SALEH AUTHORIZES ECONOMIC REFORMS: ROYG BRACES FOR

C O N F I D E N T I A L SANAA 001959

SIPDIS

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E.O. 12958: DECL: 07/19/2015
TAGS: PREL PGOV ECON EFIN EINV KMCA KMPI YM ECON COM
SUBJECT: SALEH AUTHORIZES ECONOMIC REFORMS: ROYG BRACES FOR
DEMONSTRATIONS

REF: SANAA 1919

Classified By: CDA Nabeel Khoury for reasons 1.4 b and d.


1. (C) Summary. On July 18, President Saleh approved
long-delayed portions of the economic reform package. A
reduction or elimination of the fuel subsidy is likely to
accompany this decision, and some fear it will lead to civil
unrest. Several reports indicate that the security forces
will employ harsh tactics to control demonstrations should
they erupt. The ROYG canceled permits for the diplomatic
community to travel outside the capital city for "the next
few days." Lifting of the fuel subsidy may result in the
scapegoating and possible removal of prominent government
officials, first among them, the Minister of Finance. End
summary.

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ROYG Prepares to Employ "Strict Measures"
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2. (C) Interior Minister Alimi recommended that foreign
diplomats remain in Sanaa and restricted their in-country
travel for the next few days for fear of demonstrations to
the lifting oil subsidies (reftel). All ROYG ministers and
many other officials have been instructed not to leave the
country. Removal of oil subsidies is highly unpopular with
Yemenis. There is as yet no word about the exact timing of
price hikes in fuel, but indications point to the next few
days.


3. (C) A source at the Ministry of Interior said President
Saleh summoned police officials to his palace to prepare for
civil unrest. He handed out riot batons to those in
attendance, raised one above his head, and instructed them to
use force in the event of demonstrations.

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Economic Reform: "The Sweet Before the Bitter"
-------------- -


4. (SBU) Removal of the fuel subsidy was preceded by passage
of three key elements of the long awaited economic reform
package. In the words of a UN official, the ROYG "supplied
the sweet before the bitter." On July 18, Saleh issued
presidential decrees authorizing the general sales tax (GST),
the customs tariff law, and the law for employment, wages,
and salaries. The new GST law reflects the input of business
leaders in private meetings with Saleh, and will come in the
form of a five percent levy on all imported and locally
produced goods (reftel). The law represents a major
departure from the IMF-WB recommended value added tax and
passed by Parliament exempting basic goods including wheat,
rice, medicine, baby milk, raw gold, and cashing money.
Tobacco products, qat, weapons, phone service, and jewelry
will be taxed at different rates.


5. (SBU) The Customs Tariff Law ratifies amendments to the
Customs Law that bring Yemen's tariffs in line with the World
Customs Organization, a positive step toward WTO accession.
The Employment, Wages, and Salaries System Law re-classifies
salaries and provides pay increases to public employees
compatible with a minimum wage and above the poverty line.
The law is part of a larger program of civil service reform,
headed by the Ministry of Civil Service, which proposes to
reduce government payroll and increase efficiency.

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Top Ministers May Pay the Price
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6. (C) Comment: Speculation is the subsidies will be lifted
on Friday afternoon (July 22),when most Yemenis have already
returned home from prayer and are the least likely to take to
the streets. Minister Alimi told CDA that the opposition is
on board with the reforms but that there is no guarantee they
will not call for the demonstrations anyway, adding, "Maybe
you can help us with them!" The lifting of subsidies may
also be used to conduct a long-anticipated cabinet shake-up,
depending on the strength of the public reaction. Prominent
figures such as Prime Minister Bajamal may take the fall for
an unpopular Presidential decision. According to prominent
businessman Fatti Fahem, Minister of Finance Salami,
currently receiving medical attention in Frankfurt, has
already unofficially resigned. End comment.
Khoury