Economy of Yemen

Economy Of Yemen

At the time of unification, South Yemen and North Yemen had vastly different but equally struggling underdeveloped economic systems. Since unification, the economy has been forced to sustain the consequences of Yemen’s support for Iraq during the 1990–91 Persian Gulf War: Saudi Arabia expelled almost 1 million Yemeni workers, and both Saudi Arabia and Kuwait significantly reduced economic aid to Yemen. The 1994 civil war further drained Yemen’s economy. As a consequence, for the past 10 years Yemen has relied heavily on aid from multilateral agencies to sustain its economy. In return, it has pledged to implement significant economic reforms. In 1997 the International Monetary Fund (IMF) approved two programs to increase Yemen’s credit significantly: the enhanced structural adjustment facility (now known as the poverty reduction and growth facility, or PRGF) and the extended funding facility (EFF). In the ensuing years, Yemen’s government attempted to implement recommended reforms—reducing the civil service payroll, eliminating diesel and other subsidies, lowering defense spending, introducing a general sales tax, and privatizing state-run industries. However, limited progress led the IMF to suspend funding between 1999 and 2001.

In late 2005, the World Bank, which had extended Yemen a four-year US$2.3 billion economic support package in October 2002 together with other bilateral and multilateral lenders, announced that as a consequence of Yemen’s failure to implement significant reforms it would reduce financial aid by one-third over the period July 2005 through July 2008. A key component of the US$2.3 billion package—US$300 million in concessional financing—has been withheld pending renewal of Yemen’s PRGF with the IMF, which is currently under negotiation. However, in May 2006 the World Bank adopted an assistance strategy for Yemen under which it will provide approximately US$400 million in International Development Association (IDA) credits over the period FY 2006 to FY 2009. In November 2006, at a meeting of Yemen’s development partners, a total of US$4.7 billion in grants and concessional loans was pledged for the period 2007–10. At present, despite possessing significant oil and gas resources and a considerable amount of agriculturally productive land, Yemen remains one of the poorest of the world’s low-income countries; more than 45 percent of the population lives in poverty. The influx of an average 1,000 Somali refugees per month into Yemen looking for work is an added drain on the economy, which already must cope with a 20 to 40 percent rate of unemployment. Yemen remains under significant pressure to implement economic reforms or face the loss of badly needed international financial support.

At unification, both the Yemen Arab Republic and the People's Democratic Republic of Yemen were struggling underdeveloped economies. In the north, disruptions of civil war (1962–1970) and frequent periods of drought had dealt severe blows to a previously prosperous agricultural sector. Coffee production, formerly the north's main export and principal form of foreign exchange, declined as the cultivation of khat increased. Low domestic industrial output and a lack of raw materials made the YAR dependent on a wide variety of imports.