IF THE YEMENI GOVERNMENT IS RUNNING OUT OF MONEY,

C O N F I D E N T I A L SANAA 000541

SIPDIS

SIPDIS

STATE FOR NEA/ARP (FRANCESCHI AND BAGWELL)
STATE FOR EEB

E.O. 12958: DECL: 03/26/2018
TAGS: EAID ECON EFIN PREL YM
SUBJECT: IF THE YEMENI GOVERNMENT IS RUNNING OUT OF MONEY,
WHY IS IT RAISING SALARIES?

REF: A. 2007 SANAA 01343

B. 2007 SANAA 02193

Classified By: Ambassador Stephen A. Seche, per reasons 1.4 (b) and (d)


1. (C) SUMMARY: The ROYG apparently does not have enough
revenues to cover its expenses. Against this background, it
has promised to increase salaries, pensions and social
welfare payments by USD 372 million. Raising General Sales
Tax revenues, reducing smuggling/tax evasion, eliminating
"ghost workers" and liquidating Yemen's foreign reserves may
offer some hope, but Yemen's decision to raise salaries is
ultimately likely to worsen the economic situation and drive
the country deeper into crisis. END SUMMARY

YEMENI GOVERNMENT IS OUT OF MONEY
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2. (C) In a March 24 meeting with Econoff, Tax Authority
Chair Ahmed Ghaleb admitted that current government
expenditures are greater than current government revenues,
and that the ROYG may not have enough funds to cover
salaries. He stated that total expenditures for 2007 were
525 billion Yemeni Riyals (YR),whereas total revenues were
only YR 450 billion. He gave Econoff a breakdown of 2007
expenditures:

-- Wages and Salaries: YR 425 billion
-- Subsidies: YR 600 billion
-- Interest Payments: YR 150-200 billion
-- Social Welfare Payments: YR 150 billion


3. (C) Ghaleb's statement confirmed fears Post has heard
previously. On March 3, the Saudi Ambassador told POL/E
Chief that he was seriously concerned with the financial
situation of the ROYG. He said that he had recently spoken
to Minister of Finance Numan al-Suhaibi, who told him that,
in the coming months, the ROYG will reach a point where it no
longer has sufficient funds to pay salaries. In addition to
worrying about how the ROYG would meet its payroll, he
expressed concern that the ROYG will not be able to pay the
USD 3.5 billion it needs to subsidize fuel prices. He
predicted the price of fuel will double or triple and noted
that the last time fuel prices increased in July 2005, it led
to rioting in the streets (Note: Although Yemen is an
exporter of oil, its very limited refining capacity leaves it
dependent on imported fuel. End note.)

SEVERAL FACTORS BEHIND LACK OF REVENUES
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4. (U) There are various factors behind the shortfall in
revenues. In 2007, crude oil production dropped by 12.2
percent. Additionally, higher oil prices have translated
into the higher costs for the oil subsidies which the ROYG
provides the general population. In a February 23 speech to
Parliament, Prime Minister Ali Mujawar reported that between
2006 and 2007, the oil subsidy's share of the general budget
increased from 21.2 percent to 30 percent. He opined that
the ROYG may not be able to economically sustain the oil
subsidy and may have to cut it. (Note: Post has received
mixed signals about the potential oil-subsidy cut. The
Ministry of Oil and Mineral Resources denied that the subsidy
will be cut, whereas the World Bank anticipates that the ROYG
will implement a partial reduction of the oil subsidy later
in 2008. End note.) A third factor behind the budget
shortfall is the high inflation rate, which was around 14
percent in 2007. During 2007, however, the prices of many
basic commodities, including bread, doubled (reftel A and B).
Inflation is aggravated by the declining value of the Yemeni
riyal, which is pegged to the USD. Widespread smuggling and
tax evasion have also contributed to low revenues.

NEVERTHELESS, THE ROYG OFFERS HIGHER WAGES
--------------


5. (U) Despite the shortfall in revenues, the ROYG announced
a new round of increases in wages, pensions and social
welfare benefits in March 2008. Senior World Bank Economist
Ali Abdulrazzaq told Econoff on March 25 that the new
measure, intended to mitigate the effect of rising inflation,
has three prongs: The first is increased wages for all civil
service and military personnel (an estimated 1.2 million
persons) by YR 3,000 (USD 15) per month, thus adding some YR
44 billion to the annual wage bill. The second is increased
monthly pensions for all retirees by YR 1,500, with an annual
cost of YR 4.8 billion (USD 24 million). The third is
doubling the poverty allocations under the Social Welfare
Fund (SWF),with an additional cost of YR 25 billion.

Abdulrazzaq estimated the total annual cost of the new
package is about 74 billion Yemeni riyals. He concluded that
for 2008 alone, these provisions will cost about YR 62
billion, thus contributing to widening the budget deficit
from 6.8 to 7.3 percent of the GDP.

MITIGATING FACTORS TO THE DECREASE IN REVENUES
-------------- -


6. (C) Ghaleb hopes that, to fill the gap between revenues
and expenditures, the ROYG will implement a General Sales Tax
in 2008, which would raise an additional YR 1 trillion. He
also said that the ROYG will crack down on smuggling and tax
evasion, which would raise additional revenues. In 2007, the
Ministry of Civil Service embarked on a Civil Service
Modernization Project, which will eliminate thousands of
"ghost workers" or "double dippers" (i.e. where one person
holds multiple jobs on paper and receives multiple salaries)
through the issuance of biometric identity cards and the
creation of a civil service identification system. In
addition, Abdulrazzaq believes that the ROYG has USD 5-6
billion in foreign reserves which it can use to compensate
for the decrease in revenue. As a result, he expects the
ROYG to fulfill its promise of March 2008 salary increases,
at least in the short term.

COMMENT
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7. (C) Already facing unrest in the North and South,
inflation and terrorism, the Saleh regime can ill-afford a
budget crisis. Trying to fight inflation with wage increases
shows a profound failure to understand basic economics. To
paraphrase a famous speech by Libyan Leader Muammar
al-Qadhafi, "Yemen is standing on the brink of an economic
cliff and its plans to increase wages may constitute a giant
step forward."

SECHE