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IMF Loan to Help Yemen Tackle Reforms, Attract Aid

 On September 2, the IMF approved a $553 million loan for Yemen to support the country’s plans to strengthen fiscal and external positions, boost growth, and fight poverty by reducing inefficient fuel subsidies, improving governance, and increasing monthly allowances paid by the Social Welfare Fund.

The loan to Yemen (150 percent of its quota) is part of the IMF’s ongoing support to the Arab Countries in Transition (ACTs)—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen. It comes only a few months after a regional conference co-hosted by the IMF in Jordan to foster a dialogue among various stakeholders on an appropriate economic vision and needed reform plans for this group of countries.

Yemen was the first among the ACTs to tap IMF resources through a loan in 2012. The global lender also provides financial assistance to Jordan, Morocco, and Tunisia.

Speaking to the IMF Survey magazine, IMF Mission Chief for Yemen, Khaled Sakr, discussed the economic challenges the country faces, explained the main ingredients of the national economic reform program, and the underlying reasons for the IMF loan.

IMF Survey: What are the economic challenges facing Yemen?

Sakr: Yemen is at an important crossroads in its political transition and economic development. A new constitution is being drafted, following a participatory National Dialogue, but political differences remain to be bridged. Since early 2014, the increased sabotage of oil facilities led to a decline in oil revenues, deterioration in the fiscal and external positions, and severe fuel and electricity shortages which have compounded Yemen’s long-standing economic problems.

Nearly half of the population currently lives below the poverty line and roughly one in two children suffers from malnutrition. Unemployment is very high, especially among the youth, and social tension contributes to security challenges. At the same time, large and inefficient untargeted subsidies and an even larger public sector wage bill have continued to drain the government budget and breed waste and corruption.

IMF Survey: What are the main policy components of Yemen’s economic program that the IMF will support?

Sakr: The country has launched a necessary bold reform agenda to boost growth, employment creation, and poverty alleviation and to reduce smuggling and corruption. We hope that the new high economic commission will provide impetus to the reform effort. The centerpiece of the reform program is addressing the large and inefficient fuel subsidies, which has been costing about $10 million daily, mostly to the benefit of smugglers and the large consumers.

The program, which is home-grown and designed to address the urgent domestic economic crisis, aims to shift some of the budget resources from these inefficient subsidies to infrastructure investment and direct social transfers to the poor. Under the program, the government plans to increase the average monthly allowances paid by the Social Welfare Fund to poor families by 50 percent. The Social Welfare Fund covers about one third of all households in Yemen, and its targeted coverage will be improved and expanded.

The program also aims at addressing major corruption issues, including the phenomenon of “ghost workers”—fictitious persons on the government payroll or employees that do not perform a job. Some important decisions have been taken to tackle this issue by generalizing the use of biometric identification cards throughout the general civil service, including the military and police, and by phasing in the process of wage payments through bank accounts and post offices. Progress in this process is an important benchmark for the success of the national reform agenda, and will be monitored under the program with the IMF.

In addition, the government plans to introduce reforms to address the deficiencies in the business environment that were identified by the World Bank’s Doing Business survey, including reducing corruption and red tape, and strengthening property rights so that citizens are better enabled to use their property for economic activity and to obtain the funding they need to finance it.

IMF Survey: How would the financial assistance from the IMF help Yemen?

Sakr: Let me first say that Yemen was the first Arab country in transition to receive financial support from the IMF. This support, in the amount of about $94 million, came in April 2012 under our Rapid Credit Facility (RCF), which is a type of emergency assistance with modest reform objectives when capacity to implement policies is impeded by crises.

The current financial assistance from the IMF under the Extended Credit Facility (ECF)—nearly $553 million at today’s exchange rate—supports Yemen’s economic program aimed at moving toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. The ECF is the IMF's main tool for providing medium-term support to low-income countries like Yemen, with higher levels of access to financial resources, very concessional financing terms, and flexible program design features.

Importantly, the IMF’s assistance would also help mobilize further financial resources from international donors. The country would also be able to better benefit from support from the Friends of Yemen, as its reform program helps improve the economy and protect the poor in an effective and efficient way. We also think that progress on the economic reform agenda would, in turn, support the political process.

IMF Survey: What are your views on the recent increase in fuel prices and the associated impact on the poor?

Sakr: The international experience has shown that the system of generalized price subsidies is an ineffective way of supporting vulnerable segments of the population because subsidies benefit the rich more than the poor and encourage corruption. This is not hard to understand: if you own two gas-guzzling cars, a big electricity generator, and an air-conditioned house, you will benefit from energy subsidy far more than if you are a poor household with no car and no or little use for electricity at your home.

Before the recent increase in the cost of fuel in Yemen, official prices were at about half their international levels. While the poor reaped only small benefits from the subsidy, this created big incentives for smuggling and corruption. This situation has become clearly unsustainable in early 2014 with the severe decline in oil revenue and fuel shortages. Fuel became largely unavailable to the population at subsidized prices, and black market prices were higher than international levels. The population was paying very high prices, and the large subsidy was simply going to smugglers and black market dealers.

Furthermore, generalized subsidies cost the state budget about 7 percent of GDP in 2013, or near 60 percent of the country’s total hydrocarbon revenue. This left very little resources for social transfers and infrastructure investment to alleviate poverty and support growth and job creation.

Subsidy reform can change all these distortions. We think that, by increasing fuel prices within a well-designed approach and spending less money on the inefficient and ineffective subsidies, the government will be able to generate large savings to make more transfers to the poor; to invest in roads, schools, hospitals, and power plants; and to improve access to drinking water and sewage services in rural and slum areas where the majority of the poor live. This will also have strong positive effects on social and political stability, and ultimately security, to the benefit of the whole population.

Having said all the above, it’s indeed important to mitigate the impact of reduced subsidies on prices and on the poor who have no buffers to absorb the impact of higher fuel prices. That is why it is important to improve the amount and targeting of social transfers, and to remain vigilant and use appropriate monetary policy measures as needed to contain inflation.

IMF Survey: Unemployment rates in Yemen are alarming. What can the government do to boost job creation and improve standards of living?

Sakr: As I said, the system of generalized energy subsidies left little money for capital spending by the government—an important source of job creation, and a critical means for developing the infrastructure to improve the daily lives of Yemenis and facilitate the growth of small businesses.

Subsidy reform can help the process of job creation in two ways:

• First: the government can use the savings generated from the subsidy reform to boost job creation by building roads and other infrastructure—when you build roads, you employ people immediately, as well as create future job opportunities as you facilitate the transport of goods and expansion of small businesses around these roads.

• Second: the subsidy reform means that the state budget will have a smaller deficit and, hence, less financing needs from banks. This would make more money available to the private sector, including small and medium-size enterprises to allow for more investment and job creation. The smaller deficit would also help contain inflation to the benefit of the whole population.

Investing in people through effective education and healthcare systems, striving for a more business-friendly environment including for small and medium size enterprises, promoting access to financial services, and strengthening public institutions and fighting corruption are all essential for higher and inclusive growth, lower unemployment, and ultimately better living standards for the poor.

 

Source: International Monetary Fund

 

  • Sep 24, 2014
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