The Middle East Channel

Yemen’s unresolved economic crisis

Yemen’s unresolved economic crisis

In late 2011, the British government sent one of its top humanitarian advisors to Yemen after a year of protests, bloody crackdowns, and inter-elite fighting. Drawing on his experience from a career spanning three decades, the advisor reported back that Yemen faced the most complex set of circumstances he had ever seen.

Some of the key issues at the time, such as fighting between elite military and tribal factions in the capital of Sanaa and north Yemen’s second largest city, Taiz, have since eased off. But others, including rising violence between Shiite Houthi tribesmen, government forces, and Sunni Salafists in the northern Saada province and the rise of Ansar al-Sharia — the local al Qaeda affiliate — in the south, are still causing mass displacement on a daily basis.

Refugees and economic migrants from Somalia and Ethiopia continue to pour into the country. The United Nations High Commissioner for Refugees registered more than 100,000 new arrivals in 2011 alone. Hunger among the Yemeni poor has reached a crisis point with about 5 million going hungry so regularly that it is damaging their health. Some 5 million more only just get enough to eat according to the World Food Programme.

Meanwhile, Yemen’s economy, fragile and sclerotic at best, effectively ground to a halt in 2011. A series of explosions damaged a major oil pipeline which is the source of most of the country’s fuel. The ensuing shortage of diesel fuel, used to transport goods across the country and to pump most of the country’s water, led to a sharp increase in the price of food and water. The government was forced to import fuel and hemorrhaged foreign currency reserves normally used to settle the hefty import bill that covers most of the wheat and rice eaten in the country.

In the end, Saudi Arabia stepped in with donations of oil and fuel products to keep the economy going. However, even with Saudi support, foreign currency holdings at the Central Bank of Yemen dipped 25 percent, from $5.7 billion at the end of 2010 to $4.3 billion in December 2011. Riyadh is currently committed to supplying Yemen’s fuel needs until May.

Unemployment was also exacerbated by the crisis. Joblessness was above 40 percent on average and as high as 70 percent among people under 25 years old in 2010. It climbed as factories closed, farmers struggled to irrigate their crops, and fuel shortages and near-constant blackouts made all but the simplest economic activities nearly impossible. By some accounts, almost two-thirds of Yemenis were out of work by the end of 2011.

"There is already a humanitarian crisis in Yemen," the policy chief of one European aid agency retorted sharply when asked if the country is moving toward crisis. The problem, she said, is that Yemen is suffering multiple, interconnected crises rather than having one easily identifiable problem.

It does not require a stretch of the imagination to believe that these factors — mass displacement, hunger, a weak rentier economy in free-fall, and rising unemployment — could mean a grim fate for the 10 million-plus people currently living in poverty in Yemen.

Aid agencies are gearing up for a major humanitarian relief program, and the United Nations has doubled its annual appeal to donors for Yemen for the coming year to $446 million (of which only about 20 percent has been raised). With a bit of luck, aid agencies will be able to avert a hunger crisis of the scale seen in Africa in 2011, and at least allow Yemen’s poorest people to hold out for a year or two more. However, this will still leave unsolved the far bigger challenge of lifting people out of poverty and building a diversified, sustainable economy during a period of huge political change.

The transitional unity government that has been in place in Sanaa since December cannot realistically be expected to do this on its own. Composed of members of the General People’s Congress (GPC), a party still led by former President Ali Abdullah Saleh, and the opposition coalition Joint Meeting Parties (JMP), it has already proven to be somewhat dysfunctional. One new minister described with incredulity the decision of most GPC cabinet members to boycott a meeting in mid-March after tit-for-tat speeches given by Saleh and Mohamed Basindwah, the JMP-affiliated prime minister. In the end, he said, President Abed Rabbo Mansour al-Hadi had to call the ringleader of the GPC faction and effectively threaten to fire the entire cabinet if they did not work with one another.

Basindwah has come under considerable criticism from technocrats who see him as a weak administrator. One official who worked with him said, "He is like your grandpa, soft and cuddly…He is a really nice guy but you wouldn’t want your grandpa running a country." However, a senior diplomat cautioned that a different consensus candidate would be hard to find.

