RECORD OIL REVENUES FOR YEMEN -- WHERE HAS THE

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 002957

SIPDIS

E.O. 12958: DECL: 10/10/2015
TAGS: PREL PGOV EFIN ECON KMCA KMPI YM DOMESTIC POLITICS
SUBJECT: RECORD OIL REVENUES FOR YEMEN -- WHERE HAS THE
MONEY GONE?

REF: A. SANAA 1976

B. SANAA 1919

C. SANAA 2920

D. SANAA 2844

E. SANAA 1446

Classified By: A/DCM Thomas Burke for reasons 1.4 (b) and (d).


1. (C) Summary. In September, the Ministry of Finance (MOF)
submitted a record supplementary budget to Parliament for
approval, totaling 50 percent of the original 2005 budget.
As a result of higher than expected oil revenues and the
lifting of fuel subsidies, Yemen is showing a revenue surplus
of approximately 400 billion Yemeni Riyals (USD 2.07
billion). The budget provoked outrage in Parliament, where
MPs accused the ROYG of spending the money illegally and
wasting Yemen's windfall through corruption and
mismanagement. It also appears that Government expenditures
have exceeded surplus revenue, creating a fiscal crisis
instead of an opportunity for investment. The crisis
highlights the growing influence of Parliament in budgetary
oversight and the dire need for financial accountability at
the MOF. End summary.

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Record Oil Prices Lead to Record Spending
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2. (SBU) In September 2005, the Ministry of Finance submitted
to Parliament a record supplementary budget of 451 billion
Yemeni Riyals (YR) -- 50 percent of the original 2005 budget.
(Note: The exchange rate as of October 10 was USD 1 to YR

193. End note.)
This is the sixth consecutive year that the ROYG has
requested supplementary spending. The original 2005 budget
conservatively estimated oil revenues at USD 30 per barrel,
but with the world market averaging double that price the
ROYG is showing a surplus of YR 400 billion. This still
leaves a gap of YR 51 billion, which MOF claims it is filling
with additional tax and customs revenues, as well as some
spending cuts.


3. (SBU) The bulk of supplementary spending is proposed for
fuel subsidies, at YR 237 billion, which were reduced but not
completely eliminated in July. This is in addition to YR 44
billion already set aside for subsidies in the annual budget.
Additional military expenditures cover increased shipping
and operations costs created by higher fuel prices. Over YR
87 billion is allocated for capital expenditures, with the
largest percentage being applied to the Public Works Program
to complete road construction projects. Of note is YR 3.82
billion, set aside to reimburse the Crest company for its
share in the Block 53 oil production agreement, cancelled by
Parliament amidst charges of corruption. (Note: Crest, a
UAE-based company with strong ties to ROYG officials, was a
proposed partner in the Hunt Oil extension agreement in Block
18, also blocked by Parliament. End note.)


4. (C) The budget allocates YR 32 billion for the first phase
of the new wages strategy, which proposes to increase
salaries for government employees eightfold over an
unspecified period. The ROYG and Parliament have yet to
agree on a minimum wage or an overall wage scale, and delays
have led to growing frustration among civil servants. Public
pressure is forcing the ROYG to increase salaries as a quid
pro quo for lifting fuel subsidies in July. (Ref A) In
September, for example, over 200 military personnel protested
in Sanaa for higher wages without a permit, and were quickly
whisked away by military police. Without a commitment to
civil service reform, however, including incentive-based pay
and removal of "ghost workers," the strategy promises to
inflate ROYG expenditures for many years to come.

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Some Question ROYG's Budget Priorities
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5. (C) According to Saadaldin Taleb, a former MP and current
advisor to the National Democratic Institute, a majority of
parliamentarians appeared ready to reject the supplementary
budget without sending it to committee. In their view, the
budget is in violation of the Constitution and the Financial
Law, which stipulate that in the case of a surplus, each
government body must apply to MOF for a spending increase,
which must be approved by Parliament. Such procedures were
ignored in this case, and according to Parliament, the ROYG
already committed the money without approval. Islahi MP
Abdul Rahman Bafadel said Parliament was further outraged by
what it calculates to be a fifty percent reduction in the
investment budget. Taleb concurred, pointing to reductions
in health and education spending, despite increases in
expenditures on the military and road construction.


6. (C) MOF admits to spending surplus funds without approval,
saying that Yemen's development needs require immediate
action. Dr. Fadl al-Shoaiby, Deputy MOF for the Budget
Sector, said the ROYG had to spend the money quickly before
it was devalued by inflation. Shoaiby also contended that
Parliament forced as much as seventy percent of the spending
by opposing further reduction in fuel subsidies, demanding
extensive wage increases, and obstructing implementation of a
general sales tax. (Ref B) Ibrahim al-Nahari, MOF Director of
External Relations, disputed the accusation that the ROYG cut
the investment budget. According to Nahari, the Cabinet
simply halted new projects until those currently under
construction are completed. In fact, said Nahari, the
supplemental budget adds YR 112 billion to overall
development spending (much of it for electricity).


