YEMEN ARAB REPUBLIC Development of a Traditional Economy Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

A WORLD BANK COUNTRY STUDY PUB-2057

Public Disclosure Authorized YEMEN ARAB REPUBLIC Development of a Traditional Economy Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

JANUARY 1979

YEMENARAB REPUBLIC Development of a Traditional Economy

Europe, Middle East and North Africa Regional Office The World Bank Washington, D.C., U.S.A. The World Bank issues country economic studies in two series. This report is a working document and is, as such, part of an informal series based wholly on materials originally prepared for restricted use within the Bank. The text is not meant to be definitive, but is offered so as to make some results of internal research widely available to scholars and practitioners throughout the world. A second, more formal series entitled World Bank Country Economic Reports is published for the Bank by The Johns Hopkins University Press, Baltimore and London. Titles of these and all other Bank publications may be found in the Catalog of Publications, which is available free of charge from World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. This report is a free publication. A small charge may be made if airmail postage is required. The views and interpretations in this report are the authors' and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. Copyright © 1979 The International Bank for Reconstruction and Development/The World Bank The World Bank enjoys copyright under Protocol 2 of the Universal Copyright Conven- tion. Nevertheless, reproduction of any part of this report is hereby granted provided that full citation is made. CURRENCY EQUIVALENTS

Currency Unit: Yemen Rial (YR) YR 1 = 100 Fils

Currency Equivalents1/: - Before February 1973 YR 1 = US$0.20 US$1 = YR 5.00

Since February 1973 YR 1 = US$0.22 US$1 = YR 4.50

Fiscal Year: July 1 to June 30

1/ No par value for the Yemen Rial has yet been declared to the IMF. All exchange transactionsare effected at the Central Bank rate which has been pegged to the US dollar since February 1973.

YEMEN ARAB REPUBLIC: DEVELOPMENT OF A TRADITIONAL ECONOMY

TABLE OF CONTENTS

BASIC DATA

MAPS

PREFACE Page No.

SUMMARY AND CONCLUSIONS i

I. INTRODUCTION

A. Major Development Issues 1 B. Government Objectives 4

II. ECONOMIC GROWTH AND STRUCTURAL CHANGE 6

A. Historical Perspective 6 B. Recent Economic Growth 8 C. Level and Distribution of National Income 10 D. Regional Pattern of Development 12

III. MOBILIZING HUMAN RESOURCES 14

A. Population and Migration 14 B. Manpower, Labor Force and Employment 20 C. Manpower Planning, Education and Training 24 D. Conclusions 27

IV. STRENGTHENING THE ABSORPTIVE CAPACITY OF THE PUBLIC SECTOR 30

A. Development Planning 30 B. Public Administration 39 C. Conclusions and Recommendations

V. FINANCIAL MANAGEMENT 52

A. Budgetary Policy 52 B. The Issue of Inflation 55 C. Domestic Resource Mobilization 58

VI. EXTERNAL TRADE AND FINANCE 61

A. Foreign Trade 61 B. Services Account 65 C. Capital Flows and External Debt 66 D. Conclusions and Outlook 70 -2-

Page No.

VII. SATISFYING BASIC NEEDS 72

A. Securing Food Supplies 72 B. Providing Health Services 76 C. Spreading Literacy 78 D. Rural Development Associations 82 E. Providing Urban Infrastructure 85 F. Conclusions 89

VIII. DEVELOPING AGRICULTURE 91

A. The Agriculture Sector 91 B. Development Potentials and Constraints 99 C. Government Objectives and Programs 104 D. Options for the Future 107

IX. EARLY INDUSTRIALIZATION 112

A. Opportunities and Limitations 112 B. Recent Development and Present Industrial Structure 117 C. Government Policies and the Plan 124 D. Conclusions and Recommendations 131

X. INTRODUCING MODERN TRANSPORTATION 135

A. Development of the Transport System 135 B. The Five-Year Plan 142 C. Principal Issues 143

XI. DEVELOPMENT PROSPECTS 145

A. The Potential 145 B. The Five-Year Plan, 1976/77 - 1980/81 146 C. Principal Constraints 151 D. Major Policy Issues 152 E. Options for the Future 155

ANNEXES AND STATISTICAL APPENDIX 161-303 BASIC DATA Page 1 ot I

ARE-A POPULATION DENSITY (1976)

6 195,000 sq. km 5.5 million (end-197) 28 per square km Rate of Growth: 2% (from 1970 to 1976)

POPULATION CHARACTERISTICS (1975) HEALTH (1976) Crude Birth Rate (per 1,000) 46 Population per physician 23,256 Crude Death Rate (per 1,000) 27 Population per hospital bed 2,064

ACCESS TO PIPED WiATER (1975) ACCESS TO ELECTRICITY (1975) Occupied dwellings without 91 % of population - total 5 piped water (%) - rural 1

NUTRITION (1971-73) EDUCATION (1976) Calorie intake as % of requirements 84 Adult literacy rate % 10 Per capita protein intake (grams/day) 61 Primary school enrollment % 27 GNP PER CAPITA IN 1976/77 $390

CROSS NATIONAL PRODUCT IN 1975/76 GROSS DOMESTIC PRODUCT IN 1975/76 (market prices) Annual Growth $ million % 1969/70-1975/76 $_million percent (%, constant prices) GNP at Market Prices 1,630 100 Cross Domestic Investment 260 16 GDP, total 1,151 100 8.5 Gross National Saving 390 24 Agriculture 512 45 8.0 Cuirrent Account Balance 130 8 Industry 118 10 9.0 Export of Goods, NFS 65 4 Trade 271 23 11.0 Import of Goods, NFS 414 25 Government 113 10 10.0 Others 137 12 11.0 GOVERNMENTFINANCE

1972/73 1973/74 1974/75 1975/76 1976/77 YR Million------% of GNI Current Revenue 199 277 381 565 1,293 12 Current Expenditure 272 323 472 604 841 8 Current Balance -73 -46 -91 -39 +452 +4 Development Expenditures 57 139 185 340 463 4 External Assistance (net) 117 239 536 609 606 6 MONEY, CREDIT AND PRICES

…______----- June 30 ----- …------1972 1973 1974 1975 1976 1977 ------(YR Million Outstanding End Pericd) -----

Money Supply 348 489 640 964 2,028 3,516 Bank Credit to Gov't. Sector 103 102 70 -162 -407 -939 Bank Credit to Non-Gov't Sector 108 169 238 394 566 1,474

(Percentages of Index Numbers)

Money Supply as % of GNP 15 16 17 18 28 Consumer Price Index - .. 154 203 237 329 (1972 = IC0) 2/

Annual percentage increase 3/ in Money Supply 29 41 31 51 110 73 Consumer Price Index .. ,. .. 32 17 39

L/ The per capita GNP estimate calculated by Lhe same conversion technique as the World Bank Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. i" For Sana'a only (fiscal years) 3/ During fiscal year ending June 30. Not available BALANCE OF PAYMENTS Page 2 of 2

1973/74 1974/75 1975/76 1976/77 -$million ------

Exports of Goods, fob 14 13 12 19 Imports of Goods, cif 194 258 382 730 Trade Deficit -180 -245 -370 -711

Non Factor Services,net 14 17 21 -3 Factor Income, net 117 203 479 889 Workers' Remittances,net 112 191 457 842 InvestmentIncome, net 5 12 22 47

Balance on Current Account -49 -25 130 175

M< Capital, net 62 126 158 146 Official Grants 33 93 114 104 Official Loans, net 29 33 44 42 Disbursements 32 37 47 46 Repayments -3 -4 -3 -4 Other Capital, net 1/ 11 -3 -2 126

Increase in Reserves (-) -24 -98 -286 -447 Gross Reserves (end fiscal year) 2/ 89 187 473 920

EXTERNAL DEBT, JUNE 30, 1977 MERCHANDISE EXPORTS (AVERAGE 1975./76-1976l77) $ million %

Total outstanding 529 Cotton and Cotton Products 51 of which disbursed 292 Coffee 18 Rides & Skins 14 DEBT SERVICE RATIO24 OR 1976/77 All other commodities 17

Z Total 100

Total outstanding and disbursed 1

RATE OF EXCHANGE

Through Feb. 1973 Since Feb. 1973

US $ 1.00 = YR 5.00 US $ 1.00 - YR 4.50 YR 1.00 = US $0.20 YR 1.00 - US $0.22

1/ Includes errors and omissions. 2/ Central Bank holdings. 3/ Includesworkers' remittances. IBRD 13492R tuA MAY 1979 SD> SDO 44'rg S A UDI A RA BI A

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PREFACE

1. This report is based on the findings of two economic missions which visited the Yemen Arab Republic (YAR) in March/April and in October 1977. Mission members were Messrs. 0. Maiss (chief), A. Bouhabib (general economist), A. Barbu (fiscal economist), A. Elsaas (projection specialist), A. Edwards (industrial economist), E. Greenshields (agricultural economist), N. Ramachandran (planning specialist), S. Rangachar (social sectors) and B. Rao (external finance). Mr. A.Ramuglia drafted the chapter on transportation. The draft report was discussed with the Government in October 1978.

2. The aim of the report is to provide the basis for an understanding of the YAR's development issues and policies, and to serve as a reference work for persons and institutions interested in the country's economic development. The report is in three parts, the Summary and Conclusions, the Main Report and the Annexes and Statistical Appendix. The Summary and Conclusions contain the principal conclusions of the missions. Detailed analyses are presented in the Main Report. Background information and data are given in the Annexes and Statistical Appendix.

3. One of the main obstacles the missions had to cope with was the scarcity of reliable statistical data. Although much improved since the first statistical yearbook was published in 1971, the coverage and depth of socio- economic statistics is still very weak. This is explained by the fact that most modern institutions in YAR were established or started functioning, only after 1970. Since then a variety of important statistics has been prepared, including government accounts (first in 1973/74), a population census (1975) and a series of national accounts (1976). Additional data were collected in the context of preparing YAR's first 5-year plan. These are remarkable achievements for a country in this early stage of development.

4. However, large gaps of factual knowledge still exist and need to be filled to provide policy makers with a stronger base for their decisions. For instance, there is urgent need for agricultural and industrial surveys; for data on income distribution and household consumption; and for more reliable labor migration statistics. National accounts and the balance of payments still contain wide margins of error and need to be strengthened. These are only a few examples to which many more could be added.

5. Notwithstanding these statistical difficulties it is now possible to determine the broad features of YAR's present economic and social structure, to analyze major past trends, and to assess future development options. The missions' report endeavors to do this covering essentially the period 1969/70-1976/77 and looking forward toward the early 1980s. Valuable support was given to the missions by various government agencies, especially the Central Planning Organization. I SUMMARY AND CONCLUSIONS

i. Over the last few years the Yemen Arab Republic (YAR) has experienced far-reaching changes in its socioeconomic structure and the material welfare of its citizens. Following the 1962 Revolution which ended the feudal rule of the Imam and opened the country to the outside world, and after a protracted civil war that lasted till mid-1970, the new Republican Government succeeded in establishing within a surprisingly short period of time, the foundations of a modern state. Technical ministries were strengthened, essential government institutions were created such as the Central Bank and the Central Planning Organization, modern budgetary and banking practices were introduced, and a reasonable level of working effectiveness was achieved by the public administration. Tribal fragmentation, a major obstacle to political stability in the past, is gradually being overcome. Central Government control has been spreading throughout the country and continues to do so.

ii. Political integration and the growing influence of central authorities have provided the basis for a rapid development of the public and private sectors. In 1973 the Government launched a Three-Year Development Program (1973/74-1975/76) which subsequently was implemented largely with the help of foreign technical and capital assistance. In its wake, the physical infrastructure (roads, ports, electricity) was expanded and telecommunication links were built; first attempts were made at lifting agriculture, the mainstay of the economy, out of its medieval setting; industrialization was started, albeit on a small scale; modern education was spread; health services were improved; projects were initiated to build urban water supply and sewage facilities; and rural development was promoted through local development associations.

iii. More recently, especially since the quadrupling of international oil prices at the beginning of 1974, there has been an unprecedented increase in personal cash incomes based mainly on remittances by Yemenis who went to work in Saudi Arabia and the Gulf States. It is estimated that workers' remittances rose from some $40 million in 1969/70 to over $800 million in 1976/77. Largely as a result of these cash inflows YAR's per capita GNP has more than doubled in real terms since 1969/70 reaching a level of about $390 in 1976/77. While these developments, together with fast-growing government expenditures for both investment projects and public services, have greatly alleviated Yemen's traditional problems of poverty, famine and rural underemployment, they have created new ones which require urgent attention in the future.

Major Development Issues

iv. Foremost among these is the problem of manpower shortage which has become the overriding constraint to YAR's development. This shortage has been created by large-scale labor migration to neighboring oil countries which now absorb an estimated 30 percent of YAR's male labor force. At the same time, labor demand has increased sharply within the country as a result of fast-growing development programs initiated by the Government, and a rapid expansion of private business activity. Labor scarcities of both skilled and unskilled categories are pervasive throughout the economy; but they are - ii - especially pronounced in the public sector largely because real incomes of civil servants are lagging behind those offered in the private sector. This manpower shortage seriously limits the effectiveness of the public administration. v. Another major issue is inflation which averaged some 30 percent p.a. in recent years. Inflation creates distortions in resource allocation and income distribution, and tends to weaken the savings propensity of the private sector. The major sources of inflation have been a fast-growing demand for goods and services as well as physical constraints on the supply side, especially in housing and - during 1976 and most of 1977 - on imports due to congestion in the Port of Hodeidah. Domestic demand has been fuelled by workers' remittances and until recently, by a deficit in the Government's financial transactions as well as by an acceleration of bank credit to the private sector. vi. A third issue the Government faces at this point is to assure the rational allocation of its rapidly growing investment resources. During the past when funds were more limited and modern facilities were sorely lacking, the authorities found it relatively easy to select high-priority projects such as establishing the basic physical infrastructure, introducing modern education, building irrigation works, power stations or a few factories. With the rapid growth in development spending, however, the range of choices is increasing substantially and the long-term costs and benefits of individual projects will not always be as obvious as in the past. vii. In this context, it should be noted that a major change has taken place in YAR's relative factor prices. Whereas only a few years ago the opportunity cost of labor had been relatively low compared to those of capital and foreign exchange, this relationship has now been reversed. The policy implications of these changes are significant and will affect future priorities. Assuming that the present structure of factor prices is going to last for some years to come - and there are good reasons for this assumption - some preference will have to be given to more capital-intensive projects with higher import content over labor-intensive ones which are competing for scarce local resources. viii. A fourth issue concerns the proper maintenance of existing and new capital stock. So far this question has not received sufficient attention by the authorities perhaps understandably so because of the newness of most capital structures. However, as the stock of fixed capital increases - and there is visible evidence of fast-growing numbers of public buildings, roads, urban facilities, factories, power stations and irrigation schemes - the need for adequate maintenance of these facilities becomes more and more pressing. Introducing adequate maintenance programs and establishing repair facilities for machinery and equipment are therefore urgently required if past and future invegtments are not to be wasted. ix. Yet, the new problems of affluence as well as recent achievements in development, remarkable as they are, should not distract from the fact that YAR continues to face many of the problems of an underdeveloped country. Productivity levels are still extremely low, especially in agriculture which - iii - occupies about three-fourthsof the resident labor force. This reflects the very limited investmentin physical capital made so far as well as the predominance of traditionalproduction techniques. Nine out of ten adult persons are illiterateand only one out of every four children in 'theage group 6-11 is enrolled in primary schools. Over 90 percent of the population reside in rural areas, a large part of them in remote villages without access to modern transportation,schools, electricityor health services. Moreover, there are serious physical constraints to development in YAR. The country's known natural resourcesare limited and a rugged topographyposes severe obstacles for road transport. Agriculturalland and water are both scarce and few mineral deposits have been discovered so far.

Economic Growth and StructuralChange x. Since the end of the civil war in mid-1970, economic activity in YAR has expanded vigorously. GDP at constant market prices is estimated to have grown at an average rate of 8-9 percent a year between 1969/70 and 1975/ 76. Not surprisingly,economic growth was strongestin the modern sectors, reflectingthe rapid expansion of foreign and domestic trade, of government services,of transportationand finance. There was also a rapid increaseof modern cash crops as farmers took a growing interest in raising vegetables, fruits and chickens. Subsistenceagriculture, still the most important economic sector in YAR, grew at a much slower pace (about 4 percent p.a.). xi. When interpretingthese trends one has to remember that 1969/70 fell into the middle of a prolonged drought period. Agriculturalgrowth, especiallyin the subsistencesector, therefore reflects in large measure higher levels of precipitationin the final years. If this factor is eliminated one can conclude that agriculturalexpansion was essentiallyconfined to cash crops while subsistencefarming just about held its ground and possibly even declinedmarginally. xii. The expansion of the modern sectors was the result of a variety of factors. Fast growing cash incomes from workers' remittancesopened new markets for local merchants and farmers, and provided funds for private investment in housing, transportequipment, agriculture and industry. This coincidedwith a vigorous expansion of public developmentexpenditures. Ini- tially throughvarious ad hoc projects but later in a more coordinatedform through its Three-Year Program and the Five-Year Plan the Government increased its developmentspending from YR 57 million ($13 million) in 1972/73 to YR 340 million ($75 million) in 1975/76. While these expenditureshad a direct impact on the gross domestic product, they also supported private development initiatives. xiii. Although the period since 1970 is relativelyshort, it has witnessed perceptiblechanges in the structureof YAR's economy. The shares of modern agriculture,trade, transport and government services in GDP have all increased during the 1970s while that of subsistenceagriculture declined from over 40 percent in 1960/70 to less than one third in 1975/76. But even so, YAR's economy is still very much underdeveloped. The contributionsof cash farming and industry (includingconstruction) to GDP were still considerably - iv - less in 1975/76 than that of subsistence farming. Another indicator for YAR's low level of domestic productivity is its per capita GDP; with $220 in 1975/76 it ranked among the least developed countries in the world, notwithstanding the fast growth rates experiencedsince 1970.

Income Distribution xiv. While there is little doubt that average levels of income and consumption have risen steeply in recent years, it remains less clear how they were distributedand who is benefiting from the higher incomes. In the absence of empirical evidence -- as of now there are no reliable data for YAR on income distributionor household expenditures-- one is left to some general observations. Traditionally,there have been fairly wide differences in income distributionboth regionallyand by social groups. In the rural areas most people were extremelypoor suffering from recurrent crop failureswhich tended to push their incomes below the subsistenceminimum. Moreover, prevailing land tenure conditionswere such that even in times of good rainfall little savings could be made for the next drought, not to speak of farm improvements or investment in modern farm inputs. Incomes and living conditions were somewhat better in the few larger towns where trade and government expenditures provided employment opportunities. But even in urban areas, the average citizen was generallyvery poor. This contrastedwith a small number of affluent merchants and wealthy landownerswho, although not very rich in terms of western societies, enjoyed much higher incomes than the rest of the populations. xv. Recent developmentshave changed this situationdramatically. Workers' remittancessent home by migrants have gone mostly to rural areas which supplied most of the labor force that was absorbed by neighboring countries. Traditional strong family ties have ensured that a large number of people benefited from these transfers. At the same time, the vigorous expansion of modern sectors provided new employment opportunitiesin and around urban areas. Increasingly,labor scarcities developed which drove up wage rates, even in remote villages. Thus, a large share of the new cash incomes was spread throughout the country among many people who previouslyhad been desperatelypoor.

xvi. There were only few families who for one reason or other, failed to participate in the economic boom. Their real incomes are still very low and they depend on.support from the Government and charitable organizations. At the other end, there is a growing number of merchantswho exploit present supply shortages and charge excessive prices. Large profits are also being made by some qat farmers and intermediarieswho sell qat in the market. As qat is frequentlypurchased by workers who earn cash wages, a sizable amount of their earnings is being syphoned off by a small number of rich people, often at the expense of providing adequate food supplies to the workers' families.

xvii. The Government is now developing effectiveprograms to provide for the basic needs of the poor. Attempts are also being made to tax higher income groups, mainly through steep import duties on luxury goods. Another - v -

issue that requires attention by the Government is land tenure. Present traditions of crop sharing tend to distort the distribution of incomes and constrain the introduction of modern farming techniques.

Domestic and External Finance

xviii. The rapid growth in money incomes which YAR experienced in recent years, has led to a spectacular increase in overall savings far exceeding the fast growing investment level. In 1976/77, gross national savings reached the equivalent of 23 percent of GNP compared with only 7 percent in 1970/71. While this is, indeed, a very impressive achievement for a country of YAR's low per capita income, it must be borne in mind that the high savings rate was perhaps as much the result of fortuitous circumstances as of deliberate policies. Delayed consumer response to a massive growth of money incomes, together with large capital transfers made by Yemeni businessmen returning from Saudi Arabia, have swelled the pool of national savings to an extent which may not be perpetuated in future years.

xix. Most of YAR's national savings are being generated by the private sector while the government sector has had negative savings until 1975/76. This was mainly the result of a narrow tax base (8 percent of GNP) which did not allow the public sector to capture an adequate share of the country's growing money incomes. Shortage of tax revenue has also restricted the expansion of essential public services such as education, public health and maintenance programs for existing capital stock.

xx. So far the relatively low level of current revenue has not held back public investment. Generous foreign aid has enabled the Government to finance all projects and programs which it could effectively handle. Moreover, cash grants provided by Saudi Arabia have helped to ease the burden of current expenditures. Although substantial foreign aid is likely to be available in the foreseeable future, it is being increasingly supplemented by domestic fiscal resources. The longer term objective of fiscal policy continues to be to raise sufficient local revenue that the current budget can be balanced and a significant contribution can be made to the financing of government capital expenditures.

xxi. Significant progress has already been made in this respect during recent years. Current domestic revenue has risen from 57 percent of current expenditure in 1970/71 to 94 percent in 1975/76, while the current deficit has declined both in real and absolute terms. During 1976/77 the current budget yielded a large surplus and for 1977/78 a similar result is expected. These are remarkable achievements for a country of Yemen's early state of development. Continued efforts to increase the tax base together with maintaining judicious control over public expenditure could provide the resources not only for a growing share of investment finance but also for paying competitive salaries to civil servants.

xxii. The external financial position of the Yemen Arab Republic has changed dramatically in recent years. While at the beginning of the current decade foreign exchange was in short supply and a heavy debt burden forced - vi - the Government to request the rescheduling of major parts of its outstanding commitments, the country has now entered a phase of comfortable balance of payments surpluses and rapidly growing exchange reserves. The principal reason for this change must be seen in the close and friendly relations that YAR has established with Saudi Arabia and other Arab oil exporting nations whose vast and still growing wealth is spilling over into YAR in the form of workers' remittances and aid flows. xxiii. With the opening up of Yemen to the outside world YAR's foreign trade has grown rapidly. Reflecting the country's limited resource endowment and the underdeveloped state of its economy, Yemen's commodity exports are still extremely low. During 1973/74-1976/77 they averaged approximately $15 million a year, or the equivalent of about 1 percent of GDP. Most exports are of agricultural origin with cotton, coffee and hides being the three major commodities. Imports, on the other hand, have risen sharply from $87 million in 1971/72 to $730 million in 1976/77. This upsurge in import demand reflects the rapidly rising cash incomes and investment expenditures, the full conver- tibility of the Yemen Rial, and the absence of import restrictions. The increase would have been even stronger had there not been physical constraints - particularly in the Port of Hodeidah - to bring foreign goods into the country. xxiv. With exports lagging behind the rapid growth of imports, YAR's trade deficit exceeded $700 million in 1976/77, about nine times as large as in 1971/72. However, YAR's import capacity is only marginally based on its export potential and depends increasingly on its strong surplus position in the service sectors. Net earnings from workers' remittances and other services have grown even faster in recent years than the trade deficit. As a result, the balance on current account which was in deficit until 1974/75, recorded its first surplus in 1975/76 (US$130 million) which rose to $175 million in 1976/77.

Capital Flows and External Debt xxv. Since independence YAR has received substantial amounts of foreign assistance. Given the country's low per capita income and its UN classification as a "least developed country", most of the aid was provided in the form of grants and concessional loans. Although a complete over-view of all assistance received by the YAR is not possible because of information gaps, it can be estimated that cumulative aid disbursements came close to $750 million by the end of FY1976/77, of which more than half was disbursed in the last 3 years. xxvi. About three fifth of the total assistance given so far was provided in the form of non-reimbursable grants, mostly for food aid, technical assistance and more recently, budget support. The latter is being supplied by Saudi Arabia to finance current and development expenditures in the state budget. Food aid has been provided through the World Food Program and a number of bilateral donors. A large part of official grants has been made available in the form of technical assistance. Given the extreme shortage of skilled manpower in YAR this type of aid has high priority and will be needed - vii - by the country for many years to come. Besides the grants YAR received sizeable amounts of official loans and credits. Total commitments exceeded $560 million on June 30, 1977 about half of which has been disbursed. Drawings on these loans have increased in recent years, averaging $47 million in 1975/76 and 1976/77. More than three quarters of all official loans and credits have been committed for the financing of specific projects with the main emphasis on roads, agriculture, including irrigation, and utilities. The remaining funds were given for commodity assistance or as cash loans. xxvii. The terms on which the YAR has obtained official loan assistance have been very favorable. Loans from the USSR and the People's Republic of China are, for the most part, free of interest. Western European countries have generally charged between 3/4 percent and 2-1/2 percent. Interest rates charged by Arab countries have varied from 2 percent to 4 percent but Arab commodity assistance has been interest-free. Loan maturities generally range from 5 to 50 years with a median of 20-30 years. xxviii. Yemen's external public debt outstanding on June 30, 1977 was estimated at $529 million, of which $292 million was disbursed. The major creditors were IDA, USSR, China, Germany, the Arab Fund and the Kuwait Fund. IDA credits accounted for $110 million or about 20 percent of the total debt reported. Because of the very favorable terms of borrowing the debt service payments are estimated at only about $6 million for 1976/77, equivalent to less than one percent of gross foreign exchange earnings (including workers' remittances). Although service payments are expected to rise in the next few years, the burden of such payments should continue to remain small in relation to YAR's exchange earnings. xxix. In recent years YAR has accumulated large foreign exchange reserves. At the end of June 1977 they reached $920 million or the equivalent of more than 1 year's imports. This reflects rapidly rising exchange earnings, a relatively high level of foreign aid and last but not least, the country's limited absorptive capacity. Yemen's imports are still at a low level ($135 per capita in 1976/77) and are likely to grow rapidly in future years. Workers' remittances and aid inflows, on the other hand, are of more volatile nature and their volume could change substantially within a relatively short time. Yemen's present comfortable reserve position may therefore be a passing phenomenon and could be eroded quickly if recent trends in foreign exchange flows are not sustained. The reserve position has also to be viewed in the context of the country's dependence on agriculture and its vulnerability to the vagaries of weather. A repetition of the severe drought which gripped YAR from 1967-73 would necessitate the import of foodstuffs in even higher than the present volume adding substantially to the country's foreign exchange requirements.

The Five-Year Plan xxx. The Government's future development objectives are outlined in its first Five-Year Development Plan for the years 1976/77-1980/81. Building on the achievements of the Three-Year Program the new Plan endeavors to further develop the country's human and natural resources; to strengthen the - viii - physical infrastructure; to raise the productivity of the commodity producing sectors; and to improve the standard of living of the people, giving priority ;o their basic needs for food, health services, education, water supply and other community services. To achieve its objectives the Government has launched an impressive investment and manpower training program which it intends to carry out in close cooperation with foreign donors of capital and technical assistance. While continuing to rely on a market-oriented economic system the authorities foresee increasing collaboration between the public, cooperative and private sector. xxxi. The Plan envisages a GDP growth of 8.2 percent p.a. and identifies investment opportunities in all major sectors, especially in transport, agriculture, industry, housing, education and public health. The overall investment targets are very ambitious. They envisage an increase in gross fixed capital formation from $170 million in 1975/76 to $1,230 million in 1980/81, implying an annual growth rate of almost 50 percent. The overall investment volume during the five years of the Plan is to be US$3.5 billion. Although not excessive for a country of YAR's size and population (it represents an annual amount of about US$150 per capita) the steep increase in investment proposed by the Plan raises questions of technical feasibility and economic viability. xxxii. Implementation of the Plan will be an even greater challenge to the country than its preparation. Not only has the Government set very ambitious targets but it will also have to solve some of the burning issues mentioned earlier in this summary. Thus, solutions must be found to the pressing manpower shortage, especially in the government sector; inflationary pressure will have to be reduced; the tax base needs to be broadened to provide financial resources for the necessary increase in government salaries and essential public services; resources available for development will have to be allocated rationally; and effective maintenance programs need to be introduced for existing and new capital stock. xxxiii. Some progress is already being made in overcoming present constraints. One example is the port development project, sponsored by IDA, which will increase port capacity in Hodeidah and improve facilities in other ports of entry. The project is designed to meet YAR's requirement for port capacity up to 1985. The resulting unrestricted flow of imports should reduce present supply shortages thus easing inflationary pressure. In addition, measures have been taken, in consultation with the IMF, to reduce the overall budget deficit and to restrict the expansion of bank credit to the private sector. Encouraging results are also being achieved in education and manpower training. Enrollment in primary and secondary schools is growing rapidly and programs in technical and vocational training have been started. The University of Sana'a, established in 1970, now has close to 3,000 students many enrolled in technical disciplines. A large number of Yemeni students also receives training abroad. - ix -

(I) Manpower Planning

XXXiV. The Plan discusses the manpower problem at great length estimating that the labor force will have to be increased by some 100,000 persons if the investment and production targets are to be met. It is expected that most of the additional labor required can be mobilized within the country and that only a small part will have to be imported from abroad. However, the Plan is not very specific in translating these broad objectives into well-defined action programs. A crucial assumption made in this context is that the large net emigration of professionals, technicians and skilled workers experienced during the past can be halted and indeed be reversed. Failure to achieve that would raise serious questions about the feasibility of most Plan targets.

xxxv. The manpower issue will be particularly serious for the public sector which is to play a leading role in YAR's economic and social development. Although public sector salaries have more than doubled since 1976, they are still below those of the private sector or in neighboring oil countries. Consequently, not enough qualified Yemenis are willing to make their career in the civil service and some of those who take up government employment leave it as soon as they have received some training. This constant drain of skilled manpower weakens the effectiveness of government administrations and severely limits their absorptive capacity. The problem is further compounded by inefficient personnel management. Serious difficulties may therefore arise for the implementation of investment programs as well as the management and operation of new capacities to be built during the Plan period.

xxxvi. The Government will have to face up to this issue if it is to succeed in carrying out the objectives of the Five-Year Plan. As a first step, a thorough review of the compensation policy for civil servants would have to be initiated resulting in specific measures designed to make government agencies more competitive in the increasingly high cost labor market. This does not mean that massive pay increases are required across the board for all government employees. But work performed by skilled and essential civil servants should be compensated with salaries and other benefits, especially housing, representing the going market price. Equally important would be the introduction of a unified and consistent system of personnel management for the public sector. The basic principles governing the personnel policy should be to relate assignments and promotion to professional qualification and performance; to establish long-term career development programs for the civil service; and to unify remuneration and staff benefits for all government agencies.

(2) Mobilizing Tax Revenue

xxxvii. Another broad policy issue which requires attention by the authorities, concerns the need to mobilize financial resources for the public sector. The Plan documents assume that domestic revenue can be significantly increased through more effective tax collection, some improvement of the tax system, and larger profits from state-owned and mixed enterprises. But even a doubling of budget receipts, as envisaged by the Five-Year Plan, would fall short of the requirements for fast-growing public expenditures. xxxviii. There are indications that the scope for raising public revenue may indeed be larger than estimated by the Plan. For once, the increase of GNP can be expected to be bigger than foreseen by the Plan (6.8 prcent p.a.). Moreover, the projected tax revenue lags much behind the major source of taxation, i.e. imports. In addition, a thorough review of the present structure of import tariffs may well demonstrate that the revenue impact of such duties could be further enhanced. Other potential sources for additional revenue would be excise duties, sales and turnover taxes. There is also need for more effective taxation of business income and for more realistic pricing of some government services.

(3) Resource Allocation xxxix. A third issue of general concern is that of efficient resource allocation and investment programming. One of the problem areas in this respect is the weak project content of the Plan. Although a great number of projects is listed in the Plan document for the various sectors, many of them represent general concepts only and lack detailed feasibility studies. The Plan itself does not indicate the state of readiness of individual projects which makes it difficult to estimate the magnitude of this particular problem. But the dearth of information about project preparation work and implementation sched- ules raises serious questions about the economic viability of the investment program. Some Government officials feel that the economic and social benefits of many projects in infrastructure, industry and agriculture are so obvious that they need not be demonstrated in elaborate studies. They also point out that the preparation of such studies would unnecessarily hold back the implementation of urgently required investments. Priority is therefore being given by the authorities to project specific engineering and design work on which much progress has been made in the recent past. But experience in other countries shows that this approach carries grave risks. Projects may be undertaken which subsequently are not able to sustain themselves resulting in a drain on the country's resources instead of making a contribution to its welfare. Increasing emphasis should therefore be given to the use of economic criteria in project selection. xl. Closely related to the issue of project selection and design is the question as to which types of investment should be undertaken by the public sector, and which ones should be left to the private sector. The Government has correctly decided to assume responsibility, either directly through technical ministries or indirectly through public enterprises, for the development of transport infrastructure and public utilities such as electric power, water and sewerage. In the Five-Year Plan the Government has also expressed preference for investments in the industrial sector (manufacturing, mining and construction) to be carried out by mixed enterprises. While industrial ventures undertaken by private firms are also encouraged, the emphasis is clearly on the mixed sector. In many cases, however, this effectively implies public sector control of - and associated with that, responsibility for - the enterprises as the Government is likely to emerge as the principal shareholder. Public enterprises, however, are not subject to the same rigorous criteria of efficiency as private firms. Often they have automatic access to subsidies from the state budget which tends to weaken the need for effective management. - xi -

Moreover, if implicit subsidies are assured, the decision to invest on the basis of technical, rather than financial and economic criteria, is taken more easily.

(4) Maintenance Programs

xli. Last but not least, there is the issue of properly maintaining the existing and new capital stock (see paragraph viii). The Plan does not recognize this issue in its full dimensions. Current government expenditures which include the bulk of maintenance funds are projected to grow only by 10 percent p.a., starting from an inadequate level in the base year. This compares with a projected growth of fixed capital formation of 49 percent p.a., a discrepancy which clearly demonstrates the seriousness of the situation. The problem is aggravated by the fact that often budgetary allocations for maintenance are used for new investments. While this practice may have negligible implications in the short run, it is bound to incur increasingly heavy costs in the longer run as fixed capital structures deteriorate prematurely thus reducing significantly the time-span of their effective use.

Options for the Future

xlii. Plan targets can be modified and policies can be changed. In fact, the Five-Year Plan is conceived by the Government as a flexible instrument to be adjusted annually as the need arises. Some adjustments seem to be called for simply because recent changes in the economy which could not be foreseen at the time of Plan preparation, have altered the basic assumptions from which policy-makers have to operate. In addition, there are substantive questions of policy. The Plan in its present form calls for a very large investment effort. This may be difficult to achieve because of serious manpower and physical constraints. But even if these constraints can be overcome an investment volume of the magnitude envisaged by the Plan may not be in the best long-term interest of the country. Heavy economic costs could be incurred if investment projects are .conceived and carried out hastily. This could lead to a situation - and to some extent this is already happening - where physical structures are established at a faster pace than the institutions and staff required to operate and maintain them. The result would be a sub-optimal utilization of domestic and foreign resources which reflects itself in the premature decay of fixed assets.

xliii. An alternative to this approach, which deserves serious consideration, would be to adopt a more cautious investment policy designed to undertake investments only after the economic viability of specific projects has been firmly established. Adherence to this principle would not exclude projects with important social and political objectives; but special justification should be provided for economically non-viable projects. At the same time, efforts should be made to raise more tax revenue, to strengthen maintenance programs and, above all, to introduce more effective personnel management for the public sector.

xliv. Shifting resources from investment to maintenance and selectively higher government salaries may yield less spectacular results in the short run - xii -

but is likely to generate higher economic returns in the longer run. These returns are essential if the country is to mobilize the resources required for further development, and for the debt service on foreign loans with which some of the investments are being financed. Overall such a strategy would probably lead to a somewhat slower growth in investment than envisaged by the Plan. But that would not necessarily be a disadvantage. At this phase of development YAR is not in urgent need of creating additional jobs, and the relatively large size of its exchange earnings does not compel it to pursue an autarkic policy. Moreover, a combination of higher tax revenue, slower growth of investment and measures to remove physical constraints on imports would substantially slow down the rate of inflation. The principle of maximizing the welfare of the nation, which after all is the prime objective of the Plan, requires that resources are allocated efficiently and that they are not spent on uneconomic projects.

xlv. A strategy based on prudent choice of investment, on policies aimed at attracting qualified manpower to the public sector, and on adequate maintenance programs, could provide a viable frame for further economic and social development of the YAR. Illustrative projections prepared by the mission show that GNP could grow at a sustained rate of 8 percent p.a. during the next few years notwithstanding the country's limited human and natural resources. For 1981/82 this would result in a per capita GNP of approximately US$600 at present prices.

xlvi. Investment can still be expected to grow at a very rapid pace, even if a more prudent approach to project selection is adopted. However, the overall level of investment should be kept in line with the country's capacity to effectively operate and maintain existing and new facilities. Consumption is also likely to grow relatively fast largely because of the need to increase government services and because the removal of physical constraints to imports will allow private consumption to catch up with the growth of money incomes. The increase in consumption would slow down the growth of savings resulting in a slight decline of the national savings rate.

xlvii. Given the limitations on domestic supplies of goods and services much of the increase of investment and consumption will have to be met through imports. The assumptions made in the projections imply that imports will have to grow at about twice the rate of GNP. The scope for expanding exports which originate mostly from agriculture is much smaller. The trade deficit is therefore likely to grow substantially over the next few years.

xlviii. Current government expenditure should expand fast if salaries for civil servants are made more competitive with those in the private sector, and if maintenance programs are brought up to a more satisfactory level. But there is also much scope for increasing government revenue mainly through taxing imports and private consumption. Prudent fiscal and credit policies together with an unrestricted flow of imports should help to bring down recent rates of inflation to a much lower level.

xlix. In current prices the external resource gap could grow from YR 3.2 billion in 1976/77 to YR 9.3 billion in 1981/82. Most of the deficit in trade - xiii - and nonfactor services would be financed by workers' remittances. However, the current account surplus experienced in 1976/77 would gradually turn into a deficit which by 1981/82 could reach YR 1 billion (US$220 million).

1. The inflow of official capital is largely determined by the financial requirements of the public sector. Although it has been assumed in this context that public investment will grow slower in real terms than foreseen by the Plan, the current value of investment expenditures which actually determines the financing needs would be of the same order of magnitude as the constant value figures shown in the Plan (about YR 5.6 billion in 1981/82). The gross inflow of official capital is therefore taken to be the same as that shown in the Plan, i.e. some YR 6.6 billion for the five-year period. Approximately half of this is assumed to be provided in the form of grants - an assumption which is in line with past experience - while the other half would take the form of concessional loans. Adding to this a moderate amount of private capital, this would result in a net inflow of long-term capital of about YR 7-8 billion ($1.6-1.8 billion), or some YR 1 1/2 billion ($330 million) p.a.

li. The capital inflow would not only cover the growing deficit on current account but also allow a further increase in foreign exchange reserves. However, in relative terms the reserves would decline from the equivalent of 15 months' imports in 1976/77 to about 12 months' imports in 1981/82. More- over, in the mid-1980s net capital inflows would just about equal the current account deficit and the accumulation of reserves would come to an end.

lii. Net borrowing on a scale shown above would raise YAR's external debt from YR 1.3 billion (US$292 million) in mid-1977 to about YR 4 billion (US$900 million) in mid-1982. Assuming average interest rates of 4 percent and average maturities of 25 years this would result in debt service payments of YR 350 million (US$80 million) by 1981/82. The debt service ratio would then be about 4 percent compared with less than one percent in 1976/77. Less favorable conditions in foreign borrowing would lead to a faster increase in the debt service burden which the country would not be able to sustain over the long run. YAR will therefore have to continue borrowing on highly concessional terms.

Agriculture

liii. The macro strategy outlined above would have to be supported by appropriate sector policies. Agriculture, still the most important production sector in YAR, accounting for some 40 percent of GDP, is already undergoing major changes. After centuries of subsistance farming and efficient utilization of a meager resource base through traditional cultivation techniques, farmers are now faced with new markets, labor shortages, high and fast rising wages, relatively easy access to capital and changing consumer tastes. These shifts offer new opportunities for agricultural development especially in high-value crops and livestock, but they are also fraught with dangers of destruction and waste of resources. - xiv - liv. The new situation requires a flexible response from both farmers and Government. Instead of clinging rigidly to outdated objectives and traditional farming practices, the agricultural sector should be left free to xespond to local market conditions and price/cost relationships just as the economy at large is an open one. Government policies and programs should be aimed at providing technical and institutional support to farmers which would help them to better respond to the new opportunities. They should also preserve existing resources and develop new ones. lv. Many farmers have already started adapting to the changed market and cost structures. They are acquiring tractors and other mechanical equipment to replace increasingly scarce labor. They invest in irrigation wells and pumps, and use better seeds, more fertilizer and pesticides. They are shifting from barley to wheat which gives a higher return, and grow more vegetables and fruits. Private enterprise is beginning to get into poultry production which at present is highly profitable. lvi. However, individual farmers pay little attention to overall resource limitations. Excessive use of groundwater has already dangerously lowered the water table in some regions and created salinity problems in others. Marginal field terraces are being neglected and valuable land is lost permanently through erosion. Scarce timber resources are being depleted through excessive wood cutting and communal range lands suffer from overgrazing. Lack of experience and low cost of capital foster wasteful use of equipment, much of it not appropriate for local farming conditions. lvii. The Government is aware of the new opportunities and the cost of adjustment. Its policies and programs are generally designed to upgrade the skills of farmers and provide them with institutional support. Emphasis rightly is given to extension service, agricultural credit and research which will help the farmers to be more responsive to changing market forces. The general infrastructure is being strengthened and resource waste reduced through water surveys and investment in irrigation works, transport, storage and processing facilities. lviii. The declared policy of the Government to become self-sufficient in foodgrain production no longer seems appropriate in the light of YAR's large foreign exchange earnings which have removed earlier constraints to the importation of basic foodstuffs. The objective for wheat production to meet all local demand in the long run is not necessarily the best in view of the increasing demand for even higher return crops on the land that would be needed for the wheat production. While it may be appropriate to substitute wheat for barley or sorghum in suitable rainfed areas it would probably be uneconomic to grow wheat on newly developed, high-cost irrigated land. There vegetables, fruit and industrial crops such as cotton are likely to offer better returns. lix. Special measures may, however, be required for a limited number of crops. A case in point is cotton production which has suffered greatly from rising labor cost and exceptionally high domestic grain prices. As the latter can be expected to fall in the coming years the long-term profitability of cotton may not be so unfavorable as it appears at present. By shifting to xv - varieties which give higher yields and require relatively less labor for harvesting, the role of cotton as an important crop for export and local industry could well be preserved. Other crops that deserve special Government support are coffee, oil crops and tobacco. On the other hand, qat which in recent years has partly replaced coffee and which presently offers very high financial returns, deserves to be discouraged. Disincentives could be created either through taxation or through acreage restrictions. Another measure already in effect in some areas is to provide credit on concessional terms to farmers who agree to replace qat by coffee or fruit plantations. lx. The growing use by farmers of tractors and agricultural equipment is creating a number of problems including: (a) ill-adapted tractors and machinery for Yemeni conditions; (b) excessively large tractors and under utilization of equipment; (c) plowing too deep with the loss of precious soil moisture; and (d) poor maintenance. Special measures are required to improve farm mechanization, including credit to farmers, technical assistance, and the possible establishment of machine operation and maintenance training centers. lxi. The targets set in the 5-year Plan for expanded irrigation appear to be on the high side. They envisage an expansion by 66,000 ha between 1975/76 and 1980/81, i.e. 14,000 ha by flood irrigation, 6,000 ha by perennial flow irrigation and 46,000 ha by well irrigation. Based on the current activity in the private sector, the projected expansion target for well irrigation could possibly be achieved. However, in some areas further exploitation of ground water may prove to be not only costly but of short life because of the salinity problem. Individuals are proceeding with exploitation of groundwater without benefit of reliable groundwater information. No protection is yet provided by law against over-exploitation although the Plan does give recognition of the need for Government regulation of groundwater development. It can only be hoped that legislative authorities will recognize the need at an early date. lxii. It is foreseen in the Plan that development works will bring about added flood irrigation in eleven major wadis toward the end of the Plan period. It is doubtful that these targets will be reached except in Wadi Zabid where major civil works will be completed in 1978. In some of the other wadis investment projects have not as yet been agreed upon. A basic resource survey has been completed in Wadi Rima. Studies are in process in Wadis Mawr, Sordud, Rasyian, Bina'a and Marib. After the completion of surveys currently in progress, further engineering design and feasibility analysis will be required as a basis for specific investment projects. It will then take time for construction before actual new irrigation can be attained. lxiii. Substantial investments are also needed for afforestation and watershed protection. Tree plantations would have a number of important purposes including (a) afforestation of marginal bench terraces that have been abandoned from crop production in order to prevent their further rapid deterioration; (b) provision of woodlots to supply rough pole lumber and fuel wood to villages; (c) windbreaks especially around fields to be planted with crops subject to wind damage; and (d) fixation of sand dunes in the Tihama. Together with other measures to preserve or reestablish the natural vegetation cover especially - xvi - on marginal range lands, such investments would in the long run strengthen the moisture retention capability of crucial watershed areas and improve the country's water balance. lxiv. Livestock is an important agricultural resource in YAR and offers considerablepotential for development. Such projects are especially suited to the private sector which already has successfullymoved into commercial poultry production. When conditions are equally promising for dairy production, it can be expected that private enterprisewould also invest in that industry. lxv. The long-run prospects for the livestock subsector can be better enhanced by giving attention to the rehabilitationand protection of the country's rangelands and by fostering better husbandry practices among the already established livestockfarmers. The vast areas of land used only for open range grazing have been subject to overgrazingespecially during drought periods. The restorationof the natural grazing potential of the country will admittedly take many years. But in the meantime, a considerable output can be achieved by providing good country-wideanimal health care and by giving credit for more adequate water supplies and fodder production. lxvi. With regard to fisheries, some modest investmentseems appropriate to improve landing and handling facilities in the main ports, particularly liodeidahand Mokha, includingice-making plants, chilled storage for fish, repair yards, and water and fuel supplies. This could be supplementedby a credit scheme for the traditionalfishermen and the establishmentof a local shrimp company which would operate a shrimp plant and its own trawlers.

Industry lxvii. Industry in the YAR is at a very early stage of development. Al- though there are a large number of manufacturingenterprises, and employment in the constructionindustry is also substantial,most operations are very small, and are based on traditionalproduction methods. However, in recent years a few medium-sizedmanufacturing firms have been establishedboth in the public and private sector. A constructionboom has led also to the emergence of several larger contractingcompanies. lxviii. There is currentlyconsiderable interest and enthusiasm among the private sector for expandingexisting firms and establishingnew manufacturing enterprises. This is manifested in the substantialnumber of projects for which official approval is being sought, and in the demand for plots and factory space on the recently establishedSana'a industrialestate. The Gov- ernment also gives high priority to industrialdevelopment in its new Five- Year Plan, and has reacted positively to approval requests by the private sector. Enthusiasm is less noticeablewithin Government and in the private sector for a further rapid expansion of local constructionindustry, in spite of the boom in building activity and the very large constructiondemands of the Five-Year Plan; this follows from the basicallymanagement and manpower problems which the constructionindustry has encounteredin the last few years. - xvii - lxix. Determination to push ahead with the development of manufacturing industry, both public sector and private, is a major factor favoring success. Important factors supporting industrial development are:

(a) The knowledge of local markets and how to tap them which private sector manufacturers bring from their predominantly trading backgrounds.

(b) The quite significant number of private individuals or families able to raise, from profits from past trading activities and land transactions, and in commercial loans, sufficient funds (up to YR 5 million, say) to set up medium- sized industrial undertakings; few, however, are able to raise more substantial amounts.

(c) The natural protection provided by high transport cost for certain products, especially construction materials. lxx. While these factors work in favor of industrial development in YAR there are other features in the country's present economic structure which act as constraints. Thus, contrary to many other developing countries YAR has relatively high labor cost; it has few known raw materials which could be processed locally and perhaps exported; and the small size of the domestic market does not allow the creation of large-sized productive units, even under protective barriers.

lxxi. Nonetheless four main, and often overlapping, categories of manufacturing industry offer broad opportunities for development. First, there are products, for which, if imported, transport costs would constitute a large part of the final price. The most important are building materials, such as cement, concrete products, bricks, tiles, stone etc. Other products in this category include soft drinks, plastic and metal containers, water or drainage pipes, suitcases, foam mattresses, industrial gases, door and window units and some types of furniture. There are also some which would be both expensive and not very practical to import (bread and ice-cream, for instance). In time too, certain assembly operations may become worthwhile as the market grows (e.g. refrigerators, which are bulky to transport).

lxxii. Second, there are industries based on processing of local raw materials. Most building materials fall of course into this category too. So do cotton textiles and clothing. But in respect of these, as with other raw material based industries, it is necessary to consider whether the raw material resources are large enough to justify a production unit of economic size. Other potential raw material processing industries include: the curing and possibly tanning of hides and skins; vegetable oils and products such as soap; fruit, vegetable and fish canning; basic chemicals derived from local raw materials such as salt; and certain glass and ceramic products.

lxxiii. Third, there are certain industries whose output can be geared to specific needs of Yemeni consumers. Rarely would it be worthwhile for a - xviii - foreign manufacturer to design and produce a product solely for the YAR market, though it generally is worthwhile for wider Arab markets. The unusual combination of terraced agriculture in a dry area with high labor costs creates a need for specially-designed agricultural tools and simple machinery. In this context too, small-scale fertilizer mixing operations may be the best way of coping with the needs of particular crops in particular soils. Some textile products could be oriented towards what are often very local tastes, as could certain food products (but of course tastes could change as consumers are exposed to a wider range of choice). Newspapers, some educational material and certain other printing, particularly for the Government, are also examples of industries in this category. lxxiv. Finally, fringing on the services sector, there is likely to be a growing need for reconditioning of a range of manufactures being imported in increasing volumes. Tire retreading is an example, provided safety standards are met. Truck engine reconditioning is another. Repair work to certain electronic and other products may also best be carried out on an industrial scale. lxxv. The known development potential of the mining and quarrying industry is linked closely to the growth of the building materials sector, which in turn stems largely from the anticipated rapid expansion in construction activity. The long-term future of salt-mining depends on securing worthwhile outlets, other than limited amounts for direct local consumption, whether as an input to projected chemical industries, or for export (for which price and quality must be competitive). Glass-making and ceramics also offer opportunities for related quarrying activities. There are hopes that more significant minerals industries could develop (coal, oil or copper, for instance), but exploratory and investigatory surveys are still at an early stage. lxxvi. While Plan implementation will require a very substantial increase in construction activity, a large part of this will unavoidably go to foreign contractors. Small local builders should continue to benefit from the upsurge in house-building. Indeed, demand will probably exceed the growth capacity of this sector, constrained as it is by the labor shortage. The handful of larger local contracting firms should have learned much from the problems encountered in recent years, and may well get a larger share of contracts, particularly government, than they have the manpower, management or technical capability to handle. Steps are needed to help them in this, and to enable them eventually to take on larger and more complex contracts. lxxvii. In contrast, much of the small industry and handicrafts sector faces a difficult future. Competition from imported products has only recently begun to make itself felt. There is only limited scope in the short-term for changing traditional production techniques and working methods, so the impact of rising labor costs will be severe. Fortunately, it will be easy for those displaced to find generally better-paid jobs in other sectors, or abroad. However, many will doubtless be reluctant to abandon a traditional mode of life, status and skills, and may have to face a period of declining real incomes. Of course, not all small industrial and handicrafts sectors will be equally affected. Some should benefit from the general rise in consumer - xix - spending - for instance, those making wooden and other fittings for new and improved houses, furniture makers, and certain branches of clothing. The sectors which can be expected to do relatively well are geynerally those producing, on a small or handicrafts industrial scale, the same categories:of product as offer the better opportunities for larger-scale manufacturing. (see above) particularly perhaps those for which transport costs are high; or'which are geared to peculiarly Yemeni tastes. Help is needed, both forthese' and for the less fortunate sectors, to acquire the equipment and skills'required to adjust to new conditions. lxxviii. The Government appears aware of the opportunities for industrialization and the limiting factors. The problems posed by the shortage and cost of labor and the lack of management skills and experience are known, and the risk of allowing a larger capacity to build up than the market can support is appreciated. There is, however, need for improvement in project appraisal procedures. lxxix. Industrial policies are on the whole realistic. The level of protection to local industry is not excessive and the Government has not sought to interfere with the free play of the price mechanism. The major role allocated to the private sector in industrialization has much to recommend it, and investment incentives appear effective. The atcitude of avoiding tight controls on private sector operations, and of keeping bureaucratic procedures to the minimum is sensible. The positive attitude to foreign investment, which is showing encouraging results and the open door to foreign firms (as in the construction sector), foreign technicians and labor where local capacities appear inadequate, have much to recommend them. The policy of favoring what are, by developing country standards, capital-intensive, rather than labor- intensive operations, is undoubtedly appropriate in the circumstance of the YAR. lxxx. While these broad policies are being pursued quite effectively, there are certain inconsistencies in details which still need to be resolved. The problems which arise stem in many cases from the limited resources of qualified manpower within government. In the context of industrialization, this is particularly marked within the Ministry of Economy, whose qualified staff is clearly insufficient: to adequately appraise projects, whether private sector or public; to ensure rapid and effective implementation of public sector investments; to control the operations of public enterprises; and, to review and revise as necessary legislation and administrative arrangements affecting industry. lxxxi. There is a general need, in both public and private sectors, to further promote joint ventures with foreign firms; these have much to contribute in project implementation and operational expertise, as well as in technical knowhow and project finance. It is important to ensure that these skills and experience are passed on to the Yemeni partners in these ventures, so that their role can be steadily expanded in the future. The potential for worthwhile joint ventures is probably greater in the construction sector. -xx lxxxii. Consideration could be given to the establishment of a construction equipment leasing operation, to provide a pool of well-maintained equipment on which Yemeni contractors could draw, compensating for fluctuations in the needs of particular firms, and improving year-round equipment utilization rates. lxxxiii. A substantial increase is needed in the financial resources available to the Industrial Bank of Yemen (IBY), to enable it to make more and larger loans. IBY might also benefit from technical assistance, especially in appraisal techniques.

