ECONOMIC REFORMS STALLED; IMF DELIVERS TOUGH

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001721

SIPDIS

E.O. 12958: DECL: 07/18/2014
TAGS: ECON EAID AADP YM ECON COM
SUBJECT: ECONOMIC REFORMS STALLED; IMF DELIVERS TOUGH
MESSAGE TO ROYG

REF: A. SANAA 1537

B. SANAA 122

Classified By: DCM Nabeel Khoury for reasons 1.5 (b and d).


1. (C) Summary/Comment: Senior Ministry of Planning official
Nabil Shaiban confirmed that President Saleh has decided to
delay economic reform, but reiterated the ROYG's long-term
committment to implementation. The decision comes in spite
of the recent IMF mission headed by Senior Economist Saad
Chami, which heavily encouraged advancing the reforms. The
delay is no surprise; for the average Yemeni, economic reform
equals price increases and there has been no attempt by the
ROYG to justify the reforms to the populace. Several
contacts cited Parliament's newfound strength from the recent
oil-scandal (ref a) and many MPs were outspoken in their
opposition. Blunt messages from the IMF and donors on the
necessity of economic reform may sway reform-minded
ministers, but the tough political decision to implement
reforms remains with President Saleh who seems to have
calculated that the political climate is not ready for an
economic austerity package. End summary/comment.


2. (SBU) Background: The economic reform package (ref b)
consists of five measures designed to wean Yemen away from
depending on oil for state revenue, trim a bloated civil
service and enhance the investment climate. The five aspects
are a) General Sales Tax (GST); b) reduction of the diesel
subsidy; c) civil service reform to include wage increases;
d) customs and tariff reform; and e) investment law reform.
While not legally necessary, the ROYG has submitted the
package to Parliament for approval. The reforms were widely
expected to go into effect this summer. End background.

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Whither Economic Reform?
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3. (SBU) On 7/11 Ministry of Planning and International
Cooperation Director General for the Americas and Europe
Nabil Shaiban told Pol/Econoff that Saleh summoned Prime
Minister Ba Jammal and Deputy Prime Minister and Minster of
International Cooperation Sofan for intensive discussions
over the diesel subsidy reduction and advised them that he
has decided to "postpone implementation for a few months."
Shaiban added that DPM Sofan told Saleh that "We need to
rally public support on the positive aspects of the economic
reforms." Shaiban said that Saleh wants to build public
trust and counter opposition to the programs. Closing the
subject, Shaiban reiterated that ROYG's plan to implement the
economic reforms. He added that DPM Sofan asked British
Department for International Development (DFID) to "study the
socio-economic impact" of reducing the diesel subsidy.

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IMF DELIVERS BLUNT MESSAGE TO ROYG
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4. (SBU) On 7/7, IMF Middle East Director Saad Chami
summarized to Ambassador the results of the IMF's latest
consultations with ROYG officials, saying his team delivered
a "blunt, direct message to ROYG officials that they must
implement the reforms." ROYG officials cited "regional
circumstances," especially the security situation to Chami as
justification to delay most aspects of the reform package
(ref a),except for the civil service wage increase. Chami
said that IMF understands Yemen's "difficult circumstances"
and accepted the ROYG argument, but warned officials that
failure to implement reforms could produce serious economic
consequences in 5-6 years.


5. (SBU) According to Chami, powerful businessmen convinced
Parliament to delay GST implementation until July 1, 2005.
However, Chami is encouraged that former Minister of Finance
and present Shura Council member, Mohammed Junaid, was tapped
to lead a GST study committee. The new committee will review
the proposed GST and submit a report explaining its impact to
President Saleh in March 2005. Chami commented that a year
delay in the GST is not a significant setback because it is
intended to compensate for projected state revenue losses due
to declining oil production. In response to a question
regarding ROYG transparency regarding GST implementation, IMF
team member Bin Latifa interjected that the business
community is "pretending not to understand" the GST, noting
their real objection is that they would be subject to audits.


6. (SBU) Turning to the oil subsidy, Chami stated that high
oil prices now cost the ROYG 5.5 percent of GDP or roughly
725 million USD per year to subsidize fuel. According to
Chami, ROYG officials including PM Ba Jammal, Deputy Prime
Minister and Minster of Finance Salami, DPM Sofan and the
Head of the Shura Council, all acknowledged the ROYG's
declining oil revenue and understood the necessity for
serious economic reform. However, Chami added, "very
powerful" people are blocking the diesel subsidy.


7. (SBU) Director of Payment Systems for the Central Bank of
Yemen Omar Bazara confirmed on 7/16 to economic specialist
that the IMF had delivered a tough message to ROYG officials.
Bazara said that ROYG officials are keeping the negative
information very quiet and were "astonished" at the poor
economic picture portrayed by the IMF.
HULL