Structure and Features of the Yemeni Economy


The Yemeni Economy

Economic Performance (1990-1994)

The Economic, Financial and Administrative Reform Program
Economic Performance Indicators (1995-1999)
Socio-economic Development Planning
Private Sector Activity and Development of a Market Economy
 

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The Yemeni Economy
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     Since 1990 (after unification), the economy of Yemen has predominantly depended on primary resources (from agriculture and fisheries), amounting to over 25% of GDP. However, the following other areas have also supported the economy:

     - Government Services (16%)
     - Extracting Industries (14%)
     - Telecommunication (15.3%)
     - Manufacturing (including oil refining, 9.6%)
     - Wholesale and Retail (6.8%)
     - Financial Institutions, Real Estate and Business Services (5.7%)
     - Construction (2.7%)

 

     In recent years, the Agriculture sector has seen increasing development in the areas of plantation and livestock. Crop production constituted 66.4% of total agriculture produce (where cereals occupy most of the cultivable land. Major agriculture crops include grapes, bananas, dates, cotton, tobacco and coffee. Livestock production constituted 21.5%. The government has worked on the promotion of expansion of poultry, meat, milk and egg production. The cultivable land is around 1,669 thousand hectares, where 67.8% is cultivated (35% of which is rain fed). Irrigated land through use of wells is 30%; and 17% of irrigation comes from water streams. The government is working on maximizing comparative advantages in favor of vegetables, fruit and coffee production. Attention is also given to cereal production (especially wheat and sorghum) in a bid to realize a higher degree of food security and bring down the local consumption versus the foreign trade gap.

 

     For the Manufacturing sector (which includes extracting industries except oil), the private sector owns 97% of its establishments (around 33,966) providing 115,529 job opportunities. 95% of such establishments are small enterprises employing between 1-4 workers, making a total of 54.7% of job opportunities and contributing around 24.4% of the manufacturing value added (MVA). Medium size manufacturing establishments employ between 5-9 workers. They constitute around 3.7% of the total manufacturing establishments, contributing around 7% of job opportunities and 5.2% of MVA. Larger establishments make up only 1.2% employing more than 10 workers. They contribute around 38.3% of job opportunities and contribute around 70.4% of MVA. Oil has been a main activity in the Yemeni economy.

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     In terms of Oil, Yemen's retains 3.2 billions barrels of proven oil reserves. In 1999, its contribution to the state budget reached around 214 billion riyals (around 68% of total state revenues). Oil exports reached around 134 billion riyals (around 90.9% of the total exports) of which government share was 14.7 billion riyals.  The Government share has seen an increase during the last few years. Total value of oil exports amounted to 337 billion riyals in 1999.


     With respect to Energy production and water supply, around 1000 electrical establishments are spread nationwide, with 29 major facilities. Total electricity production reached around 3,133 million kilowatts. Yemen has also been dependent on water resources to supply power, primarily from water wells and some springs, in addition to other means of generation under the Public Water Authority.  In terms of water resources, approximately 1952 water supply establishments exist to distribute water, which produce around 111 million cubic meters of water. .


     The Banking sector comprises of 14 banks (9 commercial, 2 specializing in housing and agriculture and 3 Islamic). The Republic of Yemen has sought to develop and restructure the banking sector and establish a stock exchange market to boost the ongoing financial and economic reform program. Attention is also directed towards the creation of insurance companies and the mobilization of resources of insurance and social pension funds. The government also carefully regulates money exchange businesses and the exchange market.


     Domestic trade has a vital role in Yemen's economy. Statistics show that the number of trade establishments (around 114,050 or 49.8% of economic activity), employ 285,406 workers (especially in the import-export business). Foreign trade was estimated at 67.3 billion riyals in 1999.

