NO RELIEF IN SIGHT FOR PRICE INFLATION IN YEMEN

C O N F I D E N T I A L SANAA 002193

SIPDIS

SIPDIS

NEA/ARP FOR NATASHA FRANCESCHI

E.O. 12958: DECL: 12/03/2017
TAGS: EAGR EAID ECON ETRD YM
SUBJECT: NO RELIEF IN SIGHT FOR PRICE INFLATION IN YEMEN

REF: SANAA 1343

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


1. (C) SUMMARY: High price inflation and increasing poverty
sparked numerous demonstrations throughout Yemen between
August-November 2007. The ROYG has taken only small steps to
curb inflation, many of which treat symptoms rather than
causes. The only long-term solutions may be greater
competition in the supply of basic commodities and
sustainable economic development. END SUMMARY

WORST INFLATION IN ARAB WORLD
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2. (U) Since July 2007, Yemen has continued to face high
price inflation on basic commodities, including wheat, flour,
milk, rice, cooking oil, coffee, and propane gas. During the
month of Ramadan (September 13-October 13, 2007),the cost of
one kg of flour doubled from 120 to 240 Yemeni riyals. By
comparison, benchmark U.S. wheat prices rose 40 percent
between January-August 2007, reaching USD $6.84 per bushel.
According to the World Bank, future prices of U.S. wheat are
expected to rise to USD 8.45 per bushel by March 2008, before
the new harvest arrives. In a November 13 Yemen Times
editorial, "In elegy of the loaf," Yemeni intellectual
Abdulaziz al-Maqaleh lamented that higher wheat prices have
forced merchants to reduce the size of bread loaves.
Outside of the food sector, the cost of a 20-liter propane
gas cylinder increased from 430 to 730 Yemeni riyals during
September 2007. The Arab Unity Economic Council reported in
September 2007 that inflation in Yemen was the highest among
all Arab countries, averaging 15.5 percent in 2006 -- more
than twice the UAE's inflation rate of 7.7 percent.

A HUNGRY MAN TURNS INTO A DEVIL...PREPARE FOR AN EXPLOSION
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3. (C) High prices sparked several demonstrations in Sana'a,
Taiz, Lahj, Al-Dhale'a, and Al-Mahara governorates during
August-November 2007. During one demonstration in Taiz,
thousands of people gathered outside the main building
housing the governorate offices. One of the demonstrators
held up a loaf of bread with a handwritten phrase "Yemen
Jadeed, Mustaqbal Afdal," meaning a "New Yemen, Better
Future," in an apparently ironic reference to the primary
slogan used during President Ali Abdullah Saleh's September
2006 presidential campaign. According to al-Jazeera.net, at
least one person was killed and nine wounded in price-related
clashes between Yemeni police and demonstrators in Sana'a on
September 1. ROYG Deputy Minister for Trade Affairs Iqbal
Bahader summarized the situation to Econoff on November 26
using the Arabic expression "a hungry man quickly turns into
a devil." Sana'a Chamber of Commerce and Industry Chairman
Mahmoud Shammakh warned Econoff on November 29 that "Poor
people in Yemen can only afford to eat bread and yoghurt.
Hunger is a bad thing ... prepare for an explosion."

ROOT CAUSES
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4. (C) Persistent price inflation in Yemen has a number of
causes. One is increased demand. Traditionally, prices are
higher in Yemen during the month of Ramadan because of higher
demand for basic commodities, like wheat, bread, and cooking
gas related to holiday celebrations. (Note: Prices of basic
food commodities typically go up during Ramadan and stay up
after Ramadan, while the prices of other goods, like clothes,
go up during Ramadan but fall afterwards. The year 2007
followed the same pattern. End note) Additionally, the high
oil prices (see para. 7) have led to higher remittances from
Yemenis working in Gulf countries. These higher remittances
increased the amount of funds available to Yemenis for
purchases and therefore further drove up demand for food and
other consumer goods, as did an eight percent increase in
public sector salaries during Ramadan (see para. 11).


5. (C) Limited supply is the second factor driving Yemeni
price inflation. Bahader noted to Econoff that environmental
events such as floods in Vietnam, storms in Bangladesh and
increasing desertification in Australia have cut deeply into
the international supply of foodstuffs. Additionally, the
ROYG Ministry of Agriculture and Irrigation reported on
August 26 that locust infestations inside Yemen cost the
economy 600 billion Yemeni riyals. Finally, the shortage of
agricultural land and irrigation water in Yemen forces the
country to import most of its food. (Note: A large portion
of the water supply is allocated to the production of qat.
End note.) According to the World Bank, Yemen is the
15th-largest importer of wheat in the world, buying two
million metric tons per annum.


