Reforms must continue Sa’ada fighting hampers economic reform Mohammed Al-Qadhi The eruption of fighting in Sa’ada between government troops and rebels supporting the Shiite cleric Badreddin al-Houthi, will negatively affect the government and World Bank’s economic reform package and general economic stability. Economists believe that the fight hampers efforts to achieve economic stability by attracting investments. Instability does not encourage foreign investors to come to Yemen and dissuades local investors. Some opposition politicians argue that the fighting gives the government the excuse to further delay the unpopular price reforms. Last year the government asked the parliament to approve an additional budget of YR 180 billion, most of which was to cover the costs of Hussein al-Houthi’s three-month insurgency. Although some economists believe that the fight in Sa’ada might delay the introduction of the sales tax and the price reforms on oil derivatives, others dismiss this. Yemeni cities witnessed last month violent protests against the new sales tax, which the government has decided to introduce in July. The parliament approved the 2005 budget, which assured government’s commitment to removing diesel subsidies. The draft budget increase was put at YR 19 billion with a deficit estimated at three percent. Revenue was estimated at around YR 761 billion, while the 2004 budget was around YR 681 billion. Expenses were put at around 836 billion. Prime Minister Abdulqader Bajamal has said that it is necessary for his government to lift the subsidies on diesel and gas, alleging that they cost the treasury YR 150 billion per year. He pointed out that the government imports almost 70 percent of the local market’s needs from abroad at a cost of YR 60 per liter, which is being sold to the people at YR 17 only. The government claimed that this low price encourage businessmen to smuggle the diesel to the neighboring countries. President Ali Abdullah Saleh says that he will continue the reform process, warning that oil is diminishing, and urging his government to look for other resources, recommendations that the World Bank had already made. Now, however, the reform process is being hijacked by the crackdown on the rebels and the ability of the government to bring the Sa’ada confrontation to an end. The government is committed to the World Bank to continue the reform process and lift the diesel subsidies. The World Bank remains dissatisfied with the government’s performance in this regard. Another delay by the government will not make the World Bank happy. In his visit to Yemen last February, former World Bank President James Wolfensohn warned of the urgency for the reforms if the country is to move forward. He clearly highlighted the fact that Yemen is still underdeveloped and with a population that is largely illiterate. He depicted a gloomy scenario for Yemen if serious measure are not undertaken quickly to avoid an economic catastrophe. Wolfensohn said that it was not enough for the government to analyze and realize the situation, but he stressed that it is time to improve the investment climate, promote good governance and enhance employment opportunities. He also warned that Yemen is depending too much on oil and could face severe economic difficulties if other sources of income are not introduced. He highlighted the need to maintain macroeconomic stability, and also improve water management. He also pointed out that Yemen could face a disastrous water shortage crisis within a decade if proper precautionary measures are not taken. Wolfensohn also encouraged the government to go on with its proposed reform plan in energy-pricing, which would result price rises of gasoline and diesel up to 50 and 100 percent, respectively. The World Bank also warned, in a report released last September that Yemen’s economy is facing grave challenges for which the government should not expect further support if reforms are not implemented. “Yemeni authorities have not been able to seize the opportunity of rise in oil prices to maintain macroeconomic stability, advance economic reforms and lay foundations for strong non-oil based growth. Half way through the implementation of Country Assistance Strategy (2003-05), the signs are that Yemen is clearly slipping into ‘Low Case’ judging by three of the four CAS criterion,” the report said. “Implementation of PRSP is unsatisfactory, progress in governance reforms is tardy and the macroeconomic framework is unsatisfactory. Through the deterioration of portfolio (the fourth criterion) is noticeable, it is below the cut-off points as of August 2004,” it stressed. The report pointed clearly to the unstable political situation which has constrained “the ability of the authorities to take advantage of strong gain in oil price to advance reforms in 2004. Politically, the ongoing global war on terrorism fought in the Middle East has energized Yemeni militant groups opposed to the war. Simmering anti-government sentiment was brought to a head on June 28 in the form of an armed rebellion. Though the rebellion has been crushed decisively by early September, the durability of the success could remain an issue.” With fighting resumed and its future uncertain, it is unclear how much it would cost the already fragile economy. On the economic front, the report said that “unexpected declines in oil price, came to light in February 2004, have triggered the fear that oil reserves may depleted sooner than expected. Unanticipated declines in oil production from key oil fields could diminish oil export revenues of government and stress fiscal balance. The date of exhaustion of oil reserves has been advanced by nearly a decade to 2012 lending immediacy to launching a strategy to promote non-oil based growth.” The report said that reform agenda must also be revived urgently in areas such as education, and customs procedures, both of which contribute to macroeconomic stability. “Restarting stalled reforms of civil service, introduction of GST, phasing out of petroleum subsidies are vital to restore macroeconomic stability. Though the authorities are convinced of the direction of reform in these areas, commitment to a clear and robust implementation strategy and calendar is lacking,” the report warned, demanding that the authorities should take a decisive action to restart stalled reforms to improve the lives of the 42 percent of the country who are poor.