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Last updated on September 14, 2011

Republic of YemenProgram Note

Current IMF-Supported Program: Three-year US$369.8 million program supported under the Extended Credit Facility (ECF), approved by the IMFs Executive Board on July 30, 2010.

Background Yemen, one of the lowest income countries in the Middle East, is confronted with a range of difficult economic and security issues. The country has one of the highest malnutrition rates in the world, and an estimated 43 percent of its 23 million citizens live below the poverty line. Yemens oil reserves, on which the economy depends heavily, are expected to run out within a decade in the absence of new discoveries. The country is also facing depletion of its groundwater. These challenges are compounded by a difficult security situation and civil unrest, a rapidly growing population, poor infrastructure, and weak institutional capacity. Yemen is witnessing widespread protests calling for political reforms and more equitable access to economic opportunities. The ongoing political crisis has taken a serious toll on the economy. The past few years have been exceptionally difficult for the Yemeni economy. Oil production dropped substantially beginning in 2007. With the collapse of international oil prices in late 2008, the countrys oil revenueswhich account for about 60 percent of government revenues and over 90 percent of export revenueshave declined. Although Yemen began producing liquefied natural gas in late 2009, this positive development only partially offset the impact of the drop in oil revenues. Because of the hydrocarbon sectors dominance of the economy, the loss of oil revenue and continued large energy subsidies had a strong negative impact on public finances and the balance of payments. This has contributed to a record fiscal deficit of about 10 percent of GDP in 2009 and has put the balance of payments under considerable strain. The widening fiscal deficit that was financed by borrowing from the central bank, along with other adverse developments, put pressure on the exchange rate and led to a loss of foreign exchange reserves. The Yemeni rial depreciated by 3 percent against the U.S. dollar in 2009 and by a further 16 percent during the first seven months of 2010, while foreign exchange reserves dropped by about one-third during the same period. Role of the IMF In response to the deteriorating economic situation, the government outlined a program of reforms in mid-2010 to address the prospect of lower oil revenues while boosting public investment and social spending. The program is part of the countrys broader medium-term development plan, which focuses on accelerating inclusive growth outside the hydrocarbon

2 sector while maintaining inflation within moderate levels and putting public finances on a more solid medium-term footing. The program is being supported by an IMF arrangement under the ECF. The focus of reforms is on: Strengthening tax policy and administration reforms to reduce the countrys reliance on the hydrocarbon sector. A package of tax policy reforms to eliminate most income tax and customs exemptions has already been approved by the parliament. Containing nonessential current expenditures to shift the balance away from current spending toward capital spending and social transfers. This shiftfrom 70 percent and 30 percent, respectively, to approximately 65 percent and 35 percentis intended to strengthen the social safety net and bring about the sustained levels of public investment needed to achieve the countrys growth objectives. Reducing fuel subsidies which, at about 810 percent of GDP, are the most generous in the region. A phased increase in fuel prices has already started with the aim of an eventual elimination of fuel subsidies, while increasing social transfers to protect the most vulnerable segments of the population.

Progress to Date The program had initially succeeded in stabilizing the rial, which made up some of its earlier loss during the second half of 2010, and in safeguarding foreign exchange reserves. In addition, important fiscal reforms were advanced, including the implementation of the general sales tax and the elimination of most income tax and customs exemptions. More recently, however, fiscal and external pressures have resurfaced due to recent unrest and damage to a key oil pipeline. Indeed, the recent unrest has put reforms on hold and, as a result, the short-term outlook is likely to remain very difficult. The Challenges Ahead The challenges facing Yemen are enormous and multi-faceted and are further complicated by a difficult security situation and recent unrest. The magnitude of these challenges and the need to react quickly, including through economic reforms, were recognized at high level meetings of the Friends of Yemen in London and New York in 2010.