     Tourism has also proven important for the economy.  There are 307 hotels nationwide, with tourists in recent years spending over 526,000 nights in the country.  Moreover, tourism has helped enlarge the eating industry, with the number of restaurants growing to over 11,000 throughout the country, centered in major provincial towns and the capital


     Transport has also witnessed substantial achievements. There are 5955 km of asphalt roads, and around 4008 kms of gravel roads. The number of passenger vehicles has increased to reach 301,223 private vehicles, 98,873 taxis and 423,460 general transport vehicles. Public transportation has recently improved with the introduction private operators. Yemeni air transport includes the Yemeni Airlines Company and 8 airports, led by the Sana'a and Aden international airports. The number of incoming flights into these airports reached 19,410 flights, of which 10,943 were international flights. Sea transport has also been active at the different ports of Aden, Hodieda, Mukala, Mocka, Nashtoon and Ras Essa. Yemen also seeks to complete the remaining phases of the Aden Free Trade Zone, so as to further trade, industry and tourism. The development of a number of Yemeni islands into ports and transit stations like Soctra, Meyoon and Kamaran is underway

 

     Education is a main pillar imperative for building the Yemeni economy, and to provide adequate human capital and a qualified and productive work force. Illiteracy has declined due to improved awareness and the expansion of education. Illiteracy declined to 47.3% (31.2% among males and 64.1% among females). Statistics reveal that public education absorbs between 62-67% of the population between the ages of 6 and15. The number of schools for the latter age bracket has reached 10,976, with 1,235 institutes accommodating around 2.9 million pupils (33% are females).

 

     For secondary education, schools and institutes numbered 2,971 spread throughout the country, absorbing 371,000 pupils of which 24% are females. Teachers working in basic and secondary education number around 147,000 (93% being Yemeni nationals). In addition, a number of technical and vocational institutes employ 579 teachers, and give training to over 7,000 pupils.  Currently, there are 15 higher education institutions, 15 universities (of which 7 are government affiliated) absorbing more than 154,000 students (19% female enrollment), with a total faculty of 2,988 (81.7% Yemeni nationals). Sana'a University is the oldest and largest university. University education includes many fields covering literature, education, law, medicine, engineering, science, etc. Over 12,000 that graduate are absorbed into the labor market.

 

      With regard to Health Care, there are 104 hospitals in Yemen in addition to 2,134 medical centers and clinics. There are a total of 11,365 beds, 3,800 doctors, 897 specialists, and experts in the field of nutrition, chemistry, laboratory and social health and psychology. There are also 2,023 x-ray technicians, assistant-physicians, and 554 pharmacists.
 

     Demography: As of 2000, the population of Yemen is estimated at 18.3 million.  Population growth remains high (3.5% annual population growth) in spite of a slight decline therein. This is due to the high fertility rate of 6.5 children for every woman, thus raising the economic dependency rate (439). Demographic data show that rural population constitutes 74.4% of the total population.

 

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Economic Performance (1990-1994):

 

The first five years of Yemeni unity witnessed important economic evolution. Several important factors negatively affected the Yemeni Economy. The second Gulf War resulted in the forced repatriation of around one million Yemeni immigrants from Saudi Arabia and Gulf States. Political squabbles and disputes practiced by secessionists have also led to economic deterioration. Economic performance indicators do reflect the difficult stage that faced the Yemeni economy and could have brought it to collapse.


     GDP: economic performance showed a decline in real GDP . Mean average growth was (-1%). All sectors contributed to this decline except oil exploration which has grown since 1993;
 

     State budget: the state's treasury shouldered substantial costs during the transition period to bridge the gap in civil servants salaries and government services nationwide. This period witnessed increasing deficit in the state budget that reached 16.7% of GDP in 1994 due to increasing public expenditures and inability of revenues to match up with such increase. Financing the gap by the Central Bank was done through printing money.
 

     Balance of Payments: the .increase in imports and decline in non oil exports and the decline in remittances, loans and external aid led to a balance of payments deficit of614 million dollars in 1994 (13% of GNP).
 

