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Yemen Gets $93 Million Emergency Loan from IMF

Carpenter shop in Sanaa, Yemen, where policy priorities include macroeconomic stability, creating jobs, reducing poverty (photo: Herve Champollion/Newscom)

MIDDLE EAST

Yemen Gets $93 Million Emergency Loan from IMF

IMF Survey online

April 5, 2012

  • Yemen's political crisis took serious toll on economy
  • Recent resolution, economic program should help improve outlook
  • Yemen is first "Arab Spring" country to secure loan from IMF

The IMF’s Executive Board has approved a $93.75 million interest-free emergency loan for Yemen to support the Red Sea country’s recovery.

The loan will be made under the Rapid Credit Facility, the IMF’s concessional window for countries that have experienced serious economic disruptions.

The new arrangement was approved on April 4 after a resolution sponsored by the Gulf Cooperation Council that ended the year-long political crisis in Yemen. The key objectives of the Rapid Credit Facility are to cushion foreign exchange reserves and maintain macroeconomic stability, while scaling up social and capital expenditures.

Use of the Rapid Credit Facility serves as a holding operation to give the new government time to formulate its strategy to address underlying challenges. The approval makes Yemen the first “Arab Spring” country to secure a loan from the IMF.

Political crisis

Yemen was the third Arab country, following Tunisia and Egypt, to witness a popular uprising demanding political and economic reforms. The demonstrations continued throughout 2011 despite sporadic episodes of armed clashes and deadly violence. While damage to infrastructure was limited, attacks on key oil pipelines and electricity facilities caused severe shortages and electricity outages.

The year-long political crisis resulted in policy paralysis, shortages of basic commodities, and the collapse of economic activity. The compression of public investment, which was the first line of defense for the government to contain the budget deficit, contributed to the sharp fall in output. The crisis worsened the already high poverty and unemployment levels.

Stepping back from the brink of disaster

After nearly a year of demonstrations and negotiations, an agreement brokered by the Gulf Cooperation Council was reached in late November 2011, leading to the formation of a national unity government in December 2011 and the election of a new president in February 2012. The new unity government will manage for a transitional two-year period, implement constitutional and political reforms, and hold parliamentary and presidential elections in early 2014.

The immediate priorities of the new government are maintaining macroeconomic stability, creating jobs, and reducing poverty. The government’s economic program emphasizes the need to contain the budget deficit and address electricity outages, shortages of basic commodities, and distortions in the domestic fuel market. Governance also featured highly in the new government agenda.

Following the resolution of the political crisis, the government requested IMF help through an emergency loan to support its program. According to Hassan Al-Atrash, the IMF mission chief for Yemen, “the key objectives of the loan arrangement are to safeguard foreign exchange reserves and maintain macroeconomic stability, which is crucial for growth that benefits all segments of the society not only a privileged few.” The program envisages a significant increase in social expenditure, which is budgeted to be higher than pre-crisis levels while capital spending is expected to be doubled relative to 2011.

The program recognizes that setting the foundation for sustainable growth may require higher levels of capital spending. The authorities plan to further increase capital spending if additional financing becomes available.

Role of donors remains vital

It is recognized that this IMF loan arrangement is a holding operation to give the new government time to formulate specific medium-term policies to spur growth for all segments of the population. Yemen is facing major economic challenges that require medium- and long- term structural reforms, particularly to facilitate a smooth adjustment to declining oil production, while bolstering prospects for the non-oil sector and poverty reduction. In this context, a Friends of Yemen meeting is scheduled to take place on May 23 in Riyadh to help Yemen meet its challenges.

“The role of donors is critical. A concerted effort will be needed from the donor community to expedite tangible assistance to help Yemen. Indeed, in the absence of significant and predictable financial support, it will be difficult to sustain growth and make a significant dent in fighting poverty,” said Al-Atrash.