73008 September 2012 – Number 72 The Plight of Yemeni Private Enterprises since the 2011 Crisis: A Rapid Assessment Andrew Stone, Lina Badawy, and Nabila Assaf1 Introduction: Yemen’s political and security crises have exacted a terrible toll on its people in terms of human losses, poverty, malnutrition, and economic decline. Emerging from conflict and violence and moving towards economic recovery, growth, poverty alleviation, and job creation are critically dependent on enabling a growing and increasingly diverse and competitive private sector. 2 Understanding the effects of civil conflict on private businesses and their needs in a conflict-affected environment can provide insights on measures that will assist overall economic recovery. The 2011 World Development Report Conflict, Security and Development, found that low GDP per capita and unemployment can be major drivers of conflict. This is supported by survey data cited in the WDR. Asked for the reasons why young people join rebel groups or gangs, the biggest share of respondents indicated unemployment as the main reason. The report asserts that private sector development is crucial to recovery, "especially if creating jobs and incomes is to outlast donor- funded, short-term emergency works".3 The WDR concludes that ―we need to put greater emphasis on early projects to create jobs, especially through the private sector‖4. 1 Andrew Stone, Lead Evaluation Officer, The World Bank; Nabila Assaf, Senior Private Sector Development Specialist, The World Bank; Lina Tarek Badawy, Consultant, The World Bank. This Quick Note was cleared by Simon Bell, Sector Manager, Finance and Private Sector Development Department, The Middle East and North Africa Region (MNSFP), the World Bank. 2 World Development Report: Conflict, Security, and Development, World Bank, 2011. 3 Ibid, p. 200 4 Ibid, p. xii A recent survey of nearly 200 Yemeni enterprises of manufacturers in non-metallic mineral products points to the deep impacts of the crisis on private reported a decline in sales, averaging 71% of sales enterprise, and in particular small and medium value, while three other sub-sectors (fabricated enterprises (SMEs)5. The survey, carried out in June metal, other manufacturing, and other services) also 2012, interviewed firms in six cities, in multiple reported severe and broad impacts – over 70% of sectors, and of all sizes except microenterprises 6. In firms in these sub-sectors reported losing nearly half spite of a still uncertain security situation in some of their sales. Overall, optimism did not pervade the areas, the field team was able to directly interview sample on future sales. On average, firms expected managers of 199 enterprises in six cities. to recover to near December 2010 levels of sales only after two years from the time of the survey (June In Yemen, as in many other developing countries, 2012). Capacity utilization also decreased for nearly the private sector consists predominantly of micro, 50% of firms. Small firms were more likely to report small, and medium enterprises (MSMEs) – over 97% lower capacity utilization and reduced working of firms (about 290,000 in number) have less than 25 hours. Investments show a similar pattern of decline employees with total estimated employment of over and expected rise, although large firms expect a 600,000 workers, including approximately 30,000 smaller future increase in investments than smaller women7. The importance of MSMEs for recovery ones. and jobs is underscored by the unlikelihood of Table 1 foreign or large scale investment in the current uncertain political and security climate. MSMEs are closely invested in and tied to the national economy, with little or no option to move their businesses elsewhere. Impact of the Crisis: The survey explored the impact of the crisis on private sector exports, investment and employment, including projections for the future. On most of these key indicators, small firms (5-19 employees) were more negatively affected than medium and larger firms. The results showed that 72% of firms interviewed in June 2012 reported that their sales had fallen since December 2010, while 19% said they had risen. Large firms were the most likely to report sales had risen (as reported by 32% of large firms) while SMEs were most likely to report that sales had fallen (as reported by 76% of SMEs). Sales were most likely For employment - a developmental ―bottom line‖- to have decreased in Sana’a and Hadhramout, and the un-weighted average decline in employment least likely to have decreased in Ibb. The average was about 12% of total employees, but large and firm whose sales contracted reported a 49% medium firms contracted less than small firms. 38% reduction in sales, while the average firm whose of firms reported that employment had declined sales increased reported a growth of 29%. At least since December 2010, 48% reported that it had one sub-sector was relatively devastated-- over 94% stayed the same, and 14% said that it had increased. On average, firms expected employment to bounce 5 The survey sample included 199 enterprises with at least 5 back to 103% of the December 2010 level in one year employees. and 104% in two (Table 1). The two biggest factors 6 This includes small (5-19), medium (20-99), and large (100+ that firms associated with their future level of hiring workers) enterprises. Note that the percentage of small, medium, and large firms in the sample is not indicative of firm size were the general economic situation and wage distribution in the country, where the proportion of medium and, inflation, followed by the level of payroll taxes and especially, large firms is much smaller. the ―availability of training/apprenticeship 7 Data from Building and Establishment Census of 2004, Central programs.