ROYG CLAIMS IT IS COMMITTED TO REFORM, REMOVING

UNCLAS SECTION 01 OF 02 SANAA 000716

SIPDIS

NEA/ARP FOR ANDREW MACDONALD,
USAID FOR CHRISTOPHER KISCO

E.O. 12958: N/A
TAGS: AID EAGR EAID ECON EFIN ETRD GCC PREL YM
SUBJECT: ROYG CLAIMS IT IS COMMITTED TO REFORM, REMOVING
FUEL SUBSIDIES

REF: 08 SANAA 256


1. SUMMARY: In a departure from the recent past, the ROYG
has demonstrated a new commitment to economic reform by
revealing plans to remove diesel subsidies and extending
civil-service reform to the military and security services.
The reform agenda is being considered at the highest levels
of the ROYG, including the cabinet and the prime minister.
Emerging in the aftermath of the third Post-Consultative
Group (CG) meeting, the ROYG's new reform posture appears to
be a direct result of united donor dissatisfaction.
Continued donor coordination and pressure on the ROYG appears
to be the main hope for pushing economic reform in Yemen.
END SUMMARY.

FINALLY: THE ROYG WILLING TO REFORM?
--------------


2. Despite being either unwilling or unable to remove fuel
subsidies in recent years, the ROYG appears newly determined
to move toward economic reform by eliminating diesel
subsidies. According to Deputy Prime Minister for Economic
Affairs and Minister of Planning and International
Cooperation Abdulkarim al-Arhabi, a plan with President
Saleh's full support was submitted to the cabinet for debate
on April 7. The plan involves three scenarios to remove fuel
subsidies, each having different effects upon inflation and
the poverty level. On April 13, Prime Minister Ali Mohammed
Mujawar also reaffirmed the ROYG's commitment to reform,
echoing Arhabi's words about ROYG plans to remove diesel
subsidies and citing ROYG plans to extend civil-service
reform to the military and security services. Press reports
in the government media on April 18 indicated that a ROYG
effort to issue biometric IDs to civil-service employees had
identified 60,000 people earning two or more salaries and
28,000 retirees still drawing salaries.


3. Mujawar told a small group of representatives of key
donor countries and institutions that, by the end of the
month, he expects a ROYG decision on removing diesel
subsidies. The latest reform effort also takes into
consideration the negative impact of this decision. The ROYG
plans to institute compensatory income support to the poorest
segments of society along with an accompanying public
awareness campaign. Familiar with the debate about removing
diesel subsidies, Mujawar expressed concern about the
inflationary impact and the public reaction. (NOTE: In 2005,
an attempt to abolish diesel subsidies led to riots. END
NOTE.) Mujawar indicated that the YR 240 billion in savings
would be diverted to the Social Welfare Fund (SWF).

DONOR PRESSURE AS THE DRIVING FORCE
--------------


4. ROYG movement toward removing fuel subsidies emerged in
response to intense donor pressure prior to, during, and
following the 3rd Post-Consultative Group (CG) meeting held
in Sanaa on April 5. Western donors have consistently
criticized the lack of progress in Yemen, particularly in the
implementation of projects and coordination with the donor
community. The April 5 meeting was one of the first
instances when donors spoke to the ROYG publicly with a
united voice. They urged the ROYG to use the Mid-Term Review
process as an opportunity to identify priority reforms in the
short-term and to take action. Arab donors are also showing
greater interest in coordination with Western counterparts.
Director General of External Economic Relations of the Gulf
Cooperation Council (GCC) Dr. Abdel Aziz Abu Hamad Aluwaisheg
said the GCC is interested in more regional cooperation. He
said that the GCC has much to learn from Western donors in
terms of sustainable development. (NOTE: GCC ambassadors
resident in Sanaa play a direct role in supervising aid to
Yemen and are an important but currently underutilized
network for coordination with the greater donor community.
One reason for this is their lack of participation in the
established donor coordination process. END NOTE.)

COMMENT
--------------


5. Debating the removal of subsidies in the cabinet and at
the prime ministerial level is promising, but it is only the
first step. The plan will be publicly unpopular, potentially
destabilizing, and strongly resisted by other segments of the
ROYG that benefit from the current system. Removing diesel
subsidies is one part of a larger reform process, which must
involve concrete action on reforms and greater coordination
with the donor community. END COMMENT.

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