6. (C) According to Bahader, the devaluation of the US
dollar is a third factor in Yemeni's price inflation spike.
The Yemeni riyal is pegged to the U.S. dollar and therefore
loses purchasing power whenever the USD does.


7. (C) Senior World Bank Economist Ali Abdulrazzaq told
Econoff on November 29 of a fourth driver of price inflation:
oil prices. The high price of oil drives up the cost of
agricultural production and freight costs. Also, as
mentioned in para. 4, higher oil prices lead to higher
remittances from Yemenis working in the Gulf, which in turn
leads to increased demand for goods and services inside
Yemen, thus driving up prices.


8. (C) Other experts point to other underlying structural
reasons for price inflation in Yemen. In a November 27
meeting with Poloff, Abdallah al-Manakhi of the Yemen
Consumer Protection Association said that there is a lack of
competition and that the supply of basic commodities is
controlled by a cartel of 10-15 major trading families. He
added that the variety of products is especially limited for
low income people in Yemen, who he said are "forced to eat
anything (including) low quality and expired goods."
According to several media reports, tons of wheat have rotted
in warehouses throughout Yemen. During an August 14 speech
at the Fourth General Conference of the Cooperative
Agricultural Union, President Ali Abdullah Saleh blasted
major wheat importers, who "monopolized the marketing of
wheat and do not respect the government or the Yemeni
people."


9. (C) Shammakh linked price inflation to "corruption,"
which is rampant on a variety of levels, including bribes
offered in the marketplace and the exorbitant customs duties
charged on imported goods, which drive up prices. Shammakh
told econoff that "20 percent of the cost of every product is
attributable to corruption."

GOVERNMENT INTERVENTION TOO LITTLE OF THE WRONG MEDICINE
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10. (C) Not much action has been taken by the ROYG to combat
price inflation, and most people are resigned to continued
high prices. Deputy Minister of Trade Bahader indicated that
the ROYG has still not built any of the ten grain silos
promised by Minister of Industry and Trade Yahya Mutawakel on
July 29. Bahader further noted that the Ministry of Industry
and Trade (MOIT) marketplace field inspection units deployed
in marketplaces throughout Yemen to ensure that merchants are
complying with price ceilings are more of a monitoring than
enforcement mechanism. These units simply record marketplace
activity, according to Bahader, but do not enforce price
ceilings or refer violators to prosecution.


11. (C) Although the ROYG has not taken much action overall,
it has undertaken some steps to curb high prices. For
example, in August, President Salah announced that the ROYG
would support wheat farmers in Wadi Hadramout, Tehama,
Baihan, Al-Boun, Al-Jawf and Marib and would buy their
produce at a premium over the market price. The ROYG has
also authorized the parastatal Yemen Economic Corporation
(YECO) to import 600,000 tons of wheat and directly market it
to the public at cost, in competition with the four major
private traders. ROYG Minister of Industry and Trade
Mutawakel has pushed to amend Article 28 of the Foreign Trade
Law regarding non-Yemeni importers in order to boost
competition in basic commodities, thus leading to a reduction
in prices. The ROYG has also sought to increase its imports
of wheat. In August and September 2007, it imported an
additional 201,600 tons from the United States and in October
2007 secured USD 70 million in funding from the Arab Trade
Financial Program of the Arab Monetary Fund to import wheat
from Syria. Finally, the ROYG increased public sector
employee salaries by 8 percent during the month of Ramadan;
Bahader said that the ROYG would increase salaries even more
by the end of November. As of December 2, however, the ROYG
had announced no such salary increases.

MIXED OUTLOOK ON FUTURE PRICES
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12. (C) As World Bank economist Ali Abdulrazzaq pointed out,
inflation is high compared to previous years. In 2005, food
price inflation was only 12-13 percent. It jumped to nearly
30 percent in 2006 and is expected to be between 16-20
percent by the end of 2007. Some experts feel that food
price inflation may be lower during the first or second
quarter of 2008, but this all depends on oil prices and the
prices of commodities in the international marketplace.
COMMENT
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13. (C) As noted in reftel, there are no quick fixes to
price inflation in Yemen. The ROYG is at a loss as to how to
respond. Raises in public sector salaries will not solve
the problem, as higher incomes increase the demand for
consumer goods and thereby worsen inflation. High oil prices
will, likewise, continue to fuel inflation. Since Yemen is a
major importer of basic commodities, it will always be
vulnerable to fluctuations in the world marketplace. The
only way out will likely be greater competition in the supply
of basic commodities and sustainable economic development in
key areas like agriculture, fisheries and tourism. End
comment.
SECHE