YEMEN: INTEREST IN INVESTMENT STAGNATES AS

UNCLAS SANAA 001582 SIPDIS NEA/ARP FOR ANDREW MACDONALD USAID FOR CHRIS KISCO DEPT OF TREASURY FOR BRIAN MCCAULEY USTR FOR JASON BUNTIN DEPT OF COMMERCE FOR TYLER HOFFMAN E.O. 12958: N/A TAGS: ECON EINV EFIN YM SUBJECT: YEMEN: INTEREST IN INVESTMENT STAGNATES AS INTEREST RATES FALL ¶1. SUMMARY: The Central Bank of Yemen (CBY) has reduced interest rates in Yemen twice in the last six months, ostensibly in an attempt to stem inflation. The reduction in interest rates appears to have had little effect on investment in Yemen. The ROYG has not shown an inclination to introduce a policy of economic growth, investing more than it saves (initially) in order to gain the capital to increase production levels. END SUMMARY. ¶2. The Central Bank of Yemen (CBY) has reduced interest rates in Yemen twice in the last six months, ostensibly in an attempt to stem inflation. The CBY reduced interest rates from 13 to 12 percent in January 2009 and reduced them again to 10.5 percent in May 2009. Ibrahim al-Nahari, Sub-Governor for Foreign Banking Operations at the CBY, told EconOff on August 11 that the CBY is reducing interest rates to sterilize excess liquidity in the market. According to Nahari, the CBY has successfully managed to reduce the real inflation rate from last year's 10 percent to the current levels of 1.5 to 1.8 percent. Amin Mohie al-Din, Director of the Central Statistical Organization (CSO),confirmed to EconOff on August 23 that the Consumer Price Index (CPI) has fallen in the last six months. (Comment: While the CBY and CSO both conduct surveys of inflationary trends, there is no smooth relationship between the two organizations or the statistics that they produce. Since the numbers that they produce differ, it is more useful to examine if their trends are similar. End Comment.) ¶3. The reduction in interest rates appears to have had little effect on investment in Yemen. Nahari told EconOff that the CBY has seen steady growth in deposits over the last year and a half. Specifically, deposits in commercial banks have grown by 25 percent from January 2008 to June 2009. The growing amount of deposits has not resulted in increased loans. In fact, the amount of credit available has only increased very minimally. According to Nahari, the volume of trade has increased, signaling more integration with the world economy. (Comment: While an increase in the volume of trade is a positive sign, Nahari could not identify how much trade had increased, which suggests that it was nominal at best. End Comment.) ¶4. COMMENT: In the short-term, the CBY appears to have the upper hand on curbing inflation by reducing interest rates. In the long-term, interest rate reduction could lead to capital flight. Yemen's deep-seated problems with low investment levels are more often due to a poor investment climate than interest rates. The ROYG has not shown an inclination to introduce a policy of economic growth, investing more than it saves (initially) in order to gain the capital to increase production levels. END COMMENT. SECHE