Gerd Nonneman: Key issues in the Yemeni economy

Senior Lecturer in International Relations and Middle East Politics, University of Lancaster

This paper was delivered at a conference at the School of Oriental and African Studies, London, on November 26-26, 1995.

SOMEWHAT oversimplifying matters, it could be said that the main economic problem which Yemen is faced with is politics. This is not to diminish the importance of strictly economic and resource constraints, but to highlight the impact which both domestic and international politics have had and continue to have on Yemen's economic development and prospects.

Examples of this are the various upheavals which the country has gone through in recent years. Unification itself (1990) in a context of freer southern markets resulted in price rises and significant economic hardship for consumers in that part of the country, which in turn (together with other effects of unification) led to a number of tensions between North and South. The 1990/91 Gulf War and Yemen's position on it directly resulted in a drastic reduction in remittances and aid, as well as a massive increase in unemployment. And the 1994 Civil War - itself in part an indirect result of the effects of the above two upheavals - resulted in serious economic disruption, heavy costs for the military operations themselves and for subsequent reconstruction, the suspension if not evaporation of such investor confidence as there might have been, as well as persistent tensions between North and South, which in turn constitute a potential obstacle to economic success.

The economic effects of the Gulf war on Yemen already demonstrated in particular the country's economic vulnerability to external political factors - and especially its vulnerability to the state of relations with its neighbour Saudi Arabia. This vulnerability was shown not just in the expulsions of labour and the reduction in aid, but also in the difficulties experienced in hydrocarbons exploration in the disputed border region, where Saudi pressure forced a scaling down of operations.

In addition to these 'exceptional' and external circumstances, it must be stressed that the general dynamics of domestic politics also place certain constraints on, and in part determine, economic developments and possibilities. Two features of Yemeni politics immediately come to mind here. The first is the limited degree of central government control over some of its territory, and the consequent imperative of political consolidation. The second is patronage politics (and a degree of corruption), in which resources may be allocated on the basis of personal or tribal links rather than on strictly economically sound grounds. Often, of course, this latter type of resource allocation is in fact driven by the first imperative mentioned: that of consolidating state (and regime) power. Arguably, therefore, some of this 'skewed' economic resource allocation is inevitable, given the still insecure level of cohesion and integration of the Yemeni polity.

IN WHAT follows, a brief overview is provided of the Yemeni economy's basic features. For the purposes of this article, these can be summarised under 10 points. This will provide the background against which, in the following section, the key issues for this economy can be explored.

Before launching into any comments on performance indicators and other statistics for the Yemeni economy, it is important to draw attention to the fact that the informal sector is quite possibly as large as the recorded sector. Not only does about half of Yemen's economic activity not appear in the statistics, but these statistics are also otherwise less than wholly reliable. The inadequate data-gathering and processing capacity of the Yemeni bureaucracy thus far has meant that published figures are often no more than rough estimates, often only tenuously related to reality. This is true both in North and South, although the situation in former South Yemen differed from the North: formal statistical methods were ostensibly more developed, but they suffered from misguided Soviet-style ideological/political parameters (as well as being subject to the politically-inspired 'massaging' so typical in the bureaucracies of Communist centrally planned economies).

In light of the above, all published statistical data on Yemen (whether Yemeni or other) must be taken with caution, and as rough indications rather than accurate reflections. It is pointless, for instance, to use decimal points in percentage estimates of the growth and composition of GDP. For the same reason, it makes more sense to use rounded figures for the country's financial statistics, than to pay any attention to supposedly detailed, more precise figures. The data which will be presented in this paper must be seen in that light.

Yemen's economy is also characterised by weak national integration. Not only are linkages between North and South limited, but the same is also true within the territory of each. Distribution systems remain primitive, and instances of local subsistence economy sit side by side with external linkages (import/export, smuggling, influx of funds which are in turn used for importing consumer goods). The label 'national economy', therefore, only applies to a limited extent.

