The British departure from South Yemen in 1967 after a series of uprisings was followed by a succession of communist governments buttressed by the Soviet Union. Neither the experience of communism, nor the decades under the rule of President Ali Abdullah Saleh after unification in 1990, were beneficial to the South’s economy—quite the contrary. Business at the port of Aden decayed steadily, to the point of near inactivity today.
Aden’s trajectory from global trading hub to national symbol of misgovernment remains a notable example of the dramatic decline of Yemen’s economy, and of the disastrous consequences that decline has inflicted on its booming population, currently an estimated 25 million people. Two weeks ago the UN called on the international community to provide support for 14.7 million Yemenis in urgent need of humanitarian assistance.
Since late January and the end of Yemen’s National Dialogue Conference (NDC), aimed at offering a political roadmap and a new constitution after the 2011 protests that led to the removal of President Saleh, there have been nationwide calls for Yemen’s leaders to refocus their efforts on the many pressing economic and humanitarian problems. During the NDC, the Yemeni government was criticized for giving their full attention to the conference at the expense of addressing the issues that affect the lives of ordinary Yemenis.
Yet despite the grim economic outlook, pervasive insecurity and political instability, prominent figures of the NDC remain moderately optimistic about the future. Ahmed Abu Bakr Bazara, the chair of the dialogue’s Comprehensive Development Working Group, told Asharq Al-Awsat that there is little doubt the recommendations made in the group’s final report “will have a positive impact” on the efforts to address Yemen’s economic problems, although he adds, “Of course, this will take time.”
Those recommendations, some of which will be part of the new Yemeni constitution, include an emphasis on freedom of economic activity, social justice, the plurality of ownership in the different sectors of the economy (including through the avoidance of monopolies), and public–private sector partnerships.
The decisions of the NDC’s Good Governance Working Group are also expected to contribute to a more favorable business environment, as its vice-chair, Dr. Ahmed Al-Asbahi, explained to Asharq Al-Awsat. The group’s “305 decisions and recommendations” focus on “accountability, transparency and responsiveness, justice, efficiency and effectiveness, the supremacy of law, and the fight against corruption,” Asbahi said.
Asked if the recommendations aimed at increasing transparency in the business sector and in state institutions can be properly implemented, Asbahi sounded hopeful, provided there is the necessary institutional and popular monitoring “to serve as a form of pressure.”
But keeping Yemen’s economy afloat will be a monumental task. Last summer, acting President Abd Rabbuh Mansur Hadi summed up the massive test facing Yemen’s government: “Seventy-five percent of Yemen’s problems are economic.”
Available macroeconomic data and socioeconomic figures depict a daunting scenario. The World Bank estimates that in 2012 the percentage of Yemen’s population living below the poverty line reached 54.5 percent, up from 42 percent three years before. That figure is slightly above the average of Sub-Saharan Africa. One in two children suffer from malnutrition. Yemen is likely not to meet any of the United Nations’ Millennium Development Goals despite the progress in some areas, such as the steady drop in its infant mortality rate.
Conservative figures put overall unemployment at 35 percent, while youth unemployment stands above 55 percent. Last year’s tightening of labor laws in Saudi Arabia has aggravated the problem. Between 300,000 and 400,000 Yemenis, most of them living illegally in the Kingdom, have already returned home.
This picture is even more alarming when considered in the context of Yemen’s demographics. At a recent conference on Yemen in London, Allan G. Hill, a professor of population and international health at the University of Southampton in the UK, sounded the alarm on population growth in Yemen. Hill, a leading demographer formerly at Harvard University, predicts that at the current growth rate Yemen’s population will double in less than 20 years. Such a population rise would place unbearable pressure on the economy, as well as on education and health services.
Yemen’s economy has been overly reliant on the hydrocarbons sector for the last decade. The sector contributed 60 percent of government revenues between 2010 and 2012. Oil revenues allowed Saleh’s former government to provide fuel subsidies that are now financially unsustainable. While oil profits made up the bulk (more than 70 percent) of the government’s revenues over the decade prior to 2010, Yemen’s oil production was never significant by global standards. In addition, Yemen’s oil production has been in steady decline, and the state can no longer rely on rising oil prices to compensate for decreasing production.