Transportation

lxxxiv. It has only been two decades since the first links of a modern transport network were established in YAR. Until the late 1950s primitive tracks, suitable only for four-wheel drive vehicles and animal transport connected major towns and were the only means of land transport. Port facilities were limited to the ancient port of Mocha, which was only suitable for lighterage, and there was no air service within the country.

lxxxv. Initial development of modern transportation was on a project-by- project basis, financed by bilateral assistance. Although this development took place outside of any formal framework of national transportation planning, the initial investments in transport infrastructure were, in fact, logical and undoubtedly represented projects of the highest priority. Thus, the USSR financed the first deep-water port in the YAR, at Hodeidah; the Peoples Republic of China financed a road from the port to Sana'a, the nation's capital; the USA financed a road linking Sana'a with Taiz, the major population center in the south, as well as a road to the lighterage port in Mocha; and the USSR completed the main road rectangle by financing a road down the coast from Hodeidah to an intersection with the Taiz-Mocha road. In addition, the USSR built an international airport in Sana'a thus providing the first international air connection with the country. lxxxvi. In its Five-Year Plan the Government defines its main objective for the transport sector as relating transport development to increases in agricultural and industrial production, internal and external trade, etc. It also recognizes other than economic considerations when it additionally sets objectives of connecting population centers internally and connecting the YAR externally with neighboring countries. lxxxvii. Construction of highways and roads constitute by far the single largest item in the overall investment program of the Five-Year Plan. A total of YR 3 billion (about US$650 million) is to be spent for highway projects during the five-year period, of which YR 2.4 billion by the Central Govern- ment and YR 0.6 billion by Local Development Associations. These are ambitious targets not only in terms of financial cost but more so in terms of absorptive capacity. They require further strengthening of the administrative and engineering capacity of the Highway Administration. - xxi - lxxxviii..A number of highway projects shown in the Plan are already under construction. They include, among others, new road links between Sana'a and Marib, Damar and Beida, Taiz and Sherigah (providing a connection with Aden), Taiz and Turbah and Amran and Hajja. The large investments in new roads as envisaged by the Plan would entail equally ambitious targets for road maintenance, a task of which the Government is keenly aware. lxxxix. In view of the expected sharp increase in imports, the Plan gives high priority to port development and suggests a series of steps designed to overcome existing constraints. It emphasizes the need of both, investment to expand port capacity and measures aimed at increasing the efficiency of port administration. The major port investments (about YR 239 million) envisaged in the Plan would increase capacity in Hodeidah from a present throughput of about 600,000 tons of dry cargo to 1.75 milion tons thus meeting requirements up to about 1985. The thrust of the program is correctly directed at strengthening the port facilities at Hodeidah. The Plan explicitly recognizes the need for administrative improvements such as better coordination between port and customs authorities, importers and ship owners; strengthening of the port authority's technical staff; separation of executive and planning functions; and more efficient work organization. xc. The Plan objectives for civil aviation appear to be well balanced. They include improvements in airport facilities, in navigational and meteorological services, and in safety equipment. The bulk of investment is to be spent on the country's three major airports (YR 173 million in Sana'a, YR 217 million in Taiz and YR 150 million in Hodeidah). Another YR 330 million has been budgeted for the purchase of new aircraft. xci. The transport sector is a critical element to the continued economic development of the YAR. It is, however, suffering growing pains of its own which will be compounded by the ambitious Five-Year Plan. The principal issue to be faced now and in the future remains one of planning and management. This problem is exacerbated by the national shortage of skilled personnel at all levels and a growing scarcity of even unskilled manpower. There is no immediate, easy solution to these problems. xcii. In the longer term, to successfully operate and maintain the transport infrastructure, training of personnel must be promoted with vigor and, given the fact that, at least in the immediate future, once trained some staff will not stay with the responsible government agencies (i.e., the Highway Administration, Port Authority, etc.), the training must be continuous and intense. To be effective, and to have any short-run impact, much of the training will undoubtedly have to be in-house. Although the Plan envisages a rapid increase in vocational training the output will be diffused through the whole economy providing at least initially, only a limited number of graduates with the basic skills necessary for further specific training. Thus, little to alleviate the specific operational and maintenance problems over the Plan period should be expected from this necessary, but longer term and broader approach to training. - xxii - xciii. In addition to specific in-house training programs, the several government agencies dealing with transport will have to recruit key personnel from abroad both to fill on-line positions to ensure reasonable levels of operation and maintenance and to provide an adequate operational background for practical training of Yemeni personnel. Unfortunately, recruitment of foreign experts has proven to be difficult in the past and will continue to be a problem in the future. xciv. The Government realizes that, besides trying to mobilize the human resources needed for the operation of a fast-growing transport network, provisions will have to be made in the state budget to allocate sufficient funds for maintenance purposes. Moreover, the development of appropriate sub-sector investment studies is essential if major misallocation of scarce resources is to be avoided. Sub-sector rather than sector studies are required because the different modes are essentially non-competitive. Since a port development study was completed in August 1976 (financed by UNDP with the World Bank as executing agency) the most critical element in sub-sector planning will be the development of a highway master plan. Provision has been made for technical assistance by a consultant for this purpose in IDA's third highway project.

Basic Needs xcv. In a country as underdeveloped as YAR, much of the Government's efforts have to be directed towards satisfying the people's basic needs for food, shelter and social services. Although considerable progress has been made in some of these areas, especially in securing food supplies and reducing underemployment, the country is still far from a satisfactory situation. Elementary education, health facilities, clean drinking water, electricity, rural access roads and urban sanitation have yet to be provided to the bulk of the population.

(1) Food Supplies xcvi. The history of Yemen has been fraught with food shortages and famines. A meager agricultural resource base placed narrow limits on local food production causing widespread malnutrition. In addition, unreliable rainfall has led to periodic droughts with sometimes disastrous consequences. The last one occurred during 1967-73 when actual rainfall stayed much below the long-term average resulting in a sharp decline of crop production and substantial losses of livestock. Only generous food aid mostly through the World Food Program, prevented large-scale starvation among the population. xcvii. Not surprisingly, the Government is giving high priority to the establishment of secure food supplies. One of the main objectives of the 3-Year Program and the 5-Year Plan is self-sufficiency in food production. However, meeting this target has proven to be difficult so far. Several factors have contributed to this situation: the narrow agricultural resource base; the considerable institutional and technical problems encountered in changing subsistence farmers into efficient food producers for the market; and the massive emigration of able-bodied men from the rural areas. As a result, - xxiii - domestic production of basic foodstuffs has grown relatively slowly and may in fact have stagnated if the impact of wheather fluctuations is excluded. xcviii. At the same time, however, food supplies in YAR have become more plentiful in recent years. Fast-rising incomes have allowed a significant increase in per capita food consumption as well as an upgrading in the quality and nutritional value of food items. Whereas previously most people in Yemen had to subsist on a simple diet of grains (mostly sorghum) supplemented only marginally by some vegetables and animal protein, now an increasing number of the population is able to purchase a variety of high-value foodstuffs such as sugar, meat, dairy products, eggs, fish, edible oils, fruits and vegetables. Most of the more valuable food varieties are being imported, including wheat and rice. But there has also been a significant increase in the domestic production of vegetables, fruits and eggs, partly at the expense of traditional grain crops. xcix These changes in food consumption and production have primarily been the result of market forces rather than deliberate Government policies. Fast- rising consumer incomes (mainly from workers' remittances) stimulated the import trade and created new markets for domestic farmers which they were willing and able to serve. Initially, the Government provided indirect assistance to support these trends. It strengthened the infrastructure (ports, highways) to facilitate the internal distribution of the rapidly growing import volume. It also started to provide institutional, technical and financial support to farmers helping them to raise higher-valued crops and increase poultry production. c. More recently, the Government has started to assume direct responsibility for securing adequate supplies of basic foodstuffs at reasonable prices. it established, in November 1976, the General Corporation for Foreign Trade (GCFT) which imports large :quantities of wheat, flour and sugar. GCFT sells its products mostly to wholesalers but increasingly also to final consumers through a growing chain of company-owned retail shops. Another area of direct Government intervention is grain storage. Lack of adequate storage facilities has in the past led to irregular supplies, excessive price fluctuations and substantial losses of foodgrains. To improve the situation the Government started in mid-1976 a program to construct a 20,000 ton grain silo in the port of Hodeidah, and six regional warehouses with a total capacity of 18,000 tons. While these facilities will cover immediate requirements, a study was initiated to determine the long-term needs for grain storage which will form the basis for a nationwide storage investment program. In addition, the Govern- ment is modernizing bakeries, both in the public and private sectors, and introducing a modest nutrition program designed to fortify bread with vitamins and minerals. ci. Besides taking measures to secure overall supplies of basic foodstuffs, the Government also has a program to provide food to the poorest elements of the population who, for one reason or another, cannot afford to buy sufficient food in the market. The National Committee for Food and - xxiv -

Nutrition, established in early 1976, coordinates and supervises the distribution of food relief to needy persons. These are mainly refugees (about 5,000) and local families whose income is below the subsistence level (about 8,000). The Committee obtains its resources exclusively through foreign aid, the principal source being the World Food Program.

(2) Public Health cii. Health conditions in YAR are still very poor. This is indicated by the high death rate which presently averages some 29 per thousand inhabitants; the low life expectancy at birth which averages 37 years; and the high infant mortality which is reported around 24 percent. Inadequate nutrition, poor and overcrowded housing, lack of personal hygiene and the extreme shortage of modern health care are the main reasons for the low standard of public health in the country. Environmental problems also have a direct bearing on health. Most people use water which is more or less polluted while effective sewage disposal is almost unknown. All this creates favorable conditions for endemic diseases the most important ones being tuberculosis, bilharzia and malaria. Many people, especially children, suffer from various intestinal infections and contagious fevers. Parasitic diseases are also widespread. ciii. The Government's health program is still in its infancy. Thus in 1976 there were only 234 physicians (of which 110 expatriates) practising in YAR, or one doctor for every 23,256 inhabitants. At the same time, there were 796 medical assistants, 10 dentists and 21 pharmacists. Modern health installations in 1976 included 24 hospitals with 2,637 beds, i.e. one for every 2,064 inhabitants; 13 dispensaries with 355 beds; 16 health centers, 11 sub-centers and 75 rural health units. Many of these facilities were ill equipped and suffered from shortages of personnel and financal funds. civ. Most of the modern health care is financed by the Government which in 1976/77 spent some YR 43 million for this purpose. In addition, there are a number of foreign financed health programs funded mainly by Sweden, Kuwait and the World Health Organization. Government expenditures for public health have quadrupled in real terms since 1960/71. However, in absolute terms public health spending is still extremely low. In 1976/77 it represented only 1/2 percent of GNP or US$2 per capita. cv. Shortage of funds and medical personnel are the principal constraints for YAR's health system. Other critical issues are administrative problems which lead to inefficient utilization of existing facilities; the almost complete absence of modern health care in rural areas; the environmental health hazards created by water pollution and lack of sewage disposal; and the recent increase in endemic diseases resulting from the growing mobility of the population. cvi. The 5-Year Plan for the health sector appears to be well conceived focussing on the main present issues. It still allocates the major part of the funds to urban health facilities but pays increasing attention to the needs of the rural population. Implementation of the Plan will require substantial financial and human resources. To attract the latter the Government - xxv - will have to pay competitive salaries to its medical staff and provide other material incentives such as adequate housing.

(3) Literacy

cvii. One of the basic development objectives is literacy. Besides being a necessary condition for raising skill levels, its attainment is desirable for its own sake and directly enhances the welfare of the society. Spreading literacy and providing some elementary education to all citizens enables them to participate more actively in community affairs, increases their political awareness, and strengthens the political cohesion of the country.

cviii. The Yemeni Government is very much aware of this basic human need and vigorously pursues the objective of universal literacy and education. However, at this point it is still far from reaching its ultimate goal. The present illiteracy rate is extremely high - close to 90 percent for the adult population - and only one of every four children in the age groups 6-11 is enrolled in primary schools. Adult literacy programs provide elementary education to some 6 thousand persons of age 15 and above, that is only one out of every 500 of the adult population.

cvix. The 5-Year Plan envisages an increase in enrollment for primary schools from 253 thousand in 1975/76 to 427 thousand in 1980/81 (plus 69 percent). In addition, the Plan calls for a rapid expansion of the adult literacy program from less than 6 thousand to about 29 thousand participants. But even if these targets are met, enrollment in primary schools by 1980/81 would reach less than half of the relevant age groups while the illiteracy rate among adults would decline only marginally. Moreover, the quality of primary education will remain low resulting in relatively high rates of dropouts and failures. The social objective of achieving literacy for the great majority of the population can therefore be implemented only over the very long run.

(4) Rural Development

cx. The need to provide for the basic living requirements of the population is greatest in the rural areas. There, most people still live under very primitive conditions frequently isolated from the rest of the country. Villages and houses are often located on barren land far away from the nearest source of drinking water and usually they have no schools, no health facilities and no electricity. Although private cash incomes have risen sharply in recent years and most families can now afford substantially higher levels of consumption, the supply of social services has not kept pace with the growth in per capita incomes.

cxi. The Government has perceived the need for rural development early in the republican era. Already in 1963, i.e. one year after the Revolution, it issued a law providing for the establishment of Local Development Asso- ciations (LDA). The principal objective of this legislation was to encourage local self-help rather than relying on initiatives and programs by the central government. This was very much in the Yemeni tradition which is based on strong family and tribal ties. - XXV i - cxii. So far the LDAs have concentrated on building rural access roads, water supply systems, schools, health facilities and electrification schemes. There are no precise records of past investments carried out by LDAs. Esti- mates for the 3-Year Program (1973/74-1975/76) suggest that over 5,000 km of access roads, some 850 water supply projects and close to 600 schools were completed during that period. Usually, the projects were carried out at much lower cost than if they had been done by constractors. These are remarkable achievements which underline the strength and dynamism of the LDA program. cxiii. Yemen's LDAs are a rare example of successful local development initiative. Notwithstanding serious constraints they mobilize substantial local resources, both human and financial; they encourage active participation of the main beneficiaries; and they help develop community spirit and local leadership. The program deserves the full support of the Central Government and of foreign aid donors.

(5) Urbanization cxiv. Urbanization is a recent phenomenon in YAR. Until the end of the civil war most of the country's main towns and cities were closely linked to their rural hinterland serving as regional market centers and suppliers of traditional crafts. With the rapid expansion of modern sectors since 1970 - government services, industry, construction, motor transport - urban development has acquired a new dimension. Improved living conditions, especially schools and health services, and new employment opportunities have attracted an increasing number of rural dwellers to the country's main urban centers. But even though the urban population has more than doubled during the past seven to eight years its absolute number is still very small. The 1975 census shows only five towns or cities with a population of 19,000 or more - Sana'a, Taiz, Hodeidah, Dhamar and Ibb. Together they had 332,000 inhabitants representing about 7 percent of the total resident population. cxv. Virtually all of the urban expansion since 1970 took place in an uncoordinated fashion and without serious attempts at urban planning. As the traditional town centers were already densely settled new suburbs were usually established along the main exit roads. This has frequently led to improper land use, bad street location and overcrowding which now create obstacles to the flow of traffic and increase the cost of subsequent investment in urban services such as water supply, sewage disposal and electricity. cxvi. Meanwhile, the Government has realized that urban development cannot be left to the private sector. In May 1977, it established a Central Council for Regional and Town Planning, and commissioned the preparation of an urban master plan for the country's five major cities. The Central Council is an inter-ministerial body responsible for the coordination of public and private development projects in urban areas. The master plan is expected to be completed during 1978 and will be used as the principal guide for the Council's decisions. While comprehensive urban planning has yet to become effective, Government sponsored projects have already been started in a number of urban related areas. These include the construction and maintenance of city streets; the provision of water supplies and sewage facilities; the electrification of urban households; and the construction of adequate housing. - xxvii - cxvii. In conclusion one can observe that the Government is making a major effort in developingprograms aimed at satisyingthe basic needs of the population. Impressive results are being achieved in some areas, especially rural development,food supplies and elementary education. But given the fact that these programs started only a few years ago, much more remains to be done. Some of the principal issues to be addressed in the future can be listed as follows:

(a) There is an urgent need to identifymore precisely the principal target groups for specific programs such as food relief, adult education and low cost housing. This will enable the authoritiesto adopt a more focussed approach and to increase the cost-effectivenessof its programs.

(b) Active participationof the beneficiarieswill strengthen the effectivenessof basic needs programs. The rural developmentassociations are a good example of how this can be achieved.

(c) Food relief programs should not remain the sole responsibility of foreign aid donors. As the economy of YAR gains strength the Government should be prepared to commit increasingamounts from its own resources for such programs.

(d) While it is importantto satisfy the basic needs of as many people as possible, quantitativeexpansion should not be pursued at the expense of quality..This is particularlyrelevant in the field of elementary education where benefits tend to be diluted by inefficiencies of the education system.

(e) In some areas, effective programs have still to be developed. Examples are housing for the lower income groups; public health in rural areas; and coordinated urban planning.

I. INTRODUCTION

1.01 Over the last few years the Yemen Arab Republic (YAR) has experienced far-reaching changes in its socioeconomic structure and the material welfare of its citizens. Following the 1962 Revolution which ended the feudal rule of the Imam and opened the country to the outside world, and after a protracted civil war that lasted till mid-1970, the new Republican Government succeeded in establishing within a surprisingly short period of time, the foundations of a modern state. Technical ministries were strengthened, essential government institutions were created such as the Central Bank and the Central Planning Organization, modern budgetary and banking practices were introduced, and a reasonable level of working effectiveness was achieved by the public administration. Tribal fragmentation, a major obstacle to political stability in the past, is gradually being overcome. Central Government control has been spreading throughout the country and continues to do so.

1.02 Political integration and the growing influence of central authorities have provided the basis for a rapid development of the public and private sectors. In 1973 the Government launched a Three-Year Development Program (1973/74-1975/76) which subsequently was implemented largely with the help of foreign technical and capital assistance. In its wake, the physical infrastructure was expanded and telecommunication links were built; first attempts were made at lifting agriculture, the mainstay of the economy, out of its medieval setting; industrialization was started, albeit on a small scale; modern education was spread; health services were improved; projects were initiated to build urban water supply and sewage facilites; and rural development was promoted through local development associations.

1.03 More recently, especially since the quadrupling of international oil prices at the beginning of 1974, there has been an unprecedented increase in personal, cash incomes based mainly on remittances by Yemenis who went to work in Saudi Arabia and the Gulf States. It is estimated that workers' remittances rose from some $40 million in 1969/70 to over $800 million in 1976/77. Largely as a result of these cash inflows YAR's per capita GNP has more than doubled in real terms since 1969/70 reaching a level of about $390 in 1976/77. While these developments, together with fast-growing government expenditures for both investment projects and public services, has greatly alleviated Yemen's traditional problems of poverty, famine and rural underemployment, they have created new ones which require urgent attention in the future.

A. Major Development Issues

1.04 Foremost among these is the problem of manpower shortage which has become the overriding constraint to YAR's development. This shortage has been created by large-scale labor migration to neighboring oil countries which now absorb an estimated 30 percent of YAR's male labor force. At the same time, labor demand has increased sharply within the country as a result of fast- growing development programs initiated by the Government, and a rapid expansion of private business activity. Labor scarcities of both skilled and -2- unskilled categories are pervasive throughout the economy; but they are particularly pronounced in the public sector largely because real incomes of civil servants are lagging behind those offered in the private sector. The shortage seriously limits the effectiveness of the public administration.

1.05 Another major issue is inflation which averaged some 30 percent p.a. in recent years. Inflation creates distortions in resource allocation and income distribution, and tends to weaken the savings propensity of the private sector. The major sources of inflation have been a fast-growing demand for goods and services as well as physical constraints on the supply side, especially in housing and, during certain periods, on imports due to congestion in the Port of Hodeidah. Domestic demand has been fuelled by workers' remittances and, until recently, by a deficit in the Government's financial transactions as well as by an acceleration of bank credit to the private sector.

1.06 A third issue the Government faces at this point in time is to assure the rational allocation of its rapidly growing investment resources. During the past when funds were more limited and modern facilities were sorely lacking, the authorities found it relatively easy to select high-priority projects such as establishing the basic physical infrastructure, introducing modern education, building irrigation works, power stations or a few factories. With the rapid growth in development spending, however, the range of choices is increasing substantially and the long-term costs and benefits of individual projects will not always be as obvious as in the past. Careful appraisal and judicious selection of development programs and projects will therefore be essential to assure the technical and economic viability of the country's future investments.

1.07 In this context, it should be noted that a major change has taken place in YAR's relative factor prices. Whereas only a few years ago the opportunity cost of labor had been relatively low compared to those of capital and foreign exchange, this relationship has now been reversed. A more detailed discussion of factor prices and their changes over time can be found in Annex I-1. The policy implications of these changes are significant and will affect future priorities. Assuming that the present structure of factor prices is going to last for some years to come - and there are good reasons for this assumption - some preference will have to be given to more capital-intensive projects with higher import content over labor-intensive ones which are competing for scarce local resources.

1.08 A fourth issue concerns the proper maintenance of existing and new capital stock. So far this question has not received sufficient attention by the authorities, perhaps understandably so because of the newness of most capital structures. However, as the stock of fixed capital increases - and there is visible evidence of fast-growing numbers of public buildings, roads, urban facilities, factories, power stations and irrigation schemes - the need for adequate maintenance of these facilities becomes more and more pressing. Introducing adequate maintenance programs and establishing repair facilities for machinery and equipment are therefore urgently required if past and future investments are not to be wasted. -3-

1.09 Yet, the new problems of affluence as well as recent achievements in development, remarkable as they are, should not distract from the fact that YAR continues to face many of the problems of an underdeveloped country. Productivity levels are still extremely low, especially in agriculture which occupies about three-fourths of the resident labor force. This reflects the very limited investment in physical capital made so far as well as the predominance of traditional production techniques. Nine out of ten adult persons are illiterate and only one out of every four children in the age group 6-11 is enrolled in primary schools. Over 90 percent of the population reside in rural areas, a large part of them in remote villages without access to modern transportation, schools, electricity or health services. Most Government institutions are relatively new and lack operating experience while a narrow tax base constrains the emergence of a strong public sector.

Table I-1: DEVELOPMENT INDICATORS

1975/76

GDP per capita (US$) 220 of which agriculture 130

Employment in agriculture (%) 73

Adult illiteracy (%) 87 Primary school enrollment (%) 27

Population per physician ('000) 23

Rural population (%) 93 Access to piped water (%) 9 Access to electricity (%) 5 Persons per room 3

Current government revenue as % of GNP 8

1.10 Moreover, there are serious physical constraints to development in YAR. The country's known natural resources are limited and a rugged topography poses severe obstacles for internal transport. Agricultural land and water are both scarce and few mineral deposits have been discovered so far. Out of a total land area of some 190,000 square kilomettes only about 8 percent (1.5 million ha) are regularly cultivated. An additional 10 percent of marginal agricultural land can be cultivated during high rainfall years while the remaining 82 percent of the country are semi-arid to arid areas with only sparse vegetation. Large deposits of rock salt have been found on the Salif Peninsula. They are of high quality and commercial exploitation, halted in 1972, is soon to be resumed. Some deposits of coal and copper are known to exist but are of doubtful commercial value. Unlike most other countries of the Arabian Peninsula, no petroleum has yet been discovered in YAR even though exploration has been carried out for some time. -4-

B. Government Objectives

1.11 The Government is fully aware of these issues--old as well as new ones--and willing to address them with all the means at its disposal. This is reflected in the Government's development objectives as outlined in the first Five-Year Development Plan for the years 1976/77-1980/81. Building on the achievements of the Three-Year Program (1973/74-1975/76) the new Plan endeavors to further develop the country's human and natural resources; to strengthen the physical infrastructure; to raise the productivity of the commodity-producing sectors; and to improve the standard of living of the population.

1.12 More specifically, the principal economic objectives of the Plan can be summarized as follows:

(a) Mobilize human resources and improve their skills through education and vocational training;

(b) Expand the physical infrastructure, i.e., the transport network, telecommunications, and electricity, thus integ- rating the various regions of the country and breaking present bottlenecks in the supply of vital goods and services;

(c) Develop the productive sectors, i.e., agriculture and industry. Increase domestic food production; develop agricultural supplies for export and local industry; establish viable manufacturing industries catering to domestic and foreign markets; and expand the capacity of the construction sector so that it can cope with the fast-rising investment volume; and

(d) Increase the level of national savings and mobilize financial resources through taxation and other means, to cover the expenditures of the public sector.

Besides these economic objectives the Plan also pursues social goals aimed at satisfying the basic needs of the population for food, drinking water, health care, elementary education, housing and other community services.

1.13 To achieve its objectives the Government has launched an impressive investment and manpower training program which it intends to carry out in close cooperation with foreign donors of capital and technical assistance. While continuing to rely on a market-oriented economic system the authorities foresee increasing collaboration between the public, cooperative and private sectors. However, successful implementation of Government programs and objectives hinges on solving some of the burning issues mentioned earlier in this chapter. Thus, solutions must be found to the pressing manpower shortage, especially in the Government sector; inflationary pressure will have to be reduced; and resources available for development will have to be allocated rationally. -5-

1.14 The followingchapters will discuss these issues in more detail. Attention will be given to the mobilizationof human resources (Chapter III), to the absorptivecapacity of the public sector (Chapter IV), to financial management (ChaptersV and VI), to the basic needs of the population(Chapter VII), to the developmentof productive sectors (ChaptersVIII and IX), and to the transportsystem (Chapter X). But first we will briefly review the history of Yemen's development,recent economic growth and structural change, and present income levels (Chapter II). -6-

II. ECONOMIC GROWTH AND STRUCTURAL CHANGE

A. Historical Perspective

2.01 Like many areas in the Middle East, Yemen can look back on a long history of civilization and economic development. Assumed to be the homeland of the legendary Queen of Sheba and known to the writers of antiquity as "Arabia Felix," it was famed in those days for its walled cities, lush fruit gardens and savory spices.

2.02 The first historically documented large-scale political units in Yemen were the kingdoms of the Minaeans and Sabaeans. They were founded during the eighth century B.C. and existed simultaneously for some 500-600 years. At their height, they dominated much of southern Arabia and controlled the Incense Trail, the routes over which Arabian frankincense and Indian and East African goods were transported across or around the Arabian Peninsula to the Mediterranean Basin. To control the overland and waterborne trade, the Minaeans and Sabaeans established colonies in northwestern Arabia and maintained supremacy at sea. Equally important, however, was the agricultural system that was created by the skill and ingenuity of these people. Terraced fields made possible the full utilization of scarce land and rainfall, while dams, the most famous of which was located at Marib on the eastern slope of the Yemeni mountain range, diverted and stored flood water for irrigation. It was the surplus production in agriculture that freed a relatively large part of the population to control and carry out trade, to build cities and to develop a flourishing artisan industry.

2.03 The collapse of the two kingdoms came with the rise of the Himyarites (115 B.C.) who inherited the Minaeo-Sabaean culture and trade and founded a kingdom which endured until the sixth century A.D. Under the Himyarite rulers, however, the might of South Arabia began to decline. After the fall of Palmyra in the third century A.D., the Himyarites tried to extend their influence to central and northern Arabia, in an attempt to insure the safety of the Incense Trail. But this expansion invited Persian retaliation which drove back the Himyarites to the South. An important factor in the decline was the spread of Christianity and Judaism which served as a divisive influence in the kingdom and encouraged the Christian Abyssinians (Ethiopians) to occupy the Kingdom in the year 525 A.D. The Abyssinians were later driven out by the Persians, who in turn were superseded by Islam. It was at this period of political decline that much of the agricultural system in southern Arabia fell into disuse, and the last break of the Marib Dam around 570 A.D. signalled the end of a once great civilization.

2.04 Economic decline and stagnation continued in Yemen throughout the medieval and into modern times. The discovery of the sea route around Africa diverted most of the traditional trade while later invasions and occupations by the Ottoman Turks dealt serious blows to the livelihood of the local people. There are also indications of a long-range deterioration in weather conditions which led to a reduction in the agricultural potential. While the economic strength of the country was thus eroded the population itself kept growing -7- over the centuries. The result was a steady decline in the standard of living and growing pressure to emigrate. Many Yemenis left their country during this period and settled down in East Africa, other Middle Eastern countries and even the Far East.

2.05 It is only sixteen years ago that the stage was set for an economic revival of Yemen. In September 1962, units of the Yemeni Army occupied the palace of the Imam, the traditional ruler of the country. The revolutionary forces, supported by Egypt, rapidly gained control of Sana'a and other principal areas, and established the Yemen Arab Republic (YAR). Egypt sent troops and supplies to help combat the deposed Imam Badr, who had fled north where, with the help of Saudi Arabia and Jordan, he raised Royalist forces to oppose the Republic.

2.06 Fighting between Republicans and Royalists continued until mid-1963 when a disengagement agreement was negotiated between Saudi Arabia and Egypt; disagreement over implementation brought a renewal of hostilities later that year. Saudi Arabia and Egypt reached renewed agreement in principle towards a settlement in 1964 and again in 1965, but the agreements were not implemented. After the Arab summit conference in August 1967, Egyptian troops were withdrawn.

2.07 Almost at once the Egyptian-supported regime of President Abdullah Al-Sallal was ousted and moderate'Republican leaders rallied to the defense of Sana'a against a final Royalist siege of the city. By 1968 the siege was broken and Republican leaders began a long, but eventually successful effort of reconciliation with Royalist tribes and their Saudi supporters. Saudi Arabia finally recognized the Republic in mid-1970, when Royalist leaders accepted integration under the Republican regime.

2.08 Subsequent republican governments terminated Yemen's isolation from the rest of the world by opening the country to new social and economic concepts and values and to foreign products and technologies. Contacts with bilateral and international aid donors were established as the various Yemeni governments attempted to remain non-aligned in Arab and international affairs. Presently, Yemen receives economic aid from Western and Eastern countries (though the relative share of the latter has been declining) and above all from Arab donors.

2.09 The present Government is headed by the President, Lieut. Col. Ali Abdallah Saleh, who is also supreme commander of the armed forces. He is assisted by the Vice President who holds the position of the Chairman of the People's Constituent Assembly. The President appoints the Prime Minister and other members of his Cabinet. The Prime Minister, Abdulaziz Abdul-Ghani, is in office since January 1975. He has provided essential continuity in economic management of the country. The People's Assembly is a parliamentary body consisting of representatives from all population groups. It is entrusted with the election of the President and the Vice President. The Assembly also discusses and approves the government budget. -8-

B. Recent Economic Growth

2.10 Since the end of the civil war in mid-1970, economic activity in YAR has expanded vigorously. Although the statistical base for measuring economic growth is weak, there is sufficient evidence to identify the direction and magnitude of recent changes. The national accounts published by the CPO suggest that GDP at constant market prices grew at an average rate of 8-9 percent a year between 1969/70 and 1975/76 (see Table II-1 below). Not surprisingly, economic growth was strongest in the modern sectors, reflecting the rapid expansion of foreign and domestic trade, of government services, of transportation and finance. Industrial value added grew at a somewhat slower pace partly because salt mining in Salif was discontinued, but also because new industrial projects have longer gestation periods than service activities.

Table II-1: CHANGES IN LEVEL AND COMPOSITION OF GDP (YR million, 1975/76 prices)

Annual 1969/70 1975/76 Growth in %

GDP, total (market prices) 3,170 5,181.. 8-1/2 of which (in percent) Commodity Sectors 60 55 8 Agriculture 51 45 8 Subsistence (41) (32) (4) Modern (10) (13) (13) Industry 9 10 10

Service Sectors 40 45 9 Trade 19 23 11 Transport & Finance 4 6 17 Government 9 10 10 Others 8 6 5

GDP excluding subsistence agric. 1,840 3,630 12

2.11 Subsistence agriculture, still the most important sector in Yemen, showed the lowest growth during the period under consideration. Modern cash crops, on the other hand, increased rapidly as farmers took a growing interest in raising vegetables, fruits and chickens. It should be noted in this context that the national accounts underestimate the value of qat which has become by far the most important cash crop in Yemen. Taking all modern sectors together, i.e. excluding subsistence agriculture, economic growth probably exceeded 10 percent per annum by a significant margin.

2.12 When interpreting these trends one has to remember that 1969/70 fell into the middle of a prolonged drought period. Agricultural growth, especially in the subsistence sector, therefore reflects in large measure higher levels of precipitation in the final year (1975/76). If this factor is eliminated one can conclude that agricultural expansion was essentially -9- confined to cash crops while subsistence farming just about held its ground and possibly even declined marginally.

2.13 The expansion of the modern sectors was the result of a variety of factors. Fast growing cash incomes from workers' remittances opened new markets for local merchants and farmers, and provided funds for private investment in housing, transport equipment, agriculture and industry. This coincided with a vigorous expansion of public development expenditures. Initially through various ad hoc projects but later in a more coordinated form through its Three-Year Development Program, the Government endeavored to establish vital institutions and services, and to strengthen the physical infrastructure of the country. While these expenditures had a direct impact on the gross domestic product, they also supported private development initiatives.

Table II-2: DEVELOPMENT EXPENDITURES DURING THREE-YEAR PROGRAM (YR million and percent)

Fixed Capital Other All Total Formation Public Public Development Private Public Dev. Exp./l Expend. Expenditures

A. Sector Allocation (current prices) (- … ---- YR million ------) %

Agriculture 156 72 40 112 268 11 Industry 41 68 157 225 266 11 Transport 210 291 118 409 619 26 Housing 771 - - - 771 33 Others /2 47 175 219 394 441 19

Total 1,225 606 534 1,140 2,365 100

B. Phasing of Expenditures (in %, constant prices)

1973/74 100 100 100 100 100 1974/75 106 89 273 137 120 1975/76 121 112 622 246 175

/1 Mainly current expenditures for institutional support. /2 Mainly education, health and other government services.

Source: Central Planning Organization and Ministry of Finance.

2.14 Table II-2 indicates the size and allocation pattern of private and public development expenditures during the Three-Year Program. While these figures - as most statistical data for YAR during that period - have to be interpreted with caution, they probably give a reasonable impression of the orders of magnitude and trends involved. Thus, it can be assumed that public - 10 - development expenditures more than doubled in real terms while private investment increased at a slower pace. Public spending was about equally divided between capital and current expenditures with emphasis being given to the transport sector while industry and agriculture received smaller allocations. Private investment went primarily into housing and transport equipment, and to a lesser extent into agriculture (irrigation schemes and machinery). Taking both public and private spending together, it appears that housing received the largest share of the development funds, closely followed by the transport sector. Agriculture and industry, on the other hand, received relatively small amounts reflecting the longer time leads required to identify and prepare viable projects in these sectors.

2.15 Although the period since 1970 is relatively short, it has witnessed perceptible changes in the structure of YAR's economy. Table II-1 above shows that the shares of modern agriculture, trade, transport and government services in GDP have all increased during the 1970s while that of subsistence agriculture declined from over 40 percent in 1969/70 to less than one third in 1975/76. But even so, YAR's economy is still very much underdeveloped. The contributions of cash farming and industry (including construction) to GDP were still considerably less than that of subsistence farming. Another indicator for YAR's low level of domestic productivity is its per capita GDP; with $220 in 1975/76 it ranked among the least developed countries in the world, notwithstanding the fast growth rates experienced since 1970.

C. Level and Distribution of National Income

2.16 It is therefore less through domestic productivity gains but rather through large earnings abroad that the average Yemeni household has achieved a remarkable improvement in its real income over the last few years. Remit- tances from Yemenis working in neighboring oil countries are estimated to have risen from some US$40 million in 1969/70 to more than US$1 billion in 1976/77. On a per capita basis they thus reached some US$180 in the latter year. As a result, GNP grew even faster than GDP reaching the equivalent bf YR 11 billion in 1976/77. Converting this figure into US$ at the official rate of exchange of $1=YR 4.5 and dividing it by the estimated population of 5.5 million 1/ at end 1976 (including migrant workers) one obtains a per capita GNP for 1976/77 of US$390. 2/ 3/ Excluding the factor of inflation, this is more than twice the level of average per capita income in 1969/70.

1/ The official population figure is 6.1 million; see Chapter III for details.

2/ Using the World Bank methodology of calculating GNP per capita; see Annex II-1 for details.

3/ Based on the official population figure of 6.1 million the GNP per capita would be $350. - 11 -

2.17 Much of the higher income was used for consumption. Although the Yemeni national accounts have to be interpreted with great caution, they suggest that on a per capita basis private consumption rose by about two thirds in real terms since 1969/70. This conclusion is corraborated by the fact that food consumption has increased very significantly (see Chapter VII) and that imports of consumer goods have risen sharply (see Chapter VI). However, as will be discussed in Chapter V, consumption has apparently lagged behind the growth of incomes thus resulting in a sharp increase in national savings.

2.18 While there is little doubt that average levels of income and consumption have risen steeply in recent years, it remains less clear how they were distributed and who is benefiting from the higher incomes. In the absence of empirical evidence - as of now there are no reliable data for YAR on income distribution or household expenditures - one is left to some general observations. Traditionally, there have been fairly wide differences in income distribution both regionally and by social groups. In the rural areas most people were extremely poor suffering from recurrent crop failures which tended to push their incomes below the subsistence minimum. Moreover, prevailing land tenure conditions were such that even in times of good rainfall little savings could be made for the next drought, not to speak of farm improvements or investment in modern farm inputs. Incomes and living conditions were somewhat better in the few larger towns where trade and government expenditures provided employment opportunities. But even in urban areas, the average citizen was generally very poor. This contrasted wizh a small number of affluent merchants and wealthy landowners who, although not very rich in terms of western societies, enjoyed much higher incomes than the rest of the population.

2.19 Recent developments have changed this situation dramatically. Workers' remittances sent home by migrants have gone mostly to rural areas which supplied most of the labor force that was absorbed by neighboring countries. Traditional strong family ties have ensured that a large number of people benefited from these transfers. At the same time, the vigorous expansion of modern sectors provided new employment opportunities in and around urban areas. Increasingly, labor scarcities developed which drove up wage rates, even in remote villages. Thus, a large share of the new cash incomes was spread throughout the country among many people who previously had been desperately poor.

2.20 There were only few families who for one reason or other, failed to participate in the economic boom.. Their real incomes are still very low and they depend on support from the Government and charitable organizations. At the other end, there is a growing number of merchants who exploit present supply shortages and charge excessive prices. Large profits are also being made by some qat farmers and intermediaries who sell qat in the market. As qat is frequently purchased by workers who earn cash wages, a sizable amount of their newly-won earnings is being syphoned off by a small number of rich people, often at the expense of providing adequate food supplies to the workers' families. - 12 -

2.21 The Government has taken some action to provide for the basic needs of the poor (see Chapter VII). This includes food aid for needy families, health services, primary education, rural water supplies and other community services. These efforts need to be strengthened although it will take time to reach all regions in the country. Attempts are also being made to tax higher income groups, mainly through steep import duties on luxury goods. Another issue that requires attention by the Government is land tenure. Present traditions of crop sharing tend to distort the distribution of incomes and constrain the introduction of modern farming techniques (see Chapter VIII). The subject is now being reviewed by a special study carried out by ECWA and financed by IDA under the Wadi Rima Development Project.

D. Regional Pattern of Development

2.22 Economic activity has traditionally been concentrated in the central and southwestern parts of YAR. But within that area covering approximately one third of the country's whole territory, economic development has taken roots in various places thus assuring a fairly even regional distribution. Several factors are responsible for this pattern. First, the agricultural resource base - still the mainstay of Yemen's economy - is much stronger in the southwestern and central parts of the country than in the east and north- east (see Chapter VIII). Second, there have been several traditional urban centers in the main agricultural region, located at some distance from each other, which became the nuclei of modern sector development. Third, as was explained in the previous section of this chapter, a large amount of the new cash incomes accrues directly to rural areas where it is partly spent on development projects, albeit on a moderate scale (see Chapter VII).

Table II-3: INDICATORS OF REGIONAL DEVELOPMENT, 1975

Governorate Sana'a Hodeidah Taiz Ibb Other Total

Cultivated area 400 235 250 300 330 1,515 (in 1,000 ha) Population /1, total 827 696 898 812 1,488 4,721 (in 1,000) urban /2 135 80 79 19 19 332

Economic establishments 84 270 81 14 18 467 (10 or more employees) Loans granted by YBRD/3 131 246 96 12 1 486 (YR million) Government employees /4 20.1 3.0 3.6 1.5 3.1 31.3 (in 1,000) Construction Licenses 44 19 19 5 13 100 (in percent)

/1 Resident population only. 77 Towns and cities with 15,000 inhabitants or more. /3 Yemen Bank for Reconstruction and Development; 1976, urban areas only. /4 Civil employees only. - 13 -

2.23 The main agricultural areas are in the Governorates of Sana'a, Ibb, Taiz and Hodeidah which account for almost 80 percent of the whole cultivated land (see Table II-3 above). These are also the regions of population concentration, containing over two thirds of all residents. Moreover, the principal urban centers are located in this part of the country, i.e., the cities of Sana'a, YAR's capital; Hodeidah, the main seaport; and Taiz, the seat of previous feudal rulers and a traditional center of commerce and industry. Being some 150-200 km apart from each other they form a triangle which delineates the country's main arteries of economic activity.

2.24 Modern sector development is still largely confined to the three major cities. Thus, more than nine tenths of all economic establishments with ten or more employees are located in Hodeidah, Sana'a and Taiz. Most of these are trading firms but they also include contractors, financial institutions, public utilities and some manufacturing plants. As Table II-3 above shows, the largest number of economic establishments is concentrated in Hodeidah which offers attractive supply and marketing conditions. But a fair number of enterprises has also been established in the two other cities (see Chapter IX). This pattern is corroborated by the regional distribution of loans granted by YBRD, the country's major commercial bank. Government employment, another important modern sector, is concentrated in Sana'a which also accounts for a large part of construction activity.

2.25 More recently, economic development started radiating from the urban centers into the surrounding rural areas, and along the major highways connecting cities and towns. Fast growing urban demand for foodstuffs has stimulated agricultural output of higher valued products such as vegetables, fruits, poultry and, of course, the notorious qat. This happened especially in the vicinity of Sana'a and Taiz as well as in the rich agricultural area around Ibb which has good road connections to the main markets. In addition, some economic enterprises were set up in smaller towns such as Damar, Ibb, Amran and Salif. Rural development has been promoted through Local Develop- ment Associations which focus on providing access roads, water supply, schools and health centers for villages. Moreover, there has been an increasing volume of house construction in rural areas financed out of workers' remittances. Private savings from remittances have also been used for investments in agriculture, especially irrigation wells and tractors.

2.26 During recent years, Government policy has reinforced the traditional pattern of regional development. Most projects initiated by the 3-year program (1973/74-1975/76) are located in the Governorates of Sana'a, Hodeidah and Taiz. The current 5-year Plan (1976/77-1980/81) however, while still allocating the bulk of government expenditure to these three regions, gives increasing emphasis to the development of the outlying areas. Spearheaded by the construction of highways and roads, essential government services such as schools and health centers are now being established in the northern and eastern Governorates of Hajja, Saadah, Marib and Beida. They will be followed by industrial and agricultural projects aimed at increasing the productivity of the local labor force. This is accompanied by a perceptible increase of private sector activity especially in trade, construction and agriculture. - 14 -

III: MOBILIZING HUMAN RESOURCES

3.01 As was pointed out earlier in this report, manpower has become the dominant constraint to YAR's economic and social development. The problem is primarily one of skill shortages as the bulk of the working-age population is still illiterate and possesses only traditional skills in subsistence agriculture and handicraft. But existing manpower constraints have recently been aggravated by the migration of large numbers of able-bodied males to neighboring oil countries, severely depleting YAR's active labor force. The country therefore faces a two-dimensional task: (a) raising the skills of the local population and (b) stemming the outflow of scarce manpower especially in the semi-skilled and skilled categories.

A. Population and Migration

3.02 Until the mid-1970s very little information was available to gauge the magnitude and nature of YAR's human resources. A first census was, however, conducted in February 1975 1/ which established a fairly reliable statistical basis for the size and structure of YAR's population. While this constitutes a major step forward in providing the tools for analyzing the country's population and manpower issues, it still represents only a static view and sheds little light on the dynamics of population growth and migration.

(1) Size and Structure of Population

3.03 The preliminary results of the population census show a total resident population of 4.72 million, and an estimated 1.23 million citizens who live temporarily outside the country, mainly in Saudi Arabia. Thus, the total population in February 1975 was officially estimated at 5.95 million.

Table III-1: PRELIMINARY CENSUS RESULTS, 1975 (in thousands)

Total Males Females

Resident Population, total 4,721 2,247 2,474

Recorded (4,526) (2,155) (2,371) Under-enumerated (115) (54) (61) Uncovered (80) (38) (42)

Migrant Population 1,234 n.a. n.a.

Total Population 5,955 n.a. n.a.

1/ A brief description of the nature and scope of the census is given in Annex III-1. - 15 -

3.04 About 96 percent of the resident population (4.53 million) was actually enumerated (see also Table 1.1 of Statistical Appendix). The remaining 4 percent represent estimates of people who either were not reported to the census workers (under-enumeration) or who could not be reached because they are living in remote and inaccessible areas. Under-enumeration occurred mainly to avoid possible taxation or to conceal the number of women in a given household. A team of Swiss experts estimated the under-enumerated and uncovered resident population using special surveys and aerial photographs. The official estimate of YAR's total resident population (4.72 million) can therefore be considered to be quite accurate. It is expected that the final results of the census will not deviate significantly from the preliminary estimates.

3.05 Considerable doubts exist, however, as to the size of YAR's migrant population. The official estimate of 1.23 million has not been substantiated in detail and appears to be exaggerated. It contradicts the preliminary census returns which estimated only 350,000 migrant workers to be absent from the enumerated households. 1/ It is also at variance with the results of a recent publication by the Swiss Technical Team 2/ which estimated YAR's migrant population at around 600 thousand in early 1975.

3.06 The estimate for migrant workers can be tested by reviewing the sex distribution of YAR's population. Table III-1 above shows an excess by 10 percent of females over males of the resident population, reflecting the large number of migrants living abroad. If one assumes that around 10 percent of the non-resident population was female, one obtains the following adjusted estimate for YAR's total population:

1/ See Socknat and Sinclair, "An Estimate of Yemen's Total Population and Workers Abroad in 1975", Working Paper No. 1, an unpublished manuscript.

2/ Final Report on the Airphoto Interpretation Project of the Swiss Tech- nical Cooperation Service, Zurich, April 1978. - 16 -

Table III-2: REVISED POPULATION ESTIMATE, FEBRUARY 1975 (in thousands)

Total Males Females

Resident Population 4,721 2,247 2,474

Migrant Population 600 above 500 above 50

Total Population (rounded figures) 5,300 2,750 2,550

3.07 The adjusted estimate implies a sex ratio of 108 males per 100 females. This is quite typical for a country of Yemen's stage of economic develoment and cultural environment where infant mortality is usually higher for girls than for boys and where inadequate medical facilities result in a high mortality rate of women during childbirth.

(2) External Migration

3.08 Even with the lower estimate of migrant workers more than 10 percent of YAR's total population resided, at the time of the census, outside the country. As most of the migrants are men, the percentage of absentees was almost twice as large for the male population, and even higher for the age brackets of 15-34 years where it may have reached as much as one third of the total.

Table III-3: ESTIMATED MALE POPULATION /a (in thousands)

Total Male Of which Migrants as Age Groups Population Migrant Workers % of Total (years)

0-14 1,110 50 5 15-34 900 300 33 35-69 690 150 22 70+ 50

Total 2,750 500 18

/a Mission estimate; includes considerable margin of error.

3.09 Table III-3 above illustrates the large dimensions of YAR's migration. It shows that during the census month about one out of every three able-bodied men in the prime working age groups (15-34 years) may have been abroad. Although February is a month of relatively low agricultural activity in Yemen, and seasonal migration therefore is likely to reach its peak and - 17 - while some of the men may in fact not have left the country but sought work in the larger towns of YAR, it becomes apparent that the drain on rural manpower is very strong indeed. This, of course, has serious consequences for the level of agricultural productivity and enhances the need for modernization and mechanization in the agricultural sector.

3.10 External migration can be expected to remain a dominant feature in YAR's population movement for some time to come. However, in most cases the exodus is not permanent and the migrants will eventually return to their homeland. One of the reasons for this are the strong ties which migrants maintain with their families. Often a young man goes abroad only to earn money for his marriage or, if he is already married, to save funds for building a house, buying some land or investing in a truck, an irrigation well or in agricultural equipment. Another reason is the attractive climate of the Yemeni highlands which contrasts sharply with the oppressive heat of the Arabian desert where most migrants find their work.

3.11 By far the largest number of migrants are unskilled workers. But more recently, an increasing number of educated Yemenis have started to leave for neighboring Arab countries in response to the high incomes that they can obtain abroad. While the absolute number of skilled emigrants is low, the country can ill afford this "brain drain" in view of the very small size of YAR's skilled labor force (see paragraph 3.26).

3.12 To a very limited extent the out-migration has been offset by reverse population movements. One wave of immigration occurred when the Peoples Democratic Republic of Yemen was established and a sizeable number of Yemenis left the South for political reasons, many of them bringing some capital and skills. More recently, Yemeni citizefls have been returning from Eastern Africa as a result of political tensions in that region. But these immigration flows are very small in relation to the outflows of people and the drain on YAR's manpower resources continues to be a very serious one.

3.13 The migration problem has, however, several dimensions. One is the above-mentioned loss of manpower which increasingly constrains YAR's economic development. Yet in the longer run, many of these emigrants are likely to return home, bringing with them skills they have acquired abroad. Even more important are the financial benefits of emigration. As will be mentioned later in the report, the rapid growth of workers' remittances has removed the previous foreign exchange constraint and greatly increased Yemen's import capacity (see Chapter VI). Without emigration, YAR's national income would be much smaller and consumption levels of the resident population would be greatly reduced. At this point, however, the marginal benefits of additional workers' remittances appear to be smaller than the cost of further manpower losses, especially in the skilled categories.

3.14 It is therefore understandable that the Government has recently made attempts to control the migration of workers to neighboring Arab countries. Early in 1977, the authorities stopped issuing new passports and identification cards without which Yemeni citizens cannot leave the country. However, as no identification papers are required by the host country and - 18 - because border controls are perfunctory, emigration is continuing illegally. Given the paucity of statistical evidence on population movements, it is difficult to assess the effectiveness of official control measures.

3.15 Besides trying to slow down the emigration of its citizens, the Government is actively recruiting manpower abroad. The skilled categories are mostly brought into the country through bilateral and multilateral aid agreements. It is estimated that in June 1976, about 2,000 foreign experts (mostly teachers) were employed in YAR on that basis. Additional foreign skilled labor has been contracted by the private sector. More recently, increasing numbers of unskilled workers have been recruited abroad both by the public and private sectors. These workers come mostly from Pakistan and Bangladesh.

(3) Internal Migration

3.16 While external migration is the dominant feature of YAR's population movements, there is also a sizeable domestic migration. The growing economic activity in YAR's urban centers has created a strong labor demand which is largely being met by migration of male workers from rural areas. Although internal migration is not directly recorded the broad order of magnitude involved can be gauged from the sex distribution of the population in YAR's major cities and towns. Table 1.2 of the Statistical Appendix shows a large excess of males in Sana'a, Hodeidah, Taiz and Ibb. Most of these men represent migrant workers from rural areas who have found work in the cities. If one assumes average sex ratios and accounts for some migration of city residents abroad, the size of internal migration up to the time of the census can roughly be estimated at about 70,000 to 80,000. Although substantial, this is equivalent to only about 12-13 percent of the external migration.

3.17 Notwithstanding the recent migration towards urban centers, the regional distribution of YAR's population is still largely determined by agricultural potentials. Table 1.2 of the Statistical Appendix shows that about 70 percent of the resident population live in four Governorates - Sana'a, Taiz, Ibb and Hodeidah - which cover about one third of YAR's geographical area. These Governorates include much of the Western Slopes and Central Highlands which receive relatively more rainfall than the rest of the country (see Annex VIII-1). The Governorates of Mareb, Beida and Saada, on the other hand, have a relatively small population as they are located in the semi-arid eastern and northern parts of Yemen.