An obvious feature consists of the differences between former North and South Yemen. In this respect three points in particular may be mentioned. The first is the relatively larger role which the market played in the North as compared with the officially centrally-planned Southern economy. The state in South Yemen aimed at the nationalisation of the means of production and Soviet-style targets and central controls over economic activity - albeit that the intensity of this policy varied greatly (relaxing considerably under Ali Nasser Mohammed, for instance). In the North, the general picture was one more akin to laissez-faire. Private agricultural economic and other economic activity was both more important and subject to fewer constraints than in the South - although here too, the extent of government attempts to impose controls on foreign exchange and foreign trade fluctuated. The second point relates to the strikingly different administrative systems and statistical conventions North and South of the inter-Yemeni border. This was a direct result of the ideological differences over the role of state planning and bureaucracy. It also implied types of economic accounting - with different, Soviet-style categories being used in Aden. This has exacerbated the difficulties of unifying economic data and accounting after unification, as well as of assessing the meaning and reliability of such statistics. The final obvious point which bears highlighting here, is that, even taking into account the difficulty of assessing the value of comparative measurements and estimates, there is no doubt that pre-unification North Yemen grew faster than the South. During the 1980s, average real annual economic growth in North Yemen may be estimated at between 5-10 per cent (with some 14 per cent in 1988 when significant oil exports started). In the South the first half of the 1980s saw very slow real growth (probably averaging between 0-3 per cent). The 1986 civil war caused a drastic contraction of around 10 per cent, and subsequently real growth was barely above stagnation (0-2 per cent).

The extent to which such differences might indicate an incompatibility between the two economies, however, needs to be qualified. The fluctuations in the policies of both regimes have already been pointed at. In addition, as Carapico has shown,¹ there were a number of similarities. There was in fact:

Some of the further similarities related to the above, were the large share which government services accounted for as a proportion of recorded GDP, and the inability of the central governments to control and/or mobilise much of the remittances brought in privately and spent privately on consumption or investment. While North and South were undeniably different economic systems, therefore, there were also more similarities than is usually realised, and towards the end of the 1980s these became increasingly important. On the eve of unification, not only was the Southern government embarking on a considerable liberalisation of the economy, but the Northern authorities were indicating that the state would retain a guiding role in the economy.³ Control over oil revenues would of course reinforce the state's relative role in the economy.

The Yemeni population in 1995 may be estimated at 14-15 million. Averaging at around 3.5 per cent per annum, Yemen's population growth is among the highest in the world. This has a quadruple effect on the economic situation. First, it puts continuing pressure on the employment situation. Second, puts strains on the government's already limited ability to provide adequate services - and diverts resources from productive uses. Thirdly, it puts severe pressure on the country's natural resources, especially through the consumption of water. And fourth, it means that economic growth, in order to have any impact at all, must run at around an annual 4 per cent or more in real terms - a tall order if the past five years are anything to go by.

Traditionally probably 1.8-2 million Yemenis have earned their living by working abroad. It must be stressed, however, that the exact size of this expatriate labour force is unknown (estimates of 2.5 million and over also circulate). Remittances from these expatriate workers have long made up about half of Yemen's inward financial flows. For North Yemen alone recorded remittances were worth on average $1 billion a year in the 1980s (this masks a sharp drop in the second half of the 1980s after the end of the oil boom in the Gulf states where many of these workers were based). Much of this revenue (itself often unrecorded) went into the informal economy, and/or towards consumption and personal imports. At the same time, this option relieved some of the pressure on the local Yemeni employment situation. The de facto expulsion of some 800,000 Yemenis from Saudi Arabia in 1990/91, as a result of the Yemeni government's stance against the allied operation to evict Iraq from Kuwait, at a stroke reduced both this labour safety-valve and the inflow of remittances by half or more. Net unrequited transfers for all of united Yemen in 1991 were worth $800 million at the most -and that included the one-off effect of returnees repatriating what assets they could.

North Yemen joined the ranks of the oil exporters in 1987, but significant exports only really took off in 1988. Oil exploration in the border zone between North and South was one of the factors making for closer co-operation and eventual unification. Oil exports from the southern part of the country began in 1993. The main producing fields today are in the Marib/Jawf area (concession bloc no. 18, operated by the US firm Hunt together with Exxon), and in the large Wadi al-Masilal concession (bloc 14, operated by Canadian Occidental). Output from both in 1995 ran at about 170-180,000 barrels per day (b/d). Yemeni oil production in this year averaged some 350,000 b/d. Two smaller discoveries have been made. By the end of 1996, the small Jannah bloc (adjacent to the Marib/Jawf bloc) is likely to yield some 25,000 b/d, and the East Shabwa discoveries some 12,000 b/d. The current picture is considerably less generous than earlier estimates and hopes. The estimate of proven recoverable reserves, for instance, has had to be reduced from 5 billion barrels to 2.2 billion barrels.

Greater hopes have recently been invested in the country's gas reserves. Estimated at between 15-20 trillion c.f., mainly in the Marib/Jawf bloc, these might represent a resource worth 2-3 times the value of the country's proven oil reserves. Development of this resource, however, will be very expensive and not at all straightforward - a point we will return to later.

