## _cr13246

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### Context
- Geopolitical importance: Yemen borders Saudi Arabia and overlooks al-Mandeb Strait; strategic for regional stability and security of key oil and commercial maritime routes.
- Political environment:
  - 2011 political crisis led to decline in output, supply bottlenecks, decline in gross international reserves, substantial depreciation of the rial, and double-digit inflation.
  - National Unity Government formed December 2011; new president elected February 2012 for a two-year transition.
  - National Dialogue started March 18, 2013; security remains poor with frequent attacks on energy facilities.
- Fund and donor engagement:
  - Last Article IV Consultation concluded January 8, 2010.
  - Extended Credit Facility (ECF) approved July 30, 2010 (cancelled April 4, 2012).
  - Performance under the RCF in first half of 2012 was strong; authorities met all indicative RCF targets.
  - Friends of Yemen pledged about $8 billion for 2012-2014; disbursed about $1.8 billion so far, including $1 billion Saudi deposit at the Central Bank of Yemen (CBY).

### Recent developments (macroeconomic and social)
- Output and inflation:
  - Real GDP contracted by more than 12 percent in 2011 and is estimated to have grown by 2.4 percent in 2012.
  - Average inflation declined to 9.9 percent in 2012 from 19.5 percent in 2011.
- External sector and reserves:
  - Current account deficit narrowed to about 1 percent of GDP in 2012 compared to 4.1 percent in 2011.
  - Gross reserves increased to $5.6 billion, equivalent to about 5.5 months of imports.
- Fiscal developments:
  - Budget deficit widened to 6.3 percent of GDP in 2012.
  - Subsidies increased to about 9 percent of GDP.
  - Wage bill increased to about 11 percent of GDP.
  - Non-hydrocarbon primary deficit excluding grants deteriorated to 21.1 percent of GDP.
  - Public debt about 48 percent of GDP, external part about 18 percent.
- Monetary and financial:
  - Money supply increased by 21 percent in 2012.
  - CBY policy rate reduced from 20 to 18 percent in October 2012 and to 15 percent in February 2013.
  - Private sector credit contracted marginally; net claims on government increased by 29 percent.
  - Banking system: capital adequacy ratio estimated at 29.6 percent at end-December 2012; non-performing loans 25.5 percent.
- Social indicators:
  - Unemployment estimated to average 25 percent and about 40 percent for the youth.
  - Poverty and malnutrition widespread; severe water shortages pose medium- and long-term risks.

### Outlook and risks
- Staff baseline projections under current policy:
  - GDP growth to average around 4 percent over the medium term.
  - Non-hydrocarbon growth projected to range between 4.0–4.5 percent over the medium term.
  - Oil production expected to recover partially then resume long-term declining trend.
  - Public debt to increase gradually to about 55 percent of GDP over the medium term.
  - Inflation projected to moderate only slightly over the medium term.
  - External position would worsen absent stronger reforms or additional external support: current account deficit widening to about 4 percent of GDP and official reserves coverage declining to 2.5–3.0 months of imports.
- Alternative scenario with gradual comprehensive energy-subsidy reform:
  - Gradual energy price adjustments would create room for higher infrastructure investment and effective social spending.
  - Fiscal and external sustainability would improve: public debt kept below 50 percent of GDP and reserves coverage above 3 months of imports.
  - Recent regional support includes almost $100 million additional budget support from the Arab Monetary Fund.
- Key risks (Appendix I):
  - Political and security deterioration.
  - Decline in international oil prices.
  - Shortfall in donor support.
  - Further tightening of expatriate labor controls in Saudi Arabia leading to lower remittances.
- Mitigating measures emphasized:
  - Unwavering commitment to reform process.
  - Gradual implementation of comprehensive subsidies reforms.
  - Greater transparency and pro-active communication on benefits of reforms.
  - Careful contingency planning.

### Policy discussion and recommendations — fiscal
- Agreed fiscal objective: improve sustainability and create space for pro-poor and pro-growth spending while enhancing public financial management.
- 2013 budget targets:
  - Overall deficit: decline from 6.3 percent of GDP in 2012 to 5.8 percent in 2013 and fluctuate around that level over the medium term.
  - Public debt: increase from 48 percent of GDP to about 55 percent of GDP over the medium term.
- Non-hydrocarbon revenue and tax administration measures:
  - Increase tax collections; improve compliance of large taxpayers; combat evasion; strengthen customs administration.
  - Planned measures include pre-shipment inspection of imports and IT upgrades in tax and customs authorities.
  - Not allow amendments to the 2010 Investment Law that may include extension of tax or customs exemptions.
- Energy subsidies:
  - Subsidies absorb about 9 percent of GDP and around two thirds of hydrocarbon revenues.
  - Staff recommends gradual increase in selected fuel prices and unifying diesel prices; increase infrastructure investment and targeted transfers to mitigate impact on the poor; broad public communication campaign.
  - Authorities have taken steps to unify the price of diesel across most users but have not adopted staff’s proposal for a gradual fuel price increase.
- Wage bill and public employment:
  - Wage bill exceeded 11 percent of GDP; projected to decline to about 10 percent of GDP assuming no further extensions.
  - Agreed plan to eliminate ghost workers and double dippers, including full implementation of biometric identification across civil service, military, and police.
- Financing and debt management:
  - Financing mix: domestic borrowing, concessional external support, and some use of reserves.
  - Staff encourages expediting donor disbursements and mobilizing more external funds; suggested issuing more Sukuk instead of treasury bills to tap Islamic banks’ liquidity.
  - Debt sustainability: updated DSA upgrades risk of debt distress from “high” to “moderate.”

### Policy discussion and recommendations — monetary and exchange rate
- Monetary policy objectives:
  - Focus on price stability while supporting private sector credit growth.
  - Real interest rates remain high despite cuts in benchmark deposit rate.
- Monetary framework issues and recommendations:
  - Current framework targets banks’ minimum interest rate on deposits as benchmark; recommendation to replace with a more conventional framework, enhance monetary policy tools, and develop interbank markets.
  - Authorities requested technical assistance for sequencing.
- Islamic finance and Sukuk:
  - Islamic banks constitute about one third of banking sector assets and do not participate in treasury bill and bond markets.
  - Recommendation: improve framework for Sukuk issuance and build technical capacity at Ministry of Finance and CBY.
- Exchange rate assessment:
  - Reserves equivalent to more than 5 months of imports supported by Saudi deposit; likely to decline absent repeated exceptional external support.
  - Staff view: exchange rate broadly in line with fundamentals but greater flexibility desirable to protect reserves and support competitiveness and export diversification.
  - Econometric findings: one percent increase in oil prices leads to about 0.3 percent real appreciation (period 1995–2012); error-correction: deviations from equilibrium REER corrected by 8 percent on average in the following quarter.
  - CGER-type analyses: macroeconomic balance suggests overvaluation 2.3 percent; external sustainability approach points to undervaluation -8.5 percent; equilibrium REER approach suggests large overvaluation 73.3 percent (poor fit for oil exporters).

### Policy discussion and recommendations — financial sector and supervision
- Financial sector objectives: enhance intermediation and support growth while maintaining stability.
- Key constraints:
  - Private sector credit estimated at 5 percent of GDP; accounts for 15 percent of banking system assets.
  - Over 50 percent of banking system assets in government paper and another 25 percent in foreign assets.
  - High lending rates, weak insolvency regime, and weak creditor rights deter lending.
- Supervisory and regulatory reforms:
  - Strengthen banking supervision, risk management, corporate governance, consolidated and cross-border supervision, and macroprudential surveillance.
  - METAC-supported reforms under consideration; CBY developing guidelines for Prompt Corrective Action.
- Bank resolution and AML/CFT:
  - CBY has powers to resolve banks but gaps in tools and operational capacity exist.
  - FIU strengthened but not yet fully operational; urgent progress needed on AML/CFT to avoid FATF counter-measures.

### Structural reforms and social policy priorities
- Structural impediments and priorities:
  - Improve business environment, reduce unemployment and poverty, strengthen governance, invest in infrastructure, and implement job-creating growth strategy.
  - Yemen ranks very low in ease of doing business; property rights and access to finance (especially SMEs) limited.
- Infrastructure gaps and donor priorities:
  - Energy: least electrified in MENA; electricity access approximately 35 percent of urban population and 5 percent of rural households (EIA estimates); total power capacity caters for only half of demand.
  - Staff underscored channeling donor support to road and energy infrastructure and health and education services; prioritize security of oil pipeline and electricity transmission.
- Human capital and social protection:
  - Multifaceted approach: reallocate spending toward pro-growth capital expenditures and targeted social transfers; protect the poor in any subsidy reform.
  - Box 1 energy subsidy composition: Diesel 41%, Diesel for Electricity 12%, Gasoline 16%, Mazot 17%, LPG 12%, Kerosene 2%.
  - Budget structure indicators (percent of GDP in presented table): Wages and Salaries 31%, Energy Subsidy 24%, Interest obligations 15%, Capital expenditure 10%, Transfers 7%, Goods and services 8%, Operations and maintenance 1%, Other subsidy 2%.
- Data and statistics:
  - Data broadly adequate but gaps in GDP, inflation, unemployment, and balance of payments statistics; priority improvements in national accounts and CPI weights.

### Selected medium-term projections and key indicators (as presented)
- Real GDP at market prices (annual growth, 2010–2017): 7.7, -12.7, 2.4, 6.0, 3.4, 3.9, 3.8, 4.0.
- Real nonhydrocarbon GDP (annual growth, 2010–2017): 4.4, -12.5, 4.0, 4.0, 4.0, 4.5, 4.5, 4.5.
- Consumer price index (annual average, 2010–2017): 11.2, 19.5, 9.9, 12.0, 12.0, 11.0, 10.0, 9.0.
- Hydrocarbon production (1,000 barrels/day, 2010–2017): 426, 364, 321, 406, 399, 393, 380, 376.
- Total revenue and grants (percent of GDP, 2010–2017): 26.0, 25.0, 29.9, 27.2, 26.9, 25.9, 24.8, 24.7.
- Total expenditure (percent of GDP, 2010–2017): 30.1, 29.4, 36.2, 33.0, 32.7, 31.7, 30.5, 30.0.
- Overall balance (cash basis, percent of GDP, 2010–2017): -4.0, -4.4, -6.3, -5.8, -5.8, -5.8, -5.7, -5.3.
- Gross Public Sector Debt (percent of GDP, 2010–2017): 42.2, 45.2, 47.8, 48.1, 50.2, 51.8, 53.6, 54.8.
- Central bank gross foreign reserves (US$ million / months of imports, 2010–2017): 5,081 (5.8 months), 3,974 (3.9), 5,590 (5.6), 4,743 (4.6), 3,724 (3.6), 3,099 (2.9), 2,864 (2.6), 2,915 (2.7).
- Exchange rate (eop) (YRls per U.S. dollar): 213.8, 227.5, 214.9 (2010–2012).
- Nominal GDP at market prices (In millions of U.S. dollars): 31,046 (2010), 33,129 (2011), 35,381 (2012).

### Debt Sustainability Analysis — key outcomes and stress tests
- DSA conclusion: Yemen’s risk of debt distress upgraded from “high” to “moderate.”
- Public external debt-to-GDP: 17.9 percent of GDP as of end-2012.
- Total external debt: $6.2 billion (excluding the $1 billion Saudi deposit at the CBY).
- Friends of Yemen pledge: around $8 billion for 2012-2014; committed $6 billion; disbursed about $1.8 billion.
- Stress-test highlight: PV of debt-to-exports ratio under the most extreme shock (B2) rises above 100 percent starting in 2015 and peaks at 180 percent in 2023.
- Public nominal debt-to-GDP: would exceed 50 percent in 2015; peak 58 percent in 2018; decline to about 32.5 percent in 2033.
- Key DSA assumptions excerpt:
  - Medium-term real GDP growth (2013–18) averages about 4.1 percent; long term average 4.5 percent.
  - Proven oil reserves cited at about 3 billion barrels; oil production assumed to decline 3 percent per year over the long term in baseline assumptions.

### Risk assessment and contingency recommendations (Appendix I)
- Principal risks and probabilities:
  - Political instability/security deterioration — Probability: M; Impact: H.
  - Sharp decline in oil production — Probability: M; Impact: H.
  - Declines in global growth/lower hydrocarbon prices — Probability: L; Impact: M.
  - Shortfall in donor support — Probability: M; Impact: H.
  - Stricter GCC immigration controls — Probability: M; Impact: M (remittances ~6 percent of GDP in 2012; ~2 million Yemenis in Saudi Arabia).
  - High bank exposure to government paper — Probability: L; Impact: L.
- Mitigating actions recommended:
  - Continued collaborative political dialogue and transparency.
  - Improvements in security and investment to reduce oil production disruptions.
  - Contingency plans to re-prioritize public spending; maintain reserve buffers; greater exchange rate flexibility.
  - Strengthen donor coordination and improve aid absorption capacity.

### Priority technical assistance and IMF program engagement
- IMF TA and work program items (selected):
  - MCM TA on liquidity management and banking supervision; METAC engagements; FAD support on tax and customs; STA missions on national accounts and CPI.
  - 2013 Article IV consultation mission and ongoing TA on tax and customs administration, enforcement framework, and national accounts are noted.
- Fund relations snapshot (as of May 31, 2013):
  - Quota: 243.50 SDR Million.
  - Outstanding RCF Loans and ECF Arrangements reported; SDR = US$ 1.51335 as of June 20, 2013.

