ROYG COOLING ON LIFTING SUBSIDIES

C O N F I D E N T I A L SANAA 001146

SIPDIS

FOR NEA/ARP:AMACDONALD

E.O. 12958: DECL: 06/23/2019
TAGS: ECON EFIN EAID YM
SUBJECT: ROYG COOLING ON LIFTING SUBSIDIES

REF: SANAA 716

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

Summary
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1. (C) In contrast to the enthusiasm expressed in April, the
ROYG now seems less interested in following through on the
lifting of diesel subsidies. Never popular with the average
Yemeni, lifting subsidies probably seems less important now
that rising oil prices have removed some of the fiscal
pressure on the ROYG. Although reformers still recognize the
importance of the move, it is unlikely to happen until the
political situation in Yemen stabilizes. End Summary.

Lukewarm on Lifting Subsidies
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2. (C) Deputy Finance Minister Jalal Yacoub recently told
EconOff that the ROYG had decided to put its initiative to
end diesel subsidies on hold. When the Ambassador raised the
issue with Deputy Prime Minister for Economic Affairs and
Minister for Planning and International Cooperation
Abdulkarim al-Arhabi, Arhabi gave a lukewarm response saying
that a number of scenarios had been presented and the Prime
Minister was considering the issue. Arhabi also noted the
need for an effective public-information campaign to be
undertaken before subsidies were lifted, as an essential
ingredient in avoiding the negative public reaction that
greeted the 2005 attempt. The World Bank is designing this
communications strategy, he said. These remarks are a strong
contrast to what was said in April (reftel),when a much more
positive Arhabi lauded the plan to lift the subsidies and
Prime Minister Ali al-Mujawar said he expected a decision on
them "by the end of the month."

Where Did the Enthusiasm Go?
--------------


3. (C) There are several reasons why the ROYG may be moving
away from lifting subsidies. The idea was never popular with
Embassy contacts outside of the donor community. Abdulhakim
al-Eryani, Director of the Foreign Minister's Officer, told
POL/E Chief in May, "Now is not the time (to lift subsidies).
It may be the logical next step but you have to choose your
moment. If they lift the subsidies now, what happened in
2005 (when civil unrest ensued) will be multiplied." Sheikh
Kamal Mohammed al-Shareef, leading Sheikh in the town of Bani
Hushaish, told POL/E Chief in April, "there must be a better
way to get the money that they need." Assistant Secretary
General Mohamed al-Sadi of the opposition Islah party warned
in early June that the Yemeni people, "won't stand for"
lifting the subsidies. Even donor-country diplomats concede
that lifting subsidies will be unpopular. On June 20, when
POL/E Chief commented that the ROYG was backing away from the
idea, German DCM Michael Reuss laughed and said, "because
they can't."


4. (C) The ROYG may also feel less need now to lift the
subsidies. With oil prices hovering in the high $60s bbl
range, there is substantially less fiscal pressure on the
ROYG than in March when it was hovering in the low $40s bbl.
(Note: The current ROYG budget was prepared based on an
assumed price of $45 bbl. End Note.) Additionally, the
intensification of unhappiness in Yemen's southern
governorates amplifies the risks to the regime of taking such
an unpopular step.

Still a Good Idea
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5. (C) Reformers nonetheless continue to recognize the
importance of lifting subsidies. On May 24, the EU issued a
communique urging, among other things, the lifting of
subsidies in an attempt to keep the ROYG focused on this
issue. Dr. Mohamed al-Qubati, Director of Foreign Relations
of the ruling General People's Congress, told POL/E Chief on
June 23, "most of the benefit of the subsidies goes right
into the pocket of the diesel smugglers (who buy at the
subsidized price and then sell the diesel outside of Yemen at
the free-market price). That,s a lot of money every year
going to people who do not need it."

Comment
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6. (C) Getting rid of fuel and other subsidies is an
important part of economic reform for Yemen in the long-term.
The considerable cost of the subsidies is a drag on Yemen's
beleaguered budget and the disparity between the subsidized
and free market price is an inducement to corruption. Until
current conditions stabilize, however - and the ROYG mounts
its national communications strategy - it is unlikely that
the ROYG will be willing to take such a politically risky
step. End Comment.
SECHE