Republic of Yemen- December 2012 Staff Visit Mission Concluding Statement
IMF News, December 9, 2012
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- Published: December 9, 2012
I. Recent Developments and Outlook
- Yemen’s economic situation remains very difficult in 2012, but there has been some improvement thanks to the government’s steps and support from foreign partners.
- Intermittent progress towards starting the national dialogue is scheduled for early 2013.
- Continued attacks on oil pipelines and electricity transmission lines have led to interruptions of oil production and electricity delivery.
- Signs of economic activity reviving after over 10 percent decline in 2011.
- Inflation has come down to single digits.
- The exchange rate has appreciated then stabilized at pre-crisis levels.
- Foreign exchange reserves (including the recently received $1 billion deposits from Saudi Arabia) have increased to over $5.0 billion.
- Authorities reduced the policy interest rate from 20 percent to 18 percent.
- The fiscal deficit is expected at around 5.5 percent of GDP, as a result of the Saudi oil grant and cuts in capital expenditures and transfers.
- Non-hydrocarbon revenues have exceeded the budget estimates due to strengthened collection efforts.
- All indicative targets under the government’s reform program supported by the IMF’s Rapid Credit Facility have been met.
- Outlook for 2013:
- GDP expected to grow by over 4 percent.
- Inflation expected to further decline.
- The fiscal framework for the 2013 budget projects a deficit of 5.7 percent of GDP, almost equivalent to the estimated outcome in 2012 despite a projected decline in total government expenditures, reflecting a large decline in grants (mostly due to the phasing-out of the Saudi oil grant).
- Other government revenue expected to increase significantly as oil production recovers gradually and tax receipts improve.
- On the expenditure side, a significant decline in current expenditures—mainly lower interest payments and fuel subsidy in relation to GDP—will provide room for higher capital expenditures.
- The non-hydrocarbon primary fiscal deficit (excluding grants) is projected to remain high and increase somewhat to about 14 percent of GDP.
- The current account deficit and foreign exchange reserves would worsen unless large external grants materialize.
II. Policy Challenges and Recommendations
- Overarching policy focus: boosting inclusive growth while preserving macroeconomic stability.
- Fiscal and public expenditure management:
- Redirect public outlays to more efficient and growth-promoting expenditures.
- Strengthen tax collection especially from large tax payers and improve the underlying fiscal position.
- Contain the wage bill, which is at more than 10 percent of GDP, to achieve fiscal sustainability and free resources for social protection and infrastructure investment.
- Reforms should include eliminating ghost workers and double-dippers and pursuing civil service reforms to improve public service delivery.
- Energy pricing and social protection:
- Despite increases in domestic prices of some oil derivatives in 2012, fuel prices remain substantially lower than international prices; energy subsidies amount to about 8 percent of GDP.
- Large untargeted subsidies disproportionately benefit the richest segments, cause inefficiencies and smuggling, and contribute to environmental deterioration.
- Authorities are encouraged to further adjust fuel prices and launch other reforms to increase efficiency in the energy sector, while broadening the social safety net and increasing compensation for the poor through well-targeted cash transfers.
- Pay special attention to the use of diesel for “rental” power generation to avoid inefficiencies, leakages, and smuggling.
- Revenue administration and tax policy:
- Continue strengthening tax and customs revenues.
- Government should refrain from granting any exemptions as they will introduce more distortions and reverse past reform gains.
- Press ahead with full implementation of the increased threshold for the GST, promote self-assessment, and enhance cooperation between the Tax and Custom Authorities.
- Provide strong political and logistical support to improve administration and collection.
- Monetary, exchange rate, and central bank policies:
- Lowering further the benchmark policy interest rate gradually and more flexibility of the exchange rate would help expand credit to the private sector and improve competitiveness to support non-oil growth and job creation.
- The earlier lowering of the benchmark interest rate was a good first step given the downward trend in inflation and stable exchange rate.
- More exchange rate flexibility would help preserve foreign exchange reserves.
- The central bank should refrain from any additional lending to the government and reach an agreement with the Ministry of Finance to bring down the government’s outstanding credit within legal limits.
- Publishing detailed audit reports of the bank would be a step toward best international practices.
- Financial sector development and bank soundness:
- Preserve the financial system’s health and develop it to promote private sector–led growth.
- Banks’ assets are currently concentrated heavily in government papers and need to be diversified to minimize risks if government paper issuance shrinks.
- To facilitate credit growth while protecting bank health, improve prudential regulations, strengthen supervision and audit enforcement, reduce ownership concentration and connected lending, enhance bankruptcy and closure laws and procedures, and improve and expedite court procedures including out-of-court settlement.
- External support and implementation:
- Meeting Yemen’s challenges requires urgent actions and a medium-term reform strategy, supported by the international community.
- It is essential that the Friends of Yemen expedite disbursement of their pledges, and that the authorities spend these pledges effectively and efficiently.
- The IMF stands ready to continue to provide technical assistance and policy advice and to consider any further financial assistance the authorities may request.
Concluding statement of an IMF mission led by Mr. Khaled Sakr, December 9, 2012.