As of 1995, hydrocarbons and related activities make up some 20 per cent of recorded economic activity (GDP). This received a boost by the expansion in oil exports in 1994. Of the other components of GDP, it is worth mentioning four in particular: agriculture, fisheries, industry, and government services.

Agriculture continues to employ some 60 per cent of the labour force, and just under a fifth of GDP. While Yemen is comparatively fortunate - by Arabian Peninsula standards - in its quota of rainfall and fertile land, this is very unevenly distributed. When taking the country as a whole (including the largely arid expanses of former South Yemen), only 2.9 per cent is estimated to be cultivable, and only 2 per cent is actually cultivated. In the northern highlands, terrace agriculture relies on seasonal rainfall and the maintenance of elaborate terraces and irrigation systems. In the hot Tihama continuous irrigation is necessary, putting strain on the country's water resources. In former South Yemen, agriculture is concentrated in the Wadi Hadhramaut. Officially, the country's main crop is sorghum and millet, of which it has on average produced just over 500 million tonnes annually. In reality, the main crop (in terms of value) does not appear in the official statistics at all: the value-added in the production of qat, the mildly stimulant shrub chewed by most Yemenis, possibly equals twice that of all recorded agricultural production.⁴

Fisheries account for only 2 per cent of GDP, but present a significant potential for Yemen. With its large coastline and fertile fishing grounds in the Gulf of Aden, Yemen has a major resource here ripe for developing. In 1992, 86,500 tons were produced, down from 106,000 tons in 1989.

Yemeni GDP by sector: provisional CSO estimates
SECTOR	1992	1994
Agriculture and Fishing	20%	20%
(of which agriculture)	18%	18%
(of which fishing)	2%	2%
Mining & Quarrying	6%
(of which oil & gas)	5% (a)	20%
Manufacturing	10%
(of which oil refining)	1%
Electricity, water, gas	1%
Construction	5%
Wholesale and retail trade	13%
Transport, storage and communications	8%
Financial Institutions and real estate	6%
Other non-government services	1%
Government services	5%
Import duties	7%

Source: Ministry of Planning; rounded figures
(a) does not include oil companies' share

Industry is limited, accounting for less than 10 per cent of GDP, and employing some 4 per cent of the labour force. The main non-oil sub-sector is food processing, which accounts for just over half of manufacturing output. In addition, it is worth drawing attention to three further points.

The first is to highlight the place of the Aden Refinery. For decades, this has represented the main instance of major modern industry in Yemen. Technical, administrative/managerial and political constraints meant that it often produced at only a fraction of its design capacity of 120,000 b/d, but this was addressed in the late 1980s through greater efficiency, technical modernisation, and refining agreements with Iraq and Kuwait. The refinery also allowed Yemen to stop importing its 60- 65,000 b/d of domestic requirements. Current production design capacity stands at 170,000 b/d, but this remains theoretical as long as the expansion of storage capacity has not been completed (currently allowing only 120,000 b/d). The Gulf war and its aftermath also meant the end of the refining deals with Iraq and Kuwait.

The second point also relates to Aden - after unification officially the country's economic capital. Ambitious plans for an Aden Free Zone were announced, and a year after unification, the port of Aden was indeed declared a free zone. A master plan was completed by early 1994, and tens of different industrial projects identified by the government which it wished to attract foreign investment into. The effects of the Gulf war, and subsequent fear of instability (confirmed by the 1994 civil war) kept investors away, however.

Third, the increasing share of the private sector in industry deserves highlighting. Economic liberalisation has been especially striking in former South Yemen - given its starting point in an avowedly Marxist centrally planned economy.⁵

By 1990, the private sector officially already accounted for 27 per cent of industrial production, but by 1992, this had risen to 42 per cent. This probably understates the private sector's share, given the caveats presented under point (1) above.

Government services, finally, clearly also deserve some comment. They made up about a quarter of GDP in 1992. On the one hand, this reflects the weakness of the other sectors in Yemen's developing economy. On the other, it also follows from the nature of the polity: whether before or after unification, an ethos of a providing government remained present, combined with the central authorities' determination to spread the state's access to, and control over, territory and society. In the aftermath of the Gulf War and the return of at least 800,000 Yemenis from Saudi Arabia, the demand for government services further increased, to cope with the returnees' needs and to absorb the impact of the drastically worsened unemployment situation.

The first point to note about the pattern of economic growth in Yemen has already been put forward above (point 2), viz, the difference between North and South before unification: since the 1980s, the North grew much faster than the South. The second is that economic growth has often proceeded in fits and starts. Such hiccups were caused by civil wars (most recently 1986 and 1994), natural disasters (floods, earthquakes), fluctuating oil prices, and external events such as the 1990/91 Gulf war.

