Economy of Yemen

Khat cultivation in western Yemen near At Tawilah

Agriculture is the mainstay of Yemen's economy, generating more than 20 percent of gross domestic product (GDP) since 1990 (20.4 percent in 2005 according to the Central Bank of Yemen) and employing more than half (54.2 percent in 2003) of the working population. However, a U.S. government estimate suggests that the sector accounted for only 13.5 percent of GDP in 2005. Numerous environmental problems hamper growth in this sector—soil erosion, sand dune encroachment, and deforestation—but the greatest problem by far is the scarcity of water. As a result of low levels of rainfall, agriculture in Yemen relies heavily on the extraction of groundwater, a resource that is being depleted. Yemen's water tables are falling by approximately two meters a year, and it is estimated that Sanaa's groundwater supplies could be exhausted by 2008. The use of irrigation has made fruit and vegetables Yemen's primary cash crops. With the rise in the output of irrigated crops, the production of traditional rain-fed crops such as cereals has declined. According to the Central Bank of Yemen, in 2005 the production of khat, a mildly narcotic and heavily cultivated plant that produces natural stimulants when its leaves are chewed, rose 6.7 percent and accounted for 5.8 percent of GDP; its usage in Yemen is widespread. According to the World Bank and other economists, cultivation of this plant plays a dominant role in Yemen's agricultural economy, constituting 10 percent of GDP and employing an estimated 150,000 persons while consuming an estimated 30 percent of irrigation water and displacing land areas that could otherwise be used for exportable coffee, fruits, and vegetables.[16]

Although Yemen's extensive territorial waters and marine resources have the potential to produce 840,000 tons of fish each year, the fishing industry is relatively underdeveloped and consists largely of individual fishermen in small boats. In recent years, the government has lifted restrictions on fish exports, and production has reached one-quarter of capacity, yielding revenues valued at US$260 million in 2005. Fish and fish products constitute only 1.7 percent of Yemen's GDP but are the second largest export. In December 2005, the World Bank approved a US$25 million credit for a Fisheries Management and Conservation Project to be launched in all coastal governorates along the Red Sea and the Gulf of Aden. This project is expected to improve fish landing and auction facilities, provide ice plants for fish preservation, and enable Yemen's Ministry of Fisheries to undertake more effective research, resource management planning, and regulatory activities.[16]

Yemen is an oil producer and has massive untapped offshore oil and gas. Unlike many regional oil producers, Yemen relies heavily on foreign oil companies that have production-sharing agreements with the government. Income from oil production constitutes 70 to 75 percent of government revenue and about 90 percent of exports. Yemen contains proven crude oil reserves of more than 9 billion barrels (1.4×10⁹ m³), although that is falling from the country's older fields has been wrecked by war and corruption since oil provides around 90% of the country's exports.[25] The World Bank predicts that Yemen's oil and gas revenues will plummet during 2009 and 2010, and fall to zero by 2017 as supplies run out, and UK's Royal Institute for International Affairs warns that instability there could expand a zone of lawlessness from northern Kenya to Saudi Arabia, while describing Yemen's democracy as "fragile" and pointing to armed conflicts with Islamists and tribal insurgents. Thus western and other diplomats and leaders are concerned to preserve Yemen's stability and to avert adverse outcomes.[25] According to statistics published by the Energy Information Administration, crude oil output averaged 413,300 barrels per day (65,710 m³/d) in 2005, a reduction from 423,700 bbl/d (67,360 m³/d) in 2004. For the first eight months of 2006, crude oil output was flat, averaging 412,500 bbl/d (65,580 m³/d).[16]

Following a minor discovery in 1982 in the south, an American company found an oil basin near Ma'rib in 1984. A total of 27,000 m³ (170,000 barrels) of oil per day were produced there in 1995. A small oil refinery began operations near Ma'rib in 1986. A Soviet discovery in the southern governorate of Shabwah has proven only marginally successful even when taken over by a different group. A Western consortium began exporting oil from Masila in the Hadhramaut in 1993, and production there reached 67,000 m³ (420,000 barrels) per day in 1999.There are new finds in the Jannah (formerly known as the Joint Oil Exploration Area) and east Shabwah blocks. Yemen's oil exports in 1995 earned about US$1 billion. Offshore Yemen is estimated to contain billions of oil and gas. Marib oil contains associated natural gas. In September 1995, the Yemeni Government signed an agreement that designated Total of France to be the lead company for a project for the export of liquefied natural gas (LNG). In 1997, Yemen Gas Company joined with various privately held companies to establish Yemen LNG (YLNG). In August 2005 the government gave final approval to three LNG supply agreements, enabling YLNG to award a US$2 billion contract to an international consortium to build the country's first liquefaction plant at Balhat on the Arabian Sea coast. The project is a $3.7 billion investment over 25 years, producing approximately 6.7 million tons of LNG annually, with shipments likely to go to the United States and South Korea. Production of LNG began in October 2009. The Yemen government expects the LNG project to add US$350 million to its budget and enable it to develop a petrochemicals industry.[16]

