Yemen has shown economic improvement following 15 years of internal unrest, including the 1990 unification of North and South Yemen and the costly 1994 civil war. As a condition for a 1995 loan from the International Monetary Fund (IMF), Yemens government has been attempting to implement an economic reform program that includes banking reform, privatization of state-run industries, major infrastructure investment, and reduction or elimination of government subsidies, including wheat, flour, diesel/gasoline, and utilities. However, progress has been slow as a result of resistance to reform, sales taxes, and cuts in subsidies.
Oil income makes up an estimated 65-70 percent of total Yemeni government revenue, although oil production has been falling. Overall, Yemens economy benefits from high oil prices, which increase the countrys hard currency receipts and remittances from Yemeni workers in the wealthier Persian Gulf countries. However, high oil prices also increase the countrys expenditures on petroleum product subsidies, which cost hundreds of millions of dollars per year and constitute a heavy burden on the countrys budget. Yemens real gross domestic product grew 2.7 percent in 2004, and is projected to grow 3.3 percent in 2005.
Under terms of its agreements with the IMF and World Bank, Yemen is required to initiate privatization of most sectors of its economy. The countrys privatization program aims to boost economic growth, while improving standards of living and access to critical resources (such as power and water). The plan aims to encourage private investment in agriculture, fisheries, and oil, and selling off the governments stake in companies throughout the Yemeni economy. Some companies are to be offered for tender or auction, while others are to be sold by private subscription. The government also is seeking to create a more attractive climate for foreign investment, as well as to join the World Trade Organization (WTO). State-owned businesses cited as candidates for privatization include farm and agricultural cooperatives, construction companies, power stations, public housing facilities, refineries, the states petroleum retail network, shipping companies, and the state telecommunications company. Progress toward privatization, however, has been slow. In 2002, for instance, the countrys privatization initiative faced a setback when price controls were reintroduced for some commodities, mainly foodstuffs. Also, the government has found it difficult to roll back subsidies, with attempts during July 2005 met with rioting and unrest (in late July, the government partly rolled back the price increases).
Security remains a concern of foreign firms doing business in Yemen, particularly after the USS Cole was attacked in October 2000, and the French-flagged oil tanker Limburg was attacked off the Yemeni coast on October 6, 2002. Since then, Yemen reportedly has instituted a variety of maritime security measures, particularly at Aden and Hodeidah ports. Still, problems remain. Meanwhile, kidnappings of foreigners, including oil workers, have also been a problem. In addition, there have been periodic attacks on an oil pipeline in the Marib region of eastern Yemen, which is operated by U.S.-based Hunt Oil. The Canadian oil company Nexen, which operates the Ash Shihr/Al Mukalla oil export terminal, agreed in January 2003 to provide assistance to the Yemeni government in improving security.
Yemen held parliamentary elections in April 2003 and is scheduled to hold presidential elections in 2006. Political stability in Yemen is critically important to regional oil producers, given that Yemen sits at the entrance to the Bab el Mandab strait, which links the Red Sea to the Indian Ocean. The strait is one of the most strategic shipping lanes in the world, with an estimated 3 million barrels per day (bbl/d) oil flow (for other major oil shipping routes, please see our World Oil Transit Chokepoints report. Disruption to shipping in the Bab el-Mandab could prevent tankers in the Persian Gulf and the Gulf of Aden from reaching the Suez Canal/Sumed pipeline complex, instead diverting them at great cost around the southern tip of Africa (the Cape of Good Hope).