An indicative estimate of Yemen's 1994 formal GDP is $7.5 billion, implying a per capita figure of about $500. For an indication of the 'real' picture concerning the standard of life in the country, this figure probably needs to be doubled (that is to say, the level of Yemeni daily life on average is closer to that enjoyed by countries with a $1,000 per capita income). The $7.5 billion estimate for the formal, recorded economy is lower than many other published figures, but those are generally based on unrealistic exchange rates and on overly optimistic growth rate estimates since 1990.

The author's estimates for Real GDP growth since unification are given in the table above. The contraction in 1994 is explained by the effects of the civil war. That it is not larger is the result of the expansion in the oil sector. The Ministry of Planning's own estimate gives a 1.3 per cent contraction overall, masking a 7 per cent contraction in non-oil GDP.⁶ These figures must be seen in the context of a population growth figure of some 3.5 per cent: per capita GDP has, therefore, in fact been declining in real terms even in the best years (1993 and 1995).

Yemen has traditionally suffered from large trade deficits and large current account deficits. This has remained tine even after oil exports took off in 1988 (see table below), although since then oil has come to account for 85-90 per cent of the value of exports. Imports and the deficit on services have on average increased too, thus cancelling out the rise in export revenue, while remittances and aid - which were already being reduced in the late 1980s - fell sharply in the wake of the Gulf war. As a result, the current account deficit rose to an estimated $800 million in 1991, reaching the $1.5 billion range in each of the three following years. When adding the capital account to this, the overall balance of payments deficit has been well above $1 billion a year (indeed well over $2 billion in 1992). This situation is plainly untenable. There are no data available on Yemen's international reserves since 1992 - but they must be extremely low.

The largest single category of imports has been food and beverages. Recorded imports in this category were worth some $600 million in 1991. This shows that, although agriculture forms an important part of the economy, it has not been able to supply the country's needs. In part this is due to resource constraints (soil, water), in part to the resources devoted to Qat cultivation, and in part to the changing consumption patterns which grew along with remittances.

Yemen Balance of Payments 1990-1994, $ million
SOURCE	1990	1991	1992	1993	1994
Goods exports	1,400	1,200	950	1,100	1,800
Goods imports	1,900	2,100	2,250	2,350	2,650
Trade deficit	-500	-900	-1,300	-1,250	-850
Services net	-800	-900	-900	-1,150	-850
Transfers net	1,000	1,000*	600	700	800
Current account	-300	-800	-1,600	-1,700	-1,300
Capital Account	50	-200	-700	400	-400
OVERALL BALANCE	-250	-1,000	-2,300	-1,300	-1,700

Source: IMF, World Bank, official statistics, author's estimates
* This estimate reflects a fall in ODA, balanced by the one-off repatriation of assets by returnees

There has been considerable fluctuation in Yemen's trade partners (in part due to changing oil lifting deals), but one recent constant has been the position of the USA as the country's leading trade partner both in exports and imports. Provisional figures compiled by the IMF for 1994 are given in the table below. In exports (mainly oil and oil products), a strong 'newcomer' is Singapore, while 4th-ranked China has only recently moved up to this position. Germany's share in 1994 continued to dwindle. Imports come mainly from the USA, the UK and France (Note that these figures - from the Directory of Trade Statistics - are on the whole understatements, and that a considerable amount of trade is not included; this is evident from the totals, which are lower than the figures given in the table above).

Main trade partners, 1994 ($ million)
EXPORTS			IMPORTS
1.	USA	181	1.	USA	196
2.	Japan	170	2.	UK	125
3.	Singapore	156	3.	France	121
4.	China	136	4.	China	93
5.	France	79	5.	Saudi Arabia	75
6.	Germany	35	6.	Indonesia	70
TOTALS		1,048	TOTALS		1,814

The final 'basic characteristic' of the Yemeni economy which deserves reiterating at this point, is the extent to which the country has been hit by the crises of the 1990s - viz, the effects of the Gulf war, and the 1994 civil war. Between them, they resulted in a sharp cutback in remittances; a doubling in unemployment; the further worsening of the financial crisis; rampant inflation; significant destruction and costs of reconstruction due to the 1994 fighting (the cost of the war itself combined with that of reconstruction needs has been estimated at some $7 billion - or the equivalent of nearly a year's recorded GDP); and a considerable contraction of GDP in real terms over the period 1990-1994. It is in this context that the key issues for the Yemeni economy today and into the future become glaringly obvious.

YEMEN'S situation of financial crisis is characterised by (1) continued balance of payments deficits; (2) continued government deficit spending; and (3) mounting foreign debt.

