Information about Middle East Oriente Medio

VI Economic Performance from 1990 to 1999

Nada Choueiri, Klaus-Stefan Enders, Yuri Sobolev, Jan Walliser, and Sherwyn Williams
Published Date:
May 2002
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The performance of Yemen’s economy in the 1990s shows clearly the impact of the exogenous shocks it suffered during the period, but it also, in the latter half of the decade, bears witness to the first fruits of the reform process launched in 1995. This section reviews the economic record of the 1990s in terms of the growth of GDP and its components, employment, inflation, poverty and social indicators, saving and investment, and the external accounts.

Growth and Employment

The external shocks to which Yemen was subject in the 1990s had a strong impact on economic growth. Dislocations associated with the Gulf crisis of 1990 and with unification, and again with the civil war in 1994, contributed to sharp economic contractions; however, resumption of economic activity after both episodes was associated with rapid growth (see Table 1 in Section II).75 These swings in growth rates were exacerbated by a severe drought in 1990–91 and a milder one during the first rainy season of 1999. On the other hand, oil discoveries that brought on stream the large Masila field in mid-1993 compensated for anemic growth in other sectors at the time and helped mitigate the impact of the 1994 civil strife on national income. Indeed, the sectoral composition of GDP shows a growing importance of the oil sector over the decade (Figure 15). Government policies have also played a major role in Yemen’s growth performance. As described before, controls imposed in the first part of the decade, laws that either created or protected monopolistic practices, and regulations that inhibited or discouraged private sector activities were important obstacles to economic expansion. On the other hand, the liberalization and reform of the regulatory environment initiated after the end of the civil war were probably important elements in triggering economic growth, although such effects are difficult to quantify.

Figure 15.Composition of Real GDP

(In percent)

Source: Data provided by the Yemeni authorities.

The improvement in performance is striking when growth is compared over the pre- and post- reform periods (Table 12). Real GDP growth averaged 5.6 percent a year in 1995–99, compared with 0.2 percent in 1991–94. Even if the civil war effect is isolated by eliminating 1994 from the calculations, the difference in average annual growth remains impressive. Although this improvement habits origins in part in the oil sector, average annual non-oil GDP growth also rose, more than doubling in the second half of the decade, even alter abstracting from the adverse effect of the civil war. With population growth little changed between these two periods, the faster growth appears to have come from more rapid capital accumulation and a considerably better performance of total factor productivity (TFP; Box 4). Even so, for the decade as a whole, average TFP growth was negative, pointing to substantial scope for structural reform to improve non-oil growth performance, without necessarily higher levels of investment.

Table 12.Macroeconomic Indicators Comparing Pre-Reform and Reform Period, 1991–99
Annual Average
(Growth rotes in percent)
Real GDP1.0−0.25.6
Oil GDP−
Non-Oil GDP2.1−1.04.7
Of which
Agriculture, forestry, fishing4.82.76.1
Trade, wholesale, and retail4.4−0.38.9
Transportation, storage, and communications−1.7−6.40.0
Financial and real estate services1.32.84.6
Government services−4.0−7.8−0.3
Real per capita consumption−20.3−26.52.9
M2-growth (Dec/Dec)27.128.913.0
(in percent of GDP)
External current account (excluding grants)−14.1−9.5−0.2
Fiscal balance (excluding grants)−12.0−13.1−4.2
Gross national savings6.411.321.8
Gross investment19.719.921.0
Sources: Yemeni authorities; and IMF staff estimates
Sources: Yemeni authorities; and IMF staff estimates

Sectoral Growth in the Non-Oil Economy

Agriculture and Fishing

Agriculture, including forestry and fishing, is the largest sector of the Yemeni economy, accounting in 1998–99 for about 30 percent of GDP and 58 percent of employment (Figure 1 in Section II). Seventy-seven percent of the population derive their income from agriculture and related activities such as trade and transport. However, reliance on irrigation in a country with scarce water resources, coupled with a prevalence of traditional methods of cultivation, constrained agricultural growth over the past decade. Real growth in agriculture averaged a modest 4.5 percent a year between 1990 and 1999, and its contribution to real non-oil growth declined from the first to the second half of the decade (Box 4). The sector is highly vulnerable to variations in rainfall. For instance, following the severe drought in 1990–91, real agricultural activity contracted by 7.6 percent; it recovered impressively in 1992 (20.1 percent real growth), largely because of exceptional rainfall.

Government policies had an important impact on agricultural growth. In the first part of the decade, import subsidies on wheal and flour kept prices artificially low, discouraging local production,76 More important, the large depreciation of the rial in the parallel market in 1992–94 led to an increase in input costs (seeds, fertilizers, machinery, and pans are imported), which lowered net returns to farmers. At the same time, domestic production was stimulated through import bans on various products, such as fruits, vegetables, fats, and grains, and high import tariff rates on others. The gradual removal of bans and controls in the context of the reform program that started in 1995 nonetheless coincided with an increase in production, partly by reducing the costs of inputs and liberalizing prices, but also because about 50 agricultural units were privatized at the onset of the privatization program.77 Another factor was some improvement in cold storage and transportation facilities for agricultural production. Hence average annual growth in agriculture rose to 6.1 percent a year in 199599. compared with 4.8percent a year in 1991–93 (Table 12).

Box 4.Accounting for Growth in the Non-Oil Sector

Recent national accounts data indicate that real non-oil growth in the Yemeni economy picked up to an annual average of 4.7 percent in the second half of the 1990s, compared with 2.1 percent in 1991–93. The sectoral composition of the economy remained broadly stable, although the share of agriculture rose by 1.5 percentage points during 1995–99. However, the contribution of agriculture to non-oil growth declined from 70 percent in 1991–93 to 43 percent in 1995–99. This was partly compensated by fishing and by financial institutions and real estate, each of which contributed an additional 3 to 4 percent to non-oil growth in 1995–99 compared with the pre-civil war period. The share of government services in GDP fell slightly over 1995–99. Tourism, although generally perceived as an industry in which Yemen has comparative advantage, did not perform well: its contribution to non-oil growth (proxied by the value added of restaurants and hotels) increased by only 0.3 percent, from a low base of 0.6 percent (see Annex 1).

Sectoral breakdown of Non-Oil GDP
Sector’s Share in

Non-Oil GDP
Contribution to Non-Oil

GDP Growth
Agriculture and forestry33.435.070.542.6
Transportation, storage, and communications13.111.3−13.80.0
Government services11.510.9−34.3−0.9
Wholesale and retail trade9.110.217.817.3
Restaurants and hotels0.
Financial institutions and real estate7.
Sources: Central Statistics Organization of Yemen; and IMF staff estimates.
Sources: Central Statistics Organization of Yemen; and IMF staff estimates.

