HIGH PRICES CAUSE CONCERN IN YEMEN

C O N F I D E N T I A L SANAA 001343

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/15/2017
TAGS: EAGR EAID ECON ETRD YM
SUBJECT: HIGH PRICES CAUSE CONCERN IN YEMEN

REF: 2006 SANAA 2070

Classified By: CDA Angie Bryan for reasons 1.4 (b) and (d)


1. (C) SUMMARY: Prices of basic consumer goods in Yemen
have risen in real terms by at least 100 percent since the
September 2006 Presidential Election. Inflation has worsened
the already abysmal poverty rate and has led to the
bankruptcy of at least 2,400 businesses. The Republic of
Yemen Government and experts from the Yemeni Association for
Consumer Protection and the Chamber of Commerce have
differing opinions as to the root causes of the persistent
price increase, but the overall consensus blames the lack of
competition in basic goods. In an attempt to curb inflation,
the ROYG has imposed price controls, but many observers
believe that this will not work. Short-term solutions will
be hard to find, but a more sustainable option is increased
market infrastructure, economic development and competition
in the marketplace. END SUMMARY

--------------
ASTRONOMICAL RISE IN PRICES
SINCE SEPTEMBER 2006
--------------


2. (U) Since the September 2006 Presidential Elections,
prices have risen dramatically in Yemen. Prices of basic
commodities, including wheat, flour, rice, cooking oil, milk,
and meat have risen at least 30 percent. The price of wheat,
a major determinant of other commodity prices, increased by
54 percent. Cement recorded the largest price increase. In
July 2006 the cost for a 50-kg bag of cement was 700 Yemeni
Riyals. By May 2007, a 50-kg bag of cement cost 1,800 Yemeni
Riyals, an increase of 157 percent.


3. (C) What distinguishes the recent price increases from
previous years is their pervasive and continuous nature. In
the past, there have been specific price increases of
specific goods during specific time periods. According to the
Deputy Chairman of the Yemeni Association for Consumer
Protection, Fadhl Mansour, over the past few years there have
been two or three sporadic small increases in prices, but in
2007, there has been a single, uninterrupted large increase
in prices across the board. Mansour stated that after the
April 2007 ROYG Cabinet reshuffle, prices increased
dramatically. A new wave of price increases occurred again
in May 2007 after the National Food Council met to find ways
of reining in the soaring prices. Mansour opined that in
real terms, prices have risen by at least 100 percent.
--------------
POVERTY IN YEMEN DEEPENS
--------------


4. (C) The impact on Yemeni consumers has been devastating.
In 2006, per capita GDP in Yemen was approximately 720
dollars, one of the lowest figures in the MENA (reftel).
According to a May 2007 field study published by the Yemeni
Association for Consumer Protection, the recent price
increases have eroded average Yemeni purchasing power even
further and are a serious blow to the average standard of
living in Yemen. The value of the Yemeni Riyal to the U.S.
Dollar has also fallen from YR 195/USD 1 in September 2006 to
YR 199/USD 1 in July 2007. Most consumers are purchasing 40
percent fewer goods as a result of inflation. In Sanaa, 40
percent of families can hardly afford to buy meat, chicken or
seafood even once a week. Poverty rates in rural areas are
increasing day-by-day and in some areas 80 percent of the
population lives in poverty. Rising prices have also hit
businesses hard. The Director of the Sanaa Chamber of
Commerce and Industry, Mahfoodh Salem Shammakh, reported to
Econoff that since the September 2006 Presidential elections,
2,400 businesses have gone bankrupt because of lower sales.
Mansour pointed out that merchants are importing lower
quality goods and selling them on the market.

--------------
TERRORISM FEEDS ON HUNGER
--------------


5. (C) According to UNICEF's annual journal, more than 50
percent of children under the age of 5 are moderately to
severely malnourished in Yemen (reftel). Scholars believe
that price inflation and falling incomes will lead to a broad
famine within Yemen, accompanied by many social problems.
Yemen has a very limited safety net. The Social Fund for
Development distributes welfare checks to only the "poorest
of the poor" and these checks are only for USD 12 per month.
Mansour noted that inflation has adversely impacted the
health and development process of Yemeni citizens and that
there has been a sharp rise in the number of crimes,
including robberies, counterfeiting and fraud. The Chairman
of the Yemen International Food Industries Company (YIFCO),
Yahya al-Habari, a major wheat trader, said that the poverty
is particularly acute in the countryside, especially in
Shabwa, Abyan and Sa'ada, and people there are increasingly
desperate for jobs. Habari stated that "if somebody offers
them USD 100 to fight, they will fight." These areas are
beset by tribal violence exacerbated by a lack of government
services.

