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E.O. 12958: N/A
TAGS: EINV EFIN ELAB ETRD KTDB PGOV YM OPIC ECON COM
SUBJECT: 2003 INVESTMENT CLIMATE STATEMENT - REPUBLIC OF
YEMEN

REF: STATE 128494


1. THE FOLLOWING IS EMBASSY'S YEAR 2003 INVESTMENT CLIMATE
STATEMENT FOR YEMEN.


2. BEGIN TEXT OF INVESTMENT CLIMATE STATEMENT:



A. 1. Openness to Foreign Investment

The Republic of Yemen Government (ROYG) is committed to
attracting foreign investors by improving its overall
investment climate. To this end, it adopted a new policy of
uniform treatment for all investors, domestic and foreign.
The lead ROYG agency is the General Investment Authority
(GIA), established in March 1992, which has worked with the
World Bank's Foreign Investment Advisory service to update
Yemen's Investment law 22 of 1991 (as amended). The
alternative Investment Law number 22 of 2002 was adopted by
parliament on June 2002 and signed by the president on July
20, 2002. However, to date the law has not been
implemented. Once implemented the new law will safeguard
all exemptions and benefits called for in the previous
investment law and shift the focus of the GIA from
regulation to registration and promotion. The new law will
eliminate intervention of the GIA and other government
agencies in investment projects and gives wider freedom to
investors in running their projects. The new law will cancel
some legal provisions, which provided special exceptions for
investors from obtaining import and export licenses from the
Ministry of Industry and Trade and also from paying relevant
stamp duties. The new law will encourage local production
by reducing customs duties by 50 percent on imported raw
materials and 100 percent on raw materials produced locally

for agricultural and fisheries projects. Finally, the new
law will cancel some tax categories. The new investment law
falls under the government's financial, economic and
administrative reform program, intended to encourage foreign
investment.

Under the new law 22 of 2002, the primary role of the GIA is
limited to registration and promotion of investment
opportunities. The GIA provides potential investors with an
information packet that includes a copy of the investment
law, an investment guide summarizing GIA activities, and an
application form with instructions. Packets may be obtained
from the promotion section, General Investment Authority,
P.O. Box 19022, Sanaa, Republic of Yemen (Phone: 967-1-262-
962/3 or 268-205; Fax: 967-1-262-964, E-mails:
mohdhussein@yahoo.com; website is: www.giay.org.

The GIA welcomes investment in all projects with the
exception of arms and explosive materials, industries that
could cause environmental disasters, banking and money
exchange activities, and wholesale and retail imports.
Investments in the exploration and production of oil, gas
and minerals are subject to special agreements (e.g.,
production sharing agreements) under the authority of the
ministry of oil and mineral resources and do not fall within
the purview of the GIA. Investment is open to Yemeni, Arab,
or foreign investors acting solely or in partnership on any
project.

The investment law revision is part of a large ROYG economic
restructuring program, sponsored by the IMF and World Bank,
begun in 1995. The broad objectives of the program have
been to stabilize the economy and stimulate sustainable
growth. By and large, it has been successful, and the ROYG
will negotiate with the IMF after the April 2003 election
for a new three-year poverty reduction and growth facility
(PRGF) for 2003-2005. Macroeconomic stabilization has been
achieved with the Yemeni rial stable and floating at market
rates at the range of (1 USD equaled approximately 174 YR
until October 2002; and 183 YR from October 2002-July 2003.
Inflation (as measured by the CPI) declined from 71 percent
in 1994 to 11. 8 percent in 2003, and foreign currency
reserves now reached USD 4.7 billion, or 17.6 months of
imports. Most bilateral debt has been rescheduled under the
Paris Club and commercial debt has largely been eliminated
through a World Bank grant program. External debt is now
about 48.7 percent of GDP as at March 2003.