Although poor data quality prevents drawing any precise conclusions, the growth accounting exercise below attempts to shed some light on the roles of factor accumulation and productivity in contributing to growth. For the period 1991–99, growth of non-oil GDP per capita was negative, at -1.3 percent a year on average, even though factor accumulation of both labor and capital was substantial, reflecting relatively rapid population growth and strong investment. Thus total factor productivity was significantly negative, and this result holds for a broad range of reasonable assumptions regarding the share of capital in output and the initial capital stock. Reforms that would enhance factor productivity are therefore a key element in promoting growth. And in fact, factor productivity in the reform years 1996–99 was much higher (by about 50–100 percent, depending on the assumptions) than in the 1991–99 period as a whole.

Growth Decomposition in the Non-Oil Sector, 1991–991Average Annual Percentage Change
PeriodReal Non-Oil GDPPer CapitaLaborCapitalTFP (a = 0.2)TFP (a = 0.4)
Of which: 1996–994.−0.9−2.1
Of which: 1996–994.40.33.512.8−1.6−3.4
Of which: 1996–994.−0.2−0.7

Assumes a standard, neo-classical, constant returns to scale, Cobb-Douglas production function:Y = AKaL (1-a), where Y = potential output, A = total factor productivity (TFP), K = capital, L = labor, a = capital/output production share. It is assumed that actual GDP growth equals potential output growth and population growth equals employment growth. Average annual capital stock was calculated as K(t) = K(t – 1)*(1 – 0.03) + GKF(t) where it is assumed that the depreciation rate of capital stock is 3 percent per annum, GKF is real gross capital formation in year t, and K (1990) was set equal to real GDP in the first two rows, to 50 percent of real GDP in the second row, and to 200 percent of GDP in the last two rows.

Assumes a standard, neo-classical, constant returns to scale, Cobb-Douglas production function:Y = AKaL (1-a), where Y = potential output, A = total factor productivity (TFP), K = capital, L = labor, a = capital/output production share. It is assumed that actual GDP growth equals potential output growth and population growth equals employment growth. Average annual capital stock was calculated as K(t) = K(t – 1)*(1 – 0.03) + GKF(t) where it is assumed that the depreciation rate of capital stock is 3 percent per annum, GKF is real gross capital formation in year t, and K (1990) was set equal to real GDP in the first two rows, to 50 percent of real GDP in the second row, and to 200 percent of GDP in the last two rows.

Two decades of rapid growth under the umbrella of protectionism and subsidies had achieved, by the mid-1990s, near self-sufficiency in both fruits and vegetables. The second half of the 1990s saw a continued rise in the production of these crops, partly underpinned by (he spread of irrigation, and despite the gradual removal of import bans imposed on similar products (Statistical Appendix Table A.14). However, production of cereals generally declined over that period, with a sharp drop estimated for 1999 due to the drought that occurred in the first rainy season that year. Qat is another important crop in Yemen, capturing more than 7 percent of the total cultivated area (Box 5). However, statistics on qat production are inadequate, and its contribution to GDP is difficult to assess. Qat does seem highly water intensive; with production largely supported by indirect subsidies on diesel fuel and water pumps, its expansion may have contributed to the decline in cereal production.

Livestock and other noncrop agricultural production increased significantly over the second part of the 1990s (Statistical Appendix Table A. 15). Among these products, fish is particularly important. The country is endowed with important resources of surface water fish, as well as deepwater fish, shrimp, and other shellfish. In the first half of the decade, industrial activity related to fishing was protected through a ban on imports of fresh and frozen (but not canned) fish. At the same time, export controls maintained prices of fish at a low level, discouraging fishing. With the removal of trade controls, fishing became more lucrative, and the total catch increased by about 60 percent between 1995 and 1998.

The agriculture and fisheries sector is largely market oriented, with production privately undertaken but encouraged by the government and cooperatives that provide subsidized inputs. The government has traditionally financed the purchase of fertilizers and pesticides at low cost through the Agricultural Credit Bank. Farmers also have long benefited from low prices for diesel fuel and electricity, which encouraged the reliance on pumping water for irrigation and contributed to the depletion of underground water resources. Other bans and controls have practically been eliminated, however, and the government is shifting its focus toward more market based ways to promote agriculture.

The Ministry of Agriculture is becoming active in the development and maintenance of water resources. In 1999, it undertook preliminary studies for 77 dams, prepared designs for 40 other dams and reservoirs, and prepared an irrigation policy that was approved by the cabinet; the construction of 12 dams was finished, and 17 others are under construction. The ministry also plays an important role in protecting crops from disease through information campaigns, quality control checks on insecticides and pesticides, and assistance to farmers in controlling crop and livestock diseases.78 It provides funding for various activities such as fertilizing, refrigerated transportation, livestock production, water resource management, and marketing. Although this marks an improvement from earlier neglect of the sector, more needs to be done to encourage cultivation of rain fed crops, eliminate subsidies (particularly on diesel fuel), and improve the overall quality of public services in agriculture. A strategy for government activity in the sector was recently developed in a broad based participatory approach in the “Aden Agenda.”

Box 5.The Role of Qat in the Yemeni Economy

Chewing of qat leaves is a widespread practice in Yemen, usually in the context of social gatherings in the afternoon.1 The leaves of the hardy and drought resistant qat tree (Catha edulis) contain an amphetamine like substance, and chewing them has a mildly stimulative effect. There are some indications that qat chewing was for a long time confined to the wealthy and spread to the wider population only in the 20th century. A study in the 1960s found that, in the city of Ta’iz, about 60 percent of males and 35 percent of females were “habitual” chewers. Since late 1999, qui chewing in public buildings and during working hours has been prohibited, and a public campaign to reduce the practice has been launched.

Qat comes in a range of qualities, and prices vary accordingly. Recent household surveys indicate that qat absorbs 5 to 10 percent of household expenditure in all regions of Yemen except the desert governorates, and it probably accounts for a similar share of GDP. Consumption is widely thought to have increased in recent years, and the area cultivated with qat is believed to have increased by 10 percent between 1995 and 1990(to 98,000 hectares), roughly in line with total cultivated area. Over the same period, qat prices rose faster than the consumer price index.

Qat is appreciated especially by small farmers as a crop with a very high market value that requires relatively little labor. At least in the Sana’a basin, qat cultivation depends on irrigation and is highly water intensive. Water is typically pumped with diesel pumps, contributing to the rapid decline in water tables. Although reliable statistics do not exist, production expanded during the 1980s and 1990s, partly displacing other crops such as grapes, coffee, and cereals. Subsidies that kept grain prices low also contributed in the case of cereals (see Box 1).

Qat leaves must be brought fresh to market, to be consumed within 12 hours of harvesting. Accordingly, a highly efficient transport and marketing system has developed, even in the most remote areas. The qat trade is probably an important mechanism in transferring wealth from urban to rural areas; it is said to directly benefit 170,000 families, or 1 million people. The import of qat is banned. Some exports to neigh boring countries and Yemeni communities abroad may occur through informal channels, but no data are available.

