I recently returned from a trip to Yemen and, having spent a fair amount of time learning about the country’s past and contemplating the many challenges and opportunities it faces, I thought I would share some of my thoughts.
Yemen is a beautiful country, with an incredibly rich history and a topography ranging from coastal planes to the west and south, to rugged mountain ranges in the interior and harsh dessert to the north. Sana’a (the capital and largest city) boasts the UNESCO world heritage site of the ‘old city’ with its unique architecture and, at an altitude of 2,300 meters, is one of the highest capital cities in the world.
The Republic of Yemen was created in a hurry in 1990 with the forced unification of the Yemen Arab Republic (North Yemen) and the People’s Democratic Republic of Yemen (South Yemen). The country has had a deeply unsettled past, characterised by colonial rule, conflict, civil unrest and has been continually buffeted by external forces and powers, often vying for influence and control over the strategically positioned territory on the Arab Peninsula.
The 2011 political crisis pushed the country to the brink of civil war and resulted in the ousting of the 32-year incumbent president Salih. As a result, the humanitarian situation in Yemen has worsened significantly: poverty has increased sharply with 55% of the population living on less than $2 a day; 10.5 million people are food insecure, and 1 million children under the age of 5 are suffering from acute malnutrition. This is a sobering reminder of the country’s complicated past and underlying economic weaknesses.
However, there is some cause for optimism. The economic challenges facing Yemen today have not changed much over the past two or three decades and are relatively well understood. There are three challenges in particular, all linked to the country’s dependence on oil which has been in steady decline since its peak in the 1990s it made up around 33% of GDP.
First, public expenditure needs to be rebalanced towards delivering public services and supporting growth and not propping up the vested interests of the elite. This must be coupled with badly needed tax reforms to broaden the tax base and reduce the reliance on the oil sector (oil income provided 63% of government revenues in 2010). The 2011 crisis highlighted these core weaknesses. Oil production stalled putting severe pressure on government revenues with the fiscal deficit reaching 7.1% of GDP ($2.8 billion) in 2011. A crisis was only just averted with the combination of Saudi oil grants and cuts to government spending. However, these cuts have been taken to public investment as well as the cash transfers budget to the poor, while the wage bill and fuel subsidies remained untouched.
Second, Yemen needs to think seriously about export diversification. Oil and gas made up 89% of export earnings in 2012, and as a result the current account is closely linked to the value of oil rents. The amount of foreign exchange reserves available to pay for imports has been falling steadily since 2002, as a result of rising import demand and declining oil production, to the point that in 2011 the country had enough reserves to cover only 4 months of imports. Had this fallen much lower, the economy may have found itself in a balance of payment crisis which would have seen Yemen unable to import basic commodities.
The third challenge is job creation. Unemployment, which stood at 15% in 2009 according to official estimates, has spiralled as a result of the crisis with youth unemployment estimated to be as high as 40%. But it is perhaps underemployment which matters more. More than 70% of Yemenis live in rural areas and the vast majority rely on small scale, low productivity agriculture for their livelihoods. This sector is particularly susceptible to seasonal weather patterns (the annual ‘lean’ season in Yemen lasts from January through to may), a worsening water scarcity situation as well as more extreme shocks (floods, droughts and storms) and would surely not be the first choice of livelihoods most of these people. According to the World Bank, over 97% of firms in Yemen are small and medium sized enterprises employing less than 25 workers. Encouraging more of these firms to invest and create more productive jobs is crucial to breaking the cycle of conflict and civil unrest.
Yemen’s future is balanced on a knife edge. March 2013 saw the launch of the National Dialogue, a process that seeks to bring together political and civil society actors to create a constitution. This process will be vital in setting the stage for a more unified country with the political leadership that can help Yemen to climb the ladders of economic prosperity. However, as the former President said himself, ruling Yemen is “like dancing on the heads of snakes”. Let us hope that there are fewer snakes than ladders.
No comments:
Post a Comment