Yemen also has natural gas. The reserves in the Marib governorate adjacent to the capital, Sana’a, supply a 200-mile (320-kilometer) pipeline that ends at the Balhaf plant on the southern coast, where the liquefied gas is shipped to Asian, American and European markets. However, revenues from gas exports will not be enough to replace dwindling oil revenues. In addition, energy infrastructure across the country is constantly targeted by armed groups, and sabotage significantly disrupted gas exports in 2012.
Part of Yemen’s gas is expected to be used in electricity production, which is currently too reliant on petroleum. Power shortages are constant, and less than 50 percent of the population has access to electricity. Generators and solar and wind power are too expensive to solve the immediate issues.
But for some Yemen analysts, the most pressing problem is not the decline of Yemen’s oil reserves but the depletion of its water resources. According to Helen Lackner, a Yemen expert who specializes in rural issues and water management, 70 percent of Yemen’s population lives in rural areas, and only 47 percent of the rural population has access to an improved water source. The situation is aggravated by shifting and increasingly unpredictable weather patterns, including severe droughts and heavy rains. Dozens of people die every year in Yemen as a result of violent water disputes. In just a few years, Sana’a could become the world’s first capital city to run out of water.
Unsurprisingly, with limited opportunities (elite interests and control of various sectors of the economy remains a deep-seated feature), insecurity and political instability, the state faces a “brain drain” of qualified Yemeni professionals. A report issued by the Ministry of Expatriates last year estimated that there are 30,000 highly qualified Yemeni professionals residing abroad, mainly in the Gulf.
The capital question
There are “several promising sectors that can be drivers of economic growth and employment creation. Tourism, fisheries and other maritime activities all have great potential,” Khaled Sakr, the IMF’s mission chief to Yemen, tells Asharq Al-Awsat.
“Yemen has 2,300 kilometers of coastline” and it has “not reached its full [economic] potential,” notes Wael Zakout, the World Bank’s Country Manager for Yemen. But despite its maritime potential, the port of Aden is in a dire state and coastal fish stocks have been exhausted by illegal fishing by large fleets and the rising number of Yemeni fishermen.
Zakout also cites the “significant tourist attractions” as a potential opportunity. Yemen has a number of World Heritage sites, rugged mountains, highlands with a temperate climate, stunning coastlines, oases, and islands such as those in the Socotra archipelago, known for its great surfing and diving.
“However, this [economic potential] will not materialize in the short term, mainly because of the security situation,” warns Zakout. The security situation is indeed dire: kidnappings of foreigners are frequent, Al-Qaeda’s Yemeni branch is very active, and targeted assassinations have become normal. The North has been the scene of regular violent clashes between Houthi rebels and the Yemeni army and other groups. There are constant civil disobedience campaigns in the South, and some tribes maintain a problematic relationship with the government and the security forces.
Apart from the security situation, far more investment, both private and public, is required. In particular, investment in infrastructure is widely cited as both a key necessity and a means to generate growth and jobs in the short term. According to Zakout, “There is a need for investment in the power sector, in the highway sector, in the water sector (public supply and sanitation), and new schools.”
“Infrastructure projects, especially labor-intensive ones, would contribute directly and immediately to job creation,” says Sakr, adding, “Unfortunately, even though there has been an increase relative to 2011, allocations for capital expenditures in the budget are too low.” He notes that capital expenditure in 2012 was only 10 percent of total government spending, with 90 percent of current expenditures allocated to general subsides, servicing the debt and the public wage bill. “There is therefore a need to reorient public expenditures away from subsidies towards pro-growth, pro-poor spending,” Sakr asserts.
Asked if investment in water desalination plants could be one way to diversify the economy, decrease Yemen’s reliance on hydrocarbons, and one means of facing the water crisis, Sakr points to the very costly nature of this kind of operation. This option has been explored by GCC countries, which in contrast to Yemen have immense wealth to invest on such projects.
Instead, he says, the IMF believes “the authorities’ policies could, in the interim, focus on encouraging water conservation and slowing down the extraction of underground water resources,” which are scarce.