Qat retail sales are taxed at 20 percent, but tax collection suffers from logistical and governance problems; in 1999 the qat lax yielded YRls 1.6 billion (0.2 percent of GDP). Shifting qat tax collection to the local authorities and basing it on acreage rather than sales is under consideration. The Yemeni authorities have recently commissioned a study to better understand the role of qat cultivation in the economy, in particular regarding the level of production, water use, profitability and the distribution of revenues, labor requirements, and substitution for other crops.

1 Statistical information on qat production and use is scarce, in part reflecting official unease with the importance of the stimulant in Yemeni society. This box is based on an unpublished World Bank paper (Ward, 2000) and some information from the authorities.

The Industrial Sector

The industrial sector contributes a meager 16 percent to real GDP, mostly from manufacturing (11 percent in 1999) and construction (4 percent). Manufacturing, limited mainly to the production of consumer goods and construction materials (Statistical Appendix Table A. 13) grew steadily at about 4 or 5 percent a year in the first part of the decade. A boom in construction and real estate activities occurred in the early 1990s following the return of some three quarters of a million expatriate Yemeni workers at the time of the Gulf crisis: the sector registered real growth rates of 6.3 percent in 1991 and 16.1 percent in 1992. This boom may also have been partly due to strong demand for land and property as a hedge against inflation, which was running at 45 to 50 percent annually in 1991–92. The civil strife of 1994 disrupted industrial activity and led to a contraction in both manufacturing (by 5.3 percent) and construction (by 19 percent). Extensive damage to private properly and public infrastructure, including the Aden refinery and electric power generating stations, constrained activity mostly in the south but also in the north.

Recovery from the war, coupled with the initiation of the reform program in 1995, led to a strong pickup in industrial activity. A construction boom that began in 1995 extended into 1997. Similarly, a jump in the growth rate of manufacturing took place in 1995 but was not sustained in the following years.


Services today account for about 35 percent of real GDP. Transportation, storage, and communications; government services; and trade each account for 9 percent, and financial institutions and real estate together for 6 percent. Most of these shares were relatively stable throughout the decade except for government services, which declined from 16 percent of GDP in 1990 to 11.5 percent in 1999, and transportation, storage, and communications, which declined from 15 percent of GDP in 1990 to 9 percent in 1996. Although there are considerable doubts about the accuracy of the underlying data, public services may have declined with the privatization of a large number of small scale public enterprises in 1995–96. The growth pattern in other services also broadly reflects the effects of the Gulf crisis, the civil war, and the reform program of 1995. Trade and financial services jumped in 1991 following the repatriation of Yemeni workers from the Gulf; but whereas trade kept growing at an annual average of 4.2 percent in 1992–93, financial services contracted. The post civil war period saw another boom in both sectors, with average annual growth reaching 9 percent for wholesale and retail trade and 4.6 percent for financial services. Wholesale and retail trade even grew by 15.5 percent in 1995, probably triggered by the recovery from the civil war, but also influenced by the import and excise lax reforms introduced at the time.

Labor Market Developments

Labor market data in Yemen are scanty and do not go back beyond 199l.79 Only recently, motivated by the rise in unemployment in the aftermath of the Gulf war, was a more focused monitoring of labor market developments initiated. The Ministry of Labor and Vocational Training was created in 1997. In an effort to consolidate labor market statistics and improve its own effectiveness in vocational training, job matching, and labor force planning, the ministry embarked in 1998 on a major project to develop a Labor Market Information System (LMIS) database. The LMIS will establish links between various concerned government agencies and the labor ministry and its job offices located in different parts of the country. Information will be gathered on the supply and demand of labor according to professional description, based on input provided by various government agencies and periodic market surveys.

The Ministry of Planning estimates that, in early 2000, out of a workforce (defined as the population aged 15 and above) of 9.7 million, the labor force stood at about 4.2 million, for a 43 percent participation rate. Participation rates of the male and female populations differ sharply, at about 72 percent and 15 percent, respectively. By both regional and international standards, this difference is striking. As a result, female labor accounted only for about 18 percent of the total labor force, compared with worldwide averages of 41 percent for low income countries and 43 percent for high income countries.

Data on the sectoral distribution of employment (Statistical Appendix Table A.6) indicate a high concentration in sectors where informal employment is the norm, such as agriculture and fisheries (49 percent in 1999), followed by trade, restaurants, and hotels (about 11 percent). Female employment in Yemen is concentrated in these sectors, particularly agriculture and fisheries, which employ about 86 percent of all female workers. Manufacturing and education each account for about 4 percent of female employment. The low female participation rate in general, and in the formal sector in particular, appears to be attributable to a number of factors, such as traditional values, which discourage female employment in nontraditional areas; a tendency toward early marriage for females;80 relatively low educational attainment among females;81 and labor legislation, which imposes higher costs on the hiring of female workers (Box 6).

Available unemployment data suggest a growing overall unemployment rate, as the pace of employment creation during the last eight years was insufficient to absorb all new entrants in the labor force. The 1994 population census estimated an unemployment rate of 10.1 percent; preliminary results from the recent labor market survey suggest that unemployment rose to 20 percent in 1999.

There are no reliable data relating unemployment to age, educational level, duration of unemployment, or the causes of unemployment, and data on wages in the private sector are nonexistent. Data available from the 1994 census suggest that the majority of the unemployed (about 60 percent) were below the age of 24, and that unemployment rates fall sharply as age increases (Table 13). The long list of university graduate applicants at the Ministry of Civil Service and Administrative Reform suggests that unemployment is not confined to people with low educational attainment.82

Table 13.Distribution of Labor Force by Employment Status, Age Group (+10 Years), and Gender, 1994(In percent)
UnemployedTotal Labor Force
Age GroupMaleFemaleTotalMaleFemaleTotal
15–192331.523.97.713 78.9
Total (thousands)286393252,5506593,209
Memorandum items:
Percentage population age 10–24568659234026
Sources: Central Statistics Organizations General Population Census 1994.
Sources: Central Statistics Organizations General Population Census 1994.

International Labor Migration Trends

Emigration has a long tradition in Yemen of providing an alternative outlet for new entrants in the labor force and generating much needed foreign exchange. Migration flows have headed mainly toward three regions of the world: for centuries, many migrants went eastward, particularly to India, Indonesia, and Malaysia; others went to East Africa; and in recent decades migration to the Gulf Cooperation Council (GCC) countries has become dominant. Emigrants to the first two regions have mostly settled permanently and have been assimilated within the local communities, but those in the GCC countries still maintain a strong link with Yemen and remit a sizable portion of their income on a regular basis. The Ministry of Immigrant Affairs estimates the total number of Yemenis abroad at around 6 million to 7 million, of which about 4 million to 5 million are in Indonesia, 0.8 million in the GCC countries, and 0.2 million in African countries, notably Kenya and Ethiopia.

