International Monetary Fund and Yemen

The Economic and Commercial Office (ECO) of the Embassy coordinates with the International Monetary Fund (IMF). The purpose is to discuss any existing agreements and obligations that Yemen holds with the IMF; as well as to receive a debriefing from the IMF about the planned meetings and issues to be raised with the Yemeni government in preparation for the annual Article IV Consultation.

Based on the IMF 2007 Article IV Consultation*, the following was the assessment rendered:

Executive Board Assessment

The Executive Board welcomed Yemen's generally favorable recent economic performance, including the decline in the poverty rate, as well as the progress being made on a number of structural reforms. Nevertheless, Directors concurred that the authorities face considerable macroeconomic and structural policy challenges to promote strong economic growth, create ample employment opportunities, and reduce poverty, while ensuring fiscal and external sustainability. In this regard, Directors welcomed the authorities' strategy of basing policies on existing hydrocarbon reserves, while recognizing that the country's economic outlook could be significantly altered by the discovery of new oil and gas resources.

Directors, noting that inflationary pressures have not fully abated, were encouraged by the authorities' commitment to reducing inflation. They agreed that monetary policy should focus closely on price stability and welcomed the CBY recent efforts to keep the exchange rate of the rial vis-à-vis the U.S. dollar broadly stable, which should help limit imported inflation. Given the limitations of monetary policy in Yemen, Directors generally considered it to be appropriate for the CBY to continue to rely substantially on the exchange rate as a nominal anchor, in order to achieve lower inflation. While the exchange rate currently appears to be broadly in line with fundamentals, over time and in view of the expected decline in oil production, it will be important for the exchange rate to reflect evolving economic conditions.

Directors observed that the shallow financial intermediation, along with a relatively high level of dollarization, is limiting the effectiveness of monetary policy. They viewed that the removal of the minimum interest rate for rial deposits would allow the CBY to conduct a more active interest rate policy and enhance financial intermediation.

Directors noted that fiscal restraint, including public sector wage restraint, should provide an important complement to monetary policy in reducing inflationary pressures. They also underscored that frontloading fiscal adjustment will be needed, given the prospective decline in oil production and revenues.

Directors agreed that the gradual phasing out of domestic fuel subsidies will be central to fiscal adjustment, while recognizing that this will require political support. They noted that raising fuel prices should go hand-in-hand with strengthening the social safety net, in order to cushion the impact on the poor, including through persevering with ongoing efforts aimed at improving the Social Welfare Fund. Directors also were of the view that, if the authorities wished to cushion the impact of high wheat prices on the poor, it would be preferable to do so through the SWF. Strong efforts will also be needed to increase the government's non-oil revenues, reorient spending towards priority areas, and improve the quality and effectiveness of capital spending. Directors supported the progress being made towards strengthening the budgetary framework and improving fiscal transparency.

Directors underscored the importance of productivity-enhancing reforms to strengthen Yemen's competitiveness in non-oil exports. Further efforts are needed to improve the investment climate and the quality of labor, enhance governance and reduce red tape, including in tax and customs administration. Directors stressed that deepening financial markets will be essential for ensuring strong non-oil performance, and also recommended further strengthening of banking supervision. In this regard, they encouraged the authorities to request an Financial Sector Assessment Program update, which would help to assess potential risks in the financial system and to develop an agenda for financial sector reforms. Directors welcomed the revised Anti-Money Laundering law, and looked forward to its approval by parliament.

Directors looked forward to further efforts to improve the quality and timeliness of macroeconomic statistics, to better facilitate the formulation and monitoring of economic policies.

Additional IMF Documents:

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Synopsis of Agreements and Obligations with the IMF **

Letter of Intent on Yemen’s Economic and Financial Policies.
Date: August 3, 2002
Outlines the policies that the Republic of Yemen intends to implement in the context of its request for financial support from the IMF.

Third Annual PRGF/EFF.
Date: February 28, 2001 
Loans and credits totaling SDR 26.5 million (about US$34 million) to support Yemen's third annual program under the Poverty Reduction and Growth Facility (PRGF) and the fourth review of the Extended Fund Facility (EFF). Of the total, SDR 20 million (about US$26 million) is available under the PRGF and SDR 6.5 million (about US$8 million) is provided under the EFF..

Second ESAF/EFF.
Date: March 29, 1999
Loans and credits totaling SDR 47 million (about US$64 million) to support the Republic of Yemen’s second annual programs under the Enhanced Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF). Of the total, SDR 36 million (about US$49 million) is available under the ESAF, and SDR 11 million (about US$15 million) is provided under the EFF.

Combined ESAF/EFF.
Date: October 29, 1997
Loan and credit package over the next three years totaling the equivalent of SDR 370.6 million (about US$512 million) to support the government’s economic program for 1997-2000. Of this amount, SDR 264.8 million (about US$366 million) is available in loans under the Enhanced Structural Adjustment Facility (ESAF), and an SDR 105.9 million credit (about US$146 million) is available under the Extended Fund Facility (EFF).

Article VIII Obligation.
Date: December 10, 1996
Accepting the obligations to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval.

Stand-By Agreement.
Date: March 20, 1996
15-month stand-by credit totaling SDR 132.4 million (about $193 million) in support of the Yemeni Government's economic and financial reform program for 1996-97.

For more information please visit the IMF website.

Sources:  * Public Information Notice (2007 Article IV Consultation)
   ** Republic of Yemen and the IMF


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