Four years ago, when I gave my first interview to the Yemen Times, I highlighted the following key challenges facing Yemen: economic diversification, fiscal sustainability, human resources development, population control and management of scarce water resources. These challenges remain as valid today as then because they are long term structural issues which cannot be overcome overnight.

Nevertheless, good progress has been made over the past four years towards addressing some of these issues, notably through the implementation of a reform program, the formulation of a public investment program, and increased donor support and coordination.

Economic and social progress has been varied among sectors

The government renewed its reform effort in early 2006, with the launching of the National Reform Agenda whose focus has been on governance improvement. The government adopted key pieces of legislation: a public procurement law, a financial disclosure law for all public servants, and an anti-corruption law. Also the government established an anti-corruption agency (Supreme National Authority for Combating Corruption) and separated power between the executive and the judiciary by appointing the Chief Justice of Yemen as the head of the Supreme Judicial Council, in place of the President of the Republic.

Furthermore, the government introduced major simplification in doing business. According to the latest World Bank Report Doing Business 2009, Yemen’s overall ranking in terms of ease of doing business has improved considerably, leaping from 123rd in 2008 to 98th out of 181 countries.

The government continued to expand and deepen the reform agenda as part of its mid-term review of the third 5-year development plan Development Plan for Poverty Reduction. This second phase of reform, which covers 2008-2010, is quite ambitious in scope. During this phase, the government is expected to pay attention to the following areas: Implementation of new laws that were passed; continuing to deepen reforms in public financial management, regulatory business environment and competition, civil service and fiscal policy; and strengthening anti-corruption institutions and raising awareness on ethics and corruption issues. The recent worldwide financial crisis will have limited impact on Yemen as the country financial system is not well integrated in the world economy. The one area to be carefully watched is the management of the country’s foreign exchange reserves.

While the economy is still relying heavily on a rapidly declining oil sector, the direction is set towards a gradual move towards economic diversification with the private sector taking the lead. In recent years the economy grew at slightly above the population rate, which is about half the projected growth in the DPPR. There are several reasons for that: the implementation of the reform program takes time to see its full impact felt; continuation of internal conflict which impacted on the level of security in the country and thus posed risks to investment and tourism; and external shocks like the high level of inflation arising from high commodity world prices.

The government is aware of the mixed economic performance and decided to revise the development plan in light of recent developments and work towards reaching the MDGs. The government managed to achieve significant redaction in poverty from 42% in 1998 to 35% in 2006. Unfortunately, the gain has been more than wiped out by the recent high rate of inflation due to higher international prices of commodities. In response, some mitigating measures have been adopted such as the doubling of the social welfare cash transfers and increasing the wages in the public sector.

Other significant achievements have been made in the area of human development, particularly in education. Improvement in social protection mechanisms were scored especially with both the work of the Social Fund for Development and Public Works Programs, which received recognition for their efficiency and development impact.

Regarding the water sector, a lot has been achieved in moving towards a better demand management of water. First, there is a well prioritized investment program endorsed by the cabinet and supported by the donors. Secondly, good coordination between the ministry of water and environment and the ministry of agriculture and irrigation has been established. Finally, the donor community is harmonizing their support through a sector wide approach. In this regard, let me mention that Yemen would be better off if the question of qat production, a heavy user of water, is addressed effectively. Diversification away from qat production would require a set of polices ranging from public awareness of its negative effects to economic measures, including taxation.

The one area where progress is limited is the area of population control. The high rate of population is making it difficult for the government to keep up with job creation, provision of adequate basic services like education, health and drinking water. The Bank in coordination with other UN agencies, namely UNFPA is preparing a new project focusing on health and population, which is a step in the right direction.

Resource mobilization effort is increasing and donor coordination is improving

The implementation of reforms has earned Yemen donor support which culminated in the holding of the Consultative Group meeting in London in November 2006. The meeting which was co-chaired by the World Bank resulted in total pledges of US$ 5.3 billion, the bulk of which was from Gulf Cooperation Council (GCC). Most of these pledges have already been earmarked for specific projects and some are under implementation, notably those funded by traditional donors. The government has prepared for the first time a 4-year Public Investment Program, to be revised on an annual basis, which establishes government priorities and thus helped donors direct their pledges towards them.