As discussed before, international migration of Yemenis has slowed considerably in the aftermath of the 1990 Gulf crisis. Although in 1997 a resumption of labor migration to the GCC countries appears to have taken place on a small scale, prospects for migration to this region will likely remain limited, since most of the GCC countries are currently facing rising unemployment among their own national labor forces, and Yemeni labor has been replaced by East Asian workers.

Labor Laws and Regulations

The Labor Law was last amended in 1997 and governs employment in the private sector. Among its other features, the law empowers the government to set a minimum wage,83 provides the right to form labor unions and to conduct strikes, and sets relatively restrictive dismissal rules, working conditions and benefits for women, and maximum working hours (Box 6). In view of the administrative weakness of the implementation agencies, however, the main effect of the law appears to be to add to fiscal and regulatory incentives for firms to remain in the informal sector, contributing to its predominance.

Education and Training

General education in Yemen includes nine years of basic education, three years of secondary schooling, and technical, vocational, and higher education. Technical, vocational, and higher education in Yemen is primarily run by two government bodies: the Ministry of Education, which oversees professional-level education (three-year teachers’ training and four year university education) and the General Authority for Vocational and Technical Training (GAVTT), which falls under the jurisdiction of the Ministry of Labor and Vocational Training. Other ministries that provide specialized education include the health, transport, fisheries, agriculture, tourism, and civil service ministries.

Box 6.Provisions of Current Labor Legislation

Yemen’s labor legislation, last amended in 1997, deals with private sector employment only. Certain activities such as traditional agriculture and employment of domestic servants, are exempt, as are international organizations. Under the law, every citizen has a right to work; discrimination by sex, age, or race is banned.

Firms must report all vacant jobs to the Ministry of Labor and Vocational Training (MOLVT) first and may hire directly from the market only if the MOLVT does not nominate a candidate within 15 days. Non-Yemeni workers may only be employed in jobs for which no Yemeni expertise is available, and provided they do not exceed 10 percent of the establishment’s workforce. Firms hiring foreign workers are required to appoint local counterpart workers with appropriate qualifications and proficiency throughout the tenure of the non-Yemeni employee. Companies in certain sectors, however, may be exempted from these rules.

Unless otherwise specified in the two parties’ agreement, contract duration is unlimited for Yemeni employees. After a six-month trial period, a new worker may not be dismissed except for failure to comply with the contract terms, noticeable negligence, or commission of unlawful acts. But the employer may terminate the contract if staff must be reduced for economic or technical reasons. In all cases of contract termination, the employee is eligible for special compensation for resulting damages. The amount of this compensation, determined by a specialized arbitration committee, must not exceed six months’ salary.

Special rules apply for employing women and minors. Women may work at most five hours a day in the six months before and after giving birth; they are not to be employed in dangerous jobs, and they are not allowed to work at night except during the holy month of Ramadan and at other times as determined by the MOLVT. A woman worker is entitled to paid leave for 40 days, and to leave without pay for up to 90 days, in the event of her husband’s death.

An hour of overtime work earns one hour and a half at the basic wage, and an hour of work at night or on weekends or public holidays earns two hours at the basic wage. The MOLVT may set minimum wages for the economy as a whole or by sector. Wage discrimination based on sex or nationality is prohibited.

Official working hours must not exceed 8 a day, or 48 a week, and each 8 hour period must include at least one break. Employees are entitled to at least 30 days of annual leave (in addition to public holidays), must take at least half of these every year, and may not trade vacation time for financial compensation.

Every establishment of 10 or more employees must formulate, within given guidelines on the obligations and rights of employees, a charter of penalties and the conditions of applying them. These guidelines must be displayed in a conspicuous place.

Employers are required either to provide training directly to their workers or to make annual financial contributions to MOLVT training programs in an amount proportional to the number of employees. The ministry organizes public vocational training programs and supervises the standards of programs offered by the private sector.

Employers are required to adhere to occupational health and safety standards specified by the authorities. The MOLVT’s safety and health inspectors are responsible for monitoring workplace conditions and have the authority to conduct unscheduled inspections.

Employers must provide medical care insurance, and larger firms must establish in-house health facilities. At the end of their service, employees are entitled to a monthly pension or a lump sum reward, determined according to the rules of the social insurance law, and if they are not covered by social insurance or a similar system, they are entitled to severance pay of at least one month’s wage for every year of service.

Labor disputes may be resolved through direct MOLVT intermediation, through a specialized arbitration committee set up by the MOLVT, or through a specialized appeals court. Strikes for nonpolitical reasons are permitted only after intermediation efforts have been exhausted and a final court decision has been reached. To be legal, a strike must have been voted for by union members, with a minimum participation of 60 percent and approval by at least 25 percent in a secret ballot. The MOLVT must be notified of the strike three weeks in advance. Some businesses such as hospitals, electricity and telecommunications plants, and banks are required to maintain a minimum level of personnel during strikes.

Both employers and employees have the right to create and join collective organizations to look after their rights. Punitive action against employees participating in union activities is prohibited.

The law describes the penalties and punishments for violations of its various articles. These include a maximum imprisonment of three months and fines ranging between YRls 5,000 and YRls 20,000.

GAVTT operates training institutes at three levels: two-year vocational centers providing semis killed and skilled training, three year vocational colleges providing training in crafts, and two to three year post secondary technical colleges offering technician diplomas. Currently there arc 26 such institutes specializing in such fields as tourism, manufacturing, hotels, agriculture, and veterinary medicine. Funding comes primarily from the budget and from a 1 percent tax on the wages of workers in medium size and large firms (those with 10 or more workers), plus visa fees for expatriate labor (YR1s 5,000).

Enrollment levels and graduation at various colleges and universities are heavily biased toward the arts and humanities colleges; public and private colleges of this type together account for 77 percent of enrollment and 70 percent of graduates. These are followed by teaching colleges (11 percent and 19 percent, respectively) and technical colleges run by GAVTT (Table 14). The education system appears poorly tuned to market needs, and skills mismatch is likely a major cause of unemployment. The current ratio of 1 technical graduate for every 17 university graduates compares with an international standard of about 4 to 1. Among the causes cited for the low enrollment in technical training is the insufficient resources made available to these colleges, the inadequate skills coverage of their programs, and the general preference among the population, particularly among females, for government and administrative jobs.

Table 14.Student Enrollment and Graduation from Colleges and Universities in 1998/99
Technical colleges13,3264763,8021,0151321,147
Teaching colleges16,1903,46919,6594,2936784,971
Arts and humanities99,03026,729125,75912,9003,63716,537
Science and technical10,1053,95814,0639053031,208
Arts and humanities7,1102,93810,0489794381,417
Science and technical1,7225032,22527955334
(in percent)
Technical colleges1.
Teaching colleges9.
Arts and humanities56.415.271.650.414.264.6
Science and technical5.
Arts and humanities4.
Science and technical1.
Sources: Ministry of Planning; UNDP.

