Spurred by a rapidly deteriorating economy, the International Monetary Fund has approved a three-year extended credit facility worth $552 million with Yemen, the impoverished Arab nation that has become a breeding ground for the terrorist group al Qaeda in the Arabian Peninsula.
The lifeline will provide some relief for Yemeni authorities who face a myriad of political and security challenges that continue to drag on the economy.
An amount equivalent to about $73.8 million is available for immediate disbursement to Yemen, while the remaining amount will be phased in semi-annual disbursements, subject to six reviews, according to the IMF.
“The Yemeni authorities have made commendable efforts to support macroeconomic stability and growth. Nonetheless, political and security challenges have continued to weigh on the policy environment and economic outcomes,” said Naoyuki Shinohara, the IMF’s deputy managing director.
“In particular, fiscal and external balances have weakened due to delays in key reforms and increased sabotage of oil facilities. Looking ahead, the main challenges are to improve the fiscal and external positions, as well as support inclusive growth and job creation,” he added.
According to IMF and Yemeni estimates, real GDP is expected to slow to just 1.9% in 2014, compared with 4.8% last year. In the first half of this year, oil production declined due to sabotage activities, leading to severe fuel and electricity shortages.
Selected Yemen Economic Indicators:
The fund noted that while Yemen has progressed in its political transition since the 2011 crisis, its economic recovery remained insufficient to reduce poverty and youth unemployment, which at about 54 percent and 45 percent respectively, are among the highest in the world.
With its spluttering economy in mind, Yemeni authorities have initiated a bold economic reform program to reverse the recent slide in macroeconomic conditions and to support growth, encourage job creation, and protect the poor. Notwithstanding political challenges, Yemen’s reform push combines a package of strong policy measures and structural reforms with external financing support, the IMF noted.
“The centerpiece of the authorities’ reform package is phasing out large and inefficient fuel subsidies,” said Mr. Shinohara. “A first step in this direction has already taken place and will be complemented by well targeted social transfers to the poor.”
Mr. Shinohara said that to preserve macroeconomic stability in the near term, Yemen’s central bank needs to adjust monetary policy as needed to limit the impact of subsidies reform on inflation. It should also continue to improve its monetary framework to strengthen policy transmission and support greater exchange rate flexibility.
For Yemen’s reform program to prove a success, the support of the international community will continue to be essential in the period ahead, the IMF said.
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