*Source: IMF staff report excerpt on Yemen (content unit).*

### 2. Exchange Rate Assessment ____________________________________________________________________ 18

### 2. Exchange Rate Assessment

### Context
- Geopolitical importance: Yemen is on the border of Saudi Arabia and overlooks al-Mandeb Strait; strategic for regional stability and security of key oil and commercial maritime routes.
- Political tensions exacerbated by high unemployment and poverty and compounded by conflict with Southern separatist and Houthi movements.
- 2011 political crisis triggered a political transition, decline in economic output, deterioration in security, supply bottlenecks, decline in gross international reserves, substantial depreciation of the rial, and double-digit inflation.
- National Unity Government formed in December 2011; new president elected February 2012 to manage a two-year transition.
- National Dialogue started on March 18, 2013, with participation of all major political factions (despite resistance from Southern separatist and Houthi movements); security remains poor with frequent attacks on energy facilities.
- Fund engagement: Last Article IV Consultation concluded on January 8, 2010; an Extended Credit Facility (ECF) approved July 30, 2010 (cancelled April 4, 2012) helped stabilize the rial, safeguard foreign exchange reserves, and introduce the General Sales Tax (GST). Performance under the RCF in first half of 2012 was strong; authorities met all indicative RCF targets and implemented additional fiscal measures, including some fuel price increases.
- Donor support: Friends of Yemen pledged about $8 billion for 2012-2014; so far $1.8 billion disbursed, including $1 billion Saudi deposit at the Central Bank of Yemen (CBY).

### Recent Developments
- Output and inflation:
  - Real GDP contracted by more than 12 percent in 2011 and is estimated to have grown by 2.4 percent in 2012.
  - Average inflation declined to 9.9 percent in 2012 from 19.5 percent in 2011.
- External sector and reserves:
  - Current account deficit narrowed to about 1 percent of GDP in 2012 compared to 4.1 percent in 2011.
  - Saudi oil grant around $2 billion and $1 billion Saudi deposit at CBY supported the external position.
  - Gross reserves increased to $5.6 billion, equivalent to about 5.5 months of imports.
- Fiscal developments:
  - Budget deficit widened to 6.3 percent of GDP in 2012 due to higher spending, including on wages and subsidies.
  - Subsidies increased to about 9 percent of GDP.
  - Wage bill increased to about 11 percent of GDP owing to hiring and retroactive wage settlements.
  - Capital spending increased but remained below pre-crisis levels.
  - Non-hydrocarbon primary deficit excluding grants deteriorated to 21.1 percent of GDP, compared to 17.6 percent a year earlier.
  - Public debt about 48 percent of GDP, with the external part constituting about 18 percent.
- Monetary and financial developments:
  - Money supply increased by 21 percent in 2012; most of the increase occurred in the second semester.
  - CBY policy interest rate reduced from 20 to 18 percent in October 2012 and to 15 percent in February 2013.
  - Private sector credit contracted marginally; net claims on government increased by 29 percent.
  - Banking system: capital adequacy ratio estimated at 29.6 percent at end-December 2012; non-performing loans stood at 25.5 percent.
  - Large share of zero risk-weighted government securities in banks’ portfolios; Islamic banks hold 64 percent of their total assets in foreign assets at end-2012.

- Social indicators and structural constraints:
  - Unemployment estimated to average 25 percent and about 40 percent for the youth.
  - Poverty and malnutrition are widespread.
  - Large share of wages and generalized subsidies constrain pro-growth and pro-poor expenditures.
  - Severe water shortages pose medium- and long-term social and economic risks.

### Outlook and Risks
- Staff projections under current policy scenario:
  - GDP growth to average around 4 percent over the medium term.
  - Non-hydrocarbon growth projected to range between 4.0–4.5 percent over the medium term.
  - Oil production expected to recover partially as political transition progresses but then resume long-term declining trend.
  - Public debt to increase gradually to reach about 55 percent of GDP over the medium term.
  - Inflation projected to moderate only slightly over the medium term given the fiscal path.
  - External position would worsen absent stronger reforms or additional external support: current account deficit widening to about 4 percent of GDP and official reserves coverage declining to 2.5–3.0 months of imports.
- Alternative scenario with gradual comprehensive energy-subsidy reform:
  - Gradual energy price adjustments would create room for higher infrastructure investment and effective social spending, enhancing growth and employment and protecting the poor.
  - Fiscal and external sustainability would improve: public debt kept below 50 percent of GDP and reserves coverage above 3 months of imports.
  - Stronger reforms could encourage somewhat higher donor disbursement; recent regional support includes almost $100 million additional budget support from the Arab Monetary Fund.
- Key risks (summarized in Appendix I) include:
  - Political and security deterioration.
  - Decline in international oil prices.
  - Shortfall in donor support.
  - Further tightening of expatriate labor controls in Saudi Arabia leading to lower remittances.
- Mitigating measures emphasized:
  - Unwavering commitment to reform process.
  - Gradual implementation of comprehensive reforms of generalized subsidies.
  - Greater transparency and pro-active communication on benefits of reforms.
  - Careful contingency planning.

### Policy Discussion and Recommendations
- Authorities’ reform plan elements (already initiated in part):
  - Raise non-hydrocarbon revenue.
  - Contain wages.
  - Strengthen bank supervision and financial stability and intermediation.
  - Improve institutions and governance.
  - Improve investment climate to boost growth and reduce oil dependence.
  - Governance and efficiency measures in the energy sector (but the authorities have left out staff’s proposal for a gradual increase in fuel prices).
- Staff emphasis and recommendations:
  - Implement a gradual fuel price adjustment to reduce generalized subsidies, re-direct resources to more effective social protection and infrastructure investment, and create fiscal space for pro-growth spending.
  - Pursue fiscal consolidation while protecting pro-poor spending.
  - Strengthen bank supervision and risk-management capacities to address high NPLs and underdeveloped financial markets and payment systems.
  - Improve donor coordination and acceleration of aid absorption (e.g., Executive Bureau for the Acceleration of Aid Absorption established February 2013; Mutual Accountability Framework set up with the World Bank).
  - Enhance transparency and public communication to build support for reforms and mitigate political economy risks.

*REPUBLIC OF YEMEN — INTERNATIONAL MONETARY FUND*

### 18.      The main policy challenges facing Yemen are the need to safeguard macroeconomic

### 18.      The main policy challenges facing Yemen are the need to safeguard macroeconomic

### A. Fiscal Policies and Reforms: Achieving Sustainability and Creating Space for Growth-Enhancing Expenditures and Social Protection
- Agreed objective: improve sustainability and create fiscal space for pro-poor and pro-growth spending while enhancing public financial management.
- 2013 budget targets and projections:
  - Overall deficit: decline from 6.3 percent of GDP in 2012 to 5.8 percent in 2013 and fluctuate around that level over the medium term.
  - Public debt: increase from 48 percent of GDP at present to about 55 percent of GDP over the medium term.
- Non-hydrocarbon revenue strategy:
  - Increase tax collections and improve tax and customs administration.
  - Focus on improving compliance of large tax payers, combating evasion, strengthening customs administration.
  - Planned measures include:
    - introduce pre-shipment inspection of imports to reduce under-invoicing;
    - upgrade IT systems in tax and customs authorities for timely data sharing and real-time monitoring of inspection areas;
    - not allow any amendments to the 2010 Investment Law that may include extension of tax or customs exemptions, new or retroactive;
    - review tax legislation to introduce further enhancements.
- Energy subsidies:
  - Subsidies absorb about 9 percent of GDP and around two thirds of hydrocarbon revenues; disproportionately benefit the better off.
  - Staff recommendations:
    - gradual increase in selected fuel prices and unifying diesel prices;
    - increase infrastructure investment and targeted transfers to mitigate impact on the poor;
    - launch a broad public communication campaign on subsidy costs and reform benefits.
  - Authorities actions: steps taken to unify the price of diesel across most users, including the electricity sector; recognize need for subsidy reform but not ready for stronger measures now.
- Wage bill:
  - Has exceeded 11 percent of GDP; nominal wage bill will increase in 2013 due to generalized payment of some benefits granted in early 2012.
  - Projected to decline to about 10 percent of GDP in relation to GDP, assuming no further extension or retroactive granting of additional compensation.
  - Agreed recommendation: plan to eliminate ghost workers and double dippers, including full implementation of biometric identification throughout civil service, military, and police.
- Financing the deficit:
  - Mix of domestic borrowing, concessional external support, and some use of reserves.
  - Staff encouraged expediting donor disbursements and mobilizing more external funds to reduce crowding out of private sector and rely on concessional borrowing.
  - Suggested issuing more Sukuk instead of treasury bills to tap excess liquidity in Islamic banks and reduce borrowing costs.
  - Reserves: current level equivalent to more than 5 months of imports due to exceptional external support in 2012; some drawdown feasible but medium-term decline would impair capacity without stronger reforms and donor support.
- Debt sustainability:
  - Updated analysis points to a moderate level of debt distress (upgrade from past "high distress" assessments).
  - Revision based on low level of extraction of proven reserves and use of credible higher estimates of proven reserves; oil exports projected to last longer than previously assumed.
- Fiscal discipline and public financial management reforms:
  - Authorities determined to keep deficit within target; instruction to spending agencies to strictly stay within budget.
  - Unforeseen outlays to be matched by compensatory cuts in lower priority spending.
  - Reforms include:
    - closing multiple government accounts and moving into a treasury single account;
    - rolling out the Accounting-based Financial Management Information System (AFMIS) to line ministries and local governments;
    - implementing cash management and commitment control systems.

### Box 1 — Energy Subsidies and Reforms (key facts and findings)
- Energy subsidy levels and impacts:
  - Subsidy bill: about 9 percent of GDP in 2012 (below 2008 peak of 14 percent of GDP).
  - Subsidies constitute two thirds of hydrocarbon revenue and exceed total infrastructure and social expenditures.
  - Fuel prices remain substantially lower than international prices even after 2011–2012 domestic price increases.
- Economic distortions and distributional impacts:
  - Generalized subsidies benefit mainly the rich; incentivize overconsumption, inefficiencies, smuggling.
  - Exacerbate environmental problems by reducing cost of pumping underground water.
- Potential benefits of subsidy reform:
  - Gradual reduction would create fiscal space for growth-enhancing expenditures and more efficient social protection.
- Subsidy composition indicators (as presented):
  - Subsidies by product type (percent of total): Diesel 41%, Diesel for Electricity 12%, Gasoline 16%, Mazot 17%, LPG 12%, Kerosene 2%.
  - Yemen: Budget Structure (percent of GDP) indicators include Wages and Salaries 31%, Energy Subsidy 24%, Interest obligations 15%, Capital expenditure 10%, Transfers 7%, Goods and services 8%, Operations and maintenance 1%, Other subsidy 2%.

### B. Monetary and Exchange Rate Policies: Ensuring a Robust Monetary and Exchange Rate Policy Framework
- Monetary policy objectives:
  - Focus on achieving price stability while supporting private sector credit growth.
  - Real interest rates remain high despite reductions in benchmark deposit rate, constraining credit demand.
  - Authorities agreed to consider further cuts in the benchmark rate if inflation declines, while remaining vigilant.
- Monetary framework and market development:
  - Current framework targets banks’ minimum interest rate on deposits as the benchmark for other rates, including treasury bills.
  - Concerns:
    - High benchmark deposit rate increases government and bank funding costs and leads to high lending rates.
    - High interest rates combined with a stable exchange rate incentivize speculative capital flows.
    - Absence of interbank markets reduces monetary policy transmission effectiveness.
  - Recommendation: replace current benchmark rate with a more conventional framework, enhance monetary policy tools, develop interbank markets; authorities requested technical assistance for appropriate sequencing.
- Islamic finance and Sukuk:
  - Islamic banks constitute about one third of banking sector assets and do not participate in treasury bill and bond markets (not Sharia compliant).
  - Government has not issued Sukuk after initial issues in 2011 and 2012; Islamic banks have excess liquidity invested largely in foreign assets.
  - Recommendation: improve framework for Sukuk issuance and build technical capacity at Ministry of Finance and CBY.
- Exchange rate assessment:
  - Reserves: equivalent to more than 5 months of imports, supported by Saudi deposit; likely to decline unless exceptional external support repeats.
  - Staff view: exchange rate broadly in line with fundamentals but greater flexibility desirable to protect reserves and support competitiveness and export diversification.
  - Authorities intend to maintain a system allowing exchange rate to reflect market fundamentals and to limit FX interventions to smoothing volatility; fiscal policy should support exchange rate and inflation objectives.
- Box 2 — Exchange Rate Assessment (key findings):
  - Econometric estimates: rial broadly in line with fundamentals; one percent increase in oil prices leads to about 0.3 percent real appreciation (period 1995–2012).
  - Error-correction: deviations from equilibrium REER (measured by oil prices) are corrected by 8 percent on average in the following quarter.
  - CGER-type analyses: macroeconomic balance approach suggests some overvaluation (2.3 percent); external sustainability approach points to undervaluation (-8.5 percent); equilibrium real exchange rate approach suggests large overvaluation (73.3 percent) but fit is poor for oil exporters due to data limitations.

### C. The Financial Sector: Enhancing Intermediation and Contribution to Growth while Maintaining Stability
- Financial sector objectives: facilitate credit growth while maintaining bank health.
- Current constraints:
  - Banking sector plays a small intermediation role: private sector credit estimated at 5 percent of GDP and accounted for only 15 percent of banking system assets.
  - High lending rates constrain demand; banks reluctant to lend due to weak insolvency regime, judiciary enforcement of creditor rights, and weak economic environment.
  - Large government financing needs crowd out private sector: over 50 percent of banking system assets in government paper and another 25 percent in foreign assets.
- Reforms and infrastructure:
  - Credit registry developed with World Bank assistance; specialized judges for commercial cases assigned, but further reforms needed.
  - Suggested additional measures: establish a collateral registry; CBY to undertake loan surveys to better understand credit conditions.
- Supervision and regulatory strengthening:
  - Banking supervision being strengthened; vulnerabilities include high credit risk, loan concentrations, insider lending.
  - METAC-supported reforms under consideration include:
    - developing regulatory and supervisory framework for Islamic banking;
    - improving bank data submission processes;
    - developing a data warehouse for communication with banks;
    - enhancing corporate governance;
    - strengthening consolidated, cross-border supervision and macroprudential surveillance;
    - increasing oversight of risk management practices in commercial banks.
- Bank resolution and legal framework:
  - CBY has powers to resolve banks, but gaps exist in tools and operational capacity.
  - CBY developing guidelines for Prompt Corrective Action (PCA) with technical assistance; IMF completed a review of the Banking Act to assist comprehensive strategy.
- AML/CFT progress:
  - Financial Intelligence Unit strengthened and given more independence but not yet fully operational and effective.
  - Commitments under action plan with FATF include:
    - adequately criminalize money laundering and terrorist financing;
    - establish and implement procedures to identify and freeze terrorist assets;
    - develop monitoring and supervisory capacity of CBY and FIU.
  - Urgent progress needed to avoid FATF counter-measures that could lead to loss of international bank relationships and higher financial intermediation costs.