     Inflation and unemployment: stagflation prevailed during this period resulting from high unemployment and inflation due to the previous factors that accompanied increasing monetary supply and depletion of foreign currency reserves (due to the negative status of the balance of payments, foreign trade balance and decline in remittances and negative growth in GDP). The exchange rate had also been affected. The value of the riyal drastically dropped against the dollar in the parallel market by 557% at an average annual rate of 54.6%. The dollar rate surpassed the 100 mark of the riyal in late 1994 to reach 165 riyals to the dollar in June 1995. This drastic and unexpected decline encouraged speculation and storage of commodity.


     All previous indications clearly reflect the extent of difficulties that faced the Yemeni economy during that period coupled with the absence of policies compatible with economic development structures and programs. The high population growth with a weak GNP growth led to the sharp decline in per capita income. After overcoming the brief war in the summer of 1994, the state turned attention to economic reforms including financial and administrative reforms. The introduction and implementation the reform program began in the first half of 1995.
 

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The Economic, Financial and Administrative Reform Program:  Introduction and Implementation.

 

     The Unity State seemed to be missing a clear strategy. The old strategies that prevailed before unity became inapplicable under domestic and international changes, the absence of external support and decline in remittances. This led the state to take a courageous decision by launching financial and monetary measures in March 1995 in a bid to realize economic stability and then to move towards targeting high and sustainable growth rates.
 

     The objectives of the economic, financial and administrative reforms can be summarized in the following:

-realizing real growth rates for economic sectors; -reducing rates of inflation and unemployment and realizing a stable exchange rate;
-bringing about stable balance between the balance of payments and the state budget;
-creating a climate conducive for attracting investment through structural reforms;
-strengthening the role of the private sector;
-realizing further economic openness to the outside world.

 

     The state began a stabilization program with the aim of reducing the budget deficit and the balance of payments through the implementation of a set of financial and monetary policies. The state the undertook the implementation of structural reform programs, which include the liberalization of prices and trade, privatization of public enterprises and the enhancement of export oriented production. The start was encouraging. The government took a number of decisions during 1995-1999 as follows:
 

     1. State Budget: the program targeted the rationalization of expenditure especially current expenditures, increasing tax pays, reducing subsidy and the transfer of ownership of public entities to private ownership. In order to reduce subsidies, the state moved to wards liberalization of the exchange rate including customs exchange rate and the gradual liberalization of prices on the imports of wheat and flour which was completed in 1999. In spite of the success made on liberalizing prices on oil products and fees on basic services, developments in the world oil markets made it imperative to maintain subsidy on diesel and gas being consumables by a larger portion of society.
 

     The financial reform program has also included the implementation of measures to curb tax and customs evasion and the imposition of new taxes headed by a sales tax, the improvement of tax and custom fees collection, a reconsideration of their tariffs, liberalization of prices of public service and commodity products. The government has also re-considered the structuring of public expenditures through rationalization, reduction of salaries and technical and economic feasibility evaluation of investment programs.
 

     2. Balance of Payments: to remedy the imbalance in the balance of payments, quantitative restrictions on foreign trade and foreign currency exchange have been removed in addition to allowing the transfer of capital and profits outside the country. Other measures included addressing the foreign debt and guaranteeing sufficient foreign currency reserves to cover imports. Custom exemption not stipulated under the law and import/export licensing have been removed, custom procedures simplified and importers and exporters are allowed to make bank transactions with no constraints. Some provisions under the customs and trade registration laws have been amended. Monopoly of some of the navigation services and activities at ports has been limited and practical measures have also been taken to counter smuggling;
 

     3. Monetary Polices and the Banking Sector: the reform program targeted commercial banking entities to sort out the outstanding debt by the public sector and government agencies. It also allowed commercial banks to open up an account and transfer of foreign currency outside, now that debt interest prices have been liberalized, deposit interests raised, soft interests on government loans cancelled and legal reserves requirements at the Central Bank reduced. In order to absorb monetary liquidity, the Central Bank followed a public debt policy through issuing treasury bills in weekly, monthly, 91 days and then 182 days arriving to 364 days auctions. The Central Bank had also adopted measures to address scattered debts of banks, classified them and then allocated the necessary funds for them. Aside from addressing the external debt through rescheduling with the Paris Club and to strengthen structural reform of the banking and financial sector, an assessment and proposals have been underway to introduce legal refers covering the activity of commercial banks, the role of the Central Bank, financing leases, taxes on bank transactions, capital sufficiency, internal monitoring and control and credit risks. Other measures include civil service reform in the sector, improving the pay scale, the classification and addressing of loans, reducing restrictions on bank borrowing, the introduction of modern management schemes in the banking sector and finally preparations for the creation of a stock market.