Includes training institutes and programs run by GAVTT. Ministries of Health. Communications, Fisheries and Agriculture, Culture, Civil Services, and AWQAR

Sources: Ministry of Planning; UNDP.

Includes training institutes and programs run by GAVTT. Ministries of Health. Communications, Fisheries and Agriculture, Culture, Civil Services, and AWQAR


Inflation in Yemen is largely determined by monetary developments, which in turn are driven by domestic budgetary financing needs. As monthly consumer price index (CPI) data prior to 1995 are not available,84 annual data were used to derive Figure 16, which illustrates that the paths of money growth and inflation closely mirror that of domestic deficit financing. Indeed, the correlation coefficient between CPI inflation and domestic fiscal financing (as a percentage of GDP) is 0.66, almost equal to the correlation between CPI inflation and broad money growth. The correlation coefficient between broad money growth and budgetary finance is 0.85.

Figure 16.Inflation, Money Growth, and Budget Financing

(In percent)

Source: Data provided by the Yemeni authorities.

1 Change in the average consumer price index or broad money over 12 months

Price instability was particularly acute in 1990–94. Those years witnessed very high inflation, fueled by large fiscal deficits, which translated into high rates of money growth (see Table 1 in Section II). Inflation accelerated from 34 percent in 1990 to peak at 71 percent in 1994, the year of the civil war, as fiscal deficits and the rate of broad money growth surged.

The structural reform program initiated in early 1995 succeeded at reducing inflation to single digit levels by the end of 1999. This improvement reflects declining budget deficits (from about 16 percent of GDP in 1994 to near balance in 1999), which allowed money growth to be tightened. Indeed, the average annual rate of expansion of broad money in 1995–99 was half that in the first part of the decade.

Inflation declined only slowly in the beginning of the reform period, however, from 71 percent in 1994 to 63 percent in 1995 and 40 percent in 1996. partly because of significant adjustments in administered prices. Indeed, were it not for the effect of administered price increases,85 CPI inflation would have reached a much lower 33 percent in 1996. In that year, however, the price of diesel fuel was doubled, wheat and flour prices were raised by 150 percent, and average electricity tariffs were raised by 161 percent. Administrative price increases implemented at different limes as part of the reform process (see Table 8 in Section IV) accentuated CPI increases and contributed to inflation at least until the end of 1997. (Throughout that period, inflation excluding administered prices was about 7 to 15 percent lower than overall CPI inflation.)

Figure 17 attempts to isolate the effect of administrative price increases on several CPI components. The transportation price index shows four jumps: in April 1995 following the doubling of gasoline prices: in January 1996 following another 50 percent increase in these prices and a doubling of diesel fuel prices; in September 1997 following another 67 percent increase in diesel fuel prices; and in July 1998 following a 40 percent increase in gasoline prices. The fuel and lighting index shows major jumps in May 1995 following increases in electricity tariffs (60 percent, enacted in January 1995) and fuel oil (74 percent for purchases by the Public Electricity Corporation), and in January 1996 following another 161 percent increase in average electricity tariffs and a 133percent increase in the fuel oil price. Subsequent increases in the prices of both products (in September 1997, July 1998, and June 1999) were milder and had smaller effects, as shown by the relatively smooth path of the index from February 1996 onward. The price index for cereals also shows an upward effect due to increases in administrative prices of wheat: the two significant responses are registered following the150 percent increase in wheat prices in January 1996 and the full liberalization in the third quarter of 1999.

Figure 17.Selected Commodity Price Indices

(Index, January 1995 = 100)

Source: Data provided by the Yemeni authorities.

Other important factors driving inflation were fluctuations in the prices of vegetables and qat. Both products exhibit strong seasonality, with prices affected by rainfall or the lack thereof and by seasonal demand (around holidays for qat). and on a trend basis these prices have been rising faster than the overall index. Indeed, CPI inflation has always been lower (by 10 to 25 percent at least) when both products are excluded from its measurement. Qat and vegetable prices rose strongly in the first part of 1999 following the severe drought, which contributed more than half of the inflation recorded over the period from April to August 1999. Two additional factors affected the price of vegetables in the reform period: the exchange rate unification in July 1996 led to a rise in the price of imported vegetables, and the gradual phasing out of import bans on vegetables (in March 1998 and in mid-1999) contributed to drops in vegetable prices around these dates (Figure 17).

Poverty and Social Indicators

With an annual average decline in real GDP per capita of about 0.5 percent over the past decade, resulting from both sluggish real growth and a large increase in the population, it is not surprising that poverty seems to have risen. According to a World Bank report (World Bank, 1996), 20 percent of Yemenis lived in conditions of absolute poverty in 1992, with spending below socially acceptable levels, poor health status, and limited access to education. A report by the United Nations Development Programme (UNDP, 1999b) states that by 1998 absolute poverty had spread to cover 30 percent of households, and that 15 percent of families lived below the poverty line.

In its annual Human Development Report, the UNDP assigns Yemen a human development index (HDI)86 based on specific measures of basic human needs, all of which take into consideration a core set of socioeconomic indicators related to levels of income, health, education, and access to basic services (UNDP, 1999a). In most of these categories, and despite some improvement over the past two decades, Yemen fares poorly relative to the Middle East and North Africa region on average (Figures 18 to 22 compare Yemen’s performance with that of several other countries in the region and elsewhere).

Figure 18.Republic of Yemen and Selected Comparators: Dependency Ratios1

Source: World Bank, World Development Indicators.

1 Ratio of number of dependents to the working-age population.

2 Data for 1980s are unavailable.

Figure 19.Republic of Yemen and Selected Comparators: Adult Illiteracy Rate

(In percent of population over the age of 15)

Source: World Bank, World Development Indicators.

Figure 20.Republic of Yemen and Selected Comparators: Life Expectancy at Birth

(In years)

Source: World Bank, World Development Indicators.

Figure 21.Republic of Yemen and Selected Comparators: Infant Mortality Rate

(In deaths per thousand live births)

Source: World Bank, World Development Indicators.

Figure 22.Republic of Yemen and Selected Comparators: Access to Safe Water

(In percent of population with access)

Source: World Bank, World Development Indicators.

