New IMF Loan Backs Yemen's Reform Efforts

Yemen’s declining oil revenues make fiscal restructuring key

Social safety net to be strengthened

Donor support will be critical to the program’s success

The three-year arrangement under the Extended Credit Facility marks the first time in nearly a decade that Yemen has requested IMF financial assistance.

Yemen, one of the poorest countries in the Middle East, is confronted with a range of difficult economic 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 national poverty line. Yemen’s oil reserves, on which the economy depends heavily, are expected to run out within a decade in the absence of new oil discoveries. The country is also facing depletion of its groundwater. These challenges are compounded by a rapidly growing population, poor infrastructure, weak institutional capacity, a difficult security situation, and civil unrest.

The past few years have been exceptionally difficult for the Yemeni economy, the IMF says in its latest assessment of the country. Oil production dropped substantially beginning in 2007. With the collapse of international oil prices in late 2008, the country’s oil revenues—which account for about 60 percent of government revenues and over 90 percent of export revenues—have declined. Although Yemen began producing liquefied natural gas in late 2009, this positive development only partially offset the impact of the fall in oil revenues.

Because of the hydrocarbon sector’s dominance of the economy, the loss of oil revenue had a strongly negative impact on public finances and the balance of payments, contributing to a record fiscal deficit of about 10 percent of GDP and putting the balance of payments under considerable strain.

These adverse developments put pressures on the exchange rate, the IMF report notes, leading 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 9 percent in the first half of 2010, while foreign exchange reserves dropped by one-third in the same period.

Putting public finances on a sustainable path

In response to the deteriorating economic situation, the government has outlined a program of reforms to address the prospect of lower oil revenues while boosting public investment and social spending. The program is part of the authorities’ broader medium-term strategy, which focuses on accelerating growth outside...