The country's projected current account deficit for 1995 is $1.1 billion, rising to $1.5 billion in 1996. The government's budget deficit has been running at between 20 and 30 per cent of GDP in recent years. In 1992 it was estimated at YR26 billion (about $900 million). In 1993 and 1994 no budgets were issued, but the deficits in these two years can be estimated at some YR30 billion (about $550 million) and YR50 billion [nearly $600 million] respectively. The 1995 budget looked as if it was spiralling further out of control, until a retrenchment plan in worked out in May that year promised to bring it down from YR60 billion to YR37 billion (about $400 million). It is unclear whether the government will be able to deliver on this promise. The significance of these sums, as reflected in the rough US dollar equivalents given above, in part depends on the exchange rate used. The average rate of YR per $1 for these years was 29 (1992), 54 (1993), 85 (1994), and a projected average of 100 for 1995.⁷

Total official foreign debt - the inevitable result of years of heavy deficit spending - by the end of 1995 may be estimated at close to $10 billion. This includes over $3 billion in debts to the former Eastern Bloc (largely for arms deals); there is no agreement over whether and how to repay various parts of this East Bloc debt, and in particular over the exchange rate to be used. The above estimate is higher than some other published estimates: the latter either exclude the East bloc debt and/or use unrealistic exchange rates.

The country's needs arising from this situation can be grouped under four headings. First, it would be important to acquire larger aid flows once again. This is in large measure dependent on good foreign relations - especially with Saudi Arabia and Kuwait. Some modest success is already being achieved in this respect. Gross ODA inflows in 1995 may be projected at some $250-300 million, and improved relations with Western donors as well as with Saudi Arabia (the latter since the summer of 1995) hold out at least some further improvement. Yemen is unlikely, however, ever again to receive aid at the levels prevailing in the 1980s.

Second, there is an urgent need to regain a higher level of remittances. Again, this depends in large measure on improved foreign relations with the Gulf states. It would appear that a breakthrough was achieved in this respect in late September 1995, with the announcement by Saudi Interior Minister Prince Nayif bin Abdul-Aziz that Saudi companies and individuals were free to bring Yemeni workers into the Kingdom.⁸ Again, however, the economic climate in the Gulf states means that the level of remittances obtaining in the 1980s will remain out of reach.

Third, government spending must be kept under tight control. The May 1995 budget plan presented a step in the right direction, but the restraint should be consistent and long-term. This not, however, to argue for cuts in areas such as primary education and basic health care provision: these are at the root of Yemen's future human potential, while also being important elements in any strategy to control population growth. In any event, the difficulty here is likely to lie in political constraints. Reductions in subsidies are bound to be politically unattractive, and patronage spending is likely to retain its role. In addition, military spending is unlikely to be scaled back significantly -however important that would be.

Fourth, the need for IMF and World Bank aid, along with the economic stabilisation and restructuring that such aid will be conditional on, cannot be avoided. Success in this respect of course in part depends on the control of government spending. A successful aid and restructuring programme could have three types of beneficial effects: (1) extra aid would flow in; (2) deficit spending would be reduced; and (3) the scope for domestic and foreign investment would increase. At the time of writing (December 1995) it appeared that a package of reforms and measures would be agreed between the government and the institutions by January 1996, and both sides declared themselves moderately optimistic about the chances of the package proving successful. In the first three years, this package would include $300 million in new aid (of which $200 million from the World Bank). The hope is that the IMF/ World Bank lead will encourage larger ODA flows from other sources, as well as increasing investor confidence. Importantly, a $50 million social fund is included in the plans, to safeguard those most vulnerable to the initial effects of the stabilisation and restructuring measures.⁹ This is in line with the recent shift in World Bank thinking towards the recognition of the importance of poverty alleviation and social safety nets. This new awareness may give the implementation and outcome of such plans a greater chance of achieving some degree of success.

The expected agreement¹⁰ also holds out a significant further liberalisation of the economy and investment conditions. Among other things, the government was expected to promise that 15-20 public enterprises would be brought to the point of sale within a year. The prospect of shedding some 60,000 public employees was held out. The official exchange rate would be devalued to $1=YR115, while subsidies on energy, water, health and education would be reduced (energy costs, for instance, were expected to rise by 50 per cent).