3.18 Most of the population still lives in rural areas and small towns. In February 1975 only about 330,000 people representing not more than 7 percent of the resident population, were located in YAR's five major cities (Table 1.2 of Statistical Appendix). Sana'a, the YAR's capital, at that time had about 135,000 inhabitants. Modern urbanization thus is a very recent phenomenon in YAR which started in the early seventies with the establishment of modern government institutions and the rapid growth of foreign trade. Before then, the cities did neither enjoy significantly better living standards than the countryside nor did they have employment opportunities to attract new - 19 - residents. Moreover, the social traditions which deem a newcomer undesirable restricted internal migration even when these opportunities existed. Mean- while, the situation is changing rapidly and the population of Sana'a and other larger cities and towns has probably doubled over the last five years. Although the absolute numbers of urban residents in YAR are still small, their rapid increase is causing congestion typical for many other urban centers in less developed countries. There is an acute shortage of housing, sanitary facilities and modern streets to absorb the fast growing traffic. Investment in urban infrastructure have assumed high priority and first steps have been taken towards urban development planning (see Chapter VII).

(4) Population Growth

3.19 While there are still some doubts about the actual size of YAR's population, even less is known about population growth. There are no official records of births and people often do not know their exact age. The Popula- tion Center, a government agency attached to the Central Planning Organization, has done some research on that question using the results of the census and of a few supplementary sample surveys. Based on this information which is scanty and not very reliable, the Population Center estimates the natural rate of population increase to be approximately 2 percent p.a., with a crude birth rate of 46 per 1,000 and a crude death rate of 27 per 1,000. Given the predominantly rural character of human settlements in YAR and the extreme scarcity of basic health facilities, both birth and death rates can be expected to remain high for many years to come.

3.20 Growing at a rate of 2 percent p.a. would mean an increase of Yemen's population by about 50 percent within 20 years, and a doubling within 35 years. The broad magnitudes of such a development are illustrated below:

Table III-4: ILLUSTRATIVE POPULATION PROJECTIONS (in 1,000)

1975 1995 2010

Total Population 5,300 8,000 10,600 of which: Residents 4,720 n.a. n.a. Migrants 580 n.a. n.a.

From a total of about 5-1/2 million in 1975, YAR's population could thus grow to some 8 million in 1995 and over 10 million in the year 2010. Assuming a decline in death rates over time as medical care improves but continued high birth rates - trends which are typical for countries in their early stages of development - population growth could be even higher.

3.21 The increase of YAR's resident population is even less predictable. As was discussed earlier, many Yemenis have traditionally been seeking employment abroad and this emigration has accelerated much in recent years. The resident population has therefore been growing at a much slower rate than total population, and perhaps even declined. Given the strong demand for _ 20 -

foreign labor in Saudi Arabia and other Arab oil countries it can be assumed that emigration will continue to be a major feature of YAR's population movements for many years to come. The extent to which emigration is likely to offset the natural population growth is, however, very difficult to assess.

3.22 The present acute and persistent labor shortages do not indicate the need for official policies aimed at containing population growth. But it should be remembered in this context that present labor constraints are largely a reflection of skill shortages and low levels of mechanization. As the country develops, these shortages will probably be eased and labor productivity should rise. Moreover, it should be kept in mind that population growth is a long-term issue which cannot be manipulated in the short run. Careful analyses of population trends, especially of migration movements, and their implications for domestic employment and productivity will therefore be needed to strengthen the basis for future development planning.

3.23 In relation to YAR's known natural resources the country is already quite densely settled, reflecting a long history of civilization. Although the total area of the country extends to about 190,000 sq km only some 15,000 sq km are regularly cultivable (Table 7.1 of Statistical Appendix). Given a resident population of 4.7 million in 1975 this makes for a density of over 300 people per sq km of arable land (about 350 people if migrant workers are included). 1/ Further population growth is going to increase the pressure on the land and will require higher productivity levels in agriculture as well as more employment opportunities in other sectors.

B. Manpower, Labor Force and Employment

3.24 In a country like YAR where (a) a large part of the population is still engaged in subsistence agriculture; (b) many people, especially women, are only seasonally employed; (c) child labor is widespread; and (d) a large number of people temporarily emigrate to seek work abroad, the manpower and labor force are difficult to define. In the absence of reliable statistics one can approximate the manpower potential as comprising the age groups between 10 and 69. For 1975, this would have been a figure in the order of 3-1/2 million (see table below).

1/ For comparison, the population density per sq km of arable land is about 330 in India, 280 in Pakistan, 80 in Morocco and 60 in Syria and Mexico. - 21 -

Table III-5: POPULATION, MANPOWER AND LABOR FORCE, 1975 (in millions)

Total Male Females

Total Population 5.3 2.7 2.6 of which Manpower Potential /a 3.5 1.8 1.7 of which People not seeking employment /b 1.8 .3 1.5

Migrants .6 .5 .1

Resident Labor Force 1.1 1.0 .1

/a Age groups 10-69. /b Including students and incapacitated.

3.25 It is even harder to determine the economically active population (labor force). The preliminary results of the census indicate that the resident labor force was about 1.1 million or one third of the estimated manpower potential. Assuming that another 0.6 million were migrants this would leave about half of the manpower potential in the category of economically not active people. Most of those were women in rural areas many of whom are partially employed in agriculture. In fact, female labor participation in agriculture has apparently increased significantly in recent years, reflecting efforts to offset the loss of male labor resulting from emigration. This suggests that even in rural areas there is now little unused manpower potential left.

(1) Skill Levels and Employment Pattern

3.26 While YAR's manpower potential appears to be quite large - a reflection of the country's relatively high population density - the skill levels and productivity of the labor force are still very low. On the basis of preliminary census results, it can be estimated that about three-fourths of the full-time resident labor force (not counting part-time employment of women) possessed only traditional skills in agriculture. Less than one- fourth of the economically active population is semi-skilled (i.e. industrial laborers, drivers, salesmen) and only 3 percent of the total (less than 1 percent of the manpower potential) could be classified as fully skilled. - 22 -

Table III-6: SKILL LEVELS OF RESIDENT LABOR FORCE /a (in thousands)

Labor Force Percent of Total

Traditional Skills above 800 74 (Agriculture)

Semi-Skilled about 250 23 (Industry and Services)

Skilled 37 3 Professionals and Technicians (17) (1) Clerks (14) (1) Administrators & Managers (6) (1)

Total 1,100 100

/a Rounded figures.

3.27 The predominance of traditional skill levels is matched by the low educational status of YAR's resident labor force. Table 1.4 of the Statistical Appendix shows that in 1975 four out of five workers were illiterate. Only about 15,000 people had completed more than primary education, about equally distributed between preparatory, secondary and higher education. The educational standards are especially low among women of whom less than 1,200 had progressed beyond the level of primary education.

3.28 As was mentioned before, most of the illiterate workers possess- ing only traditional skills are employed in agriculture. People with more advanced skills work in industry, services and the government sectors. A comparison of employment and GDP by sector suggests that the productivity of the labor force rises with education and skill levels.

Table III-7: PRODUCTIVITY OF RESIDENT LABOR FORCE, 1975/76 (rounded figures)

Value Added Sector Labor Force GDP per Worker (1,000) (YR miTlion) (YR)

Agriculture 800 2,300 2,900 Industry 90 530 5,900 Services 200 2,350 11,800 _ 23 -

(2) Modern Sector Employment

3.29 A recent survey 1/ conductedjointly by CPO, UNDP and ILO reviewed modern sector employment in the five major cities of YAR (Sana'a, Taiz, Hodeidah, Ibb and Damar). The survey covered the whole public sector and enumerated all private sector establishmentswith five or more workers and 10 percent of all establishmentsemploying four persons or less. The results show that the public sector employed over 31,000 persons in 1975, and the modern private sector in urban areas about 53,000 persons (Table 1.5 of StatisticalAppendix).

3.30 Of the total number of 31,315 government employees,more than one- third (11,615 persons) were employed by the Ministry of Interior. The second largest employer is the Ministry of Education (includingSana'a University) with 4,438 persons (14 percent) followed by the Ministry of Finance (including the departmentsof taxation and customs) with 3,154 (10 percent), the Ministry of Health with 2,199 (7 percent), and the Ministry of Municipalitieswith 2,102 (Table 1.6 of StatisticalAppendix). The Armed Forces are not included in the enumerationof Government employees.

3.31 Many public sector employeesdo not possess the educationand training that their jobs require. Only 2,446 civil servants (8 percent of total) have had preparatoryor secondary education in 1975, and not more than 947 (3 percent) had post-secondarytraining. This compares with a total of about 5,570 professionaland semi-professionalpositions in the public service at that time, suggesting that at most two-thirdsof the higher-levelgovernment employees had the necessary academic qualificationsfor their job. The great majority of public sector employees (84 percent) were either illiterateor had less than primary education (Table 1.7 of StatisticalAppendix).

3.32 The distributionof government employees among the Governoratesis quite uneven (Table 1.6 of StatisticalAppendix). Excluding the employeesof the Ministry of Interior for whom a regional distributionis not available, about 43 percent (8,462) of the remaining 19,700 government employeeswere located in the Governorateof Sana'a with 4,455 of them connected to the headquartersand the rest to the Governorateitself. Taiz and Hodeidah also have a relativelylarge number of public sector employeeswhile the other seven Governoratesaccount only for one fourth of the total.

3.33 Small establishmentsprovide the bulk of employment in the modern private sector. About 70 percent (33 thousand in the survey) are employed in establishmentswith less than five workers. The survey indicates that about two out of every three modern private sector employees are employed in serviceswith retail and wholesale trade making up about 50 percent of total employment. The productive sectors account for the remaining third of employment. Manufacturingis the most important subsectorwith an employment

1/ C.A. Sinclair and J. Socknat, "An Assessment of Manpower Development and Policy and Programs Suggestionsfor YAR", May 1976. - 24 - of about 8,500 persons in 1975, closely followed by construction (around 8,000 persons). Commercial farming and mining, on the other hand, provide very little employment (Table 1.5 of Statistical Appendix).

3.34 As in the public sector, the survey found that the work force in the modern private sector is relatively unskilled and that many persons do not possess the training or education which their job would normally require. The share of persons with higher education (2 percent) is even smaller than in the public sector and there is an extreme shortage of middle-level technicians. Moreover, professional experience is usually very limited and many higher-level employees have to assume management responsibilities right after schooling or academic training. The survey estimates that on average, only one third of the employees in the modern private sector have been adequately prepared for the positions they hold.

C. Manpower Planning, Education and Training

3.35 The preceding analysis has illustrated the seriousness of YAR's manpower constraint and underlined the urgent need for a qualitative upgrading of the country's human resources. Low skill levels and corresponding low labor productivity are mainly responsible for the existing manpower shortages. These shortages, especially in the semi-skilled and skilled categories, are likely to persist as the new 5-year Plan is being implemented.

(1) Manpower Planning

3.36 The country thus faces a monumental task in mobilizing the manpower required for the late 70s and early 80s. In its 5-year Plan the Government gives special attention to the manpower problem. It estimates that the resident labor force will have to be increased by about 100,000 persons during the plan period if the Plan's overall investment and production targets are to be met. Most of the additional manpower (about four-fifths of the total) will be absorbed by the modern sectors, i.e. industry and services (Table 1.8 of Statistical Appendix). This in turn requires higher skill levels than the present average of YAR's labor force. About six percent of the new labor demand is for professionals, mainly engineers, economists, educators, scientists and agronomists (Table 1.9 of Statistical Appendix). Another 17 percent are required to have secondary school level training; they include teachers, technicians, medical assistants, extension workers, etc. The remaining labor demand is mostly for skilled workers in industry, construction and services. Only one fourth of the additional workers needed are not required to have any special skills. _ 25 -

Table III-8: MANPOWER DEMAND DURING 5-YEAR PLAN (in 1,000)

Agriculture 23 Industry 32 Services 46

Total 101 of which Professionals 6 Technicians 17 Skilled labor 54 Unskilled labor 24

3.37 About two thirds (63,000) of the labor demand are expected to be met by the natural increase in working age population after allowing for students (40,000) and net emigration (15,000). The balance of 38,000 is to be met by reducing hidden unemployment (21,000), increasing female participation in the labor force (5,000) and importing manpower from abroad, mainly technicians and professionals (12,000).

3.38 Table 1.9 in the Statistical Appendix indicates the number of trained Yemenis which the Government expects to join the labor force during the plan period. It includes some 3,600 persons who are estimated to complete their university studies within the country or abroad, and another 8,000 who are to finish a medium-level technical or general education. Together they would cover roughly 60 percent of the demand for professional..cadres, and less than half of the demand for medium-level staff. This leaves a gap to be filled by foreign experts and technicians. Moreover, the projected deficit of skilled labor (about 26,000), half of which construction workers, is unlikely to be filled by locally trained people and will have largely to be covered by importing workers from abroad. To fill the manpower gap the Government intends to increase recruitment abroad, chiefly in those Arab and Asian countries which presently have a labor surplus. The Government also considers measures to improve working conditions within YAR and to induce Yemeni emigrants to return and seek employment at home. Moreover, private firms, including foreign contractors, are now encouraged to cover the balance of their labor needs through recruitment abroad.

(2) Educational Objectives and Targets

3.39 The dimensions of YAR's education and training problem become clearer when one recalls that formal public education was introduced in 1963 and did not really become effective until the end of the Civil War in 1969; that higher education started only in 1970; and that technical and vocational training are still very rudimentary. Yet, in 1975/76 some 253 thousand students were enrolled in public primary schools, 16 thousand in preparatory schools, 6 thousand in secondary schools, over one thousand in teacher training institutes, and some 2 thousand at Sana'a University. At the same time, - 26 - more than 2 thousand Yemeni students were enrolled at colleges and universities abroad while an adult literacy program provided elementary education to almost 6 thousand persons of age 15 and above. 1/

3.40 Impressive as these developmentsare, they fall still short of the country's requirements. Only one out of every four children in the age groups 6-11 was enrolled in primary schools while the percentage of participationin preparatoryand secondary schools was not more than 4 and 2 percent of the relevant age groups, respectively. As was mentioned above, the present capacity of YAR's educationalsystem cannot supply all the technical and academic skills needed by the economy over the next few years. The 5-year Plan therefore calls for a vigorous expansion of education facilities as well as for improvementsin the quality of education.

3.41 Government objectives in education are essentiallytwo-fold: (a) to provide basic educationalfacilities for every citizen (cultural objective) and (b) to meet the demand for technicallyqualified manpower (economicobjec- tive). The first objective is discussed in Chapter VII of this report. In pursuance of the second objective, the Government endeavors to increase enrollment in technicaland vocational schools more than four times during the Plan period, and higher educationmore than two times. Combined with a vigorous expansion of general secondary education and of teacher training this program should considerablyupgrade the skill levels and qualificationsof YAR's human resources. Another objective presently under review is to upgrade the skills of migrant workers. The global education targets of the 5-year Plan are summarized in Table III-9 below.

Table III-9: EDUCATION TARGETS OF 5-YEAR PLAN /a

Enrollments in 1975/76 1980/81 Increase (----in 1,000----) (inT

Primary schools 252.7 426.9 + 69 Adult literacy programs 5.7 28.9 +407

General preparatoryschools 15.6 40.3 +158 General secondary schools 6.1 15.5 +156

Teacher training 1.4 4.6 +228 Vocational & technical schools .6 3.0 +444

Universityof Sana'a 2.3 8.0 +250

/a For more.detailssee Table 10.9 of StatisticalAppendix.

1/ A more detailed review of YAR's education system and its historical developmentis given in Annex III-2. - 27 -

3.42 To meet the physical needs for such rise in enrollments, new schools will be built and functionally unsuitable schools will be improved and supplied with equipment and school materials. The Plan targets are to add 4,120 classrooms (including the renovation of 5 percent of existing classrooms) at the primary level and to construct 24 preparatory schools, 20 secondary schools, 7 centers for adult literacy and a center for the production of school furniture and teaching equipment and materials. Capital expenditures during the Plan period would amount to YR 638 million ($142 million). About half of this will be spent on preparatory, secondary, technical and vocational schools; another 27 percent, on primary schools and 17 percent for the expansion of Sana'a University (Table 10.10 and 10.11 of Statistical Appendix).

3.43 The personnel requirements for carrying out the Plan's education targets are substantial and can only be partially met by the country's own human resources. The MOE estimates that by 1980/81, additional 5,228 primary school teachers will be needed while not more than 3,130 teachers are expected to graduate from teacher training institutes during the Plan period. As in the past, the gap (about 2,10t teachers) will probably be largely filled with underqualified personnel. For preparatory and secondary schools additional 1,268 teachers will be required while only 700 students are expected to graduate from the School of Education at Sana'a University. Most of the remaining 568 teachers will have to be recruited abroad as there will be few Yemeni students returning with appropriate qualifications from foreign universities. Further teaching personnel will be required for literacy programs, the in-service training of existing teachers and for expanding the staff of the university. There is also an urgent need to strengthen the staff of the Ministry of Education itself. Presently, the MOE relies extensively on a UNDP/UNESCO task force to carry on with daily administration and medium-term planning.

D. Conclusions

3.44 Mobilizing the human resources needed for the implementation of the 5-Year Plan presents a major challenge to the country. The manpower plan (see paragraphs 3.36-3.38) illustrates the magnitudes involved and outlines ways of overcoming present and future manpower constraints. However, there are some major areas of uncertainty which could jeopardize the achievement of the Plan's manpower targets. First, there is the possibility that emigration will continue on a substantially larger scale than estimated, seriously draining YAR's manpower resources especially in the professional and skilled categories. Second, reaching the ambitious targets for recruitment of foreign experts and technicians may prove to be difficult given the strong demand for skilled manpower in the neighboring countries. Third, the educational achievements of many Yemenis who graduate from local schools, are still rather low and almost all of them lack practical working experience. This will reduce their productivity at least in the early years of their working life.

3.45 These obstacles are serious and there is no easy solution in sight. Future manpower policies will have to concentrate on improving the material incentives for skilled labor, especially in the public sector; filling the most pressing manpower gaps through recruitment abroad, largely with the help - 28 - of foreign technical assistance; and strengthening the quality and scope of YAR's own education system. Solving these problems will be difficult and even if significant progress is being made during the Plan period it would still be prudent to assume that the manpower constraint is going to persist for some time to come.

3.46 Notwithstanding the recent rapid expansion in enrollment, YAR's education system will remain inadequate to cover the country's total requirements for trained manpower during the foreseeable future. On a global scale this can be illustrated by the fact that in 1975/76 expenditures for education were equivalent to less than one percent of GNP (Table 10.15 of Statistical Appendix), a very low ratio indeed. Although expenditures for education will grow fast during the 5-year Plan they will still be less than 2 percent of GNP in 1980/81. Moreover, the quality of education in Yemen is relatively low and needs to be upgraded. Education policy thus will have to pursue both quantitative expansion and qualitative improvement. Efforts should also be made to enhance the status of women, by providing them with greater educational opportunities and occupational choices, thus allowing them to contribute more directly to their country's development needs.

3.47 As the authorities proceed to implement the Plan objectives they are facing a number of serious constraints. First, there are physical constraints as the mountainous terrain of the country makes it difficult to expand education to rural areas. Schools are therefore concentrated in cities and towns. But even there large discrepancies exist in the availability of classrooms with some schools being underutilized while others are overcrowded. Second, the quality of many teachers leaves much to be desired at almost every level of education. This is largely the result of the rapid expansion of education facilities during the 1970's and it will take time to upgrade the qualifications of teachers. Third, a very large number of students graduating from secondary and technical schools aspire to proceed to higher education. This creates grave imbalances in the skill composition of the labor force. Fourth, there is a severe shortage of teaching materials and many of the adopted curricula and books are not particularly suited for Yemeni students. Finally, as was mentioned above, the MOE itself is seriously understaffed, a factor which weakens its administrative effectiveness.

3.48 The development of YAR's infrastructure, especially the expansion of the road network foreseen in the 5-year Plan (see Chapter X) should help to overcome some of the geographical constraints. Attention will also have to be given to proper regional balance of investment in school buildings so as to avoid overcrowding and underutilization of classrooms. The standards of under-qualified teachers should be raised by in-service training courses and unqualified teachers should gradually be phased out. Remuneration of teachers ought to be raised to a level where it is competitive with salaries paid for alternative job opportunities and a regular advancement system for teachers ought to be adopted. For example, graduates from primary teacher training institutes would have to teach for a certain number of years before they become eligible to enter secondary teacher training institutes. Likewise, admission to post-primary schools (general and technical) and later, to - 29 - higher education ought to be selectiveand only those students who qualify should be accepted. Selectivityin school admissionswould reduce ineffi- ciency and result in a more balanced skill structure of the labor force.

3.49 Measures recommendedabove will require increasing financialresources. As the Government'sown budgetary income is unlikely to meet these requirements,large-scale foreign assistance will be needed both for recurrent and capital expendituresto realize the Plan targets for education. Substan- tial foreign aid has already been provided during the past mainly by Arab donors (see Annex III-3) and it is to be hoped that such donations will continue to be made available in the future. The MOE estimates that more than half of all capital expendituresand much of the current expendituresin the 5-year Plan will have to be funded through foreign sources. At the same time, continuedand perhaps even increasing support through expatriate teachers and administrativeexperts is needed to implement the Plan objectives (see paragraph 3.43). In this context, greater attentionwill have to be given to the appointmentof Yemeni counterpartswho can be trained by the foreign experts and eventuallywill replace them. - 30 -

IV. STRENGTHENING THE ABSORPTIVE CAPACITY OF THE PUBLIC SECTOR

4.01 Modern economic and social development in YAR, as in many other LDCs, is spearheaded by the public sector. Although its contribution to the gross national product is much smaller than that of the private sector, the public sector plays a pivotal role in the modernization of the economy. It estab- lishes the physical infrastructure such as roads, ports, electric power, etc. without which modern development could not take place. It is responsible for education and manpower training; it organizes institutional and technical support for private enterprise; and selectively it takes the lead in modern manufacturing and agriculture.

4.02 In order to maintain the momentum of development it is therefore essential to further strengthen the public sector, and to increase its absorptive capacity. Above all this requires careful planning and coordination of public sector operations as well as modern administrative procedures and skills. The effectiveness with which public administration and planning has been conducted in the past, the problems that have arisen, and the steps required to overcome present and future constraints in these areas, are being discussed in this chapter.

A. Development Planning

4.03 Planning in the YAR is still in its infancy. As the country came out of its historic isolation and backwardness in the early 1960s, it also came to share the worldwide interest in national planning as a means of achieving progress. Planning for economic and social development was first entrusted to the Ministry of Economy in 1963. Three years later, a High Council for Construction and Development was decreed, and in 1968, a High Planning Council--a ministerial planning cbmmission. A "Technical Office" was created to serve as the technical arm of the High Planning Council. Realizing that planning is essentially a series of interconnected administrative actions which requires a well-organized civil service, the Government also established a Civil Service Commission in 1967. Through this step, the Government hoped to introduce some order into the administration, and to reorganize and improve it.

4.04 The institutional arrangements for planning, however, remained inoperative. For the diverse reasons which hampered the establishment of an effective government administration, the country was not able to develop a central organ, equipped with technical expertise, to handle and promote planning at the national level. The planning that was undertaken was confined to short-term and sectoral objectives and to preparation of individual projects. The civil war and the frequent cabinet changes in the decade after the 1962 Revolution, were not conducive to forging an overall and longer-term view of the socio-economic development of the country.

4.05 With the return of more stable conditions, and the growing awareness of the need for better institutional arrangements for planning, the Government established the Central Planning Organization (CPO) in 1972. A high ministerial committee headed by the Prime Minister was instituted to chart the country's - 31 - economic and social objectives. At the technical level, the CPO was gradually built up with the support of a team of foreign experts financed by the World Bank and Kuwait Fund. UNDP also provided important technical assistance. A number of Yemeni graduates and other supporting staff were induced to join the organization, and were trained in planning techniques. The CPO was attached to the Office of the Prime Minister, and its immediate task was to prepare the country's first public investment program. The CPO was also to compile the necessary statistical data, coordinate foreign assistance and assist in formulating social and economic policies. Concurrently, the Government extended its planning efforts by adopting its first ever annual budget in 1973, and through enhancing the administrative capability of the Central Bank and of key ministries with the help of technical assistance programs.

4.06 Development planning in the YAR has come a good way from its rudimentary beginnings in the early 70s. With the CPO's inexperience in planning, the acute shortage of planners and the virtual absence of any reliable statistics, the Government began its planning efforts in a modest way. The 3-Year Development Program, 1973/74-1975/76, which the CPO issued in April 1974, was essentially a public investment program. Not all public sector projects, however, were included. A number were left out for lack of information, particularly those being executed through bilateral assistance.

4.07 The experience gained in implementing the 3-Year Program, and the advances made in the country's statistical system, have enabled the CPO to formulate YAR's first 5-Year Development Plan, 1976/77-1980/81. This Plan is better coordinated than the 3-Year Program, and more directly linked with programs for the main sectors. The technical ministries were encouraged to prepare comprehensive plans for their sectors, and the CPO staff assisted them in this task. The formation of about 65 planning committees in ministries, public corporations and other entities, with CPO representation on each committee, considerably facilitated the preparation of the Plan. Unlike the preceding 3-Year Program, the 5-Year Plan specifies quantitative targets for each sector and traces the interdependence between sectors.

(1) Organization for Planning

4.08 The changes in the scope of national planning are reflected in the institutional arrangements for planning. The Chairman of the CPO is a cabinet- rank minister (Minister of Development) and reports to the Higher Development Committee, a cabinet committee headed by the Prime Minister. This Committee is assigned the overall responsibility for promoting, directing and overseeing the socio-economic development of the country.

4.09 While at the political level the planning function rests with the Chairman of the CPO and the Higher Development Committee, at the official and technical level the function devolves on the Deputy Chairman of the CPO, foreign experts and five departments of the CPO, as shown in Annex IV-1. The functions prescribed by the CPO for each of these departments are given in Annex IV-2. - 32 -

4.10 The CPO is manifestly understaffed to perform these wide-ranging functions. The expert assistance provided by external agencies has played a crucial role in building up the CPO. These aid programs have been in operation from the time of the CPO's inception; the World Bank/Kuwait Fund assistance program, for instance, is now completing its third phase. However, considerable delays have been experienced in recruiting experts under the aid programs, with adverse effects on many aspects of the CPO's program of work.

4.11 The Yemeni staff, for their part, have clearly demonstrated their ability to assume many of the responsibilities of the CPO. In its first years, the CPO was able to insist on strict entry requirements, and attracted some of the most qualified Yemenis. With increasing participation in the planning process, the level of competence of the Yemeni staff has grown. A number of them were even assigned to higher-level positions in other ministries, as part of the CPO's service in strengthening important points in the administration.

4.12 But more recently, the CPO's staffing position has tended to weaken. Its five departments now have a graduate staff of only 30 (including those in training) while 25 authorized positions remain vacant. With the increased competition from technical ministries, state economic enterprises and the private sector, the CPO is also no longer able to attract the same quality of staff as it did earlier. Besides, it is experiencing difficulty in retaining its existing staff; twenty-eight graduate staff have left the CPO over the last 5 years. The specialized training courses on planning and project evaluation given to the CPO staff at the National Institute of Public Administration have also not been repeated after 1973. Weak staffing is a problem that the CPO has in common with the YAR's entire administrative service, and we therefore deal with this in a later section in this chapter.

4.13 An important development during the recent past was the establishment, by a special decree of the Prime Minister, of statistical and planning units in other ministries and departments. Prior to this, planning was centralized in, and almost entirely confined to, the CPO. The 3-Year Program, for instance, was entirely the product of the CPO, with very little original contributions by the operational ministries. Recognizing the need to more directly associate the ministries in the planning function, assist them in collecting statistics, and to provide them with a better basis for decision-making, the CPO created these planning and statistical units in all the key ministries and departments. The staff in these units now total 45. The CPO has supervised the training of this staff and maintains close liaison with them.

4.14 While this is a step in the right direction, it appears that these units have been created at too low a level for them to be very effective. Each unit has typically a staff of 4 statistical assistants or clerks with just secondary to intermediate level education. The only function they are able to perform is collecting statistics. However, each of these units should properly be viewed as a planning agency for its department or ministry, and should therefore have the capability to formulate and review sector programs and necessary policy measures for that agency. This implies that the staffing of these units should be at least at the level appropriate for the CPO itself, and such that the staff of each unit could work closely with the head of their own agency. - 33 -

4.15 Perhaps the most important aspect of planning in the YAR, is that the Government has given political teeth to the planning organization. The country's political leaders are unambiguously committed to planning as a vehicle for progress. By locating the CPO in the Prime Minister's Office, the Government has vested it with sufficient authority to perform its crucial functions.

4.16 An important power vested in the CPO, so as to give effect to its development plans, is the approval of capital expenditures in the annual budget. Disbursement of funds on individual projects needs CPO authorization, but the CPO is in the process of divesting itself of this cumbersome procedure. CPO's approval of capital expenditures, though effective, is however, less than complete, since not all state economic enterprises yield their surpluses to the Government's unified budget. Several of the older state economic enterprises still enjoy some degree of freedom in the use of their net profits, and to this extent the application of their surpluses remains outside the control of the CPO. It appears that the procedures for the use of these surpluses should be systematized. The Government ought to decide on what degree of control is appropriate, and then apply it uniformly in all state enterprises.

4.17 Within the CPO itself, there is need for two important changes. First, there ought to be more effective coordination of all foreign assistance. At present, coordination is weak, and information on total technical assistance is not readily available. To plan for projects, and for programs for institutional support, the Foreign Aid Department of the CPO ought to have, at minimum, an overview of available and likely foreign aid and technical assistance. Second, there is need for the establishment of a new division for population and manpower planning. The acute shortage of skills in the YAR reflects the scant attention given to planning of what proved to be the country's most precious resource. The feebleness of the administration is due also in good measure to the inadequate planning for the manpower needed for the-public sector, through neglecting to gear the country's educational policy to meet these needs. Now with the findings of the first census and manpower survey, there is sufficient basic information for a new division to commence work on manpower questions; the present arrangement of entrusting these questions to the Statistics Department seems inappropriate. The new division should study the current and anticipated manpower requirements at different levels in the public as well as the private sector, and link these requirements with plans for the education and training of Yemenis at home and abroad. Following on these studies, it could proceed to strengthen the manpower plan which should also cover migration.

4.18 In a different area of planning, one can see the prospects for consultations with the private sector. By giving the private sector an opportunity to contribute its knowledge and judgments to the planning process, these consultations could become quite productive. Planning in the YAR has so far placed considerable reliance on investments by the private sector. And with workers' remittances reaching record heights, the role of the private - 34 - sector is likely to be further enhanced, as private investmentescalates. The agents of private sector representation--thevarious chambers of commerce and industry--arealready active, and appear willing to participate in the planning of their sector. The formation is now underway of the General Con- federation of Commerce and Industry, comprisingthe Chambers of Sanaa, Taiz, Hodeidah and all other centres. Once established,the Confederationwould be a convenientchannel for consultationsbetween the Government and the private sector. A period of trial and experimentationwill clearly be necessary, to determine at what stage and in what manner the private sector should be invited in. Involvementin planning of the less organized section of the private sector, viz, the rural sector, is another possibility,to be dealt with later (see paragraphs 4.31-4.33 below).

(2) Plan Implementation

4.19 If one of the stronger points about the arrangementsfor planning is the power vested in the planning organization,the weaker aspect is plan implementation. Planning in the YAR has succumbedto the fairly widespread tendency to identify planning with the writing of developmentplans; not enough attention is being given to implementationand to viewing planning as a continuous process. During the country's first plan, i.e., the 3-Year Program 1973/74 - 1975/76, implementationrates were low, and recovered only in the latter half of the plan period. Indeed, many of the projects included in the 3-year Program were hardly begun, and instead now form the core of the current 5-Year Plan. Only for a very few other projects envisaged in the Plan have feasibilitystudies been completed, although the Plan itself is already in force. The essentialpoint is that the writing up of the Plan, and the preparationof the projects on which it is based, should have proceeded simultaneously. The risk in adopting the Plan, without the necessary stock of well-conceivedprojects, is that projects might eventuallybe undertaken for which there is insufficientjustification on the basis of costs and benefit. Some project ideas may not materialize at all, since it takes on average about. two years for feasibilityand engineeringstudies to be completed.

4.20 The basic factor underlying this weakness in implementation,is the virtual absence of local effort to undertake feasibilitystudies or to prepare projects. Whatever project preparationwork that has been done, has been by foreign consultants,by foreign experts or aid agencies; the Yemeni authorities usually only reacted to these initiatives. The content and phasing of the public investmentprogram have thereforebeen largely determined by external aid agencies, though the location of projects is being increasingly influencedby the Yemeni authorities. Even in the current 5-Year Plan, top priority is being given to projects for which foreign aid is available, and there has been little pressure on the Yemeni authoritiesto evolve their own priorities.

4.21 Given this situation, the developmentof simplified forms of project analysis among the local staff, is both necessary and feasible. For projects producing traded goods, for example, a small group of the CPO staff could well prepare schedulescomparing estimated per unit production costs and c.i.f. import prices, so as to assess comparativeadvantages of these projects and rank their priorities in a rough and ready way. For non-traded goods, - 35 -

simplified feasibilitystudies, like those now done on feeder roads by the staff of the Highway Authority, should be possible. Ranking of priority of projects in this form is the best practicableway of asserting local priorities, and ensuring that foreign finance flows into the most desired projects. At the same time, efforts could be made by the technicalministries to develop their own capability to prepare investmentprograms and feasibilitystudies. A preconditionof this is of course the strengtheningof the staff of the CPO and of planning units in the ministries,combined with a resumption of the specializedtraining programs. Some of the staff could then be freed from much of the routine work in which they are now engrossed, to participate in project preparationand selectionwork. Some project preparationwas in fact undertaken by the local staff of the CPO in the first two years of the CPO's existence,but has since been abandonedwith the rapid increase in routine work.

4.22 Turning now to the implementationof individualprojects, the most frequent problem here is the shortage of trainedYemeni counterparts. A recent tripartite review by the Government,UNDP and IBRD revealed that nearly all ongoing projects in agriculture,whether financed bilaterallyor multilaterally, were severely handicappedby an acute shortage of suitable local counterparts. In the IDA Tihama project, the Government had perforce to recruit foreign surveyors and engineers as counterpartstaff. The indicationsare that this dearth of trained local counterparts,is likely to persist at least for the next few years. Another set of problems have been the underestimationof the management implicationsof projects, project managementweakness and delays in recruiting expatriatemanagerial staff. In some cases, the delays in recruitment were due to the Government underestimatingthe cost of foreign technical assistance. Implementationdelays have also frequentlybeen caused by the severe labor shortage, particularlyin the constructionindustry, as well as by the congestion in Hodeidah port.

4.23 A major deficiency of the planning system is the inadequatemonitor- ing of projects under execution. In the absence of early warning signals, delays and bottlenecks,particularly in projects financed from budget sources, are not discovered in time for corrective action to be initiated. 1/ Some progress has neverthelessbeen made since 1972/73 when there was no information on projects and no system of progress reporting. The Projects Department of CPO has gradually increased its efforts at supervisingprogress on projects, to complement the existing system for monitoring of projects executed by aid agencies. The departmenthas now under supervisionabout 200 projects, in 10 sectors. The chief problem the department faces is, again, inadequate staffing. It has, on average, only one graduate to supervise all projects within a single sector. Its work is rendered even more difficult, by the poor response from technicalministries to its questionnaireson progress on projects. Consequently,CPO officials have to visit the ministries frequently to obtain this information. On the other hand, field trips by CPO officialshave so far

1/ Many aid financed projects, on the other hand, do use good monitoring systems. Implementationof IDA projects, for instance,has in general been satisfactory. - 36 - not been feasible. And despite its efforts, the CPO has so far been unable to maintain updated information on the actual state of implementation of public sector projects.

4.24 The Government is aware of this weakness and has recently established, after consultation with a World Bank expert, a monitoring system for public sector projects. Under the general direction of the Minister of Develop- ment the planning units attached to technical ministries and departments (see paragraph 4.13) have been given the responsibility to closely supervise the progress of individual projects. The units are to prepare supervision reports at three-monthly intervals, and to submit them to the ministry or department concerned as well as to the CPO. The reports are then being analyzed by a special division of CPO's projects department which ascertains the accuracy and completeness of the reports, identifies problem areas, and suggests reme- dial action. So far, the monitoring system has not become fully operative. As in other areas of development planning, finding qualified people to staff the monitoring units proves to be a serious constraint.

4.25 A final aspect of plan implementation is the procedure for proposing and considering policy measures to facilitate the achievement of plan targets, particularly investment and production targets in the private sector. The current arrangements are for each ministry to make its policy proposals to the Higher Development Committee. The Committee's decisions are then transmitted to the Prime Minister's Office for approval by the Cabinet and the President. While this procedure is satisfactory, policy issues are often brought up for consideration tardily, and sometimes not at all. Examples of this, to which attention is drawn in various chapters of this report, are the handling of policy issues relating to agricultural development, capital intensity of production, population and migration, urbanization, incentives for the public service, and mobilization of domestic savings. A more systematic and continuous evaluation and study of policy measures is what is needed. This requires that senior officials in the ministries be increasingly involved in the formulation and analysis of policy recommendations.

(3) Basic Data for Planning

4.26 When the Statistics Department was brought into the CPO in 1972, the YAR had little, if any, basic data on which planning could rest. The Three- Year Development Program, 1973/74-1975/76, could, at best, therefore, be only a program of public investment and a partial plan. Since then, however, with the assistance provided by several multilateral agencies, the statistics and data base have improved significantly. Notably, the Statistics Department has:

- held the first population and housing census in 1975, and published the preliminary results in 1976. This could provide the basis for future surveys;

- completed the first manpower survey in 1975 and published its findings in 1976;

- published three socio-economic reports; - 37 -

published annually the Statistical Yearbook, which includes data on population, agriculture, industry, foreign trade, transport and communications, prices and finance;

undertaken a number of specific enquiries like the family budget survey of Sanaa, 1972, socio-demographic survey of Sanaa, 1972, industrial surveys, and more recently, a socio- demographic survey of Taiz;

established, in the course of the last two years, statistical and planning units in the ministries and departments, as well as statistical offices in Taiz and Hodeidah.

4.27 With the improved data availability, the new 5-Year Plan is better coordinated than the preceding 3-Year Program and also linked more directly with individual sector programs. However, the reliability of much of the data is limited. The statistics on banking and finance are perhaps more dependable than the data on most other sectors. The Financial Statistical Bulletin and Foreign Trade Statistics published quarterly by the Central Bank, in particular, are useful sources of information. The import figures published here, however, relate only to private imports and are at variance with the balance of payments data. The collection by the CPO of retail and wholesale prices of selected commodities also needs to be improved. Transport and communications statistics are incomplete, since there are no statistical offices in most of the departments and agencies concerned. In the construction sector, the information is based only on licenses granted in three cities. The data on the industrial sector are again based on fairly small sample surveys undertaken since 1971. Least dependable are the data on the most important sector, agriculture. Little information exists, except for two sample surveys in Taiz and Hodeidah. Agricultural statistics are thus largely based on personal judgments and discussions with field officials.

4.28 Improving the reliability of the existing statistics, should thus constitute the main objective of the Statistics Department, if the base for planning is to be strengthened. Inadequate budgetary allocations for statistical work has been the main impediment, coupled with the short supply of trained personnel. Though the single biggest department within CPO, the Statistics Department has a graduate staff of only 11, and an equal number of positions vacant. The staff is sufficiently qualified for the relatively simple work now done; almost all of them have had 3 to 12 months of graduate- level training abroad. But more staff is needed, particularly in the statistical and planning units in the ministries and in the regional offices in Taiz and Hodeidah, none of which have any graduate-level staff. Strengthening the statistical and planning units in the ministries could also be an effective way of providing technical supervision for the collection of statistics by ministries and departments. Priority should also be given to opening regional offices in all the 10 governorates.

4.29 The conditions of service of statisticians are comparable to those of other officials in the CPO and in the general administration. The staffing problems of the Statistics Department will thus need to be resolved in the context of the general problem confronting the administration. Because of the 38 - nature of its work, the StatisticsDepartment could, however, use special techniquesto attract more staff. To the extent that foreign funding becomes available for statisticalwork, universitystudents, for example, could be employed temporarilyon non-recurrentjobs, as on small surveys; this could also serve to familiarizethese students with the work of the Department and arouse their interest in continuingwith statisticalwork at a later stage. Again, higher per diems could be offered for special tasks to statisticians in the units in ministries and departments. Another advantagethe StatisticsDepartment has is the relativelygreater opportunitiesit provides for the overseas training of its staff.

4.30 There are promising prospects,therefore, for improvingthe statistical system, if the YAR could have continuedaccess to foreign funding for this purpose. And with the StatisticsDepartment's 5-Year Program of work (which assumes external assistance)the YAR ought to reach an intermediate stage of statisticsdevelopment. Over the next two years, the Department's work program includes a family budget survey, a demographicsurvey, participation in the World Fertility Survey, a cost of living survey and a nationwide agriculturalsample survey. To help in defining an emigrationpolicy, and to study systematicallythe impact of migration on the nation's development,a migration survey is also being planned for early implementation.

(4) Planning from Below

4.31 While Yemeni planning has overwhelminglybeen 'planningfrom above', encouragingbeginnings have been made to 'plan from below' by associatingthe local developmentbodies in plan formulationand implementation. This has become feasiblebecause of the peculiar Yemeni organizationfor self-helpat the local level. The backdrop to this is the decentralizedlocal administration, which the country has had with little change over the last four centuries. After the Revolution of 1962 and appropriatelegislation in the followingyear, the villagers demonstratedtheir traditionalcapacity for self-helpby forming a number of local developmentassociations. By 1977, 150 associationshad been formed throughoutthe country. Indeed, YAR is one of the few developingcountries (and the only Arab one) where these local associations have risen so spontaneously. Several special factors explain the formationof these local developmentassociations at this time. The local people, community leaders and the Yemenis who had returned to their villages with savings from work abroad, all shared a strong desire to develop local areas. But the central government,with its weak administrativemachine, could hardly foster local developmentprojects. The long drought beginning in 1968, and the compellingneed to look for new water resources,was another factor prompting local initiatives. The success of the first associations encouragedthe formation of new ones. The participativepattern of Yemeni village life and the leadershiprole provided by these associations,soon contributedto making them importantagents for developmentof local projects.

4.32 The central government,aware of the limitationsof its own admin- istrativeapparatus, has long recognized the local developmentassociations as an active force in rural development,and also yielded to them a part of the local tax collections. Initially,the central governmentand the CPO - 39 - dealt with each associationseparately, in the absence of a common organization to represent them. The local developmentassociations soon realized the disadvantagesof dealing individuallywith the central government,and formed the Confederationof Yemeni DevelopmentAssociations (CYDA) in 1973. The aims of CYDA are to coordinate local projects with those of the central government, to assist the local associationswith the technicalaspects of their projects, to strengthen their claims to central governmentand foreign assistance,and generally to deal with the central governmentmore effectively. The central governmentwelcomed this move. It gave CYDA a special budget for operating expenses,and the President of Yemen became its chairman. The establishment of CYDA has now provided the central governmentwith a more handy method of solicitingproposals for local development. In formulatingthe 5-Year Plan, the CPO asked CYDA to coordinatewith each local development association,and come out with a single local developmentplan. The CPO provided CYDA with staff assistance,while other government departmentslike Health, Agriculture and Water Supply, which have functions closely related to rural development, are also required to coordinatewith CYDA.

4.33 The local developmentassociations' record in carrying out projects has been impressivein projects relating to schools, dispensaries,feeder roads, water supply and electricity. The local developmentassociations and CYDA are more and more influencingthe location of foreign aided projects. CYDA has also, over the past 4 years, achieved most of its other objectives. Because of the limitationsof central plannng in the YAR, skillful harnessing of these local initiativescan be extremely important. 1/

B. Public Administration

4.34 The prospects for effective plan implementation,and with it, growth and development,hinge on the efficiency of the Government'sadministrative system; for it is through the administrationand the public enterprisesthat the Yemeni developmentplans will for the most part be implemented. While administrativeweakness is a characteristicof most LDCs, the Yemeni administration is frail even by these standards. Modern administrationin the YAR has a relativelyshort history, and began only in 1962 with the Revolution that establishedthe Republic. Before that year, the system of government was largely feudal, and had no semblancewhatever to an administrationin its modern sense. The era was characterizedby the concentrationof absolute power in the hands of the Imam and a few members of his family. The country was socially,economically and politicallybackward, and the Imam saw to it that Yemen was isolated from the rest of the world. The entire organization of the administration,including appointments, was handled by the Imam on a personal basis, and the system of governmentwas designed to fortify his personal power and to help him collect taxes. In such a setting, there was, unlike in many countrieswhich have been under colonial rule, no attempt by the Government to build administrativeor planning institutionsor to establish a trainedmanpower base for such institutions.

1/ The functions and achievementsof local developmentassociations are further reviewed in Chapter VII, D. - 40 -

4.35 Following the 1962 Revolution,successive Governments worked towards establishinga modern administrativestructure. Ministries,departments and public bodies were created with wide ranging functions. However, the modern administrativesystem that was introduced,essentially remained on paper, and very little was achieved in making it operative. The civil war from 1962 to 1970, the poverty and illiteracyof the people, their tribal and religious loyalties and the absence of modern education, all combined to thwart the building of a modern administration.

4.36 With the end of the civil war in 1970, and with a growing awareness among the political leadershipof the need for reform, there were renewed attempts to improve the administrativesystem. But the progress achieved has been limited, and the administrativemachine is still inadequatein meeting the requirementsof the country. In terms of number of employees,however, the growth in the administrationhas been striking.

1962 1970 1975

No. of government employees 4,000 13,500 31,300 No. of ministries and departments n.a. 20 33 /1

/1 See Annex IV-3 for a full list of the governmentalagencies.

Many of the ills of the present administrativesystem spring precisely from its rapid growth of the central governmentmachinery and a proliferationof decrees, without adequate study of the system's capacity for growth. The deep-rootedweakness in the YAR administrationhas many facets, but for sake of conveniencewe consider them under five broad heads: the acute shortage of qualified and experiencedpersonnel, the inadequate scheme of incentives, organizationaluncertainty, the need for training, and finally, the working of the state economic enterprises. We deal with each of these in turn.

(1) Shortage of Qualified Personnel

4.37 An acute shortage of qualified personnel is the most evident lacuna in the system, and one which has characterizedthe Yemeni administrationfrom the time of inception. In 1970 only 1 percent of the entire public service consistedof college graduates. The position has changed little since then, as in demonstratedby the results of the recent Manpower Survey: - 41 -

Table IV-1: GOVERNMENT EMPLOYEES BY EDUCATION LEVEL

Educational Level No. of Employees % of Total

University 691 2.2 Secondary 1,540 4.9 Preparatory 1,162 3.7 Primary 1,584 5.0 Informal Education 18,434 58.9 Literate 2,744 8.8 Illiterate 5,160 16 .5

Total 31,315 100.0

Source: CPO, 1975 Manpower Survey.

In 1975 only 2 percent of government employees have had university education. There was no national university from which the Government could recruit its top personnel. The Yemenis who sought education abroad, seldom qualified in fields like public administration, accounting, business management, or in other subjects relevant for a modern public service. Even the educated Yemenis in the administration are not fully effective because of their inadequate training and experience, and the country's heavy reliance on expatriates continues unabated. At the lower end of the scale, the picture is even more startling. Eighty-four percent of the entire public service have not even had primary schooling.

4.38 The critical shortage of trained personnel is reflected in the administration in several ways. At least 8,000 positions remain vacant in the public service, i.e., about 20 percent of the total number of approved positions.. The largest number of vacancies are in the technical departments, where as much as one-half of the approved positions are vacant. In recruiting for specialized positions like those of doctors, engineers, higher administrative and supervisory positions, the Civil Service Department is experiencing its greatest difficulties. The authorities have perforce had to fill a number of supervisory jobs, such as of director generals, with inexperienced graduates. Delegation of authority to these officers has thus not always been feasible, and with their inability and unwillingness to take decisions, executive responsibilities continue to mount at the political levels. In other areas of skill shortages too, the requirements of the Personnel Law on minimum qualifications have had to be relaxed, to fill some of the urgently needed positions. A recent example is the relaxation of the qualifications needed for elementary school teachers, so as to staff the quick expansion in elementary schools. Staff shortages have also led to frequent transfers of the few skilled staff, resulting in lack of continuity, and even disruption of work, in some departments. The competition for staff among departments has in addition resulted in a less than optimum distribution of staff between them. For the governorates and districts, trained staff are even more difficult to come by, than for the central administration. - 42 -

4.39 As an immediate relief measure, we recommend a reassessment of the manpower requirements at the top echelons of each governmental agency, and a reassignment of personnel on a more rational basis. This should be linked with a more rigorous check on the creation of new departments, especially where the new functions proposed are likely to overlap with those of existing departments, or could be readily subsumed by them. In the near- to mid-term, assuming that the public service is made more attractive, the prospect are promising of increasing the supply of personnel to it. With the establishment of Sanaa University, and the introduction of several appropriate lines of study, an increasing number of graduates are expected from 1978. Many years of training and experience will, however, be necessary for the new graduates to become fully effective in the administration. The educated labor force is also likely to be augmented by the Yemenis studying abroad, and by the return of those migrants who have acquired skills and experience in other countries.

4.40 The prospective increase in the supply of graduates, however, will not diminish the YAR's need for foreign technical advisers, for these graduates will need many years in-service training and experience before they could assume full responsibilities. The foreign technical advisers have played a vital role in helping to identify, and to provide for, the YAR's most urgent development needs. And this contribution has been made despite several obstacles: difficulties and long delays experienced in recruiting foreign advisers, the unavailability of an adequate number of Yemeni counterparts, and demands on the foreign advisers to deal with day-to-day problems, which dis- tracts them from their primary functions. Foreign advisers have often been provided (by multilateral agencies) in teams at key points in the administration: Ministries of Finance, Agriculture, Education, Public Works and Economy; CPO, Central Bank and the National Institute of Public Administration. The continuation and extension of this kind of institutional support will clearly be needed, if the tempo of development is not to be relaxed. A proposal now before the Government suggests a redesigning of the present arrangements, but we feel that it needs to be examined more closely before any changes are instituted. Under this proposal, foreign advisers would be brought in for shorter periods, say, 3-4 months at a time, though each technical assistance program would continue, as now, to be spread out over 2-3 years. Several advantages are claimed for'the proposed change: that it would afford the counterparts more opportunities to shoulder responsibilities when the foreign advisers are away; and that it would help increase the acceptability of foreign technical assistance in the YAR. But what is not clear is whether suitable foreign advisers could be recruited readily on these terms, whether they could be as effective under the new arrangements, and whether the total quantum of foreign technical assistance would not, as a consequence of this scheme, decline at this crucial point in the YAR's development.

(2) Incentives

4.41 While the stock of educated Yemenis is likely to grow in the years immediately ahead, the demand for them is increasing in all sectors and from abroad. Will then the public service, with its present level of remuneration and terms of service, be able to attract sufficient numbers of its qualified nationals, and also retain those who are now in its service? - 43 -

4.42 The current economic boom, rising wages in the private sector and escalating living costs have aggravatedthe problem of remunerationin the public service and brought this issue to the forefront. Although public sector salaries have more than doubled since 1976, they are still below those of the private sector or in neighboringoil countries. The public service does carry several advantages like relatively greater security of tenure, availabilityof scholarshipsand study leave, prestige of service and a scheme of pensions. But despite these compensatingfactors, the public service is severely handicapped,and is facing increasing competitionfrom other employers at home and abroad for the small number of qualified personnel.

4.43 Compoundingthe problem are the lack of standardizationof salaries within governmentdepartments, and the demoralizingeffects of neglecting the principle of merit. There is no position classification,and salary differentials are not necessarily linked to specializedpositions and responsibilities. Most ministries and public corporationsadopt their own pay scales and fringe benefit schemes. There are no descriptionsof the responsibilitiesand duties of each job. The salary differentialscontribute to the frequencyof staff movements, as the different departmentsvie for the limited number of qualified staff. Insufficientattention to staff evaluation and to promotion according to merit, is also affecting adversely the morale of the service. Even an adequate system of personnel files is lacking; besides the more obvious consequencesof this inadequacy,the Law of Pensions also cannot be applied until personnel files are built up. Nor is there a proper system of recording, filing and storing of information. Although in theory, recruitment and promotion are centralized in the Civil Service Department, in practice the ministries and departments act on their own, and no uniform principle is followed. However, the Government has recently addressed these issues through Law No. 49 which calls for a fair system of compensation,based on the principle of merit. The new law is to replace the different personnel decrees issued by various ministries and departments. The Government is also trying to find solutions for.the pressing housing problems of civil servants.

4.44 There is obviously a compellingneed for several reform measures. One of them carries a large price tag; the cost of others will be minimal. The expensive item of reform is the need to raise salaries and to provide compensationfor rising cost of living, especially for housing. The Govern- ment appears to be aware of this need. Popvlar opposition to salary increases of public servants -- a factor in many other countries-- is luckily not a problem in the YAR. Other reform measures could increase the attractiveness of the service, at little cost. The law that recruitmentshould be done centrally, and on merit, should be followed in practice. Promotions and incentiveallowances should be on a fair evaluation of performance and on the level of training achieved. The developmentof personnel departments in each ministry and departmentwill facilitate some degree of flexibilityand delegation of personnel functions to them. Also needed are classificationof positions, rationalizationof salary differentialsand the adoption of a public service manual. The scheme of transfers should be amended to emphasize the need for a specializedand career service. Training opportunitiesabroad can be a forceful incentive for young graduates, and a scheme for these facilities - 44 - should be regularized. A minimum period of service should be stipulated prior to training abroad, and the requirement that trainees should return to the public service, should be enforced. Given the will on the' part of the authorities, and the still manageable size of the public service, such a program of reform should be feasible, and would lay the foundation for the growth of a viable administration.