Under the international financial institutions' reform
programs, Yemen's trade environment has also improved, and
basic elements of a social safety net have been implemented.
A simplified and less protective tariff structure has been
initiated with the elimination of nearly all import bans,
export restrictions, and import licensing, and the adoption
of a unified tariff. Under the new (investment) law 22 of
2002, duties applied on raw materials not available locally
will be exempted by 50 percent. There will also be a full
exemption on imported materials included in agricultural and
fisheries projects. Also as instructed by the president,
there should be a 100 percent exemption on lands in the
southern and eastern provinces if the project cost,
excluding land, is more than ten million dollars. A
privatization program, begun in 1998 with sixteen
enterprises in industry, tourism, and trade, came to a
standstill in April 2001 when parliament refused to approve
a World Bank credit to fund a larger, long-term
privatization program. Financial sector reform has advanced
with passage of a new law granting full independence to the
Central Bank. Commercial banks have also been required to
improve their accounting procedures and loan recovery rates.
That said, the bank system remains weak, with most
commercial banks owned by families who have very low
capitalization rates.

A.2. Conversion and Transfer Policies

The Yemeni rial is freely convertible at market rates. It
has been stable at the 176-177YR/1USD range through October

2002. The rial went down to 182-183YR/1USD through the end
of the year, due partially to the impact of the attack on
the oil tanker M/V Limburg off the coast of Yemen. All
other foreign currencies, especially U.S. dollars, are
readily available and trade freely at market rates. Under
Investment Law 22, investors may transfer funds in hard
currency from abroad to Yemen for the purpose of investment
and may re-export invested capital, whether in kind or in
cash, upon liquidation or project disposal. Net profits
resulting from investment of foreign funds may be
transferred freely outside of Yemen.

A.3. Expropriation and Compensation

Yemen's investment law stipulates that projects will not be
nationalized or seized. Moreover, the funds will not be
blocked, confiscated, frozen, withheld or sequestered by
other than a court of law. Likewise, real estate may not be
expropriated except in the national interest, according to
the law and a court judgment, and against fair compensation
based on its market price on the issuance date of the court
judgment. Such compensation may be freely transferred
abroad.

Since Yemen's unification in 1990, there have been no cases
of property expropriation. The ROYG recognizes that
expropriation (which existed in the socialist-led Peoples'
Democratic Republic of Yemen, the former South Yemen, until
1990) is contrary to its economic reform aspirations. Much
of the expropriated lands in the southern and eastern
provinces have been returned to the rightful owners. Land
registration, however, is in its infancy in Yemen, and
disputes over both residential and commercial plots are
frequent and nearly impossible to adjudicate legally.

A.4. Dispute Settlement

There have been no significant investment disputes involving
U.S. investors over the past several years, although
commercial disputes are common. Yemen signed the Convention
on the Settlement of Investment Disputes in 1997, but has
not yet ratified the New York Convention on Arbitration. In
the interim, business disputes are generally handled by
informal arbitration or within Yemen's court system. In
1998, a private arbitration center, the Yemeni Center for
Conciliation and Arbitration, was created by a group of
lawyers, bankers, and businessmen as an alternative to the
courts. The center has settled a number of cases so far in
the areas of trade, finance, construction and industry, and
is gaining recognition as a viable alternative.

The formal judicial system is widely regarded as inefficient
and corrupt. While Yemen's investment-related laws are
basically sound, enforcement remains problematic at best and
nonexistent at worst. The ROYG has special commercial
courts to provide a mechanism for commercial dispute
resolution, but they are generally considered ineffective.
In the fall of 2002, the GIA board of directors and the
council of ministers decided to establish specialized courts
for settlement of investment disputes with four appointed
judges. To date these special courts has not been
established. Bilateral and multilateral donors are actively
encouraging the ROYG to press forward with more extensive
judicial reforms.

Most investors would be best served by establishing a
partnership with a Yemeni who knows the system, and by
including International arbitration clauses in their
contracts. In cases involving interest, most judges use
Shari'a (Islamic) law as the guideline, under which claims
for interest payments due are almost always rejected. Local
commercial banks are sensitive to this problem, and rarely
lend to other than established, large trading houses for
this reason.

A.5. Performance Requirements/Incentives

Under Yemen's investment law, no performance requirements
are specified as a condition for establishing, maintaining
or expanding investment. Incentives include, but are not
limited to: exemption from customs fees and taxes levied on
fixed assets of the project; tax holiday on profits for a
period of seven years, renewable for up to 18 years maximum;
the right to purchase or rent land and buildings; and the
right to import production inputs and export products
without restrictions and registration in the import/export
register.

