Press Release No. 14/526

Press Release No. 14/526
September 24, 2014

On September 2, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Yemen.

The macroeconomic situation continued to be relatively stable in 2013 and growth remained moderate. Nonhydrocarbon growth was steady at about 4 percent, while hydrocarbon growth picked up strongly, reversing part of the oil output decline in the preceding two years. As a result, real GDP growth is estimated to have doubled to almost 5 percent. At the same time, average inflation edged up slightly to reach 11 percent (up from about 10 percent a year earlier), and the exchange rate remained stable.

The overall fiscal deficit worsened only moderately in 2013 despite a large decline in grants. Although grants declined by about 5 percent of GDP, the overall fiscal deficit deteriorated by only 0.6 percent of GDP to reach 6.9 percent. This was achieved through a combination of expenditure restraint and an increase in nonhydrocarbon revenue. Subsidies and transfers were reduced by about 2.7 percent of GDP, mostly through limiting the supply of fuel products and shifting the schedule for payment of the subsidy bill by one month. Capital spending was also reduced by 1.3 percent of GDP. A 2012 decision to increase civil servants’ allowances was not implemented, leading to a 0.9 percent reduction in the wage bill. As a result, the underlying fiscal deficit (defined as the nonhydrocarbon primary deficit excluding grants) narrowed by about 6 percent of GDP. This adjustment was forced by the lack of financing and the authorities’ determination to refrain from central bank borrowing.

The widening of the external current account deficit was also moderate in 2013. The large decline in grants was mitigated by a healthy growth in exports and in remittances. At the same time, capital outflows increased, reflecting large scheduled repatriation of past oil companies’ foreign direct investment and the nonrecurrence of the large Saudi deposit of 2012. As a result, gross reserves declined by about US$740 million to reach US$4.9 billion, or 4.5 months of imports despite the sale to the central bank of pension funds’ foreign currency holdings of about US$250 million. On the other hand, the real effective exchange rate appreciated by 6.5 percent due to the relatively high domestic inflation and the nominal depreciation against the dollar of the currencies of Yemen’s key trading partners.

Monetary policy continued to be generally prudent, but fiscal dominance remained high. Broad money growth was slightly slower than the growth of nominal GDP, mostly reflecting the decline in net foreign assets. But net claims on central government continued to grow rapidly at about 28 percent. Private sector credit growth was also high at 39 percent, from a low base and after declining in the preceding two years. On February 7, 2013, the Central Bank of Yemen reduced the benchmark deposit interest rate from 18 percent to 15 percent.

The banking system remained stable, but some vulnerabilities remain. Banks are profitable, and liquid and capital adequacy ratios are high, albeit in large part reflecting the large zero-risk-weighted government securities on banks’ balance sheet. Nonperforming loans remain high, and so is asset concentration in government securities. Islamic banks have high exposure to the real estate markets abroad. The banking sector remains small and underdeveloped, and financial markets and the payment system are underdeveloped, limiting financial intermediation and monetary policy transmission.

The recent wave of sabotage of oil pipelines has had strong adverse effects on macroeconomic developments in the first half of 2014. The frequent sabotage resulted in a significant decline in oil production and exports. This has led to pressures on the fiscal and external positions. In the absence of reforms, the fiscal deficit would reach 9 percent of GDP and reserves would decline well below 3 months of imports. Severe fuel and electricity shortages have negatively impacted economic activity, with real GDP growth expected to decelerate to less than 2 percent.

Executive Board Assessment²

Executive Directors commended the authorities for policies that have preserved macroeconomic stability in a challenging political and security environment. Directors agreed, however, that GDP growth continues to be insufficient to bring down Yemen’s high unemployment and pervasive poverty. Accordingly, they welcomed the authorities’ ambitious reform program to be supported by an arrangement under the Fund’s Extended Credit Facility which will boost the pace of activity, address the country’s fiscal and external imbalances, and catalyze donors’ support.

Directors concurred that a substantial overhaul of the poorly targeted and distortionary system of energy subsidies needs to be the centerpiece of the reform package. They considered that the recent adjustment in the prices of key fuel products is an important step in this direction. Directors also welcomed the authorities’ plan to use part of the savings from subsidy reforms to finance high-quality infrastructure investment and to increase social transfers to the poor.

More broadly, Directors encouraged the authorities to reduce the fiscal deficit over the medium term by continuing to improve the structure of expenditures and revenues. In this regard, they endorsed plans to further reduce untargeted subsidies, better control the public sector wage bill, and improve tax compliance and administration. Directors also underscored the importance of strengthening public financial management, as well as the institutional capacity to implement fiscal decentralization.

Directors cautioned that, in the period ahead, monetary policy should aim at containing the impact of subsidy reforms on prices and encouraged the authorities to adjust the stance as needed to preserve macroeconomic stability. In this regard, reforms to strengthen central bank independence remain an important policy priority. While taking note that data limitations and other factors hamper the staff’s assessment of the real effective exchange rate, Directors were of the view that greater exchange rate flexibility would help protect reserves and support competiveness.