(3) Organizational Issues

4.45 Another aspect of the administrative problem is the uncertainty concerning inter-departmental relationships, and about the relationships between the local and central administrations. Partly because of the quick growth of the departments of the central government, there is no clear demar- cation of the responsibilities of each department. Associated with this is the insufficient coordination between departments working on related issues. A good example of this is the absence of coordination between the different ministries to which the various state economic enterprises report.

4.46 The problems are even more marked in local-centre relationships, and appear to flow from conflicting aims of the authorities. On the one hand, they recognize the value of local administration in a large country with a highly dispersed population and a relatively new central administration. On the other, they show a distinct desire to strengthen the power of the central government, a desire which seems in part at least to spring from some fear about the possible divisive effects of excessive local autonomy. These conflicting aims are reflected in the legislation relating to local administration. One of the first attempts to develop local administration, and to vest it with special authority, was by the Law of 1963 and several decrees which followed it. But with growing doubts on the relevance of the 1963 Law to local realities, it was revoked in 1976, and replaced by Law No. 64 of that year.

4.47 Whatever the merits of the centre vs local authorities issue, the Law of 1976 has not removed the ambiguities that have for long existed in the relationships between the central and local administration. In particular, there is no clear definition of the responsibilities and authorities of the governor, who is the representative of the state in each governorate; consequently, the relationships between him and the central state divisions, are ambiguous. The governor, for instance, has no administrative supervision over departments like the police or traffic control, though he is held responsible for these functions. Again, the financial responsibilities of the governors are also ill-defined, and they perforce have to come frequently to the capital, to appeal to the central government for supplementary funds to carry out their responsibilities. At the local level, therefore, we feel that administrative reform must include two main components: removing these ambiguities; and organizing more effectively the representation of the central government in the governorates and districts. - 45 -

(4) More Training

4.48 Another major weakness is the inadequate arrangementsthat exist for in-service training. A viable public service and an efficient administrative structurewill obviouslytake a long time to evolve in the YAR. However, the YAR's developmentopportunities are immediate. In-service training therefore acquires special importanceas the only practical means of alleviating the problem of administrativeweakness fairly quickly. The sole institution in the YAR enjoined with the responsibilityfor administrativetraining is the National Institute of Public Administration(NIPA). It commencedwork in 1963. It received only occasionalUnited Nations assistance until 1973, when a regular UN project to assist NIPA became effective. In 1974, the Government formally institutionalizedNIPA by issuing Decree No. 138. This attached NIPA to the Council of Ministers, and establishedit as an autonomous governmental agency, with high governmentrepresentation on its board and with the Minister of Developmentas its chairman. By this decree, the function of NIPA is "to train and qualify personnelin the civil service and the public corporations in the furtheranceof improvingthe standard and efficiencyof the administration. The institutewould also carry out research and undertake publications in the field of public administration".

4.49 Despite its creditableefforts, NIPA has been unable to live up to these high expectations. In the 2-1/2 year period, 1974-mid-1976,it trained 1,167 public servants or only 3.7 percent of the total public service. The training provided,by type of course, is as follows:

Table IV-2: NUMBERS TRAINED AT NIPA, 1974 - MID-1976

Type of Course Numbers Trained

Public Administration 162 Organization& Methods 26 Top Management 60 Personnel Administration 80 FinancialAdministration 839

Total 1167 /1

/1 The classification,by level of staff trained, is as follows: 60, Under Secretariesand Director-Generals;300, Heads of Departmentsand Divisions; and 807, the rest.

While training for the public service has been meager, training for the public corporations,i.e., state economic enterprises,has not been undertaken at all. Progress on the two other functions envisagedfor NIPA, viz, research and publications,has been only sporadic; the last research project attemptedwas in 1974. - 46 -

4.50 The shortcomingsof NIPA are attributablebasically to inadequate manpower and material support for this key institution. Only two foreign experts are now available for teaching its variety of courses. Local counterparts for the foreign experts are in extreme short supply; NIPA at present has only 7, plus a few more undergoing training abroad. With the attraction of higher salaries abroad and in the private sector, NIPA, in common with other governmentalagencies, is experiencingdifficulties in recruiting and retainingmore counterparts. Lack of equipmenthas hampered the programs for clerical training,particularly at NIPA's branches at Hodeida and Taiz. Another source of NIPA's difficultieshas been the inadequatecooperation with the departmentsof government. There is, on the one hand, a noticeable decline in the interest of experts within the public service, to assist in the teaching of NIPA's courses. On the other hand, efforts are inadequate to get ministries and departmentsto submit periodicallytheir proposals for training, and to persuade officials to undergo training as part of their work.

4.51 It can be estimated that at least 15-20 percent of the public service will need to be trained within the next two years, if a meaningful impact is to be made on the administrativeproblem. This implies a quadrupling of the effort of the past several years at each level, i.e., top management, middle management,new graduate entrants, secretarialand clerical. In addition, high priority needs to be given to the initiationof new courses in public enterprisemanagement for the staff of the state economic enterprises. The first requisite for such a program is a greater government commitment and support to NIPA -- particularlyin the provisionof counterpartsand of equipment-- commensuratewith the importantrole assigned to it. Other measures that can be introducedearly are a more systematic formulationof training needs within the ministries and departments,and more credit for training completed, in determiningthe promotion of public servants. Greater government commitment to NIPA could also assist in bringing about a shift in the prioritiesof several bilateral and multilateraldonors.

4.52 NIPA probably will require at least 6 additionalexperts in public and business administration,organization and methods, personnelmanagement and secretarialtraining. A projectmanager will be needed to coordinate the program, and to work out the longer-rangeobjectives of NIPA. And to ensure the longer-termviability of NIPA, a minimum for 12 new counterpartsshould be provided. We recommend this as the minimum program compatiblewith the government'sannounced policy of regardingNIPA as the principalvehicle to effect improvementsin the organizationand the administrativecapacity of the public service, and to raise the productivityof the state economic enterprises.

(5) State Enterprises

4.53 State economic enterprisesare customarilychosen as a means of keeping certain economic activitieswithin the state sector,while at the same time attemptingto avoid the administrativerigidities of operatingthem as part of the regular civil service. But in the YAR, a number of these enterprises were actually brought into the state sector so as to assist the private sector to run them more efficiently. For instance,the ElectricityCorporation - 47 - was created in 1975 to assist the Sanaa, Taiz and Hodeida enterprisesto meet the sharp rise in consumption. The Tobacco Corporationhas a similar history. A few, however, were set up under special circumstances. The Yemen Rocksalt Corporationhas been fully government-ownedsince Turkish times. The Cotton Corporation is almost entirely state-owned,as the private sector could not be expected to fulfill the Corporation'saim of supportingthe growing and export of cotton.

4.54 The YAR now has 18 state economic enterprises,most of them established between 1970 and 1975. Nine of them are totally-ownedby the state, and the other nine, only partially-owned. Most enterprisesreport to the Ministry of Economy, and the chairmen of the enterprisesare directly responsible to the Minister. The boards of these enterprisesare composed of both part-time and full-timedirectors, and functionwith varying degrees of efficiency. The central governmenthas made increasingefforts to bring these enterprisesmore directly under its control, through requiring CPO approval of their investment programs,yearly reporting of their budgets and accounts to the Ministry, and through occasional inspectionvisits by ministry officials. Nevertheless,control over the operations of these enterprisesremains weak. Several enterprisesdo not even have a manual of operations,budget and accounts or regular auditing. And without these, no analysis of the problems of these enterpriseshas been feasible.

4.55 The state economic enterprisesare somewhat better provided with managerial and technical skills than is the public service. Salaries tend to be higher in these enterprises (and considerablyhigher in the banks and airlines)but are subject to central government control. The enhancement of salaries would be an importantelement in the program to strengthenthe management of public sector enterprises. We would also support the proposal, currentlybeing considered by the Government,for some uniformity in salaries in the various corporations,and in the staff rules and regulations.

4.56 One of the healthy features of the YAR's state economic enterprises, is that they are not allowed to snuggle into a monopoly position,but are subject instead to varying degrees of competitioneither from other local producers or from imports. The state enterprisesdealing with foreign trade, tobacco, Yemen Bank for Reconstructionand Development,cement, textiles, air travel and pharmaceuticals,for instance,all face competition,in one form or another. A few like the Electricityand PetroleumCorporations are, however, complete monopolies. In the petroleum sector, the Government uses price controls to counter any possible adversemonopoly effects.

4.57 Table IV-3, which follows, shows the net profits of most state enterprises. Only the Foreign Trade Corporation incurred losses of substantial magnitude. Twelve of the 18 enterprisesare estimatedto have earned profits, and this would appear creditable,both in view of the competition they face and because of their relativelyshort operatingexperience. These profits seem indeed to have induced some degree of complacencywithin the Government. However, in most enterprises,the profits are small in relation to the capital employed, and there are clear prospects for improved productivity and profitability. Operationalinefficiencies are still quite common. - 48 -

An acute shortage of good, trained managers afflicts nearly all state enterprises, and is one of the more important factors underlying the inadequate level of profits. Many enterpriseshave, in addition, lost skilledworkers to neighboringcountries. But, given appropriateincentives, the outlook is now promising for building up the stock of educated and skilled labor.

Table IV-3: NET PROFITS OF THE STATE ECONOMIC ENTERPRISES, 1975/76*

Enterprise Net Profits (Rials) Public Sector

Weaving 1,661,450 Salt n.a. Airways 879,800 Cement 4,035,900 Hodeidah Port 4,658,300 Industrial n.a. Central Bank 31,865,600** Water and Drainage n.a. Roads Department n.a. Total Public Sector 43,101,050

Mixed Sector

Pharmaceuticals 220,200 Sanaa Electricity 547,500 Petroleum 1,077,700 Tobacco 1,135,000 Cotton 1,969,400 Printing n.a. Foreign Trade n.a. Yemen Bank for Reconstruction and Development 2,519,100 Taiz Electricity n.a. Total Mixed Sector 7,468,900

Total Public and Mixed Sector 50,569,950

* Data on losses are not available. ** The high profits of the Central Bank must be seen in the light of its unique position.

Source: Ministry of Finance, Government Budget, 1975/76.

4.58 On balance, one finds the progress of these enterprises encouraging, especially since these are still infant enterprises, and operate under difficult conditions. A general requirement for their improved performance is that - 49 -

the Government ought to increasinglyview them as commercialundertakings, and they should be managed with that specific objective. The articles incor- porating five of these enterprisesdo not now even envisage them being run as commercialundertakings. Government proposals for reform have so far been concerned mainly with meeting targets of investment and turnover;commercial operation has not been a primary objective. The major elements of reform -- implicit in the precedinganalysis -- which we consider necessaryto place these enterpriseson a commercialfooting are:

(a) the enterprisesshould choose the best managers available, and provide them with specializedtraining;

(b) staff salaries in most corporationsshould be increasedto make them more competitive,and a flexible scheme of incentives should be introduced;and

(c) a well-formulatedsystem of accountingand auditing should be introducedin each corporation,and made mandatory. The accounts should include statisticson production,costs, sales, employmentand profits. The accounts should be audited, and the ministry concernedshould review them annually.

C. Conclusionsand Recommendations

4.59 In reviewingplanning in the YAR, the weaknesses in the system tend to come to the fore. We have in this chapter attempted to present a balanced assessment,and have drawn attention to the system's strengths as well. The CPO has been vested with sufficient authority to perform its crucial functions. With the experiencegained in the last several years, and with the improvement in the statisticalsystem, planning has become more effectiveand coordinated. The 3-Year DevelopmentProgram did succeed in creating the nucleus of a modern sector. A less evident achievementof the first program is that it has helped indirectlyto train project managers, and important lessons have been learned by the administrationin implementingprojects. The program has thus created a potential that did not exist before, and what has been achieved is essentially in the nature of laying the foundationsfor future advance. When the program was launched in 1973, developmentplanning was entirely new in the YAR. The progress made since then, despite the backward conditionsin the country, is thereforepraiseworthy. And although the CPO is seriouslyunder- staffed and overloadedwith responsibilities,it is still one of the most efficientdepartments of government. It has also served as a model to the other government departments,and has helped to disseminateamong them some of the basic concepts of modern administration.

4.60 If planning has passed its embryonic stage, it is neverthelessstill in its infancy. The country's feeble administrativesystem restricts the extent to which planning, in its wider sense, can be improved in the short run. But there are distinct possibilitiesof strengtheningthe administrationin the longer term. If the incentive system could be revamped, the prospects are promising of increasingthe supply of qualifiedpersonnel. However, until .50 - the local personnel can be fully effective, continuedaccess to foreign technical assistance will be necessary. In-service training is the only other feasible way of alleviating the administrativeproblem fairly quickly. The outlook for the state economic enterprisesis also encouraging. For some time now, the Government has had a formal commitment to a policy of administrative reform, but progress has been small. The problem is not so much in the legislation on administrativereform, but rather in the actual practices followed. Given the deficienciesof the central administration,we feel that the accent on private sector investmentsin the current 5-Year Plan, and the harnessing of local initiativesin implementinglocal projects,are entirely appropriate.

4.61 With the YAR's increasingaccess to external resources,the administrative weakness, together with the general manpower shortage, appear more and more to be the real factors holding back the country'sdevelopment. Our recommendationson what improvementscould be made in the country'splanning and administrativesystem, are given at various points in this chapter; for sake of convenience,we restate them below:

(a) DevelopmentPlanning

(i) Strengthenthe staffing of all departmentsof the CPO.

(ii) Raise the level of staffing of the statisticaland planning units in ministries and departments.

(iii) Adopt a uniform practice on government control over the surplusesof state economic enterprises.

(iv) Coordinate effectivelyall foreign assistance.

(v) Establishwithin CPO, a new division for population and manpower planning.

(vi) Consult with the private sector on policy and investment proposalsaffecting it.

(vii) Give greater emphasis to project preparation,

(viii) Develop simplifiedforms of project appraisalamong the local staff.

(ix) Resume the specialized in-servicetraining courses in planning and project evaluation.

(x) Strengthenproject monitoring and supervision,

(xi) Study and evaluate policy measures more systematically.

(xii) Improve the reliabilityof existing statistics. - 51 -

(xiii) Strengthen staffing of regional statistical offices, and open offices in the remaining governorates.

(xiv) Continue to harness through CYDA local initiatives for development.

(b) Public Administration

(i) Reassign personnel at the top echelons of the public service.

(ii) Check more rigorously the creation of new departments.

(iii) Extend the use of foreign technical assistance at key points in the administration.

(iv) Make remuneration in the public service more competitive; in particular find solutions to the pressing housing problem.

(v) Recognize merit in recruitment, promotions.

(vi) Classify positions, rationalize salary differentials, systematize transfers and foreign training, and adopt a public service manual.

(vii) Remove ambiguities in central-local administration and in interdepartmental relationships.

(viii) Provide greater government commitment and support to NIPA.

(ix) Initiate courses in public enterprise management.

(x) View state enterprises as commercial undertakings.

(xi) Choose and train the best managers available to these enterprises.

(xii) Make salaries and incentives in the state economic enterprises more competitive.

(xiii) Introduce a well-formulated system of accounts for the state enterprises, audit and review these annually. - 52 -

V. FINANCIAL MANAGEMENT

5.01 Before the 1962 revolution, financial transactions in YAR - like most other economic activities - took place in a largely traditional environment. There was no central bank issuing a national currency, no formal state budget, and only one foreign commercial bank. A large subsistence sector dominated the economy while national saving and investment rates were very low, reflecting the extreme poverty of the population.

5.02 This situation has changed dramatically over the last few years. Fast growing money incomes, especially from workers' remittances, have led to a rapid monetization of the economy. This was accompanied by the establishment of modern financial institutions who are gradually spreading their activities throughout the country. 1/ Many people who only a few years ago were living in a subsistence economy, are now increasingly exposed to money incomes, cash transactions and bank credit.

5.03 The process of monetization which is still under way, has created major stresses and imbalances. The Government is trying to bring these imbalances under control by gradually developing the tools for effective fiscal and monetary management. In this endeavor it relies extensively on the advice of international organizations, especially the International Monetary Fund.

5.04 During the past, two issues have created serious challenges to the effectiveness of the authorities' financial management: the need to mobilize adequate financial resources for the public sector, and an excess of effective demand over available supplies which caused serious inflationary pressure. Both issues were difficult to resolve in the context of Yemen's economic situation but considerable progress has been made, especially in the field of budgetary management.

A. Budgetary Policy

5.05 As can be seen from the table below the Government has been unable until 1975/76 to cover its current expenditures from domestic revenue. Public investment and indeed, part of current expenditures had to be financed through foreign assistance. This was mainly the result of a narrow tax base which did not allow the public sector to capture an adequate share of the country's growing money incomes.

1/ For a brief review of the history and present state of YAR's financial institutions, see Annex V-1. - 53 -

Table V-1: SUMMARY OF STATE BUDGET (YR million)

1970/71 1975/76 1976/77

Current Revenues 97 565 1,293 Import Duties (53) (393) (929) Others (44) (172) (364)

Current Expenditures 170 604 841 Current Deficit/Surplus -73 -39 +452 Development Expenditures 83 340 463 Foreign Assistance, net 119 609 606

5.06 However, the Government has made strenuous efforts to strengthen the budgetary situation. By raising additional revenue and keeping a strict control over current expenditure, it managed to gradually eliminate the current deficit and, more recently, to achieve substantial current surpluses. As the above table shows current domestic revenue rose from a level of 57 percent of current expenditure in 1970/71 to 94 percent in 1975/76, while the current deficit declined both in real and nominal terms. During 1976/77 the current budget yielded its first surplus (YR 452 million) and for 1977/78 a similar result is expected. These are remarkable achievements for a country like Yemen which is still at a very early stage of economic development.

5.07 Current government revenue amounted to only about 8 percent of GNP in 1975/76, but rose to 12 percent of GNP in 1976/77. Its structure is dominated by import duties which in 1976/77 yielded 72 percent of total revenue. Other indirect taxes contributed 8 percent while direct taxes on incomes and profits represented only 3 percent of the total. The remaining 17 percent were income from property, administrative fees and others. These percentages illustrate clearly the structural weakness of YAR's present tax system.

5.08 Major efforts are therefore required to diversify the sources of government revenue. The IMF in a report on tax reform submitted in 1974, made a number of recommendations to that effect. It suggested a streamlining of the tax system that would eliminate low yielding tax provisions and free administrative manpower for the collection of larger tax debts. It further advocated the preparation of a general tax code; the improvement of Customs Department operations; and the establishment of a training program.

5.09 Some of these recommendations have been implemented by the Govern- ment. For example, more emphasis is given to the collection of rental income taxes from larger real estate owners; a turnover tax has been introduced; the collection of import duties has been improved; a training institute for customs officials has been opened; and the first consolidated tax code is being prepared. However, further improvements will have to be made before the Government has an adequate instrument of resource mobilization at its disposal. - 54 -

5.10 In the short run, emphasis will have to be given to improving the collection of existing taxes, especially import duties which are yielding rapidly growing receipts as the import volume expands further. A thorough review of the present structure of import tariffs would be desirable in order to maximize the revenue impact of such duties. Other promising sources for additional revenue would be excise duties, sales and turnover taxes. There is also much scope for direct taxation of business incomes. However, the administrative and political obstacles against broadening the tax base are formidable, and it will take time before a significantly higher tax ratio can be achieved.

5.11 The relatively low level of current government revenue before 1976/77 has acted as a constraint to the establishment of an effective public administration. It has prevented the Government from paying competitive salaries to civil servants (see Chapter IV) who often used the training provided by government agencies to obtain higher paid jobs in the private sector or abroad. Although government salaries have been repeatedly increased in recent years, the gap to private sector incomes has not narrowed. More recently, civil servants are being offered more fringe benefits, especially low priced foodstuffs and other consumer goods supplied by the newly established "Corporation for Government Employees". However, further improvements in the remuneration of civil servants - especially some form of housing allowance - appear necessary to retain qualified staff and to provide adequate material incentives for an active recruitment program.

5.12 On the expenditure side there is some scope for eliminating redun- dant government workers of whom there are many in the lower grades. Given the strong labor demand by the private sector these unproductive government employees could be gradually phased out. Another item that could probably be eliminated from the budget is the gasoline subsidy. Although such measures could only marginally improve the budgetary situation, they would be steps in the right direction. In this context, it should be emphasized that so far the Government has exercised great restraint on current spending, including defense expenditures which are the largest item in the budget (38 percent of the total in 1976/77). Since 1970/71 the latter have grown at a much slower pace than expenditures for education, health and economic services. Defense expenditures are also quite moderate in relation to GNP (less than 5 percent) as well as in absolute terms, i.e. US$109 million in 1976/77 which is relatively low for a country of Yemen's geographical size and population. Budget appropriations for 1977/78 and 1978/79 are even lower.

5.13 A growing contribution to the government budget is being made by the public and mixed enterprises. Based on incomplete information it can be estimated that revenue from dividends has risen from about YR 10 million in 1975 to an estimated YR 120 million in 1976/77. As new mixed enterprises are planned to be established over the next few years government income from this source is expected to grow further.

5.14 During the past, the relatively low level of current revenue has not held back public investment. Generous foreign aid has enabled the Government to finance all projects and programs which it could effectively handle. More- over, cash grants provided by Saudi Arabia have helped to ease the buTden of -55 - current expenditures. Although substantial foreign aid is likely to be available in the foreseeable future, it is being increasingly supplemented by domestic fiscal resources. The longer term objective of fiscal policy continues to be to raise sufficient local revenue that the current budget can be balanced and a significant contribution can be made to the financing of government capital expenditures.

B. The Issue of Inflation

5.15 Inflationary pressure has been heavy in recent years. Although the exact dimensions of the problem are difficult to gauge as there are no reliable and comprehensive price indices for the country, the consumer price index for Sana'a (Table 9.1 of Statistical Appendix) indicates that prices rose by about 160 percent between 1972 and 1976, or at an average rate of 27 percent p.a. During 1976/77 consumer prices in Sana'a were reported to have risen by 39 percent.

5.16 The principal source of inflation has been workers' remittances which are exchanged by the Central Bank into local currency resulting in a rapid increase of domestic money supply (see table below). This factor was reinforced by the deficit of government domestic transactions and more recently, by an acceleration of bank credit to the private sector.

Table V-2: RECENT MONETARY DEVELOPMENTS (YR million)

Fiscal Year ending June 30 1974/75 1975/76 1976/77 increase in money supply /1 386 1,367 1,935 caused by Workers' remittances, net 859 2,057 3,791 Government domestic deficit /2 220 147 286 /3 Bank credit to private sector, net 113 178 932 Net imports of goods and services -970 -1,470 -3,003 Other factors 164 455 -145

/1 Including quasi-money. 7-7 Excess of government domestic expenditures over domestic revenue. This concept differs from the one used in Table V-1 as it compares domestic revenue with domestic expenditure in both the current and development budgets. /3 Preliminary estimate.

5.17 The increase in incomes and money supply was not accompanied by a similar growth in the supply of goods and services. Real GDP grew at about 9 percent p.a. between 1973/74 and 1976/77. Imports, another important source of supply for domestic markets, were constrained by physical factors, especially the congestion in the port of Hodeidah. Moreover, import prices themselves grew fast during this period, almost doubling between 1973 and 1977. - 56 -

More recently, import prices have been rising following the gradual devalua- tion of the US$ to which the Yemen Rial is pegged (see Chapter VI). Finally, local production factors - particularly labor and land - became increasingly scarce driving up wages and rents, and raising production costs.

5.18 Actual price increases would have been even stronger if it had not been for the extensive cash holdings by the population which slowed down the velocity of money circulation. In addition, a substantial part of money supply was absorbed by the progressive monetization of the economy as areas previously relying on barter deals or using of Maria Theresia Thalers and Saudi currency, adopted the Yemeni Rial for their business transactions. The exact magnitude of these two factors cannot be measured. But their combined impact is illustrated by the fact that from 1970/71 to 1976/77 the ratio between money supply and GNP doubled, rising from 14 percent to 28 percent.

5.19 To some extent, the past increase in prices reflects the inevitable adjustment of a poor subsistence economy to the higher price levels of a more affluent money economy. However, continued inflationary pressure creates distortions in resource allocation and income distribution, threatens to erode confidence in the local currency, and weakens the saving propensity of the private sector. The Government therefore is rightly concerned about the dangers of unchecked inflation, and has started to take action aimed at restraining the inflationary forces.

5.20 The principal factor, i.e. workers' remittances, is of course difficult to control directly without seriously disrupting the country's foreign exchange earnings. Compulsory confiscation of remittances by the state through exchange regulations and collecting part of it through direct taxation, would be counterproductive causing widespread evasion and a reduction in the inflow of such funds. The Government has therefore decided to tackle this problem from the supply side by easing physical constraints in the country's transport network thus allowing a more adequate flow of imports. Significant progress is already being made in increasing the handling capacity of Yemen's principal ports (see Chapter X) and supply conditions have already much improved. This is supplemented by a vigorous expansion program of the country's road network which will allow goods to be shipped quickly to the interior. Easing other physical constraints such as the acute housing shortages in Sana'a and other urban centers will take more time but should eventually lead to a stabilization and perhaps even reduction, in the extremely high level of rents.

5.21 Accelerating the flow of imports will increase revenue from import duties; this in turn will help the Government to plug another important source of inflation, i.e. budgetary deficits. Ideally, all domestic expenditures made by the Government for current and investment purposes, should be financed from locally collected revenue. In view of fast growing government expenditures, this is difficult to achieve notwithstanding recent progress in fiscal management (see para. 5.06). The IMF estimates that during 1976/77 domestic expenditures by the Government exceeded domestic revenues by YR 286 million. Thus, further effort is required to reduce and eventually fill this gap. Action required to achieve this objective has been discussed in the preceding section. - 57 -

5.22 The third major factor of inflation, i.e. bank credit to the private sector, has given rise to concern in 1976/77. Such credits have grown by almost YR 1 billion during that year, that is over five times as much as in the previous year. This extraordinary expansion was partly related to the rapid growth of imports which in June 1976 claimed two thirds of total advances outstanding to the private sector. Another important category that has shown rapid growth are credits for business enterprises (contractors, transport firms, service industries) and personal loans. In June 1976, they represented approximately one fourth of all bank credits outstanding, having grown by 150 percent during the preceding 12 months (Table 6.3 of Statistical Appendix). Although precise information about the end-use of private bank credits is not available, there are strong indications that a sizable amount of these loans, including some claimed for import financing, has been diverted to real estate speculation and to the speculative financing of stocks of commodities that are temporarily in short supply (including foodstuffs). In this fashion, bank credits have directly contributed to inflation in some of the most sensitive sectors of the economy.

5.23 To avoid excessive inflationary pressures from the banking sector, credit to the private sector should be limited to essential trade-related operations and to the partial financing of quick yielding investment projects. The amount of savings and time deposits collected by the banking system could serve as an indicator for the overall limitations of bank credit. The fact that at the end of 1976 bank loans to the non-government sectors exceeded term deposits by about 40 percent (Table 6.2 of Statistical Appendix), illustrates the dimension of excessive credit expansion.

5.24 A stabilization program adopted by the Government in consultation with the IMF and covering the period from January 1, 1977 till June 30, 1978 was designed to restrain commercial credit expansion. This program which also included some of the fiscal measures mentioned before, called for the limita- tion of advances by each commercial bank to 50 percent of all deposits; required commercial banks to liquidate all outstanding loans from foreign banks and not to acquire new ones except if the proceeds are used for the financing of development projects; and urged the banks to ascertain that credits extended for the financing of international trade were not used to finance the purchase of land and real estate. In addition, the banks were authorized to raise cash margins for letters of credit to 30-100 percent of import values, except for essential imports for which cash margin requirements were kept at 20 percent.

5.25 These measures have had a significant restraining impact on the further expansion of commercial bank credit. Although initially somewhat slow in implementing the new targets, the banks have come under increasing pressure by government authorities to adhere to the agreed ratios. As a result, bank credits to the non-government sectors have ceased to expand further-during 1977/78.

5.26 Continued adherence to the restrictive policies adopted by the Government in the recent past together with efforts aimed at removing present bottlenecks in the distribution system, will not fail to yield tangible - 58 - results within a relatively short time. There are already signs that the rate of price increase is declining and that the Government'santi-inflationary program is becoming more effective. There is substantialscope for further action, especially in mobilizing additional government revenue. Close control over public expenditureneeds to be maintained, particularlyduring the present Five-Year Plan when rigorous standardsof selectionare required to assure the technical and economic viability of the country's investments.

C. Domestic Resource Mobilization

5.27 The rapid growth in money incomeswhich Yemen experienced in recent years, has led to a spectacular increase in overall savings far exceeding the fast growing investment level (see Table V-3 below). In 1976/77, gross national savings reached the equivalentof 25 percent of GNP compared with only 7 percent in 1970/71. While this is, indeed, a very impressive achievement for a country of YAR's low per capita income, it must be borne in mind that the high savings rate was perhaps as much the result of fortuitouscir- cumstances as of deliberate policies. Delayed consumer response to a massive growth of money incomes, together with large capital transfers made by Yemeni businessmenreturning from Saudi Arabia, have swelled the pool of national savings to an extent which may not be perpetuated in future years.

Table V-3: SAVINGS AND INVESTMENTS (YR millions, current prices)

1971/72 1976/77 /b

1. Gross National Savings 232 2,786 - Public Sector (-71) (452) - Private Sector /a (309) (2,334)

2. Gross Investment 330 2,000 - Public Sector (136) (463) - Private Sector (194) (1,537)

3. Savings Deficit/Surplus(1-2) -98 +786

4. GNS as percent of GNP 10 25

/a Includes savings of public and mixed enterprises. 7F Mission estimate.

5.28 Most of Yemen's national savings are being generatedby the private sector. Yet, little statisticalinformation exists as to their origin or use. The national accounts suggest that in 1976/77 total private savings were on the order of YR 2.3 billion (US$520million). It can be assumed that a large part of these savings originated from workers' remittances,which are a major source of money incomes in YAR. Recipients of those remittancesoften hesitate spending them on consumption items, partly as an insurance against future - 59 - income fluctuations, partly to save up for investments in housing, agricultural equipment, etc., and partly because of physical constraints in the delivery of consumer goods to rural areas. Savings are thus generated throughout the country, and their ownership is widely distributed among different population groups. Financial assets in one form .or another can be found in the remotest village, although there is probably some concentration in urban centers, such as Sana'a, Taiz and Hodeida. Urban savings have recently been reinforced by capital repatriations of Yemeni businessmen who returned from Saudi Arabia. Large amounts of savings are also being generated in the trading sector (most of which is in private hands), in some areas of agriculture (e.g., qat growing), in real estate and, to a lesser extent, in the new manufacturing sector.

5.29 A substantial amount of private savings is being invested in housing (about YR 500 million in 1975/76). There is also much land speculation, although the Government has recently passed legislation restricting such investment. In the rural areas, increasing amounts are being invested in agricultural equipment and irrigation wells. Substantial savings funds are, furthermore, held in the form of bank deposits, mostly with the YBRD. During 1976/77, such deposits increased by YR 364 million (see Table 6.2 of Statis- tical Appendix). The rest of the private savings - probably the largest single category - is, however, not invested, but hoarded in cash. This can essentially be explained by the geographic limitations of the banking network, the lack of familiarity by many people with modern banking services, and the rapid monetization of the economy, which requires an increasing amount of cash holdings by individuals.

5.30 Even though the exact magnitudes of private savings and their uses cannot be traced down, there is strong evidence that large financial resources are being generated in the private sector, and that much of it would be available for longer term investment. A substantial part of these resources could be considered risk capital, i.e., funds which the owners would be willing to invest in potentially profitable, but not risk-free, ventures..

5.31 It is, however, doubtful whether the high rate of private savings can be maintained in the future. Once present physical bottlenecks in the supply of consumer goods are overcome and time lags between income generation and consumer spending are narrowed down, private savings may decline at least in relative terms. Savings can also be discouraged by excessive inflation. Prudent policies will therefore have to be pursued by the authorities to provide positive incentives for private savings and institutional arrangements will have to be made to offer worthwhile opportunities for private investment in real and financial assets.

5.32 Substantial savings are now also being generated in the government sector (see para. 5.06). This follows a prolonged period of extreme shortage of budgetary resources, due to a very narrow tax base. The recent improvement in the budgetary position does not, however, preclude the need for continued foreign aid which will be required to finance a substantial part of the large investment program during the present Five-Year Plan. - 60 -

5.33 Moderate profits are being earned by the few public and mixed enterprises. Tentative financial data for nine firms are shown in Table 5.4 of the StatisticalAppendix. A consolidationof those figures gives estimated total gross savings of about YR 57 million for 1975 (incorporatingdata for 1974/75 in cases where they are available for fiscal years only). Given the recent date of establishmentof most of these firms and their limited operational experience,this is a credible achievement. But there is scope for further improvementand indeed, reforms have been initiatedto strengthen the efficiency and financialviability of public enterprises. An importantstep in this direction is the recent creation of the Central Auditing and Control Organizationwhich has been made responsiblefor the financial control of all public entities. - 61 -

VI. EXTERNAL TRADE AND FINANCE

6.01 The external financial position of the Yemen Arab Republic has changed dramatically in recent years. While at the beginning of the current decade foreign exchange was in short supply and a heavy debt burden forced the Government to request the rescheduling of major parts of its outstanding commitments, 1/ the country has now entered a phase of comfortable balance of payments surpluses and rapidly growing exchange reserves. In other words, foreign exchange which once was a serious constraint to development in YAR, is no longer a limiting factor to domestic consumption and investment.

6.02 The principal reason for this change must be seen in the close and friendly relations that YAR has established with Saudi Arabia and other Arab oil exporting nations whose vast and still growing wealth is spilling over into YAR in the form of workers' remittances and aid flows. The strong demand by the oil countries for foreign labor which Yemen is able to meet, has led to large-scale emigration of Yemini workers to Saudi Arabia and the Gulf countries. These migrant workers keep sending a large part of their growing incomes home thus swelling the foreign exchange earnings of YAR. At the same time, generous aid donations especially from Saudi Arabia, are supporting the expenditures of Yemen's public sector.

6.03 The statistical base recording these events is still incomplete and not always reliable (see Annex VI-1). However, the magnitude of structural change that has occurred during recent years, does allow the identification of major trends and important policy issues.

A. Foreign Trade

6.04 With the opening up of Yemen to the outside world after the revolution and especially since the political consolidation following the civil war, YAR's foreign trade has grown rapidly. It rose from about $50 million in the mid-1960s to $750 million in 1976/77, a figure equivalent to about 30 percent of GNP. Even accounting for the substantial increases in international prices, YAR's foreign trade expanded more than five times in real terms during this period. Yet, the merchandise trade account of the YAR still exhibits some characteristics of a relatively small underdeveloped country endowed with a narrow domestic resource base. Chief among these are: (a) the limited range of export commodities and their small contribution to import coverage, (b) the decreasing share of exports in total trade, (c) frequent and changing relationships with its trade partners and (d) given the small share in the world total, the ability to export the entire surplus of a given commodity to a single country.

1/ See "The Economic Development of the Yemen Arab Republic", report No. EMA-25a, Oct. 16, 1970, paragraphs 103-109; also "Memorandum on Current Economic Position of the Yemen Arab Republic", Report No. EMA-50a, April 20, 1972, paragraph 35. - 6

(1) Commodity Exports 1/

6.05 Reflecting the country's limited resource endowment and the underdeveloped state of its economy, Yemen's commodity exports are still extremely low. During 1973/74-1976/77they averaged approximately$15 million a year, or the equivalent of about 1 percent of GDP. Most exports are of agricultural origin with cotton, coffee and hides being the three major commodities(see Table 3.3 of StatisticalAppendix). Cotton and cotton products alone represented one half of the recorded export earnings in 1976/77while coffee contributed 20 percent and hides about 12 percent.

6.06 Due to the vicissitudesof an agrarian-basedeconomy, dependenton weather conditions and the frequent changes in world prices for agricultural raw materials, YAR's exports have fluctuatedwidely from year to year. Thus, they doubled between 1972/73 and 1973/74 but declined in the followingtwo years. Even more pronounced,however, have been the changes in the relative weight of individual commodities. Coffee exports, for example, which accounted for over 50 percent of total exports in 1969/70, sharply declined in the followingyear and remained relatively stagnant till 1974/75. This was entirely the result of a fall in production arising from the prolonged drought during 1967-73, and from the partial replacementof coffee by qat. Since 1975/76, however, coffee exports have risen again under the stimulus of higher prices and an increase in the quantity of exports. Cotton exports, on the other hand, showed the opposite trend. After tripling in value between 1971/72 and 1973/74 they have since fallen off at an alarming rate. The decline is attributableto the higher costs of labor and the switch to foodgrain production (see Chapter VIII).

6.07 Exports of processed agriculturalproducts have shown some gains in recent years due to the emergence of YAR as a textile manufacturerand the establishmentof food industries,e.g. biscuits and confectionery. Together exports of these products,which were non-existentin 1971/72, now account for

1/ For reasons stated in Annex VI-1, the following section draws for its analysis on the Central Bank's data of recorded exports and customs data on private imports. These differ from the data used in the Central Bank's balance of payments compilation. The differencesare particularly significantin the case of imports even allowing for the fact that the customs data for imports exclude government imports. The difference between the two sets of data is summarizedbelow:

71/72 72/73 73/74 74/75 75/76 ------(YR millionsT------

Exports As per Record 25 25 55 53 50 As per BOP 42 34 62 58 55 Imports As per Customs 204 411 745 981 1707 As per BOP 348 500 715 1000 1452 - 63 - about 11 percent of recorded commodity exports. Another significantdevelop- ment has been the disappearanceof rock salt exports; they had amounted to about one-sixth of total exports in 1970/71 with Japan as the principal market. The subsequentdecline and disappearance0o this commodity from the export list is chiefly due to the considerableproduction and marketing difficultiesencountered by the Salif Salt Corporation.

6.08 It was stated earlier that the entire exportable surplus in some commoditieswas shipped to a single country. For example, the customs trade data for calendar 1975 show that the People's Democratic Republic of Yemen absorbed the entire exports of biscuits, textiles and baskets. Saudi Arabia was the importer of the entire YAR exports of camels, leguminousvegetables and tiles. Several countries imported only a single commodity. For instance, the entire exports to Belgium, Norway, and the USSR in 1975 consistedof coffee; the UK's only imports from YAR were animal skins, and exports to Singapore consistedwholly of dried fish. In earlier years, because of a trade agreement with the Peoples DemocraticRepublic of China, the entire export of cotton lint was destined to that market. Under the terms of that agreement,any excess in the payments' balance with China in its favor could be settled through cotton lint exports as could repayments on loan capital. The market for YAR's cotton exports have since become diversifiedwith the Federal Republic of Germany and the Netherlandssharing the market with China.

6.09 During the past, the Governmenthas actively supported the development of commodity exports from YAR. By establishingthe Cotton General Com- pany (CGC) it has been instrumentalin introducingand promoting the country's principal export crop. The CGC provides seeds, credit and extension services to farmers in the Tihama, and is responsiblefor the ginning, storage and marketing of the cotton. The Government is very concerned about recent set- backs in cotton production and is determined to provide further incentivesto stimulate a recovery of output. In addition, the authoritiesare supporting the establishmentof new coffee plantationswith a view of increasingcoffee exports. By encouragingthe growing of vegetables,potatoes and other high- value crops they are also preparing the ground for the developmentof new export commoditiesto neighboringoil countries. However, given the present low level of commodity exports and the long gestation period required to produce new crops on a large scale, it is unlikely that Yemen's export earnings will grow rapidly over the next few years.

(2) Commodity Imports

6.10 While exports have tended to fluctuate and in fact, declined substantially in relative terms, imports have risen sharply from $87 million in 1971/72 to $730 million in 1976/77. This upsurge in import demand reflects the rapidly rising incomes, especially from workers' remittances,the full convertibilityof the Yemen Rial, and the absence of import restrictions. The increasewould have been even stronger had there not been physical constraints - particularlyin the Port of Hodeida - to transport foreign goods into the country. - 64 -

6.11 With the rapid growth of imports some changes in import composition have occurred. Imports of machinery and equipmenthave been growing most rapidly and in 1976/77, accounted for almost one third of private sector imports (see Table 3.4 of StatisticalAppendix). Foodstuffswere the second largest category, but their growth has slowed down substantiallyin the recent past. Manufacturedconsumer goods have also grown sharply, while improved road links and transportationhave resulted in a rapid increase of imports of petroleum products. 1/ Imports of constructionmaterials have also risen, though less sharply, under the impetus of the upsurge in building activity. Rising imports of chemicals- pesticides and fertilizers- reflect, inter alia, improved agriculturaltechniques.

6.12 In striking contrast to the markets for exports, YAR's sources of supply are much more diversified (see Table 3.7 of StatisticalAppendix). There has been a major shift in imports to Asian countries,primarily Japan, the Peoples Republic of China, India and Singapore. As a group, the share of Asian countries in YAR's total imports rose from 21 percent in 1971/72 to 35 percent in 1976/77. On the other hand, the share of Arab countries fell sharply from 28 percent in 1971/72to 19 percent in 1976/77. Furthermore, not all of the recorded imports attributedto the latter group are in fact of Arab origin. A substantialbut undefinedamount is shown against them as they provide the points of entry for goods destined for YAR, e.g. Aden in the Peoples Democratic Republic of Yemen and Jeddah in Saudi Arabia. YAR imports from the EEC have held relativelysteady accounting for about one-fourth of the total. The African countries,mainly Djibouti,have improved their share significantlyto 7 percent of the total whereas the share of Australia and New Zealand, formerly 14 percent in 1971/72was reduced to 5 percent in 1976/77.

6.13 With exports lagging behind the rapid expansion of imports, YAR's trade deficit exceeded $700 million in 1976/77, about nine times as large as in 1971/72. During 1976/77, commodityexports covered only 3 percent of the import bill, revealinga basic structuralweakness in the country's foreign trade pattern. However, as will be shown in the following section, Yemen's import capacity is only marginally based on its export potential and depends increasinglyon its strong surplus position in the service sectors.

Table VI-1: FOREIGN TRADE BALANCE (in US$ million)

1971/72 1976/77

Exports, fob 8 19 Imports, cif 86 730 Trade deficit -78 -711

1/ Although their share in total value of imports has remained much the same, the volume of imports of petroleum products has risen sharply as for customs purposes they are valued at their pre-October 1973 prices. - 65 -

B. Services Account

6.14 In contrast to the trade balance which has been steadily worsening, the balance on services is showing large and increasing surpluses. Although such transactionsare only partially recorded in official statistics,it can be estimated that the surpluses rose from some $60 million in 1971/72 to almost $900 million in 1976/77 (see Table 3.2 of StatisticalAppendix).

(1) Workers' Remittances

6.15 By far the largest item in the services account are workers' remittances: they rose from an estimated $65 million (net) in 1971/72 to over $1 billion in 1976/77. The figure includes a certain element of private capital transfersmade by Yemeni businessmenwho returned from Saudi Arabia (and to a lesser degree from other areas) to their home country. There are indications that the official data significantlyunderestimate the total inflow of remittances. Many migrant workers, for example, who visit their home in YAR, carry part of their earnings in the form of merchandisewhich they purchased abroad. Others, especially those from the northern areas where the Saudi Rial is still used as currency besides the Yemeni Rial, do not change their remittancesinto local money. Still others keep their earnings in foreign exchange accounts with which they can pay directly for foreign goods and services. It can therefore be assumed that the above figures represent a conservativeestimate likely to understatethe total amount of remittances.

6.16 Private transfers from Yemenis working abroad have historicallybeen a major source of foreign exchange for the country. Originally spread throughout the area, includingEast Africa and the Far East, most migrant workers now find employment in Saudi Arabia and the Gulf States. 1/ Usually they are unskilled or semi-skilledlabor engaged in constructionwork, transport activities and domestic services. In their host countries they are highly valued because of their compatabilitywith the local population,their industrious- ness and reliability. The wages they earn are high and they save much of it to support relatives at home or to accumulate funds for investment in housing, livestock and equipment. With labor being scarce in the oil exporting countries and Yemenis being very much in demand, it is not surprisingthat remittances have grown so rapidly. As there are no signs that labor demand in Saudi Arabia and the Gulf States will slacken, the flow of remittancesis likely to continue to remain high in the foreseeablefuture.

(2) Other Services

6.17 Receipts from other services have also been making an increasing contributionto the balance of payments although in relative terms they are much less importantthan workers' remittances (Table 3.8 of Statistical Appendix). One of the larger items is interest received on YAR's foreign

1/ More informationabout the size and direction of external migration is given in Chapter III. - 66 - exchange reserves which in 1976/77 yielded $48 million and exceeded by far the interest paid on the country's foreign debt. Another net contributorto the services account is transportationwhich includes earnings by the national air line, air port fees, sea port dues, etc. However the item is positive only because most of the correspondingoutpayments are includedunder commodity imports which are valued c.i.f.

6.18 Earnings from travel and tourism also have grown fast in recent years. In absolute terms, however, they are still relativelysmall ($6 million in 1975/76). This reflects the acute shortage of hotel accommodation which severely constrains the number of tourists who can visit the country. Most of the present arrivals are businessmenwho generally stay only a few days at a time. Receipts in this category are largely offset by similar payments incurred by Yemenis travelingabroad.

6.19 An important item in the service balance are receipts and payments related to Government activities. These include foreign exchange expenditures made by foreignembassies and aid missions in YAR, and correspondingpayments by YAR's representativesabroad. Precise figures for this category are not available and estimates shown in the StatisticalAppendix contain a large margin of error.

6.20 Net earnings from services have grown even faster in recent years than the trade deficit. As a result, the balance on current account which was in deficit until 1974/75, recorded its first surplus in 1975/76. The global magnitudes of this developmentare shown in Table VI.2 below. While the data are subject to considerablemargins of error, they correctly reflect the major trends.

Table VI-2: BALANCE ON CURRENT ACCOUNT (in US$ million)

1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

Trade deficit -78 -108 -180 -245 -370 -711 Services,net 58 91 131 220 500 886 Current account balance -20 -17 -49 -25 +130 +175

C. Capital Flows and External Debt

6.21 Since independence,YAR has received substantialamounts of foreign assistance. Given the country's low per capita income and its UN classification as a "least developed country",most of the aid was provided in the form of grants and concessionalloans. Although a complete over-viewof all assistance received by the YAR is not possible because of informationgaps, it can be estimated that cumulative aid disbursementscame close to $750 million by the end of FY1976/77,of which more than half was disbursed in the last 3 years. The major donors were Saudi Arabia, the Gulf States, the USSR, China, IDA, Germany, United States and the Arab Fund. - 67 -

(1) Official Grants

6.22 About three fifths of the total assistance given so far was provided in the form of non-reimbursable grants, mostly for food aid, technical assistance and more recently, budget support. The latter is being supplied by Saudi Arabia at a rate of some $80 million per year to finance current and development expenditures in the state budget. Food aid has been provided through the World Food Program ($45 million since 1966) and a number of bilateral donors. Among those US PL-480 assistance amounted to $43 million between 1959 and 1967 when diplomatic relations were severed. It was resumed in 1973 and allocations, including for FY 1976/77, have reached $29 million.

6.23 A large part of official grants has been made available in the form of technical assistance. Given the extreme shortage of skilled manpower in YAR this type of aid has high priority and will be needed by the country for many years to come. Considering the large number of donors, and the perfunctory recording of such assistance by the Yemeni authorities, a complete overview of technical assistance received by YAR cannot be obtained. But an attempt has been made to compile the major elements of this aid for recent years (Table 3.9 of Statistical Appendix). It shows that in 1975/76, technical assistance reached a level of some $30 million.

6.24 A significant part of the assistance is being provided by the UNDP which in mid-1976 was committed to a program of $30.2 million (See Annex VI-2). Out of a total of 65 projects covering 11 key sectors only 9 are directly administred by UNDP, the remaining being executed by different agencies of the UN system including IDA which is responsible for 4 projects. About 170 foreign experts are presently stationed in YAR under the program.

6.25 Most of the bilateral technical assistance comes from Arab countries. This assistance is somewhat triangular in nature; that is to say, the richer among them meet the financial cost of the expertise provided by those countries who have little financial resources to spare but who have a surplus of skilled manpower, e.g. Egypt or Syria. A number of Arab donors also under- write the costs of the physical facilities - e.g. schools and hospitals - associated with the project financed. Other important providers of technical assistance are western industrialized countries, members of CMEA, and China. The range of assistance provided extends from agricultural research to public administration, oil prospecting and meteorological studies. But the primary focus has been on education, public health, and agriculture.

(2) Official Loans and Credit

6.26 Besides the grants YAR received sizeable amounts of official loans and credits. Total commitments exceeded $560 million on June 30, 1977 of which more than half has been disbursed. Drawings on these loans have increased in recent years, averaging $47 million in 1975/76 and 1976/77. - 68 -

Table VI-3: ESTIMATED CAPITAL FLOWS (in US$ million)

Cumula- tive until 1973/74 1974/75 1975/76 1976/77 June 1977 /1

Official Grants 33 93 114 104 420 Official Loans, net 29 33 44 42 290 (a) Disbursements (32) (37) (47) (46) (330) (b) Repayments (3) (4) (3) (4) (40) Total Official Capital 62 126 158 146 710

/1 Rough orders of magnitude only.

6.27 Of the total loan commitments made by various donors until mid-1976, close to one third was obtained prior to 1970, mostly from the USSR and the People's Republic of China. Loans from these two countries were essentially for infrastructure development and technical and scientific cooperation. There were no borrowings from multilateral and regional agencies before 1970. The first such loan was made by IDA in 1972 for a road project. And the first loan from the Arab Fund for Social and Economic Development was in 1974 to help subsidize YAR's oil imports. Western European countries became active in 1969 when the Federal Republic of Germany extended a commodity loan of $3.5 million and Italy provided a supplier's credit of $1.5 million for a cigarette factory. Arab loans also became prominent in the early 1970s; they were given mainly as balance of payments support and to provide cover for capital subscriptions to international organizations;

6.28 Project lending has become relatively more important in recent years (Table 3.10 of Statistical Appendix). It is estimated that more than three quarters of all official loans and credits, yet to be fully disbursed as of June 30, 1977, have been committed for the financing of specific projects with the main emphasis on roads, agriculture, including irrigation, and utilities. The remaining funds were given for commodity assistance or as cash loans. The largest single source of project finance was IDA which alone had lent $110 million or one fifth of the total of loans yet to be fully disbursed. The projects cover a number of sectors, including agriculture, industry, transport, education and urban development. Other major project lenders are the USSR and China (see paragraph 6.27 above). Among the West European countries, the Federal Republic of Germany is the largest creditor with a total of $75 million; the bulk of this was for the construction of the Sana'a-Taiz road and for the Sana'a airport. Largely because of the cofinancing of projects through the Kuwait Fund, Kuwait has emerged as a principal creditor among the Arab countries.

6.29 The terms on which the YAR has obtained official loan assistance have been very favorable. Loans from the USSR and the People's Republic of - 69 -

China are, for the most part, free of interest. Western European countries have generally charged between 3/4 percent and 2-1/2 percent. Interest rates charged by Arab countrieshave varied from 0 percent to 4 percent but Arab commodity assistancehas been interest-free. The higher rates of 5 percent and 6 percent have been for cash loans; however, some of these loans were subsequentlyconverted into grants. Loans from the Arab Fund for Social and Economic Developmentcarry a 4 percent rate but one for subsidizingYemeni oil imports is interest-freeand it is quite likely that it may not have to be repaid. Loan maturities generally range from 5 to 50 years with a median of 20-30 years.

(3) Private Capital

6.30 Not much is known about private capital movements although they appear to have been quite substantial. There were sizeable foreign borrowings by domestic commercialbanks ($99 million by June 30, 1977) while investments of liquid bank funds abroad reached $50 million. Sizeable capital transfers were apparentlyalso made by private businessmenboth into and out of the country (see paragraph6.15). But no data exists on the amount, origin or destinationof such capital flows. Given the relatively large volume of official capital aid made available to YAR the country had to use very few suppliers'credits (about $8 million until mid 1977).

6.31 Direct investmentof foreign private capital in developmentprojects is being encouragedby the Government. In August 1975 an investmentcode was issued (Law No.18) which opens the country to foreign investorsby guarantee- ing equality of treatmentwith domestic investors. Tax incentivesand liberal provisions for profit transfers underline the Government'sdetermination to develop and diversify the economy with the help of foreign private capital. Such limitationsas exist relate only to the type of investment that may be undertaken,and its sector focus. The priority sectors are minerals, building materials, consumer goods and hotels. Substantialforeign investmentsare already being undertaken in oil explorationand salt mining although no data exist on the amount of the commitmentsmade. Growing interest also is being expressed by foreign investors in hotel building and the manufacturingof consumer goods. Shortage of feasible projects and physical supply bottlenecks appear to be the main present constraintsto foreign direct investment.