### D. Structural Reforms: Facilitating Diversification and Inclusive Growth
- Policy discussions emphasized structural reforms to underpin growth:
  - Improve public financial management, governance, and the business environment to facilitate diversification and inclusive growth.
- Staff also discussed:
  - debt sustainability, trade, AML/CFT efforts, and adequacy of economic and financial statistics as part of structural reform agenda.

*Source: IMF staff report excerpt on Yemen (content unit).*

### 37.      Higher and inclusive growth will require tackling structural impediments, in addition

### _cr13246 - 37.      Higher and inclusive growth will require tackling structural impediments, in addition

### Structural impediments and reform priority
- Higher and inclusive growth requires tackling structural impediments in addition to addressing macroeconomic challenges: improve the business environment, reduce high unemployment and poverty, strengthen governance, invest in infrastructure, and implement a job-creating growth strategy.
- Staff agreed with authorities’ plan to expedite and broaden structural reforms.

### Business environment, governance, and private sector constraints
- Yemen ranks very low in ease of doing business.
- Constraints: complicated regulatory environment, uncertain property rights, limited access to domestic finance (particularly to SMEs).
- Improvements in governance and transparency are critical; poor governance and corruption are reported to be endemic and localized patronage continues as a strong element of social protection.
- Authorities agree on the need for enhanced transparency and a well functioning legal infrastructure.
- Yemen finalized negotiations on WTO membership with all but one member and hopes to achieve accession soon.

### Infrastructure gaps and donor priorities
- Energy: least electrified country in the MENA region; total power capacity caters for only half of the demand.
- Electricity access estimates (EIA): approximately 35 percent of the urban population and 5 percent of rural households have access to electricity; supply is intermittent and recently targeted for sabotage.
- Other infrastructure is lacking, including housing stock.
- Staff underscored channeling donor support to improve road and energy infrastructure and the provision of health and education services.
- Improved security of the oil pipeline and electricity transmission should be given priority.

### Central Bank of Yemen (CBY) governance and autonomy
- Authorities began to enhance CBY independence and governance framework.
- An update safeguards assessment concluded in June 2013 noting governance steps: appointment of new Board members and establishment of an Audit Committee with members having financial expertise.
- Political and economic events strained CBY’s financial autonomy: CBY extended credit to the government beyond legal limits; authorities plan to develop a schedule for repayment.
- Authorities agreed to ensure central bank operational independence and have recently published CBY’s full audited financial statements.

### Unemployment, poverty, and human capital
- Addressing high unemployment and poverty remains a priority; unemployment is already high and could worsen with tightened Gulf immigration controls.
- Multifaceted approach needed: improve structure of public spending, enhance business environment and access to financial services, support SMEs, and reform education and vocational training.
- Poverty and malnutrition are widespread; youth unemployment is especially high.

### Data and statistics for economic management
- Improving financial and economic statistics is key to guiding policy.
- Data are broadly adequate for surveillance but important gaps exist in quality and coverage of GDP statistics; improvements needed for output, inflation, unemployment, and balance of payments statistics.
- Authorities are addressing capacity deterioration; some progress in improving national accounts and CPI statistics.
- Development of other high frequency economic indicators would enhance analysis and policy guidance.

### Staff appraisal: macroeconomic and political context
- Progress: economic activity picked up, inflation declined substantially, exchange rate appreciated to pre-crisis level; national dialogue advancing, security forces restructured, elections scheduled for February 2014.
- Remaining challenges: recovery at early stage and vulnerable to sabotage of oil pipelines; underlying fiscal position deteriorated in 2012 despite large grants; near and medium term financing needs are large.
- Large share of wages and generalized energy subsidies in the budget constrains space for pro-poor and pro-growth expenditures.
- Serious environmental challenges (including rapid extraction of scarce ground water) pose risks.
- Economic prospects depend on sustained reform implementation, progress on political and security fronts, and continued donor support including for budget financing.

### Fiscal policy recommendations
- Reorient expenditures from energy subsidies to pro-growth capital expenditures and targeted transfers for social protection.
- Energy subsidies absorb two thirds of hydrocarbon revenues and reduce resources for investment and social development.
- Recent decision to unify the price of diesel is welcome; needs to be complemented with urgent implementation of comprehensive, albeit gradual, subsidy reform.
- Subsidy reform would create room to finance infrastructure investment and targeted transfers; proactive government communication could help build public support.
- Authorities’ plans to increase non-oil revenues and contain the wage bill are welcome.
- Containing the wage bill and eliminating ghost workers are critical for fiscal sustainability.
- Strengthen compliance of large taxpayers, avoid tax exemptions, enhance customs administration (including introducing pre-shipment inspection of imports).
- Strengthen budget control and treasury operations; adhere strictly to budget targets to avoid increasing large financing needs.
- Draw and implement contingency measures as needed to safeguard deficit targets while protecting social outlays.

### Donor coordination and external financing
- Authorities need to advance efforts to ensure timely donor disbursement of pledges and attract budget support.
- Strict implementation of reforms would catalyze donor support.
- Close collaboration and monitoring through the Mutual Accountability Framework and effective Executive Bureau operation to improve project preparation are critical.
- External assistance is key to reducing crowding out of private sector credit and lowering borrowing costs.
- Timely and increased concessional support from donors will be critical to cushion impact of any future subsidy reform.
- Continued prudence in external borrowing would help maintain the recently upgraded moderate level of debt distress.

### Monetary, exchange rate, and financial sector policies
- Monetary and exchange rate policy has anchored inflation but framework improvements are needed.
- Transition monetary policy from direct interest rate control and reliance on primary market of government papers to a more efficient indirect approach to develop the interbank market and enhance banks’ liquidity management.
- Increased issuance of Sukuk would help absorb excess liquidity of Islamic banks and lower government borrowing costs.
- Reduced domestic public borrowing is critical to provide space for banks to extend credit to the private sector and lower interest rates.
- Exchange rate is estimated to be broadly in line with fundamentals; greater flexibility is desirable to preserve reserves, provide a cushion against external shocks, and support export diversification.
- Develop financial system while preserving its health to promote inclusive growth: expand access to financial services, enhance collection and dissemination of credit information, strengthen supervision, and improve banks’ risk assessment and collateral collection ability.
- Staff welcomes efforts to improve banking supervision, regulation and resolution framework, and financial infrastructures; authorities encouraged to further improve the AML/CFT framework.

*International Monetary Fund — Staff appraisal and recommendations from the Republic of Yemen report*

### 52.      It is recommended that the next Article IV consultation take place on the standard 12

### _cr13246 - 52.      It is recommended that the next Article IV consultation take place on the standard 12

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12 month cycle.

### Selected economic indicators (production, prices, and key aggregates)
- Real GDP at market prices (annual growth): 7.7, -12.7, 2.4, 6.0, 3.4, 3.9, 3.8, 4.0 (2010–2017)
- Real nonhydrocarbon GDP (annual growth): 4.4, -12.5, 4.0, 4.0, 4.0, 4.5, 4.5, 4.5 (2010–2017)
- Real hydrocarbon GDP (annual growth): 46.9, -14.5, -11.5, 26.2, -1.8, -1.5, -3.2, -1.2 (2010–2017)
- Consumer price index (annual average): 11.2, 19.5, 9.9, 12.0, 12.0, 11.0, 10.0, 9.0 (2010–2017)
- Consumer price index (eop): 12.5, 23.2, 5.8 (2010–2012)
- Hydrocarbon production (1,000 barrels/day): 426, 364, 321, 406, 399, 393, 380, 376 (2010–2017)
  - Crude oil: 264, 197, 154, 226, 232, 226, 213, 209 (2010–2017)
  - LNG (oil equivalent): 162, 167, 167, 180, 167, 167, 167, 167 (2010–2017)

### Fiscal sector and government finance (levels and ratios)
- Total revenue and grants (percent of GDP): 26.0, 25.0, 29.9, 27.2, 26.9, 25.9, 24.8, 24.7 (2010–2017)
- Total expenditure (percent of GDP): 30.1, 29.4, 36.2, 33.0, 32.7, 31.7, 30.5, 30.0 (2010–2017)
- Overall balance (cash basis, percent of GDP): -4.0, -4.4, -6.3, -5.8, -5.8, -5.8, -5.7, -5.3 (2010–2017)
- Nonhydrocarbon primary balance (cash, percent of GDP): -18.1, -16.5, -15.0, -16.4, -15.9, -14.4, -13.0, -12.3 (2010–2017)
  - Excluding grants: -19.3, -17.6, -21.1, -17.6, -17.4, -16.0, -14.6, -14.0 (2010–2017)
- Gross Public Sector Debt (percent of GDP): 42.2, 45.2, 47.8, 48.1, 50.2, 51.8, 53.6, 54.8 (2010–2017)
  - External debt (percent of GDP): 19.3, 18.3, 17.9, 16.7, 17.0, 17.6, 18.5, 19.2 (2010–2017)
  - Domestic debt (percent of GDP): 22.9, 26.8, 29.9, 31.5, 33.2, 34.3, 35.1, 35.6 (2010–2017)

### Fiscal accounts (levels, selected)
- Total revenue and grants (In billions of Yemeni rials): 1,774 (2010), 1,772 (2011), 2,268 (2012), 2,039 (2013 Est.), 2,414 (2014), 2,691 (2015), 2,912 (2016), 3,117 (2017)
  - Hydrocarbon revenue (In billions of Yemeni rials): 1,120, 1,156, 1,071, 1,022, 1,348, 1,443, 1,462, 1,440 (2010–2017)
  - Nonhydrocarbon revenue (In billions of Yemeni rials): 571, 533, 734, 920, 961, 1,101, 1,277, 1,477 (2010–2017)
- Grants (In billions of Yemeni rials): 83, 84, 46, 49, 71, 104, 146, 172, 200, 235 (note: table structure shows grants across years and projections)
- Total expenditure and net lending (In billions of Yemeni rials): 2,050, 2,086, 2,749, 2,668, 2,926, 3,269, 3,569, 3,833, 4,188 (2010–2017)
- Overall balance (In billions of Yemeni rials): -275, -313, -481, -628, -512, -579, -657, -716, -741 (2010–2017)
- Financing (In billions of Yemeni rials): 276, 354, 488, ... , 512, 579, 657, 716, 741 (2010–2017; table shows some entries elided)

### Monetary and banking aggregates
- Broad money (annual percentage change): 9.2, 0.0, 21.5, 16.0 (2009–2013 series shown)
- Reserve money (annual percentage change): 7.7, 15.8, 12.9, 10.0 (2009–2013 series shown)
- Credit to private sector (annual percentage change): 8.2, -16.9, -0.6, 15.0 (2009–2013 series shown)
- Benchmark deposit interest rate (percent): 20.0, 20.0, 18.0, 15.0 (2009–2013 series shown)
- Central Bank of Yemen reserve money (In millions of Yemeni rials): Reserve Money 765,184 (2009), 824,315 (2010), 954,508 (2011), 1,077,612 (2012), 1,185,680 (2013 Proj.)
  - Currency outside banks (In millions of Yemeni rials): 532,372, 547,284, 777,407, 803,407, 823,493 (2009–2013)
- Broad money (In millions of Yemeni rials): 2,076,154 (2009), 2,267,149 (2010), 2,268,264 (2011), 2,756,834 (2012), 3,198,709 (2013 Proj.)

### External sector and balance of payments
- Exports, f.o.b. (million U.S. dollars): 7,650, 8,662, 7,908, 9,149, 9,439, 9,165, 8,750, 9,056 (2010–2017)
  - Hydrocarbon exports (million U.S. dollars): 6,281, 7,850, 6,891, 8,061, 8,285, 7,948, 7,466, 7,702 (2010–2017)
  - Nonhydrocarbon exports (million U.S. dollars): 1,369, 812, 1,017, 1,088, 1,153, 1,217, 1,284, 1,354 (2010–2017)
- Imports, f.o.b. (million U.S. dollars): -8,473, -8,543, -9,805, -9,797, -10,106, -10,347, -10,600, -11,177 (2010–2017)
  - Nonhydrocarbon imports (million U.S. dollars): 6,400, 5,964, 6,400, 6,656, 7,234, 7,598, 7,980, 8,079 (2010–2017)
- Current account (percent of GDP): -3.7, -4.1, -0.9, -2.7, -3.4, -3.7, -4.2, -3.8 (2010–2017)
- Current account (in millions of U.S. dollars): -1,154, -1,365, -329, -1,092, -1,467, -1,647, -1,919, -1,813 (2010–2017)
- Central bank gross foreign reserves (US$ million / months of imports): 5,081 (5.8 months), 3,974 (3.9), 5,590 (5.6), 4,743 (4.6), 3,724 (3.6), 3,099 (2.9), 2,864 (2.6), 2,915 (2.7) (2010–2017)
- Exchange rate (eop) (YRls per U.S. dollar): 213.8, 227.5, 214.9 (2010–2012)
- Nominal GDP at market prices (In millions of U.S. dollars): 31,046 (2010), 33,129 (2011), 35,381 (2012)
- Per capita GDP (in U.S. dollars): 1,272 (2010), 1,318 (2011), 1,367 (2012)
- Population (in thousands): 24,398 (2010), 25,130 (2011), 25,884 (2012)