--------------
WHAT IS TO BLAME FOR
THE PRICE INCREASES?
--------------


6. (C) Interpretations differ about what is to blame for
the price increases. The ROYG Ministry of Industry and Trade
(MOIT) attributes the price inflation to the general rise of
prices worldwide. Yemen imports most of its food. According
to the Director of the MOIT Domestic Trade Administration,
Muhammed Faragi, 70 percent of Yemen's wheat comes from the
United States, and another 15 percent comes from Australia,
India, Ukraine, and Saudi Arabia. Faragi indicated that
wheat and oil prices have gone up and rice production in
India and Pakistan has dropped. YIFCO Chairman Yahya
al-Habari backed this interpretation in a July 1 meeting with
Econoff, stating that whereas in January 2007 wheat cost USD
185 per metric ton, in July 2007, the price shot up to USD
325 per metric ton. Habari added that in June 2007 his
company could not afford a shipment of U.S. wheat, because
the cost increased by 15-20 percent from the previous
contract.


7. (C) Mansour refuted this claim that the global
marketplace is to blame for inflation, stating that prices
have risen globally only on some commodities, while the
prices of all commodities in Yemen have gone up. He believes
that a more credible explanation is that there is a lack of
competition in the supply of basic goods in Yemen. The
variety of brands is limited and the Yemeni consumer is
therefore unable to compare the prices of two different
brands of flour, for example, and choose the cheapest. Most
basic consumer goods found in the rural areas are of low
quality. Habari explained that even though there are less
expensive brands of wheat in the world marketplace, Yemenis
prefer to purchase the more expensive U.S. wheat, and
lamented that "People in Yemen can die of hunger, but still
want a brand." The lack of variety in consumer goods, such
as wheat, is compounded by the fact that production is down
in many countries, including Pakistan, Ukraine, Russia and
Canada. According to Habari, Pakistan will not export any
wheat to Yemen due to a current wheat shortage in Pakistan.


8. (C) Mansour told Econoff that in Yemen only six traders
and merchants deal with basic commodities, such as wheat,
flour, sugar and rice and that there are only four-to-five
producers of cooking oil. For example, Habari has a monopoly
over the wheat and flour supply in Yemen and President Saleh
has a share in this company. There is also a monopoly on the
transportation system. Habari accused the ROYG-owned Yemen
Economic Corporation (YECO),another major trader in
commodities, of recently selling 45,000 tons of subsidized
wheat on the black market at a high price. The MOIT, Chamber
of Commerce and Industry and academics support the view that
there is a lack of competition. In a June 17 meeting with
the former DCM, the ROYG Minister of Industry and Trade,
Yahya al-Mutawakel, stated that "the real issue is monopoly
and that Yemen imports a lot of its wheat and flour from the
United States." The Minister observed in a later meeting
with the Ambassador on June 23 that "Yemen does not have
perfect competition or instruments to alleviate the
phenomenon of an oligarchy of very powerful families, who
control the trade of basic commodities." Mutawakel stated
that creating more competition in Yemen will be a long-term
process because of a lack of infrastructure, including grain
storage silos.


9. (C) Shammakh offered another explanation for the price
increases, citing a "long train" of high operational costs,
which businesses then pass on to the consumer. He said these
include increased freight rates because of high oil prices,
an increase in insurance premiums for commodities, higher
transport and shipping and handling charges, higher water and
electricity bills, and an increase in the General Sales Tax
by 10 percent. He added that "If I used to pay a worker YR
600, now I have to pay him or her YR 1,000."


10. (C) The Yemeni Association for Consumer Protection
holds both the ROYG and the traders responsible for the price
increases. According to Mansour, while merchants and traders
are raising their prices at capricious rates, sometimes at 50
percent, other times at 200 percent, the ROYG is doing
nothing about it. Shammakh cited one case in which the ROYG
allowed 30,000 bags of wheat flour to rot in a warehouse.
Mansour questioned why the MOIT withdrew a draft Consumer
Protection Law (submitted by the Association in 2006) from
Parliament in May 2007. He added that the ROYG has not raised
the salaries of its employees to keep up with inflation. He
opined that "in Yemen, if you are a big investor, the
government is on your side." Many observers believe that
corruption is still rampant in the basic commodity sector, at
the expense of the Yemeni consumer.