(4) External Debt and Reserves

6.32 Yemen's external public debt outstandingon June 30, 1977 was estimated at $529 million, of which $292 million was disbursed (Table 4.1 of StatisticalAppendix). The major creditors were IDA, USSR, China, Germany, the Arab Fund and the Kuwait Fund. IDA credits accounted for $110 million or about 20 percent of the total debt reported. Because of the very favorable terms of borrowing the debt service payments are estimated at only about $4 million for 1976/77, equivalent to less than one percent of gross foreign exchange earnings (includingworkers' remittances). Although service payments are expected to rise in the next few years, the burden of such payments should continue to remain small in relation to YAR's exchange earnings. - 70 -

6.33 In recent years YAR has accumulated large foreign exchange reserves. At the end of June 1977 they reached $920 million or the equivalent of more than one year's imports (Table 3.11 of Statistical Appendix). This reflects rapidly rising exchange earnings, particularly from workers' remittances, a relatively high level of foreign aid and last but not least, the country's limited absorptive capacity. Yemen's imports are still at a low level ($135 per capita in 1976/77) and are likely to grow rapidly in future years. It should be pointed out in this context that YAR's official reserves are not assets earned by the state--such as in the case of some oil exporting countries --but that they represent largely the counterpart of unspent private incomes which could be drawn down quickly as import levels rise. Workers' remittances and aid inflows, on the other hand, are of more volatile nature and their volume could change substantially within a relatively short time. Yemen's present comfortable reserve position may therefore be a passing phenomenon and could be eroded quickly if recent trends in foreign exchange flows are not sustained. The reserve position has also to be viewed in the context of the country's dependence on agriculture and its vulnerability to the vagaries of weather. A repetition of the severe drought which gripped YAR from 1966-72 would necessitate the import of foodstuffs in even higher than the present volume adding substantially to the country's foreign exchange requirements.

D. Conclusions and Outlook

6.34 The opening up of Yemen's economy to the outside world has led to a rapid increase of exchange earnings, imports and capital flows. Essentially an exporter of services (i.e. migrant labor) the YAR has been able to sustain a fast growing volume of imports while at the same time accumulating sizable reserves. However, the comfortable balance of payments position has not eliminated the need for foreign aid. Especially the public sector will remain dependent on outside finance both for current and capital expenditures. This dependence requires the Government to seek capital aid and technical assistance from abroad. Given YAR's still very low level of economic development such assistance will need to be provided on concessional terms.

6.35 The absence in recent years of a foreign exchange constraint has allowed the Government to pursue liberal foreign trade policies. There are at present no import restrictions to speak of and custom duties are levied essentially for fiscal reasons. The Yemeni Rial is freely convertible into any foreign currency at the representative rate of US$1 = YR 4.5625. The exchange rate for other currencies is determined daily on the basis of the rate prevailing for those currencies in relation to the dollar on the London market. Private capital flows in and out of the country without Government intervention and official regulations are aimed only at containing domestic inflationary pressures (see Chapter V).

6.36 Foreign exchange is unlikely to become a constraint to development in the foreseeable future as long as the Government continues to pursue responsible financial policies. This implies not only a balanced budget but - 71 - also careful selection--asin the past--of viable investmentprojects for the public sector which contribute to the diversificationand strengthening of the economy. The private sector can be expected to cover its foreign exchange requirementsthrough the large and still growing money incomes that Yemeni workers are earning abroad.

6.37 Yemen's own exchange earnings will continue to be supplementedby public and private capital inflows. The main channels for official capital transfersare well establishedand the Government is cooperatingclosely with foreign donors. Foreign private investors, especially from Arab countries, are showing increasinginterest in the YAR. The identificationand preparation of viable developmentprojects appears at present to be the most important constraintto capital inflows both from public and private sources although progresshas been made in this field during recent years. There is also need for careful aid coordinationin order to optimize the development impact of foreign assistance. Foreign donors tend to concentratetheir cooperationin selected areas which do not always reflect national priorities. The new 5-Year Plan should,however, provide an improved basis for aid coordination and will strengthenYAR's absorptive capacity for foreign capital. - 72 -

VII. SATISFYING BASIC NEEDS

7.01 In a country as underdeveloped as YAR, much of the Government's efforts have to be directed towards satisfying the people's basic needs for food, shelter and social services. Although considerable progress has been made in some of these areas, especially in securing food supplies and reducing underemployment, the country is still far from a satisfactory situation. Elementary education, health facilities, clean drinking water, electricity, rural access roads and urban sanitation have yet to be provided to the bulk of the population. In fact, the weakness of "social infrastructure" itself became to some extent an obstacle to the effective utilization of fast growing private incomes. Limited port capacity and inadequate road connections made it difficult to move goods to the interior thus creating supply bottlenecks which inflated prices and eroded the purchasing power of the final consumer.

7.02 The inadequacy of social services and investment is clearly recognized by the Government which realizes that satisfying social needs is as important at this juncture of the country's development as creating new jobs or raising the productivity of the existing labor force. In addition, the Government is aware of its responsibility towards those citizens who for one reason or other, have been left out of the growing stream of private incomes. One of the key objectives of the new 5-Year Plan, therefore, is to strengthen programs and policies aimed at satisfying the basic needs of the people. Following some of the more important issues arising in this context will be discussed: securing adequate food supplies, providing health facilities, spreading elementary education, and strengthening the rural and urban infrastructure.

A. Securing Food Supplies

7.03 The history of Yemen has been fraught with food shortages and famines. A meager agricultural resource base placed narrow limits on local food production causing widespread malnutrition. In addition, unreliable rainfalls have led to periodic droughts with sometimes disastrous consequences. The last one occurred during 1967-73 when actual rainfall stayed much below the long-term average resulting in a sharp decline of crop production and substantial losses of livestock. Only generous food aid mostly through the World Food Program, could at that time prevent large-scale starvation among the population.

7.04 Not surprisingly, the Government is giving high priority to the establishment of secure food supplies. One of the main objectives of the 3-Year Program and the 5-Year Plan is self-sufficiency in food production. However, meeting this target has proven to be difficult so far. Several factors have contributed to this situation: the narrow agricultural resource base; the considerable institutional and technical problems encountered in changing subsistence farmers into efficient food producers for the market; and the massive emigration of able-bodied men from the rural areas. As a - 73 - result, domestic food production has not kept pace with the rapid rise in food consumption, and may in fact have stagnated if one excludes the impact of weather fluctuations. 1/

Table VII-1: AGRICULTURAL BALANCES (YR million, current prices)

1971/72 1975/76

1. Agricultural imports /a 143 916 2. Agricultural exports /b 23 46

3. Agricultural trade deficit 120 870 4. Agricultural GDP /c 1,113 2,305

5. Domestic consumption of agricultural products (3 + 4) 1,233 3,175

6. "Food gap" (3 as % of 5) 10 27

/a Agricultural imports include all foodstuffs and tobacco, but not beverages; Government imports are assumed to have same percentage of agricultural commodities as private imports. /b Includes raw materials and processed agricultural products. /c Much of the increase is due to higher prices.

7.05 The above table illustrates this point. It shows that the food gap - here loosely defined as difference between agricultural imports and exports - almost tripled in relative terms since the early 1970s, rising from 10 percent of domestic food consumption in 1971/72 to about 27 percent in 1975/76. While the table suggests that self-sufficiency in food production will at be.st be a long-term goal, it also shows that food supplies in YAR have become more plentiful in recent years. Fast-rising incomes apparently have allowed a significant increase in per capita food consumption as well as an upgrading in the quality and nutritional value of food items. Whereas previously most people in Yemen had to subsist on a simple diet of grains (mostly sorghum) supplemented only marginally by some vegetables and animal protein, now an increasing number of the population is able to purchase a variety of high-value foodstuffs such as sugar, meat, dairy products, eggs, fish, edible oils, fruits and vegetables. Most of the more valuable food varieties are being imported, including wheat and rice. But there has also been a significant increase in the domestic production of vegetables, fruits and eggs, partly at the expense of traditional grain crops.

1/ See paragraph 2.12 in Chapter II. More about recent trends in agricultural production will be said in the following chapter. - 74 -

7.06 These changes in food consumptionand production have primarily been the result of market forces rather than deliberateGovernment policies. Fast- rising consumer incomes (mainly from workers' remittances)stimulated the import trade and created new markets for domestic farmers which they were willing and able to serve. Initially, the Government provided indirect assistance to support these trends. It strengthenedthe infrastructure(ports, highways) to facilitatethe internal distributionof the rapidly growing import volume. It also started to provide institutional,technical and financial support to farmers helping them to raise higher-valuedcrops and increase poultry produc- t ion.

7.07 More recently, the Governmenthas started to assume direct responsibility for securing adequate supplies of basic foodstuffsat reasonable prices. It established,in November 1976, the General Corporationfor Foreign Trade (GCFT) which imports large quantities of wheat, flour and sugar. The GCFT has a capital of YR 20 million, all government-owned,and is allowed to borrow up to YR 10 million from the Central Bank at concessionalrates. Its headquarters are in Sana'a and it has branches in Taiz and Hodeidah as well as agents in the smaller towns. Having started its operations in February 1977, the GCFT is now by far the biggest single importer of basic foodstuffs,representing about 30 percent of the total. It sells its products mostly to wholesalersbut increasingly also to final consumers through a growing chain of company-owned retail shops.

7.08 GCFT operates on a strictly commercial basis competingwith established private traders. By selling its merchandise at low profit margins and occasionallycompensating for price fluctuations,it puts pressure on market prices thus serving the interestsof consumers. GCFT restricts its activities to a few basic products which are imported in bulk--this keeps its operating expenses at low levels. Attention is being given to modern marketing and packing techniques and some technical assistance is provided in these fields by two EEC experts. In future, GCFT intends to expand its trading activities into building materials, agriculturalequipment and heavy machinery. This raises the question as to where the line should be drawn for GCFT's operations. By adding a variety of new products, some of which entail substantial servicing responsibilities,the principalobjective of GCFT - i.e. securing basic foodstuffsat reasonableprices - would be obscured and operating efficiencymay suffer. Careful considerationshould therefore be given to the size and scope of GCFT's activities.

7.09 Another area of direct Government interventionis grain storage. Lack of adequate storage facilitieshave in the past led to irregular`supplies, excessiveprice fluctuationsand substantiallosses of foodgrains. To improve the situation the Government started in mid-1976 a project to construct a 20,000 ton grain silo in the port of Hodeidah, and six regional warehouseswith a total capacity of 18,000 tons. While these facilitieswill cover immediate requirements,a study was initiatedto determine the long-term needs for grain storage which will form the basis for a nationwide storage investmentprogram. In addition, the project will modernize bakeries, both in the public and private:e-sectors,and introduce a modest nutrition program designed to fortify br-eadjwithvitamins and minerals. - 75 -

7.10 The project is well under way and is expected to be completed in 1980. Total project cost is estimated at $22 million, of which $11 million is being financed by the Saudi Development Fund and another $5 million by IDA. The project agency is the newly-established Yemen General Grain Corporation, a semi-autonomous government-owned enterprise under the supervision of the Ministry of Supply. Completion of the project will result in more secure grain supplies for the population, reduced storage losses, and improvements in the quality and nutritional value of bread.

7.11 Besides taking measures to secure overall supplies of basic foodstuffs, the Government also has a program to provide food to the poorest elements of the population who, for one reason or another, cannot afford to buy sufficient food in the market. The National Committee for Food and Nutrition, established in early 1976, coordinates and supervises the distribution of food relief to needy persons. These are mainly refugees (about 5,000) and local families whose income is below the subsistence level (about 8,000). The Committee obtains its resources exclusively through foreign aid, the principal source being the World Food Program.

7.12 The above analysis shows that the supply of basic foodstuffs has become more secure in recent years, and that nutritional standards have significantly improved. However, for the country as a whole food consumption is still below physiological requirements, and more will have to be done to achieve adequate nutritional balances, and to satisfy the needs of the poorer population groups. Following are some of the issues still to be resolved:

(a) Very little information exists in YAR about income distribution and food consumption at different income levels. Substantial statistical research is therefore required to identify target groups in need of nutrition programs.

(b) Food relief for the poor and needy should not only rely on foreign assistance. As the strength of YAR's economy grows the Government will be able to make increasing contributions from its own resources.

(c) Government intervention should be confined to correcting distortions of the market mechanism, and refrain from assuming functions which could be carried out more effectively by the private sector.

(d) At present, an excessive amount of private incomes is spent on qat, often at the expense of essential food consumption. Moreover qat growing claims valuable agricultural resources which otherwise would be available for domestic food prodution. Effective measures are therefore required to contain the production and consumption of qat. - 76 -

B. Providing Health Services

7.13 Health conditions in YAR are still very poor. This is indicated by the high death rate which presently averages some 29 per thousand inhabitants; the low life expectancy at birth which averages 37 years; and the high infant mortality which is reported around 24 percent.

7.14 Inadequate nutrition, poor and overcrowded housing, lack of personal hygiene and the extreme shortage of modern health care are the main reasons for the low standard of public health in the country. Environmental problems also have a direct bearing on health. Most people use water which is more or less polluted while effective sewage disposal is almost unknown. All this creates favorable conditions for endemic diseases the most important ones being tuberculosis, bilharzia and malaria. Many people, especially children, suffer from various intestinal infect.ions and contagious fevers. Parasitic diseases are also widespread.

7.15 The Government's health program is still in its infancy. Table VII-2 below shows that in 1976 there were only 234 physicians practising in YAR, or one doctor for every 23,256 inhabitants. At the same time, there were 796 medical assistants, 10 dentists and 21 pharmacists. Modern health installations in 1976 included 24 hospitals with 2,637 beds, i.e. one for every 2,064 inhabitants; 13 dispensaries with 355 beds; 16 health centers, 11 sub-centers and 75 rural health units. Many of these facilities were ill equipped and suffered from shortages of personnel and financial funds.

Table VII-2: PUBLIC HEALTH INDICATORS

Total Number Population per No. 1970 1976 1970 1976

Physicians 184 234 26,630 23,256 of which Yemenis (102) (124) Foreigners (82) (110)

Medical Assistants 643 796 7,620 6,837 of which Yemenis (601) (653) Foreigners (42) (143)

Hospital Beds 3,317 2,637 1,477 2,064

7.16 Most of the modern health care is financed by the Government which in 1976/77 spent some YR 43 million for this purpose. In addition, there are a number of foreign financed health programs funded mainly by Sweden and Kuwait. The World Health Organization administers a health institute in Sana'a to train local medical assistants. Government expenditures for public health - 77 - have quadrupled in real terms since 1970/71 which is reflected in the growing number of Yemeni medical staff. However, in absolute terms public health spending is still extremely low. In 1976/77 it represented only 1/2 percent of GNP or US$2 per capita.

7.17 Shortage of funds and medical personnel are the principal constraints for YAR's health system. Other critical issues are administrative problems which lead to inefficient utilization of existing facilities; the almost complete absence of modern health care in rural areas; the environmental health hazards created by water pollution and lack of sewage disposal; and the recent increase in endemic diseases resulting from the growing mobility of the population.

7.18 In the new 5-Year Plan the Ministry of Health addresses these issues and endeavors to strengthen the public health system. The main objectives of the Plan are to increase the number of medical staff; to modernize and expand hospitals; to spread modern health care to the rural areas; to launch an effective disease control program; and to improve the administration of health services. For the 5-year period 1976/77-1980/81 the Plan envisages a total of YR 247 million development expenditures while recurrent spending for public health programs is expected to increase sharply from the YR 22 million spent in 1975/76. A substantial amount of these funds will be provided by foreign donors, especially Arab countries, and international organizatons (WHO, UNDP, UNICEF). So far over YR 100 million foreign aid have been committed to the health sector, and more is likely to be made available in the future. These expenditures will be supplemented by projects aimed at providing clean drinking water to the people, and establishing sewage disposal systems (see the sections on rural and urban development in this chapter).

Table VII-3: PUBLIC HEALTH EXPENDITURE IN THE 5-YEAR PLAN (YR million, 1975/76 prices)

Total Development Expenditure 247 of which Manpower training 29 Hospitals 132 Rural health services 44 Disease control 40 Administration and planning 2

7.19 The YR 29 million allocated for manpower training will be spent for the education of local medical assistants such as nurses, midwives, laboratory assistants, etc. The program is expected to train about 1,142 students during the plan period. In addition, there are at present close to 500 Yemenis studying medicine, dentistry and pharmacy abroad many of whom are expected to return to their country. Together with foreign medical personnel working in YAR this is expected to increase the number of staff by 1980/81 to a total of 470 physicians (or one per every 12,662 inhabitants), 14 dentists, 38 pharmacists, and 1,938 medical assistants. - 78 -

7.20 More than half of the development expenditures will be used for modernizing existing hospitals which are badly in need of new equipment. In a number of cases it is planned to consolidate small and ill-equipped units into larger and more efficient hospitals. The total number of hospital beds is expected to increase only marginally. Preference is thus given to quality improvement over quantitative expansion.

7.21 A special program has been launched to provide basic medical services to rural areas. The objective is to establish about 1,300 nurse clinics, several mobile health units, and 120 health centers. The latter will be responsible for health planning, guidance and supervision in a given region. It is hoped that this program will reach about 20-25 percent of the rural population by 1980/81.

7.22 Vaccination and disease control is another major objective of the Plan. The program will be administered by a special unit in the Ministry of Health and aims at vaccinating all children up to the age of five. It will also try to contain major endemic diseases such as malaria, tuberculosis, polio and diphtheria. Mobile vaccination units will be created and much of the immunization will be done at schools.

7.23 Finally, the Plan envisages a strengthening of the health administration. A special unit will be established in the Ministry of Health to supervise the planning of health programs, to collect the necessary statistics, and to assist in the preparation of specific projects.

7.24 The 5-Year Plan for the health sector appears to be well conceived focussing on the main present issues. It still allocates the major part of the funds to urban health facilities but pays increasing attention to the needs of the rural population. Implementation of the Plan will require substantial financial and human resources. To attract the latter the Government will have to pay competitive salaries to its medical staff and provide other material incentives such as adequate housing.

C. Spreading Literacy

7.25 One of the basic objectives of modern development is literacy. Besides being a necessary condition for raising skill levels, its attainment is desirable for its own sake and directly enhances the welfare of the society. Spreading literacy and providing some elementary education to all citizens enables them to participate more actively in community affairs, increases their political awareness, and strengthens the political cohesion of the country.

7.26 The Yemeni Government is very much aware of this basic human need and vigorously pursues the objective of universal literacy and education. However, at this point it is still far from reaching its ultimate goal. As was mentioned earlier in the report (Chapters I and III) the present illiteracy rate is extremely high - close to 90 percent for the adult population - - 79 - and only one of every four children in the age groups 6-11 is enrolled in primary schools. Adult literacy programs provide elementaryeducation to some 6 thousand persons of age 15 and above, that is only one out of every 500 of the adult population.

(1) Primary Education

7.27 Judging these figures one has to remember that modern education in YAR started to grow vigorously only after the civil war, and that substantial progress has been made since the beginning of the present decade. Enrollment in primary schools, almost all public, increased from 72 thousand pupils in 1969/70 to 253 thousand pupils in 1975/76, i.e. at an average rate of 23 percent p.a. (see Table 10.1 of StatisticalAppendix). These are impressive achievements1/ consideringthe serious physical and manpower constraints under which the Governmenthad to operate during that period.

7.28 The equivalent of about 27 percent of the age group 6 to 11 were enrolled in primary schools in .1974/75. About 16 percent of the students were over-age with relatively less girls (14 percent) than boys (17 percent) over 11 years of age. The female ratio of total enrollmentis still low and only slightly increasing. About 11 percent of total student enrollmentsin 1975/76 were girls, compared to 8 percent in 1969/70. Significantdisparities with regard to female and total enrollmentsstill exist between Governorates. In 1975/76, the percentageenrollment of girls varied from 17 percent of total enrollmentin Taiz to 2 percent in Saada. In fact, about 43 percent of girl enrollmentsin 1975/76 was in Taiz Governoratewith Sana'a and Hodeidah followingat 25 percent and 14 percent, respectively. As for total enrollments, the enrollmentratio ranged from a high of 52 percent in Sana'a to a low of 6 percent in Mareb during 1975/76.

7.29 Enrollmentsseem to be determinedby the availabilityof schools and teachers. The Governorateof Sana'a had 687 schools (40 of them offering all six grades) in 1975/76, while Mareb had 65 schools (only 3 offering all six grades). In terms of populationper school, Sana'a had a school for every 208 children in the age group 6-11 in 1975/76, while Mareb had a school for every 131 children in that age group during the same year. As for teachers availabilityin 1974/75,Taiz and Hajja had a teacher for every 105 children in the relevant age group, while Ibb and Mahweet had a teacher for every 401 and 309 children in the same age group, respectively.

7.30 The repeater rate is high in all grades but has been declining steadily in recent years except in grades 3 and 4 where it was at about

1/ Data on primary educationhave to be interpretedwith caution. Offi- cials at the Ministry of Education (MOE) believe that some of the rural enrollmentfigures are fictitiousand were reported to enable some contracted teachers to draw salaries. The MOE is presentlyconducting a survey to obtain more accurate enrollmentdata. - 80 -

30 percent and 23 percent respectivelyduring the academic year 1974/75. However, dropouts remain the most serious problem of primary education. The effects of dropouts, repeaters and cumulative repeaterson primary education may be traced through the outcome of students who enter first grade. It is estimated that from every 1,000 students who enter first grade, 127 are likely to graduate six years later while 138 will complete four years of education and achieve relative literacy. This low efficiency is attributed to the poor quality of teachers,large classes, inadequateschool buildings and classroomconditions.

7.31 During 1969/70-1975/76the number of primary schools increasedfrom 700 to 2,137. There is considerableunevenness in buildings as well as inade- quacies in equipment and educationalmaterial and in the distributionof these schools among Governorates. The quality of schools range from modern buildings provided through foreign aid to simple buildingsconstructed under local self-help schemes and rudimentaryshelters. In the major cities rooms are overcrowdedwith classes up to 100 students and many schools operate two to three shifts. In rural areas, schools are often unattendedbecause they lack teachers while in some villages only makeshift shelters from sun and wind are available. Instructionmaterials are very limited. Moreover, of 1,952 public schools in 1974/75,only 234 (11 percent) of the schools, enrolling about 41 percent of students,offered the full range of six grades and about 68 percent of the schools, enrollingabout 38 percent of students,had only three grades or less.

Table VII-4: STUDENT ENROLLMENTBY TYPE OF SCHOOL (1974/75)

No. of Students Schools having No. of Schools Male Female Total

Six grades 234 79,524 16,546 96,070 Five grades 144 19,301 2,511 21,812 Four grades 249 25,547 1,445 26,992 Three grades 567 43,947 1,421 45,368 Two grades 539 29,594 606 30,200 One grade 219 12,083 259 12,342

TOTAL 1,952 209,996 22,788 232,784

7.32 Another importantproblem that limits the developmentof primary education in Yemen is the quantity and quality of teachers. During 1975/76, about 6,701 teachers,of which 656 were females, were employed in public primary schools, an increase of 876 teachers over 1974/75. The overall pupil/ teacher ratio is 38:1. Although the ratio is acceptable,it is misleading because of imbalancesamong Governoratesand between urban and rural areas, and because some of those who are reported as teachers do not perform any teaching job; they are only on the Government'spayroll. Thus, there is no doubt that the shortage of teachers is a major obstacle for the possible increase in enrollments. A large number of schools in the rural areas are without teachers and in cities, large classes are formed because of the lack of teachers. - 81 -

7.33 Of the 6,701 primary school teachers, 6,303 are Yemenis (528 females). Unfortunately,most of the Yemeni teachers are underpaid and underqualified. Often, teachers in the first and second grades are dropouts from the fourth and fifth grades of primary school. Table 10.2 of the StatisticalAppendix shows that about half of all primary school teachers (with both temporaryand permanent appointments)have at most a primary school diploma or its equivalent. Most of the other half have either preparatorydiploma (20 percent), or secondary school diploma (24 percent). Graduates from teacher training schools are still relativelyfew. About 7 percent of all primary school teachers are graduates from lower teacher training schools (288) and higher teacher training schools (144). Expatriate teachers, on the other hand, are usually better qualified than their Yemeni counterparts. There were 398 expatriate teachers in 1975/76 of which 128 females. The Yemeni Government finances 84 locally contractedexpatriate teachers and the rest are financed by Arab countriesand UNICEF.

(2) Adult Literacy Program

7.34 YAR still has very high illiteracy rates. In 1975 the average rate of illiteracy for the population of 15 years and above was estimated at 87 percent with even higher rates for women.

Table VII-5: ILLITERACYRATES IN 1975 (in 1,000)

Population Of which Illiteracy 10 years illiterate rate and above people (percent)

Males 1,352 1,005 74 Females 1,598 1,560 98 Total 2,950 2,565 87

7.35 In 1970 the Government started a program to promote adult literacy. Responsibilityfor this program has been assigned to the Supreme Literacy Organizationwhich is attached to the MOE. In 1975/76, there were 23 centers with 171 classes enrolling 4,887 adults. Only students who are 15 years of age and older are accepted in trainingprograms. Dropout rates are relatively high because the literacy programs cover the whole range of subjects throughout the duration of the primary level. Female attendance is higher than that of males, and some female centers teach home economics.

Table VII-6: ADULT LITERACY PROGRAM, 1975/76

No. of No. of Classes No. of Students Governorate Centers M F T M F T

Sana'a 9 29 51 80 870 1,465 2,335 Taiz 5 20 18 38 530 470 1,000 Hodeidah 4 16 13 29 445 355 800 Ibb 4 10 6 16 316 196 512 Damar 1 - 8 8 - 240 240

TOTAL 23 75 96 171 2,161 2,726 4,887 - 82 -

7.36 Under IDA's first education project a provison was made for the initiation of a non-formal basic training scheme and for the establishment of 3 district centers. During the first phase of this program, the three district centers were established in Amran, Kaida and Bajil. About 21 classes (7 for females) were conducted in these centers and the surrounding villages. Total enrollments in 1975/76 reached 549 males and 295 females. 1/ The centers' function is to promote and plan literacy campaigns and recruit and train the personnel necessary for carrying out the programs. Presently, the level of training and experience of the instructors leaves much to be desired. It is expected that during the second phase (started January 1977) the district centers would train permanent qualified staff to carry out the programs in-the centers and the districts.

7.37 The 5-Year Plan envisages an increase in enrollment for primary schools from 253 thousand in 1975/76 to 427 thousand in 1980/81 (plus 69 percent). In addition, the Plan calls for a rapid expansion of the adult literacy program from less than 6 thousand to about 29 thousand participants (Table 10.9 of Statistical Appendix). But even if these targets are met, enrollment in primary schools by 1980/81 would reach less than half of the relevant age groups while the illiteracy rate among adults would decline only marginally. Moreover, the quality of primary education will remain low resulting in relatively high rates of dropouts and failures. The social objective of achieving literacy for the great majority of the population can therefore be implemented only over the very long run. The problems encountered in pursuing educational objectives in YAR have been discussed in Chapter III.

D. Rural Development Associations

7.38 The need to provide for the basic living requirements of the population is greatest in the rural areas. There, most people still live under very primitive conditions frequently isolated from the rest of the country. Villages and houses are often located on barren land far away from the nearest source of drinking water, and usually they have no schools, no health facilities and no electricity. Although private cash incomes have risen sharply in recent years and most families can now afford substantially higher levels of consumption, the supply of social services has not kept pace with the growth in per capita incomes.

7.39 The Government has perceived the need for rural development early in the republican era. Already in 1963, i.e. one year after the Revolution, it issued a law providing for the establishment of Local Development Associa- tions (LDA). The principal objective of this legislation was to encourage local self-help rather than relying on initiatives and programs by the central government. This was very much in the Yemeni tradition which is based on strong family and tribal ties.

1/ Together with the Government's program total enrollment in adult literacy courses was 5,731 in 1975/76. - 83 -

7.40 The formation of LDAs and their operations were initially held back by the civil war. But after 1970 the movement spread quickly throughout the country. Now there are some 150 active associations in YAR most of them in the Go-iernorates of Sana'a, Taiz, Ibb and Hajja. Each LDA is administered by a management board which is democratically elected by the association members. The LDAs are supervised by the Ministry of Social Affairs and supported by the Confederation of Yemeni Development Associations (CYDA) which was established in 1973. CYDA operates under the direct supervision of the President of the country. At the Governorate level Coordinating Councils have been established which are chaired by the Governor.

7.41 So far the LDAs have undertaken the construction of rural access roads, water supply systems, schools, health facilities and electrification schemes. Individual projects are being identified by the individual Associa- tions who, after consultation with the Coordinating Council, submit them to the Central Government for approval. After examination by the CPO, the Ministry of Social Affairs and other government agencies, the approved project will be implemented by the LDA concerned. Financial and technical assistance is usually provided by CYDA. In some cases, e.g. access roads, several associations participate in one project. Upon completion of the project the association usually becomes responsible for maintenance of the facilities.

7.42 Typically, these projects are financed from three sources: the Central Government, the LDA concerned, and voluntary contributions of association members. The Central Government has earmarked 2 1/2 percent of custom duties for rural development projects. These resources together with special budget allocations and some foreign aid are channeled through CYDA to the different associations. The LDAs obtain their own funds largely from the locally levied crop tax (Zakat=tithe) of which they can keep three quarters. Voluntary contributions are mostly made in kind, often in the form of labor.

7.43 There are no precise records of past investments carried out by LDAs. Estimates for the 3-Year Program (1973/74-1975/76) suggest that over 5,000 km of access roads, some 850 water supply projects and close to 600 schools were completed during that period. Usually, the projects were carried out at much lower cost than if they had been done by contractors. These are remarkable achievements which underline the strength and dynamism of the LDA program.

7.44 Prodded by CYDA the associations have now started to prepare medium- term investment programs (3-5 years) for their areas. These are reflected in the new 5-Year Plan which envisages that the LDAs will invest a total of YR 1.5 billion (US$325 million). A rough breakdown of these investments by type of projects is given below. - 84 -

Table VII-7: DEVELOPMENTEXPENDITURES OF LDAs DURING 5-YEAR PLAN (YR million)

Access roads 615 Schools 268 Water supply 103 Public health 58 Other 94 Unidentified 325

TOTAL 1,463

7.45 Implementationof ongoing and future developmentprojects of the LDAs is constrainedby a number of factors, the most importantones being:

(a) Shortage of qualified staff for planning, administration, project preparationand supervisionof implementation;

(b) Inadequate financialresources to cover the costs of rapidly expandingdevelopment programs;

(c) Insufficientcoordination between LDAs, CYDA and various government agencies involved. This often delays project decisions and in some cases jeopardizesthe viability of programs if, for example, a school or infirmaryis built but no teachers or medical staff are provided.

7.46 Yemen's LDAs are a rare example of successfullocal development initiative. Notwithstandingserious constraintsthey mobilize substantial local resources,both human and financial;they encourage active participation of the main beneficiaries;and they help develop community spirit and local leadership. The program deserves the full support of the Central Government and of foreign aid donors.

7.47 Until now the LDAs have confined their activities to rural infrastructure and social service projects. Apart from occasional investments in irrigationwells, usually combinedwith the provision of drinking water supplies, they have not been involved in programs aimed at raising agricultural productivityor developing local industry. Given the seriousmanpower constraintsunder which LDAs are presentlyoperating, it would probably be premature to broaden the scope of their responsibilities.1/ However, in the longer run they could well play a crucial role in setting up agricultural cooperatives,disseminating new production techniques,and improvingmarketing arrangementsfor the farmers. They could also establish local credit associations designed to collect savings in the community and make funds available to local farmers, entrepreneurs,for house constructionand even for LDAs own

1/ At present, a small but growing number of integratedrural development project which pursue both economic and social objectives,are being carried out or planned by various foreign donors. See Annex VIII-2. - 85 -

projects. By strengthening the economic viability of rural areas the LDAs could help to stem the tide of migration to urban areas.

E. Providing Urban Infrastructure

7.48 Urbanization is a recent phenomenon in YAR. Until the end of the civil war most of the country's main towns and cities were closely linked to their rural hinterland serving as regional market centers and suppliers of traditional crafts. With the rapid expansion of modern sectors since 1970 - government services, industry, construction, motor transport - urban development has acquired a new dimension. Improved living conditions, especially schools and health services, and new employment opportunities have attracted an increasing number of rural dwellers to the country's main urban centers. But even though the urban population has more than doubled during the past seven to eight years its absolute number is still very small. The 1975 census shows only five towns or cities with a population of 19,000 or more - Sana'a, Taiz, Hodeidah, Dhamar and Ibb. Together they had 332,000 inhabitants representing about 7 percent of the total resident population.

Table VII-8: URBAN POPULATION IN FEBRUARY 1975

City/Town Population

Sana'a 134,588 Hodeidah 80,314 Taiz 78,642 Dhamar 19,467 Ibb 19,066

Total 332,077

7.49 Virtually all of the urban expansion since 1970 took place in an uncoordinated fashion and without serious attempts at urban planning. As the traditional town centers were already densely settled new suburbs were usually established along the main exit roads. This has frequently led to improper land use, bad street location and overcrowding which now create obstacles to the flow of traffic and increase the cost of subsequent investment in urban services such as water supply, sewage disposal and electricity.

7.50 Meanwhile, the Government has realized that urban development cannot be left exclusively to the private sector. In May 1977, it established a Central Council for Regional and Town Planning, and commissioned the preparation of an urban master plan for the country's five major cities (see Table VII-8 above). The Central Council is an inter-ministerial body 1/ responsible

1/ The Council is chaired by the Ministry of Public Works and includes representatives from CPO, the Ministries of Economy, Transport, Health, Education, Communications, Interior, Agriculture and other public authorities. - 86 - for the coordinationof public and private developmentprojects in urban areas. The master plan 1/ is expected to be completed during 1978 and will be used as the principal guide for the Council's decisions.

7.51 While comprehensiveurban planning has yet to become effective, Government sponsored projects have already been started in a number of urban related areas. These include the constructionand maintenanceof city streets; the provision of water supplies and sewage facilities;the electrification of urban households; and the constructionof adequate housing. Following is a brief discussion of the progress made in these fields and the problems encountered.

7.52 The internal road network of Yemeni cities is still rudimentary. Narrow, winding and unpaved roads prevail in the old parts making vehicular traffic extremely difficult. Few streets are paved and where pavement exists, it is deterioratingfast and requires urgent maintenance. Street lighting is perfunctoryand arrangementsfor the regular collectionof solid wastes are inadequate. The uncollectedwaste piles up in the streets creating health hazards mainly through water pollution. Dumping areas for garbage outside the towns also pollute aquifers used for the supply of drinking water.

7.53 The MunicipalitiesDivision in the Ministry of Public Works is responsiblefor urban streets and garbage collection. During the 5-year Plan the Division intends to spend, in collaborationwith municipal administrations, some YR 250 million for the constructionand improvementof 500 km in-city roads; about YR 80 million for sanitary projects;and over YR 60 million for public parks, central markets, planning and training. The main problem facing the MunicipalitiesDivision is shortage of qualifiedmanpower. Together with the shortage of machines and equipment this places severe constraints on the implementationof Plan targets.

7.54 Urban water supply and sewage systems are completely inadequate. Water shortages are widespread because groundwaterlevels - the principal source of drinking water - are lowered through excessive pumping for domestic and agriculturaluses. Moreover, many wells used for urban drinking water are contaminatedas a result of sewage seepage. Urban dwellers still rely to a large extent on open wells for their water supply, and often buy water from street vendors. In the three main cities about half the populationhas access to piped water provided either through local cooperativesor private enterprises. But even those supplies are not free of pollution. Only Taiz has a limited sewage collection system serving about 2,000 people in 1975. All other urban citizens dispose their sewage into pit latrines,cesspools and only in exceptionalcases through septic tanks. Many low-lyingareas with

I/ The master plan is prepared by a consultancygroup (Berger/Kampsax) who started their work in February 1977. - 87 - high water tables are therefore accumulating sewage in stagnant pools which contribute to the transmission of infectious diseases such as typhoid, hepatitis and dysentery.

7.55 The National Water and Sewerage Authority (NWSA) is responsible for urban water and sewage systems in YAR's urban centres. It was established in 1973 just before the first IDA credit was made available to the sector. To- gether with two further credits granted in mid 1975 and early 1977 IDA is now participating in the financing of municipal water and sewage systems in both cities. Implementation of these projects is progressing satisfactorily, after some delays in the Sana'a project resulting from cost-overruns. IDA is also assisting NWSA in strengthening its administrative capability. The current 5-year Plan anticipates the investment of YR 464 million in water and sewage projects of the five major urban centers. Upon completion, these projects would provide safe water supply and sewage disposal facilities for about half a million people, equivalent to 9 percent of YAR's estimated resident population in 1980. As in the case of urban road development, manpower shortages are the greatest constraints to the implementation of these projects.

7.56 A large number of urban households still is without electricity. The 1975 census estimates that 43 percent of all residents in Sana'a, Taiz and Hodeidah used kerosene for lighting their homes. Since then the Yemen General Electric Corporation (YGEC) which controls electricity generation and distribution in the three cities, has extended its network to about two-thirds of the present urban population. Providing electricity to all urban households is a major objective of YGEC in the current 5-year Plan. This requires extensive investment in both power generation and distribution. Total capital expenditure is estimated to reach YR 858 million during the Plan period. 1/ Upon completion, the program would supply electricity to about 600,000 urban residents, including those living in medium-size and smaller towns.

7.57 The rapid increase in urban population has created an extreme housing shortage in the main cities and towns. This shortage has been aggravated by fast rising land prices and construction costs. The 1975 census estimated that almost two thirds of the living quarters in the three largest cities had only one or two rooms, and that the average rate of occupancy was 1.6 persons per room in Sana'a, 1.4 persons in Taiz and 2.9 persons in Hodeidah. Since then density of occupation has further increased as more people move to the cities from rural areas. Moreover, the quality of housing is often very poor, lacking, as was pointed out before, running water, sanitary facilities and electricity. About one fourth of urban dwellings consist simply of huts, tents or other temporary structures.

1/ Including some rural electrification schemes. - 88 -

7.58 Until now, housing construction has been left almost exclusively to the private sector. Strong demand for living quarters from expatriate technicians, civil servants, private businessmen and migrant workers (see the section on internal migration in Chapter III) all combined to drive up rents and land prices. While this stimulated the construction of higher quality housing virtually nothing was done to provide adequate accommodation to the lower income groups. Even many middle class city dwellers could not keep up with the fast growing housing cost, and had to lower their standards of housing.

7.59 To relieve some of the pressure on the housing market the Government has recently launched a program to build some 11,000 dwelling units in Sana'a. The main component, the new suburb of "Hamdi City", is being financed by YBRD and will eventually accommodate up to 5,000 families. Most of these units will be leased to government employees and foreign experts. Another 3,000 living quarters will be built in the "Workers' City" under the direction of the Ministry of Public works; they are destined for medium and low income factory workers and technicians. In addition, the Ministry of Defense plans to construct 3,000 housing units for personnel of the armed forces.

7.60 In August 1977, the Government also established a Housing Credit Bank (HCB) with a capital of YR 100 million of which the Government owns 70 percent. The lending policy of the new institution has yet to be determined, but there are indications that preference will be given to borrowers who own a plot of land. Lending rates are set at 6-7 percent p.a., and maturities between 7 years for institutions and up to 15 years for private citizens.

7.61 Although urban projects are not grouped together in the 5-year Plan a sizeable amount of total investments is apparently allocated for the improvement of urban infrastructure. The major programs add up to more than YR 2 billion, as shown in the table below.

Table VII-9: PUBLIC INVESTMENT IN URBAN PROJECTS DURING THE 5-YEAR PLAN (YR million)

City streets /1 390 Water and sewage 460 Electricity /2 860 Housing /3 440

Total 2,150

/1 Including sanitary projects, public parks, etc. /2 Including some rural electrification schemes. /3 Including government shares in the housing bank, but excluding military housing projects. - 89 -

7.62 While each of these programs has high priority they should be seen as integral parts of a comprehensive urbanization strategy. This calls for more effective urban planning to which the Government is already committed. Experience in other countries shows that the costs of urban investments increase rapidly if the growth of cities is not well coordinated. The fact that urban development in YAR has only just begun offers the authorities a unique opportunity to protect the historic core of these cities and avoid costly mistakes in the future. This requires careful review of the adequacy of present legislation and institutional arrangements as well as judicious appraisal of the economic and social justification of urban investments. Other issues to be resolved are the need to raise the present low standard of urban construction; to properly maintain existing urban structures; and to recover an adequate amount of urban development costs through user charges.

F. Conclusions

7.63 The Government is making a major effort in developing programs aimed at satisfying the basic needs of the population. Impressive results are being achieved in some areas, especially rural development, food supplies and elementary education. But given the fact that these programs started only a few years ago, much more remains to be done. Some of the principal issues to be addressed in the future can be listed as follows:

(a) There is an urgent need to identify more precisely the principal target groups for specific programs such as food relief, adult education and low cost housing. This will enable the authorities to adopt a more focussed approach and to increase the cost-effectiveness of its programs.

(b) Active participation of the beneficiaries will strengthen the effectiveness of basic needs programs. The rural development associations are a good example of how this can be achieved.

(d) While it is important to satisfy the basic needs of as many people as possible, quantitative expansion should not be pursued at the expense of quality. This is particularly relevant in the field of elementary education where benefits tend to be diluted by inefficiencies of the education system.

(e) In some areas, effective programs have still to be developed. Examples are housing for the lower income groups; public health in rural areas; and coordinated urban planning. - 90 -

(f) The principal constraint facing YAR at this point in time is the extreme shortage of qualified staff required by government agencies and public and cooperativeorganiza- tions responsiblefor the planning and implementationof basic needs programs. - 91 -

VIII: DEVELOPING AGRICULTURE

8.01 The domestic economy of the Yemen Arab Republic is still predominantly based on agriculture: in 1975/76 the sector accounted for close to one half of GDP, employed over 70 percent of the labor force, and produced the bulk of the country's export commodities. The role of agriculture is changing, however, due to the dynamism of other sectors, to emigration of rural labor, and to structural changes within agriculture itself. This is illustrated by the declining share of agriculture in total GDP which fell from an estimated 53 percent in 1969/70 to 44 percent in 1975/76 1/ (see also Chapter II).

8.02 But these changes do not reflect a stagnation or even decline in agricultural output. On the contrary, in the first half of the 1970s agricultural production increased by about 50 percent even though the male labor force employed in agriculture declined significantly during that period. Two factors are mainly responsible for this rapid expansion: an improvement in weather conditions and a shift from traditional subsistence farming to higher valued cash crops. After a prolonged drought (1967-73) rainfall became more plentiful which resulted in higher production especially in the rainfed areas. Fast growing incomes in other sectors provided new market opportunities to which farmers responded by growing more vegetables and fruits, increasing poultry production and last but not least, planting more qat. In addition, the use of modern inputs (seeds, fertilizers and pesticides) is gradually expanding and yields of some crops are rising. Investments in irrigation works are providing additional water supplies while mechanization and the growing use of female labor are compensating for the emigration of male labor from rural areas. These changes are facilitated by a generally favorable economic climate with farm prices reflecting the shifts in demand, and by the beginning of institutional support through the Government. Agriculture in YAR is thus adapting surprisingly quickly to the changing structure of the economy.

A. The Agricultural Sector

(1) Resource Endowment

8.03 Yemen is not richly endowed in agricultural resources. Out of a total land area of approximately 20 million ha only 1.5 million ha are regularly cultivated (Table 7.1 of Statistical Appendix). An additional 2 million ha of marginal agricultural land is cultivated during high rainfall years. Woody vegetation or shrub growth covers 1.6 million ha. About 15 million ha are rocky, mountainous and semi-arid to arid range lands with very sparse vegetation.

1/ All agricultural data are subject to wide margins of error and should be taken as rough approximations only. - 92 -

8.04 Yemen is fortunate in having a well-marked rainy season corresponding to the monsoons of India and East Africa. The monsoon rains which occur in July, August and September, bring the heaviest precipitation of the year. A second, lighter, rainy season occurs in April and May. The high mountain ranges extending the full length of the country hold back the moisture-laden monsoon clouds with the result that the country gets more rainfall than any other part of the Arabian Peninsula.

8.05 The rainfall that does occur, however, is by no means uniform throughout the country. The mountain range that forms the north-south axis of the country divides it into four distinct climatic and topographic regions: the Tihama coastal lowlands; the foothills and middle heights of the western slopes; the central highlands; and the eastern slopes. The variable topography of the country results in an equally variable rainfall pattern. It ranges from less than 100 mm p.a. in the arid regions to over 1,000 mm in some areas of the western slopes. (A brief description of the principal geographical regions is given in Annex VIII-1).

8.06 While Yemen receives good rainfall compared to the rest of the Arabian peninsula, its erratic occurrence can cause havoc to agricultural production as was the situation during 1967-73. In that period, the annual rainfall was recorded at Sana'a as ranging from 17 mm in 1967 to 163 mm in 1973. The yearly rainfall was only around 100 mm in four years out of this seven-year period. The rainfall of that extended drought period contrasts with the annual rainfall recorded at Sana'a for the ten-year period 1938/47, which ranged from 200 to 500 mm with an average of 300 mm.

8.07 With a long-term average rainfall of about 450 mm over the whole of Central Yemen, it stands to reason that water resources should be sufficient to provide irrigation to more than the 15 percent of the crop acreage which is now irrigated. However, development of water supplies in the areas where soils are suitable but with rainfall not generally adequate for good crop production, presents serious difficulties. Basic water resource data is still lacking. While a good start is being made, it will take years of work to obtain reliable data on surface runoff and groundwater reserves, flows and replenishment rates and recording of actual withdrawals.

(2) Agricultural Techniques and Production Pattern

8.08 Even with the limited resources at their disposal, especially water, the Yemenis have achieved a remarkable degree of agricultural efficiency within the confines of traditional techniques. A unique characteristic of the midlands and highlands is the terraced farm lands. Millions of bench terraces to provide a level area of deep soil and to collect runoff water have been constructed through the centuries by generations of peasant farmers. The terraces now form the base for much of the country's output of foodgrains. Irrigation also has a long tradition in Yemen as is evidenced by the remains of the dam at Marib which was built in the 7th century B.C. and utilized for more than 1,200 years. Smaller dams are still being used in wadi agriculture to divert spate flood flows onto deep soils with high water retention capacity enabling a crop to be produced with only a single diversion. Other traditional forms - 93 - of irrigation are shallow wells with animal and hand-lift means as well as perennial spring and stream flows which are diverted to irrigate the good valley soils and some terraced mountain slopes.

8.09 About 85 percent (1.3 million ha) of the cultivated land depends solely on rainfall, 8 percent (120,000 ha) is supplied with a single irrigation by spate flood flow, and 7 percent (110,000 ha) is supplied with regular irrigation by perennial stream and spring flows and by wells (see Table 7.2 of Statistical Appendix). Crops account for about 75 percent of the sector's output value, some 20 percent is from livestock, 4 percent from forestry and 1 percent from fisheries. Since the early 1970's, crop output has increased, livestock production has been level, and fisheries and forestry have steadily declined (Table 7.3 of Statistical Appendix.) The decline in fisheries is primarily due to the pullout of a large commercial trawler fleet leaving the fish catch now largely based on artisan fishermen. The decline in forestry reflects the absolute depletion of the country's woodlands.

8.10 Crop production is heavily concentrated on foodgrains--sorghum, millet, wheat and barley (Table 7.4 of Statistical Appendix). Historically, 95 percent of all crop acreage was planted to these cereals. In recent years, diversification of cropping practices has reduced this to about 90 percent of all cropped land. Despite this predominance of grains, the distinctly different ecological zones of the country permit the growing of a wide range of crops. In the Highlands, temperate zone crops like potatoes, grapes and deciduous fruits are grown successfully. Various legumes such as beans and pulses are grown extensively. In the sub-tropical climate and relatively ample rainfall of the Southern Uplands, sorghum, millet, maize, barley and wheat are the principal crops. But a large variety of fruits and vegetables are also grown, including bananas, citrus fruits, tomatoes and onions. In the Tihama Plain with its tropical climate, warm winters, hot summers, high humidity and scant rainfall, millet is the staple crop. With irrigation, the area is well adapted for the growing of cotton, tobacco and sesame. Also melons, green and dry edible beans, tomatoes and onions are good crops for this zone. Present fruit crops of the Tihama are dates, bananas and mangoes. As the urban population has grown, and as rural households have also become more affluent with their large cash remittances, the demand for a more varied diet is bringing about sustained increases in vegetables, potatoes, tree fruits and grapes. Oil crops, tobacco and coffee crops are also increasing.

8.11 Probably the most important cash crop in YAR - and also the most controversial - is qat, a mildly narcotic plant which is widely consumed by the population. Although there are no statistics estimating the acreage planted to qat, the farm inputs used (e.g. water, fertilizer, labor) and the value of annual production, there is ample evidence suggesting that qat growing has expanded rapidly in recent years and that agricultural resources are increasingly diverted to this crop. Qat owes its popularity among farmers to a strong consumer demand, high prices and relatively low production cost. An indigenous plant well adapted to the climatic conditions of the highlands, qat is more drought resistant and requires less care than most competing crops, especially coffee. As a result, qat is extremely profitable to farmers and its returns generally exceed those of competing crops by a wide margin. - 94 -

8.12 Notwithstandingthe efficient use of resources through traditional methods of cultivation,absolute levels of productivityare still very low. Cereal grain yields of 600 to 1,000 kg per ha, cotton yields of 1,000 kg of seed cotton per ha, maize yields of 1,500 kg per ha and potato yields of 10 tons per ha, for example, are among the lowest of any country in the world with similar physical constraints. Under traditionalfarming practices without the use of high yielding seeds, chemical fertilizersand insecticides better results cannot be expected.

8.13 Livestock--mostlysheep, goats, cattle and donkeys--iskept throughout the country. The animals are used primarily for the productionof milk and meat, but in the traditional farming environmentthey also serve widely as dtaft animals and beasts of burden. Existing husbandry practices are primitive and inefficient. Meager and uncertain feed supplies together with lack of modern veterinary care create heavy losses and keep productionrates at very low levels. In addition, the practice of communal grazing leads to serious depletionof the scant feed supplies available.

(3) Recent Developmentsin AgriculturalOutput

(a) Crop Production

8.14 Some meaningful shifts in the diversity of crop productionare emerging (Table 7.4 of StatisticalAppendix). Millet and sorghum remain the predominantcrop, occupying about three-quartersof all crop area. The cereals as a group (millet, sorghum, wheat and barley) have retained a steady 90 percent of all crop area harvested. However, while millet and sorghum acreage remains steady,maize and wheat have increasedand barley has declined. Maize has increased from 4,000 ha in 1969/70 to a level of roughly 50,000 ha in 1975/76. Barley has declined from 145,000 ha in 1969/70 to 68,000 ha in 1975/76. Considerablemaize is being grown under irrigationin the Tihama. The shift in consumptionof wheat and high prices have led to expansion of wheat in areas with high rainfall.

8.15 Foodgrainoutput continues to fluctuatesharply as most of these crops are grown under rainfed conditionsand subject to erractic rainfall. The production of sorghum and millet, for example, has ranged from less than 630,000 tons in 1971/72 to over 1 million tons in 1974/75, the peak production year on record. Production in 1975/76 was about 860,000 tons, having dropped 15 percent from the previous year. The output for 1976/77was even lower, due to continued adverse weather conditions (800,000 tons).

8.16 An even sharper decline has taken place in cotton production over the past two seasons. The more advantageousprice of millet and maize together with other factors, especially fast rising labor cost, have led to a drastic fall in cotton productionfrom 27,000 tons of seed cotton in 1974/75 to 13,000 tons in 1975/76 and 7,000 tons estimated for 1976/77. The output of vegetables, potatoes and fruits, on the other hand, is expanding steadily. From 1969/70 to 1975/76 vegetable productionhas increased from 50,000 tons to 183,000 tons, potatoes from 20,000 to 76,000 tons, fruits from 23,000 to 65,000 tons and grapes from 10,000 to 42,000 tons. - 95 -

(b) Livestock

8.17 As most agriculturalstatistics in the YAR, estimatesof livestock numbers are subject to considerableerror. Latest official estimates for 1974 were: sheep and goats - 10 million; cattle - 900,000; camels - 100,000; and donkeys - 600,000. A marked decline in livestockoccurred during the 1967-73drought years. Cattle numbers declined from 1.2 million in 1966 to 0.8 million in 1973. During the same period, sheep and goats declined from an average populationof 11.1 million to 9.5 million.

8.18 The livestocksituation remains more or less static. A prosperous livestock subsectordepends on ample feedstuffsand grazing. These are resources which are not now available and which are difficult for the country to provide in the foreseeablefuture. The semi-arid to arid range lands can be rehabilitatedand restored to some extent, but not without risk, considerable investmentand time.

8.19 Government services to livestockproducers are still very inadequate. The importanceof livestockto agricultureand to the economy as a whole justi- fies a greater effort to support the hundreds of thousands of farm families that have a few heads of livestockand some laying hens. Traditionalcultiva- tion has depended to a large extent upon animal draft power, and despite the current influx of tractors,the prospects for the thousands of remote villages in mountainous areas with their very small and inaccessibleterraced plots is continued reliance upon animal power for cultivation.

8.20 The estimated catch in 1976 of all fish from Yemen waters was 17,000 metric tons. The potential is estimated to be about 25,000 metric tons per year. This includes some fish types which are not now eaten by the local population. The main fish resources presently exploitedby the artisanal fishermen are pelagic in habit; i.e., they are the fast-movingtype that live in the water column. These species include the Indian mackerel, which makes up the largest part of the catch, the king mackerel, tuna, black cobia, large jacks, sharks and barracuda.

8.21 The highly prized shrimp and lobster resources are substantial,but not as great as once assumed. Based on production potentialsoff West Africa of 3 metric tons per square mile, and a maximum of 500 square miles of shrimp grounds off Yemen, the production potential indicatedwould thus be 1,500 metric tons per year. On the basis of latest surveys,however, it has been found that the shrimp areas are mainly in the coastal waters, especiallynorth of Hodeidah around Kamaran Island. This area is not more than 250-300 square miles.