     4.Other reform programs: These include privatization, civil service reforms and the social safety net program to reduce the negative impact of the various reform programs. These programs have been implemented at different paces. The government is currently undertaking the identification of large public entities to be restructured or privatized in accordance with the privatization law regulating such operations.
 

     The merger of the former administrative structures inflated the civil service system structures of the government apparatus thus weakening its performance. The government has long been aware of the importance of civil service reforms to back up success in economic and financial reforms. To maintain gains, it has been imperative to introduce a modern public administration system, a re-consideration of the role of the state and tasks of the new government. The modernization of the civil service which is a framework and a comprehensive vision for administrative restructuring aims at providing highly efficient services and improving the growth of the private sector and promotion of investment allowing the creation of new job opportunities.
 

     Under the civil service reform program, a civil service survey has been implemented. The measure is vital in setting up an integrated database for the civil service. Data centers have also been operational backed up by complete data about civil servants in the administrative apparatus of the state, public and mixed sectors. An integrated network links up these centers with the main center. The government has also prepared a new employment policy that is based on advertisement, competition and qualification ensuring equality, justice and equal footing for all individuals in society. A Civil Service Fund has been established to address surplus labor through disbursement of salaries, retirement referrals, compensation for those wishing to leave public office, the procurement of civil service years allowing for early retirement and the provision of training allowing for re-distribution.
 

     The civil service reforms coincide with the adoption of incentive policies like the issuance of the social pension law and the start of implementation of a reform program of the Pension Fund putting in place a system for the purchase of the period of work and referral for early retirement. The government is working on the restructuring of civil service ranks, a new wages system dependent on job descriptions with the organizational restructuring of government ministries and agencies.
 

     The government has also sped up the implementation of the social safety net program through the creation and activation of special funds like the Social Welfare Fund, the Public Works Project and the Social Fund for Development. It also ratified the National Program of Productive Families. All of these are effective mechanisms to combat poverty. The financial reform program seeks to improve the collection of alms and taxes providing resources for the social safety net. The state had also adopted a set of measures to reform the judiciary and the security apparatus and the creation of an investment climate attractive for Yemeni, Arab and foreign capital. It also adopted intensive awareness programs addressing reforms in addition to the improvement of the flow of information enabling appropriate decision-making.
  


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Economic Performance Indicators (1995-1999):

 

     The economic reform program made positive results applauded by international and regional organizations. The reforms enabled the Yemeni economy to overcome difficulties and move on the right track. The most important achievement is realizing economic stability as shown in the following economic indicators:

 

     GDP Growth: economic performance during this period was characterized with a high rate of growth of real GDP which reached 5.6% on average in spite of fluctuation in oil production during this period. This is an acceptable growth compared to that of the period 1990-1994. The non-oil GDP growth in real prices reflects real improvement in economic activities.
 

     State's Budget: the introduction of strict measures on public expenditure (current or investment) has continued in addition to seeking an increase in revenues in a bid to reduce the deficit in the state budget, reduce dependency on the banking sector and resorting to domestic public debt resources (treasury bills) in the last two years of 1998 and 1999. Growth in money supply has seen remarkable decline due to decline in demand especially consumption, and the government abidance by contracting economic measures. The improvement in the state budget deficit had an impact on the decline in . money supply growth.
 