Boycott issues: Yemen formally renounced observance of the
secondary and tertiary aspects of the Arab League boycott of
Israel in 1995. However, occasional reports of violations
occur when some Yemeni companies use old purchase order
forms that contain prohibited language. When these
violations are brought to the attention of concerned
officials, corrective action is taken. Yemen has stated
that it will not renounce the primary aspect of the boycott
absent an Arab League consensus.

A.6. Right to Private Ownership

While foreigners may own property, foreign companies and
establishments generally may trade in Yemen only through a
Yemeni agent. Law 23 of 1997 (amended), Regulating Agencies
and Branches of Foreign Companies and Firms, outlines the
requirements for establishing a Yemeni agent. Chapter 3 of
law 23 permits foreign companies and firms to conduct
business in Yemen by establishing foreign-owned and managed
branches. Foreign establishments wishing to open branches
in their own names must obtain a permit by decree from the
Minister of Industry and Trade, subject to law 23 and other
laws in force at the time of application. However, as a
practical matter, establishments should plan to engage a
Yemeni partner. Regarding investment projects, under the
new investment law foreigners can own 100 percent of the
land and can execute projects without a Yemeni agent and
without obtaining import/export license from the Ministry of
Industry and Trade or implementing law 23 of 1997. (The
investment law has precedence over other laws.)

Mortgage lending in Yemen is rare because of the
aforementioned unwillingness of the court system to uphold
the payment of interest. In addition, Yemen has a long
history of incomplete or inaccurate land records and
frequent land ownership disputes, which make using land or
buildings as collateral difficult for lenders to manage.
While the general survey authority is working to establish a
just and legally defensible land registry system, it is some
years off.

A.7. Protection of Property Rights

Yemen has a record of inadequate protection of intellectual
property rights (IPR), including patents, trademarks,
designs, and copyrights. It has not acceded to any
international IPR conventions, and its IPR law no. 19 of
1994 is not TRIPS compliant. Yemen's Ministry of Industry
and Trade drafted three new projected laws known as the
patents law; trademark law, and the designs and copyrights
law. These three new laws are expected to be approved this
year by the cabinet, ratified by parliament and endorsed by
the president, which will replace the IPR law no. 19 of

1994. In March 1999, Yemen became a member of the World
Intellectual Property Organization (WIPO) and is now
revising its laws with WIPO guidance. Yemen's application
to join the World Trade Organization (WTO) was approved in
July 2000. As a next step in the accession process, Yemen
presented to the WTO a memorandum of foreign trade regime in
October 2002. As part of its accession requirements, Yemen
will need to enact its revised IPR legislation and take
concrete steps to enforce adequately these laws.

A large U.S.-based multinational firm litigated successfully
a trademark infringement case in Yemen's courts in 1999.
The ruling is now under appeal and the violator continues to
infringe on the trademark despite the court ruling. A final
resolution was expected by the end of 2000, but it is still
pending in the Supreme Court. In a second case involving a
U.S. Company's trademark, the Appeal Court handed down a
final ruling in April 2001 to enforce the rights of the U.S.
Company. As of April 2003, the enforcement of the final
ruling to cease production of the infringed products has not
been implemented. Both of these cases demonstrate the
soundness of Yemen's basic IPR laws. However, enforcement
of rulings remains weak.

A.8. Transparency of the Regulatory System

While Yemen has fundamentally sound investment laws, labor
laws, customs tariff regulations and tax laws, transparency
of implementation and enforcement is elusive. The next
steps required in Yemen's civil service and administrative
reform process are to clarify procedures, create
implementing regulations and build a mechanism by which to
enforce these standards. Health and safety standards are
rudimentary and not enforced.