8.22 Another potentiallyexploitable marine resource would be the cray fish or spiny lobsters existing in the coral reef area. There is undoubtedly considerablesuitable habitat for spiny lobsters fringing the reefs, but - 96- additional exploratory fishing trials need to be undertaken to estimate the quantities that might be exploitable.

8.23 The bivalve mollusca located in the shallow litoral regions along the beaches is possibly another potential marine resource. The local clams have a hard consistency but are quite delicious and are already exploited to a small degree by the foreign community in Hodeidah. Development of this resource as a canned export is a possibility. However, further work on stock will be necessary prerequisite.

8.24 An estimated 4,000 fishermen earn a meager livelihood from artisanal fishing. The estimated number of fishing vessels now in operation is as follows: 100 large motorized boats (sambuks), 140 small motorized boats (houris), 640 medium-sized boats (houris), and roughly 100 small rafts. Most of the local catch of fish is sold in the immediate coastal region. However, increasing amounts of fresh fish are reaching the urban centers of Sana'a and Taiz. A large part of the fish landed is salted and dried for transport to interior markets as well as for export.

8.25 Fishermen get relatively low prices for their catch at the village landing centers. In addition, the price fluctuates widely with availability and season. If their catches are too large they may not have a market at any price.

(d) Forestry

8.26 The forestry resources of Yemen are sparse and being depleted at an unslackening rate. Wood for fuel is in great demand and is used mostly for cooking purposes. Prices have increased to a level of YR 35 (US$8) for a 65-kg stack of fire wood.

8.27 Yemen has no forest in the strict sense. However, large areas are covered by some woody vegetation. These woodlands may be grouped into 5 distinct types as follows:

(a) mangroves of the coastal belts that occupy the saline coastal marshes of the Red Sea from Hodeidah to the Saudi Arabia border;

(b) savannah-type woodlands running close to the foothills in the Tihama with acacia species dominant which grow in gravelly or sandy sediments:

(d) acacia scrub woodlands of the Midlands and Highlands extending over large areas on the western and southern slopes of the central mountain range; and

(e) wadi bottom woods which include the ficus species that provide small-size construction lumber for local buildings. - 97 -

8.28 In the Montane Plains, trees are normally very scattered and used mainly for poles and fuel. Tamarix is increasingly planted as windbreaks around irrigated fields and Eucalyptus as woodlots in the wetter areas. The acute shortage of wood and high market prices have encouraged farmers to plant trees. This trend needs to be sustained as there is much scope for additional afforestation which would have other beneficial effects such as soil retention and watershed protection.

(4) Factors Affecting Agricultural Production Changes

8.29 Weather is still the single most important factor that determines the output of agriculture. Rainfall is not only unpredictable from year to year, but it is quite variable seasonally throughout the year except in the high central mountain area of the Ibb Governorate (see Table 7.5 of Statistical Appendix for variability of rainfall in the southern uplands, Table 7.6 for the Tihama and Table 7.7 for rainfall data in the Central Highlands).

8.30 Farm labor is in short supply and wages have greatly increased. The continued heavy migration of laborers from the rural villages has led to these changes. Within the past three years, rural wages advanced from an average of YR 8 per day in the Ibb/Taiz area to YR 30 per day. In the Hodeidah area, daily wage rates have gone from YR 5 to YR 25 per day. Labor intensive crops, especially cotton production which has not been mechanized, have been adversely affected by wage increases. The usual third round of picking of cotton appears to have been abandoned in many fields.

8.31 Marginal terraced lands are being abandoned. The shortage and high cost of labor have been the chief causes for this development. Once these terraces have been allowed to become eroded with the retaining rock walls collapsing, rebuilding would not be feasible under the present economic situation. It is therefore a matter of some urgency that the Government adopt a vigorous program to get these terraces planted to tree crops wherever suitable, and in any case planted to permanent protective cover. In some situa- tions increased mechanization would release the demand for hand labor so that it might be used for maintaining the terraces.

8.32 A rapid advance in tractor use has been brought about by two forces: the shortage and high cost of labor and the fact that remittances have enabled farmers to purchase tractors. Also, farmers have availed themselves of loans from the newly functioning Agricultural Credit Bank and the Agricul- ture Credit Fund (ACF) for the purchase of tractors. For example, during the period October 1, 1976, to February 28, 1977, the ACF branch of the Southern Uplands Rural Development Project (SURDEP) received 77 applications in the amount of YR 6.3 million for tractor loans. While the latest official data for 1975/76 shows only 417 tractors in use, unofficial estimates indicate that 1,130 tractors are in use. An estimated 2,000 tractors are expected to be imported in 1976/77 (700 Volvos, 850 Massey-Fergusons, 300 Fiats, 150 others).

8.33 The large inflow of remittances is also enabling more and more farm families to develop their own tube wells. Several private drillers are - 98 - engaged in well drilling with costs running up to YR 50,000 per well for drilling and casing. In the approximatelyfirst 8 months of operations,the ACF component of the SURDEP Project received 262 applicationsfor farm development loans, most of which were for undergroundwater development for irrigation. Imported pumps have steadily increased from 400 in 1969/70 to 900 in 1975/76.

8.34 As groundwateruse has increased (Table 7.9 of StatisticalAppendix), particularlyin the Tihama, problems of excessive soil salinityhave become more apparent. A limited examinationof water quality in Tihama showed more than half of the water samples examined presented a very high salinity hazard. The poorest quality of water was found in Wadis Siham, Risyam and Mawza. With salty waters, greater quantitiesmust be applied to ensure adequate leaching and drainage must be provided. The number of salt-tolerantcrops is limited, and crop yields are reduced by high salinity. Studies in the central highlands show very little problem with salinity,but some soils are medium to highly alkaline.

8.35 Fertilizeruse is beginning, but wide use is not likely for a number of years. Until 1974/75, fertilizer imports ranged between 2,000 and 4,000 tons per year. Imports in 1975/76 were double those of the previous years (Table 7.10 of StatisticalAppendix). The three-year fertilizer demonstrationand promotion project (1970/73)of the German aid program, the fertilizer trials and extension promotionwork of the Tihama DevelopmentAuthority, the work of the UNDP/FAO supportedCentral Agricultural Research and Extension Organizationand the IDA/KuwaitFund SURDEP Project, have brought about the increased fertilizeruse. However, despite the work being done under all these activities,relatively few farmers are adopting fertilizeruse. A comparison of fertilizeruse in other countries illustrates this situation(see Table 7.11 of StatisticalAppendix).

8.36 More effectiveplant protection is on its way. The work of the UNDP/FAO Locust Control Project, the UNDP/FAO large-scaletethnical assistance teams at Hodeidah and Taiz, the plant protection team of TDA in Wadi Zabid, and the massive joint effort of both bilateral and multilateralgroups in the army worm infestationcampaign of the summer of 1974 have made farmersmore aware of the importanceof insect control. Insecticideimports have grown from 118 tons in 1969/70 to 717 tons in 1974/75, jumping to 2,510 tons in 1975/76 (Table 7.9). Farmers in Ibb and Taiz, who were the prime beneficiaries of the army worm control campaign are reported to be very receptive now to the use of improved plant protection.

8.37 The severe erosion and depletion of plant cover on the rangelands continues unabated under the communal grazing traditionsof the country. The steady decline in animals reported slaughteredfrom 1972 to 1975 clearly indicatesa decrease in livestocknumbers. In 1973 110,000 sheep, 99,000 goats and 46,000 cattle were slaughtered,while in 1975, 90,000 sheep, 81,000 goats and 27,000 cattle were slaughtered. The ten pilot Village Development Associationsand the Range ImprovementCenter to be establishedunder the IDA Livestock Credit may hopefully demonstratea way to reverse the present range deteriorationprocess. Each pilot village project will include communal grazing control together with forestry and natural pasture improvement. - 99 -

8.38 An effective start has been made in veterinary and animal health care services, largely with the help of British technical assistance. How- ever, without a large corps of trained Yemini staff, countrywideeffective service will remain unattainable. The two currently availableYemeni veterinariansare mostly involved in administrativeduties. Only one student has thus far been sent abroad for training in veterinarymedicine, and only four in livestockhusbandry. These students are due to return in 1979/80.

B. DevelopmentPotential and Constraints

(1) DevelopmentPotential

8.39 The present low level of agriculturalproductivity suggests considerablepotential for developmentnotwithstanding the existing physical constraints. Even under the limiting conditions of low and erratic rainfall, crop yields could be significantlyincreased. Better husbandry and animal health care can increaseweight gains and milk production. A considerable long-rangepotential is also achievable through range management which would strengthen the feed base for the animals. The fisheries'output could be about doubled on a sustainedbasis with improved landing and handling facilities and better marketing arrangements. The steady decline of forestry, however, cannot be reversed except over the very long run.

8.40 The size of the agriculturalpotential is difficultto gauge at this time because of the dearth of basic information. Accurate data are not available even on the land base. No overall soil capabilityclassification survey has been made; no complete agriculturalcensus exists which would give a dependable base to estimate crop and livestockproduction trends. While a large body of good crop research has been carried out in recent years, the results are far from adequate for applicationto the many micro-climatesand soil areas of the country. Rainfall and other agro-meteorologicaldata is available for only a few locationsand for very short and often broken periods of time.

8.41 The fertilizerresearch results indicate a very substantialpoten- tial for increasingoutput in high rainfall regions and on perenially irrigated land. Caution must be exercised in making assumptionsas to the extent that chemical fertilizerswill be applied by farmers. In areas where the probabilityis that rainfallwill be less than 400 mm per year, farmersmay not be willing or able to take the financialrisk of applying fertilizers. Roughly estimated,only about half of the country's 1.3 million ha of rainfed cultivated land is in areas with a mean average rainfall of over 600 mm. While these areas alreadyhave the highest and most stable crop yields, they also have the greatest potential for still higher yields. These higher rainfall zones are in the Governorates-ofIbb and Taiz and parts of the Governo- rates of Sana'a and Damar.

8.42 The response to nitrogen fertilizerapplications (60 kg/ha) under farmers' conditions in the Ibb area in 1971/74was an increase of 0.66 tons per ha of sorghum, 0.49 tons per ha of wheat and 0.52 tons per ha of barley, or 26, 28 and 47 percent, respectively. At higher levels of applied nitrogen - 100 -

(90 kg/ha), the addition of phosphates and potassic fertilizers was shown to be potentially profitable, but further trials are needed to show conclusive results. Best wheat yield increases were obtained by use of nitrogenous plus phosphatic fertilizers. Barley trials carried out in the lower rainfall Yarim area showed that a combination of nitrogenous, phosphatic and potassic fertilizers gave best response.

8.43 Best results with fertilizer use can be obtained along with the introduction of high-yielding varieties. For example, local varieties of wheat do not respond well to fertilizers. The farmers in the Ibb area with local varieties get about 600 kg per ha without fertilizer and 1,100 kg per ha with application of 80 kg of ammonium sulphate. With new high-yielding rust tolerant varieties, yields of 2,500 to 3,000 kg per ha are obtained with fertilizer application. Non-rust resistant varieties gave up to 3,500 kg per ha, with applications of 100 kg of nitrogen.

8.44 In the Ibb-Taiz area, new sorghum varieties with application of a composite fertilizer (80-80-40) gave yields up to 4,000 kg per ha. In this area, farmers with their local varieties and with the application of no fertilizer get about 1,100 kg of sorghum per ha. One problem is that farmers resist the high-yielding semi-dwarf, small-grain size varieties. The farmers do not like the small-sized grain sorghums. By tradition, they strip the leaves from sorghum for livestock fodder feed. The stocks are also used for fodder feed. Even the root system is sold for cooking fuel.

8.45 The team effort of the Tihama Development Authority (TDA) in the promotion of modern agricultural techniques indicates the potential results that can be obtained by application of fertilizer, use of higher-yielding varieties and better plant protection. In 1976, the TDA team on farmers' demonstration fields obtained average yields of 3,520 kg of maize per ha, which compared to the average of 1,180 kg per ha by farmers generally--a gain of almost 200 percent. The cotton demonstration fields gave 170 percent more than the average farmer--2,992 kg of seed cotton per ha as compared to 1,109 kg per ha obtained by farmers using traditional methods.

8.46 The use of higher yielding crop varieties, chemical fertilizers and insecticides for better plant protection can conceivably double output on about half of the country's present cropland where rainfall is highest or where irrigation is practiced. A further potential exists by the shift to more intensive crops. A trend in the direction is already apparent. More vegetables and fruits are being grown; potato acreage is expanding rapidly. With rising incomes, and especially with more cash money in the hands of the consuming public, dietary habits are changing. Continued increase in demand for fruits, vegetables and wheat will support a shift to these higher-return crops.

8.47 Livestock also has the potential for a greater contribution to the rural economy. This requires an increase in the feed base through improved range land development, supplementation of crop by-products and the growing of fodder crops in rotation with food grains. Together with better husbandry practices, including veterinary care, such measures would increase - 101 -

the productivity of herds and possibly allow expansion in livestock numbers. Commercial dairy farming and poultry production has a limited potential near the urban centers. But this should not be overestimated and efforts to improve the livestock sub-sector should include both, modern commercial enterprises as well as the large numbers of traditional farmers who keep a few animals as a vital source of cash income, protein foods and draft power.

(2) Development Constraints

8.48 The exploitation of YAR's agricultural potential is presently constrained by a number of human, institutional and physical factors.

(a) Human Factors

8.49 While the farming population is highly industrious and skillful in their traditional ways of cultivating crops and caring for livestock, they are not knowledgeable or experienced in modern agricultural practices. Even when new techniques are successfully demonstrated on their own fields, the farmers are usually not ready, when left on their own, to take the financial risks involved in the adoption of new practices. To move from a traditional and basically self-sufficient agricultural system to a market-oriented one based on cash costs and sales will require continued extension guidance and credit supplies.

8.50 More recently, the constraints associated with traditional skills and attitudes of the farming population have been compounded by an increasing labor shortage caused by the emigration of adult males from the rural areas. This has pushed wage rates up to relatively high levels (see paragraph 8.30), sharply increasing the costs of traditional labor-intensive farming practices. Moreover, the large cash remittances sent home by the migrant workers are reducing the incentive to continue cultivating marginal plots.

8.51 There is also an extreme shortage of professionals and technicians required to staff the new agricultural institutions and services. As of July 1976, the Ministry of Agriculture had only 72 university-trained agricultural specialists (including veterinarians) and 219 agricultural technicians (Table 7.12 of Statistical Appendix). This compares with an estimated need for additional 288 professionals and 867 technicians until 1981, i.e. four times the 1976 complement (Tables 7.13 and 7.14). It is unlikely that the additional staff can all be found during this period. For example, it is expected that only 156 university graduates will be returning to Yemen during 1976-80 (Table 7.15) some of whom are likely to choose employment outside agriculture. Furthermore, as recent experience shows, some of the present staff will probably leave the Ministry over the next few years. The shortage of qualified manpower in agricultural administrations and institutions will therefore continue to persist in the foreseeable future.

(b) Institutional Factors

8.52 Nearly all institutions to serve agriculture are just beginning their operations and have branch offices in only part of the country. While - 102 - noteworthyprogress is being made in the strengtheningof institutions,much remains to be done before it can be said that all of agricultureis adequately reached by essential services. For example, there is now only one agricultural engineer per nearly 20,000 rural households and one extensionworker for 6,000 households. The AgriculturalCredit Bank has not yet been able to establish branch offices in all of the Governorates. The extension agents that do exist do not have the means or training (except in two limited areas) to carry out effective guidance programs.

8.53 Institutionalizedagricultural credit is a relativelynew experience in Yemen. It is not yet known to the majority of farmers. The Agricultural Credit Fund (ACF) was establishedwithin the Central Bank in 1974 for the IDA Tihama DevelopmentProject. Loans were made for a part of fiscal year 1974/75; the first full year of operationwas at the ACF Wadi Zabid Branch for 1975/76. The ACF started to extend credit in connectionwith the SURDEP Project in 1976. ACF will be extending credit in connectionwith all four IDA projects,each of which has limited areas and programs. The other IDA projects are the Grain Storage and ProcessingProject and the Livestock Credit and Processing Project. Funds for the four projects from ACF will amount to about US$40 million. ACF has a total staff of only 28, two at Central Bank headquarters,1 local and 1 expatriate;10 at the Ibb Branch, 9 local and 1 expatriate;11 at the Wadi Zabid branch, including 1 expatriateand 5 local staff at the Wadi Mawr Branch. Table 7.16 lists the conditionsunder which ACF extends credit.

8.54 The AgriculturalCredit Bank (ACB) was establishedby Law No. 21 of 1975 and commenced lending operations in July 1976. Priority lending activities of ACB have been establishedfor (a) seasonal inputs, (b) developmentof wells and irrigationsystems, (c) agriculturalmachinery, (d) improvementof land, (e) agriculturalindustry, (f) livestock prouctionand (g) storage and processing facilities. As of February 1977, ACB had a total staff of 59, four of whom were expatriate. Branch offices have been establishedin Sana'a, Hodeidah and Beit El Fakih. ACB also make loans through the ACF Branch Offices. A summary of ACB's and ACF's lending operations is shown in Table 7.17 of the StatisticalAppendix.

8.55 All credit operations are constrainedby a lack of qualified personnel. Yemen can ill-afford a duplicationof institutionsin agricultural credit. The actual credit needs of farmers are not limited to the loan categories as establishedfor the IDA projects operating through ACF. To avoid such duplicationthe Government is therefore consideringa merger of the two credit institutions.

8.56 The land tenure and social conditionsof the country necessitate speciallyadapted credit procedures. Most farms are small and tenant-operated. The general conviction of most rural people is that land should not be mort- gaged (or given) as security for loans. This constitutesa major constraint under presently establishedcredit regulations. The existing pattern of land ownership and traditionalsharecropping arrangements are unlikely to be changed except very gradually over the long run. It is thereforeessential that the credit institutionsfind ways to extend credit within the frameworkof the - 103 - existing tenure system. This can be done. The establishment of farmer credit cooperatives may be one way. In the long run, some means of land consolidation would help in achieving the country's physically-feasible optimum level of agricultural output.

8.57 The two issues with respect to the present land tenure situation are (a) that it does not give the tiller of the soil--the sharecropper--an incentive or the means to adopt more modern practices and especially the use of chemical fertilizers, insecticides and herbicides; and (b) that the system has contributed to excessive fragmentation of the operating units which make it difficult or impossible for the sharecropper and small owner/operator to mechanize his farm operations.

8.58 The traditional 50/50 sharing of the crop and costs of production has been adjusted to meet special conditions. Whether the adjustments have been equitable to both parties cannot be answered. Nor can an answer be given without detailed study to what other adjustments should be made in the future in anticipation of the needs for enhancing agricultural output.

8.59 One aspect of the present tenancy situation which may require special attention is that of security of tenure. At present, the sharecropper operates under a verbal agreement with the landowner under terms and conditions that are determined largely by tradition. This same tradition has tended to give these sharecroppers considerable security of tenure. A more formal assurance of security of the length and terms of the tenancy may, however, eventually be desirable. Both owners and tenants have an interest in the building of the fertility of the land, in building more efficient and water-conserving irrigation systems, in soil erosion prevention measures and in land reclamation. The cooperation and equitable sharing of the labor and costs of such long-range on-farm improvements between the landowner and sharecropper can hardly be expected on a year-to-year verbal understanding. Long- term tenancy terms that can be legally protected are likely to be required.

8.60 Definite limits to the further expansion of agricultural production are set by the country's limited land suitable for arable agriculture and its water resources. In areas where rainfall and water supplies are generally adequate for high level production, available arable land is already in full use. In areas where unused arable land exists, strictly limited additional water resources are available for development.

8.61 The absolute limit of the amount and nature of physical resources means that the prospects for expansion of agricultural output lies in the better utilization of land and water for the highest return crops that are best adopted to the widely differing conditions in the country. In some places, a system of mixed livestock-crop farming can be employed to enhance total output. In other areas, conservation grazing practices could, in the long run, result in increased livestock production. In the rougher regions, watershed protection and afforestation could advance the economic potential of the country. - 104 -

8.62 Recent developments which are putting further constraint on the physical resources are: (a) increased salinity of water supplies; (b) rapidly spreading sand dunes in the Tihama area; and (c) the abandonment of marginal terraced lands. Once the terraces have become eroded with the collapsing of the rock support walls, it is unlikely that they could ever be economically restored; the shortage and high cost of labor would make it prohibitive.

8.63 Good all-weather roads connecting the three main towns of Sana'a, Hodeidah and Taiz are now completed. Already the beneficial impact of these roads is evident. Along the road in the Tihama coastal area, new wells were dug and new land brought into production. The roads have made it feasible to transport fuel for the diesel motor pumps and other inputs and to transport farm products to the market. However, secondary and feeder roads to the farming areas and to the fishing villages have not been developed. Many farming areas are not yet accessible by motorized transport.

8.64 A large amount of new capital stock is needed on the farms of Yemen to enable them to shift out of subsistence labor intensive type of farming to a capital intensive high input/output system. The very nature and low level of development in the economy of YAR constitutes in itself a major constraint to the advances in agriculture that are feasible within the limits set by the physical environment. The predominance of the population in agriculture has meant that most farms had no alternative except to be subsistence in type. The non-agricultural population provided only a relatively small domestic market for cash sales. Historically only a small part of agriculture has been devoted to production of export crops. Very little of the farm economy had any opportunity of becoming market oriented. Farmers mostly have been concerned with production for their own consumption. This is now changing as money incomes grow rapidly and with it consumer demand for different and more sophisticated food products. However, progress toward a market- oriented agriculture will require more machinery, more farm storage facilities, and capital or credit for more costly seasonal inputs.

C. Government Objectives and Programs

8.65 Recognizing the important role of agriculture in YAR's economy, the Government is giving high priority to the development of the sector. Initial efforts concentrated on setting up needed institutions and services, conduct- ing resource surveys and preparing a few large investment projects.

(1) The Three-Year Development Program (1973/74 to 1975/76)

8.66 The Three-Year Development Program represented a first attempt at pursuing these objectives in a coordinated form. YR 138 million were planned to be spent on agricultural development (about 15 percent of the total program). Actual expenditures amounted to YR 73 million, most of it financed through foreign aid, representing an implementation rate of 53 percent. As there were large cost overruns the real rate of implementation was even lower. - 105 -

8.67 Although the quantitative targets of the Program were not reached, significant progress was made in institution building and manpower training. The general secretariat of the Ministry of Agriculture was reorganized and its staff was strengthened. The Agricultural Credit Fund was set up to be followed by the Agricultural Credit Bank, and a Department for Fisheries was created within the Ministry. The Tihama Development Authority was established and started to prepare work for the construction of large irrigation schemes. Research stations were created in Taiz, Ibb and near Hodeidah and nurseries were set up for the production of deciduous fruit trees and coffee seedlings. Extension services were introduced in Wadi Zabid and the Southern Uplands.

8.68 Water and land surveys were conducted in a number of areas, including Wadi Mawr, Wadi Rima, Wadi Seyhan and on the Montane Plains. A survey of coastal sea fish resources was completed for the continental shelf area north of Hodeidah. Various feasibility studies were undertaken and exploratory wells were drilled to locate underground water resources. Thus, while project outlays lagged behind the targets there is no question that the developmental impact of the Program has been substantial.

(2) The Five-Year Plan (1976/77 to 1980/81)

8.69 The new Five-Year Plan defines the Government's objectives in agriculture more clearly, and proposes a large number of specific development projects some of which have been identified and prepared under the Three-Year Program. The principal objectives of the Plan can be summarized as follows:

(a) Work towards self-sufficiency in food production within economic limits;

(b) Provide raw materials for agro-industries already existing and those to be established during the Plan period;

(c). Reduce the widening trade deficit in agricultural commodities;

(d) Improve the quality of agricultural products;

(e) Provide special support to small farmers and create equitable and stable land tenure relations; and

(f) Limit the growing of qat.

8.70 These objectives are to be achieved through the following means:

(a) Continue the institution building and training of agricultural staff;

(b) Carry out a comprehensive survey of soil and water resources;

(d) Establish farmer cooperatives suitable for Yemeni conditions; - 106 -

(e) Provide storage capacities for agricultural products and extend the network of rural roads;

(f) Conduct an agricultural census to obtain reliable data for the sector; and

(g) Carry out studies on marketing, prices and taxation with a view of arriving at policies that would best promote agricultural development.

In addition, a great number of investment projects are to be carried out under the Plan with emphasis given to irrigation schemes, farm mechanization, seed preparation, plant protection, livestock and poultry production, afforestation and integrated rural development. Total investment for agriculture is planned to reach YR 2.6 billion of which 0.4 billion is to be provided by the public and mixed sector, 1 billion by the private sector and 1.2 billion through foreign aid.

8.71 The production targets set for the Plan and the inputs required to achieve these targets, are shown in Tables 7.18 and 7.19 of the Statistical Appendix. In the crop sector, special stress is to be put upon increasing wheat production. The demand for wheat has rapidly increased, especially among the cities population. The old reliance on sorghum and millet is diminishing. An increase in wheat production is expected to take place in the Montane Plains where rainfall is adequate to replace sorghum and barley by wheat, and in new irrigated areas. The long-range target for wheat is to become self-sufficient with an annual production of 265,000 tons by 1990. The yield target is to increase the present average of 1.04 tons per ha to 1.6 tons per ha by 1980/81. Yield targets for wheat and other major crops are shown in Table 7.19 of the Statistical Appendix.

8.72 The goals for expansion of irrigation for the 5-year Plan may have to be pursued cautiously until more basic water resource surveys and investigations are undertaken. The Wadi Mawr feasibility investigation will soon be completed and execution of development is expected to start during the 5-year period. The Wadi Rima investigations are also completed, and a specific development project has been determined. Investigation is currently being undertaken in Wadis Sordud, Risyan, Bina'a and Marib. The medium and long- range targets for the expansion of irrigation are shown in Tables 7.20 and 7.21 of the Statistical Appendix. For year-to-year targets for flood and perennial irrigation by Wadis, see Tables 7.22 and 7.23. For well irrigation targets by Governorates, see Table 7.24.

8.73 Studies are to be made for the possible use of sewage water for irrigation. Also, investigations are planned for the location of dam sites in mountainous areas for the possible storage of surface flow for irrigation. The program of works envisages some construction of small dams for flood retardation and soil erosion prevention as well as water conservation.

8.74 Agricultural research plays a vital role in providing a scientific basis for improving agricultural production. Through the UNDP and bilateral - 107 - aid programs, a good beginning has been made. There has been some duplication as centralized direction could not be given previously because of the various sources of financing. In the 5-year plan, both plant protection and crop research are expected to be better coordinated by the establishment of a high- - level committee for all agricultural research. The aim in the future is to have a main station in each of the following regions with all other stations in each region being sub-stations: Tihama, Montane Plains, southern Uplands and Marib.

(3) Foreign Assistance

8.75 The Government realizes that in order to achieve its development objectives in the agricultural sector, it has to rely extensively on foreign assistance. Foreign technical and capital aid have been provided on a large scale over the past few years and are expected to increase substantially during the current Five-Year Plan. The major donors are international organizations such as IDA, the Arab Agricultural Development Corporation, the United Nations Development Program as well as a growing number of bilateral aid agencies (Annex VIII-2). The bilateral aid groups making major investments in agriculture thus far include the Kuwait Fund, the Abu Dhabi Fund for Arab Economic Development, the UK Overseas Development Ministry, USAID, the Federal Republic of Germany, the Netherlands, China and the Soviet Union. Others actively studying aid projects for the agricultural sector include the Republic of Korea and the Saudi Arabia Aid Fund.

8.76 Foreign assistance covers a wide range of activities including fellowship training, institution building, research, storage, irrigation, development, livestock development and basic land and water resources surveys. Such heavy reliance on foreign assistance naturally raises a number of problems. Each aid agency has its own standard which may not be consistent with other aid agencies nor that of the Government. It is very difficult to coordinate the activities of so many donors. The large number of expatriate staff do not have enough local counterparts with the result that a great opportunity for in-service training is lost. With further strengthening of the Central Planning Organization and the Ministry of Agriculture, better coordination should, however, be attained in future years.

D. Options for the Future

8.77 Major changes are emerging in the agricultural sector of YAR. After centuries of subsistence farming and efficient utilization of a meager resource base through traditional cultivation techniques, farmers are now faced with labor shortages, high and fast rising wages, relatively easy access to capital and changing consumer tastes. These shifts offer new opportunities for agricultural development especially in high-value crops and livestock, but they are also fraught with dangers of destruction and waste of resources.

8.78 The new situation requires flexibility from both, farmers and Gov- ernment. Instead of clinging rigidly to outdated objectives and traditional farming practices, the agricultural sector should be left open to respond to - 108 - local market conditions and price/cost relationships just as the economy at large is an open one. Government policies and programs should be aimed at providing technical and institutional support to farmers which would help them to better respond to the new opportunities. They shpuld also preserve existing resources and develop new ones.

8.79 Many farmers have already started adapting to the changed market and cost structures. They are acquiring tractors and other mechanical equipment to replace increasingly scarce labor. They invest in irrigation wells and pumps, and use better seeds, more fertilizer and pesticides. They are shifting from barley to wheat which gives a higher return, and grow more vegetables and fruits. Private enterprise is beginning to get into poultry production which at present is highly profitable.

8.80 However, individual farmers pay little attention to overall resource limitations. Excessive use of groundwater has already dangerously lowered the water table in some regions and created salinity problems in others. Marginal field terraces are being neglected and valuable land is lost permanently through erosion. Scarce timber resources are being depleted through excessive wood cutting and communal range lands suffer from overgrazing. Lack of experience and low cost of capital foster wasteful use of equipment.

8.81 The Government is aware of the new opportunities and the cost of adjustment. Its policies and programs are generally designed to upgrade the skills of farmers and provide them with institutional support. Emphasis rightly is given to extension service, agricultural credit and research which will help the farmers to be more responsive to changing market forces. The general infrastructure is strengthened and resource waste reduced through water surveys and investment in irrigation works, transport, storage and processing facilities.

8.82 The declared policy of the Government to become self-sufficient in foodgrain production no longer seems appropriate in the light of YAR's large foreign exchange earnings which have removed earlier constraints to the importation of basic foodstuffs. The objective for wheat production to meet all local demand in the long run is not necessarily the best in view of the increasing demand for even higher return crops on the land that would be needed for the wheat production. While it may be appropriate to substitute wheat for barley or sorghum in suitable rainfed areas it would probably be uneconomic to grow wheat on newly developed, high-cost irrigated land. There vegetables, fruit and industrial crops such as cotton and forage crops for milk and meat production are likely to offer better returns.

8.83 Special measures may, however, be required for a limited number of crops. A case in point is cotton production which has suffered greatly from rising labor cost and exceptionally high grain prices. As the latter can be expected to fall in the coming years the long-term profitability of cotton may not be so unfavorable as it appears at present. By shifting to varieties which give higher yields and require relatively less labor for harvesting, the role of cotton as an important crop for export and local industry could well be preserved. Other crops that deserve special Government support are coffee, oil crops and tobacco. On the other hand, qat which in recent years - 109 - has partly replaced coffee and which presently offers very high financial returns, deserves to be discouraged because it is damaging to the health of the population. Disincentives could be created either through taxation or through acreage restrictions. Another measure already in effect in some areas is to provide credit on concessional terms to farmers who agree to replace qat by coffee or fruit plantations.

8.84 The growing use by farmers of tractors and agricultural equipment is creating a number of problems including: (a) ill-adapted tractors and machinery for Yemeni conditions; (b) excessively large tractors and under utilization of equipment; (c) plowing too deep with the loss of precious soil moisture; and (d) poor maintenance. As a tool to help the country adopt farm mechanization, a specialized project to provide a line of credit would be advisable. As with other projects, it should appropriately include a large element of technical assistance, and the possible establishment of machine operation and maintenance training centers. For actual repair and maintenance, the project might include a line of credit for private tractor and machine repair garages.

8.85 The targets set in the 5-year Plan for expanded irrigation appear to be on the high side. They envisage an expansion by 66,000 ha between 1975/76 and 1980/81, i.e. 14,000 ha by flood irrigation 1/, 6,000 ha by perennial flow irrigation and 46,000 ha by well irrigation. Based on the current activity in the private sector, the projected expansion target for well irrigation could possibly be achieved. However, in some areas further exploitation of ground water may prove to be not only costly but of short life because of the salinity problem. Individuals are proceeding with exploration of groundwater without benefit of reliable groundwater information. No protection is yet provided by law against over-exploitation although the Plan does give recognition of the need for some Government regulation of groundwater development. It can only be hoped that legislative authorities will recognize the need at an early date.

8.86 It is foreseen in the Plan that development works will bring about added flood irrigation in eleven major wadis toward the end of the Plan period. It is doubtful that these targets will be reached except in Wadi Zabid where major civil works will be completed in 1978. In some of the other wadis investment projects have not as yet been agreed upon. A basic resource survey has been completed in Wadi Rima and a Rural Development Project appraised. Studies are in process in Wadis Mawr, Sordud, Rasyian, Bina'a and Marib. After the completion of surveys currently in progress, further engineering design and feasibility analysis will be required as a basis for specific investment projects. It will then take time for construction before actual new irrigation can be attained.

8.87 Substantial investments are also needed for afforestation and watershed protection. Tree plantations would have a number of important purposes including (a) afforestation of marginal bench terraces that have been abandoned

1/ Implementation of this target may be delayed due to delays in financing arrangements. - 110 -

from crop production in order to prevent their further rapid deterioration; (b) provide village with wood lots which supply rough pole lumber and fuel wood; (c) windbreaks especially around fields to be planted with crops subject to wind damage; and (d) fixation of sand dunes in the Tihama. To- gether with other measures to preserve or reestablishthe natural vegetation cover especiallyon marginal range lands, such investmentswould in the long run strengthenthe moisture retention capability of crucial watershed areas and improve the country'swater balance.

8.88 Livestock is an importantagricultural resource in YAR and offers considerablepotential for development. Such projects are especially suited to the private sector which already has successfullymoved into commercial poultry production. When conditions are equally promising for dairy production, it can be expected that private enterprisewould also invest in that industry. The Government is willing to provide veterinary services and other institutionalsupport.

8.89 The long-run prospects for the livestock subsector can be better enhanced by giving attention to the rehabilitationand protectionof the country's rangelands and by fosteringbetter husbandry practices among the already long established livestock farmers. The vast areas of land used only for open range grazing have been subject to overgrazingespecially during drought periods. The restorationof the natural grazing potential of the country will admittedlytake many years. But in the meantime, a considerable output can be achieved by providing good country-wideanimal health care and by giving credit for more adequate water supplies and fodder production.

8.90 With regard to fisheries,a modest investment as is proposed for IDA participationseems appropriate. Yemen has already had an unsuccessfullarge- scale commercial exploitationof its fish resources. The proposed project would consist of improved landing and handling facilities in the main ports, particularlyHodeidah and Mokha, which facilitieswould include ice-making plants, chilled storage for fish, repair yards, and water and fuel supplies. The project would also include a credit scheme for the traditionalfishermen and support the establishmentof a local shrimp company which would operate a shrimp plant and its own trawlers.

8.91 Most infrastructureprojects, appropriatelyincluded in the Plan as essential to achieve Government objectives,depend on complementarymanpower for their implementationand subsequent operation. Moreover, as was shown earlier in this chapter, qualifiedmanpower is urgently required to strengthen the country's agriculturalservices. Yet, it is here that the sector faces its greatest bottleneck. The analysis of manpower requirementsfor the 5-year Plan shows that only one third of the needed staff will be available even under optimistic assumptions.The shortage can be overcome through the employmentof expatriate personnel as is proposed. For example, in the veterinary services field, there are now 9 expatriateveterianarians but the full Plan program will need 30 in the later years of the plan period. The question is, however, to what extent can developmentbe fostered by use of foreign personnel. Real and lasting progress in the farming sector can only be achieved through Yemeni - Ill - trained staff in extension, research, plant protection, animal health care, credit and other services working directly with farmers. Expatriate staff can be engaged for planning, surveys, and execution of physical works, but they are costly and perhaps not too effective in providing direct services to the rural communities.

8.92 Foreign assistance will nevertheless continue to be required for the development of the agricultural sector. As has just been pointed out, its greatest impact will be helping to relieve the manpower constraint. Insofar as Government support to agriculture entails investment by the public sector, substantial foreign capital funds will also be needed (see Chapter V). Foreign donors who are willing to support agricultural development in YAR should be aware of the recent changes in factor pricing and market opportunities. Moreover, they should be careful in establishing long-lasting services which do not falter upon completion of a project. If necessary, continuity should be assured through follow-up projects. Another important issue is aid-coordination: foreign aid agencies should seek to supplement each other rather than competing for projects and services. The new 5-year Plan provides a good basis for a well-conceived and coordinated aid program, the implementation of which should be pursued through judicious negotiations and project selection between the Government and individual aid agencies. - 112 -

IX. EARLY INDUSTRIALIZATION

9.1 Industry in the YAR is at a very early stage of development. Although there are a large number of manufacturing enterprises, and employment in the construction industry is also substantial, most operations are very small, and are based on traditional production methods. However, in recent years a few medium-sized manufacturing firms have been established both in the public and private sector. A construction boom has led also to the emergence of several larger contracting companies.

A. Opportunities and Limitations

9.2 There is currently considerable interest and enthusiasm among the private sector for expanding existing firms and establishing new manufacturing enterprises. This is manifested in the substantial number of projects for which official approval is being sought, and in the demand for plots and factory space on the recently established Sana'a industrial estate. The Government also gives high priority to industrial development in its new Five-Year Plan, and has reacted positively to approval requests by the private sector. Enthusiasm is less noticeable within Government and in the private sector for a further rapid expansion of local construction industry, in spite of the boom in building activity and the very large construction demands of the Five-Year Plan; this follows from the basically management and manpower problems which the construction industry has encountered in the last few years.

9.3 Determination to push ahead with the development of manufacturing industry, both public sector and private, is a major factor favoring success. Important factors supporting industrial development are:

(a) The knowledge of local markets and how to tap them which private sector manufacturers bring from their predominantly trading backgrounds.

(d) The element of natural protection to local manufacturers stemming essentially from the smallness and special characteristics of the local market; import consignments are smaller, increasing international transport costs and - 113 -

reducing the scope for quantity price discounts; also, it is rarely worthwhile for foreign manufacturers ':o design products tailored specifically to Yemeni tastes and needs indeed they may not even seek to determine what these are.

9.4 In recent years this natural protection has been temporarily magni- fied by port delays and by the ignorance of foreign suppliers of the greatly improved sales opportunities in the YAR. Moreover, Yemeni consumers have not always been very price-conscious in purchasing-products new to local markets.

9.5 While these factors work in favor of industrial development in YAR there are other features in the country's present economic structure which act as constraints. Thus, contrary to many other developing countries YAR has relatively high labor cost; it lacks raw materials which could be processed locally and perhaps exported; and the small size of the domestic market does not allow the creation of large-sized productive units, even under protective barriers.

(1) Limiting Factors

9.6 The biggest comparative advantage which most developing countries have enjoyed in the early stages of industrialization is that low wages and associated wage costs more than offset initially poor productivity resulting mainly from low skill levels. In the YAR not only is productivity low, due essentially to low skill levels, but wage rates are far above those typical in developing countries. Few firms appear to pay under YR 650 ($144) a month for unskilled labour, and it is claimed that some pay as much as YR 1,500 ($333). Skilled workers typically get around twice the unskilled rate, though in some industries it may be three times or more; exceptionally, as much as YR 3,500 ($778) per month is paid.

9.7 Annual bonuses, leave entitlement, medical facilities, transport, clothing.and subsidized food are the most common non-wage elements in wage costs, though few firms provide all of these. Typically they probably add 20-25 percent to basic wage costs, though in the case of the most generous companies the mark-up is over 50 percent. Wage costs naturally vary considerably between companies and industries. Generally, construction work is particularly well paid, while the public sector pays appreciably less than the private. Indeed some private sector skilled workers appear to earn more than senior management in some public corporations. The public sector is also less generous than large private sector companies in the bonuses, fringe benefits etc. given. There does not appear to be any significant difference in wage costs between the three main cities of the YAR.

9.8 Though comparisons of wage costs in different countries are noto- riously difficult, it is clear that typical rates in the YAR are closer to those of Southern Europe than to other developing countries, most of which are much further advanced industrially than is the YAR. The average hourly wage rate paid by the government owned Spinning and Weaving Corporation - 114 -

(a relatively poor payer in the YAR as are most cotton textile industries world wide) was $1.20 in 1977, compared according to ILO data with $0.17 in Egypt (1976) and in India (1973), $0.33 in the Republic of Korea (1975), $0.44 in Syria (1975) and $1.36 in Spain (1975).

9.9 Processing, often for export, of local raw materials has been a prime basis for industrial development in many countries. The YAR is unfor- tunate in this respect, since most raw materials and semi-finished inputs to the industrial process are imported. Cotton, cotton seed, hides and tobacco are the only agricultural products with significant processing potential - if one disregards cereal milling. But the amounts available are not large, and exportable quantities are negligible. There are substantial resources of stone and other products suitable for building materials industries (lime- stone, clays for bricks and tiles, kaolin, sandstone suitable for glass- making, marble, and tuffstone). Fair-sized industries could be built up from these, but solely (with the possible exception of marble) to meet local demand. Salt-mining is being reestablished and there are plans to refine and pack it, and produce caustic soda and chloride in part for export. No crude oil has been found and though there are believed to be deposits of coal, copper, cobalt, gold, iron ore, nickel, phosphorous and zinc in various parts of the country, none have been proven to be economic; basic aerial geophysical and ground survey work is being carried out.

9.10 The limited size of the YAR market also represents a serious constraint on industrialization. The total market for manufactures of all types in the YAR was worth around YR 2,500 million ($550 million) in 1976/77 in c.i.f. import or factory gate prices. 80 percent of this was supplied by imports. But an analysis of 1976 recorded import data reveals that there were only 22 individual items worth over YR 5 million which represented either a single product or a group of products which might be manufactured in conjunction with one another.

9.11 However, though there are certainly some industries which can be viable with an annual output of under YR 5 million, for several of these 22 products, demand is clearly insufficient to support economic local production. In some industries such as fertilizers, and basic steel products, minimum viable production units need markets ten times or more the size of current demand in the YAR. Other items such as motor vehicles or certain types of machinery cannot realistically be expected to be manufactured in the YAR in the foreseeable future. Thus even taking the most optimistic view of economic prospects in the YAR, there will only be a limited number of industries for which the domestic market can be large enough to support local production in the foreseeable future.

9.12 Other comparative disadvantages which the YAR has to face, are the high cost of electricity and the above average cost of internal transport, industrial land, and water. Electricity from public supply generally costs industry 60 fils ($0.13) per kwh, more in some areas; although below the cost of supply, this is several times the typical cost per kwh in other developing countries. The unreliability of public supply has, however, led most significant industrial enterprises to generate their own power from small diesel - 115 - sets; this too is far from cheap and in some cases can amount to around 10 percent of total production costs (as in the Spinning and Weaving Corpora- tion). Truck transporton the main intercityroutes typicallycosts around YR 0.65 ($0.14)per ton/km, or a little less for a bulk commodity like cement. While the Sana'a industrial estate charges a reasonableYR 10 ($2.2)per square meter a year for developed plots, it seems that speculationhas pushed up the general price of land suitable for industry to several times this level. Firms that need significant quantities of water often have to bring this from a considerabledistance by road tanker, and even then it generally needs treatment.

9.13 In addition to these broad factors shaping the potential for industry, at present and for some years to come new operations unavoidablyhave to face a range of problems stemming essentiallyfrom the very limited development to date of industry in YAR. First, the small industrialbase means that individualmanufacturers have to hold substantialstocks of most raw materials and intermediatesneeded in the production process and of spare parts for capital equipment; they cannot be purchasedas required from local stocklists. Irregularityin deliveries force most manufacturersto hold stocks of many products, and additionallythey usually have to place orders even for regular supplies severalmonths in advance. Both create financing problems and a need for accurate forecastingof future needs. The storage space itself also requires capital investment.

9.14 Second is the problem, emphasizedby almost all of those met from the private sector, that in setting up a significantindustrial project the entrepreneurat present generallyhas to start from scratch. He has to acquire land, provide access roads, water, electricity,and train a wholly unskilled labor force to the required standard. Firms which do not rely largely on bringing in foreign engineers,sometimes themselvesfinance the training abroad of suitable Yemenis. After the successfulestablishment of an industrialestate in Sana'a two additional estates are now being set up in Taiz and Hodeidah. This will be of considerablehelp to medium-sizedenter- prises. So too, in time should the Government'smanpower trainingplans.

9.15 The need to organize everythingfrom scratch exacerbatesanother problem, the general lack of management and technicalskills in the YAR. Educationaldevelopment and practical experienceshould in time mitigate these problems, though it is of course importantto ensure that, once trained, staff are not tempted to go and work abroad. In the meantime,many private industrial enterprises,particularly, are overdependentfor advice (on production technologyand organizationand on equipmentneeds) on foreign machinery suppliers (who may not always take an objectiveview), or on foreign engineersworking on their staff (who may not always be very experienced).

9.16 Finally, finance for industryappears to be limited, at least for projects requiring an investmentin excess of around YR 5 million. The ceiling on individualloans by the recently establishedIndustrial Bank of Yemen is YR 6.4 million, though the largest single loan to date is YR 4 million. As the Bank is planned to have YR 25 million to lend in 1977/78,and - 116 - only a little more in the next few years, and the number of loan applications has been substantial, a modest ceiling on individual loans is sensible. Its loans so far have been medium-term bearing 7 percent interest - below the commercial bank rates. Loan guarantees also present a problem for entrepreneurs seeking to establish fair-sized operations.

(2) Opportunities for Industrialization

9.17 Nonetheless four main, and often overlapping, categories of manufacturing industry offer broad opportunities for development. First, there are products for which, if imported, transport costs would constitute a large part of the final price. The most important are building materials, such as cement, concrete products, bricks, tiles, stone etc. Other products in this category include soft drinks, plastic and metal containers, water or drainage pipes, suitcases, foam mattresses, industrial gases, door and window units and some types of furniture. There are also some which would be both expensive and not very practical to import (bread and ice-cream, for instance). In time too, certain assembly operations may become worthwhile as the market grows (e.g. refrigerators, which are bulky to transport).

9.18 Second, there are industries based on processing of local raw materials. Most building materials fall of course into this category too. So do cotton textiles and clothing. But in respect of these, as with other raw material based industries, it is necessary to consider whether the raw material resources are large enough to justify a production unit of economic size. Other potential raw material processing industries include: the curing and possibly tanning of hides and skins; vegetable oils and products such as soap; fruit, vegetable and fish canning; basic chemicals derived from local raw materials such as salt; and certain glass and ceramic products.

9.19 Third, there are certain industries whose output can be geared to specific needs of Yemeni consumers. Rarely would it be worthwhile for a foreign manufacturer to design and produce a product solely for the YAR market, though it generally is worthwhile for wider Arab markets. The unusual combination of terraced agriculture in a dry area with high labor costs creates, it has been suggested, a need for specially-designed agricultural tools and simple machinery. In this context too, small-scale fertilizer mixing operations may be the best way of coping with the needs of particular crops in particular soils. Some textile products could be oriented towards what are often very local tastes, as could certain food products (but of course tastes could change as consumers are exposed to a wider range of choice). Newspapers, some educational material and certain other printing, particularly for the Government, are also examples of industries in this category.

9.20 Finally, fringing on the services sector, there is likely to be a growing need for reconditioning of a range of manufactures being imported in increasing volumes. Tire retreading is an example, provided safety standards are met. Truck engine reconditioning is another. Repair work to certain electronic and other products may also best be carried out on an industrial scale. - 117 -

9.21 The known development potential of the mining and quarrying industry is linked closely to the growth of the building materials sector, which in turn stems largely from the anticipated rapid expansion in constructional activity. The long-term future of salt-mining depends on securing worthwhile outlets, other than limited amounts for direct local consumption, whether as an input to projected chemical industries, or for export (for which price and quality must be competitive). Glass-making and ceramics also offer opportunities for related quarrying activities. There are hopes that more significant minerals industries could develop (coal, oil or copper, for instance), but exploratory and investigatory surveys are still at an early stage.

9.22 While Plan implementation will require a very substantial increase in construction activity, a large part of this will unavoidably go to foreign contractors. Small local builders should continue to benefit from the upsurge in house-building. Indeed, demand will probably exceed the growth capacity of this sector, constrained as it is by the labor shortage. The handful of larger local contracting firms should have learned much from the problems encountered in recent years, and may well get a larger share of contracts, particularly government, than they have the manpower, management or technical capability to handle. Steps are needed to help them in this, and to enable them eventually to take on larger and more complex contracts.

9.23 In contrast, much of the small industry and handicrafts sector faces a difficult future. Competition from imported products has only recently begun to make itself felt. There is only limited scope in the short-term for changing traditional production techniques and working methods, so the impact of rising labor costs will be severe. Fortunately, it will be easy for those displaced to find generally better-paid jobs in other sectors, or abroad. However, many will doubtless be reluctant to abandon a traditional mode of life, status and skills, and may have to face a period of declining real incomes. Of course, not all small industrial and handicrafts sectors will be equally affected. Some should benefit from the general rise in consumer spending - for instance, those making wooden and other fittings for new and improved houses, furniture makers, and certain branches of clothing. The sectors which can be expected to do relatively well are generally those producing, on a small or handicrafts industrial scale, the same categories of product as offer the better opportunities for larger-scale manufacturing (see above) particularly perhaps those for which transport costs are high, or which are geared to peculiarly Yemeni tastes. Help is needed, both for these and for the less fortunate sectors, to acquire the equipment and skills required to adjust to new conditions.

B. Recent Developments and Present Industrial Structure

9.24 The scale and structure of industry in YAR has advanced considerably in the present decade. By the end of 1975, 56 significant industrial establishment (i.e. employing more than about 10 persons) had been set up, nearly all since 1970. They employed over 4,000 workers and involved a capital investment of YR 129 million ($29 million). Then in 1976, 36 licenses were - 118 - issued for significant new private industries, and 10 for expansion projects of existing ones, representing a total investment of YR 159 million ($35 million); most of these appear to be going ahead, and a fair number of new projects emerged in 1977, too. On the Sana'a industrial estate it seems that the demand for space, both buildings and plots, substantially exceeds the rather limited amounts available.

9.25 National accounts data suggest that after rising rapidly (at 14 percent a year in constant prices terms) from 1969/70 to 1973/74, total industrial output including mining and electricity rose by only 3 percent in 1974/75. In each of the next two years it rose by about 8 percent in real terms. This impressive growth has been achieved mainly through a very sharp increase in investment by the private sector, which now invests roughly the same annual amount in industry as does the public sector. Six years ago private investment in industry was only a small fraction of public investment. Sectoral production data is scanty and perhaps not very reliable, but suggests that growth has been almost entirely among the more modern private industries established since 1970. Production in those sectors dominated by public corporations has risen relatively slowly, or, as in cotton textiles, has actually fallen. There is not much scope for rapid growth in small traditional private sector industry (notably milling, baking and handicraft activities) and their expansion has probably been modest.

9.26 The sectoral pattern of this growth reflects the factors, both positive and negative, bearing on the potential for industrial development discussed in Section A above. To a large extent the problems created by a small market, a scanty resource base and relatively high labor costs are recognized and acted upon.

(1) Manufacturing Industries

9.27 There are significant statistical problems in measuring the scale and structure of the YAR's industrial sector. At least three different estimates have been made, all relating to 1975, but when definitional differences are allowed for, they show a reasonably consistent picture. The most comprehensive are probably those compiled as a result of a survey under Arab League auspices, and it is these which are in the main quoted here. For details, see Table 8.1 in the Statistical Appendix. In total it appears there were some 23,000 persons employed in manufacturing industry in 1975, plus around 800 in mining and quarrying. But the great majority were in tiny establishments, mostly 1 or 2-man workshops. Only about 4,200 persons were employed in the 56 (out of almost 11,000) industrial establishments with 10 or more workers. The ten establishments which employed over 100 workers accounted for 3,300 of these. The relative importance of these few comparatively large operations was considerably greater in 1975 than a few years earlier, and has undoubtedly risen since, in spite of the problems faced by the state-owned Spinning and Weaving Corporation - until recently the country's largest industrial under- taking, but now overtaken in terms of employment, capital and turnover by the private Yemen Company for Industry and Trade.

9.28 The five largest industrial operations in the country are the above mentioned Spinning and Weaving Corporation in Sana'a (currently employing - 119 - around 1,500), the Yemen Company for Industry and Trade's biscuit and sweet factory at Taiz (employing around 1,000), the same company's plastics and plastic foam factory also at Taiz (350), the public sector Cement Corpora- tion at Bajil (300) and the National Tobacco and Matches Company (220). Other substantial operations are the public Cotton Corporation's Hodeida ginnery, the Yemen Company for Industry and Trade's ghee substitute plant at Taiz, an aluminum products plant at Taiz, and three soft drinks plants, two at Hodeida, one at Taiz. These eleven probably account for between a quarter and a third of total industrial output in turnover terms, and perhaps rather more in added value. For details of these and other significant manufacturing plants, see Table 8.2 of the Statistical Appendix.

9.29 While employment in these is predominantly in Taiz and Sana'a, with Hodeida appearing considerably less important, the heaviest concentration of medium-sized operations is in Hodeida; in total output terms Hodeida is believed to be of roughly equal importance to the other two cities combined. lbb and Dhamar are lesser industrial centres. Small-scale traditional industries and handicrafts are more evenly spread throughout the country.

