AMBASSADOR FINDS STRONG ALLY IN MINISTER OF FINANCE

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 002441

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/16/2016
TAGS: PGOV ECON EFIN EAID EINV ETRD KMPI KMCA YM
SUBJECT: AMBASSADOR FINDS STRONG ALLY IN MINISTER OF FINANCE

REF: A. SANAA 647

B. SANAA 2006

C. SANAA 2136

SANAA 00002441 001.2 OF 002


Classified By: Ambassador Thomas C. Krajeski for reasons 1.4 (b) and (d
).


1. (C) SUMMARY. On August 14, Ambassador met Minister of
Finance Dr. Saif Al-Asali who was strongly supportive of the
U.S. position on Hezbollah. MOF suggested that Yemen was the
best hope for the region in its example as an emerging
democracy, and urged the United States to back reformers like
him within the ROYG. Asali stressed his commitment to
privatization and to the establishment of a Yemeni stock
exchange. Ambassador and MOF agreed on the need for further
progress on a range of reforms, including customs valuation,
public finance management, and regulatory improvements.
Asali held true in many ways to his quixotic reputation (Ref
A),but has emerged as a positive and increasingly effective
force within the ROYG. END SUMMARY.

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"Yemen Best Hope in Middle East
--------------


2. (C) Asali began his August 14 meeting with Ambassador by
once again expressing support for the United States, this
time in its opposition to Hezbollah in Lebanon. Asali
expressed doubt that the current cease-fire would hold,
saying the extremist groups are not interested in practical
solutions but rather in a "new way of life." Referring to
other Arab governments, Asali told Ambassador: "Your friends
are cowards."


3. (C) MOF said all of the current forces in the Middle East
were negative, citing status quo governments, Al-Qaida,
radical Shi'as, and the Muslim Brotherhood. Yemen is the
only example of an alternative, argued Asali, in that it is
moving towards democracy. Despite his rhetoric, Saleh is
better than leaders such as Mubarak, in that he uses
"dialogue and not force." The development of local councils
is a key development in Yemen, continued MOF, allowing people
to experiment in a "laboratory of democracy."

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Building Trust With the Private Sector
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4. (U) Ambassador complimented recent progress on economic
reform, stressing recent measures to increase transparency in
the budget process and in decentralizing fiscal authority.
(Ref B). Asali responded that his ultimate goal is to
separate the functions of the state from those of the private
sector. He expressed his desire to eliminate state-owned
enterprises, changing the ROYG's role in business from
competitor to regulator and facilitator. "Government's job
is to help business," said Asali.


5. (U) Asali recommended a number of areas for continued
progress, including an open dialogue with the private sector
on tax policy. MOF also referred to the need for training in
risk management, image analysis, and value cost to accompany
the installation of new Chinese-made scanners. MOF is
currently in talks with a Swiss contractor, but Asali
expressed his preference for American assistance. Ambassador
noted an existing program on customs valuation, funding by
the Middle East Partnership Agreement and USAID, which has
been stalled due to the lack of appropriate legislation.
Asali responded that he was personally taking responsibility
for passage of the needed laws.


6. (U) MOF also addressed the issue of corporate governance
and the need to restructure state-owned companies. At the
ROYG's invitation, the Dubai International Financial Center
(DIFC) came to Yemen to evaluate these conditions and others
as part of an early feasibility assessment for a local stock
exchange. Ambassador and MOF agreed that a good regulatory
framework was an essential prerequisite for preventing fraud
and other negative economic impacts. (NOTE: DIFC is
discussing a more extensive assessment with the USG-backed
International Finance Corporation, Financial Services
Volunteer Corps, and regional office of the Department of the
Treasury. END NOTE.)

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Gradual Approach to Reform
--------------


7. (U) Ambassador inquired as to future of the government's
reform agenda, and the ministers currently driving it.
"Reform can't be stopped now," responded Asali. It is in the
interest of the country and the President realizes this."

SANAA 00002441 002.2 OF 002


MOF supported a gradual approach to changing Yemen's culture
of corruption, but said that overall the interest of Yemen
and the United States -- democracy, dialogue, reform -- were
the same. Asali implied that the United States should
support moderate reformers within the ROYG rather than
looking for dramatic and immediate changes.


8. (C) Asali expressed his strong personal support for
joining the Extractive Industries Transparency Initiative
(EITI),but accused the Prime Minister, "a former communist,"
of standing in the way. Yemen has nothing to fear from EITI,
continued Asali, as there is "no naked corruption" in the oil
sector. "In fact," said MOF, "the budget is much more
accurate than I thought during my days with the opposition.
Asali disputed claims that the President and others benefit
personally from oil revenue. Ambassador stressed the
importance of EITI in boosting investor confidence,
particularly as the Overseas Private Investment Corporation
considers financing Yemen's liquefied natural gas industry.
(Ref C)


9. (C) On public finance management reform, Asali noted that
the Accounting Financial Management and Information System
(AFMIS) will be fully operational at the beginning of 2007,
and allow for greater transparency and internal control in
the budget process. Ambassador praised MOF's progress,
noting that this was a key part of reforms required for the
Millennium Challenge Account.

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Free Market Qat
--------------


10. (U) One of the most significant reforms carried out by
MOF, according to Asali, was the removal of multiple
checkpoints and tolls for qat distribution in Sanaa. Asali
said that he has now instructed the Tax Authority to collect
a flat rate tax only at the point of sale, and that the
police have been instructed to crack down on independent toll
collectors -- generally from the tribes and armed forces.
According to Asali, this has resulted in a fifty percent
increase in revenue for the Sanaa area, and has put a dent in
one of the major sources of corruption. When asked, many
residents of Sanaa were unaware of the change and skeptical
that it could be enforced.

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SUMMARY: Will Reformers Survive?
--------------


11. (C) Asali added to his reputation as an "out-of-the box
thinker," with innovative policies on qat taxation and U.S.
foreign policy. At times, Asali may be so far outside the
norm of Yemeni politics that he compromises his standing both
within the Cabinet and among ordinary Yemenis. Nevertheless,
he appears increasingly comfortable in his position and is
delivering long-awaited reforms in the Ministry. On the
stock market, budget preparation, and other issues, Asali's
initially manic tone has settled into a methodical and
strategic approach that is focused on delivering results. It
will be a litmus test for the ROYG's direction on reform
whether Asali and other forward-thinking ministers survive
beyond the September elections. END SUMMARY.
Krajeski