SALEH "RESCUES" YEMEN FROM PRICE HIKES

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 002062 SIPDIS E.O. 12958: DECL: 07/27/2015 TAGS: PGOV PREL PHUM ECON EINV ENRG KMPI KMCA YM ECON COM DOMESTIC POLITICS SUBJECT: SALEH "RESCUES" YEMEN FROM PRICE HIKES REF: A. SANAA 1976 ¶B. SANAA 2022 ¶C. SANAA 1959 ¶D. SANAA 2032 Classified By: CDA Nabeel Khoury for reasons 1.4 b and d. ¶1. (C) Summary. Following a week of protests against the ROYG's decision to partially lift fuel subsidies, on July 25 President Saleh ordered the Cabinet to reduce prices by seven to 22 percent. The President reached his decision after consulting with tribal leaders, who in return agreed to lift a blockade of fuel shipments to Sanaa. The Ministry of Finance is linking revenue from reduced subsidies to civil service wage increases, set to take effect over several months. In rolling back the price hikes, Saleh is responding to some real domestic pressures. Far from emerging the hero, however, there is now real dissatisfaction both in the street and inside the Government with the ROYG's handling of the entire affair. End summary. -------------- Saleh Takes the "Middle Way" -------------- ¶2. (U) On July 25, President Saleh issued an order to the Government to lower the just raised fuel prices on both diesel and gasoline. The ROYG's decision to lift fuel subsidies one week earlier led to rapid inflation and prompted riots throughout the country (ref A). Saleh came to his decision following negotiations with tribal leaders from Mareb, al-Jawf, and Sa'ada, some of whom were responsible for a blockade of the Mareb-Sanaa road (ref B). The roadblocks prevented critical shipments of diesel and cooking gas from reaching the capital, leading to shortages and long lines. The government-controlled newspaper al-Thawra reported that the President also held meetings with the Parliament, business leaders, and local council members to explain the economic necessity of lifting subsidies. ¶3. (SBU) The Cabinet formally endorsed the President's decision on July 26, rolling back gas prices from 65 YR (approximately 33 US cents) to 60 YR (31 cents) per liter, and diesel from 45 YR (23 cents) to 35 YR (18 cents) per liter. The Cabinet announced that the ROYG's annual subsidy for gas now totals 50 billion YR (260 million USD) and 165 billion YR (855 million USD) for diesel. (Note: Even after the partial lifting of subsidies, fuel prices in Yemen are less than half the world average. End note). ROYG officials sought to explain the sudden change of course by emphasizing Saleh's compassion. "The President saw that the price was too high for the people and decided to take the middle way," said Deputy Minister of Oil Abdulmalik Alama. ¶4. (U) The Cabinet also announced measures to cut government spending on conferences, travel, and celebrations, as well as on diplomatic missions abroad. The Cabinet required that ministries "strictly observe laws and regulations" in the handling of foreign assistance and loans. At the same time, the ROYG linked the reduction in fuel prices to government salaries. The Salary and Wages Law, recently approved by the President, included a monthly minimum wage increase from 7000 YR (approximately 32 USD) to 16,000 YR (85 USD) and to 20,000 YR (104 USD) by the end of 2006. It is now widely reported that Cabinet will balance the President's decision on fuel prices by limiting the increase to 15,000 YR (78 USD). -------------- ROYG Was Unprepared -------------- ¶5. (C) Ibrahim al-Nahari, Director General of External Relations at the Ministry of Finance, echoed the thoughts of many in the donor community, saying that it was unwise of the ROYG to introduce major policy changes without a clear "education plan" for the public. In his view, it was not clear to Yemenis what benefits they would derive from lifting fuel subsidies. Only in the days following the riots, said Nahari, did ROYG ministers issue public statements defending the new policies (ref A). Nahari also noted that despite anticipating widespread demonstrations against the price hike months ago, security forces appeared wholly unprepared for the July 20 riots. Policemen were not in position to protect government buildings and reinforcements did not arrive until the following day. ¶6. (U) The decision to lift subsidies cannot be separated from goals of civil service reform, explained Nahari. Government revenue derived from the removal of subsidies will be used primarily to fund salary increases and to offset lost revenue from the lowering of tariffs (ref C). Nahari said the ROYG is currently in the final stages of implementing a biometric system to identify all civil service and security employees, and to eradicate duplications. Ministries will receive increased salaries for staff retroactive to August 2005, on the condition that they utilize the new biometric system for salaries. (Note: The biometric system is designed to avoid mistakes arising from human error, such as the spelling of names. End note). -------------- -------------- Comment: Political Maneuvering Dictates Economic Policy -------------- -------------- ¶7. (C) Saleh's decision to reduce fuel prices after a week of unrest revealed the ROYG's cynicism and confusion in implementing economic reform. By delivering Yemenis from the burden of high fuel prices, Saleh sought to distance himself from the government and his own GPC party, and to further his image as the "President of all Yemenis" (ref D). This distinction may be lost on average Yemenis. When asked who was responsible for the unrest, one taxi driver responded, "The Government belongs to the President. The President controls the tanks." Reformist counselors to the President are equally frustrated. Saleh's decisions first raising, then quickly lowering of fuel prices were both arbitrary and, de-linked from civil service or other economic reform measures. ROYG officials were unable to explain whether lower prices would be supported by renewed subsidies or price controls. While the former seems likely, the figures offered for this year's subsidies are identical to those agreed upon in Parliament several weeks prior to the riots. In reality, the Cabinet is scrambling to provide economic justifications for the President's political maneuvering. End comment. Khoury