### Balance of payments (selected flows and memorandum)
- Trade balance (million U.S. dollars): -823 (2010), 120 (2011), -1,897 (2012), -647 (2013), -667 (2014), -1,182 (2015), -1,851 (2016), -2,121 (2017)
- Services, net (million U.S. dollars): -737, -1,066, -1,227, -1,182, -1,207, -1,067, -850, -714 (2010–2017)
- Income (million U.S. dollars): -1,717, -2,552, -1,574, -2,018, -2,436, -2,420, -2,336, -2,322 (2010–2017)
  - Hydrocarbon company profits (million U.S. dollars): -1,614, -2,079, -1,213, -1,929, -2,022, -1,851, -1,768, -1,723 (2010–2017)
- Current transfers (million U.S. dollars): 2,123, 2,134, 4,370, 2,755, 2,843, 3,022, 3,118, 3,344 (2010–2017)
  - Workers' remittances, net (million U.S. dollars): 1,476, 1,359, 2,180, 1,980, 2,060, 2,176, 2,209, 2,344 (2010–2017)
- Overall balance (million U.S. dollars): -1,170, -1,385, 1,534, -771, -1,211, -819, -343, 32 (2010–2017)
- Export oil price (U.S.$/barrel): 77.2 (2010), 102.7 (2011), 101.2 (2012), 97.7 (2013), 97.0 (2014), 93.2 (2015), 90.4 (2016), 87.9 (2017)

### Banking system financial soundness indicators (selected)
- Risk-weighted capital adequacy ratio (percent): 12.0 (2006), 8.7 (2007), 14.6 (2008), 14.6 (2009), 20.2 (2010), 24.3 (2011), 29.6 (2012)
- Capital (net worth) to assets (percent): 6.5, 4.9, 8.7, 8.2, 9.3, 10.6, 8.8 (2006–2012)
- Nonperforming loans to total assets (percent): 5.7, 5.4, 5.2, 3.5, 4.2, 4.7, 4.4 (2006–2012)
- Nonperforming loans to gross loans (percent): 23.0, 19.5, 18.0, 13.9, 17.7, 21.2, 25.5 (2006–2012)
- Average return on assets (percent): 1.2, 1.6, 1.0, 0.9, 1.3, 1.5, 1.2 (2006–2012)
- Average return on equity (percent): 17.3, 19.7, 11.4, 9.6, 14.1, 14.2, 13.6 (2006–2012)

### Illustrative medium-term scenario (selected projections and ratios)
- Real GDP growth rate (percent): 7.7, -12.7, 2.4, 6.0, 3.4, 3.9, 3.8, 4.0 (2010–2017 projection)
- Total revenue and grants (percent of GDP): 26.0, 25.0, 29.9, 27.2, 26.9, 25.9, 24.8, 24.7 (2010–2017 projection)
- Total expenditure (percent of GDP): 30.0, 29.4, 36.2, 33.0, 32.5, 31.4, 30.2, 29.6 (2010–2017 projection)
- Overall budget balance (cash basis, percent of GDP): -4.0, -4.4, -6.3, -5.8, -5.8, -5.8, -5.7, -5.3 (2010–2017 projection)
- Gross domestic investment (percent of GDP): 11.6, 5.5, 8.7, 8.9, 9.9, 10.0, 9.7, 10.2 (2010–2017 projection)
- Gross national savings (percent of GDP): 7.9, 1.4, 7.8, 6.2, 6.5, 6.2, 5.5, 6.4 (2010–2017 projection)
- Saving/investment gap (percent of GDP): -3.7, -4.1, -0.9, -2.7, -3.4, -3.7, -4.2, -3.8 (2010–2017 projection)

### Social and development indicators (Millennium Development Goals, selected)
- Life expectancy at birth, total (years): 56.1 (1990), 57.4 (1995), 59.7 (2000), 62.6 (2005), 64.1 (2008), 64.6 (2009), 65.0 (2010), 65.5 (2011)
- Mortality rate, infant (per 1,000 live births): 88.5 (1990), 79.5 (1995), 71.4 (2000), 64.5 (2005), 60.7 (2008), 59.4 (2009), 58.3 (2010), 57.0 (2011)
- Mortality rate, under-5 (per 1,000): 126 (1990), 111 (1995), 99.1 (2000), 88.1 (2005), 82.3 (2008), 80.2 (2009), 78.5 (2010), 76.5 (2011)
- Immunization, measles (% of children ages 12-23 months): 69, 40, 71, 76, 73, 69, 73, 71 (1990–2011 series shown)
- Internet users (per 100 people): 0.0 (1990), 0.08 (2000), 1.05 (2005), 6.8 (2008), 9.9 (2009), 12.3 (2010), 14.9 (2011)
- Mobile cellular subscriptions (per 100 people): 0.0 (1990), 0.00 (1995), 0.05 (2000), 0.18 (2001), 1.03 (2005), 28.4 (2008), 35.6 (2009), 46.0 (2010), 47.0 (2011)

*Sources: Yemeni authorities; Central Bank of Yemen; Ministry of Finance; Ministry of Planning; Fund staff estimates and projections.*

### Appendix I. Risk Assessment Matrix

### Appendix I. Risk Assessment Matrix

### Risk matrix — key risks, probabilities, and potential impacts
- Political instability and/or a deterioration in security
  - Probability of occurrence: M
  - Potential impact: H
  - Nature of vulnerabilities and expected impact:
    - The political transition is fragile as tensions persist and the high unemployment, especially among the youth remains.
    - If the risks materialize, it would disrupt economic activity and test the political resolve to implement reforms.
    - Mitigating measures: Continued collaborative political dialogue, greater transparency, an unwavering implementation of the reform agenda and proactive communication of the benefits of the reforms could help build public support.
- A sharp decline in oil production
  - Probability of occurrence: M
  - Potential impact: H
  - Nature of vulnerabilities and expected impact:
    - Oil production has declined significantly because of sabotage activities and inadequate investments.
    - A sustained large decline in oil production would adversely impact the external and fiscal accounts.
    - Mitigating measures: Improvements in security and increased investment could help mitigate the risks.
- Declines in global growth leading to lower hydrocarbon demand and prices
  - Probability of occurrence: L
  - Potential impact: M
  - Nature of vulnerabilities and expected impact:
    - A slowdown in global demand for oil and gas would affect fiscal and external sustainability, given Yemen’s dependence on hydrocarbons for exports and fiscal revenues.
    - Negative spillovers could occur from the GCC countries through aid, remittances, FDI, and trade.
    - Mitigating measures: Contingency plans that identify lower priority public spending; maintenance of reserve buffers; and greater flexibility in the exchange rate could help minimize the potential impact.
- Shortfall in donor support
  - Probability of occurrence: M
  - Potential impact: H
  - Nature of vulnerabilities and expected impact:
    - Shortfalls in the disbursement of pledged donor funds would reduce capital expenditures needed to foster growth, employment creation, and poverty reduction.
    - Mitigating measures: Greater transparency and enhanced implementation capacity could help expedite donor disbursements.
- Stricter immigration controls in the GCC countries, particularly Saudi Arabia
  - Probability of occurrence: M
  - Potential impact: M
  - Nature of vulnerabilities and expected impact:
    - Remittances averaged around 6 percent of GDP in 2012 and about 2 million Yemenis are estimated to work in Saudi Arabia.
    - Thus, unemployment and poverty could increase and the external position adversely impacted.
    - Mitigating measures: Job creating reforms could help absorb displaced workers.
- High bank exposure to government paper
  - Probability of occurrence: L
  - Potential impact: L
  - Nature of vulnerabilities and expected impact:
    - The large share of government paper in banks’ assets against the backdrop of large financing gaps in the budget exposes the banking system to sovereign risk and increases the correlation between fiscal and banking system vulnerabilities.
    - Mitigating measures: Fiscal consolidation will be key to reducing the risks.

### Appendix II — Unemployment, poverty, and human development: findings and indicators
- Unemployment
  - Estimates of unemployment range from 15 to 40 percent, with the Central Statistical Organization of Yemen at the lower end of this range.
  - The labor force is only about 40 percent of the total population in the age group 15–64, with men constituting about 90 percent.
  - Population age structure and growth:
    - 42 percent is under the age of 15.
    - 65 percent is under the age of 24.
    - Population growth: 3.0 percent annually.
  - The 2011 political crisis aggravated unemployment; unofficial estimates suggest as many as to one million workers may have lost their jobs during the crisis.
  - Immigration exposure:
    - About 2 million Yemenis are reported to be working in Saudi Arabia.
    - Worker’s remittances to Yemen average around 6 percent of GDP.
    - Repatriation of workers could add to the high unemployment rate and further erode incomes through its impact on remittances.
- Poverty and social indicators
  - Nearly half the population lives below the poverty line of $2 a day.
  - Poverty is estimated to have risen from about 43 percent of the population in 2009 to almost 55 percent in 2011.
  - Rural characteristics:
    - Rural areas are home to about 73 percent of the population and 84 percent of the poor.
  - Food security and malnutrition:
    - The U.N. World Food Program estimates that nearly 45 percent of the population was food insecure in 2012.
    - Almost 60 percent of children under the age of five have chronic malnutrition.
    - 35 percent are underweight.
    - 13 percent have acute malnutrition.
    - 27 percent of pregnant women and 35 percent of lactating women are malnourished.
  - Mortality:
    - Maternal mortality: 365 per 100,000 live births.
    - Infant mortality rate: 69 per 1,000 live births in 2009.
  - Human Development:
    - Yemen occupies the 154th position (out of 184) on the U.N. Human Development Indicators list.

### Appendix III — Fiscal policy and structural reforms: overview, diagnostics, and priorities
- Fiscal structure and imbalances
  - Oil receipts make up about half of total budget revenues and are on a declining trend.
  - Tax revenues are less than 25 percent of total revenues, and have remained low at about 7 percent of GDP or less recently.
  - Current expenditures make up about 80‒90 percent of total expenditures.
  - Wages and subsidies account for about two thirds of current expenditures.
  - Public investment remains at less than 15 percent of total expenditures.
  - Fuel subsidies account for over 25 percent of total expenditures and about 9 percent of GDP.
- Tax reform progress and challenges
  - Pre-2011 reforms: a modern investment law (2010); GST fully implemented; elimination of most income tax and customs exemptions in 2010; Tax Authority reorganized; self-assessment introduced; strengthened penalty regime; taxpayer classification.
  - Post-2011: progress stalled during the political crisis; decline in compliance and lower tax revenues; revenue collection recovered in 2012, rising to about 7 percent of GDP.
  - Remaining issues:
    - GST registration needs rationalization and improved coordination between Tax and Customs Authorities.
    - Number of registered taxpayers about 3,080, of which 2,000 are large tax payers.
    - Cumbersome tax documentation and weak enforcement powers of the Tax Authority.
- Cross-country tax perspective and specific figures
  - Yemen’s tax to GDP ratio is about 7 percent compared with about 13 percent in low income countries, and about 13.6 percent for comparator countries.
  - Contributing factors: low GST rate of 5 percent (the lowest among comparator countries); high GST threshold (Yemen’s GST threshold is $233,000).
  - Revenue composition (selected points):
    - Almost one-half of tax revenues come from income taxes (in particular taxes on wages and salaries).
    - Revenues from taxes on goods and services are less than 3 percent of GDP (below low-income countries’ average of 5 percent of GDP).
- Expenditure patterns and comparisons
  - Wages:
    - Wages were estimated to be around 10 percent of GDP in 2011 and increased to about 11 percent of GDP in 2012.
    - MENA average for wages: about 8 percent of GDP.
  - Subsidies:
    - Subsidies about 9 percent of GDP in recent years compared to 7 percent in MENA.
  - Capital expenditures:
    - Declined from about 5 percent of GDP before the crisis to about 2‒4 percent of GDP in 2011‒12.
    - MENA average for capital expenditures: 9 percent of GDP.
- Priority measures for 2013 and medium term
  - Main objective: strengthen fiscal consolidation and create space for increasing targeted social spending and infrastructure investment.
  - Priority reforms: reduce energy subsidies, contain the wage bill, improve tax collection, and improve public financial management and transparency.
  - Role of donors: Financial and technical assistance support from donors are essential to jump start the reform agenda and mitigate social effects.
- Tax policy priorities (2013 and medium-term)
  - 2013 focus: strengthen tax administration, simplify tax procedures, reinvigorate partnership with the business community to improve tax compliance.
  - Authorities’ stance: oppose any amendments to the 2010 investment law that may weaken tax collection, including extension or granting of any new tax or customs exemptions.
  - Medium-term tax policy goals:
    - Reduce, if not eliminate, existing tax exemptions and expand the tax base.
    - Increase gradually the GST tax rate toward the average for low-income countries.
    - Reduce the GST threshold to a “reasonably high level”, once tax administration is more efficient.
    - Establish a regular and periodic review of tax policy and reforms to increase efficiency and close potential loopholes.
- Tax administration reforms — immediate and medium term measures
  - Immediate measures:
    - Improve coordination between tax and customs authorities.
    - Expand the tax base by increasing number of taxpayers (subject to GST) by 20 percent.
    - Open (and make fully operational) medium taxpayers’ offices in Sana’a and major cities.
    - Simplify tax procedures by strengthening risk analysis alongside self-assessments.
    - Empower the tax authority to enforce collections and introduce a penalty regime.
    - Improve capacity for risk-based ex-post tax audits by developing risk profiles for large and medium taxpayers.
  - Medium-term measures:
    - Open more taxpayers’ offices in phases to cover all governorates.
    - Continue tax-simplification procedures and strengthen enforcement of collection.
- Customs administration reforms
  - Introduce pre-shipment inspection of imports by hiring the services of a reputable international company to reduce under-invoicing and improve customs revenue.
  - Develop and update the reference price database as a module of Automated System for Customs Data (ASYCUDA) to prevent under-invoicing.
  - Replace physical inspection with selective inspection generated by ASYCUDA, after establishing an appropriate information database and improving staff capacity to identify high-risk consignments.
- Restructuring of expenditures and energy pricing
  - Expenditure reforms should focus on improving the structure of spending via gradual reduction of fuel subsidies and wages in percent of GDP and recovery of hydrocarbon revenues from the low level of 2012.
  - In 2013, the decline in subsidies is projected to result mainly from the full year effect of increases in the prices of diesel and kerosene which took effect in April 2012 and from governance and efficiency measures.
  - Rationalizing energy consumption by government agencies:
    - Authorities decided to unify the price of diesel across most users, including the electricity sector.
    - The electricity sector had been paying about half of the prevailing domestic price.
    - The unification is not expected to reduce the very large subsidies' bill as public electricity company and private energy providers will be fully compensated to avoid an increase in retail electricity prices, but it should reduce incentives for leakages and inefficient consumption.
    - For the private sector, considering rationing through a coupons system could allocate/limit subsidized fuel consumption by private agents.
  - Gradually increase retail prices for fuel and electricity, with targeted mitigating measures (including direct cash transfers) to offset effects on low income households (at least the bottom 40 percent of the population).
  - Curtail non-essential current expenditures to create fiscal space for increased capital and social spending and re-examine policy of subsidizing public enterprises.
- Public Financial Management (PFM) reforms
  - Immediate reforms:
    - Develop a roadmap for PFM reforms and speed up transition to a comprehensive treasury system.
    - Roll out AFMIS to additional line ministries.
    - Develop a macroeconomic model for cash flow estimates using seasonal trends of aggregate budget data and revenue estimates.
    - Introduce monthly reporting on incurred and outstanding commitments, received and outstanding invoices, and payments made.
  - Medium-term measures:
    - Establish a Treasury in the Ministry of Finance.
    - Develop cash management and commitment control functions and enforce regulations that do not allow override of expenditures.
    - Incorporate special funds and applicable donor funds into the single treasury account structure.
    - Roll out AFMIS to remaining ministries and governorates for budget preparation and execution, while developing accompanying modules (cash management, commitment control, debt management).
    - Improve management of oil revenues and develop a strategy to extend the life of oil sector in collaboration with ministry of oil.
- Banking and credit indicator
  - Private sector credit, 2012: 4.6 (Percent of GDP)