Even if they were able to work alongside one another, the new ministers would have to cope with the same overstaffed, undertrained bureaucracy that has presided over decades of poor socioeconomic development in Yemen. "There are new ministers in place, but everything else is the same," said the official, adding that the decision of the previous administration to add 60,000 new civil service jobs in 2011 would only serve to complicate things. "It is hard work just finding things for people to do," he said. "Most government departments are now crowded with too many people of the wrong caliber."

Another official quietly added that, of the small number of skilled technocrats in government before the political crisis of 2011, a number have now moved on to the private sector or international institutions. "There are even less good people around than before," he said. "And the number is shrinking fast."

One of the first significant tasks for the government was to prepare a budget which addressed concerns about a growing fiscal deficit, which it simply cannot fund, while preparing the ground for economic development. In talks with international institutions like the World Bank and the International Monetary Fund, and with international donors in early 2012, the government had agreed in principle to limit the budget deficit for the year to about $2 billion, and in return asked for direct support to fund the gap.

In late March, the Yemeni national assembly was presented with a budget which projected the year’s revenue at 2.1 trillion Yemeni Rial (YER) and spending at about 2.7 trillion YER, compared to spending in 2011 of 1.8 trillion YER. That meant a projected budget deficit of 600 billion YER, or $2.6 billion, some 50 percent higher than even officials in the ministry of finance had expected. Most of the budget, about 80 percent, is directed toward current spending — paying for salaries, bills, and other day-to-day expenses. Of that amount, 860 billion YER alone, a third of the overall budget, will be used to pay wages while a similar amount will be used to fund fuel subsidies.

This is not an encouraging sign according to an economist at one prominent international institution. Another, similarly-placed economist saw the budget as an attempt on the government’s part to start a bargaining process with donors over budget support. Never mind, the first economist said, the Yemeni budget rarely bears much resemblance to actual patterns of spending over a given year. The big issue, both agreed, will be bridging the deficit gap. Spending of any kind will be a bonus, said the second economist.

Cabinet ministers have spent considerable amounts of time meeting their Gulf counterparts in the hope of raising cash according to sources connected with government business. "They have been headed off to the Gulf, cap in hand, with no real plans," said one well-placed source. "The Gulfies are trying to get them to explain what the money is going to be spent on, so there is a bit of a disconnect."

Some economic planning is happening. The ministries of planning and finance are working with the World Bank, the European Union, the United Nations, and the Islamic Development Bank on a post-crisis assessment of the economy and a rapid recovery plan. The findings of the assessment were originally due to be unveiled at an April meeting of the international "Friends of Yemen" group as part of an effort to get donors interested in the government’s plans. The meeting has now been pushed back to May. A report from the World Food Programme on food security due in late April, which aid workers say will be "shocking," could also loosen up a few wallets.

Even if donors do start putting money aside for big projects in Yemen, there is considerable debate over how quickly the impact will be felt by Yemenis on the street. If the government gets funding for its budget and aid agencies start work, the inflow of cash and demand for services should give the economy something of a shot in the arm, but one which is only likely to be felt in the big cities. Unemployed agricultural workers in Hodeidah don’t get much benefit from expensive cups of coffee or cab rides in Sanaa.

The really big projects which could get the economy moving range from power stations and roads to huge real estate developments. But these kinds of schemes take a long time to get from the planning stage to a point when they are creating jobs on the ground. Given that the first donor meeting to discuss these kinds of projects isn’t until July, and that Yemen is hardly the easiest place in the world to do business, it is conceivable that most initiatives won’t even have reached the construction phase by the end of the two year transition period.

If things don’t get moving soon, another debilitating factor could throw economic development even further off track. From policymakers to farmers by way of the Change Square protest encampment in Sanaa, Yemenis are generally giving Hadi and the Basindwah government two or three months to show they have made genuine progress before they start getting fed up again. That would make things just a little bit more complicated.

Peter Salisbury is an independent journalist and analyst.