Current Economic State of Yemen
Yemen is the poorest country in the Middle East, with an average national per-capita of less than $1 a day. In the years after its 1990 unification, the economy suffered as government spending, inflation and unemployment rose sharply. However, in the last half decade, under the guidance of the IMF and World Bank, the country has begun to turn around its oil-fueled economy. Since 1995 when reforms began, the local currency was floated and stabilized, triple-digit inflation curbed to single-digit and many government-subsidies have been abolished.
The country is building a free trade zone in Aden that it hopes will transform Yemen's economic and commercial capital into a major tans-shipment hub. It is also pinning future hopes on its large Liquefied Natural Gas resources. Its location, history and culture also suggest a potentially lucrative tourism sector.
But many obstacles must be overcome before the country can attract tourists and the needed large-scale foreign investment. Such obstacles include widespread smuggling, corruption, kidnapping of foreigners and an inadequate infrastructure. Other challenges include high population growth, water scarcity, inadequate infrastructure, non-utilized natural resources and economic, monetary and administrative reforms.
The changes and reforms, however, are not just economic, but are political and cultural. Existing side-by-side with the young modern state is a complex and ancient tribal system that has rules and alliances that often clash with the government's. Gaining acceptance of modern economic and political principles will be perhaps a crucial key in continuing the economic turnaround.
Unification was declared May 22, 1990. Various factors contributed to the unified country's poor economic performance in the first few years after the unification. First, there were enormous costs associated with the unification, including the need for increasing expenditures particular for wages and defense. Second, just months after the unification, Iraq invaded Kuwait, an act that had negative economic consequences for Yemen. For example, Yemen never received $50 million in promised aid from Iraq. Furthermore, Yemen's reaction to the crisis angered the Gulf States. So angered was Saudi Arabia, that it, and eventually the other Gulf States, expelled all Yemeni workers. This resulted in 1.2 million Yemenis returning to Yemen, the loss of a $1 billion injection into the economy from remittances home and swelling unemployment. Furthermore, the country fell into a nearly 4-year long civil war.
Between 1990 and 1994, real GDP contracted and unemployment rose significantly. Budget deficits rose from 13 percent to 17 percent of GDP along with inflation to more than 70 percent. But beginning in 1995, the country began an impressive turnaround as it overhauled its macro structure under the guidance of the IMF. Real growth reached 7 percent in 1995 and 3 percent the following year. Inflation dropped to 12 percent by 1996 and the budget deficit comprised only 2.3 percent of GDP that year.
The picture has remained bright into the late 1990s. Government officials expect GNP to grow by about 4 percent in 1999, that is compared with 2.7 in 1998 and 5.2 in 1997.
Oil is the country's main revenue source, comprising 98.6 percent of total exports in 1997. And despite the sharp drop in oil prices in 1998 and the beginning of 1999 – which slashed the country's export earnings by the equivalent of 10 percent of GDP – the government has injected stability into the macro-economic system, improved the state budget, stabilized the exchange rate and reduced the inflation rate to 1 percent. The government was able to reduce the money growth rate from 34.7 percent in 1994 to 10.7 percent in 1997, and the budget deficit from 17.4 percent of GDP to 4 percent in the same time period.
Both the IMF and World Bank have praised these developments and have pledged further funds as long as reforms proceed. The World Bank said it would commit as much as $700 million during the next three years compared with $420 million during the previous three. These funds would be earmarked for improving the civil service, stimulating the private sector, and promoting the sustainable use of water and to developing education and health services.
This year, the World Bank did commit $50 million to help reform the public sector management. Yemen wants to borrow $876 million from international donors and the World Bank between 1999-2002.
While the country's first round of macro-structural improvements has been successful, the country has many areas to improve. The monthly per capita is $32.44 in urban areas and $23.81 in rural. (Those figures, however, could double with the inclusion of smuggling and the qat trade.) As of 1998, its maximum electricity capacity is 609 megawatts, but actual output is between 35-400 and that only reaches 30 percent of the population. Water and sewage services are even less adequate. Residents in the country's third largest city, Taiz, receive public water once ever 30-40 days. In some parts of Sana’a, raw sewage runs onto major thoroughfares. Unemployment exceeds 30 percent and illiteracy hovers at around 58 percent.
The 3.7 percent population growth rate, one of the region’s highest, must be curbed while consumption of scarce renewable water supplies, which is occurring at 140-150 percent of recharge rate, needs to be reduced. According to experts, subsidies must be eliminated, and the government must also develop a transparent legal environment that can objectively and independently resolve disputes. Consequently, the government bureaucracy should be streamlined. Currently, the state employs 400,000 people, with wages consuming 60 percent of the state budget.
The government must eliminate the massive smuggling network, something that may create a confrontation with the tribal aspect of society. Smuggling is estimated to be a YR 70 billion (nearly $0.5 billion) a year business, roughly 30 percent of Yemen's total imports. Furthermore, smuggling cost the treasury YR 1.4 billion in income tax each year. Approximately 65 percent of incoming food supplies and 35 percent of pharmaceutical enter the country illegally.
According to local industrial sources, smugglers have saturated the market with all types of merchandise, causing thousands of workers to lose their jobs in the past couple of years.