*Source: _cr13246 - Appendix I. Risk Assessment Matrix*

### Appendix IV. Monetary and Financial Reforms

### Appendix IV. Monetary and Financial Reforms

### A. State of the Financial System

- Yemen’s financial system is relatively small compared to other countries in the region.
- Total assets at end 2012 were estimated at 30 percent of GDP.
- Private sector credit is around 5 percent of GDP.
- Banking and other financial activities are concentrated around Sana’a and Aden; rural branches are considered non-economical.
- Postal services provide basic banking services (excluding lending) and have a relatively large branch network including non-banked rural areas.

- Financial system composition and market structure:
  - Banks account for 72 percent of the financial system assets.
  - Pensions account for 26 percent.
  - Other sectors (insurance, foreign exchange bureaus and micro finance) are miniscule.
  - There are no equity markets; the debt market consists mainly of government treasury bills and bonds.
  - The government has not issued any Sukuks after the debut of the two initial issues in 2011 which matured in April 2013.

- Banking sector structure and concentration:
  - At end 2012, there were 17 banks licensed to operate in Yemen and two micro finance institutions.
  - The four largest banks account for over half the banking system assets; the 8 smallest banks have less than 20 percent of the assets.
  - The commercial banking sector consists of 12 conventional banks and 5 Islamic banks.
  - Ownership of conventional banks: 3 state-controlled banks, 4 domestic private banks, and 5 branches of foreign owned banks.
  - Islamic banks include one state controlled bank and 4 privately owned banks.
  - Market shares: Islamic banks 31 percent, state-owned banks 28.7 percent, domestic private banks 21.6 percent, foreign owned banks 16.9 percent, micro finance 14 percent.
  - State-owned banks hold about 50 percent of all government securities issued; the balance is almost split equally between domestic private banks and foreign owned banks.
  - Islamic banks do not participate in the treasury bill and bond market since these securities are not Sharia compliant and about 60 percent of their assets are invested in foreign assets.
  - Competition is generally weak due to dominance of a few, mainly public sector banks.

- Intermediation and inclusion:
  - Banks hold proportionately more assets in government papers; lending to private sector is less than 30 percent of deposits.
  - Lending is concentrated in a few traditional borrowers and is mostly for short-term finance and trade rather than investment.
  - The Yemeni economy remains a cash economy; the share of the population with bank accounts is reported to be in single digits.
  - At end 2012, the ratio of M2 to non oil GDP was estimated at 50 percent.
  - Currency in circulation is 29 percent of M2.

- Soundness indicators and risks:
  - Overall capitalization level of the banking system is above the minimum required level, though a couple of banks are not compliant.
  - Non-performing loans (NPLs) at 25 percent; increased from 20.6 percent in 2011.
  - High NPLs reflect credit risk more than stability risk because most lending is to the government and private sector credit accounts for a very small share of banks’ assets.
  - If government financing requirements decrease over time, banks may seek relatively more risky avenues and NPLs could increase unless supervisory controls are enforced.

- Non-bank financial institutions and markets:
  - Postal system provides deposit services, pensions and transfer services to non-banked rural areas and is fully computerized.
  - Pension funds serve as a captive source of government finance and invest in Treasury bonds at below treasury bill rates.
  - Insurance activity is insignificant, fragmented, and unsupervised.
  - Money market is limited to treasury bills auctions; interbank money and foreign exchange markets have not developed.
  - Leasing is still insignificant.

### B. Banking Regulation, Supervision and Resolution

- Legal and supervisory framework:
  - Banking law number 38 of 1998 governs regulation and supervision of banks.
  - Islamic banks are subject to a separate law originally issued under law no. 21 in 1996 and later revised under law no. 16 in 2009.
  - There are no separate regulations, instructions issued or reporting requirements for Islamic banks.
  - Legal provisions need enhancing across licensing, supervisory powers, consolidated and cross border supervision and issuance of prudential regulations.
  - Supervision is constrained by limited resources and training opportunities for supervisors.
  - The law does not include a clause on legal protection of supervisors.
  - While it establishes some corporate governance requirements, detailed guidelines or instructions on corporate governance for banks are yet to be issued.

- Risk-based supervision shortcomings:
  - Inspectors perform work according to a risk focused onsite manual, but risk based policies for onsite inspections are yet to be developed.
  - No clear policies for the frequency and scope of inspection missions relative to systemic importance, weaknesses, and problems.
  - Coordination between onsite and off-site supervision is not as effective as it should be.
  - Inspection of full-fledged Islamic banks is currently performed in a similar manner to conventional banks.

- Enforcement and corrective powers:
  - Banking law and regulations allow the CBY to take enforcement measures, but there is no systematic or structured process to implement the enforcement framework.
  - Criteria and parameters that would trigger enforcement measures and the progressive actions for non compliance are not stipulated.

- Macroprudential surveillance and data:
  - The CBY does not undertake stress testing and there are no guidelines on stress testing requirements for banks.
  - Data for undertaking stress testing is not collated.
  - The current manual process for banking submitting returns to the CBY impedes effective surveillance.

- Bank resolution framework gaps:
  - CBY has powers to approve voluntary liquidation, revoke licenses in specified cases and to reorganize or liquidate banks including appointing conservators.
  - Areas needing strengthening include triggers for placing a bank under official administration, deadline for terminating official administration, powers to override shareholders and provisions for judicial review, and the context for reorganizing banks and license revocation.

### C. The Monetary Policy Framework and Operations

- Market and instruments:
  - Economy is largely cash based, reducing the efficacy of the interest rate as a monetary policy tool.
  - Money markets are limited to primary issuance of treasury bills of 3, 6, and 12 months.
  - Government issues 3 year bonds and introduced Sukuk in 2011 to help manage liquidity of Islamic banks; there has been no issuance after the two first issues.
  - There is no overnight money market, interbank market for foreign exchange, or secondary trading of bonds.
  - Islamic banks do not participate in the treasury bill market in line with Sharia’a.

- CBY tools and practices:
  - CBY’s principal tool has been direct control of interest rates.
  - CBY sets a minimum interest rate on time and savings deposits that serves as a benchmark for other interest rates.
  - Other monetary policy tools include unremunerated reserve requirements (7 percent on rials deposits and 10 percent on foreign currency deposits); a rediscount facility at a penalty rate; an overdraft facility; treasury bill auction; repurchase operations; foreign exchange sales; and certificates of deposits.
  - The interest rate structure for treasury bills and bonds has an inverted yield curve that is not anchored on inflation expectations.

- Policy stance and exchange rate:
  - In principle, CBY operates a free floating exchange rate regime and targets monetary aggregates with the final aim of maintaining price stability, but in practice it targets the exchange rate.
  - Imported food accounts for a large share in the consumer basket and authorities are cognizant of potential pass through to inflation.
  - The “benchmark” or minimum interest rate on time and savings deposits has been used to enhance attractiveness of the rial and ensure exchange rate stability.

- Effects and risks of the benchmark rate:
  - The benchmark rate increases banks’ funding cost and lending rates and sets the floor for banks to bid on treasury bill interest rates.
  - CBY uses it to set rates on key monetary policy instruments, including commercial banks’ overdraft facility, repos, and Central Bank deposits.
  - High interest rates risks:
    - Attract more rial deposits but reduce credit in rials, leaving banks with additional liquidity invested in government securities or foreign assets and increasing the net open position.
    - Potentially create adverse selection in borrowers and increase NPLs as borrowers might not be able to pay high rates.
    - Encourage banks to refuse remunerated domestic deposits and thereby discourage financial intermediation.
    - Combination of high interest rates and a stable exchange rate could encourage carry trade activities.

### Priority Reforms

- Financial deepening and access to credit:
  - Enhance competition, provide business friendly environment, and lower the cost of doing business.
  - Address constraints to access to credit: non-user-friendly loan process, inadequate credit information, delays in legal proceedings, and difficulties to realize collaterals.
  - Improve database and dissemination of credit history and collateral information for SME sector.
  - Revisit the administered interest rate regime as it contributes to high lending rates and constrains credit demand.

- Strengthening banking supervision:
  - Close gaps in the legal framework.
  - Improve coordination of off-site supervision and on-site inspection and implement full-fledged risk based supervision.
  - Strengthen banks’ credit risk management systems as well as supervisory oversight and enforcement to address high credit risk.
  - Address concentrated and related parties’ lending and large exposures.
  - Ensure compliance with corporate governance, given predominance of large family business groups.
  - Strengthen supervision of Islamic banks.
  - Enhance enforcement of existing regulations and adopt international accounting and audit standards to promote transparency and reliability of information and ensure timely corrective actions.

- Macroprudential and data capacity:
  - Develop capacity in stress testing (staff expertise and data).
  - Expedite efforts to introduce electronic submission of data from commercial banks and improve the data warehouse for timely data.

- Develop non-bank financial sector:
  - Facilitate development of microfinance institutions to self sustaining levels.
  - Develop appropriate prudential and supervision rules and supervisory skills specific to the microfinance sector to enhance competition and modernize the sector and reduce cost of financing for small enterprises and individual borrowers.

- Deepen financial markets:
  - Develop secondary market for treasury bills by establishing institutional framework and introducing longer term maturity government bonds (to provide a basis for corporate bond and equity markets).

- Improve payments system:
  - Expedite efforts to improve payments system; current system provides only for checks which are not used much.
  - With World Bank assistance, CBY has been providing a legal basis for electronic settlements and handling payments of civil service salaries and public utility bills more easily.
  - Expansion of ATMs and direct depositing of some government salaries has improved services, but lack of modern electronic communications facilities remains a problem.
  - Improvements in the payment system could improve efficiencies in the banking system and facilitate monetary policy conduct.

*Prepared by Ms. Inutu Lukonga and Mr. Abdul Naseer.*

### 25.      For monetary policy, the recommendations of the MCM TA Mission should be given

### _cr13246 - 25.      For monetary policy, the recommendations of the MCM TA Mission should be given

### Monetary policy recommendations
- The Fund has recommended replacing the benchmarked minimum deposit rate with active liquidity management.
- In case of exchange rate pressures, tightening liquidity would be a more efficient instrument to stabilize the exchange rate and would allow for a smoother adjustment of the interest rate.
- These recommendations originate from MCM TA Mission advice and should be given consideration for monetary policy.

### Fund relations — membership and resources (as of May 31, 2013)
- Membership Status: Joined: May 22, 1990; Article VIII.
- General Resources Account:
  - Quota: 243.50 SDR Million 100.00 %Quota
  - Fund holdings of currency (Exchange Rate): 243.49 99.99
  - Reserve Tranche Position: 0.01 0.01
- SDR Department:
  - Net cumulative allocation: 232.25 100.00
  - Holdings: 164.64 70.89
- Outstanding Purchases and Loans:
  - RCF Loans 60.88 25.00 %Quota
  - ECF Arrangements 34.79 14.29 %Quota

### Latest financial arrangements
- ECF:
  - Date of Expiration: Jul 30, 2010; Apr 04, 2012
  - Amount Approved (SDR Million): 243.50; 34.79
  - Amount Drawn (SDR Million): 34.79 (second entry)
- ECF 1/:
  - Oct 29, 1997 – Oct 28, 2001: 264.75 approved; 238.75 drawn
- EFF:
  - Oct 29, 1997 – Oct 28, 2001: 72.90 approved; 46.50 drawn
- 1/ Formerly PRGF.
- SDR = US$ 1.51335 as of June 20, 2013

### Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming:
  - 2013: Principal 6.96 (presented in table context)
  - Charges/Interest: 0.02
  - 2014: Charges/Interest: 0.04
  - 2015: Charges/Interest: 0.28
  - 2016: Charges/Interest: 0.27
  - 2017: Charges/Interest: 0.25
  - Total (presented row): 0.02 0.04 0.28 7.23 13.30
- 2/ When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

### Safeguards assessment
- An update safeguards assessment was completed in June 2013 with respect to a disbursement made under the Rapid Credit Facility in April 2012.
- The updated assessment noted:
  - Steps have been initiated to strengthen CBY governance.
  - Financial statements are prepared and audited in accordance with international standards.
  - CBY has enhanced transparency with the publication of the full set of audited financial statements as recommended by the update assessment.
- Recommendations from the assessment:
  - CBY, in coordination with the Ministry of Finance, should finalize an agreement on repayment terms for credit extended to the government.
  - The capacity of the internal audit function should be further developed.