1 Data for 1980 are unavailable.

2 Data for 1997 are unavailable.

3 Data for 1980 and 1990 are unavailable.

Measures of Poverty

The extent of poverty in Yemen can be gauged through sociodemographic variables, which, although showing improvement over the course of the past two decades, look weak compared with those of other countries in the region.87 Life expectancy at birth, despite having increased by nearly eight years between 1987 and 1998, is about eight years below the average for the Middle East and North Africa. Similarly, although infant and under five mortality rates in Yemen declined by 15 percent and 31 percent, respectively, within a decade, they remain nearly twice the regional average. The share of the population with access to safe water and sanitation is less than half the regional average. Yemen also trails behind the region as a whole in terms of educational achievement, with a higher illiteracy rate and a widening gender gap in education. At the same time, however, some indicators have improved faster in Yemen over the past two decades than in the rest of the region or than in the average developing country. For example, between 1985 and 1998 the illiteracy rate in Yemen decreased by about 27 percent; the decline over the same period was about 10 percent for the least developed countries as a group and 15 percent for the Middle East and North Africa region.

Not surprisingly, poverty tends to be correlated directly with family size and inversely with education. The average household size among poor families is 8.5 persons, whereas that for nonpoor households is 6.8. Educational achievement is also significantly worse among the poor: their illiteracy rate of about 66 percent in 1996 compares with only 59 percent for the nonpoor. The difference is even more striking at the household level: 77.3 percent of poor households are headed by illiterates, whereas only 7.7 percent are headed by individuals with secondary education or above. Moreover, the gap between poor and nonpoor is wider for females than for males. In 1998, for example, about 80 percent of poor adult females were illiterate, compared with 64 percent of all adult women; the corresponding numbers for males were 44 percent and 31 percent, respectively. Female headed households are also more likely to be poor: the risk of poverty increases by 20 percent for them compared with male headed households.

Inequality of expenditure in Yemen reflects poverty patterns. Spending by the poor was only about 6 percent of total private spending in 1992. whereas that of the richest quintile was nearly half of that total. The picture improved a little by 1998: the results of the latest Household Budget Survey indicate that spending in that year by the 30 percent of Yemenis with the lowest level of expenditure (the absolute poor) was about 13 percent of total private spending.88 However, the richest quintile still captures about 41 percent of that total. Yemen also suffers from growing income inequality: the Gini coefficient for income distribution increased from 0.39 in 1992 to 0.43 in 1998.

As in many poor countries, poverty in Yemen is associated more with low wages than with unemployment. Indeed, 80 percent of the poor are employed; given that the labor force is about 25 percent of the population, this suggests that the percentage of nonpoor employed is lower. Although the poor tend to enter the labor force earlier than the nonpoor and remain employed until later in life, both groups have the same labor force participation rate, which indicates that poor people do not suffer from a higher incidence of unemployment than the nonpoor. The percentage of the poor employed in the private sector (about 80 percent) is somewhat higher than that of the nonpoor (about 73 percent).

Poverty in Yemen is mainly a rural phenomenon: in 1995 only 3.8 percent of urban families lived in poverty, compared with 16.7 percent of the rural population. This is not surprising given anecdotal evidence that living conditions, in terms of access to education, health services, and sanitation, seem much worse in rural than in urban areas.89 In particular, there seem to be more schools and health facilities per capita in larger agglomerations than in small villages. Only 19 percent of the rural population have access to safe water, compared with 74 percent in urban areas. This difference is far smaller in developing countries as a group (50 percent and 61percent, respectively, in 1993) and for the Middle East and North Africa region (70 percent and 98 percent, respectively, in 1990).

Another striking characteristic of poverty in Yemen, emphasized by UNDP and World Bank assessments, is its unbalanced distribution across parts of the country. About 43 percent of the poor live in three of the country’s 17 governorates—Sana’a, Ta’iz, and Ibb—and an additional 28 percent live in Dhamar, Hodeidah, and Hadramout. Four population groups in particular are distinguished as suffering from high poverty levels: Somali refugees of Yemeni descent, foreign refugees living in refugee camps, dispossessed farmers in the south who were not compensated after the government returned the land to its original owners, and the Akhdam, an ethnic group constituting the lowest social class in Yemen.90

Main Causes of Poverty

A number of characteristics specific to Yemen contribute to the country’s poverty. The harsh, desert-like climate in certain parts of the country and the general scarcity of water prevent the use of much of the land for agricultural production and severely limit the productivity of the agricultural land that exists. Another factor is rapid population growth, which exceeded 3 percent a year for most of the 1990s, partly due to a high fertility rate, which contributes to large household size and high dependency ratios. Coupled with a low labor force participation rate, rapid growth of the population prohibits the achievement of satisfactory productivity levels and keeps income per capita depressed.

Two major shocks contributed to economic decline, and thus to increasing poverty, in the 1990s. First, the war in the Gulf led to the repatriation of about three quarters of a million Yemenis, who left most of their possessions behind. For a society geared toward migration and dependent on workers abroad for the provision of essential financial transfers, the return of the workers had a two pronged negative effect. A substantial cut in national income resulted from the loss of remittances, and the closure of regional labor markets to Yemeni workers led to a significant increase in unemployment at home; both factors reduced income per capita and worsened dependency ratios. The costly civil war that broke out in 1994 was another contributor to the decline in living standards, and the resulting economic losses accentuated poverty.

However, as discussed elsewhere in this paper, inadequate economic policies also played an important role in keeping poverty high. Many distortions in the Yemeni economy have been addressed only since the adjustment program was implemented in 1995. High rates of inflation, a multiple exchange rate system, and extensive protectionist policies depressed real income, distorted the rural urban terms of trade by creating a bias against promotion of exports in agriculture, and led to inadequate access to credit in the early 1990s.

The inadequate design and composition of government expenditure accentuated the inefficiencies that contribute to the persistence of poverty in Yemen. Unification in 1990 resulted in a bloated and inefficient civil service, with wages and benefits absorbing a large share of public expenditure. Current expenses are large relative to spending on core activities such as infrastructure creation and social programs. Moreover, as explained elsewhere, the government spends large amounts on generalized subsidies, intensifying economic distortions while not necessarily benefiting the most needy.91 Even more direct transfer policies such as the provision of cash to the most deprived face difficulties because of problems beneficiaries face in asserting their claims; this causes benefits to leak to the nonpoor.

Poor implementation of government antipoverty programs adds to the negative effects of inadequate budgeting. For example, the World Bank Poverty Assessment Report highlights the mismatch between the distribution of the population (or the incidence of poverty) across regions and the shares of the education budget that regions receive; some remote poor areas are virtually ignored by such programs, which end up being implemented in areas with relatively less needy people. A second important problem is the low quality of services offered by these programs, which translates into low success rates. For example, although health expenditure per capita was comparable in Yemen and Egypt in the mid-1990s ($39 in Yemen in 1994, versus $38 in Egypt in 1995), Egypt reported seven years longer life expectancy, 47 percent lower infant mortality, and 65to 80 percent higher immunization rates. In education, low program quality takes the form of unsatisfactory facilities (lacking water, electricity, and sanitation) and poor quality teaching. This translates into high grade repetition rates. Although public spending on education in the mid 1990s was higher in Yemen (as a share of GDP) than the average for the Middle East and North Africa (6.1 percent versus 5.2 percent), the adult illiteracy rate in Yemen is higher, at 47.3 percent compared with 37.8 percent. Yemen’s high illiteracy rate is in large part due to very low female literacy; the World Bank Poverty Assessment Report states that female education is hampered in large measure by the absence of adequate facilities in schools to host female students (such as suitable toilets, separate classrooms, or flexible hours to accommodate female child labor within families).

