DEAL CUT ON YEMEN'S BUDGET -- FOR NOW

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000093

SIPDIS

STATE PLEASE PASS TO MCC

E.O. 12958: DECL: 01/13/2015
TAGS: PGOV ECON KMPI YM KGOR ECON COM
SUBJECT: DEAL CUT ON YEMEN'S BUDGET -- FOR NOW

REF: SANAA 37

Classified By: DCM Nabeel Khoury for reasons 1.5 b, d.


1. (C) Summary: In a rare roll-call vote on January 5,
Parliament approved Yemen's 2005 budget while striking a deal
with the Government that postpones the lifting of oil and gas
subsidies pending the Government's implementation of several
wide-reaching economic reforms demanded by Parliament. While
the Arabic official press touts the budget agreement as "a
victory for the people" and headlines, "No price hikes in oil
and gas derivatives," the English official press banners the
Government's success in pushing through reforms as suggested
by the World Bank and warns, in this context, that "the
capital braces for violence as demonstrations threatened to
protest price hikes!" The reforms demanded by Parliament are
far too broad and sweeping for the ROYG to be able to
realistically implement them in the near term. This suggests
that the lifting of the subsidy will again be rejected by
Parliament when the issue comes up before them again in six
months. The donor community, meantime, is being set up to
accept a further postponement of reform in order to avert the
"threatened demonstrations and violence." This duplicitous
presentation of events, along with conversations we've had
with MPs, ROYG officials and independent observers, leads us
to believe that a political deal has been struck that will
give each side something they want: tribes can keep smuggling
oil; Parliament - as champion of the people - keeps the oil
subsidy; and, the foreign community appreciates the calm
maintained in the streets. A clever deal that ultimately
denies the country the reforms it so desperately needs. End
summary.

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Parliamentary Action
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2. (SBU) In a briefing to donors on January 10, Deputy Prime
Minister and Minister of Planning and International
Cooperation Ahmed Sofan described negotiations between
Parliament and the Ministers as "furious." Sofan said after
two weeks of intense negotiation that produced nothing, it
became imperative the budget pass to start the ROYG's fiscal
year, which began January 1, and so a vote was called. Of
the 301 members of Parliament, 161 voted for the bill, 25
against, and six abstained. Most who voted were members of
the ruling GSP party. During the vote, 109 members of the
YSP and Islah parties walked out complaining to the press
that the process was "disorganized." Deputy Finance Minister
Ahmed Ghalib and Director General Ibrahim al-Nahari told
Pol/Econ Deputy that parliamentarians individually all admit
that economic reform must happen, they just do not want to
stand up for it. Sofan echoed a similar view and blamed
Parliamentarians for playing politics with the budget.


3. (SBU) In a move to promote the reforms to the average
Yemeni, PM Ba Jammal and others held a January 8 press
conference broadcast on Yemen TV to answer questions ranging
from the price of bread to corruption. Ba Jammal
characterized himself as a crusader against corruption and
trumpeted the necessity of economic reform. (Comment: The
press conference is remarkable in itself as a step forward
putting the case for reform before the public. End comment.)

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What did Parliament Get?
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4. (C) The list of reforms Parliament called for is lengthy.
Essentially, it is a laundry list of outstanding demands
ranging from anti-corruption measures, reform of notoriously
poorly run ministries, and assistance to those most likely to
be affected by a diesel subsidy reduction. A range of
contacts from the Foreign Ministry, Ministry of Finance and
Ministry of Planning all confirmed that a deal was struck
with Parliament to go forward with the budget with promises
from the executive that pending reforms will come in the next
three to six months. Consensus is that the government will
offer reforms focusing on customs, procurement laws,
borrowing regulations and funding Local Councils. In a
budget briefing to donors, Sofan claimed incorrectly that the
ROYG has already funding local councils and blamed budget
increases of 25 percent in the last two years on money
disbursed to local councils. (Comment: Sofan's claim is
blatantly misleading, most local councils are not funded and
local councils funding currently accounts for only 1-3
percent of the national budget. End comment). Prime Minister
Ba Jammal publicly announced that wage restructuring and
civil service reform will be implemented by the government to
demonstrate their commitment to reform. Sofan claimed that
all of these reforms requested by Parliament are "underway"
and that the government is already working on its response
Parliaments reform demands. Ministry of Finance officials,
however, are already blocking the wage restructuring. Deputy
Finance Minister Ghalib told Pol/Econ deputy that his
ministry is drafting a letter to the Cabinet saying that
civil service reform can only be implemented after the diesel
subsidy is cut.

