Press Release No. 01/6

The Executive Board of the International Monetary Fund today approved loans and credits totaling SDR 26.5 million (about US$34 million) to support the Republic of Yemen's third annual program under the Poverty Reduction and Growth Facility (PRGF)¹ and the fourth review of the Extended Fund Facility (EFF). Of the total, SDR 20 million (about US$26 million) is available under the PRGF and SDR 6.5 million (about US$8 million) is provided under the EFF.

A three-year loan and credit package totaling SDR 370.6 million (about US$479 million) was approved for Yemen on October 29, 1997 (See Press Release No. 97/49) consisting of SDR 264.8 million (about US$342 million) representing commitments under the PRGF, and SDR 105.9 million under the EFF (about US$137 million). Four PRGF disbursements totaling SDR 150 million (about US$194 million) have been made, and four EFF loans, amounting to SDR 40 million (about US$52 million) have been disbursed.

Following the IMF Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:

"The program adopted by theYemeni authorities aims at higher sustainable growth and lasting poverty reduction through consolidation of macroeconomic stability and structural reforms that address weaknesses in the business and investment environment.

"The Fund welcomes the authorities' commitment to adhere to a prudent fiscal policy aimed at saving some of the oil wealth for leaner years ahead and shifting public finances towards a sustainable non-oil deficit. On the revenue side, the authorities are encouraged to increase non-oil revenue and improve the investment climate by introducing broad-based and simple-to-administer direct and indirect taxes. In particular, the authorities intend to promulgate a general sales tax law that would allow the implementation of a value-added tax on most goods and services at a single rate. On the expenditure side, the program aims to curb subsidies in the energy sector, in order to release resources for more productive expenditures—particularly in social areas.

"The authorities plan to pursue civil service reform with renewed vigor in order to achieve a leaner civil service, better qualified to carry out the overall reform strategy. Planned wage increases for 2001 will be linked to the reduction in subsidies. The authorities also plan to move ahead with reforms that ensure the sustainability of the pension system, by establishing stronger links between benefits and contributions and more clearly circumscribing survivor benefits. The authorities intend to tighten monetary policy so as to bring down the inflation rate to a single digit level in 2001, and to limit intervention in the foreign exchange market so as to allow the exchange rate to respond flexibly to market forces. The program also calls for a strengthening of bank supervision and improvement in the functioning of commercial courts, as key to achieving higher domestic and foreign investment.

"The Interim Poverty Reduction Strategy Paper (IPRSP) provides a sound basis for the development of a full participatory PRSP by setting the tone for a frank and constructive consultation with a wide cross-section of government and nongovernmental institutions. With the support of technical assistance from the World Bank and the Fund, the authorities will further improve their public expenditure management to ensure that poverty-related spending is effectively monitored. It is expected that the PRSP will develop concrete proposals to address urgent issues relating to population management, water scarcity, efficiency of education services and a range of governance issues," Mr. Sugisaki said.

ANNEX

Background

Macroeconomic balances improved dramatically in 1999-2000 as a result of higher oil prices, the maintenance of high interest rates and expenditure restraint. Annual inflation was brought down to 8 percent in 1999 and reserves rebuilt by more than the equivalent of six months of imports by end-1999. The buildup of reserves continued in 2000, to more than ten months of imports by end-2000. However, average annual inflation rate rose to 10.9 percent. Real economic growth in 1999 was below target at an estimated 3.8 percent, reflecting: (a) a lower-than-expected increase in crude oil extraction; (b) drought in the first half of the year; (c) a decline in tourism; and (d) a continued weak investment climate. Growth in 2000 is estimated at 6.5 percent mainly due to higher crude oil production, with non-oil growth at 3.8 percent.