1998 1997 1996
Nominal GDP (US$ billions) 6.68 5.79 5.23
GDP Growth (percent) 6.1 5.19 4.4
GNP Growth (percent) 2.7 5.2 5.6
Nominal GNP Per Capita (US$) 327 306 280
Total Government Expenditure as % of GD 43 44 43
Inflation (%) 27.3 6.3 5
Oil & Gas Sector
An exportable amount of oil was first discovered in Yemen in 1984 in the Marib Governorate. Since then, petroleum has been the driver of Yemen's economic growth. By the end of 1997, oil production from three fields pushed the country's output to 385,000 bpd. Currently, the country is producing 380,000 bpd.
More important than oil to the Yemen's petroleum industry's future is Liquefied Natural Gas (LNG). The country plans to process and export the 17 trillion cubic feet of proved and associated and natural gas reserves. In 1995, Yemen concluded a gas development agreement with Total and in January 1997 agreed to include Hunt Oil, Exxon and Yukong of South Korea in the project. It is believed that during 25 years $3.5 billion will be invested in the project, which is expected to yield roughly 5.2 million tons of LNG a year.
Aden Free Trade Zone & Aden Container Terminal:
In 1999, the first phase of the Aden Container Terminal (ACT) was launched. This $188 million facility will have the capacity to handle 500,000 twenty-foot equivalent units. It is part of a $580 million planned free trade zone at its southern port of Aden, which is anticipated to transform Yemen's economic and commercial capital into a major transshipment hub.
The zone will have six quays and a 16 meter-deep navigational channel, increased from 12, with all service and facilities to accommodate the world's largest container vessels.
The country plans to offer facilities and fast turnaround for the largest carriers now plying routes from Europe through the Suez Canal and the Red Sea to Southeast Asia, Australia and the Far East.
Free Zone incentives include exemption from taxation on industrial and commercial profits for 15 years with a possible extension for an additional 10 years; 100% foreign ownership permitted and encouraged; free transfer of capital and profits outside of the Aden Free Zone, not subject to exchange controls; and exemption from income tax on salaries, and bonuses of non-Yemeni employees working on Aden Free Zone projects.
Agriculture has been and remains a key industry in Yemen, employing more than half of the workforce. While its role in the economy has diminished somewhat over the years, it is still crucial. In 1970, for example, agriculture absorbed 75 percent of the labor force and comprised 45 percent of GDP. In 1996, those figures dropped to 58 percent and 15 percent, respectively.
During the 1970s and 1980s, the agriculture sector underwent a significant transformation, evolving from traditional farming into a more modern industry. This transformation was fueled by investment, market expansion and protectionist policy.
Today Yemeni agriculture is market-oriented. It relies on irrigation and has enormous qat farming, which covers 10 percent of prime farmland. Many crops have strong economic potential such as cotton, grapes, papaya and coffee.
A main agricultural problem facing the country is sustainability. Many of the crops they produce, such as qat and cotton, are water intensive. There is already ground water overuse, a deterioration of upper watersheds and an increased risk of floods. It will be necessary to implement water conservation methods and to improve productivity to fuel growth. This will be crucial to help satisfy the country's growing population, which is expected to nearly double to 30 million within the next 20 years.
The World Bank reports that cultivation, retailing and distribution of Qat, a naturally-grown narcotic, account for up to 25 percent of Yemen’s Gross Domestic Product. But experts agree that this plant offers little economic benefit, since very little of it is exported. In fact, qat-chewing is virtually a national pastime. During the afternoon, the country comes to a virtual standstill while people indulge in social chewing sessions. The problem has become such a national issue, that the president publicly announced his commitment to dropping the habit and urged others to follow his example. Furthermore, the government passed laws that would limit the places and times that people could chew Qat.
The government’s main concerns with this endemic are as follows:
- There are adverse affects on human health and productivity, which have economic implications. Studies show that people consume more Qat than any other fruit or vegetable.
- “Qat sessions” result in a loss of 1 million human-hours a day.
- Qat cultivation uses more land than does wheat, fruit or vegetable farming. Qat farming currently consumes 70 percent of all agricultural land and 55 percent of ground water, further exacerbating an existing water scarcity problem.
Yemen has a unique culture, history and geography, which can be important lures for tourists. This potential cannot be fully met, however, until the infrastructure is improved and violent attacks and kidnappings are stopped.
But kidnappings are not the only issue putting the country in the region’s unenviable 18th place in terms the number of tourists visitors. Other realities include the following:
Tourist attractions and accommodations are generally insufficient and of low quality and are virtually non-existent beyond major cities. One-star hotels constitute 55 percent of all hotels in Yemen.
Insufficient tourism laws.
Polluted streets and tourist areas.
While many industries remain undeveloped in Yemen, many also offer good investment opportunities, excluding hydrocarbon exploration and production. They include, tourism, health services, power generation, fisheries, ship repair and maintenance and consumer products.
Principal Business Opportunities
Automotive Parts & Services
Medical Instruments, Supplies & Pharmaceuticals
Agricultural Machinery & Equipment
Electrical Power Systems
Oil/Gas Field Machinery
Canned Fruits & Vegetables
© 2000 Mena Report (www.menareport.com)