--------------
ATTEMPTS TO CURB INFLATION
--------------


11. (C) In order to control skyrocketing prices, the ROYG
has established a joint public-private sector National Food
Council, headed by the Deputy Prime Minister for Economic
Affairs, Abdul-Karim al-Arhabi, which met in May 2007. The
MOIT plans to establish a strategic stock of basic
commodities to cover the needs of the people in case of a
global price increase. Faragi said that in June 2007, the
ROYG purchased a 3-month supply of wheat from the United
States. MOIT Minister al-Mutawakel told the former DCM that
the ROYG is seeking other storage facilities in the United
Arab Emirates in order to import additional quantities into
Yemen. Four silos of wheat are in operation and another two
are under construction. According to press reports on May 7,
the ROYG had ordered the importation of cement and the
opening of new stores for direct sale of cement to lower the
cost. The Central Bank flooded the market with currency three

times in May and June 2007 in order to stabilize the exchange
rate


12. (U) The MOIT also imposed price ceilings in late May
2007 on basic goods in order to return prices to their
December 15, 2006 levels. The MOIT has published these price
list declarations in newspapers. In order to enforce these
price ceilings, MOIT told media that it has deployed field
inspection units in marketplaces throughout Yemen. Violators
of these price ceilings are subject to judicial penalties.
Faragi stated that the inspection units consisted of 45-50
people and that the MOIT is currently soliciting nominations
from governorates for more field inspectors. He noted that
if businessmen are caught violating price declarations, they
are first sent a warning. Faragi added that businessmen in
general have been cooperating with the ROYG in honoring the
price declarations. The media reported on June 13 that the
MOIT has referred 150 cases of price increase violations and
product fraud for prosecution.


13. (C) On the other hand, according to a recent report
issued by the Yemeni Association for Consumer Protection,
there has been no commitment by traders to keep prices down
or obey the price declarations. Shammakh warned that if the
ROYG imposes price controls on the market, basic commodities
would disappear from store shelves or rise by at least
another 50 percent. Several newspaper articles were
skeptical of the impact price controls would have. In a May
26 article in the "Yemen Observer," Abdul-Aleem al-Hashemi
remarked, "Thus far, nothing has stopped the juggernaut of
persisent price increases- not firm government statements,
nor orders issued by the various ministries." In a June 23
meeting with the Minister of Industry and Trade, Ambassador
Krajeski opined that price controls would not work and would
create black markets, citing the United States' experience
with price controls in the 1970's.


14. (C) While price ceilings may not be the answer to
persistent inflation woes in Yemen, experts have offered
other solutions. For example, Fadhl Mansour of the Yemeni
Association for Consumer Protection proposes that the ROYG
print out price labels for basic goods and place them
directly on the products instead of publishing price list
declarations in newspapers. He believes this would give
consumers a chance to compare prices. He advocates getting
Yemenis involved in the economic development process, which
would raise their incomes during times of global inflation.
COC Director Shammakh argues that the ROYG should have 30
silos of wheat available inside major cities like Sanaa, Taiz
and Dhamar. He added that the Central Bank could also give
merchants a loan of USD 1 billion to import an additional six
month supply of basic goods, which they would have to sell
right away, thus lowering prices. According to Shammakh, the
best way to raise incomes is to develop small-scale cottage
industries inside Yemen.

--------------
NO QUICK SOLUTIONS
--------------


15. (C) COMMENT: Despite the ROYG's contention, the
overall consensus is that price controls will not solve the
current crisis of inflation. In the short-run, the ROYG will
be hard pressed to find a quick remedy to persistent price
increases. Dramatic price increases have sometimes led to
violent reactions, as was the case during the July 2005 fuel
price hike riots. There may be light at the end of the
tunnel, however: since June 2007, wheat prices have fallen
in the United States and this may reduce wheat prices in
Yemen. In a June 23 meeting with Econoff, the MOIT stressed
that prices are finally beginning to stabilize. A long-term
strategy may hinge on increasing competition in basic
commodities and breaking monopolies in the sector.
Sustainable economic development, which creates more
infrastructure and jobs, may be the key to boosting the
national income of Yemen and stabilizing a precarious
security situation in the face of rising prices. END COMMENT.


BRYAN