IDA support to Yemen has witnessed a steady increase since it fell by over one third in 2005. The increase was in response to two developments: the improvement in policy reforms and the improvement in the performance of the portfolio of Bank-funded projects. Furthermore, starting with the last fiscal year (July 2007-June 2008), IDA support has been switched from concessional lending to grants. The move to grants is a reflection of the concerns the World Bank has about debt sustainability for Yemen.

With this donor support in response to initial success in reform implementation, it is hoped that Overseas Development Assistance (ODA) to Yemen could show a sustained increase in the years to come. As of 2006, the latest year for which figures are available, ODA to Yemen remains low by international standards at only $13 per capita.

Donor coordination and harmonization in Yemen continues to improve with the adoption of the Paris Declaration. Donors are increasingly coordinating their strategies towards Yemen to avoid duplication and ensure complementarities of their limited resources. In a number of areas, namely education and water, donors are actually moving towards a programmatic approach.

Yemen has also the potential to attract significant resources from the private markets.  As shown at the Investors Conference, held in Yemen in April 2007, Yemen received significant interest from regional private investors.

World Bank Portfolio is healthy and impacts positively on the lives of people in Yemen

The World Bank Group has been supporting Yemen’s effort in promoting development and reducing poverty through projects and non-lending advisory service since 1971. IDA is currently financing 20 projects, with a total commitment of $866 million and an additional $76 million in Trust Funds grants. In FY08 alone total IDA commitment amounted to US$ 155 million, including a $10 million emergency grant in response to the food price crisis, a $20 million project addressing girls’ education, and a grant of $ 51 million in support of the reform program (a quick disbursing operation).

Most IDA lending/grant operations are investment projects, covering a broad range of economic and social sectors, including education, health and social protection, infrastructure, urban development, agriculture and fisheries, environment, and public sector governance.

The Yemeni Government performance of the IDA-funded portfolio has improved significantly since the 2005 Country Portfolio Performance Review. There are currently no long-term problem projects and disbursement increased from $95 million in 2005 to $137 million in 2007.

IFC strategy in Yemen focuses on manufacturing, agribusiness, infrastructure, the financial sector, and the investment climate. IFC has dramatically increased its investments over the last few years from $16 million in 2005 to $134 million in 2007. 

The healthy portfolio of Bank Group projects shows that the implementation capacity constraint in the country can be overcome, with the establishment of appropriate project implementation mechanisms (ranging from the strengthening of existing government agencies to the establishment of autonomous agencies/units such as the Social fund for Development and Public Works Project); and above all with a close supervision by donors.  Unfortunately, only very few donors have either the capacity or the mandate to be engaged deeply with the government in the formulation of projects, supervision during implementation and evaluation of achievements.

In this context let me address the persistent perception by the public that the World Bank is burdening the country with debt and that it imposes conditionalities. As I mentioned earlier, starting a year ago all IDA financial assistance to Yemen is in the form of grants. Prior to that IDA credits were highly concessional, with a grant element of 85% or more.  The terms of the credits are: 40 years repayment period, 10 years grace period, and an administrative charge of 0.75%. There are no interest rate charges.

Regarding the second question, the Bank does no longer impose conditionalities which used to be associated with Structural Adjustment Loans/Credits which dominate the eighties and nineties. The Bank does, however, make sure that the money gets used effectively for the intended purpose. The Bank does also reward a country when it actually implements its own policy reforms. It is important to note that the government is in the driver seat and the Bank (as well as donors), as a development partner, does constructively dialogue with the government and share its worldwide knowledge and experience to ensure that the government’s development effort is well guided.

In conclusion, Yemen has made good progress in a number of critical areas, but the challenges are fundamental which requires time and effort both on the part of the government and the donors.

Yemen is still quite vulnerable to internal and external shocks. An internal conflict in Saada has been going on since 2004, with some hope of receding lately; food crisis has drastically affected the poor segments of the society; and more recently the flooding in two governorates (Hadramout and Al-Mahra) caused the loss of lives and severe damage to infrastructure.

The recent strong support of GCC countries and agencies to Yemen is a clear manifestation of the importance to the region of a stable and prosper Yemen. A move towards economic partnership of Yemen with GCC would certainly accelerate the transition of Yemen from a potential fragile state to a stable state.