According to Zakout, “In coastal areas desalination could be an option; today there’s the technology available at a lower cost.” But the problem in Yemen “is that much of the population that needs water is in the highlands.” Thus, the energy cost of transporting the water from coastal areas to the highlands would be prohibitively expensive. He argues there should be a focus on the reduction of irrigated production of qat, a mild stimulant, in the highlands to free up more water for domestic use. And, while Yemen imports about 95 percent of its wheat and all of its rice, 90 percent of its water is still used in agriculture.
One area currently being explored is micro-finance, which would take advantage of the Yemenis’ renowned entrepreneurial spirit. According to Bazara, the chairperson of the Comprehensive Development Working Group at the NDC, a number of decisions have been made to prepare banks and small finance institutions “to offer micro-finance guaranteed by the government, benevolent loans, and providing support, especially in rural areas.” In addition, he adds, “20 percent of state projects have been earmarked for small and medium companies.”
In the absence of significant public and private investment, international donor support has played an important role in mitigating the negative economic impact of the 2011 uprising. The Friends of Yemen group pledged 8 billion US dollars for the period 2012–2015, a substantial part of which is to finance infrastructure projects. Roughly 25 percent of that amount has already been delivered, mostly from Saudi Arabia. In addition, of all Arab countries going through political transition processes after the 2011 uprisings, Yemen was the first to receive financial assistance from the IMF.
Yet implementation capacity and other governance concerns have slowed down donor disbursements in the past, Sakr explains, while also noting that “authorities are making efforts to improve the quality of public investment and help catalyze donor disbursements.” These efforts include the establishment of a Mutual Accountability Framework and an Executive Bureau for the Acceleration of Aid Absorption, in coordination with the World Bank.
Before the political transition, Yemen ranked as one of the worst countries in the Corruption Perceptions Index issued by Transparency International. “Much needs to be done in this area,” Zakout says. “Unfortunately, it continues to be a very serious issue”.
Bazara tells Asharq Al-Awsat about the need to conduct a comprehensive review of aid received by Yemen, to look at “the impact it has had over the past two or three decades.” “Moreover,” he adds, “we need to reconsider the mechanisms and the priorities of this aid and adapt them to future development plans.”
A report published in September last year by Chatham House, a London-based think tank, highlighted the “outward capital flows facilitated by tax havens, which dwarf international aid flows.” According to the report, for every dollar spent on aid in Yemen between 1990 and 2008, another 2.70 left the country.
Rebuilding a legitimate state
Yemen’s National Dialogue Conference has many local critics, who believe the old elites and power circles used the process to secure their own priorities. But numerous observers consider the NDC a success due to the way it managed to prevent a civil war and bring together all sectors of Yemeni society to discuss the country’s future.
The Regions Committee, formed in late January by President Hadi to consider the trickiest question of Yemen’s political transition, issued its final report on February 10. It proposes a division of Yemen into a federation with six regions, two in the south and four in the north, and accords special status to the cities of Sana’a and Aden. In theory, this model offers a solution to some of Yemen’s longstanding problems, namely the feeling of neglect or exploitation that various regions—but especially the South—feel towards the centralized power in Sana’a.
But as with all other recommendations coming out of the NDC, the key lies in the implementation. The referendum on the new constitution is yet to be held, and the legislative and presidential elections have been delayed. This does not bode well for a government that still has to convince ordinary Yemenis that it can defend the interests of the whole and not of a few, and be a source of investment and reliable security provider.
Experts now see strengthening state institutions as the cornerstone of any semblance of economic success. But capacity-building is unlikely to do the trick alone. The Yemeni state faces a profound legitimacy crisis. It is still haunted by the deeply embedded patronage system developed by former President Saleh to strengthen his grip on power, reward allies and punish rivals.
The hope is that the completion of the political transition will help reshape the image of the Yemeni state, and thus put an end to the current climate of insurrection and violence. That could create the confidence necessary to attract investors and allow the private sector to expand. This will take time—a luxury the Yemenis can scarcely afford.
Arafat Madabish contributed reporting from Sana’a.