The U.S. government estimates that Yemen's industrial sector constitutes 47.2 percent of gross domestic product. Together with services, construction, and commerce, industry accounts for less than 25 percent of the labor force. The largest contributor to the manufacturing sector's output is oil refining, which generates roughly 40 percent of total revenue. The remainder of this sector consists of the production of consumer goods and construction materials. Manufacturing constituted approximately 9.5 percent of Yemen's gross domestic product in 2005. In 2000 Yemen had almost 34,000 industrial establishments with a total of slightly fewer than 115,000 workers; the majority of the establishments were small businesses (one to four employees). Almost half of all industrial establishments are involved in processing food products and beverages; the production of flour and cooking oil has increased in recent years. Approximately 10 percent of the establishments are classified as manufacturing mixed metal products such as water-storage tanks, doors, and windows.[16]

Economists have reported that Yemen's services sector constituted 51.7 percent of gross domestic product (GDP) in 2002 and 52.2 percent of GDP in 2003. The U.S. government estimates that the services sector accounted for 39.7 percent of gross domestic product in 2004 and 39.3 percent in 2005.[16]

Yemen's tourism industry is hampered by limited infrastructure as well as serious security concerns. The country's hotels and restaurants are below international standards, and air and road transportation is largely inadequate. Kidnappings of foreign tourists remain a threat, especially outside the main cities, and, coupled with terrorist bombings at the Port of Aden in 2000 and 2002, present a significant deterrent to tourism. As recently as September 2006, tribesmen in the Shabwa province, east of Sanaa, kidnapped four French tourists on their way to Aden. They were freed two weeks later. In October 2006, the U.S. Department of State reiterated previous warnings to U.S. citizens, strongly urging them to consider carefully the risks of traveling to Yemen. Britain's Foreign Office has issued a similar advisory. Recent statistics for tourist arrivals in Yemen are not available, but in 2004 the number rose to 274,000 from 155,000 in 2003.[16]

During the 1990–91 Persian Gulf War, Yemen supported Iraq in its invasion of Kuwait, thereby alienating Saudi Arabia and Kuwait, which both had provided critical financial assistance to Yemen. In addition to withdrawing this aid, Saudi Arabia expelled almost 1 million Yemeni workers. The resultant fall in expatriate remittances had a disastrous impact on Yemen's governmental budget. The civil war of 1994 further drained the economy, and in 1995 Yemen sought the aid of multilateral agencies. In 1996 the International Monetary Fund (IMF) granted Yemen a US$190 million stand-by credit facility, and the following year it approved two funding facilities that increased the country's credit by approximately US$500 million. The funding was contingent on Yemen's adoption of stringent economic reforms, a requirement that the country had limited success in fulfilling. As a result, the IMF suspended lending to Yemen from late 1999 until February 2001. The extension of the two funding facilities, particularly the poverty reduction and growth facility (PRGF), through October 2001 was again contingent on Yemen's commitment to economic reform. Because of Yemen's failure to comply sufficiently with the terms imposed by the IMF, since 2002 the IMF has withheld US$300 million in concessional financing. Discussions over the renewal of the PRGF are ongoing. In 2000 Kuwait and Saudi Arabia resumed financial aid to Yemen.[16]

In October 2002, bilateral and multilateral lenders led by the World Bank agreed to give Yemen a four-year economic support package worth US$2.3 billion, 20 percent in grants and 80 percent in concessional loans. This funding is almost eight times the amount of financial support Yemen received under the IMF's PRGF. However, in December 2005 the World Bank announced that because of the government's continued inability to effect significant economic reforms and stem corruption, funding would be reduced by more than one-third, from US$420 million to US$240 million for the period July 2005 – July 2008. In May 2006, the World Bank adopted a new Country Assistance Strategy (CAS) for Yemen for the period FY 2006 to FY 2009, providing a blueprint for fostering the country's fiscal and human development improvement. The bank pledged to contribute approximately US$400 million in International Development Association (IDA) credits over the CAS time frame. At present, Yemen owes approximately US$264 million to Japan, one of its largest donors. In December 2005, the Japanese government pledged to write off US$17 million of the debt. That same month, Germany pledged to increase its annual aid to Yemen to US$83.6 million over the next two years; funding will go primarily to education and water improvement projects. In November 2006, the United Kingdom announced that aid to Yemen would increase 400 percent, to US$222 million through 2011.[16]