### Exchange arrangements and Article IV consultation
- Currency: Yemeni rial.
- IMF classification: “other managed” arrangement.
- Yemen has accepted the obligations of Article VIII, Sections 2, 3, and 4.
- In accordance with UN Security Council Resolutions, Yemen has taken measures to block the accounts of certain individuals and organizations and has notified the Fund in accordance with Decision 144.
- The latest Article IV consultation was concluded on January 8, 2010. Yemen is on the standard 12-month consultation cycle.

### Technical assistance (selected IMF TA missions listed)
- FAD:
  - Pension Reform, August 2001
  - Reform of the Budgetary Process, April 2002
  - Public expenditure management expert installation, September 2002
  - Tax policy, tax administration and customs reform, October–November 2002
  - Public Expenditure Management Advisor, August 2003–January 2004
  - Public Expenditure Management, March–April 2004
  - Support to LTO, April 2005
  - GST Implementation, April 2005
  - Support to LTO and GST Implementation, November 2005
  - Reforming Tax Administration and implementing GST, June 2006
  - Treasury Function and Related PFM Reforms, July 2007
  - Participation in World Bank Review Mission, June 2009
  - METAC revenue administration advisor and short term expert, June–July 2009; May 2010; August 2010
  - Developing Core Treasury Functions, December 2010
  - Revenue Administration Assessment Mission, February 2011
  - Energy Subsidy Reform, December 2012
- LEG:
  - AML/CFT Diagnostic, May 2006
  - AML/CFT Legal drafting, November 2006
  - Desk Review of Payment System, January 2011
- MAE:
  - Foreign reserves management, February–March 2001
  - Technical Assistance and Training Coordination and Expenditure Resource Mobilization, March 2005
  - ST Regional Expert Assignment, June–July 2005; August 2005
  - Support for the regulatory framework of the Central Bank of Yemen, September–October 2005
- MFD:
  - Liquidity Management, March–April 2005
  - Regional Advisor, September 2005
  - Payment Systems and Monetary Operations, October 2005
  - Support for the Central Bank of Yemen credit Registry, November–December 2005
- MCM:
  - METAC-Technical Assistance on Banking Supervision, May 2006
  - Banking supervision, June–July 2006
  - Credit Registry, July 2006
  - METAC- Banking Supervision, December 2006
  - METAC – Needs Assessment Visit, March – April 2007
  - Payment systems, January – February 2008
  - Developing the Government Sukuk Market, July 2009; May 2010; July 2010; February 2011
  - METAC- Developing Debt Management Capacity, July 2010; February 2011
  - METAC- Banking Supervision, August 2010; November 2009; October 2012
  - METAC- Strengthening Prompt Corrective Action (PCA), March 2013
- OTM:
  - TCAP Review, March 2004
  - Yemen - TCAP, March–April 2004
  - METAC – Needs Assessment Mission, February 2005
- STA:
  - Balance of payments statistics, January 2003; September 2005; January 2009; July 2009
  - Government Finance Statistics, January 2004
  - National Accounts Statistics, January 2004; May–June 2004; July 2009; December 2010; February 2013
  - Multisector Statistics Mission, August – September 2007
  - Consumer Price Index/Producer Price Index Mission, June–July 2009
  - Producer Price Index Mission – February 2010
  - METAC- Producer Price Index Mission, December 2012
  - METAC- Consumer Price Index Mission, December 2012

### Resident representation and TA coordination
- Resident Representative: Mr. Gazi Shbaikat.
- TA Coordinator: Mr. Ahmad Skeik Ebid.

### World Bank relations (selected figures and program elements)
- As of mid-June, the active IDA and TF portfolio in Yemen includes 31 projects with US$930 million in commitments, of which about US$655 million in undisbursed balances remain.
- The Bank’s new framework for support (ISN) endorsed November 2012 rests on three pillars:
  - (i) achieving quick wins and protecting the poor;
  - (ii) promoting growth and improving economic management;
  - (iii) enhancing governance and local service delivery.
- Joint Management Action Plan (JMAP) — selected Bank work program items and amounts:
  - Emergency Recovery Grant ($100 m IDA) Completed February 2013
  - AF for SFD - LIW for Youth and Child Nutrition ($25 m IDA) Completed March 2013
  - Basic Education II ($66 m IDA) Completed February 2013
  - Road Asset Management ($40 m IDA) Completed February 2013
  - AF for Health and Nutrition ($10 m IDA) FY14
  - AF for PFM Modernization Project ($5 m IDA) Completed May 2013
  - Enterprise Revitalization and Employment Pilot ($4.5 million Deauville Partnership Transition Fund) Completed January 2013
  - Government-CSOs Partnership ($1.5 m Transition Fund) Completed February 2013
  - Conducting a new Household Budget Survey (MDTF) September 2013
  - Growth Study September 2014 FY14
  - IFC Business Edge Advisory Program (IFC) FY13-14
  - Many other FY14 activities including Enhancing Financial Inclusion, Transparency and Stability Project (IDA), Accountability and Transparency Enhancement –Support to SNAAC ($5 m Deauville Partnership Transition Fund), and Water TA.

### IMF work program in next 12 months (selected items)
- Technical assistance on Enforcement Framework and FXR — March 2013
- Technical assistance on National Accounts — February 2013
- Technical assistance on tax and customs administration and tax policy — December 2013
- Technical assistance Needs Assessment — February 2013
- The 2013 Article IV consultations mission — March 2013 April 2013
- Staff Visit – Review of macroeconomic development and discussions of the macroeconomic framework and main parameters of the 2014 budget — October 2013

### Statistical issues — assessment and priorities
- Data remain broadly adequate to conduct surveillance, but some weaknesses persist (including delays in reporting).
- Priority improvements: national accounts data.
- Yemen has participated in the GDDS since April 26, 2001.
- Monetary statistics:
  - CBY disseminates total official reserve assets and monetary statistics with a lag of one month.
  - A multisector mission in August 2000 recommended:
    - (a) repurchase agreements be treated as collateralized loans;
    - (b) all nonstandard loans be reclassified as claims on the relevant sector;
    - (c) counterparty for several monetary accounts be more accurately identified;
    - (d) a number of monetary accounts be disaggregated to present position on a single financial instrument.
  - In June 2003, authorities began reporting more disaggregated data to STA.
  - In March 2007, the definition of broad money was broadened to include deposits of the pension funds, starting with data for December 1999.
  - CBY does not yet report monetary data to STA using Standardized Report Forms (SRFs).
- National accounts and price statistics:
  - Significant work remains despite progress toward 1993 SNA standards.
  - CSO improvements include GDP estimates for 1999–2005, new GDP series for 2000–2008, partial resolution of fluctuations in nominal and volume measures, and methodological fixes.
  - ESCWA assistance (2007–2009) resulted in a new National Accounts series adopted June 2009.
  - Remaining weaknesses noted by STA: non-observed economy, survey frame and sampling updates, improved deflators, small surveys for agriculture inputs, and outdated labor force survey (last survey 1999).
  - A follow-up mission planned for February 2013 to address weaknesses.
  - CPI constructed with weights derived from the 1998 Households Budget Survey (HBS); CSO working to update weights to reflect the 2005 HBS and considering reducing number of commodities from current coverage of 900 goods.
  - METAC TA on price statistics: Producer Price Index TA mission visited Sana’a during December 2–13, 2012.
- Fiscal data:
  - Reliability and timeliness improving.
  - Fiscal data published in the quarterly Bulletin of Government Finance Statistics (GFS Bulletin) on the Ministry of Finance website (www.mof.gov.ye), with annual, quarterly, and monthly data but significant lags and irregularity.
  - Authorities have reported data for publication in the Government Finance Statistics Yearbook from 2000 onwards; latest data are estimates for 1999.
  - No sub-annual data are reported for publication in International Financial Statistics.
  - GFS concepts and definitions are in transition from GFS 1986 to GFSM 2001; the GFS Bulletin uses a mixture of both.

*Prepared By Middle East and Central Asia Department (In Consultation with Other Departments) — Staff report excerpt for the 2013 Article IV Consultation — Informational Annex*

### 7. The CBY is responsible for compiling and disseminating balance of payments statistics, and

### _cr13246 - 7. The CBY is responsible for compiling and disseminating balance of payments statistics, and

### Balance of payments (BOP) and IIP compilation: institutional capacity and practices
- The CBY compiles and disseminates balance of payments statistics, and more recently, the international investment position (IIP) statistics based on the IMF’s Balance of Payments Manual, fifth edition.
- Compilation tasks are performed on a rather ad hoc basis, mostly relying on survey-based questionnaires with a response rate that is generally poor.
- The quality of the questionnaires themselves is weak due to limited expertise and experience in developing such material.
- Additional weaknesses include:
  - inadequacies in documented sources and methods;
  - limited financial and material resources dedicated to balance of payments compilation;
  - shortage of qualified staff dedicated to the compilation;
  - weak coordination between the CBY and other government agencies (customs authority, CSO, ministry of oil and mining resources).
- Coverage gaps and discontinued data collection:
  - Coverage of the oil and gas industry transactions remains weak.
  - Data questionnaires on Foreign Direct Investment (FDI) and selected items in services have either been discontinued or not followed up.
- STA and resident advisor engagement:
  - Successive STA balance of payments statistics missions (2002, 2003, and 2005) and the IMF’s resident advisor on balance of payments statistics (1998–2000) recommended an action plan; implementation has had only limited success.
  - STA missions have consistently called for better coordination between the CBY and other government agencies for timely and effective data collection and compilation, improved staffing and training, and the reinstitution of discontinued surveys.
  - A balance of payments mission in September 2005 found some progress: increased manpower and equipment in the balance of payments division, and training through the Arab Monetary Fund (AMF). The mission also focused on the method of estimating inward worker’s remittances.
- Data supplied to STA:
  - Yemen submitted quarterly balance of payments data to STA until end-2006, although the latest data published in the IFS and Balance of Payments Statistics Yearbook (BOPSY) relate to end-2005.
  - Quarterly IIP data has also been supplied to STA for 2003 and 2004.
- CBY publishes quarterly external debt statistics within one quarter of the reference period for:
  - the banking sector;
  - general government;
  - the monetary authority.

### Data reporting, coverage, and timeliness (Table of Common Indicators Required for Surveillance, As of June 3, 2013)
- Exchange rates: Latest Observation Jun 2013; Date Received Jun 2013; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International reserve assets and reserve liabilities of the monetary authorities 1/: Latest Observation Jun 2013; Date Received Jun 2013; Frequency of Data W; Frequency of Reporting W; Frequency of Publication Q.
- Reserve/base money: Latest Observation Apr 2013; Date Received Jun 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Broad money: Latest Observation Apr 2013; Date Received Jun 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central bank balance sheet: Latest Observation Apr 2013; Date Received Jun 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated balance sheet of the banking system: Latest Observation Apr 2013; Date Received Jun 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest rates 2/: Latest Observation Feb 2013; Date Received Feb 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consumer price index: Latest Observation April 2013; Date Received May 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, expenditure, balance and composition of financing 3/—general government 4/: Latest Observation Dec 2012; Date Received Feb 2013; Frequency of Data M; Frequency of Reporting I; Frequency of Publication Q.
- Revenue, expenditure, balance and composition of financing 3/—central government: Latest Observation Dec 2012; Date Received Feb 2013; Frequency of Data M; Frequency of Reporting I; Frequency of Publication Q.
- Stocks of central government and central government-guaranteed debt 5/: Latest Observation Dec 2012; Date Received Feb 2013; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- External current account balance: Latest Observation Dec 2012; Date Received Feb 2013; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Exports and imports of goods and services: Latest Observation Dec 2012; Date Received Feb 2013; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- GDP/GNP: Latest Observation 2012; Date Received Jan 2013; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Gross external debt: Latest Observation 2012; Date Received Feb 2013; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- International Investment Position: Latest Observation 2010; Date Received 2010; Frequency of Data Q; Frequency of Reporting A; Frequency of Publication A.
- Notes in table: 1/ Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. 2/ Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. 3/ Foreign, domestic bank, and domestic nonbank financing. 4/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. 5/ Including currency and maturity composition. 6/ Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