‖ Statistics Office. More recent data is not available. September 2012 · Number 72 · 2 Table 1 than were medium and large firms, medium firms were disproportionately concerned with reduced demand and deficits, and large firms felt especially affected by exchange rate instability. Not surprisingly after a civil conflict, many more firms (78% vs. 56%) identified political instability as a serious problem in the rapid assessment than had in the ICA. Firms in Aden and Al-Hodeida were especially likely to perceive deterioration in political stability. Firms in these cities, as well as Sana’a, were more likely to perceive deterioration in crime, theft and disorder as well. Large firms were especially likely to identify ―increase in theft or vandalism‖ as a hindrance to their operation. Corruption dropped from being the leading constraint identified in 2010 to the fourth leading Top Constraints: The survey suggests that constraint in 2012, but this was due to the ascension restoration of infrastructure and civil order and of other constraints. A similar percentage of firms in broader availability of short-term finance are key. 2012 (77%) identified corruption as a serious Issues of economic and political instability and problem as had in 2010 (74%). governance also remain high on the near-term agenda. In the medium-term, a broader agenda of Finally, in stark contrast to 2010, when only 15% of policy and institutional reforms is also needed. firms identified transport as a major or very severe constraint, in 2012 61% of respondents did so. Firms In the aftermath of the civil conflict, electricity had in Hadhramout were most likely to identify come to the forefront as the leading constraint to transport as a serious problem, followed by those in firms (see Figure 1). Already in 2010, the average Aden and then Sana. Logistical constraints had firm reported 719 interruptions in a year resulting in become much greater as a result of the conflict – an average loss equal to 14% of sales. After the Overall, 59.6% of firms reported that the civil conflict, 83% of firms now identified electricity as a conflict had interrupted their transport services. ―major‖ or ―very severe constraint‖. Daily power 46% of firms identified interrupted supply of key interruptions had reportedly become more inputs/products as a serious hindrance to extended. 89.3% of firms reported that the civil operations. conflict had led to service interruptions of power Table 2 supply. 89% of firms said that electric power failures directly hindered their operations. 100% said ―restoration of electric power‖ would be useful to their business. Macroeconomic uncertainty: This was not directly addressed in the 2010 Investment Climate Assessment (ICA), but was a major concern of 82% of respondents to the rapid assessment. 25% of firms felt the problem had gotten worse. When asked what aspect of the macro-economy was most problematic for their business, 31% of respondents identified reduced demand, 27% said inflation, 24% identified exchange rate instability, and 15% said government deficits. Those citing unemployment and the security situation stood at 2% each. Small firms were much more concerned about inflation September 2012 · Number 72 · 3 17% of large enterprises. A final significant area of Not surprisingly, firms identify the lack of electricity dispute was the assessment of sales tax liability. as their leading hindrance to current operation (see Table 2). However, the second leading hindrance is Investing in Private Enterprise Recovery: now ―lack of short term capital.‖ This problem was Addressing constraints to private enterprises will be especially identified as serious by several critical if Yemen is to move towards a virtuous cycle manufacturing sectors as well as 85% of firms in Ibb. of economic growth, jobs, security, and stability. About 27% of respondents reported having a loan or Initiatives are needed to build the confidence of the line of credit, ranging from 12% of small firms to private sector and revive employment and private- 51% of large ones. 44% of firms expected their led growth. On top of any list is the restoration of access to finance to increase over the coming year, infrastructure, led by electric power, but also 28% expected it to remain the same, and 28% including roads, ports, water and telecom. thought it would decrease. Restoring stability – both macroeconomic and political—is also at the forefront of priorities. This Firms identified a number of sources of losses due to includes the need to improve physical security. the conflict, led by ―negative publicity or image of Addressing pervasive corruption remains critical, Yemen or my area‖. This striking response suggests especially (as interviews highlight) in the area of tax that the psychological effects of the conflict on administration. Yet all of these improvements in clients and investors may outweigh the physical enabling conditions can only go so far if firms damage as a constraint to business. This response cannot access needed inputs to recover and grow. In was especially prevalent among large firms (94%) this regard, it is important to note that lack of short- and firms in al-Hodeida. Street closures and loss of term capital was rated second to electricity as a public access to the business were a second leading current hindrance to operation. Yemen’s SMEs have source of loss, while loss of customs, suppliers, and suffered substantial shocks due to the civil conflicts workers all figured prominently for respondents. – on average much greater than large firms. Thus 27% had suffered some physical damage to their they may require special support to recover and building, equipment, computers, etc. with generate sustained employment – including substantial variations by sector and location. 42% of financing for needed equipment and services to firms in Sana’a and 39% of firms in Hadhramout recover, to seize new market opportunities, and to reported such losses, while only 9% of firms in al- compete in an open (and thus global) economy. Hodeida and 13% of firms in Taiz did so. Overall, only 6.5% of firms said they did not operate during the civil conflict, but 53.3% said they were only ―partially open‖. The average firm lost a reported Contact MNA K&L: 69 days of production or operation due to the civil Laura Tuck, Director, Strategy and Operations. conflict. MENA Region, The World Bank Supportive Public Policy: Firms were asked what Regional Quick Notes Team: type of public policy actions would be of greatest assistance to them. Not surprisingly, the leading Omer Karasapan, and Roby Fields candidates all concerned restoration of Tel #: (202) 473 8177 infrastructure. At the same time, some firms looked to government as a source of problems, rather than a The MNA Quick Notes are intended to summarize solution. 16% of respondents (including 27% of lessons learned from MNA and other Bank Knowledge large firms, 39% of firms in Aden and 26% of firms and Learning activities. The Notes do not necessarily in Sana’a) reported they had a pending dispute with reflect the views of the World Bank, its board or its Government. The most common kind concerned the member countries. assessment of the firm’s income tax liability. The second most common kind concerned payment owed by Government for a contract for goods or services provided by the enterprise. This kind of dispute affected only 7% of responding firms, but September 2012 · Number 72 · 4