     Balance of Payments: the rise in crude oil prices during 1995- 1996 helped in the improvement of the trade balance. In spite of improvement in non-oil exports, the increase in imports due to the liberalization of foreign trade, the simplifications of custom clearance procedures, reforms of the customs tariffs law and the decrease in value of oil exports during 1997-1998, they have all negatively affected the balance of trade especially at the outset of 1998 which witnessed a sharp decline in world oil prices. These factors affected the overall standing of the balance of payments which dropped into the minus in 1998 to reach 136.8 million dollars (2% of GNP) after it had gained a surplus of 118.9 million dollars in the previous year.
 

     Inflation: the effect and diversity of economic structural reform polices and measures especially contracting policies had led to a substantial decline in inflation. The policies had also led to a reduction in the state budget deficit, reduction in money supply growth and an increase in foreign currency reserve in addition to achieving positive real GDP growth. The liberalization of the exchange rate reduced the value of the riyal to the dollar by 36% during this period (by an average annual rate of 14.5%). The rate of the riyal reached 160 to the dollar in 1999 which reflected a relative stability compatible with the monetary and reform measures (interest rate, percentage of reserve, increased tax rates and reduced government expenditure). This curbed currency speculation and storage of commodity.
 

     Despite the positive GDP and GNP growth, retroactive measures and the relative stability oftl1eriyal against other foreign currencies and the high population growth rate led altogether to a per capita income of between $306 and $366 during this period. The per capita income increased and decreased due to those factors and the impact of the fluctuation of world oil prices. Overall indicators show a trend towards economic stability due to the stabilization and structural reform measures.
 

     The government has focused on the implementation of the reform programs on the basis of the legal framework suitable for a market economy. It stresses the continuation of judicial, security and administrative reform in order to create a environment conducive for investment especially private sector investment. In response to the successes of the economy during this period and the completion of the reform process, international donor countries and agencies have expressed readiness to support the reform programs in addition to the support of social safety net schemes tackling the negative impact of the reforms. In order to maintain the success of reforms, the government has sought to strengthen cooperation with the outside world to benefit from the experiences of others and moving ahead towards merger with the world economy.

 

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Socio-economic Development Planning:

 

     Faced with economic difficulties that restricted economic development, Yemen had to re-consider its existing strategies and policies especially on the macroeconomic level. Yemen resorted to planning socio-economic development that is based on a market mechanism and a more prominent role of the private sector in economic activity. Accordingly, it prepared the first 5-year Plan (1996-2000). What made Yemen's experience stand out is that the plan was done as the country was passing through a difficult transformation emerging from the necessity to combine economic reform and the need to maintain the economic role of the state as the sole supplier of infrastructure and social services.
 

     To ensure successful efforts, the government began first by diagnosing the strategic factors affecting the economic reality and medium and long-term socio-economic development. It then identified pre-requisites for boosting the institutional capacity of the government apparatus or those of the private sector taking into account the suitable time factor for the implementation of the plan's relevant policies under the following three pillars:
 

     -correction of the economic imbalance and controlling side effects in the form of inflation and unemployment;
 

     -increase of economic growth rate through the optimization of existing capacity and expansion of domestic and foreign investment projects and government development projects so as to increase income and improve the standard of living, the development of social services like education and health and also narrowing income and wealth disparity of individuals and regions.
 

     -Making use of the comparative advantages of the available human and economic resources and undertaking the necessary structural changes and increase of exports.
Socio-economic development strategy aims at achieving the following:
 

     -the development of human resources ( social, education, health, cultural, civilization, economic and professional ) all being of strategic importance;
 

    - the maximization of benefit resulting from the exploration and export of crude oil and gas as a crucial financial resource for government current and investment expenditures. This can be done through raising proven reserves and expansion into new finds and increase of revenues form crude oil and gas exports,
 

     -the promotion of the manufacturing industry being the sector most capable of increasing production, exports and absorption of technology and creation of jobs;
 

     -paying attention to agriculture activity and fisheries which constitute a source of income for a larger portion of the population and food production directed towards the increasing local consumption;
 

     - the maximization of the tourism sector. Yemen enjoys fabulous natural and diverse features and moderate climate throughout the year in addition to the historical wealth and civilizations. All of these create substantial investment prospects and opportunities for an overall tourism reconnaissance in the country;
As part of the ongoing preparations for the second 5-year Plan for the period 2001-2005 (taking into account lessons learned from the first plan) and maintaining the development planning process, Yemen is presently evaluating the performance of economic sectors and constraints that hampered the implementation of some of the objectives under the first plan.