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Budget Passed, Reforms Put on Hold
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5. (C) The most pressing economic reforms: Diesel subsidy
reductions (the cost of diesel would rise from 17 Riyals per
liter to 33 Riyals, and Gas from 35 riyals to 45 riyals per
liter),initiating a general sales tax, customs reform,
investment law implementation, and civil service reform have
all been delayed until Parliament is satisfied with the
executive's response to their demands. Finance official
al-Nahari characterized the reforms as "cut and paste" and
noted that many of the demands actually implement policies
that the government wants to promote, but feared would be
rejected by Parliament. For instance, in the case of customs
valuation, the government requested several specific
reductions on cars and a few other heavily smuggled goods.
Parliament carried it further, calling for wide ranging tax
cuts in line with WTO and GCC countries customs rates.
Nahari said the Ministry of Finance is happy to comply, but
noted it was a strange procession of events. On the General
Sales Tax, a type of VAT levied at the company level, Deputy
Finance Minister Ghalib said that businessmen have largely
dropped their opposition and implementation will begin this
summer.

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Will Saleh Save the Day?
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6. (C) Parliamentarians are concerned that now that they have
passed the budget, President Saleh will sweep in three months
from now and cancel implementation of the tough economic
measures promised by the government. Former MP and
Parliament watcher Saad Talib reports that President Saleh is
worried about the 2006 election, and may be setting the stage
for himself to emerge as the champion of the common man by
canceling the plan for subsidy reduction. This theory was
given more credence over the weekend when the English
language Yemen Observer, which has a direct line to the
President, predicted widespread rioting if the subsidies are
lifted. The government daily al-Thawra took a more
reassuring tone, reporting that no immediate price hikes are
expected. The English press is leaving the door open for
Saleh to claim to the donor community that the reforms are
unpopular and a threat to internal security, a point
President Saleh has made repeatedly to Western diplomats.


7. (C) In contrast, Deputy Foreign Minister Noman told
Pol/Econ Chief that he believes President Saleh now
recognizes the need to support economic reform. Noman said
that President Saleh is rumored to have threatened Speaker of
Parliament Sheikh Al-Ahmar to vote for reforms or be replaced
as speaker, pointing out that Ahmar was the only Islah member
to vote for the package. Noman characterized the budget
debate as a "tough fight," but remained skeptical about the
actual implementation of reforms. Noman discounted the Yemen
Observer's and opposition press' predictions of widespread
riots, saying Islah is the only party that has the ability to
organize riots, but has nothing to gain from them.

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Will they Stick?
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8. (C) Comment: As expected, the Ministry of Finance is
unable to support all the reforms demanded by Parliament and
offered by PM Ba Jammal. The PM may have cut a deal he knows
his long-time rival Deputy Prime Minster and Finance Minister
Salami will not accept. While Parliament may have passed the
budget, the future of economic reform remains uncertain and
Parliament may have just punted the issue six months into the
future. Despite several assurances that the push for
economic reform comes from the top, the jury is still out on
whether Saleh has the political will to follow through with
unpopular reforms. As long as both the legislative and
executive fail to fully recognize rapidly dwindling water
recourses, growing population and declining oil production,
the long-term stability of Yemen continues to hang in the
balance. End comment.

KRAJESKI