A.9. Efficient Capital Markets and Portfolio Investment

In the 1990s, Yemen's financial sector consisted of a
banking system that suffered from a large volume of non-
performing loans, inadequate loan provisioning, low bank
capitalization, and weak enforcement of prudential
standards. Under a 1997 World Bank-sponsored financial
sector reform program, the government took actions to
address these problems. A bank reform law was passed in
December 1998 to update, strengthen, and regulate the
industry. By June 2000, the Central Bank of Yemen (CBY) had
circulated strict regulations pertaining to credit risk
management, liquidity, insider lending, foreign exchange
exposure, financial leasing and external auditors. Banks
are now required to reach a capital adequacy ratio of eight
percent and meet new classification and provisioning
standards for loan portfolios. Most banks are complying.
That said, commercial banks still suffer from extremely low
capitalization rates and are essentially owned by large
trading families who establish the bank to service their own
business needs.

Lending to the private sector is constrained by the lack of
judicial recourse to recover bad loans. To correct this
weakness, a steering committee produced a series of reform
recommendations in mid-1999 that were approved by the
government and sent to the Ministry of Justice for
implementation. Among the recommendations was the
establishment of special loan recovery courts, which began
operations in 2000.

The ROYG was engaged in a program to privatize government-
owned commercial banks, although progress in this area was
thwarted when parliament did not approve a World Bank credit
to fund the privatization program. The National Bank of
Yemen was to be put up for sale pending a final audit report
for 1999, but no action has been taken. The Yemen Bank for
Reconstruction and Development is under restructuring and
will likely not be privatized. The two remaining
specialized banks--housing and agriculture--are also being
restructured. Once sound, they too were to be privatized.

In June 2000, the president signed the Central Bank law no.
14, which grants greater independence to the CBY. Its
mandate will now focus on price stability, limiting public
sector financing to emergency loans, freedom to adopt its
own monetary and exchange rate policies, and enforcing
greater commercial bank accountability. It is authorized to
conduct inspections of all banks implement provisioning and
capital increase schedules, and enforces penalties and
corrective measures. Interbank activities are limited, and
there are no equity or bond markets. The ROYG is planning
to establish a stock market in Yemen to promote the
government's private sector-led growth strategy. However,
the consensus of most Yemeni and foreign observers is that
the country lacks the expertise to establish such a market
at this time. It is also doubtful that there are sufficient
numbers of Yemeni investors to sustain an active stock
market.

The CBY began offering treasury bills in December 1995.
Commercial banks purchased a large share of the bills,
investing up to 30 percent of their assets in them. The
interest rate on T-bills was gradually reduced from a high
of 23 percent in 1999 to about 13-14 percent in April 2003
to encourage investment lending.

A.10. Political Violence

While there were no kidnappings in 2002, Kidnappings of
foreigners have occurred sporadically since the 1970s and
received wide international press coverage. Some tribal
groups have used hostage taking to put pressure on the
government to obtain projects or services, or to focus
government attention on the redress of grievances. Victims
have included foreign businessmen, diplomats, aid workers
and tourists. Historically, most have been treated well and
released unharmed after two to three days, although some
have been held as long as four weeks. A botched rescue
attempt during a May 2000 kidnapping of a Norwegian citizen
resulted in his death. Tribal kidnappings of foreigners
have been on the decline since 1998, partly as a result of
tough penalties enacted by the Yemeni government as a
deterrent, and no foreigner has been kidnapped in Yemen
since November 2001. The president has spoken out strongly
against kidnapping, terming it "terrorism." Many tribal
leaders have given assurances to the ROYG to cooperate in
hunting down kidnappers.

A significant exception to the usual pattern was the
kidnapping in Abyan Governorate of 16 foreign tourists in
December 1998. Four died during a rescue attempt, at least
two of those at the hands of the kidnappers. Most
observers, however, have concluded that this incident was
the responsibility of Islamic extremists rather than tribal
kidnappers. The perpetrators were tried, found guilty of
murder, and sentenced. The Yemeni national who led the
kidnapping was sentenced to death under the anti-kidnapping
law of 1998 and executed in October 1999. The non-Yemeni
nationals involved were given maximum prison sentences, but
some were deported in early 2002. In late December 2002,
three American doctors were killed near the city of Ibb.
The perpetrator was convicted and sentenced to execution.