Table IX-1: STRUCTURE OF INDUSTRY IN 1975

No. of Establishments Labor Force Turnover (YR million) Manufacturing Total With 10 or more workers

Food processing 6,808 4 11,440 192.7 Soft drinks 6 4 207 12.7

Tobacco and Cigarettes 70 1 462 18.9

Building materials 107 9 748 41.0

Textiles and related id. 2,601 7 607 65.3 /a

Metal products 1,158 9 2,819 63.9

Other manufacturing 337 22 1,331 72.4

Total Manufacturing 10,587 56 23,076 466.9 /a

Mining/quarrying /b

Stone quarrying 250 - 780 24.3

/a Includes only some clothing. /b The salt mine was inoperative in 1975. - 120 -

9.30 Manufacturing is heavily oriented towards food processing, predominantly flour milling and bread baking. Both are mainly carried out in very small establishments, as is the vegetable oils industry, cement blocks, clothing, many metal workshops, jewellery, most wood products, pottery, and stone quarrying. Nearly all operations in these sectors are of an essentially artisan or handicrafts nature, rather than involving industrial processes. Of the 4,100 or so persons engaged in the more significant operations at end-1975, half were in textiles (most of them employed by the Spinning and Weaving Corporation), and around 10 percent each in food processing, building materials, and other manufacturing. Since 1975, food processing and soft drinks have become relatively more important, due largely to the growth of employment at a few major private sector plants. More recently, a major expansion of cement production capacity was started at Bajil, and a tire retreading plant has just been commissioned for production. If the sectoral breakdown is considered in turnover terms, a very similar structure emerges, though a value added breakdown would undoubtedly reduce the relative importance of food processing.

Table IX-2: INCREASE IN VOLUME OF OUTPUT OF SOME MAIN INDUSTRIAL PRODUCTS

Percent increase Unit 1973 1976 p.a.

Biscuits tons 3,247 5,338 18 Sweets tons 3,985 5,049 8 Soft drinks million bottles 19.6 49.0 36 Cement '000 tons 50 61 7 Ginned cotton '000 tons 7,328 6,383 -4 Cotton yarn /a '000 tons 1,193 801 -10 Cotton cloth /a '000 metres 9,909 5,579 -13 Aluminium prods. tons 140 192 11 Paint '000 ,gals 44 76 20

/a Spinning and Weaving Corporation only.

9.31 In total the public sector employs only about 11 percent of those in industry, two thirds of them by the Spinning and Weaving Corporation. In turnover or added value terms the public sector share is rather larger. Nearly all private firms, even the larger ones, are effectively owned and run by one man or by a close family group, as with the Yemen Company for Industry and Trade.

9.32 A characteristic of recent and present investment in private sector industry is that, although the industries concerned are by nature only moderately capital-intensive, the leading industrialists have sought to minimize labor inputs and are installing quite sophisticated and expensive machinery. This is of course a direct reflection of the shortage, and cost, of labor. Both capital/output ratios and investment per job created are therefore much closer to what is normal in West Europe for the subsectors concerned than to typical developing country conditions. - 121 -

9.33 Apart from milling local grain, subsequent baking, cotton ginning and some handicrafts, manufacturing industry is almost wholly import-substituLing in nature. Other than some limited exports of biscuits and confectionery (worth YR 3.1 million in 1976), there are no industrial exports. Cotton textiles, much of the building materials industry, and some food products are predominantly based on local raw materials. Other industries in general need to import most of their materials inputs. Although foreign investment is welcome, there appears to have been none to date in manufacturing or mining.

(2) Construction Industry

9.34 It is likely that total employment in construction is of roughly the same order of magnitude as in industry proper (i.e. around 25,000) though estimates for 1975 range from little over 20,000 to 47,000. Only a small part of construction activity is undertaken by organized units, with fixed central locations, and this makes analysis of the industry difficult. The 1975 Man- power Survey of the five main cities found only 2,191 people employed in construction, 4.7 percent of total modern sector private employment. This was considered implausibly low (indeed only a year later an analysis carried out in connection with the Sana'a Second Water Supply and Sewerage project suggested that the six largest construction firms had a labor force of nearly 5,000 countrywide), and employment was arbitrarily estimated at 7,950 or 15 percent of modern sector private employment in the five cities, similar to the proportion found in neighboring Arab countries.

9.35 Most construction workers are hired as individuals, building and extending houses throughout the country, using traditional methods and skills. The boom in house construction in the YAR is very evident, and is reflected by the rapid increase in the value of housing for which licenses were issued in the main cities; however, problems in finding labor and money have led to a halt of work on many buildings. Because of this demand for their services and the possibilities offered by work abroad, only to a limited extent do these workers represent a pool from which labor can be drawn into substantial construction activities such as roads and public works, and larger buildings; the skills required are also somewhat different.

9.36 This boom in house construction, together with rapidly mounting public sector constructional investments led, according to provisional national accounts figures, to more than doubling the sector's output in constant price terms in 1976/77. It followed an annual average increase of 13 percent from 1970/71 to 1973/74, an 18 percent fall in 1974/75, and a 19 percent rise in 1975/76. In gross output terms, the sector's YR 1.2 million in 1976/77 at 1975/76 prices is almost double that of the manufacturing and mining industry. (In GDP terms its ouput is valued at YR 538 million - 60 percent larger than the output. of industry proper.) Investment figures suggest that in 1975/76 around three-quarters of total constructional activity was private sector, most of it in housing; public investment was concentrated in roads, and in public buildings (including schools and hospitals). - 122 -

9.37 Public sector constructional investments are undertaken by the relatively small organized construction industry, in which the National Highway Authority is the largest single operation, with some 2,250 workers in 1976. All other significant construction organizations are privately owned. In 1976 there were four substantial Yemeni private construction firms which claimed to have upwards of YR 10 million each of contracts in hand, ranging up to YR 70 million for the largest (Mohamed Saif Thabet), and with labor forces ranging from 400 to 1,000.

9.38 It is doubtful whether any private firms are so large today; possibly they never were. The industry has encountered severe problems due mainly to its inexperience in organizing large projects, compounded by the impact of inflation on fixed price contracts. Virtually all significant firms incurred substantial losses in 1976 and 1977. This is resulting in a shakeout in the local industry, particularly among the medium-sized firms; the four largest appear to be as in 1976. It also forced the Government to ease restrictions on foreign contractors (though there remains a 25 percent cost preference margin for local firms). Foreign firms have been awarded many large recent contracts; it is widely recognized that without them there would be no hope of implementing public sector investment programs. The shortage of labor, particularly skilled, and of building materials mean that the local content in construction projects undertaken by foreign firms is very low -- only 15 percent in some cases.

9.39 The larger local contractors are heavily dependent on foreign engineers and frequently on foreign skilled labor too. Large portions of the work are sometimes subcontracted abroad. Often the local contractor's role is little more than a financing one. Like foreign firms they also resort when possible to basing construction on the import of prefabricated sections -- particularly in factory building.

(3) Operational Problems

9.40 In contrast to construction and to public sector manufacturing, the significant private sector manufacturers are generally satisfied with the profits achieved in recent years. Undoubtedly this is a major reason for the large number of new projects envisaged. It is likely that profits would in many cases not have been achieved but for the temporarily high prices within the YAR of manufactures of all kinds. The paragraphs which follow note the main operational problems of existing significant industrial undertakings, both public and private, and include where relevant, the construction sector.

9.41 With no pool of workers with modern industrial skills to draw upon, and the very limited impact to date of government training pograms, industrial undertakings usually recruit all their Yemeni labor as unskilled, often under- age, and give them limited on-the-job training. Labor turnover is high. Male workers frequently seek work abroad as soon as they are old enough, or the - 123 - skills acquired may tempt another Yemeni employer to offer a higher wage. The substantial proportion, often 25 percent or more, of female workers are also predominantly young, are often available to work for only a few years, and are sometimes employed on manual handling tasks for which they lack the physical strength. This situation, coupled with the frequently related problem of absenteeism, has adverse effects on productivity. A partial solution is to be substantially more generous in pay and fringe benefits than are other Yemeni manufacturers. Several have adopted this policy. Public sector industry has not, and this has been a major factor in its operational problems.

9.42 Typical levels of operation per shift appear to be between half and two-thirds of plant capacity. Rarely are market insufficiency or interruptions to raw material supplies major reasons for the shortfall. Labor efficiency and long meal breaks are more important. Some of the more modern machinery installed is probably too sophisticated for any but the most skilled workers to achieve full capacity utilization; reasonably satisfactory results are achieved when a qualified, at present generally foreign, engineer is available to supervise closely the operation and routine maintenace of each individual machine, but even so there may be a high proportion of rejects, or products may need finishing by hand. Maintenance and spares are another problem. Deficiency in planning shows up in bad matching of successive stages of the production process; one section often constitutes a bottleneck keeping the whole plant operating below capacity.

9.43 Poor planning can also be seen in, for instance, somewhat primitive raw material preparation procedures being used in conjunction with quite advanced technology in the manufacturing stage proper; often quality suffers in consequence. Packaging is rarely automated. The amount of manual handling required in frequently poorly laid-out plants is usually excessive, particularly in the light of high labor costs. Excessive handling appears especially marked in the construction industry, which is also characterized by insufficiently intensive use of machinery and by over reliance *on labor- intensive traditional construction methods (especially in stone).

9.44 The largely trading backgrounds of most private sector manufacturers has meant that they are generally stronger in sales, marketing and financial management than technically. Though use of modern professional methods (in for instance accounting and budgeting) is rare, this has been of little importance for businesses which have remained small enough for the owner to exercise effective personal control. In the construction industry, however, sales and marketing skills are of lesser importance, but it is essential to keep within time and cost budgets. Failures in these respects, particularly perhaps a failure to foresee the impact of inflation on costs, has been largely responsible for the problems of the local contracting industry.

9.45 Weaknesses in routine production supervision and in accounting and advance planning are probably more serious in some public industries -- because they are larger and less personally controlled -- than in the private sector. Some public corporations are, however, markedly stronger than others in these respects. The Unified Financial System which it is hoped to formalize in 1978 - 124 - could, however, do much to improve the performance of public corporations in these areas. Inevitably, though, they will take some time to become fully operative; much will depend on the ability of the Ministry of Economy to assist corporations, as is apparently envisaged, in establishing and operating the systems.

9.46 Small-scale traditional and handicrafts industries, in employment terms the bulk of both manufacturing and construction industries, have so far done little to adapt their production methods or general organization to twentieth century conditions. Technologies are generally labor-intensive and often result in substandard products. In many cases, quite modest investments in simple machinery or equipment, or design modifications (e.g. in brick or pottery kilns) could substantially reduce costs and/or improve product quality. Sometimes it may be necessary to reconsider the use of traditional materials -- the extensive use of cut stone in construction, though aesthetically pleasing, is an example of a once moderately priced material which, through escalating labor costs, has become very expensive.

9.47 Though there is considerable scope for improvements in productivity, and in quality of product in small-scale industry, the process of persuading workers to change age-old methods is bound to be long-drawn. In the meantime, competition from abroad and from newly established larger scale production units in the YAR will make itself felt in many products. So too, will an outflow of labor to better paid jobs in the modern sector or abroad. Some shrinkage in the small-scale industrial sector seems inevitable. Buoyant demand and the lack of competition from larger operations in small-scale housing projects should, however, prevent this in the construction sector.

C. Government Policies and the Plan

9.48 The Government appears aware of the opportunities for industrialization and the limiting factors. The problems posed by the shortage and cost of labor and the lack of management skills and experience are known, and the risk of allowing a larger capacity to build up than the market can support is appreciated. There is, however, need for improvement in project appraisal procedures. The Government is aware of this need and has recently secured the services of international experts in this field.

(1) Industrial Policies

9.49 Industrial policies are on the whole realistic. The level of protection to local industry is not excessive and the Government has not sought to interfere with the free play of the price mechanism. The major role allocated to the private sector in industrialization has much to recommend it, and investment incentives appear effective. The attitude of avoiding tight controls on private sector operations, and of keeping bureaucratic procedures to the minimum is sensible. The positive attitude to foreign investment, which is showing encouraging results, and the open door to - 125 -

foreign firms (as in the construction sector), foreign technicians and labor where local capacities appear inadequate, have much to recommend them. The policy of favoring what are, by developing country standards, capital- intensive, rather than labor-intensive operations, is undoubtedly appropriate in the circumstance of the YAR.

9.50 While these broad policies are being pursued quite effectively, there are certain inconsistencies in details which still need to be resolved. The problems which arise stem in many cases frQm the limited resources of qualified manpower within government. In the context of industrialization, this is particularly marked within the Ministry of Economy, whose qualified staff is clearly insufficient: to adequately appraise projects, whether private sector or public; to ensure rapid and effective implementation of public sector investments; to control the operations of public enterprises; and, to review and revise as necessary legislation and administrative arrangements affecting industry.

9.51 The system of import duties is designed primarily to raise government revenue, of which it is by far the most important source. To a limited extent tariff adjustments have also been used to protect new industries. Tariffs on raw materials and semi-finished products are in most cases significantly lower than those on the comparable finished products, and margins of effective protection appear to be around 10-25 percent. However, there are certain examples of what seems to be excessive protection, some of 'negative' protection, and several of similar products bearing very different rates of duty. Some reconsideration of the tariff structure may be needed, linked perhaps to a general rather than ad hoc policy on the extent to which tariff changes could be introduced to protect new industries. Import controls have never been used; it is felt that they would be inadvisable on broad policy grounds and impractical to implement.

9.52 The systems of investment approvals and of investment incentives granted to approved projects constitute a single process. Bureaucratic procedures are not onerous, except conceivably for very small operations, and are commendably rapid. Normally the following concessions are granted: 5 years exemption from all taxes on import of capital equipment, spare parts, building materials, and raw materials (up to 25 percent of c.i.f. value); and, 5 years exemption from all profits and other business taxes. The raw materials duty exemption is, unlike the others, discretionary rather than automatic, and though granted to all past projects may not be to future soft drinks projects, because of fears of excess capacity.

9.53 Two problems have arisen with the investment incentive system:

(a) Each separate consignment of goods imported needs separate approval by the full Investment Exemption Committee. Al- though meeting regularly and dealing with matters rapidly, some delay is inevitable and the preparation of the necessary documents is time-consuming. The system will undoubtedly become very cumbersome, not least in respect of - 126 -

the demands on the time of those on the Committee,as industrialinvestment increasesduring the Five-YearPlan period.

(b) Although the Commissionerfor Customs and the Under- Secretaryof the Ministry of Finance are members of the Committee, it seems that their departmentsare sometimes reluctant to allow the concessionswhich the Committee has approved. Private sector interestsfeel that a new higher level institutionalmechanism is required to resolve the differencesbetween Ministries in interpretationof regulations,in this and in other matters; but problems need not arise provided the decisionsof the Committee are regarded as binding on all branches of government.

9.54 There are also private sector complaintsof poor coordination between Ministries in other matters. However, the problems created do not in general appear too serious, and to iron out all such problems, even if possible,might involve an unacceptabledegree of bureacracy.

9.55 Favorable attitudes towards foreign industrial investmenthave already yielded positive results. Joint venture agreements have been con- cluded with foreign investorsto set up tomato paste and fruit and vegetable canning plants. The open door to foreign labor and the easing of restrictions on the employment of foreign contractors have brought skills urgently needed to implementthe Plan. The Government has also set up an industrialpromotion unit to assist potential investors in industrialprojects.

9.56 Public sector corporationsare given considerableinternal autonomy, with few government controls on their operations- though major decisionson investmentsare taken within the Ministry of Economy. When management is strong and possesses the necessaryfinancial control and technical expertise, a minimum of operationalinterference is desirable. But several, though not all, public sector corporationshave seriousmanagement deficiencies,and their financialperformance has been unsatisfactory. Accounting procedures are often woefully deficient,and actual financialperformance may be worse than availablefigures suggest. However as was mentioned in paragraph9.45 the Government recently introduceda Unified Financial System for all State Corporations(this lays down the financialprocedures and methods of internal control to be followed),and it is intended to introduceshortly a Unified Accounting System (describingbookkeeping systems, presentationof monthly, quarterly and annual accounts,methods of depreciationand stock valuation, etc). These should effect a considerableimprovement in the relevant areas of state corporationmanagement, provided that, as envisaged, the Ministry of Economy is able to give support in establishingand operating them.

(2) The Five-Year Plan

9.57 The overall industrialstrategy of the YAR is to a large extent shaped by the character of the individualprojects which feature in the Plan rather than by broad principles. Though both raw material processingand import-substitutionindustries are importantPlan objectives,the balance - 127 - between them is seen as emerging post hoc, as does the lack of any export industries. The need to avoid labor-intensive processes is appreciated, but neither project appraisal procedures nor resource allocation are geared specifically to achieve this. There is no conscious favoring of heavy, rather than light *industry (or the reverse). And, only to a limited degree does the sectoral balance in the Plan reflect an attempt to meet major potential supply shortfalls in, for instance, construction materials; indeed the lack of input/output or adequate demand data makes a systematic gap-filling exercise extremely difficult.

9.58 The Plan envisages a total of YR 2,235 million of manufacturing investment and YR 234 million of mining and quarrying investment during 1976/ 77-1980/81. 92 percent of manufacturing investment and 88 percent of mining/ quarrying is regarded as first priority. In practice, second priority projects appear to be those for which no finance has been found or allocated; they are, however, considered viable. Financial arrangements for a substantial proportion of first priority projects are moreover only tentative. Investment is expected to be heavily concentrated in the last two years of the Plan period (60 percent of total first priority manufacturing investment, compared with only 21 percent during the first two years). 79 percent of all industrial investment is in projects which are individually identified, the balance being in private and mixed sector unidentified projects - drawn from a long list of potential industries.

9.59 Some 45 percent of total manufacturing investment, and 40 percent of mining/quarrying investment (sectoral definitions as in the accompanying table) is planned to be in the mixed sector, funds for which are expected to come predominantly from private Yemeni sources or from abroad. There are six large identified mixed sector industrial projects - Amran Cement (YR 314 million), Hodeidah steel bar production (YR 169 million), Zabeed wood pulp (YR 138 million), Sa'ada glass (YR 84 million), Dhamar woollen textiles (YR 66 million), and Salif fish processing (YR 54 million). These constitute 34 percent of total industrial investment, and 68 percent of investment in projects of over YR 50 million. This emphasis on mixed sector projects appears distinctly optimistic. Few seem very far advanced towards implementation. The more substantial private interests are cautious in their attitude towards collaboration with government in industrial ventures, pointing to the not very successful record to date of public sector industry. The problem of where effective management control is to rest is crucial, but does not appear to have been given sufficient consideration. For some projects the Government itself expects to put up the bulk of funds, for other the local private sector is allocated a larger share, while for some the foreign contribution is to predominate. Small investors may be more willing to contribute funds to mixed sector industries, but it would be premature to count on substantial sums from this source. For large projects offering sufficiently attractive rates of return, it may be possible to arrange joint ventures with appropriate foreign firms, but this would not achieve the hoped-for partner- ship between Government and Yemeni private interests. - 128 -

Table IX-3: INDUSTRIAL PROJECTS IN FIVE-YEAR PLAN

Cost and Financing (YR million)/ Total No. of Gov- Pri- EX- Jobs Projects ernment vate ternal Total Created

Mining and Quarrying Public sector - all identified 6 99/b - .../b 99 ... Mixed sector - identified 1 5 5 10 38 non-identified ... 4 71 - 75 ... Private sector - identifled 7 - 11 - 11 129 non-identified ... - 20 20 ...

Total ... 108 107 -/b 215

Manufacturing Public sector - all identified 20 428 /d - 192 622 3,482/c Mixed sector - identified 11 247 335 315 897 2,693/c non-identified ...... 83 ... Private sector - identified 49 - 300 - 300 2,289 non-identified ... - 285 - 285 ...

Total ... 701/c/d 946 538/c 2,187 10,886

Note: The definitions of mining/quarrying and manufacturing used for this table do not precisely correspond to those used in the Plan (housing and agricultural investments are excluded, stone extraction and cutting is included under quarrying, and salt processing under manufacturing).

/a During Plan period; a few projects are expected to carry over to Second Plan.

/b External finance for public sector projects included under government.

/c Includes estimated for some projects.

/d Includes some self-financing by public sector corporations.

9.60 It seems that in the event of the private sector being unwilling to subscribe the required funds for mixed sector projects, the Government envisages increasing its own contribution, conceivably selling off shares later. But a big shortfall could create difficulties. Whether the hoped-for private funds can be raised, depends partly on a resolution of the problems of legal - 129 - and real control and partly on how viable the individual projects appear. For few, if any, has this as yet been adequately established.

9.61 Forty-six percent of mining/quarrying investment in the Plan and 28 percent of manufacturing investment is public sector, all in the form of identified projects. Four of these are large - three different Spinning and Weaving Corporation factories (totalling YR 273 million) and the extension to the Bajil cement plant (YR 120 million). Though over a quarter of the total finance required is envisaged as coming from abroad, a substantial proportion of this is either agreed or under negotiation. Some of the projects are making rather slow progress though, and others may be reconsidered.

9.62 Twenty-seven percent of total manufacturing and 14 percent of total mining investment planned is private sector, only around half of it in identified projects. Most of the 56 identified projects are fairly small, under YR 5 million investment, and very few exceed YR 15 million. The sections of the Plan dealing with private sector industry are largely indicative in nature. Since the completion of the Plan, several wholly new projects have emerged, others have been expanded in scale, while implementation of others has become less imminent.

9.63 Indeed the industrial section of the Plan has in general a "rolling" character. Projects continue to be added and others deleted. The boundaries between private, mixed, and public sectors are not fixed by sector, by volume of funds required, by capital-output ratios, or in any other way (though private sector projects are typically, but not always, small); some projects originally allocated to the public sector are now regarded as private.

9.64 The sectoral emphasis of the Plan is shaped essentially by a few large individual projects. Thus, the bulk of investments in the largest sector, building materials, stems from the two large cement projects; the three Spinning and Weaving Corporation factories contribute most of the textiles, clothing, etc. total; the steel bar project accounts for most of metals and metal products investments; and the wood pulp project dominates the "other" industry sector. Only food processing among the larger sectors lacks any large dominating investments. - 130 -

Table IX-4: INVESTMENTS IN IDENTIFIED INDUSTRIAL PROJECTS DURING FIVE-YEAR PLAN

Private Mixed Public Total ------(YR million)------

Productive Mining/quarrying 11 10 30 51 Food processing 88 66 53 207 Beverages/tobacco 47 3 - 50 Cotton, textiles, clothing, footwear 10 80 312 402 Building materials 79 314 130 523 Chemicals, rubber, plastic 45 43 22 110 Metals, metal products 20 169 - 189 Other 11 222 14 247

Total 311 907 561 1,779

Non-productive Industrial estates - - 91 91 Minerals surveys, etc. - - 69 69

Total 311 907 721 1,939

9.65 The big investments in building materials are linked to the rapid growth planned in constructional activity. Cement capacity is to be increased to around 12 times present production levels. The YAR now imports the bulk of its cement requirements (58 percent in 1976), and even if planned investments are completed on schedule, self-sufficiency within the Plan period seems unlikely. It can also be questioned whether the modest investment envisaged in some other building materials, such as stone, bricks, and tiles, will be adequate.

9.66 It is accepted that the rapid increase planned in constructional activity for the next few years is far beyond the physical, management and technical capacities of the local construction industry. Many, probably most, substantial projects will have to be carried out by foreign contractors. There is, however, :.cope for increasing the involvement of local firms in contracts where the lead role is taken by foreign organization.

9.67 The future development of industry is elaborated in considerable detail in the Plan, which constitutes an ambitious, and in many ways impressive, first major programming exercise. But individual projects have rarely been studied in sufficient detail to:demonstrate their economic viability, although it is a legal requirement that-this should be done before an investment permit is issued and investment concessions granted. Studies carried out by equipment suppliers or consultants for public sector industries are not always critically appraised. Data accepted by private entrepreneurs are not reviewed by the Ministry of Economy, although it is agreed that the figures are often unreliable and some of the indicated rates of return improbably - 131 - high; it seems that no private project supported by appropriate documentation is ever turned down. These deficiencies stem largely from the limited number of qualified staff within the Ministry of Economy, and the many other tasks they have to perform.

9.68 Nor is it generally appreciated that the procedures used to appraise industrial projects, whether within or for presentation to the Ministry of Economy, have serious deficiencies. The distinction between commercial viability and socio/economic viability is not made. Discounting is rarely employed. Perhaps the most serious deficiency is a probably overpricing of outputs (see paragraph 9.73). Labor productivity may often be overestimated, and insufficient account taken of operational problems. Technological, agricultural, or other supply problems may be underestimated.

9.69 The shortage of qualified staff also has serious implications for Plan implementation. Neither within the Ministry of Economy nor in existing state corporations are there the technical knowhow, project management skills and experience to be effective in seeking to establish over a five-year period some 15 substantial and sometimes technically complex, public and mixed sector industrial projects (involving investments in excess of YR 25 million). There are signs that progress towards implementation of several projects is lagging behind the necessary timescale for their completion within the Plan period.

9.70 The Plan estimates that during the period 1976/77-1980/81, the manufacturing, mining/quarrying, and building/construction industries will require the following additional manpower:

Engineering graduates 536 Other graduates 598 Higher level technicians 805 Technicians (tech. school trained) 2,729 Semi-skilled and unskilled 26,445

Total 31,113

The planned rapid expansion of vocational and technical schools and higher education could supply only a part of these needs during the Plan period, even assuming few of those newly trained go to work abroad. Moreover, industry, and perhaps still more the construction sector, needs a fair proportion of engineers and higher level technicians with some years of practical experience in addition to formally acquired skills. Foreign workers may have to fill many of the semi-skilled and even unskilled jobs, as well as the majority of the upper grade posts. The implications, and indeed desirability, of building up an industrial structure so heavily dependent on imported skills do not appear to have been sufficiently considered.

D. Conclusions and Recommendations

9.71 In conclusion, it is clear that, though there are a number of factors encouraging the establishment of new industries in YAR, others constrain the potential. Many developing countries have found that the initial - 132 - problems of industrialization have been insufficiently recognized. Large amounts have been sunk in public sector enterprises which have subsequently proven to be a drain on public funds, while in spite of high protective barriers private industrial undertakings have been unable to operate at their designed capacity. These adverse experiences have often led, after the initial spurt of industrial development, to a hiatus of several years during which efforts were concentrated on seeking to avoid having to close loss-making operations, and few new enterprises were established. It is important to ensure that YAR avoids making similar mistakes. Though there is an encouraging appreciation of the need to avoid excessive protection or of allowing permitted capacity to exceed likely demand, it is clear that project vetting procedures need to be made more stringent for all except perhaps medium and small private sector investments.

9.72 In developing industrial programs and in attitudes to individual projects both public and private sector, it is necessary to ensure that projects do not go ahead unless likely to contribute net economic benefits to the country. It must be recognized that a project can be commercially viable, yet not worthwhile in economic terms. In most cases, this situation can be avoided by not protecting industry too much; a suitable tariff structure may be the best mechanism to prevent uneconomic private sector industries from developing. However, all comparatively large industrial projects, particularly those involving public funds, should be carefully studied to demonstrate that they are likely to bring identifiable net benefits.

9.73 One general factor which should be recognized in this context is that local prices of imported manufactures particularly consumer goods, are well above those current in other parts of the world. Were these high prices to be a permanent feature, they would undoubtedly be a major factor encouraging the development of further manufacturing capacities. Yet, the elimina- tion of port delays will soon reduce the real cost of importing (partly through the disappearance of freight surcharges), and the consequent improvement in the supply of goods should stimulate price competition between traders. At the same time, foreign suppliers are rapidly becoming aware of the sales potential in the YAR, while consumers are likely to become increasingly price-conscious as they acquire a 'feel' for value for money in respect of products to which they have only recently been introduced. In real terms, a general fall in the prices of manufactures seems therefore likely over the next few years.

9.74 However, the viability of most industrial projects has, it seems, been assessed on the basis that the output can be sold at present-day local market prices. If any account is taken of price changes, it is usually assumed that the prices of outputs will rise as rapidly as those of imports. In only a few cases is allowance made for the likelihood that to secure a market a Yemeni product hias, initially at least, to sell at a discount on the prices of equivalent imported goods. Though project appraisal procedures, both by the private sector and in government, are deficient in several other respects, it seems that overpricing of outputs is primarily responsible for what appears to be a general tendency for excessive optimism in assessing the potential for industrial development in the YAR. - 133 -

9.75 Both Government and, where relevant, the private sector must also recognize that:

(a) The absence of extensive practical experience in establishing and bringing into full operation new industrial projects, particularly large ones, leads to underestimating the technical, organizational, and manpower training problems involved. Both time and cost estiamtes are therefore often likely to be exceeded.

(b) Even with improved loan facilities, the private sector will be unable to raise the funds to mount really large industrial projects, or with very few exceptions fair-sized ones (over YR 25 million in investment). And the more significant investors at least are sceptical of the mixed sector concept. This concept needs to be carefully defined, especially the question of where effective management control is to rest.

(c) To make a success of public sector industry, including possibly some projects now allocated to the mixed sector, priority needs to be given to improving the calibre of both management and workers. Management needs more engineering, other technical, financial and marketing skills and experience; this implies increased employment of expatriates for some years to come. More attention is needed to training of labor, and then retaining it. For both, it is necessary to pay competitively.

(d) For essentially practical reasons, an important proportion of projected investments in industry, particularly in the public and mixed sectors, is likely not to be operational by the end of the Plan period; indeed some projects may have to be post- poned by several years, or even abandoned. Unexpected technical problems (some of which might have been avoided by better feasibility studies) are bound to crop up in ongoing and new projects, and be serious in some. The shortage within the public sector, particularly, of staff with necessary skills and experience in project implementation is another important factor. Insufficient attention to the phasing of investments, notably in constructional activitiy and building materials, is yet another source of difficulties. These factors will affect Plan implementation, even if no projects are reconsidered and sufficient finance proves to be forthcoming for all.

9.76 The highest priority needs to be given to manpower development at all levels - building management capacities, engineering expertise, production supervision, and both higher and lower technical skills. This is an essential foundation for industrial development, and at this stage is probably more important than is identifying and implementing specific industrial projects. Training needs of small industries and handicrafts should be given attention and linked to the use of new and improved-equipment. - 134 -

9.77 The Ministry of Economy needs a considerable expansion in staff with qualifications and experience in project appraisal, preparation, and implementation. Economists, financial specialists, contracts staff, and engineers with practical experience in project implementation are all needed. If sufficient suitable Yemenis or specialists under international aid programmes are not available, it may be necessary to recruit staff directly abroad. Consideration could also be given to contracting with foreign firms to manage major projects.

9.78 The structure of import tariffs should be reviewed, considering not only revenue needs but the avoidance of distortions through inconsistencies in rates applicable to similar types of goods. Some degree of effective protection should be accorded to local industry, but this should only be moderate in extent, and not too dissimilar as between industrial sectors.

9.79 Certain administrative procedures could be streamlined, and there is room for some improvements in interdepartmental coordination. In particular-

(a) Some system is needed to avoid separate authorization for each consignment imported by firms granted investment incentives; possibly a firm could be granted an annual or 5 year blanket authorization up to stated volumes of imports under particular SITC numbers.

(b) It is necessary to ensure that decisions of the Investment Exemption Committee are treated by all branches of government as binding, and to resolve any differences in interpretation.

(c) Wider use might be made by some other Ministries of the rather greater capability of the Ministry of Public Works in preparing projects for tender, in evaluating-bids and in general contractual procedures.

9.80 There is a general need, in both public and private sectors, to further promote joint ventures with foreign firms; these have much to contribute in project implementation and operational expertise, as well as in technical knowhow and project finance. It is important to ensure that these skills and experience are passed on to the Yemeni partners in these ventures, so that their role can be steadily expanded in the future. The potential for worthwhile joint ventures is probably greater in the construction sector.

9.81 Consideration could be given to the establishment of a construction equipment leasing operation, to provide a pool of well-maintained equipment on which Yemeni contractors could draw, compensating for fluctuations in the needs of particular firms, and improving year-round equipment utilization rates.

9.82 A substantial increase is needed in the financial resources available to the Industrial Bank of Yemen, to enable it to make more and larger loans. IBY might also benefit from technical assistance, especially in appraisal techniques. - 135 -

X. INTRODUCINGMODERN TRANSPORTATION

10.01 It has only been two decades since the first links of a modern transport network were establishedin YAR. Until the late 1950s primitive tracks, suitable only for four-wheel drive vehicles and animal transport connectedmajor towns and were the only means of land transport. Port facilities were limited to the ancient port of Mocha, which was only suitable for lighterage,and there was no air service within the country.

A. Developmentof the Transport System

10.02 Initial developmentof modern transportationwas on a project-by- project basis, financed by bilateral assistance. Although this development took place outside of any formal frameworkof national transportationplan- ning, the initial investmentsin transportinfrastructure were, in fact, logical and undoubtedlyrepresented projects of the highest priority. Thus, the USSR financed the first deep-water port in the YAR, at Hodeidah;the Peoples Republic of China (PRC) financed a road from the port to Sana'a, the nation's capital; the USA financed a road linking Sana'a with Taiz, the major population center in the south, as well as a road from Taiz to the border with PDRY, and another one to the lighterageport in Mocha; and the USSR completed the main road rectangleby financinga road down the coast from Hodeidah to an intersectionwith the Taiz-Mocha road. In addition,the USSR built an internationalairport in Sana'a thus providing the first international air connectionwith the country.

10.03 These transportinvestments were very important,economically and socially. For the first time major sections of the country were conveniently linked with each other, a prerequisiteto an effective central authority. That is not to say that tribal rivalrieswhich, in this part of the world, have been a real impedimentto national unity, disappearedwith the coming of modern transport. Nevertheless,the importanceof such transportties in the developmentof a single state is apparent and after the civil war of 1962-1970, the Government continuedto press for the developmentof modern highways to link the country together for economic and social reasons.

10.04 The increase in mobility that resulted from the developing road network, and to a lesser extent, the air network, acceleratedthe social and economic changes. Some of these changeswould, no doubt have occurred in any eventuality,but certainly at a much slower pace and at less impact. In broad terms, the developmentof transport infrastructureopened up the country - not only to the outside world, but more immediatelysignificant, internally. It facilitatedtrade, eased access to markets for agriculturalproducers, and allowed new industries to be established. Opening up includesopening out though it is really not possible to estimate the precise impact that better transporthas had on the outward migration from the countrysideto the urban areas and to neighboringoil countries. - 136 -

10.05 Bilateral aid continues to be a major source for financing transportation infrastructure. The Federal Republic of Germany (FRG) has financed the paving of the Sana'a-Taiz road; the PRC has built a paved road from Sana'a north to Saadah; Saudi Arabia (SA) is financing road construction from Hodeidah north through Zaidiya, Azzohrah, Harad and Madi (to connect with a road south from Jizan in Saudi Arabia), as well as the Damar-Rada- Al Beida road (see Map). In addition to bilateral aid the YAR has also received assistance from a number of international development organizations, including IDA, the Kuwait Fund for Arab Economic Development (KF), the Abu Dhabi Fund for Arab Economic Development (ADF) and the Arab Fund for Economic and Social Development (AF). The KF financed the installation of a new salt mining berthing facility at Salif and participated with IDA in the financing of the Taiz-Km 64 road. The ADF is financing the construction of the Sana'a- Marib road and the Af the Taiz-Rahida road. Major transport projects completed or initiated so far are listed in the following table.

Table X-1: MAJOR TRANSPORT PROJECTS, 1957-78

Construction Project Period Financing Status

Hodeidah port 1957-61 USSR completed Hodeidah-Sana'a road 1957-61 PRC completed Sana'a airport 1960 USSR completed Sana'a-Taiz-Mocha road 1961-66 USA completed Sana'a-Saadah road 1964-77 PRC completed Hodeidah-Almafrak road 1966-70 USSR completed Sana'a-Taiz road paved 1971-77 FRG completed Sana'a airport modernized 1973-75 FRG completed Taiz-Almafrak road paved 1975-76 IDA/KF/YAR completed Taiz-Turba road 1975-78 IDA/KF YAR completed Damar-Al Beida road 1976-79 SFD/ND/YAR advanced Sana'a-Marib road 1976-79 ADF advanced Amran-Hajja road 1974-80 PRC/YAR advanced Saada-Zaram road 1978-81 SFD started Hodeidah-Jizan road 1978-82 SFD started Taiz-Rahida road 1977-80 AF/YAR advanced

(1) Highways

10.06 IDA's initial involvement in the transport sector of the YAR was as an executing agency for a 1971 feasibility study of roads which was financed by the UNDP. This study provided the basis for the first Bank Group operation in the YAR, an IDA credit of US$7.7 million (315-YAR, effective date January 15, 1973) to help finance a highway development project. The project which was cofinanced by the Kuwait Fund ($1 million), included construction of about 70 km of bitumen road, consulting services to supervise the construction, additional feasibility studies of about 480 km of roads, purchase of spare parts to rehabilitate existing maintenance equipment, technical assistance to the Highway Authority (HA), purchase of some engineering and laboratory equipment, and overseas training for selected HA personnel. The project is now largely completed. - 137 -

10.07 A second highway project (558-YAR) became effective in January 27, 1976, providing an IDA credit of US$9.0 million, with an additional US$5.0 million being co-financed by the Kuwait Fund, to assist in the construction and supervision of 63 km of bitumen road and to continue technical assistance to the HA. The construction element was substantially completed in November 1976. A third highway project ($11.5 million) has been approved in April 1978. One of the basic elements of the project is to introduce effective highway maintenance practices. The project includes a substantial HA staff training program to that end as well as technical assistance in the form of direct staffing by individual experts of critical positions in the HA.

10.08 The highway network in the YAR now consists of somewhat over 4,000 km of roads of which 1,000 km are paved, about 1,200 km are gravel roads, and the rest earth tracks. The main trunk road network is nearly all paved and links the principal centers of population. However, a significant portion of the paved network, much of which traverses rugged terrain, is deteriorating due to axle overloading and rapid traffic growth. This has caused greater need for maintenance and for reconstruction of certain road sections.

10.09 Until 1977 there has been no statutory loading limit for roads in the YAR. However, in 1976 the HA requested the consultants financed under the second IDA highway project to study axle loadings on the basis of overall (national) economic costs and to recommend a least cost (user plus maintenance plus construction plus reconstruction) alternative. On the basis of this study the Council of Ministers approved a national 13-ton axle load limit. Meanwhile, there is evidence of pavement distress in a number of areas, and even the 13-ton axle limits will cause problems for certain highways which were designed for lower limits. The third highway project includes an element for studying future overlay requirements as well as for the construction of an overlay on one section of road already analyzed.

10.10 Statistics on the highway sector, especially historical data, remain sparse and reliable trend data on vehicle registration, fuel consumption, commodities hauled or length of haul is not available on a national basis. How- ever, in 1976 the HA established, with the help of the technical assistance consultants, a traffic division which has initiated traffic counting on a regular basis. This has provided the first real up-to-date indication of traffic volumes (1976) by type of vehicle for each highway section of the paved road network.

10.11 The HA which was established as a separate entity only in 1972, is responsible for the design, construction and maintenance of the national highway network. It replaced the General Corporation for Construction and Development (GCCD) as far as road development is concerned. Up to 1972 the GCCD carried out highway works as well as public building construction. The HA is an autonomous government organization under the Ministry of Public Works (MPW) with its own capital (mainly road construction and maintenance equipment) officially controlled by a Board of ex-officio Government Direc- tors; the present chairman of the Board is also the Minister of Public Works. The HA is responsible for carrying out.:technical planning, design and road - 138 - maintenance at cost from government allocations and may carry out road construction for the central government and local authorities on a contractual basis. As part of the technical assistance provided under IDA's second highway project, and as a major input to the third highway project, a three- year (1978/79 - 1980/81) national highway maintenance program has been prepared and the third highway project provides for the development of a national highway master plan by consultants. This master plan is intended to provide the first integrated framework for highway investment decisions.

10.12 Highway design work has been carried out by foreign consultants, with limited review by the HA. A more thorough review has been made for a number of projects financed by international agencies. There is still shortage of qualified staff in the HA. The Government is aware of the situation and is making efforts to recruit Arabic speaking staff from abroad. The third highway project includes a training component basically oriented towards maintenance and mechanical training.

10.13 General planning for highway development, as well as transport planning as a whole, is the responsibility of the Ministry of Development and its planning arm, the Central Planning Organization (CPO). Initially, highway planning has been on an ad hoc basis, project by project. However, in 1971 consultants carried out some basic highway studies financed by the UNDP with the Bank as executing agency (see paragraph 10.06). These studies resulted in a basic program for highway investment from 1972 through 1977 of about 1,400 km of roads. Although prepared with limited data, the study (actually a reconnaissance study) provided a basis for determining priorities and a number of the projects were included in the Government's Three-Year Development Program (1973/74 - 1975/76) and more recently, in the Five-Year Plan. The Government, supported by UNDP, Saudi Arabia, Kuwait and IDA has financed the feasibility studies and detailed engineering done by consultants. The detailed engineering for other roads was done directly by the Government.

10.14 Construction of much of the secondary (or feeder) network has been financed by local authorities and development associations, with some help from the World Food Program. Construction of certain feeder roads has also been included in the IDA financed Tihama and Southern Uplands projects. A substantial part of the feeder road construction has been carried out by the HA.

10.15 Road maintenance for the national network is financed directly from the Government's budget. Although the funding has grown significantly since the first appropriation three years ago (from Yemen Rials 1 million in 1974/75 to 32 million for 1977/78) much more will be required in future years.

(2) Ports

10.16 Prior to 1960 port facilities in the YAR were limited to the ancient port of Mocha, which was suitable only for lighterage, and much of the import traffic moved through the port of Aden. After the independence of the Peoples - 139 -

Democratic Republic of Yemen (PDRY) this traffic came to a virtual halt. How- ever, by that time the YAR had its first deepwater port at Hodeidah, which started to go into operation in 1960.

10.17 The port of Hodeidah is located on the Red Sea, west of the capital city of Sana'a, to which it is connected by a paved road. It presently handles about 90 percent of all legal imports coming through domestic ports, exclusive of petroleum, as well as the majority of Yemen exports. The port also handles substantially all the passenger traffic by sea which is, however, essentially limited to pilgrims during the Hajj.

10.18 At a throughput of about 600,000 tons of dry cargo per annum the port had, until 1977, severe problems of congestion due to lack of warehouse space, handling equipment and paved (and leveled) storage areas. Besides the physical constraints, there were various administrative problems which reduced the efficiency of port operations. Examples were the cumbersome customs procedures and excessive double handling of cargo. As a result there have been long waiting periods for unloading general cargo in Hodeidah.

10.19 To reduce port congestion, the Port Corporation commissioned in early 1978 a temporary floating jetty (built on two pontoons; dimension 190 m x 28 m, with 9 m draft) at Ras Al-Kateeb near Hodeidah's outer harbor. The Government has completed a 14 km gravel road linking Hodeidah town to the new facility. In the port of Hodeidah six prefabricated warehouses have been erected, and the paved open area has been significantly enlarged. As a result, port congestion has been overcome and the waiting time for ships has been reduced to about one week.

10.20 These are temporary measures designed to ease traffic flow until the port's capacity itself has been increased, and its operating procedures streamlined. In 1974 the USSR agreed to provide technical assistance, materials and equipment to the Hodeidah Port Authority for construction of a fourth general cargo berth, in addition to the three already existing berths. This was later amended to include a fifth cargo berth and a sixth berth is to be built under the provisions of an IDA credit approved in May, 1977. Construction of the fourth berth is under way, with completion expected soon. The IDA project, which is an outgrowth of a port study financed by UNDP and the Kuwait Fund for which the World Bank was executing agency, is designed to meet YAR's requirements for port facilities up to 1985 when dry cargo traffic is expected to reach 1.75 million tons. The project will also provide technical assistance to improve port operations. Total project cost is estimated at US$28 million of which IDA will contribute US$6 million, the Kuwait Fund US$8 million, the Government US$9 million and the Port Authority US$5 million.

10.21 Until early in 1976 the Port of Hodeidah was operated as an authority under the Ministry of Public Works (MPW). A Port Authority Board served as a policy and review board and was composed of representatives from the Ministries of Commerce, Communications, Public Works and Finance. It also included the General Manager of the port and two of his assistants. Execution of the - 140 -

Board's decisions as well as direct management of the port was the responsibility of the General Manager. In April 1976, an autonomous Ports and Marine Affairs Corporation (PMAC) was established with full administrative and financial powers to operate the ports in YAR under the general supervision of the MPW. The PMAC consists of a seven member board, including a Chairman and a Director General who are appointed by the President and the Prime Minister, respectively on the recommendation of the Minister of Public Works. Although generally responsible for cargo storage and handling, PMAC leaves cargo movement largely to private shipping agents. All manpower required for stevedoring and cargo handling in the port is furnished from a central labor office established by the Governorate of Hodeidah.

10.22 To reduce the great economic cost inherent in the port congestion at Hodeidah, the Government is also using, to the extent possible, the facilities at Salif. Originally built for bulk loading of rock salt, found in great quantities on the Salif peninsula, the port of Salif has virtually no equipment for unloading. Ships must use their own gear. Consequently, only certain vessels and cargoes (such as roll-on roll-off) are being directed to Salif. The pier can berth two large freighters at a time and cargo is trucked over a recently improved road south to Hodeidah. However, the use of present port facilities for imports will be constrained as anJ when the export of rock salt, discontinued in 1972, is resumed.

10.23 The port of Mocha lies to the south of Hodeidah and west of the city of Taiz, to which it is connected by an engineered gravel and paved road. Although the port cannot directly berth even small ships, they can obtain anchorage with depths of 6.5 to 9.0 meters at a distance of 2 to 3 km from the port. The present port facilities were constructed in 1955 and consist of a 160 m long causeway and a pier 20 m wide and 200 m long. The causeway is connected to Mocha by a 1,850 m access road across a long sandy island which is connected to the town proper by a short bridge.

10.24 When constructed, 100 m of the pier had a depth of 4.7 m alongside, 50 m had a depth of 3.5 m and another 50 m had a depth of 2.5 m. However, shortly after construction the basin in front of the pier started to silt as a result of littoral drift along the coast and by 1971 depths along the pier ranged from 1 m to 2.5 m. By June 1975 two sandbars stretched east of the pier, reducing the usable quay to about 30 m with a depth of about 2 m. Due to the limited depth all cargo is discharged by lighters and barges.

10.25 The Government has started a major improvement program for Mocha port. This includes the construction of a breakwater (750 m long); the dredging of an access channel (2 km), including a turning basin and berthing pockets; the strengthening and enlargement of the pier; and the modernization of navigational systems. After completion of the project - expected in the near future - the port will accommodate vessels up to 15,000 dwt. Some further structural improvements will be financed under the IDA project (paragraph 10.20).

10.26 Like the other ports in YAR Mocha port is administered by the Ports and Marine Affairs Corporation (paragraph 10.21). To strengthen its staff - 141 - the PMAC has recently recruited a chief engineer, an electrical engineer, accountant, mechanic and storekeeper.

(3) Civil Aviation

10.27 Three major aiports at Sana'a, Taiz and Hodeidah, service domestic and international travel, and airstrips at Saadah and Berat provide for domestic service in the north. There are also a number of other, rudimentary, strips in the country some of which can handle DC-3s. The airport at Sana'a has a fairly new and generally adequate terminal, and has recently been equipped for night landings. It was originally built by the USSR and in 1973 re-equipped and modernized by the FRG. The runway, which was strengthened in 1975, is 3,200 m long and 45 m wide and can accommodate planes of the Boeing 707 class. Work is now underway on further improvements to the runway and to the parking apron, which is being substantially expanded.

10.28 Air traffic has increased rapidly in recent years. In 1976 there were close to 5,000 plane arrivals and departures in Sana'a with 102,000 arriving and 133,000 departing passengers. Although comparable data on passenger and plane movement is not available for Taiz airport, it has considerably less traffic than the Sana's airport which is the main international gateway to the YAR. In 1975, Yemen Airways, the major user of the Taiz international airport, carried just over 33,000 passengers to and from Taiz. The Taiz airport, with a runway 2,400 m long and 45 m wide can handle two- engine and the smaller three-engine jets. The passenger terminal is fairly modern although small and without many amenities. However, a new terminal building is planned as are some navigation and runway improvements.

10.29 Very little traffic now moves through Hodeidah airport, primarily because the present runway is only structurally capable of handling planes no larger than DC-3s. However, a project is under way for the rebuilding of the runway to medium (707s) international jet standards. In 1975, Yemen Airlines was the major user of Hodeidah airport, and it carried less than 2,300 passengers to and from Hodeidah. Over 2,200 of these were to and from Aden. The other half dozen airstrips in the country are unmanned and in relatively poor condition. Depending on the weather most can take DC-3 and DC-6 aircrafts.

10.30 YAR's airports, by and large, lack adequate navigational and safety equipment. The UNDP has provided electrical equipment for the Sana'a, Taiz and Hodeidah airports and has, since 1969, provided technical assistance in airline operation, airport management, radio engineering and civil aviation. The UNDP has also provided fellowships to Yemenis for training in various aspects of civil aviation.

10.31 Yemen Airways, the national air carrier owned by the Government, has a fleet of four DC-3s, two DC-6s (not all of which are regularly in operating condition) and one Boeing 737. In addition, it has two Boeing 727s on "wet" lease (everything, including crew, provided). In 1976, Yemen Air- ways carried 139,000 passengers most of which were on international flights to Aden, Asmara, Kuwait, Doha, Jeddah, Cairo, Djibouti and Abu Dhabi. - 142 -

B. The Five-Year Plan

10.32 The Government defines its main objective in the transport sector as relating transport development to increases in agricultural and industrial production, internal and external trade, etc. It also recognizes other than economic considerations when it additionally sets objectives of connecting population centers internally and connecting the YAR externally with neighboring countries.

10.33 Construction of highways and roads constitute by far the single largest item in the overall investment program of the Five-Yar Plan. A total of YR 3 billion (about US$650 million) is to be spent for highway projects ,during the Five-Year period, of which YR 2.4 billion by the Central Govern- ment and YR 0.6 billion by Local Development Associations. These are ambitious targets which require further strengthening of the administrative and engineering capacity of the HA.

10.34 A number of highway projects shown in the Plan are already under construction. They include, among others, new road links between Sana'a and Marib, Damar and Beida, Taiz and Sherigah (providing a connection with Aden), Taiz and Turbah and Amran and Hajja. The large investments in new roads as envisaged by the Plan would entail equally ambitious targets for road maintenance, a task of which the Government is keenly aware.

10.35 In view of the expected sharp increase in imports, the Plan gives high priority to port development and suggests a series of steps designed to overcome existing constraints. It emphasizes the need of both, investment to expand port capacity and measures aimed at increasing the efficiency of port administration. The major port investments (about YR 239 million) envisaged in the Plan have been outlined in paragraph 10.20. The thrust of the program is correctly directed at strengthening the port facilities at Hodeidah. The Plan also explicitly recognizes the need for administrative improvements such as better coordination between PMAC, customs authorities, importers and ship owners; strengthening of PMAC's technical staff; separation of executive and planning functions; and more efficient work organization.

10.36 The Plan objectives for civil aviation appear to be well balanced. They include improvements in airport facilities, in navigational and meteorological services, and in safety equipment. The bulk of investment is to be spent on the country's three major airports (YR 173 million in Sana'a, YR 217 million in Taiz and YR 150 million in Hodeidah). Another YR 330 million has been budgeted for the purchase of new aircraft. Interestingly enough this is the only subsection of the transport plan where the stated objectives are qualified on the basis of economic feasibility.

10.37 Table X-2 below summarizes the investment targets set by the Five- Year Plan for the three major modes of transport. In addition to the government-sponsored projects discussed above, it includes investments to be made by the private sector, chiefly in transport equipment such as trucks or - 143 - motor cars. The table shows that the bulk of all transport investments will be allocated to road transport (about 76 percent of the total).

Table X-2: TRANSPORT INVESTMENT IN FIVE-YEAR PLAN

YR million Percent

Road transport, total 3,494 76 Public sector /a (2,964) (64)

Private sector /b (530) (12)

Ports development 239 5

Civil aviation 872 19 Airports (542) (12)

Aircrafts (330) (7)

Total Transport Sector 4,605 100

/a Includes cooperative sector (YR 615 million).

/b Includes mixed enterprises.

C. Principal Issues

10.38 The trarsport sector is a critical element to the continued economic development of the YAR. It is, however, suffering growing pains of its own which will be compounded by the ambitious Five-Year Plan. The principal issue to be faced now and in the future remains one of planning and.management. This problem is exacerbated by the national shortage of skilled personnel at all levels and a growing scarcity of even unskilled manpower. There is no immediate, easy solution to these problems.

10.39 In the longer term, to successfully operate and maintain the transport infrastructure, training of personnel must be promoted with vigor and, given the fact that, at least in the immediate future, once trained some staff will not stay with the responsible government agencies (i.e., the HA, Port Authority, etc.), the training must be continuous and intense. To be effective, and to have any short-run impact, much of the training will undoubtedly have to be in-house. Although the Plan envisages a rapid increase in vocational training (see Chapter III) the output will be diffused through kthe whole economy providing at least initially, only a limited number of graduates with the basic skills necessary for further specific training. Thus, little to alleviate the specific operational and maintenance problems over the Plan period should be expected from this necessary, but longer term and broader approach to training. - 144 -

10.40 In addition to specific in-house training programs, such as the maintenanceoriented program which is part of the proposed third highway project (see paragraph 10.07) the several governmentagencies dealing with transportwill have to recruit key personnel from abroad both to fill on-line positions to ensure reasonablelevels of operation and maintenanceand to provide an adequate operationalbackground for practical training of Yemeni personnel. Unfortunately,recruitment of foreign experts has proven to be difficult in the past and will continue to be a problem in the future.