The combined problems of the falling rate of the riyal and inflation are in part the result of the financial crisis, in part of the political upheavals which weakened confidence in the riyal relative to the US dollar. Controlling inflation would be integral to the stabilisation programme introduced under IMF supervision, and would in part follow from the control of government spending (less printing of money), and in part from a revival in the value of the riyal. The latter, of course, is in turn linked to the former. At the same time, the riyal's unrealistic official exchange rate, which had needed adjusting for some time, only became even more unrealistic as the currency's market value plummeted (see above). Until March 1990, the official exchange rate for staple commodities was $1=YR12, with two further rates for other goods (YR18) and tourists and oil companies (YR25). With a market rate of $1=YR140, the devaluation that month to an official rate of $1=YR50 was a necessary minimum step.

Indeed, the situation in the Spring of 1995 was disastrous: inflation was running at an estimated 150 per cent, and by April the riyal had fallen to $1YR165. Two factors helped bring about a reverse from the summer of that year. Firstly, both domestic and foreign confidence in Yemen's fortunes received a major boost from President Saleh's successful visit to Saudi Arabia in June, which marked the beginning of a turnaround in relations with this crucial neighbour. Secondly, the government appeared to be coming closer together with the IMF and World Bank over the course to be followed in pursuing economic stabilisation and restructuring - not only holding out a better-run economy but also additional aid. The devaluation was part of a number of measures which already went some way towards addressing the problems (some price subsidies were reduced, petrol prices doubled (but not diesel: that would have hit the rural population hard), both electricity and telephone rates were doubled, and public transport fares went up by up to 40 per cent.

As a result of this renewed confidence, the riyal recovered dramatically in the summer, initially reaching a high of $1=YR55 in August. This also resulted in a brief reversal of inflation, with a number of prices actually falling.¹¹

In the last quarter of the year, the riyal fell back again, trading at $1=YR115 in November, and inflation climbed back to an estimated 80 per cent. This does highlight the need for consistent further reforms and measures to boost confidence, but at the same time the inflation and exchange rate rollercoaster has also shown that retrieving the situation is in fact possible, and that the new official rate of $1=YR50 need not be out of reach in the market — given the right measures. The average rate over the year 1995 is likely to be around YR100, while inflation will probably average 100 per cent. If a credible reform package is indeed agreed with the IMF/World Bank by early 1996, the inflation rate may be halved, returning to its 1991-93 levels. The package was reported to include a devaluation of the riyal in 1996 to $1=YR115.¹²

As already pointed out, today's estimates of Yemen's recoverable oil reserves stand at only 2.2 billion barrels - down from hopes of 5 billion barrels or more in the late 1980s. This is the equivalent of 15-16 years' production.

These levels are based on the continued production of some 350,000 b/d from the Marib/Jawf and Al-Masilah field, and production starting up from The Jannah and East Shabwa blocs, which should be producing 25,000 b/d and 12,000 b/d by late 1996. In the course of 1997, production may be expanded to 400,000 b/d.

It remains unclear how much the government is receiving from this in revenue. The details of initial hefty down-payment deals for the granting of concessions to companies were in many cases not revealed. Moreover, in the wake of disappointing results, some of these are now being challenged by the oil firms concerned. As regards income from oil produced, this again is difficult to ascertain. There are different cost recovery and royalty arrangements with different companies, and each of these operate on sliding scales depending on the volume of production. Again, in the wake of disappointing results, some of these arrangements are being renegotiated.¹³ It seems clear, however, that the government's share of oil revenue will remain under $1 billion in 1996. Account must also be taken of the country's domestic requirements, which run at about 65,000 b/d.

With modest production, modest reserves, and generous takings by the oil companies involved for cost recovery and otherwise (takings which are being revised upwards in 1995 because of these firms' downward revisions in expected exploration results), it is clear that oil cannot by itself be the answer to the government's - and the country's - dilemmas.

Gas reserves are estimated at anywhere between 15-20 trillion cubic feet - potentially worth two or three times the value of the country's oil reserves. These reserves are located mainly in the Marib/Jawf concession where Hunt is the lead operator. The government has an agreement with the French oil company Total, for the development of a $5 billion LNG project which is meant to exploit these gas reserves mainly for export. The LNG plant and associated equipment are provisionally costed at $3 billion, while the necessary pipelines would come to $2 billion. The project will be 30 per cent government-owned, while 70 per cent of the capital will be in the hands of Total and other companies joining in the scheme. The project is scheduled to come on stream in 2001, and have a 25-year life, during which 1 trillion cf. would be produced for domestic consumption, and 10 trillion cf. for export, probably via a terminal on the Red Sea. Potentially, this could be worth some $600 million a year in export revenue.