 

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Private Sector Activity and Development of a Market Economy:

 

     Within the framework of development planning and the applicability of the liberal approach in managing the national economy and the implementation of the reform program, the state's role has been defined as an instrument for removing constraints hampering the activity of the private sector and the development of market mechanisms and sustaining economic stability, the completion of basic infrastructure and social services so as to encourage the private sector to undertake its prominent and leading role in realizing economic growth.
The past decade witnessed visible openness in the government relationship with the private sector. This was reflected in the consultations on policies and measures which could affect the competitiveness of the economy or local private sector and the inclusion of the private sector in government committees undertaking the review of legislation and the various plans and programs. The government has also given the private sector the opportunity to take part in joint Yemeni Arab and Yemeni foreign commissions and WTO negotiations committees. The state has also sought to have broader private sector involvement to enable it to carry on its hopeful role under global changes.
 

The Appropriate Climate for Private Sector Activity:

     The government works on creating conditions conducive for successful private sector investment. Democratization has been the first step for the creation of suitable conditions for foreseen development. It has aided the adoption of appropriate economic policies, revision of legislation and valid laws allowing for a more efficient and clean judiciary (judicial reform program). The administrative reform program also addresses the suitability of the institutional setup, which poses a revision of the roles and tasks of the government apparatus, restructuring if needed to accommodate the requirements of the liberal approach in economic management and merger into the world economy. Sufficient financial resources and efficient banking apparatus and non-banking financial institutions have been an important element in the improvement of an investment environment for the private sector. The government undertakes the implementation of a financial sector reform in a bid to develop relevant proper working mechanisms.
 

     The private sector, out of responsibility, has moved towards:

-paying further attention to public issues especially on macroeconomic performance and relevant policies;
-serious and effective participation in the preparation of strategies and socio-economic policies at the national and domestic local macro levels and through the different stages of the decision-making process;
-revision of the performance of the private sector and diagnosis of its points of strengths and weaknesses visa a vis economic exposure as a result of economic liberalization policies and rules governing globalization and the need to accommodate scientific and technological evolution. Such revision is to include aspects of organization, management, work mechanisms and forms of ownership and financing and other factors that could affect the efficiency of enterprises and their ability to compete.
 

Private Sector Organizations
     The commercial private sector was the pioneer in organizing itself through a number of independent chambers of commerce and then formed a federation of chambers of commerce. Such a union has long been the sole representative of all economic activities and businessmen of different activities. The union has helped bridge a vacuum for the absence of non-commercial organizations and provided some services that businessmen were in dire need for.
 

     As economic life became more complex and diverse with time, sectors of the national economy gradually developed certain features and due to the transformation that took place with unity and the need to meet pressing demands, there was the need to create other business associations and unions like the Yemeni Industrialists Association. Such private sector entities became more active taking part in workshops and conferences and organizing business exhibitions.
 

     Private sector organizations tend to improve their activities and programs through the following:
-Strengthening their research base in economic, professional and technological fields enabling the private sector to be aware of new changes, assessment of present conditions and diagnose constraints and devise counter-proposals.
-Establishing and upgrading of information needs through a follow-up and survey system ( data base systems);
-Crystallizing visions and views of the private sector towards different issues;
-Mobilizing private sector efforts towards economic and social public affairs;
-Organizing exhibitions promoting Yemeni products and participating in foreign export exhibitions;
-Establishing a center providing services for investment like feasibility studies, administrative and technological consultancies, information on technology import markets, raw materials and exports markets, etc. 

 

* "Republic of Yemen, 10 Years of Achievements", a publication of the Ministry of Planning and International Cooperation.  

 

 

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