### Debt Sustainability Analysis (DSA): summary findings and projections
- Overall DSA assessment statements in the text:
  - "Based on the updated Debt Sustainability Analysis (DSA) reflecting the most recent information, Yemen’s risk of debt distress is upgraded from “high” to “moderate.”"
  - Later conclusion: "Based on the updated macroeconomic assumptions and ongoing reforms, Yemen’s risk of debt distress is upgraded to “medium” from “high.”"
- Key quantitative points and context:
  - Yemen’s public external debt-to-GDP is at a relatively low level of 17.9 percent of GDP as of end-2012.
  - Total external debt is $6.2 billion; half is owed to multilateral creditors. (Footnote: Excluding the Saudi deposit at the CBY of $1 billion.)
  - Largest bilateral creditors: Russia $1.2 billion, Saudi Arabia $0.4 billion, Japan $0.3 billion, Kuwait $0.2 billion.
  - Friends of Yemen pledge: around $8 billion dollars in aid for the period 2012-2014; exceptional $2 billion grant provided in 2012 by Saudi Arabia in support of the budget.
    - Of the Friends of Yemen pledges: amount committed thus far is $6 billion; amount disbursed so far is about $1.8 billion (including the $1 billion Saudi deposit at the central bank).
  - Borrowing from the Arab Monetary Fund (AMF): rose from around $99 million at end 2010 to about $260 million; an additional $100 million loan was signed and disbursed in 2013.
- Baseline and scenarios:
  - Baseline: all debt indicators are below the policy-dependent thresholds over the projection period; the PV of debt-to-exports ratio rises close to the threshold over the long term but does not exceed it through 2033.
  - Stress tests and alternative scenarios: all indicators remain below thresholds except the PV of debt-to-exports ratio under the most extreme shock, which rises above the threshold of 100 percent starting in 2015 and peaks in 2023 at 180 percent (B2).
  - Public DSA:
    - Nominal debt-to-GDP ratio would exceed 50 percent in 2015 and remain above it through 2020.
    - Debt-to-GDP ratio peaks in 2018 at 58 percent and declines thereafter, reaching about 32.5 percent in 2033.
  - Vulnerabilities: Yemen remains vulnerable to less favorable borrowing terms and to an abrupt decrease in exports, possibly associated with a sharp decrease in oil prices.
- Key assumptions and macro framework (Box 1 highlights):
  - Growth: medium term (2013–18) real GDP growth averages about 4.1 percent; converges to average 4.5 percent over long term (2019–33). Non-hydrocarbon growth assumed average 4.4 percent in medium term (2013–18) and 4.7 percent in long term.
  - Hydrocarbon sector: oil production continues towards the end of the projection period rather than being depleted in 2022; assumed subsequent declines of three percent per year over the long-term; Yemen would use only about half of the proven reserves by 2033 given these assumptions. Proven oil reserves cited at about 3 billion barrels.
  - LNG: assumes no increase in LNG over the medium-term and a gradual average annual increase of 5 percent from 2019 onwards.
  - Inflation: medium term stays relatively high but single digit; long term average 6.8 percent.
  - Public finance: fiscal deficit around 5.8 percent of GDP in 2013; overall expenditures decline from 33.0 percent in 2013 to 22.1 percent in 2033; overall fiscal deficit gradually declines to around 2.2 percent in 2033.
  - External sector: exports expected to decrease in the medium term; non-hydrocarbon exports growth around 5.9 percent in the medium term and 6.0 percent in the long run; import growth modest at average 2.8 percent over the projection period; current account deficit would gradually increase to over 3.6 percent of GDP in the medium term but slowly worsen over the projection period.
- DSA sensitivity and stress-test results (select highlights):
  - PV of debt-to-exports ratio under extreme shock: exceeds 100 percent starting in 2015; peaks at 180 percent in 2023 (scenario B2).
  - Public sector nominal debt-to-GDP: peak 58 percent in 2018; 32.5 percent in 2033.
  - Table excerpts (selected indicators):
    - Public external debt-to-GDP as of end-2012: 17.9 percent of GDP.
    - Total external debt: $6.2 billion.
    - Friends of Yemen pledges: around $8 billion; committed $6 billion; disbursed about $1.8 billion.
    - AMF borrowing: around $99 million at end 2010; about $260 million later; additional $100 million loan disbursed in 2013.
    - PV of debt-to-exports threshold breach: 180 percent peak in 2023 under B2 shock.

### Policy implications and recommended actions (as discussed in the source)
- Strengthen BOP and IIP compilation and dissemination:
  - Improve staffing and training dedicated to balance of payments compilation.
  - Reinstitute and follow up discontinued surveys, including FDI and selected services questionnaires.
  - Improve coordination between the CBY and other government agencies (customs authority, CSO, ministry of oil and mining resources) for timely and effective data collection.
  - Enhance documented sources and methods and allocate financial and material resources to BOP compilation.
- Fiscal and external policy priorities to reduce vulnerabilities:
  - Embark on a fiscal consolidation path to contain public debt dynamics.
  - Increase non-oil revenues through recently introduced General Sales Tax and strengthening tax and customs administration.
  - Exercise expenditure restraint, including moderate efforts to control the public wage bill and fuel subsidies, to allow overall expenditures to decline from 33.0 percent in 2013 to 22.1 percent in 2033.
  - Facilitate non-hydrocarbon growth by improving the investment environment, restoring security, and attracting donor-funded public investment and private credit.
  - Monitor borrowing terms and external shocks; remain vigilant to abrupt decreases in exports and sharp decreases in oil prices.

*Source: IMF staff report and DSA text included in the provided PDF content.*

### 1. Real GDP growth and primary balance are at historical averages164175191208218240287349

### 1. Real GDP growth and primary balance are at historical averages164175191208218240287349

### Alternate Scenarios and Bound Tests (Summary of scenario labels and select numeric outcomes)
- A. Alternative scenarios (selected entries shown in source):
  - A1. Real GDP growth and primary balance are at historical averages: 164175191208218240287349 (title line reflects scenario label and numbers as given).
  - A2. Primary balance is unchanged from 2013: 164172182184197202219233233 (as listed).
  - A3. Permanently lower GDP growth 1/: 164176193213226259286425 (as listed).
- B. Bound tests (selected entries shown in source):
  - B1. Real GDP growth is at historical average minus one standard deviations in 2014-2015: 164190230259277319347393 (as listed).
  - B2. Primary balance is at historical average minus one standard deviations in 2014-2015: 164186212227232257228175 (as listed).
  - B3. Combination of B1-B2 using one half standard deviation shocks: 164185213236249283286290 (as listed).
  - B4. One-time 30 percent real depreciation in 2014: 164197210224229254229188 (as listed).
  - B5. 10 percent of GDP increase in other debt-creating flows in 2014: 164208222237242268238183 (as listed).
- Baseline references in source text also list repeated numeric sequences: Baseline1918192019181511 and alternative Baseline1919202120203451 (retain exact numeric strings as provided).

### External Debt Sustainability Framework — Baseline Scenario (2010–2033) — Key indicators (selected exact values)
- External debt (nominal) 1/: 21.1 20.4 20.3 19.2 20.2 21.6 23.3 24.6 26.2 27.9 22.5 (historical/projections row as shown).
- Of which: public and publicly guaranteed (PPG): 19.3 18.3 17.9 16.7 17.0 17.6 18.5 19.2 19.9 19.2 14.5.
- Change in external debt: -5.0 -0.7 -0.1 -1.1 1.0 1.3 1.7 1.4 1.6 0.1 -0.9.
- Identified net debt-creating flows: 0.8 5.8 -1.3 3.6 4.5 4.5 3.9 3.3 2.6 3.4 0.4.
- Non-interest current account deficit: 3.5 3.9 0.7 2.9 4.6 2.4 3.2 3.4 3.9 3.4 3.0 4.4 1.1 3.2.
- Deficit in balance of goods and services: 5.0 2.9 8.8 4.5 4.4 5.1 5.9 6.0 4.9 5.6 2.7.
- Exports: 29.8 29.9 26.5 26.4 25.9 24.9 23.7 23.9 23.3 18.7 16.1.
- Imports: 34.9 32.8 35.3 30.9 30.3 30.0 29.6 29.9 28.1 24.2 18.8.
- Net current transfers (negative = inflow): -6.8 -6.4 -12.4 -7.7 2.0 -6.8 -6.7 -6.8 -6.8 -7.0 -7.0 -6.2 -5.6 -6.0.
  - Of which: official: -2.1 -2.3 -6.2 -1.9 -1.8 -1.9 -2.0 -2.1 -2.0 -1.5 -0.6.
- Net FDI (negative = inflow): 2.1 3.0 -1.0 -0.8 3.4 2.0 1.7 1.5 0.5 0.3 0.1 -0.3 -0.3 -0.3.
- Endogenous debt dynamics: -4.7 -1.2 -1.1 -0.8 -0.4 -0.5 -0.4 -0.4 -0.4 -0.7 -0.4.
  - Contribution from nominal interest rate: 0.2 0.2 0.2 0.3 0.2 0.3 0.4 0.5 0.5 0.5 0.5.
  - Contribution from real GDP growth: -1.6 2.5 -0.5 -1.1 -0.6 -0.8 -0.8 -0.9 -0.9 -1.2 -1.0.
  - Contribution from price and exchange rate changes: -3.3 -3.8 -0.8 ...
- Residual (3-4): -5.8 -6.6 1.2 -4.7 -3.4 -3.1 -2.2 -1.9 -1.1 -3.3 -1.3.
  - Of which: exceptional financing: -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0.
- PV of external debt 4/: 16.5 15.6 16.6 17.8 19.3 20.5 22.0 24.7 20.3 (as shown in PV row).
  - In percent of exports: 62.3 59.2 64.2 71.6 81.5 85.8 94.8 132.4 125.9 (as provided).
- PV of PPG external debt: 14.1 13.1 13.4 13.8 14.6 15.1 15.7 16.0 12.4.
  - In percent of exports: 53.2 49.7 51.8 55.6 61.5 63.3 67.6 85.6 76.7.
  - In percent of government revenues: 59.2 50.4 52.6 56.8 62.7 65.8 72.2 78.8 64.3.
- Debt service-to-exports ratio (in percent): 2.8 2.6 3.0 3.0 3.4 3.7 4.4 4.4 4.6 5.9 6.5.
- PPG debt service-to-exports ratio (in percent): 2.8 2.6 2.9 3.0 3.3 3.4 3.9 3.5 3.6 4.1 4.6.
- PPG debt service-to-revenue ratio (in percent): 3.3 3.3 3.2 3.0 3.4 3.5 4.0 3.7 3.9 3.8 3.8.
- Total gross financing need (Billions of U.S. dollars): 2.0 2.6 0.2 2.1 2.5 2.6 2.5 2.2 2.0 3.4 2.3.
- Non-interest current account deficit that stabilizes debt ratio: 8.5 4.7 0.8 3.6 2.1 2.1 2.2 2.0 1.4 4.3 2.0.

### Key macroeconomic assumptions (exact values from source)
- Real GDP growth (in percent): 7.7 -12.7 2.4 2.5 5.5 6.0 3.4 3.9 3.8 4.0 3.7 4.1 4.4 4.5 4.5.
- GDP deflator in US dollar terms (change in percent): 14.7 22.3 4.3 10.2 10.9 7.9 2.2 -0.4 -0.4 0.1 -0.2 1.5 1.4 1.6 1.4.
- Effective interest rate (percent) 5/: 1.2 0.9 1.2 1.2 0.3 1.4 1.4 1.5 1.7 2.1 2.1 1.7 1.8 2.5 2.2.
- Growth of exports of G&S (US dollar terms, in percent): 30.6 7.0 -5.5 6.6 21.7 14.2 3.5 -0.5 -1.6 5.1 0.5 3.5 4.4 4.1 3.5.
- Growth of imports of G&S (US dollar terms, in percent): 8.2 0.3 15.0 12.0 15.3 0.3 3.3 3.2 2.1 5.1 -2.6 1.8 3.5 3.3 3.2.
- Grant element of new public sector borrowing (in percent): 22.1 21.9 21.8 21.8 21.8 20.4 21.6 20.4 20.4 20.4 (as listed).
- Government revenues (excluding grants, in percent of GDP): 24.8 23.8 23.8 26.0 25.5 24.4 23.2 23.0 21.8 20.3 19.3 20.1.
- Aid flows (in Billions of US dollars) 7/: 0.7 0.5 2.5 0.6 0.8 0.9 1.0 1.1 0.8 0.8 0.7.
  - Of which: Grants: 0.4 0.4 2.2 0.5 0.6 0.7 0.7 0.8 0.8 0.8 0.7.
  - Of which: Concessional loans: 0.3 0.1 0.3 0.2 0.1 0.2 0.3 0.3 0.0 0.0 0.0.
- Grant-equivalent financing (in percent of GDP) 8/: 1.5 1.8 1.9 2.1 2.1 2.0 1.5 0.7 1.2 (as listed).
- Grant-equivalent financing (in percent of external financing) 8/: 56.9 62.9 57.3 54.9 56.3 56.8 56.3 52.8 54.6.

### Memorandum items (exact values)
- Nominal GDP (Billions of US dollars): 31.0 33.1 35.4 40.5 42.8 44.2 45.7 47.6 49.2 65.4 118.0.
- Nominal dollar GDP growth: 23.5 6.7 6.8 14.4 5.6 3.4 3.3 4.1 3.5 5.7 5.8 6.2 6.0.
- PV of PPG external debt (in Billions of US dollars): 4.9 5.2 5.5 5.9 6.4 7.0 7.6 10.2 14.3.
- (PVt-PVt-1)/GDPt-1 (in percent): 0.8 0.6 1.0 1.2 1.3 1.2 1.0 0.9 0.3 0.7.
- Gross workers' remittances (Billions of US dollars): 1.6 1.4 2.3 2.1 2.1 2.3 2.3 2.5 2.6 3.3 6.2.
- PV of PPG external debt (in percent of GDP + remittances): 13.2 12.5 12.8 13.2 13.9 14.4 14.9 15.2 11.8.
- PV of PPG external debt (in percent of exports + remittances): 42.9 41.7 43.4 46.1 50.7 52.0 55.3 67.5 57.8.
- Debt service of PPG external debt (in percent of exports + remittances): 2.4 2.5 2.8 2.8 3.3 2.9 3.0 3.2 3.4.

### Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (2013–2033) — selected percent outcomes
- Table 3b, PV of debt-to-GDP ratio (selected baseline and scenario values as listed):
  - Baseline (2013–2018 average shown): Baseline1313141515161612 (numeric string from table).
  - A. Alternative Scenarios:
    - A1. Key variables at their historical averages in 2013-2033 1/: 13107655-12.
    - A2. New public sector loans on less favorable terms in 2013-2033: 21313141617182018.
  - B. Bound Tests (selected):
    - B1. Real GDP growth at historical average minus one standard deviation in 2014-2015: 1314151617171814.
    - B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/: 1317232424252415.
    - B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/: 1318192021222217.
- Additional baseline rows in sensitivity tables include strings: Baseline5052566163688677; Baseline5053576366727964; Baseline33344445; Baseline33444444 (retain exact numeric strings as provided).
- Selected scenario outcomes for other ratios (PV of debt-to-exports ratio; PV of debt-to-revenue ratio; Debt service-to-exports ratio; Debt service-to-revenue ratio) are presented in the tables as exact numeric sequences; examples include:
  - A1 (alternative scenario) rows: 503829242120-414; 503930252222-412; 33332210.
  - B1, B2, B3, B4, B5, B6 rows include many exact numeric sequences shown in the source tables (e.g., 50577279818710789; 50659410210511411677; 35565555).
- Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/: 19 19 19 19 19 19 19 19 19 (as listed).

