Drop in oil income leads to Yemen budget deficit in 2009

SANA'A, Dec. 05 (Saba)- The
budget figures reported by the Central Bank of Yemen have marked a drastic
deterioration
of government finances in 2009 after the budget deficit increased to 8.3% of GDP,
from just 2.7% in 2008.
The sharp increase in the budget deficit was a direct result of the sharp drop in
global oil prices on which Yemen relies for the vast majority of its government
revenue.
While the fiscal challenges facing Yemen are numerous, its position as one of the
poorest countries in the world, and its role in recent global terror attacks will
continue
to make it eligible for both low-cost loans from multilateral organisations and
bilateral aid from its neighbours in the Gulf and elsewhere. This financial
assistance was
expected as well as planned austerity measures and new income streams, to gradually
reduce the fiscal deficit over the medium term, to under 4% in the medium-term
forecast.
Figures from the Central Bank of Yemen reported a drastic deterioration in Yemen's
fiscal position during the 2009 fiscal year, due in large part to the sharp drop in
global
crude oil prices during the same period.
The country's deficit reached 501 billion rials (US$2.5 billion) last year.
Including both exports and domestic sales, oil and gas revenue fell to 12% of GDP
in 2009, from
nearly 24% in 2008. Crude oil export earnings alone plunged 55% year-on-year (y/y)
to just 377.7 billion rials as prices dropped and production continued to decline.
Non-oil
revenues posted a much milder decline on the other hand as an increase in tax
revenue helped offset a decline in non-tax non-oil income.
Tax revenues jumped 9.3% y/y to 406 billion rials, from a revised 371.4 billion
rials in 2008. Recent efforts to streamline and enhance tax-collection methods and
the introduction
of a nationwide sales tax helped boost indirect tax revenue by 15.6% y/y to 194.8
billion rials while direct taxes increased slightly to 211.2 billion rials, from
202.9 billion
rials in 2008.
The gain in tax revenue was offset by a 30.2% y/y drop in non-oil non-tax revenue,
which fell to 105.4 billion rials in 2009 due in part to the streamlining of
tax-collection
methods, as fee income was reduced. Grants on the other hand were up to 20.7 billion
rials from 14.2 billion rials in the previous year. Including grants, total revenue
fell
35.9% y/y to 1,276.6 billion rials.
Due to tight fiscal conditions in previous years, authorities had little room to
boost spending to counteract the impact of the global economic slowdown
domestically in
2009, and total expenditures actually fell by nearly six percentage points to around
30% of GDP.
Most of this decrease was reflected in decreased current outlays, which dipped
20.9% y/y to 1,476.3 billion rials. Public-sector wages and subsidies, and transfer
payments-the
two largest government outlays-both registered declines in 2009.
Government efforts to reduce the size of its bloated civil service bill through
early retirement programmes resulted in a 3% decline in spending on wages during
2009 (559
billion rials). Lower global crude prices and, to a limited extent, reductions in
government energy subsidies helped bring down Yemen's total spending on transfers
and subsidies
to 568.6 billion rials last year, from 940.4 billion rials in 2008.
While current transfer payments remained largely unchanged at 171.6 billion rials,
spending on subsidies dropped 48.1% y/y to 397 billion rials. Current expenditures
continued
to represent 80% of government expenditures. Development expenditures also declined
slightly in 2009 to 297.8 billion from 300.4 billion during the previous year.
Over 30% of government spending had to be funded via non-revenue sources in 2009,
up from just over 10% in 2008. The vast majority of this came from domestic
sources, with
commercial banks lending the government 262.9 billion rials in 2009 and the Central
Bank of Yemen providing another 176.1 billion rials of funding. Including government
deposits
held at the central bank, net domestic public debt increased to around 16% of GDP
(961 billion rials) in 2009, from 8% of GDP in 2008.
Yemenis have been aware of the need to plan for a future without oil for some
years, but rising, record high international crude prices through 2008 temporarily
reduced
the need for immediate action.
After a spate of reforms in the early 2000s, progress has largely stalled in recent
years, particularly on the fiscal front. Although the authorities have continued to
reformulate
regulations that encourage foreign investment, such as setting up a one-stop shop
for business registration, financial reforms that are necessary to create
sustainability
in Yemen's fiscal accounts have lagged.
While Yemen's fiscal challenges are numerous, its position as one of the poorest
countries in the world and its role in recent global terror attacks will continue
to make
it eligible for both low-cost loans from multilateral organisations, and for
bilateral aid from neighbours in the Gulf and elsewhere.
The sharp deterioration in Yemen's fiscal position during 2009 is a direct result
of the steep drop in global crude oil prices experienced last year and its severity
is
expected to be a one-off event. With a new liquefied natural gas export stream,
planned fiscal austerity measures under the International Monetary Fund's
US$370-million loan
programme, higher global crude oil prices, and growing financial assistance from the
international community due to concerns about Yemeni-based terrorist cells, should
all
help ease budgetary pressures in the near term.
IHS Global Insight expects financial assistance, as well as planned austerity
measures and new income streams, to gradually reduce the fiscal deficit over the
next several
years back to under 4% in the medium term.
Nonetheless, authorities will need to remain committed to enacting painful
austerity programmes, including reducing a bloated government payroll and reforming
its costly
subsidy programme for budget deficits to come down.
Source: IHS Global Insight