Failed State Revue: IMF Bails Out Yemen

♠ Posted by Emmanuel in ,, at 8/04/2010 12:11:00 AM
Most are familiar with Yemen via the USS Cole incident in 2000 when a boat laden with explosives manoeuvred close to the aforementioned American vessel and detonated a large bomb that killed 17 sailors and injured 39 more. Since then, the US Navy has been less asleep at the helm, but the damage was done. Still, more spectacular suicide attacks involving other craft were yet to come before America wised up to these threats. Remember, too , that the would-be Detroit bomber who graduated from University College London "studied" in Yemen [1, 2].

Unfortunately, Yemen has not made strides in improving its security situation in the intervening decade. Its government--or better yet, what passes for one--has floundered, allowing al Qaeda operatives believed to have masterminded the USS Cole attack much space to fill in the blanks of tenuous governance. Aside from al Qaeda in the south of the country, the predominantly Sunni leadership has since had to deal with Shiite separatists in the north (the Houthi rebels). Not fun stuff.

The picture is no better in the economic realm as these security challenges have taken their toll on prospects of a functioning economy. Indeed, its currency has just collapsed together with the rest of its legitimate, not underground, economy. Much research has been done about how IMF lending is done in accordance with US interests, and the US understandably has little interest in the implications of further state failure in Yemen. In 1997, the country went to the Washington-based lender with hat in hand, and it is doing so again. From Reuters:
The International Monetary Fund approved on Monday a $370 million loan for Yemen to help the Arab state stave off a growing economic crisis that has seen its currency tumble recently to record lows. The IMF said it would immediately disburse an initial sum of $53 million to the government and the remainder would be subject to quarterly reviews.

Yemen's economy has worsened as the government struggles to cement a fragile truce against rebels in the north and curb an increasingly violent separatist movement in the south, while also fighting an al Qaeda wing based in the country. The country's currency, the rial, has fallen against the U.S. dollar, despite a $57 million injection into the exchange market by the central bank.

The central bank has blamed the rial's recent drop on a worsening security situation and increased demand for foreign currencies to import goods for the Muslim fasting month of Ramadan, which start in August.

In the first year of the loan program, the IMF said the adjustment would focus on fiscal measures and raising revenues through tax policy changes. The IMF said revamping tax policies would include fully implementing a general sales tax and a package of laws that abolishes most exemptions on tax and customs duties.

The IMF said the economic program targets growth of 5 percent annually, while inflation should stay in the vicinity of 10 percent a year. Meanwhile, the fiscal deficit should decline to 3.5 percent of GDP in 2013 from 5.5 percent this year, the IMF said.
Meanwhile, here is Deputy Managing Director Naoyuki Shinohara discussing the parameters of this new lending from the IMF blurb sheet (as an aside, the growing role of Japanese officials at the Washington-based lender is a manifestation of Japan's increased funding--an interesting story in itself that I'll try to cover in the future):
“Yemen is confronted with a range of difficult economic challenges related to its heavy dependence on declining oil revenues, widespread poverty, and water shortages. The global financial crisis has aggravated these challenges through a reduction in world oil prices, resulting in mounting macroeconomic imbalances.

“The government is embarking on a three-year economic program that aims to achieve high and sustained growth and durable poverty reduction over the medium term. The program reinforces macroeconomic stability in the face of a difficult global environment and declining oil production. It puts public finances on a strengthened medium-term footing by combining fiscal consolidation with a restructuring of expenditures more toward capital and social outlays.

“The centerpiece of the 2010 program is a reorientation of fiscal policy that reins in unsustainable deficits, while allowing for higher social spending and safeguarding capital outlays. This will be complemented by tax policy reforms to increase the revenue base, including the full implementation of the general sales tax and adoption of a package of laws that abolishes most exemptions on tax and customs duties.

“Going forward, a comprehensive structural reform agenda will be needed to meet the objectives of the program. The reforms in the first year focus largely on tax policy. Priority reforms also include a strengthening of public financial management and financial sector development.

“The role of the donors is crucial for meeting the government’s objectives. Yemen’s developmental and social needs are considerable. In the absence of significant donor financial assistance, it would be difficult for Yemen to make tangible progress toward meeting its Millennium Development Goals.”
There is an interesting thread about whether the United States has heaped misery upon Yemen by turning it into a front in the global war on terror (GWOT). Riz Khan, formerly of CNN and now of al-Jazeera, explores this possibility in a series of interviews on whether Yemen is a failed state [1, 2]. In the meantime, structural adjustment--don't leave the Gulf of Aden without it.