7. (C) Bafadal ridiculed this claim, saying the ROYG "refuses
to allocate the full investment budget and then calls it
savings." He continued his attack saying that MOF
intentionally underestimates the price of oil, in order to
give the appearance of fiscal restraint when examined by the
IMF. MOF then uses supplementary budgets to cover
expenditures they don't want the public to see. Dr. Mohamed
al-Mansoob, Assistant Deputy Minister of Finance, confirmed
many of these accusations, admitting to Econoff that there
are a number of hidden costs that indicate a lack of spending
discipline. These include an estimated YR 70 billion spent
on the May Unification Day celebration in Mokhallah. Another
YR 70 billion is dedicated to military spending, said
Mansoob, without oversight or audit.

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Budget Provokes Parliamentary Crisis...
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8. (C) Sheikh Abdullah al-Ahmar, Speaker of Parliament,
defended the supplementary budget in the legislature and
demanded that it be passed immediately, without discussion.
The members responded with outrage, with one MP screaming at
the Speaker from the floor, "You are a tyrant!" Al-Ahmar
eventually retracted his position, allowing for debate on the
budget and opening the door for serious dissent. Bafadel and
others argued that any extra oil income should be put in a
special account, to be accessed only with explicit
Parliamentary consent.


9. (C) Prime Minister Bajammal, recognizing a possible crisis
in the works, called a meeting with the GPC members in
Parliament. According to Taleb, Bajammal and GPC MPs cut a
deal in a private session. The PM agreed to Parliament's
demands to question a number of ministers on issues of
corruption and in return, the budget would be sent to the
Finance Committee. (Ref C) Committee Chairman Ali Ahmed
al-Imrani, known as an honest GPC parliamentarian and a
reformer, suddenly found himself in an impossible position.
By recommending the budget for approval, Imrani could appease
the ROYG and remain loyal to his party, while provoking the
ire of reform-minded parliamentarians. Alternatively, he
could oppose the budget, making him a hero to Parliament
while bringing the full wrath of the ROYG down on himself.

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...Becomes Third Rail for MPs
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10. (C) By his own admission, Imrani then did the only
reasonable thing: he fled to his village in Abyan claiming
his mother was ill. The Chairman did not return to Sanaa
until after Parliament went to recess, leaving the
supplementary budget in limbo. Imrani is resentful that the
ROYG does not respect Parliament's role in the budgeting
process, dumping the supplementary budget on the Committee at
the end of the fiscal year. When Parliament returns, it will
also have to consider the proposed 2006 budget and the final
spending statement from 2004. Imrani pleaded with post to
provide the Finance Committee with the training and technical
assistance necessary to analyze and evaluate Yemen's budgets.


11. (C) Imrani expressed his hope that Parliament would be
able to compromise by approving only part of the budget, but
admitted that this tested the previous limits of
Parliamentary power. In the case of the annual budget,
Parliament is not permitted to amend the budget -- only to
recommend changes. It is not clear at this time if MPs have
broader powers over a supplementary budget. Without such a
compromise, however, Imrani fears that the budget will face
rejection on the floor. "There are too many signs of
corruption in this budget," lamented Imrani, adding: "I will
resign as Chairman as soon as possible."

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Comment: "A Program of Corruption"
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12. (C) The supplementary budget offers clear indications of
runaway spending at MOF. Despite higher than expected oil
revenues, the ROYG is still running in the red. Minister
Salami has been applying pressure on all Government
ministries and agencies to contribute to the treasury. This
has resulted in poor decisions on a recent telecommunications
tender and near panic at the Customs Authority, where
officials are attempting to enforce new import fees on
automobiles. (Ref D) Nahari admitted that even with the
supplementary budget, the ROYG will only manage to maintain
last year's deficit level of 1.5 percent. The GPC-controlled
Parliament is likely to approve the budget at the end of the
day, but the sheer size of the request has provoked
incredulity among MPs. "This is a program of corruption, not
reform," said one parliamentarian.


13. (C) The core issue is lack of accountability in the
budgeting process. Efforts by the World Bank to install
budgeting software (AFMIS) at MOF and other agencies have run
into delays and corruption -- the program is led by Minister
Salami's nephew. The Central Organization for Control and
Audit, Yemen's monitoring body for corruption, is flawed in
that it reports to the President's office and has no
authority over military spending. Recognizing systemic
problems at MOF, post is participating in a donor working
group on public finance management reform, with the aim of
rationalizing the budgeting process and opening it to public
scrutiny. (Ref E) As part of this effort, strengthening
parliamentary oversight of Government finance would help
create a check on corruption and allow for broader input into
the ROYG's investment priorities.
Krajeski