The difficulty is that the obvious partners for investment - the companies already involved in the Marib/Jawf concession, and Hunt in particular - are proving less than eager to join in at the terms which are being offered. While protracted negotiations are not unusual in these types of LNG schemes, it does seem to indicate a lesser degree of confidence in the scheme's long-term commercial attraction than the government and Total were assuming. This is particularly significant since these firms are the very ones who developed the fields in the first place. The insecurity of expectations is in part due to the peculiar nature of LNG projects: they require enormous investments not just at the producing end but also by the consumers, necessitating a long-term secure supply relationship. This in turn requires both confidence in the long-term level of production and in the ability to set a realistic long-term price. Given some apparent hesitations about the nature of the field, but especially about the political environment within which the scheme would have to be executed, it is by no means a foregone conclusion that the necessary billions in investment will in fact be found within the time envisaged. Serious delays, of course, imply the possibility that other suppliers would get in first.

The country's two areas of immediate need in the field of hydrocarbons, therefore, are (1) increased exploration and development especially for oil; and (2) measures to increase confidence in the LNG project's feasibility. Both depend largely on political factors. Indeed, the prospects for oil exploration and development depend on (a) offering better conditions to oil companies (this is already being done); and (b) investor confidence. The latter in turn depends on improved domestic stability, and the consolidation of good relations with Saudi Arabia. Confidence in the future of the LNG project (necessary to persuade investors to sink the necessary capital into the project's development, and consumers to commit themselves to long-term supply agreements) again depends to a large extent on the assurance of a sufficient degree of political stability in Yemen.

The fourth major area of concern must be the unemployment situation. In mid-1995, it may be estimated that 40-50 per cent of the labour force were either unemployed or underemployed (The UNDP estimate for 1994 is 37 per cent unemployed). This may acquire serious political implications, as well as being a huge social and economic problem, especially since the population is likely to double well within the next two decades - unless the rate of population growth is curbed.

In the longer term one answer to this must be economic growth and diversification. Much here will depend on successful restructuring and attracting domestic, expatriate Yemeni and foreign investment (see also point 5 below). One precondition for this is, yet again, political consolidation and stability.

Yet in the shorter term there is no serious alternative to increased expatriate employment. This in turn depends on a consolidation of the country's relations with Saudi Arabia, as well as Kuwait. As already indicated, there were indications in the Autumn of 1995 that a turning point may have been reached in this respect - even though it remains to be seen to what extent that will translate into anything near the pre-1990 level of Yemeni employment in these Gulf states.

The main opportunity for expansion and diversification of the country's industrial sector would seem to lie in the realisation of the potential which the Aden Free Zone represents. As indicated, the master plan was completed before the 1994 fighting, and the government had repeatedly held out development of the scheme as a key component of its economic plans. Following the end of the civil war, however, announcements that the government would not itself consider funding the scheme's development a priority indicated an apparent loss of interest. This led to speculation that the victorious powers were not interested in this essentially southern project, and indeed might wish to 'punish' the South. At the same time, this apparent lack of political commitment was combined with a falling away of investor confidence, given the political upheaval.

However, by the Autumn of 1995, two international consortia were actively interested in taking on the main scheme - although their respective bids differed in scope. A group headed by the UK-based MBI International Group was proposing the construction of a container transhipment area on Caltex Island, while a consortium led by the Yemen Investment & Development Company (Yeminco) was putting forward a more comprehensive development, including expansion of the Ma'alla terminal, the building of an industrial estate and a world trade centre, as well as the upgrading of Aden airport. It is worth noting in this regard, that Yeminco is in fact the local subsidiary of the Saudi Economic Development Company (SADCO), owned by the Saudi Bin Mahfouz family (itself of Hadhrami origin).¹⁴ At the time of writing the government had not yet decided between the bids - but whichever group comes away as the winner, the important point is that such a development both indicates confidence in Aden's potential, and will engender further interest. This potential - at least from the point of view of foreign investors - is in large measure due to Aden's position as one of the most impressive and best-located natural harbours in the world. Given the right political environment and a swift enough development, the prospect of the port reclaiming much of its former glory is not wholly fanciful. In addition to the economic benefits to be derived, there is of course the very important political effect it would have: firstly it would contribute to the integration of the South into the nation and demonstrate that the interests of this part of Yemen can indeed be well served within a united Yemen; secondly, the contribution to the country's overall economic fortunes would be a major factor in favour of political stability and consolidation.

The same argument applies for other types of investment - whether by expatriate Yemeni or other foreign investment in the industrial diversification of the country. Whether for the Adeni scheme or more generally, the two key conditions remain (1) a stabilisation and restructuring package with the World Bank and IMF which is seen to be effective, and (2) political stability.

