JEFFREY SACHS VISITS SANAA, WARNS OF ECONOMIC

1. (U) Summary. Jeffrey Sachs, Director of the UN Millennium
Project, projected a bleak future for Yemen without dramatic
policy changes and a significant increase in foreign
assistance during a visit to Sanaa, July 1-4. In Sachs's
view, poor economic performance, declining natural resources,
and a looming demographic crisis put Yemen on a direct course
for economic collapse and social unrest. Sachs's agenda was
to create a greater sense of urgency within the ROYG and to
pressure donors to increase aid, but his conclusions matched
those of other international observers, which indicate that
Yemen may be on the verge of becoming a failed state. End
summary.



--------------------------



--------------------------


Yemen: One of the Most Difficult Challenges in the World


--------------------------



--------------------------





2. (U) On July 2, Sachs made a presentation to the donor
community in which he characterized the situation in Yemen as
"one of the most difficult challenges in the world." (Note:
Yemen is one of eight pilot project countries selected by the
UN as a target for the Millennium Development Goals Project.
End note.) He contended that there were serious problems
with the ROYG's current strategy for poverty alleviation and
development, as the country is struggling simply to maintain
existing economic level. With estimates that that the
population will double by 2028, rapidly depleting water
tables, and no prospects for replacing diminishing oil
resources, Sachs predicted a rapid decline in GDP and a
"pressure cooker" situation for Yemeni society.



3. (U) Sachs attacked the IMF's plan for Yemen as "baby
economics." He said it offered the country nothing more than
an austerity program without a real development strategy, and
would lead to a collapse of living standards for most
Yemenis. He was also highly critical of donor countries for
not providing sufficient funds to stem the negative trends,
saying aid levels need to reach per capita USD 90 if Yemen is
to have a "fighting chance." Consistent with his global
campaign to assist developing nations, Sachs called for
immediate improvements to health, family planning, education,
and agriculture. He stressed that to attract foreign
investment, Yemen needs to develop the production sector and
anti-corruption programs within it. Sachs specifically
highlighted Aden Port, tourism, and natural gas as areas for
targeted improvement.



--------------------------

--
Growing Consensus: Yemen Faces Economic Crisis


--------------------------

--



4. (U) Sachs's conclusions echo recent reports from a number
of organizations. The World Bank, in its Spring 2005
Economic Update, characterized Yemen's macroeconomic position
as increasingly fragile. The Bank reported decelerating GDP
growth (now about 3 percent) and consistently declining per
capita GDP, as well as high inflation and dwindling current
account surpluses. The anticipated decline of oil production
over the coming decade (7.5 percent in 2005) will put
increased pressure on the ROYG to tap alternate sources of
revenue to maintain basic services. Even with the projected
removal of fuel subsidies and the introduction of a sales tax
(septel), the Bank projects a large fiscal deficit and
balance of payments gap that the ROYG will be unable to fill
without extensive administrative reforms and growth in the
non-oil production sector. The ROYG has shown little
progress in improving administrative efficiency or in
developing a more diversified economy.



5. (U) Similarly, the IMF concluded in its March report on
Article IV consultations with the ROYG that without a
complete program of policy adjustments, Yemen will face
calamity in the near future. The IMF projects that the share
of oil revenue to GDP will drop from 25 to 8.5 percent and
the budget deficit will increase to 21.9 percent of GDP by


2009. In addition, the IMF predicts a current account
deficit to exceed 13 percent of GDP and depleted
international reserves within five years. As a result of
these trends, as well the possibility of a currency crisis
(reftel), it will become increasingly difficult for Yemen to
service its public debt.



6. (U) Poor economic indicators are coupled with sobering
social and political realities. In its annual Failed States
Index, the NGO Fund for Peace ranked Yemen the eighth most
fragile state in the world, in more danger of collapse than
Haiti, Afghanistan, Rwanda, and North Korea. (Note: The
index was based on twelve indicators, including demographic
pressures, emigration, economic development, and the
criminalization of the state. End note.)



7. (U) Comment: Sachs met with President Saleh for nearly
two hours but, as in the aftermath of similar encounters,
there seems to be little indication that Saleh absorbed the
immediacy of Yemen's economic problems. Parliament's recent
decision to enact elements of the long-awaited economic
reform package, including a sales tax and the lifting of the
fuel subsidy (septel), give some cause for hope. Sachs is
correct, however, that such austerity measures without an
effective program for economic development will have a
devastating effect on the populace and would likely bring
social unrest. With rampant corruption and inefficient
administration, it is unclear whether Yemen would be able to
absorb successfully the quantity of foreign aid suggested by
Sachs. Nevertheless, without some form of immediate
international intervention, Yemen is facing an economic
collapse that could have a broad ripple effect on regional
and international security. End comment.
Khoury