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"A lot of budget reform has already been done but we face some major challenges: high population growth, the scarcity of resources, refugees from the Horn of Africa and the fall in oil production" |
Yemen is the Arabian peninsula’s anomaly. With one of the world’s poorest and quickest-growing populations, it sits uneasily next to booming petrodollar earners such as nearby Saudi Arabia or the United Arab Emirates.
A series of civil conflicts that ended in the mid-1990s, coupled with limited energy resources and weak government control outside the major cities, has left the country years behind development in the rest of the region.
The Yemeni government has, however, recently stepped up its efforts to court international donors and lure foreign investment, a process that was jump-started last November with an aid conference held in London. Of the $4.7 billion raised from donors, around half came from the Gulf countries and $1 billion from Saudi Arabia alone.
"The success of the London meeting was the result of reforms that we had already implemented", says Noman al-Suhaibi, who chaired Yemen’s tax authority before being made finance minister in an April reshuffle that was widely seen as ushering in technocrats to key cabinet positions.
"We’ve signed a partnership agreement with donors to implement a public financial management strategy and are very keen to demonstrate that we are moving in the right direction," he says. "First and foremost, though, the government must keep the promises that it has made to itself."
President Ali Abdullah Saleh, whose portrait looms on the wall above al-Suhaibi’s desk, now appears to be back in the international good books. In May the veteran leader was due to visit Washington, which considers him an ally in the war on terror and recently reinstated Yemen to the Millennium Challenge Account, a US government aid scheme.
"A lot of budget reform has already been done but our country faces some major economic challenges," says al-Suhaibi. "These include the high rate of population growth, the scarcity of resources, a large number of refugees from the Horn of Africa and the small decrease in oil production which we have recently experienced."
Dependence on energy is a big worry. Yemen derives about 71% of its GDP from oil but production is already on the wane because of dwindling reserves. Although most of the country’s exploration blocks remain untapped, a critical question for the future is how to diversify away from hydrocarbons.
For al-Suhaibi, one answer is to improve tax collection – not straightforward in a politically fragile country where the slightest effect on income levels can spark unrest, as fuel riots in July 2005 showed.
Egyptian experience
"Educating the population about tax changes will be paramount," he says. "We want to copy the Egyptian experience of public awareness campaigns and use plenty of TV advertising: we need to make sure people know that taxes will build them schools, roads and hospitals."
A litmus test will be the introduction of a 5% general sales tax, which according to al-Suhaibi will function in a similar way to value-added tax. "The GST was postponed since 2001 because we lacked the infrastructure to make it possible," he says. "The majority of Yemen’s goods are sold on informal markets or by small shopkeepers, which makes the tax very difficult to collect. But since the start of 2007 we have started to impose it at ports of entry and on larger wholesalers."
Private-sector growth is also crucial. A first investment conference aimed at attracting foreign capital took place in Yemen’s capital, Sanaa, in April, and was generally considered to be a success, but the government also has plans to drive home-grown change.
Away from oil
"We want to reduce corporate tax from 35% to around 15% to 20%," says al-Suhaibi, for whom strengthening local companies is an essential part of a move away from the oil-based model. "A draft proposal of the change will be presented to the cabinet soon, and then to the parliament."
Yemen is the only country in the region without a stock exchange, and has long fuelled speculation about the possible creation of an equity market – and whether it has the legislative and financial sophistication to do so.
"Many essential steps towards establishing capital markets have already been taken by the government, in cooperation with the IMF, the World Bank and the Arab Monetary Fund," says al-Suhaibi. "We have revived a ministerial committee on the subject, and together with the central bank and international consultants we are now drawing up a road map. A financial market will be a very important element of Yemen’s development but it needs strong foundations and the right legislative base. We can learn a lot from the experience of the other Gulf countries."
More immediate priorities for al-Suhaibi include higher spending on basics such as health, education and sewerage. He also notes that expenditure on vocational training more than doubled in the 2007 budget, a measure designed to help reduce unemployment from its sky-high unofficial level of around 40%.
Yemen faces a long struggle ahead, especially with the escalation of what is virtually a localized civil war in the northern border areas. But many eyes in the region will be watching the country’s promising progress, and few of them have any interest – political or economic – in seeing it fall further behind its neighbours.