Some tribal elements hijack automobiles or other expensive
equipment owned by foreign companies as another means to
pressure the government to accede to their demands.
Particularly where oil and mineral extraction are concerned,
some tribes in the mineral-rich areas feel that they are not
getting their share of the wealth. Investors in such
ventures should be sensitive to the need to hire more local
tribesmen than might first be judged economically necessary
in order to build community relations and preserve the
peace. The provision of community-based buildings and
services, such as in health care and education, can go a
long way toward ensuring trouble-free investment in isolated
areas.

The bombing of the USS Cole in Aden harbor in October 2000,
in which 17 U.S. Servicemen and woman were killed, and the
October 2002 bombing of a French oil tanker of the coast of
Mukalla, are considered to be the acts of international
terrorists. The Republic of Yemen Government and the United
States are cooperating closely on counter terrorism
measures, and in investigations and preventions following
repeated terrorist acts.

A.11. Corruption

As one of the poorest countries in the world, with a hugely
overstaffed (due in part to the unification of North and
South Yemen) and underpaid civil service, Yemen has a
significant and widely acknowledged corruption problem. If
anticorruption laws exist on the books, they are not
enforced. Illicit activities range from soliciting and
paying bribes to facilitate or obstruct projects, to
leveraging dispute settlements, skewing taxation and customs
tariff augmentations, and engaging in family or tribal
nepotism. The government recognizes that it must affect
civil service and administrative reforms (better jobs,
higher pay, removal of the worst offenders) to create new
disincentives to corruption. Following Yemen's signing of a
border treaty with Saudi Arabia in June 2000, Yemen's
president Ali Abdullah Saleh announced a new commitment to
reduce corruption. The Ministry of Civil Service has the
lead on anticorruption issues and has set up an executive
committee to address the issue. A national strategic plan
to eliminate corruption is still not in place, however.

B - Bilateral Investment Agreements

The U.S. and Yemen are currently discussing a bilateral
investment treaty (BIT) but there is no bilateral tax treaty
between the two governments. According to the General
Investment Authority, Yemen signed in 2002 three new
investment promotion and protection agreements, bringing the
total bilateral treaties to 31, with five additional
countries having initialed a tentative agreement. Yemen has
bilateral investment treaties with Algeria, Austria,
Bahrain, Belgium, Bulgaria, China, Djibouti, Egypt,
Ethiopia, France, Federation of Russia, Germany, Indonesia,
Iran, Jordan, Kuwait, Lebanon, Malaysia, Morocco, the
Netherlands, Oman, Pakistan, Qatar, South Africa, Sweden,
Syria, Tunisia, Turkey, the UAE, Ukraine, and the United
Kingdom. Yemen has initialed agreements with, Croatia,
Hungary, India, Mongolia, and Romania.

C - OPIC and other Investment Insurance Programs

Yemen and the United States signed an investment guarantee
agreement in 1972. As of October 1997, OPIC and EXIM Bank
are on cover (or provide guarantees) for both private and
public sector projects of short and medium term (up to seven
years) duration. Yemen is a member of the Multilateral
Investment Guarantee Agency (MIGA).

D - Labor

The Yemeni government generally adopts International Labor
Organization (ILO) standards regarding labor and worker
rights. In 1999, it ratified ILO conventions on the
elimination of the worst forms of child labor and the
minimum work age for employment. As in other areas,
enforcement of the law is weak. Child labor has increased
due to the negative impact of economic reforms. Most
children work with their families in agriculture, although
an increasing number are being sent out to work in shops and
restaurants. To address this issue, the ROYG signed in June
2000 an agreement to cooperate with the International
Program on Elimination of Child Labor (IPEC). After
ratification of the ILO, the ROYG established the Child
Labor Unit at the Ministry of Labor to implement and enforce
child labor laws and regulations. Investors may find the
local pool of skilled labor for technology intensive
ventures limited.