### Figures and Most Extreme Stress Tests (text summary of source captions and labels)
- Figure 1 caption explains: "The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock."
- Figure panels include labels and axes for:
  - a. Debt Accumulation (Rate of Debt Accumulation; Grant-equivalent financing (% of GDP); Grant element of new borrowing (% right scale))
  - b. PV of debt-to GDP ratio
  - c. PV of debt-to-exports ratio
  - d. PV of debt-to-revenue ratio
  - e. Debt service-to-exports ratio
  - f. Debt service-to-revenue ratio
- Figure 2 caption: "Indicators of Public Debt Under Alternative Scenarios, 2013-2033 1/" and notes that revenues are defined inclusive of grants.

### Press Release highlights (Press Release No. 13/291, July 31, 2013) — selected exact findings
- The IMF concluded the 2013 Article IV consultation with the Republic of Yemen on July 19, 2013.
- Macroeconomic developments and 2012 outcomes:
  - After contracting by more than 12 percent in 2011, real GDP is estimated to have grown by 2.4 percent in 2012.
  - Average inflation declined to 9.9 percent from 19.5 percent in 2011.
  - The current account deficit narrowed in 2012 to about 1 percent of GDP compared to 4.1 percent in the preceding year.
  - Gross reserves increased to $5.6 billion, equivalent to about 5.5 months of imports.
- Fiscal and budgetary outcomes:
  - The budget deficit widened to 6.3 percent of GDP.
  - Subsidies increased to about 9 percent of GDP.
  - The wage bill increased to about 11 percent of GDP.
  - The non-hydrocarbon primary deficit excluding grants deteriorated to 21.1 percent of GDP (text cuts off after this figure in provided excerpt).

*Sources: Country authorities; and staff estimates and projections.*

### 17.6 percent a year earlier. Public debt remained moderate at about 48 percent of GDP, with

### _cr13246 - 17.6 percent a year earlier. Public debt remained moderate at about 48 percent of GDP, with

### Macroeconomic developments and outlook
- Real GDP at market prices: 3.9 (2009), 7.7 (2010), -12.7 (2011), 2.4 (2012), 6.0 (2013, proj).
- Real nonhydrocarbon GDP: 4.1 (2009), 4.4 (2010), -12.5 (2011), 4.0 (2012), 4.0 (2013, proj).
- Real hydrocarbon GDP: 1.6 (2009), 46.9 (2010), -14.5 (2011), -11.5 (2012), 26.2 (2013, proj).
- Consumer price index (annual average): 3.7 (2009), 11.2 (2010), 19.5 (2011), 9.9 (2012), 12.0 (2013, proj).
- Consumer price index (eop): 8.8 (2009), 12.5 (2010), 23.2 (2011), 5.8 (2012).
- Hydrocarbon production (1,000 barrels/day): 290 (2010), 426 (2010?), 364 (2011), 321 (2012), 406 (2013, proj).
  - Crude oil 1/: 274 (2009?), 264 (2010), 197 (2011), 154 (2012), 226 (2013, proj).
  - LNG (oil equivalent): 16 (2009?), 162 (2010), 167 (2011), 167 (2012), 180 (2013, proj).
- Gross foreign reserves (memorandum): 6,213 (2009), 5,081 (2010), 3,974 (2011), 5,590 (2012), 4,743 (2013, proj).
- In months of imports (reserves): 7.2 (2009), 5.8 (2010), 3.9 (2011), 5.6 (2012), 4.6 (2013, proj).
- Exchange rate (eop) (YRls per U.S. dollar): 207.4 (2009), 213.8 (2010), 227.5 (2011), 214.9 (2012).
- Real effective exchange rate (2008 = 100): 96.7 (2009), 99.6 (2010), 108.4 (2011), 121.8 (2012).
- Nominal GDP at market prices:
  - In billions of Yemeni rials: 5,098 (2009), 6,817 (2010), 7,083 (2011), 7,588 (2012), 8,870 (2013, proj).
  - In millions of U.S. dollars: 25,131 (2009), 31,046 (2010), 33,129 (2011), 35,381 (2012).
- Per capita GDP (in U.S. dollars): 1,061 (2009), 1,272 (2010), 1,318 (2011), 1,367 (2012).
- Population (in thousands): 23,687 (2009), 24,398 (2010), 25,130 (2011), 25,884 (2012).

### Fiscal position and public debt
- Total revenue and grants (percent of GDP): 25.0 (2009), 26.0 (2010), 25.0 (2011), 29.9 (2012), 27.2 (2013, proj).
- Total expenditure (percent of GDP): 35.4 (2009), 30.1 (2010), 29.4 (2011), 36.2 (2012), 33.0 (2013, proj).
- Overall balance (cash basis, percent of GDP): -10.2 (2009), -4.0 (2010), -4.4 (2011), -6.3 (2012), -5.8 (2013, proj).
- Nonhydrocarbon primary balance (cash, percent of GDP): -22.3 (2009), -18.1 (2010), -16.5 (2011), -15.0 (2012), -16.4 (2013, proj).
  - Excluding grants: -19.3 (2010?), -17.6 (2011?), -21.1 (2012?), -17.6 (2013?) — as presented in the source table.
- Gross Public Sector Debt (percent of GDP): 49.9 (2009), 42.2 (2010), 45.2 (2011), 47.8 (2012), 48.1 (2013, proj).
  - External debt (percent of GDP): 24.6 (2009), 19.3 (2010), 18.3 (2011), 17.9 (2012), 16.7 (2013, proj).
  - Domestic debt (percent of GDP): 25.3 (2009), 22.9 (2010), 26.8 (2011), 29.9 (2012), 31.5 (2013, proj).
- Key fiscal policy messages and measures:
  - Authorities committed to improving fiscal sustainability and creating fiscal space for poverty reduction and pro-growth spending.
  - Plans to boost non-hydrocarbon revenues through strengthened tax collection and revenue administration, including pre-shipment inspections, IT upgrades in customs and tax, and enhanced tax-customs cooperation.
  - Commitment to avoid grandfathering previous tax or customs exemptions under the 2010 investment law.
  - Measures to control the wage bill, including biometric identification for civil service, military, and police to eliminate fraudulent wage payments.
  - Unification of diesel price in electricity sector already taken; timing of further subsidy reforms to depend on political and social developments.
  - Fiscal deficit financing mainly from domestic borrowing and grants; plan to reissue Islamic bonds (Sukuks).
  - Need for additional and increasingly concessional donor support; authorities ready to cut expenditures if revenue shortfalls occur, with attendant risks to investment and social spending.

### Monetary developments and banking sector
- Monetary aggregates and rates:
  - Broad money (twelve-month change in percent): 10.6 (2009), 9.2 (2010), 0.0 (2011), 21.5 (2012), 16.0 (2013, proj).
  - Reserve money (twelve-month change in percent): 11.2 (2009), 7.7 (2010), 15.8 (2011), 12.9 (2012), 10.0 (2013, proj).
  - Credit to private sector (twelve-month change in percent): -4.8 (2009), 8.2 (2010), -16.9 (2011), -0.6 (2012), 15.0 (2013, proj).
  - Benchmark deposit interest rate (percent): 10.0 (2009), 20.0 (2010), 20.0 (2011), 18.0 (2012), 15.0 (2013, proj).
  - Velocity (non-oil GDP/M2): 2.0 (2009), 2.1 (2010), 2.1 (2011), 2.2 (2012), 2.1 (2013, proj).
- Specific monetary developments noted:
  - Money supply in 2012 increased by 21 percent, reflecting higher net foreign assets and net credit to the government.
  - Most of the increase in money supply occurred in the second semester of 2012, beyond indicative benchmarks set under the RCF.
  - With deceleration in inflation, the Central Bank of Yemen (CBY) reduced the policy interest rate in October 2012 from 20 to 18 percent, and again to 15 percent in February 2013.
  - Despite substantial excess reserves, private sector credit contracted slightly in 2012 (twelve-month change -0.6 percent), reflecting high real interest rates, fledgling recovery, and high credit risk.
  - Net claims on government increased by almost 30 percent (as described in the narrative).
- Banking system condition:
  - Banking system described as stable, with aggregate profitability and liquidity.
  - Capital adequacy ratio estimated at 29.6 percent at end-December 2012.
    - High capital ratio partly due to large share of zero risk-weighted government securities in banks’ portfolios and high interest rates earned on these securities.
  - Non-performing loans stood at 25.5 percent, reflecting credit risk level and deficiencies in commercial banks’ risk management.
  - Footnote: "The large share of NPLs does not currently pose stability risks because private sector credit accounts for a small share of total assets."
  - Islamic banks challenged by limited eligible domestic investment opportunities.
  - Financial markets and the payment system are underdeveloped.

### Executive Board assessment and policy recommendations
- General assessment:
  - Executive Directors welcomed progress toward macroeconomic stability but noted the recovery is fragile and considerable challenges remain.
  - Emphasis on sustained implementation of reforms to strengthen macroeconomic stability, promote strong growth, employment, and poverty reduction.
- Fiscal recommendations:
  - Urged containment of the widening fiscal deficit and continuation of fiscal restructuring.
  - Supported plans to reorient the budget toward pro-growth and pro-poor expenditures.
  - Recommended gradual reduction in the share of wages in the budget — including by eliminating ghost workers — and reduction of generalized subsidies to free resources for infrastructure and priority social spending.
  - Noted that untargeted fuel subsidies disproportionately benefit the rich and encourage smuggling; welcomed decision to unify diesel price.
  - Urged building public support for comprehensive, gradual reform of fuel prices and increasing targeted transfers to protect the most vulnerable.
  - Called for securing timely donor disbursement through enhanced transparency and capacity in public finance management and program implementation.
  - Welcomed efforts to improve non-hydrocarbon revenue and stressed the need to strengthen tax and customs administration and refrain from extending tax exemptions.
  - Cautioned that limiting nonconcessional borrowing will be important to safeguard debt sustainability.
- Monetary and exchange rate recommendations:
  - Emphasized achieving price stability while ensuring monetary policy support for growth.
  - Underscored fiscal restraint to help reduce inflation and interest rates and avoid further crowding out private sector credit.
  - Saw need to improve the monetary policy framework and enhance central bank independence.
  - Noted the exchange rate is broadly in line with fundamentals and that greater exchange rate flexibility would help preserve international reserves and provide a cushion against external shocks.
- Financial sector and AML/CFT:
  - Highlighted importance of safeguarding financial system health and developing financial intermediation.
  - Encouraged expediting efforts to strengthen bank supervision and resolution frameworks.
  - Called for measures to address remaining shortcomings in the AML/CFT framework.
- Structural and statistical reforms:
  - Emphasized structural reforms to support high and inclusive growth and diversification: improving infrastructure, enhancing business climate, expanding access to financial services, and strengthening public institutions and governance.
  - Called for further efforts to improve economic and financial statistics to facilitate analysis and policy formulation.

### Authorities' statement and program priorities
- Background observations by authorities:
  - Economy began to recover in 2012 after contracting by 12 percent in 2011.
  - Inflation fell substantially and the exchange rate stabilized at pre-crisis levels; foreign exchange reserves increased.
  - Recovery remains nascent amid fragile political and security environment; attacks on oil pipelines and electricity transmission lines continue to disrupt production and delivery.
  - Country faces significant development needs, chronic water shortages, pressing social demands, high malnutrition rates, and over 55 percent of the population living below the poverty line.
  - Unemployment is high, particularly among youth.
- Transitional Program for Stabilization and Development (2012-2014) priorities:
  - Maintain macroeconomic stability while implementing ambitious reforms to promote inclusive growth and address social needs.
  - Enhance governance and civil sector reforms, financial sector regulation, and the business climate; reduce dependence on oil revenues.
  - Timely donor disbursement seen as crucial; Mutual Accountability Framework set up with World Bank to oversee aid disbursements.
- Monetary and financial sector commitments:
  - CBY lowered benchmark interest rate from 20 percent to 15 percent to encourage private sector credit and stands ready to adjust policy further as inflation declines.
  - Authorities intend to maintain exchange rate system that reflects market fundamentals and limit intervention to smoothing short-term fluctuations.
  - CBY committed to strengthen banking supervision, improve legal and operational framework for bank resolution, increase oversight of internal controls and risk management, enhance cross-border and macroprudential surveillance, and develop a regulatory framework for Islamic banking.
  - CBY developing guidelines for Prompt Corrective Action and reviewing the Banking Act; measures planned to strengthen AML/CFT framework.
- Structural reform commitments:
  - Continue reforms to diversify the economy into non-hydrocarbon sectors, improve business climate, and implement governance and judicial reforms to enhance transparency.

### Key external sector figures (in millions of U.S. dollars unless otherwise indicated)
- Exports, f.o.b.: 5,855 (2009), 7,650 (2010), 8,662 (2011), 7,908 (2012), 9,149 (2013, proj).
  - Hydrocarbon exports: 4,432 (2009), 6,281 (2010), 7,850 (2011), 6,891 (2012), 8,061 (2013, proj).
  - Nonhydrocarbon exports: 1,423 (2009), 1,369 (2010), 812 (2011), 1,017 (2012), 1,088 (2013, proj).
- Imports, f.o.b.: -7,868 (2009), -8,473 (2010), -8,543 (2011), -9,805 (2012), -9,797 (2013, proj).
  - Hydrocarbon imports: 1,966 (2009), 2,073 (2010), 2,578 (2011), 3,405 (2012), 3,140 (2013, proj).
  - Nonhydrocarbon imports: 5,902 (2009), 6,400 (2010), 5,964 (2011), 6,400 (2012), 6,656 (2013, proj).
- Current account (percent of GDP): -10.2 (2009), -3.7 (2010), -4.1 (2011), -0.9 (2012), -2.7 (2013, proj).

*Sources: Yemeni authorities; and Fund staff estimates and projections.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13246.pdf_