Yemen needs transition deal to fix economy

DUBAI/SANAA: Yemen’s economy appears on the brink of collapse after three months of street protests and political stalemate that have swollen budgetary deficits and are driving off urgently-needed foreign aid.

Western and Gulf donors are wary of stepping in before a conclusion of a deal for the peaceful departure of President Ali Abdullah Saleh – something the longtime ruler has resisted.

“If there is no injection from outside … the Yemen economy will collapse, definitely,” said Mohammad al-Maytami, economics professor at Sanaa University. “The rial will collapse, inflation will rise to a level Yemen had never witnessed, the most needed food will not be available for majority of people who are poor.”

Yemen has allies with a strong interest in saving the country. Allies in Washington and Riyadh fear a protracted standoff could prompt clashes between rival military units in the capital, and worry the ensuing chaos could benefit an active Al-Qaeda branch in the country that also targets Saudi Arabia.

Worried by protests that have drawn tens of thousands to the streets in cities across Yemen, the cash-strapped Cabinet has vowed to raise wages, create jobs and distribute handouts worth an estimated 3.5 percent of economic output, or $1.1 billion.

But as hard currency reserves dry out, the government has little room to maneuver. Yemen will need at least $2 billion in the next six to 12 months from donors to keep basic public services running, Maytami estimates.

Yemen’s foreign minister urged foreign donors in March to inject up to $6 billion into the state over the next five years to boost economic development.

But potential donors including wealthy Gulf neighbors, which have pledged $20 billion for Bahrain and Oman, both hit by sustained protests in the wake of revolts elsewhere in the Arab world, are not seen rushing in with aid before Saleh leaves.

“They are not going to reward the regime with economic assistance. It hinges on a peaceful and successful transfer of power,”

Yemen’s economy was struggling even before the protests, battered by fights against northern rebels, southern secessionists and Al-Qaeda in a country awash with weapons.

But months of protests, in which over 170 people have been killed, have brought the economy to the brink of collapse after it grew 8 percent last year.

“The biggest problem is that basic needs are difficult to find. The situation is getting more and more difficult by the day,” said economics professor Taha al-Fusail, who estimates that the economy has lost $5 billion or more.

Vehicles queue for hours at gas stations, while daily water supply shortages and power blackouts are the norm.

Fuel supplies diminished when a refinery closed after tribesmen attacked a pipeline, causing losses of around $300 million to $400 million a month. Yemen normally exports 105,000 barrels per day out of 280,000 produced.

Prices of gas cylinders, which many use for cooking, have shot up five to seven times to $21 and $29 on the black market. Some food staples are hard to find with prices up by 10 to 20 percent, according to the latest street prices.

Some economists estimate inflation is currently running at up to 30 percent, double January’s 13 percent.

With dollars hard to buy, some shopkeepers now request payment in greenbacks to be able to import, as the rial dropped around 14 percent in value to 243 rials per dollar during the protests.

Economists say the rial, now near historic lows of 250 a dollar seen last August, would probably weaken more if the central bank were not restricting the dollar supply as demand stays high.

Officially, foreign currency reserves dropped to around $5.1 billion from $5.9 billion at end of 2010 but economists dispute that figure, saying they believed reserves were lower at around $4.4 billion or less.

Economic hardship was part of the impetus that drove many to protest – some 40 percent of Yemen’s 23 million people live on less than $2 a day and a third face chronic hunger.

“The severity of poverty is getting worse. Many stocks are now draining out and if there is no import it may happen that within a few weeks these stocks are depleted,” Maytami said.

A version of this article appeared in the print edition of The Daily Star on May 19, 2011, on page 5.




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