Yemen's overall illiteracy rate is approximately 47 percent
(2000), 27.7 percent for men and 67.5 percent for women.
Given the departure of thousands of unskilled and semi-
skilled Yemeni laborers from Saudi Arabia, Kuwait and other
Gulf states during the 1990-1991 Gulf war, Yemen's
unemployment rate now stands at about 35 percent. Those who
complete secondary education and university studies in Yemen
often do not possess the same professional standards as
their counterparts hailing from Western educational
institutions. University graduates also experience
difficulty finding appropriate employment and are sometimes
unwilling to accept lower skilled jobs. The government is
beginning to focus considerable attention on increasing
access to and improving the quality of vocational training
as a means to develop a cadre of skilled laborers in high
demand fields, including construction workers, electricians,
plumbers and carpenters.

E - Foreign Trade Zones/Free Ports

The Yemen Free Zone Public Authority was established in 1991
to develop the Aden Free Zone. Yeminvest, a joint venture
of the Port of Singapore Authority (PSA) and the Bin Mahfouz
Group of Saudi Arabia, was awarded the concession to develop
the area. PSA now holds primary ownership and manages the
Aden Container Terminal. ACT started operating in March
1999, and was officially opened in September of that year.
The impressive growth was achieved in spite of the effects
of September 11. However, the October 2002 terrorist attack
on the French oil tanker M/V Limburg significantly impacted
Yemen's economy. Initially, insurance premiums rose 250%
and as a result, ships were diverted to the ports of
Djibouti and Salalah in Oman. The ROYG is working with the
insurance industry to lower insurance rates, and by the end
of 2003 insurance premiums may drop somewhat. In 2003, it is
expected to handle 388,500 Tons Equivalent Units, TEUs, a 3
percent rise over the 377,400 TEUs of 2002. The port mainly
serves as a transshipment hub, but attempts are being made
to increase the percentage of the local cargo through the
development of the industrial and warehousing estate. Both
the container terminal and industrial estate are run by PSA
and its infrastructure is now in place.

In its first phase of development, ACT planned to handle up
to 1 million Tons Equivalent Units annually on its two-
berth, 700m quay. Recently a fifth quay crane was added in
February 2002 bringing current capacity to 650,000 TEUs.
The container yard of 35 hectares offers storage capacity
for 10,000 boxes.

The industrial and warehousing estate called Aden Distripark
(ADP) has been launched. The first 30 hectares are ready
for occupation and building of tenants' factories and
warehouses. This area will grow to 74 hectares and
eventually to 1,550 hectares when demand increases. The
Aden Container Terminal and the Aden Free Zone are promising
areas for investment. Majority ownership and operation by
PSA as assured technical excellence both in construction and
management of the container port. Yeminvest is offering
special "early bird" deals to the first investors.
Opportunities in light industry, repackaging and
storage/distribution operations are welcome. Future plans
include development of heavy industry and more extensive
tourist facilities than currently exist in the greater Aden
area.

Free zone incentives include 100 percent foreign ownership,
no personal income taxes for non-Yemenis, and corporate tax
holiday for 15 years (renewable for 10 additional years),
100 percent repatriation of capital and profits, no currency
restrictions, and no restrictions on, or sponsoring
required, for the employment of foreign staff. Aden's main
selling point is its strategic location - nine days steaming
from Europe and seven from Singapore. It is just 4 nautical
miles off the main Far East - Europe sea route. PSA's
expertise and management guarantees stability and efficiency
to shipping lines calling at ACT and investors to the ADP.
For further information, contact: Richard Cheong, Chief
Executive Officer, Yeminvest, P.O. Box 4165, Aden, Republic
of Yemen (Phone: 967-2-234-789 or Fax: 967-2-234-880.
Email: crichard@yeminvest.com, or check out the website:
http://www.yeminvest.com; or http://www.psa.com.sg).

In May 2001, a new terminal at Aden International Airport
was officially opened. In addition a study was completed in
August 2001 for future plans for the airport to include a
duty free zone and cargo village to facilitate transit trade
with the Aden Free Zone port facilities. The Aden Free Zone
Authority is looking for a company to build and operate the
cargo village.

F - Foreign Direct Investment Statistics

Yemen produces no reliable statistics on foreign direct
investment. Most U.S. investment in Yemen to date is in oil
exploration, production and oil field services.