Directors recommended further strengthening prudential oversight of banks and enhancing financial market infrastructure. Priorities include addressing gaps in cross-border supervision, the regulation of Islamic banking, and the bank resolution framework, as well as strengthening the enforcement of the regime to combat money-laundering and the financing of terrorism.

Directors encouraged the authorities to improve governance and public sector service delivery to support inclusive, private sector-led growth. They also noted that improved economic and financial statistics would help guide economic policy making and surveillance.

Republic of Yemen: Selected Economic Indicators, 2010–18       2010 2011 2012 2013 2014 2015 2016 2017 2018           Prel. Proj. Proj. Proj. Proj. Proj.       (Change in percent, unless otherwise indicated) Production and prices                     Real GDP at market prices   7.7 -12.7 2.4 4.8 1.9 4.6 4.7 5.2 5.9 Real nonhydrocarbon GDP   4.4 -12.5 4.0 4.0 3.0 4.5 5.0 5.5 6.5 Real hydrocarbon GDP   46.9 -14.5 -11.5 13.2 -8.3 5.4 1.4 1.6 -1.3 Consumer price index (annual average)   11.2 19.5 9.9 11.0 9.0 11.4 8.5 8.0 7.8 Consumer price index (eop)   12.5 23.2 5.8 8.1 13.0 9.0 8.0 8.0 7.5 Hydrocarbon production (1,000 barrels/day)   426 364 322 365 334 352 357 363 358 Crude oil 1/   264 197 155 175 167 185 190 196 191 LNG (oil equivalent)   162 167 167 190 167 167 167 167 167     (In percent, of GDP) Government finance                     Total revenue and grants   26.1 25.3 29.9 23.9 23.9 22.7 22.9 23.0 22.4 Total expenditure   30.2 29.8 36.2 30.8 29.3 27.7 27.6 27.3 26.6 Overall fiscal balance (cash basis)   -4.1 -4.5 -6.3 -6.9 -5.4 -5.0 -4.7 -4.3 -4.2 Primary fiscal balance (cash)   -1.7 -0.2 -0.9 -1.5 -0.1 0.0 0.2 0.5 0.3 Nonhydrocarbon primary fiscal balance (cash)   -18.2 -16.7 -15.0 -14.3 -11.3 -9.6 -9.5 -8.7 -7.9 Excluding grants   -19.4 -17.9 -21.1 -15.2 -12.7 -10.6 -10.3 -9.4 -8.8 Gross Public Sector Debt   42.4 45.7 47.3 48.2 48.2 47.4 48.0 47.8 47.4 External debt   19.9 18.6 17.4 15.2 13.7 13.2 13.7 14.0 14.2 Domestic debt   22.5 27.1 29.9 33.0 34.5 34.2 34.3 33.8 33.2     (Twelve-month change in percent) Monetary data                     Broad money   9.2 0.0 21.5 12.5 11.2 … … … … Reserve money   7.7 15.8 12.9 1.9 5.7 … … … … Credit to private sector   8.2 -16.9 -0.6 38.9 12.0 … … … … Benchmark deposit interest rate (percent)   20.0 20.0 18.0 15.0 15.0 … … … … Velocity (non-oil GDP/M2)   2.4 2.3 2.4 2.4 2.4 … … … …     (In millions of U.S. dollars, unless otherwise indicated) External sector                     Exports, f.o.b.   7,648 8,662 7,349 7,639 9,024 10,535 10,620 10,801 10,762 Hydrocarbon   6,279 7,731 6,332 6,537 7,880 9,328 9,340 9,439 9,304 Nonhydrocarbon   1,369 931 1,017 1,101 1,144 1,207 1,279 1,362 1,458 Imports, f.o.b.   -8,473 -8,543 -10,240 -9,892 -10,211 -10,283 -10,592 -11,088 -11,772 Hydrocarbon   2,073 2,578 3,840 3,265 3,373 3,138 3,089 3,136 3,303 Nonhydrocarbon   6,400 5,964 6,400 6,627 6,837 7,145 7,502 7,953 8,469 Current account (percent of GDP)   -3.4 -3.0 -1.7 -3.1 -1.3 -1.1 -1.4 -1.4 -1.7 Memorandum items                     Gross foreign reserves   5,081 3,974 5,590 4,854 3,448 3,465 3,988 4,570 4,966 In months of imports   5.7 3.7 5.5 4.5 3.2 3.1 3.4 3.7 3.8 Exchange rate (eop) (YRls per U.S. dollar)   213.8 213.8 214.89 214.89 … … … … … Real effective exchange rate (2008 = 100)   98.9 116.2 122.5 130.3 … … … … … Nominal GDP at market prices                     In billions of Yemeni rials   6,787 6,997 7,587 8,685 9,767 11,338 12,653 14,210 15,998 In millions of U.S. dollars   30,907 32,726 35,401 40,415 … … … … … Per capita GDP (in U.S. dollars)   1,267 1,302 1,368 1,516 … … … … … Population (in thousands)   24,398 25,130 25,884 26,660 … … … … …   Sources: Yemeni authorities; and IMF staff estimates. 1/ The sharp declines in crude oil production reflects sabotage of oil pipeline, in 2011, 2012, and 2014.         1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.