Saving, Investment, and External Vulnerability

Data on private investment are highly unreliable and based mostly on estimation rather than recorded observations; saving is estimated as a residual using GDP and external sector estimates. Accordingly, any analysis of saving and investment can at best hope to highlight broad trends. On this basis, over the period 1990–99 gross fixed capital formation rose from 12.3 percent of GDP in 1990 to 18.6 percent in 1999 (Table 15). There was some shift in the composition of investment (Figure 23): as a share of GDP, private sector investment remained unchanged on average from the first to the second half of the decade, while government investment rose. The latter reflected the improving fiscal situation, efforts at reconstruction after the 1994 civil war, and a growing focus on the state as provider of infrastructure and social services.

Table 15.Republic at Yemen: Phasing of Macroeconomic Adjustment, 1990–991
(Change in percent)
Real GDP at market prices1−−
Real non-oil GDP1−1.58.0−0.1−
(In percent of GDP)
Public sector19.521.121.320.721.
Private sector76.977.875.982.660.969.970.469.579.571.4
Gross investment14.616.822.420.020.520.720.823.721.118.6
Change in stock2.
Gross fixed capital formation12.314.220.417.919.420.320.423.321.118.6
Public sector8.
Private sector3.610.217.014.416.917.213.816.515.013.0
Domestic absorption110.9115.7119.5123.4102.6106.5106.1109.0117.8106.8
Net exports of goods and nonfactor
Gross domestic product100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Net factor income1−4.8−7.1−6.2−6.2−8.9−7.7−10.6−9.6−5.7−9.6
Net current transfers112.712.112.513.417.117.018.419.019.919.2
Gross national disposable income107.8105.0106.3107.3108.2109.3107.8109.5114.2109.7
Gross national savings11.
Public sector−3.7−3.0−9.4−11.1−13.6−−0.25.3
Private sector15.29.118.515.139.726.519.819.317.716.1
Total fiscal revenue and grants19.823.116.114.912.819.535.932.826 431.8
Fiscal revenue18.722.015.814.712.619.235.632.226.030.9
Oil revenue and payment for past
excess cost recovery7.
Non-oil revenue11.212.611.
(In percent of GDP)
Total fiscal expenditures32.330.128.929.529.025.639.834.732.732.1
Current expenditure23.626.125.526.026.422.533.227.926.626.5
Development expenditure8.
Overall fiscal balance (cash basis)−11.7−5.6−11.7−13.9−15.7−5.20.6−1.8−7.9−0.4
Foreign financing (net)−
Domestic financing (net)8.84.411.819.715.75.3−−2.3
External trade balance−3.6−8.8−9.7−11.94.6−0.2−0.5−2.0−11.50.4
Exports, f.o.b.14.815.013.315.128.029.935.234.523.836.1
Oil and oil products13.914.411.713.126.028.934.032.521.734.0
Total current account balance−3.1−10.7−13.2−−3.72.9
Memorandum items;
Debt service (as share of exports of goods and services, obligation basis)46.791.389.180.846.842.131.912.617.010.5
Gross official reserves (in months of imports)
Total subsidies (implicit and explicit in percent of GDP)
Real per capita consumption (1996=100)335.4271.8217.1169.897.6104.9100.0112.4110.8112.7
Real per capita private consumption438.7350.6278.0222.587.9103.6100.0111.1110.6110.6
Real per capita GNDI (1996=100)297.2228.4188.0139.5101.8105.8100.0114.1103.1110.9
Incremental capital output ratio (ICOR)−8.04.650.1−
Terms of trade122.3113.0107.491.885.585.3100.0100.769.5114.1
Real effective exchange rate76.2100.0109.7119.5107.1
Sources: Yemeni authorities; and IMF staff estimates.

For 1990–96, a weighted exchange race based on the official and parallel rates was used to convert external transactions into Yemeni rials, following the methodology set out in SNA 1993. This allows adjustment for the implicit taxes (subsidies) involved In export transactions undertaken at the more appreciated (depreciated) rate and in import transactions undertaken at the more depreciated (appreciated) rate.

Sources: Yemeni authorities; and IMF staff estimates.

For 1990–96, a weighted exchange race based on the official and parallel rates was used to convert external transactions into Yemeni rials, following the methodology set out in SNA 1993. This allows adjustment for the implicit taxes (subsidies) involved In export transactions undertaken at the more appreciated (depreciated) rate and in import transactions undertaken at the more depreciated (appreciated) rate.

Figure 23.Saving and Investment

(In percent of GDP)

Sources: Data provided by the Yemeni authorities; IMF staff estimates.

During 1991–94 the relatively low level of private investment likely reflected macroeconomic instability and the uncertainty associated with very high rates of inflation, large fiscal deficits crowding out bank credit to the private sector, multiple exchange rates, external shocks, political instability, and deep rooted weaknesses in the investment environment.92 Private investment in 1990 was particularly low, probably because of measurement problems associated with the first year of unification. However, the stagnation in private investment around 15 percent of GDP on average in the pre- and post reform periods is some what difficult to explain. Macroeconomic stabilization, price liberalization, the removal of trade and exchange restrictions, and other structural reforms aimed at facilitating and encouraging private investment should have significantly improved the investment climate after 1995 and should have led to a significant increase in the share of private investment in GDP. Yet the more deep rooted obstacles to investment were hardly addressed, and high real interest rates stifled investment projects. In addition, major investments in the oil sector had been completed by the mid-1990s. Although the data do not permit oil-related investments to be separated out, it may well be that non-oil investment ratios rose in the reform period.

Private saving averaged 19.9 percent of GDP during 1995–99, compared with an annual average of 20.6 percent of GDP during 1991–94. During the earlier period, high inflation was disruptive to saving, producing negative real interest rates and increasing the difficulty in anticipating real future returns and interest rates. Yet it is striking that the relatively low and stable inflation during 1995–99 appears to have been insufficient to stimulate higher private saving. Given the drastic improvement in public saving between the two periods (as detailed in Section IV), this may in part reflect a measure of Ricardian equivalence (in which agents increase their saving during periods of high fiscal deficits in anticipation of higher future taxes). But it may also reflect the presence of liquidity constraints that forced the population to reduce saving in order to meet consumption needs. Indeed, the path of consumption seems to confirm the strong effect of liquidity constraints: real consumption per capita declined dramatically during 1990–95 and improved only marginally during 1996–99; in 1999 real consumption per capita was still below its 1993 level. This decline mainly mirrored the decline in real income per capita in the first half of the 1990s, and the weak growth in more recent years, which is also consistent with the observed rise in poverty. Finally, with oil revenue accruing largely to the government, private saving had to come out of non-oil income (including workers’ remittances); as a share of non-oil GDP, private saving attained a respectable 23.2 percent during 1997–99, considerably higher than during 1991–93, when it averaged 15.4 percent.