In agriculture, the three main problems issues one can identify are (1) the disproportionate place which Qat takes up; (2) the erosion of the mountain terraces; and (3) the over-use of the country's limited water resources. It should be pointed out here, that the Qat debate is subject to controversy: at the very least it can be argued that the cultivation of the crop has financed investment through the earnings of the rural population, and that it has kept many terraces cultivated and maintained which would otherwise have been left untended.

Theoretically, a 50 per cent increase in cultivation (although not in production) would be possible, given that just under a third of cultivable land is not at presented cultivated. But the problem with this is that an aggressive expansion in this direction would only worsen the problems of salinity and a falling water table which are already affecting the country (for instance in the Tihama). Such a major expansion, therefore, must not be the aim. At the same time, however, a concerted effort must urgently be made to stimulate the maintenance and reconstruction of the terraces and their associated irrigation systems.

In fisheries, however, there is great potential for expansion, especially given the very fertile fishing grounds in the Gulf of Aden. Thus far clearly under-exploited, these could prove to be very attractive to foreign investors.

THE COUNTRY'S main current problems pertaining to the economy may be summarised as follows: (1) domestic political tensions; (2) incomplete government control over the territory and polity; (3) inadequate government/administrative capacity; (4) patronage, corruption and military expenditure; (5) financial and trade deficits; (6) inflation; (7) unemployment; (8) high population growth; (9) lack of investor confidence; and (10) vulnerability in relations with other states - especially Saudi Arabia, Kuwait.

It will be noted, again, that the list starts and finishes with political matters: domestic and international respectively. It must be stressed at this point that not all of these points can be seen as criticisms of the government: given Yemen's s socio-political make-up, and given the stage of development it finds itself at, many of these features are, at least in part, unavoidable. That is not to say, of course, that they need not be addressed. There is evidence, however, of a government recognition of the problems, and a willingness to address them.

The main opportunities would appear to lie in the following areas:(1) gas: in the long term (2001 onwards, if then); (2) oil: modest prospects; (3) fisheries; (4) Aden Free Trade Zone / Aden Port / Aden refinery; and (5) possible labour export.

In light of the above, the main needs can be enumerated as follows: (1) domestic political reconciliation/consolidation (geographically/politically); (2) consolidation of foreign relations; (3) education (especially of women!) and curbing of the population growth rate; (4) the creation of an investment-friendly climate; (5) the pursuit of opportunities for the export of labour; (6) restructuring and aid.

Some of these imperatives are obviously interrelated: the creation of an investment-friendly climate depends crucially both on the political imperatives and on that of successful stabilisation and restructuring.

In the near future, therefore, it will be these two areas which be watched most closely. Clearly, also, the government must hope that success in the latter, with its hoped-for result of increased investment, will improve the political climate in the country.

Equally clearly, however, success in these areas is by no means a foregone conclusion. Meanwhile, the difficulties, uncertainties and perhaps also the older problem of administrative overload appear to have delayed the finalisation of the 5-year development plan 1996-2000 (by November 1995 it was, according to some sources, only half completed). A successful conclusion of the discussions with the World Bank and IMF should allow this to move forward more swiftly.

Yemen, then, continues to face daunting economic problems. Given the right policies, however, the hope for success is not negligible - even though any such hopes must of necessity remain modest. With the all-important regional relations at last moving in a positive direction again, the chances for future economic improvement would appear to hinge largely on the domestic political context.

This paper was delivered at a conference at the School of Oriental and African Studies, London, on November 26-26, 1995. It is published as a chapter in Joffe E.G.H., Hachemi M.J., and Watkins E.W. (eds). Yemen Today: Crisis and Solutions (London: Caravel Press, 1997). Price £14.99 or $24.99. From good bookshops or Caravel Press, 26f Clanricarde Gardens, London W2 4NA. Tel/fax +44-171-792-4650.

1. Carapico, Sheila 'The Economic Dimensions of Yemeni Unity', Middle East Report, Sept 1993, pp 9-14.

3. Nonneman, Gerd "Oman and Yemen". In: Murphy, E. and Niblock, T. (eds.) Political and Economic Liberalisation in the Middle East, London: British Academic Press, 1993, pp 256-277.

4. According to a 1992 report published by the Yemen Times, also quoted by the EIU Country Profile: Yemen, Oman 1994-95, p 56.

5. For an account and analysis of the economic liberalisation trends in North and South Yemen, and the first two years of the Yemen Republic see Nonneman, "Oman and Yemen" Op.cit., pp 265-275.

10. See report by Abdulaziz Al-Saqqaf in the Yemen Times, 4 December 1995. 11. MEED, 8 September 1995.

14. a summary of the MBI-led bid, see MEED, 29 September 1995; for the Yemico-led bid see MEED, 3 November 1995.