IMF: ‘Urgent action’ needed on Yemen’s economy

National Yemen

Yemen Central-Bank front main gate

The International Monetary Fund (IMF) says the Central Bank of Yemen should refrain from any additional lending to the Government. The IMF recommends that the central bank reach an agreement with the Ministry of Finance to bring down the Government’s outstanding credit within legal limits, adding that publishing detailed audit reports of the bank would be a step further towards best international practices.

Commercial banks’ assets, which are currently concentrated heavily in government papers, need to be diversified in order to minimise the risk for banks’ income in case Government needs to issue such papers shrink, said the IMF.

“To facilitate credit growth, while protecting the health of the banks, it is essential to improve prudential regulations, strengthen supervision and audit enforcement, reduce ownership concentration and connected lending, enhance bankruptcy and closure laws and procedures, and improve and expedite court procedures including out-of-court settlement.”

Meeting Yemen’s economic challenges and ambitions require urgent actions as well as a medium term reform strategy, said the IMF.

“The efforts of Yemen need the support of the international community. It is essential that the Friends of Yemen expedite disbursement of their pledges, and that the authorities spend these pledges effectively and efficiency. The IMF stands ready to continue to provide technical assistance and policy advice in support of Yemen’s home-grown reform efforts and to consider any further financial assistance the authorities may request.”

Yemen’s economic situation remained very difficult in 2012 and the country’s economic challenges will continue to be very serious in 2013 especially in view of the high poverty and unemployment rate particularly among the youth. However, there are signs of recovery, with GDP expected to grow by over four per cent and inflation to further decline.

The fiscal framework for the 2013 budget projects a deficit of 5.7 per cent of GDP, almost equivalent to the estimated outcome in 2012 in spite of a projected decline in total government expenditures. This reflects a large decline in grants, mostly due to the phasing-out of the Saudi oil grant. Other government revenue is expected to increase significantly as oil production recovers gradually and tax receipts improve due to higher collection of taxes on goods and services.

On the expenditure side, a significant decline in current expenditures – mainly lower interest payments and fuel subsidy in relation to GDP – will provide room for higher capital expenditures. The non-hydrocarbon primary fiscal deficit (excluding grants) is projected to remain high and increase somewhat to about 14 per cent of GDP. The current account deficit and foreign exchange reserves would also worsen unless large external grants materialise.