As a result mainly of the sharp improvement in government saving, the external current account improved dramatically in the second half of the 1990s, from an average deficit of 9.5 percent of GDP during 1991–94 to near balance on average during 1995–99(Table 15). When the civil war period is excluded, the difference is even more striking: the deficit narrowed by 14 percentage points on average. Like the movements in the fiscal balance, these developments reflect mostly the rise in oil revenue. The surging share of exports in GDP is virtually all due to oil. although non-oil exports also doubled (from extremely low levels) as a share of GDP, from 1 percent in the early 1990s to 2 percent in recent years. Coffee and fish still account for most non-oil exports, but exports of these items arc stagnating or declining, and non-oil export growth was largely driven by fruits and vegetables for the regional market. The weak development of non-oil exports is consistent with the observed trend of a real appreciation of the Yemeni rial against the currencies of partner countries in recent years and may be a symptom of Dutch disease in Yemen. (In Dutch disease, demand for a dominant export, typically a natural resource export, causes an appreciation of the domestic currency that makes other exports uncompetitive.) In the same vein, imports grew strongly throughout the decade, nearly doubling their share of GDP from 20 percent in 1990 to 36 percent in 1999. Other components of the current account have been rather stable over the decade. Workers’ remittances have been broadly stable after the secular decline in the early 1990s, The performance of the tourism industry, meanwhile, has been disappointing: security problems and inadequate infrastructure have hindered development of this industry despite its obvious potential to create jobs and generate foreign exchange earnings (see Annex I).

Growing dependency on oil underlies the improvement in the external account but also engenders a growing vulnerability to oil price and production volatility. Even so, recent years have witnessed a reduction in Yemen’s external financial vulnerability (Table 16). In particular, thanks to substantial debt relief and a prudent borrowing policy, the external debt has declined dramatically as a share of GDP. This decline masks an even larger fall in the net present value of the debt, as new borrowing has been largely on concessional terms, and debt rescheduling has similarly stretched the maturities of existing debt (see Section II for details). Accordingly, debt service on a commitment basis fell, as a ratio to goods and nonfactor services, to 11 percent in 1999, from eight to nine limes that level in the early 1990s. The elimination of the external debt overhang was not, however, bought at the expense of domestic indebtedness. The government’s domestic debt was cut, if less dramatically, from more than half of GDP in the early 1990s to a quarter in 1999, even though interest payments as a share of government income remained at about 10 percent, reflecting the phasing out of financial repression as the government has increasingly paid market rates for its borrowing. At the same time, the maturity of public domestic debt increased steadily during the reform period. By any measure, the reserve position has also greatly strengthened. Since 1996, gross official reserves (net of reserves needed to cover foreign exchange deposits of commercial banks with the central bank) roughly covered high powered money, and by the end of 1999 they also covered more than half of broad money. Since 1995, reserves have exceeded the equivalent of three months of imports, a level often taken as a benchmark of sufficiency.

Table 16.Vulnerability Indicators(In percent, unless otherwise indicated)
External solvency indicators
Real effective exchange rate
(average period, percent change)−41.0−42.6−33.68.9−10.4
Total external debt (in millions of US$)9,915.210,323.510,540.710,734.710,876.211,017.411,134.75,359.25,373.45,490.1
(in percent of GDP)105.7129.5127.9138.5167.1170.1173.281.285.380.4
Short-term external debt
(in millions of US$)1586.0975.6922.4916.4766.7747.2659.0218.2225.4204.5
Debt service ratio (obligations basis,
in percent of GNFS exports)46.791.389.180.846.842.131.912.617.010.5
External liquidity indicators
Total official own gross foreign
reserves (in millions of US$)424.0679.6322.6147.4357.0525.5937.41,152.2853.21,350.7
In months of imports2.
In percent of short-term
external debt72.469.735.016.146.670.3142.3528.1378.5660.5
In percent of MO18.644.724.812.632.551.798.8118.486.5129.3
In percent of M29.922.812.26.517.526.944.150.436.356.9
Public sector solvency indicators11.712.
Government’s net domestic debt/GDP60.755.154.563.467.946.230.925.332.324.2
Government’s external debt/GDP105.7129.5127.9138.5167.1170.1173.281.285.380.4
Total debt service/total revenue1,240.347.649.
Interest payments/total revenue1,212.012.611.617.722.
Oil revenue/total revenue337.840.829.128.128.747.969.967.452.162.7
Financial sector indicators
Net domestic credit (percent change)418.910.121.940.740.716.6−11.7−5.537.5−13.8
Private sector credit (percent change)33.114.915.326.039.235.4−6.353.857.715.2
Net domestic credit/GDP463.558.956.564.270.449.130.223.532.222.3
Of which
Nongovernment credit/GDP8.
Nonperforming loans/GDP21.
Average maturity of public domestic debt (months)
Treasury bill spread (over U.S.T-bills)
Private credit/total assets of banks14.713.512.111.311.113.412.518.025.625.8
Share of crude oil exports in total exports80.777.
Source: The Yemeni authorities

Defined as amortization obligations with maturity of less than one year.

Domestic interest payments are recorded net of central bank profits until 1998.

includes domestic oil and gas revenue.

Net domestic credit refers to the sum of net credit to government and nongovernment sectors, and excludes other items net.

Source: The Yemeni authorities

Defined as amortization obligations with maturity of less than one year.

Domestic interest payments are recorded net of central bank profits until 1998.

includes domestic oil and gas revenue.

Net domestic credit refers to the sum of net credit to government and nongovernment sectors, and excludes other items net.

The limited role of financial intermediation also limits the potential risks emanating from the financial sector. The ratio of credit to GDP has been declining, reaching 22 percent in 1999 compared with over 50 percent in the mid-1990s. This decline, however, is mostly due to the strong fiscal situation, as private sector credit remains about 6 to 7 percent of GDP. However, as discussed elsewhere in this report, recorded vulnerabilities in the banking sector have been rising in recent years (although this likely reflects better reporting and enforcement of prudential regulations rather than a genuine deterioration of portfolios). The size of nonperforming loans (17 percent of GDP in 1999), although still manageable, points to the importance of the planned reforms in the banking sector. Yemen has no private credit ratings, and in the absence of a secondary treasury bill market, interest rates may not fully reflect market forces. However, the declining yield spread of Yemeni government paper over U.S. Treasury bills indicates that, in the view of investors inside (and outside) Yemen, progress in macroeconomic stabilization is appreciated and has substantially improved Yemen’s credit worthiness.

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