The government has prepared an interim Poverty Reduction Strategy Paper (I-PRSP) and has launched preparation of a full-fledged PRS in the context of elaborating the next Five-Year Plan (2001-2005). As proposed in the I-PRSP, the poverty reduction strategy will focus mainly on promoting private investment to achieve higher growth, strengthening the efficiency of public expenditure in delivering basic social services and providing infrastructure needed to allow the poor to participate in, and contribute to, economic growth; enhancing the capabilities of the poor and increasing the return on their assets; and providing a stronger social safety for the most vulnerable .The government's macroeconomic objectives for 2001 are to achieve an increase in non-oil growth to about 4 percent through higher public and private investment, containing inflation to an annual rate of 9 percent, and achieving a small external current account surplus in order to build a cushion for the future. As to the macroeconomic policy mix, fiscal policy will aim to contain the non-oil deficit to 13.5 percent of GDP, while within a flexible exchange rate system reserve money targeting will provide a nominal anchor. The government plans to tighten monetary policy in 2001 to reduce the growth of monetary aggregates, to prevent the acceleration of inflation.

The challenge ahead will be to preserve macrostability and to speed up the implementation of structural reforms in order to address deep-rooted weaknesses in the business and investment environment. Progress on structural reforms picked up in 2000 after a slowdown in late in 1999. The government plans to accelerate the implementation of these reforms in 2001. The centerpiece of the planned structural reforms is the promulgation of a General Sales Tax Law that would allow the implementation of a value added tax on most goods and services at a single rate supported by a modernization of tax administration through a large taxpayer unit and self assessment. On the expenditure side, the government plans to take measures to curb subsidies in the energy sector in order to release resources for more productive expenditures and accelerate civil service reform, including reforms to ensure the sustainability of the pension system. . Budget expenditure on social needs, including health, education and welfare, is targeted to increase from 9 percent of GDP in 2000 to over 11 percent of GDP in the medium term.

Yemen's membership in the IMF dates from May 22, 1990, its quota² is SDR 243.5 million (about US$315 million) and its outstanding use of IMF credit currently totals SDR236.8 million (about US$306 million).

Table 1. Republic of Yemen: Selected Economic and Financial Indicators, 1996-2001           Prog. 1   1997 1998 1999 2000 2001   (Annual percent change, unless otherwise indicated)             National income and prices           GDP at constant prices 8.1 5.3 3.8 6.5 2.4 Consumer prices (average annual) 4.6 11.5 8.0 10.9 9.0 Consumer prices (end-of-period) 7.1 11.9 10.2 2.8 8.8 External Sector 2           Exports 0.0 -51.5 64.2 63.8 -27.4 Imports 4.9 -7.4 9.5 24.5 6.3 Money and credit           Net domestic assets -7.8 44.1 -18.8 -107.1 -94.5 Credit to the private sector 53.6 54.0 15.1 21.3 31.2 Broad money (M2) 10.7 11.7 13.8 25.1 11.4 Velocity 3 2.9 2.6 2.8 2.9 2.7       (Percent of GDP) Government financial operations           Total revenue 32.8 26.4 31.8 43.4 36.9 Total expenditure and net lending 34.7 32.7 32.1 33.3 34.0 Overall fiscal balance (commitment excluding grants) -2.5 -6.7 -1.2 9.4 2.3 Overall balance (cash) -1.8 -7.9 -0.4 9.4 2.9 Domestic public debt 25.3 32.3 24.2 9.3 3.4 External sector           Current account balance           Excluding transfers -1.1 -4.6 1.6 9.6 0.7 Including transfers 0.3 -3.7 2.9 10.0 1.3 External public debt service 4 12.6 17.0 10.5 7.4 8.1 External public debt 81.2 85.3 80.4 63.7 66.8 Gross official international reserves 5 5.3 4.2 6.0 10.0 10.7 Sources: The Yemeni authorities; and IMF staff estimates. 1 Scenario based on an economic program that could be supported under the IMF's PRGF and EFF facilities. 2 Goods only; in U.S. dollar terms. 3 Annual GDP divided by M2. 4 In percent of exports of goods and nonfactor services. 5 In months of imports. 1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Yemen, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP that was presented to the Executive Boards of the IMF and the World Bank in February 2001, and preparations for a participatory process are underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.