Yemen economy starts to recover from political crisis

Source: Reuters, By Martin Dokoupil and Mohammed Ghobar,

14/02/2013

* Firms report jump in sales, still below pre-crisis levels

* Construction, tourism remain paralysed, job market idle

* Inflation fell sharply, currency stabilised

* Government faces budget strains, unemployment high

* Pipeline attacks cost up to $500 mln every month

DUBAI/SANAA- When political turmoil drove Yemen to the brink of economic collapse in 2011, Jumaan Trading & Investment Co saw its sales plunge by more than 60 percent, prompting the company to shift part of its operations to neighbouring Saudi Arabia.

But the ouster of strongman president Ali Abdullah Saleh a year ago, and a partial improvement of security in the poverty- and militancy-stricken country, are now helping to revive the economy, boosting JTI's sales.

"There is definitely an improvement in the situation, especially compared to 2011," said Ahmed Jumaan, general manager of JTI, which focuses on agriculture, power generation and construction.

Sales at JTI, founded in 1958, jumped 55 percent to about $24 million in 2012, although that is still 5-10 percent below levels seen before the political crisis began, he told Reuters.

Yemen's fledgling economic recovery is good news for efforts to restore political stability in the country, which is important for the entire region because it lies near major oil shipment routes.

The recovery is also a positive omen for other Arab Spring states which are struggling to rebuild their economies after political turmoil in the past two years.

The economy of Yemen, the second poorest Arab state after Mauritania, shrank 10.5 percent in 2011, the International Monetary Fund estimates, as the unrest caused fuel and power shortages and oil pipelines were attacked.

The IMF says the economy stabilised in 2012, and after a business revival toward the latter half of the year, it predicts growth of around 4 percent in 2013.

Other key indicators have drawn back from crisis levels. Inflation eased from a peak of 25 percent in October 2011 to 5.5 percent last November, the latest available official data shows.

The Yemeni rial has stabilised around 215 to the U.S. dollar after sinking to about 243 in 2011. This has allowed the central bank to cut its key interest rate twice in four months to aid the economy, by a total of 5 percentage points to a still-high 15 percent.

SUBSISTENCE

Much of Yemen's economy is operating close to subsistence, so it would not take much to stifle the recovery. The country faces dwindling oil and water reserves, and per capita income was $2,232 in 2012, just 8 percent of the level in neighbouring Oman, according to the IMF.

A third of the 25 million people live under a poverty line of $2 a day and unemployment is estimated at around 35 percent - with youth unemployment at 60 percent.

Watheq al-Hamadi, manager of a large grocery store in Sanaa's upscale neighbourhood of Hidda, said that despite the economy's improvement, few Yemenis could afford to buy any form of luxury item.

"The only thing that has come back is power supplies and petrol. The purchasing power is still weak," Hamadi said as he warned his staff to look out for shoplifters.

Since the tourism and construction industries remain paralysed - Jumaan said his company's construction equipment sales were still only about 30 percent of normal - economic growth will not necessarily create many jobs.

"I've been living off my friends since the revolution started," said Ali Abdul Rahman, who used to work as a translator, teacher and assistant to foreign aid agencies, but now spends most of his time reading at Sanaa cafes.

"I was hoping that electing a new president and forming a new government would improve the situation, but nothing has changed so far," he said

.

Finding jobs outside Yemen, which could be a safety valve to limit unemployment, is difficult since countries in the region restrict the entry of Yemeni workers.

Yemen's labour market "can absorb barely 20,000-30,000 from this huge number of unemployed", said economist Mohamed al-Maytami, chairman of the Khobara Centre for Development and Consulting Services, which provides services to foreign aid donors, the government and the business sector.

AID

JTI and tens of other Yemeni firms moved their construction businesses to Saudi Arabia and other Gulf states during the 2011 turmoil. If Yemen's construction sector starts to recover, many of these companies will return and the sector could absorb 150,000-200,000 local workers, Jumaan said.

A construction recovery will require the cash-strapped Yemeni government to issue a large number of infrastructure tenders, however. And for that to happen, at least two conditions will have to be met.

One is further improvement in security. Yemen depends on crude oil exports for about 60-70 percent of its state budget income, and its finances are still being sapped by bombings of oil and gas pipelines by insurgents or disgruntled tribesmen.

"You are talking about a $400-500 million loss every month because of the sabotage, which is big money for Yemen," Maytami estimated.

In the latest incident, attackers last week blew up the country's main oil export pipeline, which carries 110,000 barrels per day.

The government is mounting a two-pronged campaign to secure the oil infrastructure, at times attacking tribesmen with tanks and rockets and at other times negotiating with them, but a solution lasting more than a few weeks has not yet been found.

The second condition for a construction recovery is larger inflows of foreign aid. Last autumn wealthy Gulf Arab countries, Western governments and other donors pledged $7.9 billion over several years to Yemen, but only a small fraction of that money has so far arrived; Maytami estimated under $750 million. The Yemeni government is seeking $12 billion.

Other countries hit by Arab Spring uprisings have found that pledged aid can be slow to arrive. Donors are due to meet in London next month to assess the situation in Yemen.

The IMF estimates Yemen posted a state budget deficit of about 5.5 percent of economic output last year, and that the deficit will widen slightly this year.

"I do not think the budget itself is enough to confront challenges facing the country. That's why in the short term, there is concern about the financial commitment from donors," Maytami said.