Press Release No. 96/11

The International Monetary Fund (IMF) today approved a 15-month stand-by credit for the Republic of Yemen totaling SDR 132.4 million (about $193 million) in support of the Government's economic and financial reform program for 1996-97.

Background

Yemen's economy faced severe difficulties in recent years. Both the real rate of growth and incomes declined, unemployment rose, inflation accelerated, and the balance of payments deficit widened. In response to these conditions, the authorities in 1995 initiated a reform program to improve the economy's performance. The adjustments to fiscal, monetary, pricing, and exchange rate policies and the start of structural reforms yielded positive results with output recovering and inflation moderating sharply over the second half of the year.

The 1996-97 Program

The Government's macroeconomic objectives for 1996-97 are real GDP growth of 2.5 percent in 1996 and 5 percent in 1997; a reduction in the core inflation rate (excluding the effects of administered price adjustments) to about 20 percent in 1996 and 10 percent in 1997 from 55 percent in 1995; and the elimination of external debt service arrears by end-June 1996. To these ends, the Government's program aims at substantially strengthening the fiscal position by more than 5 percentage points to 2 percent of GDP in 1997. The financing of the central government deficit will not entail any domestic bank borrowing and will be met largely from external sources. The program also entails achievement of positive real interest rates, exchange system unification, and adoption of a floating exchange rate regime.

Structural Reform Policies

The Government's structural reform priorities under the program include major improvements in the tax system; reforms of the civil service, customs administration, and public enterprises; legal reforms to enhance banking system intermediation; one-step trade liberalization, tariff reform, and harmonization of excise taxes; multi-sector privatization; and a major liberalization of the investment and regulatory framework in order to further enhance private sector investment and activity.

Addressing Social Concerns

The program's social safety net components include a Social Safety Net Fund for which some resources have been provided in the 1996 budget and external resources are being solicited; a civil works program to create income-generating employment for unskilled labor while upgrading infrastructure and social service facilities; and concessional first tranche pricing for electricity and water following large price increases for these public utilities. The budget also maintains the expenditure to GDP ratios for primary health care as well as primary and secondary education. The Government is also studying a targeting mechanism to assist vulnerable groups which will replace the present generalized food subsidy with income support from the Social Safety Net Fund.

The Challenge Ahead

The timely availability of external financial assistance on appropriate terms will be crucial to the success of the program, given the magnitude of Yemen's external debt service relative to the debt-servicing capacity of the economy. Implementation of the program is being supported by broadened and quickly available technical assistance under IMF and UNDP programs.

Yemen's membership in the IMF dates from May 22, 1990. Its quota¹ is SDR 176.5 million (about $258 million). Yemen has no outstanding obligations to the IMF.

Yemen: Selected Economic Indicators   1993 1994 1995* 1996** 1997** 1998**   (percent change) Real GDP growth 5.9 -0.0 5.1 4.3 3.6 2.5 Core inflation1 -- 66.0 20.0 10.0 5.0 55.0     (percent of GDP) External current     account balance, (deficit –)2 -12.2 -11.6 -10.1 3.5 -1.5 -10.0 Central government     primary cash balance, (deficit –) -15.4 -14.9 0.8 1.0 -6.3 -1.9 1. Excludes the effects of administered price adjustments. 2. Excludes transactions of foreign oil companies. Sources: Hungarian authorities; and IMF staff estimates. *Estimated **Program ***Projections   1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access the IMF financing, and its allocation of SDRs.