Yemen is a member of the Arab Fund for Economic and Social Development, which since 1974 has contributed to the financing of economic and social development in Arab states and countries through loans and guarantees. In March 2004, the Arab League provided US$136 million to Yemen to finance infrastructure improvements. At a mid-November 2006 meeting in London, a group of bilateral and multilateral donors pledged US$4.7 billion over four years (2007–10) to fund economic development in Yemen. The goal of the meeting, which was jointly chaired by the World Bank and the government of Yemen, was to provide sufficient economic aid to Yemen to enable it to qualify for future Gulf Cooperation Council (GCC) membership. More than 55 percent of the aid, which is primarily in the form of grants, will come from the GCC. Yemen was granted observer status at the World Trade Organization (WTO) in 1999, and its application for full membership was under negotiation as of December 2006.[16]

Imports totaled an estimated US$4.7 billion in 2005 and are projected to increase to US$5 billion in 2006 and to US$5.4 billion in 2007. Yemen is a net importer of all major categories of products except fuels. Principal imports are machinery and transport equipment, food and livestock, and processed materials. According to the United Nations, Yemen imports more than 75 percent of its main dietary staple—wheat. The principal source of Yemen's imports in 2005 was the United Arab Emirates (13.4 percent of total imports); the bulk of these imports are actually re-exports from the United States and Kuwait. Yemen received 10.6 percent of its total imports from Saudi Arabia and 9 percent from China.[16]

In 2005 Yemen's exports totaled US$6.4 billion. Exports are expected to increase to reach a record US$8.6 billion in 2006 as a result of strong oil revenues. Petroleum is Yemen's main export, accounting for 92 percent of total exports in 2004 and 87 percent in 2005. Yemen's non-oil exports are primarily agricultural products, mainly fish and fish products, vegetables, and fruits. In 2005 Asia was the most important market for Yemen's exports, primarily China (37.3 percent of total exports), Thailand, and Japan. Chile was also a primary export market (19.6 percent of total exports).[16]

Yemen's import and export values have increased and decreased dramatically in the past 10 years owing to shifts in global oil prices. As a result, the country's trade balance has fluctuated significantly from a deficit of almost US$800 million in 1998 to a surplus of US$1 billion in 2000. Rising oil prices resulted in a surplus of US$817 million in 2004 and a surplus of US$1.7 billion in 2005.[16]

In recent years, Yemen has reported increasing non-merchandise deficits. These deficits have, however, been offset by record export earnings, which have resulted in large enough trade surpluses to keep the current account in surplus—US$175.7 million in 2003, US$524.6 million in 2004, and US$633.1 million (about 4 percent of gross domestic product) in 2005.[16]

In 1990 the newly unified Republic of Yemen inherited an unsustainable debt burden amounting to roughly 106 percent of gross domestic product. Debt rescheduling by the Paris Club creditor countries in the 1990s coupled with assistance from the World Bank's International Development Agency resulted in a drop in Yemen's debt stock to US$5.4 billion (an estimated 39 percent of gross domestic product) by year-end 2004. According to the Central Bank of Yemen, Yemen's debt stock was US$5.2 billion (an estimated 33 percent of gross domestic product) by year-end 2005. According to the U.S. government, Yemen's reserves of foreign exchange and gold were US$6.1 billion in 2005.[16]

Yemen does not have a stock exchange, therefore limiting inward portfolio investment. Portfolio investment abroad is also very limited, with the result that portfolio flows are largely unrecorded by authorities. In the early 1990s, net direct investment was at its peak as foreign investors tapped Yemeni oil reserves, but since 1995 net direct investment flows have been negative because cost recovery for foreign oil companies has exceeded new direct investment. A five-year US$3 billion liquid natural gas (LNG) construction project involving a consortium of foreign companies is planned following government approval in August 2005. Such a project raises the prospect of increased foreign investment in the future as LNG facilities are built.[16]