Press Release: IMF Approves Second Annual ESAF and EFF Credits and Loans for the Republic of Yemen

March 23, 1999

The International Monetary (IMF) has approved loans and credits totaling SDR 47 million (about US$64 million) to support the Republic of Yemen’s second annual programs under the Enhanced Structural Adjustment Facility (ESAF)1 and Extended Fund Facility (EFF).2 Of the total, SDR 36 million (about US$49 million) is available under the ESAF, and SDR 11 million (about US$15 million) is provided under the EFF.

The latest disbursements are from a three-year loan and credit package totaling the equivalent to SDR 370.7 million (about US$506 million) that was approved for Yemen on October 29, 1997 (See Press Release No. 97/49). Of that total, SDR 264.8 million (about US$362 million) represents commitments under the ESAF, and SDR 105.9 million (about US$145 million) under the EFF. Two ESAF disbursements totaling SDR 88 million (about US$120 million) have been made, and two EFF loans, amounting to SDR 18 million (about US$25 million), have also been disbursed.


In 1995 Yemen introduced a comprehensive macroeconomic adjustment and structural reform program that signaled a sharp break from past policies. Under this strategy, which was subsequently supported by IMF financial resources beginning in 1996, the authorities established financial discipline and initiated structural reforms to create a market environment conducive to investment and growth in the non-oil sector. Interest rate liberalization, tariff and tax reform, exchange rate unification, and price increases in subsidized goods began to shift the economy to a more market-oriented footing. Official debt relief agreements in 1996 and 1997 with the Paris Club creditors further substantially improved Yemen’s external prospects. By late 1997, a considerable degree of macroeconomic adjustment had been achieved and a first wave of fundamental structural reforms introduced.

However, the sharp drop in world oil prices in 1998 had an adverse impact across all sectors of the economy. Yemen lost almost 10 percentage points of GDP in oil revenue in 1998 compared to 1997 but moved quickly to offset the effect of this loss by significantly curtailing development expenditure and further reducing untargeted subsidies. By taking these corrective measures, although partially offset by expenditure in wages and in other areas, Yemen containedthe fiscal deficit in 1998 to an estimated 6 percent of GDP. At the same time, real GDP growth slowed to under 3 percent in 1998 and the external accounts shifted back into deficit as government oil exports receipts were halved. The inflation rate picked up to about 11 percent on average in 1998, above the target rate of 8.5 percent, spurred also by the impact of heavy late summer floods on agricultural prices. Despite the difficult environment, the authorities moved on a range of structural reforms, including in customs administration, privatization, civil service reform and approval of a modern banking law. In addition, steps were taken to improve public awareness of the economic reform program.

The Medium-Term Strategy and 1999 Program

The fall in oil prices reinforced Yemen’s commitment to the medium-term strategy pursued since 1995, with its emphasis on financial discipline and market-oriented reforms to encourage private non-oil sector growth while protecting health and education expenditure and social safety net outlays. In line with this medium-term strategy, the weight of adjustment will be on fiscal policy in 1999. With some improvement in private savings expected from ongoing financial sector reform, a reduction in the external current account deficit by about 2.5 percent of GDP is targeted. Monetary policy will aim at an inflation rate of about 9 percent, including the effects of increases in wheat and flour prices.

Structural Reforms

Yemen has already begun the next phase of a broad structural reform program, with key steps taken early in 1999 and many additional measures aimed at further developing the market oriented regulatory and legal frameworks needed to attract domestic and external investment, and to stimulate economic growth, on the agenda for the remainder of the year. Structural reforms already taken, or expected, in 1999 include: deepening civil service reforms central to the implementation of the remainder of the program, additional income tax and sales tax reform, financial sector measures including a significant strengthening of bank supervision, customs reform, privatization of public enterprises, elimination of import bans, pension reform, creation of the Aden free trade zone, and judicial reform.

Addressing Social Needs

The government will continue to increase the provision and targeting of social assistance programs in Yemen. To mitigate the impact of subsidy cuts on the poorest segments of the population, direct assistance through the government’s Social Welfare Fund will be strengthened. Budget expenditure on social needs, including health, education and welfare, is targeted to increase from less than 7 percent of GDP in 1997 to close to 12 percent over the medium-term.

The Challenge Ahead

The challenge ahead will be to maintain the momentum of structural reform so as attract private investment and stimulate private sector, so as to reduce the sensitivity of the economy to changes in the world oil markets growth in the non-oil sector, while preserving important social safety net expenditure.

Yemen’s membership in the IMF dates from May 22, 1990; its quota3 is SDR 243.5 million (about US$333 million); and its outstanding use of IMF credit currently totals SDR 238 million (about US$326 million).

Republic of Yemen: Selected Economic Indicators






(Percent change)

Real GDP






Consumer prices (12-month change end-of-period)






(Percent of GDP)

Overall fiscal balance (cash basis)






Current account balance






(Months of imports)

Gross official international reserves






Sources: The Yemeni authorities; and IMF staff estimates

1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace on principal.
2 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4½-year grace on principal.
3 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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