IMF Survey: New IMF Loan Backs Yemen's Reform Efforts

IMF News, August 3, 2010

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The IMF’s Executive Board approved a $369.8 million loan for Yemen.
The arrangement is a three-year arrangement under the Extended Credit Facility.
This marks the first time in nearly a decade that Yemen has requested IMF financial assistance.

Yemen population: 23 million.
Estimated 43 percent of citizens live below the national poverty line.
One of the highest malnutrition rates in the world.
Yemen’s oil reserves are expected to run out within a decade in the absence of new oil discoveries.
Depletion of groundwater is an additional resource challenge.
Other constraints: rapidly growing population, poor infrastructure, weak institutional capacity, difficult security situation, and civil unrest.
Oil sector developments:
- Oil production dropped substantially beginning in 2007.
- Collapse of international oil prices in late 2008 reduced oil revenues.
- Oil revenues account for about 60 percent of government revenues and over 90 percent of export revenues.
- Yemen began producing liquefied natural gas in late 2009, which only partially offset the fall in oil revenues.
Fiscal and external pressures:
- Record fiscal deficit of about 10 percent of GDP (2009).
- Yemeni rial depreciation: 3 percent against the U.S. dollar in 2009 and a further 9 percent in the first half of 2010.
- Foreign exchange reserves dropped by one-third in the same period.

Overall goal: put public finances on a sustainable medium-term path and accelerate nonhydrocarbon growth while maintaining moderate inflation.
Target: reduce the overall deficit to about 3½ percent of GDP by 2013 (from about 10 percent in 2009).
Major measures:
- Cut fuel subsidies, which are about 8-10 percent of GDP.
- Increase social transfers to protect the most vulnerable segments of the population.
- Implement tax policy and administration reforms to reduce reliance on the hydrocarbon sector.
- Authorities intend to put in place a package of tax policy reforms that would eliminate most income tax and customs exemptions.
- On July 1, the authorities fully implemented a General Sales Tax (GST).
- Contain nonessential current expenditures and shift spending toward capital spending and social transfers.
- Current vs. capital/spending mix to shift from 70 percent and 30 percent, respectively, to approximately 65 percent and 35 percent.

Improve the business climate to support growth outside the hydrocarbon sector.
Strengthen the social safety net to protect the poor during reform implementation.
Maintain inflation within moderate levels while boosting public investment.

Donor support is critical to program success.
At a 2006 donor conference in London, development partners pledged about $4.7 billion; only a portion has been disbursed.
The “Friends of Yemen” group has revived donor engagement, beginning with a high-level meeting in London in January 2010 that emphasized the need for rapid action and economic reforms.

IMF Survey: New IMF Loan Backs Yemen's Reform Efforts — IMF Middle East and Central Asia Department, August 3, 2010