035 663 760 776 870 753 903 564 564 923 1O0 Shows 854 gm 818 911 90S g 988 1085 446 446 1153 1325 Housing 486 591 487 577 415 486 400 478 232 232 482 588 Fumriture & utenuils 383 470 595 1125 481 559 410 475 337 337 557 665 Duraige good 304 356 508 566 253 308 310 339 300 300 363 410 Rent nd water 526 632 455 519 3S9 460 360 425 89 89 435 530 Futl and lightirg 475 592 489 608 506 628 564 706 421 421 643 800 Othtec 416 493 467 558 385 446 394 458 244 244 434 522 Trnsportation 436 479 316 348 370 400 m 366 197 197 314 348 Edication wnd eultLre 158 166 293 313 331 357 364 393 227 227 345 386 MAdical eppenditures 905 1131 816 1020 608 760 683 854 397 397 898 1122 Household clening item 283 346 291 354 269 320 280 341 217 217 271 346 Perscut item 470 575 504 594 375 436 436 515 317 317 393 479 Sacrce: ministry of Pltnning L Central Statistics Organization 4 8