10.41 The Government realizes that, besides trying to mobilize the human resourcesneeded for the operationof a fast-growingtransport network, provisionswill have to be made in the state budget to allocate sufficient funds for maintenancepurposes. Moreover, the developmentof appropriate sub-sector investmentstudies is essential if major misallocationof scarce resources is to be avoided. Sub-sector rather than sector studies are required because the differentmodes are essentiallynon-competitive. Since a port developmentstudy was completed in August 1976 (financedby UNDP with the World Bank as executing agency) the most critical element in sub-sector planning will be the developmentof a highway master plan. Provision has been made for technicalassistance by a consultant for this purpose in IDA's third highway project. - 145 -

XI. DEVELOPMENT PROSPECTS

A. The Potential

11.01 The preceding chapters of the report suggest that YAR has a large potential for further economic and social development, notwithstanding the country's limited natural resources. A great variety of opportunities exist in both the commodity producing and the service sectors. Agriculture, still by far the most important production sector, could grow substantially in the coming years even under the limiting conditions of low and erratic rainfall. As was pointed out in Chapter VIII there is much scope for increasing yields of the traditional crops. The use of higher yielding plant varieties, chemical fertilizer and insecticides can conceivably double output on about half of the country's present cropland. Even better results could be achieved by shifting cultivation from traditional to higher value crops. A trend in this direction is already apparent: more vegetables and fruits are being grown in response to rising cash incomes and changing dietary habits.

11.02 Livestock also has the potential for a greater contribution to the economy. This requires an increase in the feed base through improved range land development and the growing of fodder crops in rotation with food grains. Together with better husbandry practices, including veterinary care, such measures would increase the productivity of herds and possibly allow expansion in livestock numbers. Commercial dairy farming and poultry production have a limited potential near the urban centers. But this should not be overestimated and efforts to improve the livestock sub-sector should include both modern commercial enterprises as well as the large numbers of traditional farmers who keep a few animals as a vital source of cash income, protein foods and draft power. The value of fisheries output could be about doubled on a sustained basis with improved landing and handling facilities and better marketing arrangements.

11.03 In the longer run, afforestation programs and watershed protection could make important contributions to the economy. Planting of trees and other protective vegetation would prevent further deterioration of marginal bench terraces that have been abandoned from crop production; provide villages with scarce pole lumber and fuel wood; establish windbreaks especially around fields to be planted with crops subject to wind damage; and contain sand dunes in the Tihama. Together with other measures to preserve or reestablish the natural vegetation cover especially on marginal range lands, such investments would in the long run strengthen the moisture retention capability of crucial watershed areas and improve the country's water balance.

11.04 Industrialization is still in its very early stages and has considerable scope for further expansion (see Chapter IX). Promising possibilities exist for the manufacturing of construction materials which are in strong demand, and for food processing using locally grown crops. Other industries with growth potential are textiles, furniture, door and window units, containers, pipes, etc. - 146 -

11.05 There is also need for an expansion of the local construction industry. Already now local firms are unable to cope with the volume of civil works to be undertaken. With the rapidly growing level of investment envisaged by the new 5-Year Plan the capacity of local contractors will have to be much increased and modernized. Small local builders should continue to benefit from the upsurge in private house construction.

11.06 Presently known possibilities for expansion of the mineral sector are more limited. Stone and other products suitable for building materials are being increasingly used and there are plans to reestablish salt mining. As exploration for oil and minerals goes on additional resources may be discovered providing the basis for further expansion of the sector.

11.07 There is a large development potential for the service sectors. Essential public sector services such as education, health, agricultural extension as well as general planning and administration, are still very rudimentary and need to be expanded. In addition there is strong demand for transport services (roads, ports, airports), for telecommunication and for urban services (water supply, sewer, electricity) much of which are also public sector responsibilities.

11.08 Private sector services, especially trade, are likely to expand together with the production sectors and with the expected growth of imports. Another important service sector for which demand is very strong is housing. Large investments are planned in this sector, mostly by private persons but also to some extent by the Government. Finally, there is a significant potential for tourism. A pleasant climate throughout the year, an interesting indigenous architecture, numerous archaeological remains, and a rugged mountain scenery are YAR's chief assets in that sector.

11.09 Together, these opportunities form a large and diversified potential for further economic and social development of the country. Combined with the large and growing incomes earned by Yemenis working abroad they provide the foundation for a viable growth of the economy.

B. The Five-Year Plan, 1976/77-1980/81

11.10 Through its first Five-Year Plan the Government has taken an important step towards realizing YAR's development potential. Following the completion of the Three-Year Program the new Plan endeavors to further develop the country's human and natural resources; to strengthen the physical infrastructure; to raise the productivity of the commodity producing sectors; and to improve the standard of living of the people, giving attention to their basic needs for food, health, elementary education, water supply and other social services. To achieve these objectives the Plan spells out a coordinated development strategy for the economy and its major sectors. It relies primarily on impressive investment and manpower training programs. These programs are to be carried out jointly by the public and private sectors, in - 147 - close collaborationwith foreigndonors of capital aid and technicalassistance. More specific features of the Plan's strategy and implementation programs have been discussed earlier in this report. 1/

11.11 Contrary to the Three-Year Program, which was essentiallya collection of individualprojects, the new Plan represents a first attempt at comprehensive planning estimating the overall investment and manpower requirements for the economy and its major sectors. The Plan was prepared jointly by the Central Planning Organization(CPO), the technicalministries and other government agencies. CPO provided the global frameworkof the Plan and coordinatedthe sector programs of individualministries, government departmentsand public organizations. Each componentof the Plan was submitted in draft to the Higher DevelopmentCommittee (see Chapter IV) for final review and scrutiny. A preliminaryoutline of the Plan was presented to the public by the Prime Minister in June 1977, and the final version of the Plan was approvedby the Government on September 26, 1977, fifteen years after the proclamationof the Republic. The Plan was subsequentlydiscussed with major bilateral and internationalaid donors at the InternationalDevelopment Con- ference held in Sana'a during November 28-December1, 1977.

11.12 The principalmacro-economic targets of the Plan are summarized in Table XI-l below. They envisage a GDP growth at constant prices of 8.2 percent p.a. with industry, transportand trade as the leading sectors. Agri- culturalvalue added is to grow at 5.5 percent p.a. and income from factor services abroad--mainlyworkers' remittances--at3.7 percent. GNP would thus increase at a somewhat slower rate than GDP, i.e. at 6.8 percent p.a.

11.13 The planned GDP growth would be in line with historicalexperience (see Chapter II). Although the target for agriculturemay be difficult to reach - dependingon the amount and timing of rainfall - other sectors, i.e. trade, transport and government services,could grow faster than envisaged in the Plan. Moreover, the estimates for workers' remittancesare definitely on the low side: already in the first year of the Plan period (1976/77) they were higher than the target set for the final year (1980/81). GNP is thereforelikely to grow at a faster rate than 6.8 percent p.a.

11.14 A larger GNP would allow consumptionto grow more than foreseenby the Plan (6.4 percent p.a.), especially if past and present constraintsto private consumption- e.g. physical bottlenecksto imports and time-lags in the earning and spending of cash incomes - are eased in the future (see Chapter V). Higher consumptiongrowth could lead to a decline in the savings ratio even though national savings can be expected to increase in absolute terms.

11.15 The investmenttargets of the Plan are very ambitious. They envisage an increase in gross fixed capital formation from YR 773 million

1/ Mainly in Chapters I, III, VII, VIII, IX and X. - 148 -

in 1975/76 to YR 5,536 million in 1980/81, implying an annual growth rate of almost 50 percent. The overall investment volume during the five years of the Plan is to be YR 16 billion or the equivalent of US$3.5 billion (in constant 1975/76 prices). Although not excessive for a c6untry of YAR's size and population (it represents an annual amount of about US$150 per capita) the steep increase in investment proposed by the Plan raises questions of technical feasibility and economic viability.

Table XI-1: MACRO-ECONOMIC FRAME OF FIVE-YEAR PLAN (YR million, 1975/76 prices)

Base Last Plan Period Annual Year Year 1976/77- Growth 1975/76 1980/81 1980/81 Rate (%)

GDP m.p. 5,181 7,671 8.2 Agriculture 2,305 3,010 5.5 Industry /1 529 971 12.9 Distribution sectors /2 1,512 2,450 10.1 Other services 835 1,240 8.2

GNP m.p. 7,751 10,757 6.8 Consumption 5,481 7,485 6.4 Government 681 1,098 10.0 Non-government 4,800 6,387 5.9 National Savings 2,270 3,272 13,830 7.6 Government -12 192 Non-government 2,282 3,080 6.2

Gross Investment 1,170 5,633 16,550 36.8 Fixed Capital Formation 773 5,536 15,971 48.3 Agriculture 106 842 2,276 52.0 Industry 61 1,370 3,996 86.0 Distribution sectors 265 1,991 5,646 50.0 Other services 341 1,333 4,053 32.0 Increase in Stocks 397 97 579

Exports, Goods & NFS 398 778 14.3 Imports, Goods & NFS 1,868 6,225 27.2 Factor Income, net /3 2,570 3,086 3.7 Current Account Balance 1,100 -2,361 -2,720 Official Loans 332 1,230 4,078 30.0

Current Government Revenue 605 1,185 14.4 Current Government Expenditure 617 993 10.1

/1 Includes construction. /2 Transport, trade, finance, communications. 73 Includes official grants. - 149 -

11.16 Over 60 percent of total investment is to be spent for projects in infrastructure and other service sectors (see Table XI-2). Transport and communications have been allocated YR 4.9 billion, or 31 percent of all investments. YR 2.1 billion is expected to be invested in housing and YR 2 billion in public buildings, such as schools, hospitals, administrative offices, etc. The commodity producing sectors receive 39 percent of total investment allocations with the bulk (YR 4 billion or 25 percent of the total) going into industrial development, including electric power generation and construction. Investment in agriculture has been set at YR 2.3 billion (14 percent of total), much of it earmarked for irrigation and water control projects. The composition of investment laid down by the Plan reflects the inadequacy of YAR's physical infrastructure and the Government's desire to strengthen it.

11.17 About one third of all investments (YR 5.4 billion) is to be carried out by the Central Government. Another YR 4.9 billion (31 percent of the total) is planned to be implemented under the responsibility of public and mixed enterprises. The latter are designed to play a crucial role in the Five-Year Plan spearheading development in the productive sectors, especially industry. Private sector investment is estimated to be YR 4.5 billion, much of it in housing, trade and transport equipment. Investments by cooperatives (including Local Development Associations) are planned to reach YR 1.1 billion.

11.18 More than half of the investments are expected to be financed from local sources. Gross national savings are estimated to be on the order of YR 13.8 billion or the equivalent of 84 percent of gross investment (including stock building). However, as was pointed out in Chapter V, the bulk of national savings will be generated by the private sector leaving a large financing gap in the public sector which will have to be covered by foreign capital. The private sector, on the other hand, is assumed to continue generating large savings surpluses much of which will be held in financial assets (mainly cash).

11.19 As in the past, the private savings surplus will to some extent be reflected in an accumulation of foreign reserves. The Plan estimates that the increase in reserves will amount to YR 1.4 billion. But the build-up of reserves could well be larger if workers' remittances keep growing and if the large amounts of foreign aid requested by the Government are actually forthcoming. YAR's external financial position may thus remain comfortable, notwithstanding the rapid increase of imports that would be the result of fast growing consumption and investment. The Plan assumes that imports of goods and non-factor services will grow at an annual rate of 27 percent reaching a level of YR 6.2 billion in 1980/81. Exports, on the other hand, are expected to grow at a much slower pace both in absolute and relative terms. The external resource gap will thus widen substantially during the Plan period, from about YR 1.5 billion in 1975/76 to an estimated YR 5.4 billion in 1980/81. This gap will, however, be more than filled by the large inflows of workers' remittances and foreign aid. - 150 -

Table XI-2: INVESTMENT IN THE FIVE-YEAR PLAN (YR million, 1975/76 prices)

YR Million Percent

1. Total Fixed Capital Formation 15,971 100

2. Sector Allocation

(a) Agriculture 2,276 14 (b) Industry 3,996 25 Manufacturing (1,998) (12) Electric Power & Water (1,373) (9) Construction (451) (3) Mining (174) (1) (c) Transport & Communications 4,925 31 (d) Other Services 4,774 30 Housing (2,090) (13) Public Administration (1,963) (12) Trade & Banking (721) (5)

3. Program Responsibility

(a) Government 5,400 34 (b) Mixed Enterprises 4,949 31 (c) Cooperatives 1,101 7 (d) Private Sector 4,521 28

4. Investment Financing

(a) Domestic Financing 9,365 59 Government (2,649) (17) Enterprises (1,109) (7) Private Households (5,607) (35) (b) Foreign Financing 6,606 41

11.20 The Plan also assumes an improvement in the Government's budgetary position. The current deficit experienced during 1975/76 is expected to change into growing surpluses over the next few years. During the entire Plan period a cumulative surplus of YR 430 million is to be realized. While such a development appears feasible and would be consistent with past trends (see Chapter V) the Plan estimates of current government revenues and expenditures appear to be conservative. Even though government revenue can be expected to be closely related to the volume of imports - import duties being the principal source of taxation - the Plan assumes that between 1975/76 and 1980/81 government revenue will only grow by 96 percent while imports are projected to grow by 233 percent (see Table XI-1). This implies a drastic decline in the average rate of taxation of imports. Current expenditures, on the other hand, are to grow at only 10 percent p.a. during the Plan period. Such a moderate expansion of government spending would be quite inadequate to accommodate the urgently required structural adjustment of salaries in the public - 151 - sector; the expected increase in government services such as education, health, and support for economic sectors; and the rapidly rising maintenance cost for existing and new capital stock.

C. Principal Constraints

11.21 The preparation of the Five-Year Plan represents a major achievement for the Yemeni autorities. For the first time in YAR's history it provided the Government with the opportunity to chart the country's course of development and to establish the basis for coordinated action programs and policy decisions. The Plan offers a wealth of new information about the economy and its major sectors. It has also enabled the Government to draw the world's attention to YAR's development problems and to rally support from aid donors.

11.22 Implementation of the Plan will be an even greater challenge to the country than its preparation. Not only has the Government set very ambitious targets but it is also facing serious constraints to the further expansion of investment and production. Probably the most crucial bottleneck is the existing manpower shortage (see Chapter III) which includes both skilled and unskilled categories. The Plan discusses this problem in great detail devoting a whole volume to the manpower issue. It estimates that the labor force will have to be increased by some 100,000 persons if the Plan's investment and production targets are to be met. Most of the additional manpower is required to have some skills. The Plan foresees that the bulk of the labor requirements can be mobilized within the country and that only a small part will have to be imported from abroad. The manpower plan is closely tied in with the education plan, and any shortfall in the education targets would create manpower shortages which in turn would jeopardize the attainment of the Plan's investment and production targets. Equally important is the implicit assumption in the Plan that the past net emigration of professionals, technicians and skilled laborers can be halted, and indeed be reversed. Failure to achieve that would again raise serious questions about the feasibility of Plan targets.

11.23 Another major bottleneck is the limited administrative capacity of the public sector (see Chapter IV). This problem is, of course, related to the manpower situation which seriously constrains the staffing of public agencies. Although remarkable progress has been made in the past to strengthen the public administration, its present capacity does not appear to be sufficient to handle development programs of the magnitude outlined in the Plan. Serious difficulties may therefore arise for the implementation of investment programs as well as the management and maintenance of new capacities to be built during the Plan period. The Government is fully aware of this issue and hopes that foreign technical assistance will help to ease the administrative constraint. It also expects that public and mixed corporations will assume a growing responsibility for the management of development programs and projects. However, these general guidelines still have to be translated into concrete action programs. - 152 -

11.24 Finally, there are major physical bottlenecks blocking the way to further rapid expansion of the economy. The three most important ones are the country's mountainous topography and geographical dispersion of its population, the limited port capacity and the inadequacy of the local construction industry. To some extent the Government is addressing these issues through the Plan itself. The large investment program for road transport, air traffic and telecommunication will go a long way in overcoming present geographical obstacles. A major program aimed at increasing port capacities and improving the efficiency of port operations, has been initiated and will be largely completed during the Plan period. The Plan also calls for a vigorous expansion of the local construction industry and encourages the participation of foreign contractors in major investment projects. But creating the required capacities in the transport and construction sectors will take time; meanwhile the capacity of the country to execute the very large investment program envisaged by the Plan will remain limited.

D. Major Policy Issues

11.25 The preceding review of the Plan's targets and the discussion of major constraints to its implementation raise several important policy issues which need to be addressed if the Government's development objectives are to be achieved. These issues are of a general nature affecting most economic sectors. They include the problems of personnel management in the public sector; of mobilizing public revenue; of efficient resource allocation; and of maintaining the existing and new capital stock. In addition, there are a number of specific sector policy issues which have been discussed earlier in the report.

11.26 One of the key problems faced by the Government at this point is the extreme shortage of qualified staff in the public administration. As was pointed out in Chapter III this is partly the result of inadequate compensation levels for civil servants, and the absence of a well structured personnel policy. Salaries and other benefits for professional and technically skilled government employees are frequently much lower than those offered by the private sector or in neighboring oil countries. Consequently, not enough qualified Yemenis are willing to make their career in the civil service and some of those who take up government employment leave it soon after having received some training. This constant drain of skilled manpower weakens the effectiveness of government administration and severely limits their absorptive capacity. The problem is further compounded by inefficient personnel management. Yet, at the present stage of YAR's economic and social development the public sector will have to play a crucial role in promoting growth and structural change. To maintain the momentum of development, it is therefore essential to further strengthen the public administration.

11.27 The Government will have to face up to this issue if it is to succeed in carrying out the objectives of the Five-Year Plan. As a first step, a thorough review of the compensation policy for civil servants would have to be initiated resulting in specific measures designed to make government agencies more competitive in the increasingly high cost labor market. This does not mean that massive pay increases are required across the board for - 153 - all government employees. But work performedby skilled and essential civil servants should be compensatedwith salaries and other benefits, especially housing, representingthe going market price. Such an adjustmentof government remunerationeven if it is done selectively,would have substantial financial implications;these are being shown later in this chapter (see Table XI-3).

11.28 Equally important,though less costly, would be the introductionof a unified and consistent system of personnelmanagement for the public sector. This issue has been discussed in some detail earlier in the report (Chapter IV) and thereforeonly the main points will be highlightedhere. They include:

(a) Reassessingthe manpower requirementsat the top echelons of each governmentalagency with the view of assigning scarce staff on a more rational basis;

(b) Defining more clearly the respective functionsand responsibilitiesof differentgovernment departments so as to avoid overlapping;

(c) Establishinga uniform classificationof civil service positionsbased on the principles of responsibilityand professionalrequirements;

(d) Linking actual pay scales to the uniform civil service classifications;

(e) Introducingan effective career system basing promotions on performanceand levels of training;

(f) Improving in-service training,making better use of specializedagencies, especially the National Institute of Public Administration;

(g) Extending the use of foreigntechnical assistanceat key points in the administration.

The basic principlesgoverning the personnel policy should be to relate assignmentsand promotion to professionalqualification and performance;to establish long-termcareer developmentprograms for the civil service; and to unify remunerationand staff benefits for all government agencies.

11.29 Another broad policy issue which requires attention by the authorities concerns the need to mobilize financialresources for the public sector. The Plan documents assume that domestic revenue will be doubled in real terms rising from 8 percent of GNP in 1975/76 to 11 percent of GNP in 1980/81 (see Table XI-1). The increase in revenue is to be achieved through more effective tax collection,some improvementof the tax system, and larger profits from state-ownedand mixed enterprises. But even a doubling of budget receipts, as envisagedby the Five-Year Plan, would fall short of the requirements for fast-growingpublic expenditures. - 154 -

11.30 There are indications that the scope for raising public revenue may indeed be larger than estimated by the Plan. For once, the increase of GNP can be expected to be bigger than foreseen by the Plan (see para. 11.13). Moreover, the macro-economic frame of the Plan implies that the ratio of government revenue to imports, the major source of taxation, will drop from 31 percent in 1975/76 to 19 percent in 1980/81 (Table XI-1). This is explained by a large shift in the composition of imports whereby lower taxed items (e.g. capital goods) will gain weight over higher taxed imports (e.g. consumer goods). This shift is, however, unlikely to materialize to that extent and the volume of imports of consumer goods will probably be higher than that projected in the Plan. Thus, even with no change in tax legislation a significantly higher level of public revenue can be expected.

11.31 But higher revenues should not be seen as a reason to delay further tax legislation. On the contrary, the fast growing requirements for public expenditures call for energetic efforts to broaden the tax base. As was explained in Chapter V there is considerable scope for improving the tax system. A thorough review of the present structure of import tariffs, for example, is likely to demonstrate that the revenue impact of such duties may well be further enhanced. Other potential sources for additional revenue would be excise duties, sales and turnover taxes. There is also need for a more effective taxation of business income. In addition, a more realistic pricing of some government services could be considered including non-essential categories of higher education such as liberal arts.

11.32 A third issue of general concern is that of efficient resource allocation and investment programming. One of the problem areas in this respect is the weak project content of the Plan. Although a great number of projects is listed in the Plan document for the various sectors, many of them represent general concepts only and lack detailed feasibility studies. The Plan itself does not indicate the state of readiness of individual projects which makes it difficult to estimate the magnitude of this particular problem. But the dearth of information about project preparation work and implementation sched- ules raises serious questions about the economic viability of the investment program. Some Government officials feel that the economic and social benefits of many projects in infrastructure, industry and agriculture are so obvious that they need not be demonstrated in elaborate studies. They also point out that the preparation of such studies would unnecessarily hold back the implementation of urgently required investments. Priority is therefore being given by the authorities to project specific engineering and design work on which much progress has been made in the recent past. But experience in other countries shows that this approach carries grave risks. Projects may be undertaken which subsequently are not able to sustain themselves resulting in a drain on the country's resources instead of making a contribution to its welfare. Increasing emphasis should therefore be given to the use of economic criteria in project selection.

11.33 Closely related to the issue of project selection and design is the question as to which types of investment should be undertaken by the public sector, and which ones should be left to the private sector. The Government - 155 - has correctly decided to assume responsibility, either directly through technical ministries or indirectly through public enterprises, for the development of transport infrastructure and public utilities such as electric power, water and sewerage. In the Five-Year Plan the Government has also expressed preference for investments in the industrial sector (manufacturing, mining and construction) to be carried out by mixed enterprises. While industrial ventures undertaken by private firms are also encouraged, the emphasis is clearly on the mixed sector. In many cases, however, this effectively implies public sector control of - and associated with that responsibility for - the enterprise as the Government is likely to emerge as the principal shareholder. Public enterprises, however, are not subject to the same rigorous criteria of efficiency as private firms. Often they have automatic access to subsidies from the state budget which tends to weaken the need for effective management. Moreover, if implicit subsidies are assured, the decision to invest on the basis of technical, rather than financial and economic criteria, is taken more easily.

11.34 Last but not least, there is the issue of properly maintaining the existing and new capital stock. So far this question has not received sufficient attention by the authorities perhaps understandably because of the newness of most capital structures. However, as the stock of fixed capital increases - and there is visible evidence of fast-growing numbers of public buildings, roads, urban facilities, factories, power stations and irrigation schemes - the need for adequate maintenance of these facilities becomes more and more pressing. The Plan does not recognize this issue in its full dimensions. Current government expenditures which include the bulk of maintenance funds are projected to grow only by 10 percent p.a., starting from an inadequate level in the base year. This compares with a projected growth of fixed capital formation of 49 percent p.a., a discrepancy which clearly demonstrates the seriousness of the situation. The problem is aggravated by the fact that often budgetary allocations for maintenance are used for new investments (see Chapter X). While this practice may have negligible implications in the short run, it is bound to incur increasingly heavy costs in the longer run as fixed capital structures deteriorate prematurely thus reducing significantly the time-span of their effective use. Introducing adequate maintenance programs and establishing repair facilities for machinery and equipment are therefore urgently required if past and future investments are not to be wasted.

E. Options for the Future

11.35 Plan targets can be modified and policies can be changed. In fact, the Five-Year Plan is conceived by the Government as a flexible instrument to be adjusted annually as the need arises. Some adjustments seem to be called for simply because recent changes in the economy, which could not be foreseen at the time of Plan preparation, have altered the basic assumptions from which policy-makers have to operate. Thus, it has become clear that workers' remittances, GNP, imports of consumer goods and current government revenue will be significantly higher than estimated by the Plan. Scarcities in labor supply, on the other hand, appear to be more pronounced than anticipated, especially in the professional and skilled categories. To some - 156 -

extent, these changes are bound to affect the pattern of future growth and influence the thrust and feasibility of development programs.

11.36 In addition, there are substantive questions of policy. The Plan in its present form calls for a very large investment effort. This may be difficult to achieve because of serious human and physical constraints (see section C of this chapter). But even if these constraints can be overcome an investment volume of the magnitude envisaged by the Plan may not be in the best long-term interest of the country. Heavy economic costs could be incurred if investment projects are conceived and carried out hastily. This could lead to a situation - and to some extent this is already happening - where physical structures are established at a faster pace than the institutions and staff required to operate and maintain them. The result would be a sub-optimal utilization of domestic and foreign resources which reflects itself in the premature decay of fixed assets.

11.37 An alternative to this approach, which deserves serious consideration, would be to adopt a more cautious investment policy designed to undertake investments only after the economic viability of specific projects has been firmly established. Adherence to this principle would not exclude projects with important social and political objectives; but special justification should be provided for economically non-viable projects. At the same time, efforts should be made to strengthen maintenance programs and, above all, to introduce more effective personnel management for the public sector.

11.38 Shifting resources from investment to maintenance and selectively higher government salaries may yield less spectacular results in the short run but is likely to generate higher economic returns in the longer run. These returns are essential if the country is to mobilize the resources required for further development, and for the debt service on foreign loans with which some of the investments are being financed. Overall, such a strategy would probably lead to a somewhat slower growth in investment than envisaged by the Plan. But that would not necessarily be a disadvantage. At this phase of development YAR is not in urgent need of creating additional jobs, and the relatively large size of its exchange earnings does not compel it to pursue an autarkic policy. The principle of maximising the welfare of the nation, which after all is the prime objective of the Plan, requires that resources are allocated efficiently and that they are not spent on uneconomic projects.

11.39 The quantitative implications of a strategy based on prudent choice of investment, on policies aimed at attracting qualified manpower to the public sector, and on adequate maintenance programs, are outlined below. Using 1976/77 as base year, so as to reflect recent changes in the structure of the economy, a set of illustrative five-year projections has been prepared which suggests that this strategy, supported by suitable sector policies, would result in a viable development pattern for the economy (see Tables XI-3 and XI-4). However, it should be emphasized that solutions to YAR's present problems - especially the manpower shortage - will not come easily and that substantial foreign support (capital as well as technical assistance) will be required for a long time to come. - 157 -

Table XI-3: ILLUSTRATIVE MACRO-ECONOMIC PROJECTIONS 7YR million, constant 1976/77 prices)

Annual Growth 1976/77 1981/82 Rate (Z)

1. GNP m.p. 11,000 16,200 8

2. Net Factor Incomes from Abroad 4,000 5,900 8

3. GDP m.p. 7,000 10,300 8

4. Imports, G & NFS 3,505 7,100 15

5. Total Supply (3+4) used for 10,505 17,400 11

6. Consumption 8,214 12,500 9 (a) Government (950) (1,800) (15) (b) Private (7,264) (10,700) (8)

7. Investment 2,000 4,400 20 (a) GFCF (1,400) (4,200) (25) (b) Stocks (600) (200) (.)

8. Exports, G & NFS 291 500 11

9. Gross National Saving (1-6) 2,786 3,700 6 (a) Government (452) (500) (2) (b) Non-government (2,334) (3,200) (7)

10. Current Government Account (a) Current Revenue 1,293 2,600 15 (b) Current Expenditure 841 2,100 20

11.40 Given the fact that a large part of investments proposed by the Plan will have a relatively small impact on economic growth, it can be assumed that GDP will grow at approximately the same rate as foreseen by the Plan (8 percent p.a.) even if total investment increases less rapidly than presently envisaged. Economic growth is likely to be concentrated in the service sectors, especially trade and government services, as well as in housing, construction, manufacturing and modern agriculture. The subsistence sector is likely to decline further both in absolute and relative terms.

11.41 There is little doubt that workers' remittances will increase less rapidly in the coming years than they actually have during the past. However, the slowdown may not be as drastic as foreseen by the Plan because (a) real wages of migrant workers will continue to rise and (b) net emigration cannot be completely stopped as long as there is a substantial wage differential between YAR and neighboring oil countries. In the projections it has therefore been assumed that workers' remittances - and with them GNP - will grow - 158 -

at approximatelythe same rate as GDP. For 1981/82 this would result in a per capita GNP of approximatelyUS$600 at 1976/77 prices.

11.42 Investmentcan still be expected to grow at a very rapid pace, even if a more prudent approach to project selection is adopted. The projections shown in Table XI-3 assume that gross fixed capital formationwill triple between 1976/77 and 1981/82 while the accumulationof stocks, which had been exceptionallylarge in the base year, is likely to fall back to more normal proportions. Consumptioncan also be expected to grow at a relatively fast rate largely because of the need to increase government services and because the removal of physical constraintsto importswill allow private consumption to-catch up with the growth of money incomes. The increase in consumption would slow down the growth of savings resulting in a slight decline of the national savings rate.

11.43 Given the limitationsin domestic supplies of goods and services much of the increaseof investment and consumptionwill have to be met through imports. The assumptionsmade in the projections imply that importswill have to grow at about twice the rate of GDP. The scope for expanding exports which originatemostly from agricultureand some services is much smaller. The trade deficit is therefore likely to grow substantiallyover the next few years.

11.44 Current government expenditureshould expand fast if salaries for civil servants are made more competitivewith those in the private sector, and if maintenanceprograms are brought up to a more satisfactorylevel. But there is also much scope for increasinggovernment revenue mainly through taxing imports and private consumption. Prudent fiscal policies could result in a moderate increase of government savings.

11.45 The foregoingmacro-economic projections have been made in constant prices so as to illustrate the changes in real terms. For the external accounts a projection in current prices is more appropriate. Table XI-4 thereforeuses an average price inflator of 7 percent p.a. reflectingthe expected rate of world inflation. Using the same real magnitudes for imports and exports as in Table XI-3 this increasesthe resource gap from YR 3.2 billion in 1976/77 to YR 9.3 billion in 1981/82. Most of the deficit in trade and nonfactor services will be financedby workers' remittanceswhich in current prices could reach YR 8 billion in 1981/82. However, the current account surplus experiencedin 1976/77would gradually turn into a deficit which by 1981/82 could reach YR 1 billion. - 159 -

Table XI-4: ILLUSTRATIVE PROJECTION OF EXTERNAL ACCOUNTS (YR million, current prices /1)

1976/77 1981/82

1. Exports, G & NFS 291 700

2. Imports, G & NFS 3,505 9,950

3. Resource Gap (1-2) -3,214 -9,250

4. Net Factor Incomes 4,002 8,250 (a) Workers' remittances, net (3,791) (7,950) (b) Investment income, net (211) (300) (i) Earnings (215) (400) (ii) Payments (4) (100)

5. Current Account Balance (3+4) 788 -1,000

6. Official Grants 470 900

7. Official Loans, Net 189 600 (a) Disbursements (208) (800) (b) Amortization (19) (200)

8. Errors & Omissions /2 566 300

9. Increase in Reserves 2,013 800

10. Gross Reserves (end of FY) 4,142 10,000

11. External Debt (disbursed) 1,314 4,000

12. Debt Service Ratio 0.5% 4.0%

/1 Assuming average price increase of 7% p.a.

/2 Including private capital flows.

11.46 The inflow of official capital is largely determined by the financial requirements of the public sector. Although it has been assumed in this context that public investment will grow slower in real terms than foreseen by the Plan, the current value of investment expenditures which actually determines the financing needs would be of the same order of magnitude as the constant value figures shown in the Plan (about YR 5.6 billion in 1981/82; see Table XI-1). The gross inflow of official capital is therefore taken to be the same as that shown in the Plan, i.e. some YR 6.6 billion for the five-year period. Approximately half of this is assumed to be provided in the form of grants - an assumption which is in line with past experience - while the other - 160 -

half would take the form of concessionalloans. Adding to this a moderate amount of private capital, this would result in a net inflow of long-term capital of about YR 7-8 billion, or some YR 1 1/2 billion p.a.

11.47 The capital inflow would not only cover the growing deficit on current account but also allow a further increase in foreign exchange reserves. However, in relative terms the reserveswould decline from the equivalentof 15 months' imports in 1976/77 to about 12 months' imports in 1981/82. More- over, in the mid-1980s net capital inflowswould just about equal the current account deficit and the accumulationof reserves would come to an end.

11.48 Net borrowing on a scale shown in Table XI-4 would raise YAR's external debt from YR 1.3 billion in mid-1977 to about YR 4 billion (US$900 million) in mid-1982. Assuming average interest rates of 4% and average maturitiesof 25 years this would result in debt servide payments of YR 350 million (US$80 million) by 1981/82. The debt service ratio would then be about 4 percent compared with 0.5 percent in 1976/77. Less favorable conditions in foreign borrowing would lead to a faster increase in the debt service burden which the country would not be able to sustain over the long run. YAR will thereforehave to continue borrowing on highly concessional terms.

11.49 The above projections- as was pointed out before - are only illustrative and should not be taken as forecastsof actual developments. The margin of error in crucial parameterssuch as investments,remittances or imports, is substantialand changes in these magnitudescould affect YAR's developmentpattern significantly. Notwithstandingthese uncertainties one can draw the conclusionthat YAR's economy is capable of furtherviable expansion provided prudent policies are being pursued. However, given the limitationsin domestic resources such developmentcontinues to depend on the export of labor as the principal engine for growth. In addition, outside support for the public sector will be required for a long time to come if a higher standard of living is to be achieved for the population. It should be rememberedin this context that YAR is still one of the least developed countries in the world where many of the basic needs of the populationare not yet satisfied. -161-

ANNEXES AND STATISTICAL APPENDIX

Page No.

ANNEX I-1 Efficiency Prices for Labor, Capital and Foreign Exchange 162

ANNEX II-1 GNP per capita (World Bank Methodology) 164

ANNEX III-1 1975 Population and Housing Census 166 -2 Structure and Development of YAR's Education System 167 -3 Foreign Assistance in Education 175

ANNEX IV-1 The Planning Machinery in the YAR 178 -2 Functions prescribed by the CPO for its Five Departments 179 -3 List of Agencies of the Central Administration 181

ANNEX V-1 Development of Financial Institutions 182 Attachment A: Summary of Tax System 191 Attachment B: Branches of Financial Institutions in YAR 195

ANNEX VI-1 Statistics for Foreign Trade and Payments 196 -2 Country Projects and UNDP Approved Projects as of June 30, 1976 198

ANNEX VIII-1 Principal Natural Regions in YAR 202 -2 Foreign Assistance in Agriculture 204

STATISTICAL APPENDIX 209

SELECTED BIBLIOGRAPHY 300 -162- ANNEX I-1 Page 1

EFFICIENCYPRICES FOR LABOR, CAPITAL AND FOREIGN EXCHANGE

1. The economyof YAR is largely directed by the interactionof market forces. Except for the exchange rate, Governmentintervention in the market mechanism is kept to a minimum. Thus, actual market prices reflect to a large extent, the relative scarcitiesof the country'sproduction factors.

Labor

2. For YAR, as for many underdevelopedcountries, a distinctionmust be made between skilledand unskilledlabor. Given the narrow base of YAR's modern educationsystem, domestic supply of skilled labor (includingprofes- sionals and technicians)has traditionallyfallen short of demand and much of the skills had to be imported (includingYemenis working abroad). The opportunity cost of skilled labor is thereforeequal to the cost of attracting expatriates. This situation is likely to persist for some time to come not- withstandingsubstantial improvements in the country'seducation system.

3. Unskilledlabor, on the other hand, had been plentifulonly a few years ago and its opportunitycost was close to zero. With the massive emigrationin the mid 1970s (see Chapter III), however, YAR's labor reserves have been largelyexhausted. Even in remote areas of the countryunskilled labor now commandsa relativelyhigh price and on occasion is not even available at the going market rate. In the circumstancesit can be assumed that local wage rates now representquite accuratelythe opportunitycost of unskilled labor. For future years, appropriateincreases of local wages will have to be taken into consideration.

Capital

4. In the absence of a well functioningcapital market it is difficult to estimateYAR's opportunitycost of capital. There is evidence that high rates of return are earned on investmentsin trade, real estate and to a lesser extent in agricultureand industry. However, the supply of capital from private and officialsources presentlyexceeds local demand. This is reflectedin an overallsavings surplus (see ChapterV). Although domestic interest rates for bank credit have been raised in recent years (see Statis- tical Annex Table 6.4) they representonly a restrictedmarket. Large amounts of investablefunds are made availableat much lower cost (see ChapterVI) and substantialsavings surplusesare invested abroad. This togetherwith the openness of the Yemeni economyand the full convertibilityof the local currency suggests that as long as the overall savings surplus persists,international interest rates could be taken as a fair approximationof YAR's opportunitycost of capital.

Foreign Exchange

5. In the early years of the Republic the rate of exchange for the Yemeni Rial (YAR) fluctuatedfreely. Since February 1973 it has been pegged throughCentral Bank interventionto the US$ at a rate of approximately -163- ANNEX I-l Page 2

$1 = YR 4.5. There are no exchange restrictionsand import tariffs are essentially levied for fiscal reasons. Until recently,the official rate and before that, the market rate could be taken as approximationsfor the opportunitycost of foreign exchange.

6. However, since 1975/76 the Central Bank has started accumulating large amounts of foreign exchange (see Chapter VI). This suggests that the YR is presently undervaluedand that its internationalprice would appreciate if official interventionwas to be discontiued. Given the fact that most of YAR's exchange earnings originate in Saudi Arabia, it can be assumed that the shadow exchange rate of the YR (opportunitycost of foreign exchange)would fall somewherebetween the official rate ($1 = YR 4.5) and that of the Saudi Rial ($1 = SR 3.5). -164-

ANNEX II - 1 Page i

GNP Per Capita, World Bank Atlas Methodology

1. In this Annex, the GNP per capita for the years 1974/75-1976/77 will be calculated on the basis of the World Bank Atlas methodology with 1975-1977 as the base period. Below is the formula used for this purpose.

n n

X t T Xt

Y -y .t - 1 . '__D_t 7 6 76 76 n n 76

Ilyt E t t = 1 t = I

Dis

i i d d pi

Where Y 1: GNP per capita in current US$ for the year 1;

Y : GNP (at market prices) in current prices, Yemeni rials;

Y : GNP (at market prices) in constant prices, Yemeni rials;

X Exchange rate in Yemeni rial per US$;

D : US GNP deflator;

P : Mid-year population;

Pd: Price ratio needed to convert GNP series to average base period prices;

Xd : The weighted average exchange rate for the base period, here expressed in US$ per Yemeni rial; and

t : base period (1975-1977). -165- ANNEX II - 1 Page 2

2. The following informationis available: 1974/75 1975/76 1976/77

Population ('000) 5,300 5,406 5,514 GNP (YR million) Current Prices 5,388 7,338 11,000 1/ Constant (1975/76)Prices 6,067 7,338 8,580 1/ US Implicit GNP Deflator (1975-77- 100) 0.94641 0.99625 1.05172 Exchange Rate (YR/$) 4.50 4.50 4.50

3. Therefore, Pd = 1.0792 and

Xd - 0.2222

Accordingly-'GNP per capita in 1976/77 = 392 GNP per capita in 1975/76 = 324 GNP per capita in 1974/75 = 260

1/ TentativeWorld Bank estimates. 2/ Fiscal years 1974/75, 1975/76 and 1976/77 correspond,with regard to US implicit GNP deflator,to calendar years 1975, 1976 and 1977 respectively. -166- ANNEX III-1 Page 1

1975 POPULATION AND HOUSING CENSUS

1. In February 1975, the Central Planning Organization (CPO), with the help of the United Nations Fund for Population Activities (UNFPA), conducted the first population and housing census in YAR. The census aimed at covering the demographic and economic aspects of human resources. With the exception of some areas in the eastern and northeastern parts of the country that were difficult to reach, the survey covered the whole country and all household families were enumerated.

2. The census was carried out in accordance to a detailed plan and timetable that took 15 months of preparation. After thorough training, about 5,500 workers, mostly unviversity and secondary school students, participated in the census that lasted from midnight of January 31 to February 20, 1975. The enumeration was carried out on a de facto basis, i.e., each individual was recorded in the place he/she was at the time of reference.

3. Since enumeration was carried out in February, a time of low agricultural activity in all the country except the Tihama, total resident population was at its minimum. A large number of Yemenis were outside the country at the time the census was conducted. Moreover, for social reasons, a large number of females were not enumerated. A Swiss technical team subsequently estimated the under-enumerated and the uncovered portions of the population with the help of special surveys and aerial photographs.

4. The preliminary results of the census were published in December 1975; they are based on a sample that covered 3 percent of the recorded resident population. The processing of all the collected information commenced some time later with the help of a UNDP-supplied computer and technicians. Final results are expected to come out in 1979. But only minor changes in the preliminary results are expected when the final results are out.

5. The population survey covered population data by governorate, city/ village, age, sex, marital status, educational attainment, and employment and occupational status. It was supplemented by a housing survey enumerating the number of rooms in living quarters, type of tenure (rental, ownership), house facilities (electricity, water, etc.) and type of housing (ordinary, cave, hut, public, etc.) by governorate and major city. -167- ANNEX III-2 Page 1

STRUCTURE AND DEVELOPMENT OF YAR'S EDUCATION SYSTEM

1. The present education system of the Yemen Arab Republic is based on four stages, (a) 6 years of primary education (grades 1-6); (b) 3 years of preparatory education (grades 7-9); (c) 3 years of secondary education (grades 10-12); and (d) higher education. Transition within this structure is regulated at the completion of each stage. So far, almost all graduates from one stage can enter the next.

2. The Ministry of Education (MOE) and Sana'a University are primarily responsible for education in YAR. Religious and private schools play a minor role, while a number of other ministries independently administer training programs related to their special technical fields. The MOE has regional offices in each of the 10 Governorates. However, there is a considerable degree of centralization; and at both national and regional levels, administration is inadequate due to the lack of qualified personnel. About 20 percent of the MOE's staff have university degrees, of which only a few are in disciplines related to education. The majority of the MOE's staff lack even secondary school education. The Ministry is being supported by an expatriate Task Force supplied by UNDP/UNESCO under IDA's first educational project (Annex III-3). The Task Force is presently helping to introduce administrative and organizational reform. Higher education is the responsibility of Sana'a University, the only higher education institute in Yemen.

(1) Primary Education (grades 1-6)

3. Primary education and adult literacy programs are reviewed in Chapter VII of this report (Satisfying Basic Needs). In this annex it suf- fices to point out that presently a primary school graduate has the choice of joining (a) a preparatory school offering formal education, (b) a teacher training school that prepares students for primary school teaching, or (c) the technical school, which trains middle level technicians. Table 1 below suggests that many primary school graduates continue their education. How- ever, the numbers are somehow misleading since a large number of the first year students in preparatory, teacher training and the technical schools may either be repeaters, have graduated abroad, or have graduated in previous years. Nonetheless, official estimates indicate that on average preparatory school entrants during the last five years (1971/72-1975/76) consisted to about 70 percent of primary school graduates. -168- ANNEX III-2 Page 2

Table 1: PRIMARY SCHOOL GRADUATES AND FIRST-YEAR POST-PRIMARY ENROLLMENTS

First Year Enrollment in Academic Primary School Preparatory Teachers Technical Year Graduates /1 Level Training School /2 TOTAL

1975/76 8,081 6,816 961 89 7,866 1974/75 5,809 5,159 325 81 5,565 1973/74 5,255 4,061 404 73 4,538 1972/73 3,552 3,155 286 82 3,523 1971/72 2,613 2,766 170 93 3,029 1970/71 2,254 1,933 66 92 2,091

/1 Primary schools graduates are for the previous academic year.

/2 The technical school is considered a secondary school, however, its first year entrants are graduates of primary schools.

Source: Ministry of Education.

(2) Second Level Education (grades 7 to 12)

4. In 1975/76, second level education, almost fully public, was provided at the preparatory stage (grades 7 to 9) in 134 formal schools and 8 teacher training institutes; and at the secondary stage (grades 10-12) in 27 formal schools and 7 teacher training institutes. On the whole, the quality of school buildings is better than those of the primary level, but the schools still lack teaching equipment especially where science teaching is concerned.

5. Second level school enrollments have increased very rapidly from 5,532 in 1970/71 to 22,975 in 1975/76, an average annual increase of about 33 percent. The proportion of girls enrolled increased during the same period from an average of 5 percent to 12 percent of all second level enrollments (Tables 10.3-10.5 of Statistical Appendix).

6. Preparatory schools provide formal education leading to intermediate certificates. The quality of students in this level is better than that of primary schools. After all, the students who join preparatory schools are among the top primary school graduates. Moreover, most teachers at preparatory schools are expatriates with at least a high school diploma and some experience in teaching. Consequently, both repeaters and dropout rates are relatively low while graduation rate is high. In 1975, 2,985 students (94 percent of grade 9 enrollments) graduated from the preparatory schools and about 78 percent of them proceeded to secondary schools. The proportion of girls returning to family life has decreased markedly; almost all girls graduating from preparatory schools proceed to secondary education. -169- ANNEX III-2 Page 3

7. There were 134 preparatory schools during 1975/76, an increase of 36 schools over 1974/75. The increase in preparatory schools is recent for there were only 22 schools in 1970/71. However, the distribution of schools among Governorates is uneven. In Taiz alone there were 58 schools enrolling about 47 percent of all students. Sana'a and Hodeidah follow with 18 schools (enrolling 27 percent) and 17 schools (enrolling 13 percent) respectively.

8. Out of 711 teachers in preparatory schools in 1975/76, 17 were women. All teachers, except for those of religion, were expatriates of whom about 90 percent were Egyptians. The pupil-teacher ratio of 22:1 is relatively good, but varies considerably among Governorates. The Governorate with the largest number of schools, Taiz with 58 schools, had the highest pupil-teacher ratio, 34:1. Sana'a and Hodeidah follow at 19:1 and 18:1 respectively. Nevertheless, since preparatory level schools have only been recently introduced to most of the Governorates with low pupil-teacher ratio, the ratio is expected to rise in these Governorates as future primary school graduates join preparatory schools.

9. Secondary formal education extends over three years after finishing preparatory education. Enrollments at this level increased from 1,189 in 1970/71 to 6,050 in 1975/76, an average annual increase of 39 percent p.a. Taiz, with 9 of the 27 secondary schools, accounts for 48 percent of total enrollments. Girls' enrollments began in 1970/71 and increased from about 2 percent to 8 percent in 1975/76. Participation of girls outside Sana'a, Taiz and Hodeidah is minimal. During the last four years, an average of 86 percent from the scientific section and 76 percent from the arts section have successfully completed high school requirements. Most of these graduates proceeded to college education, either at University of Sana'a or abroad. The student- teacher ratio is 18:1 for the country as a whole, with the highest ratio in Sana'a at 22:1. Among the 332 teachers in 1975/76, there were only 12 Yemenis.

10. . Teacher training is accomplished at both the preparatory and secondary levels. The first teacher training institute for boys at the preparatory level started in 1963 and its girls counterpart in 1966. Teacher's training at the secondary level started in 1968 with one institute for each sex. In 1975/76, there were eight institutes (4 for boys and 4 for girls) at the preparatory level and 7 institutes (3 for boys and 4 for girls) at the secondary level enrolling 961 and 354 students respectively (Table 10.5 of Statistical Appendix). The schools are almost evenly distributed among the four major cities (Sana'a, Taiz, Hodeidah and Ibb) and they are staffed by 113 (53 at the preparatory level) expatriate teachers of whom 38 are females. The teacher- student ratio is 1:18 and 1:6 at the preparatory and secondary levels respectively.

11. Difficulties have been experienced in attracting students for teacher training institutes. The MOE had to close boys' institutes at the preparatory level during the early 1970s. Dropout rates in these institutes are high due to the low level of training, dissatisfaction with late disbursements of student stipends, and unattractive teacher salaries. Moreover, potential male applicants consider that they have little chance for career -170- ANNEX III-2 Page 4 and educational advancement, particularly because whoever made it to the preparatory level is considered an able person who can be successful in the private business sector. However, the decreasing number of boys willing to enter primary teacher training is expected to be partly offset by the increasing intake of girls.

12. In spite of the large number of unqualified primary school teachers, few attempts have been made to provide follow-up training for these teachers. Special short courses (up to six months) in specific subjects, notably arith- metic, have been conducted for limited numbers of teachers. With so few teachers available, the MOE finds it difficult to release teachers for such training, although the low educational level of most teachers makes supplementary training an urgent need.

(3) Curriculum Development

13. The curriculum development branch within the Ministry of Education is responsible for the review, development and promulgation of curricula at all levels below the university. Following the revision of the primary curricula in 1972, few attempts have been made to rewrite syllabi and textbooks on some subjects. The curriculum at this level is theoretical and fragmented in too many subject divisions with insufficient time devoted to developing skills of literacy and numeracy. The extreme shortage of well-trained teachers and the almost complete absence of teaching materials are compounded by the use of textbooks written for countries and culture foreign to Yemen.

14. The curriculum consists predominantly of arts subjects. Arabic and religion are alloted 54 percent, 33 percent and 34 percent of total weekly hours taught in the primary, preparatory, and secondary levels respectively (Table 10.6 of Statistical Appendix). Mathematics and sciences are each alloted about 25 percent of the time in the primary and preparatory levels. In the final two years of the secondary cycle, two streams provide students with a choice between literature and science. In the former, mathematics and sciences are virtually non-existent while in the latter, where about 75 percent of students are enrolled, arts subjects still dominate. Laboratories and science equipment are inadequate and students have little opportunity to perform experiments.

15. The UNDP/UNESCO Task Force (see paragraph 2) is advising the MOE on developing cohesive policies at all levels. It is presently reviewing the process of curriculum development. Greater teacher involvement in planning curricula, revising syllabi and requiring textbooks emphasizing Yemeni content is envisaged at all levels. Coordination of these tasks with a review of the examination system and the more adequate provision of teaching materials and scientific equipment are urgent priorities facing the Government.

(4) Private Education

16. Private education has a relatively minor role in Yemen. In 1974/75, the total number of primary private students was less than one half percent of the number enrolled in primary public schools. There are only two private -171- ANNEX III-2 Page 5 schools, one in Sana'a and the other in Taiz. Both schools cover primary and preparatory levels with 1974/75 students enrollments of 938 and 347 respectively. The Government supervises the schools but does not control them, although it provides them with books as in the case of public schools.

(5) Religious Education

17. Religious education was the only form of post-primary education available before 1962. In 1974/75 there were 31 religious schools that enrolled 2,303 students at the preparatory and secondary levels. Religious schools allocate most of their time to Islamic teachings while hardly covering other subjects that are taught in public schools. Religious schools are attached to the MOE, but are financially supported by Arab countries, particularly Saudi Arabia. The graduates of these schools often become instructors for religion in public schools. Two religious institutes were recently established in Sana'a and Damar by the MOE to teach Islamic values with modern scientific methods.

(6) Technical Education

18. Technical education is offered at the five-year post-primary technical school in Sana'a (supported by the People's Republic of China) which enrolled 348 students in 1975/76, all of whom were boarders (Table 10.7 of StatisticalAppendix). Entry is selective for primary certificateholders. Annual admission is about 90 and the capacity of the school is 450. Graduates of this school are granted a high school diploma in technicaleducation which is equivalentto the formal education secondary certificate. The first graduates of the school (35 in 1975) were sent to China to continue a four- year university course before they return to Sana'a as instructorsfor the school. During 1975/76, there were 54 Chinese instructorsand translators teaching technical subjects and 11 Yemeni teachers for general subjects. Training is provided mainly in construction(buildings and roads) and maintenance of heavy equipment. Practicalwork and design occupy 30-40 percent of the curriculum in the third and the fourth years and 70-80 percent in the final year when students participatealso in pratical work projects. During 1974/75 the technicalschool came under the control of the MOE and the admission procedureswere changed in 1976/77. New entrants are required to have a preparatoryschool diploma and are expected to stay three years before they graduate with a high school certificatein technicaleducation.

19. Vocational training under the MOE will commencewith the establishment of two vocational training centers (Sana'a and Hodeidah)under IDA's first educationproject. The Centers will have an annual intake of 288 primary school graduates into a two-year full-timeprogram offering six trade specializations. In addition, the centers will offer part-time courses to upgrade skills of workers already employed in industry and services. Two similar centers (in Taiz and Damar) were included under IDA's second education project. -172-. ANNEX III-2 Page 6

20. In view of the gestation period required for the education system to respond to skilled manpower needs, and because of the shortages of skilled manpower, some ministries and government agencies initiated their own skill training schemes. Three vocational training programs are conducted by the Ministry of Public Works, two of which are UNDP assisted dealing with repair and maintenance of road-building equipment and motor vehicles; and the third, USAID assisted training skilled and semi-skilled workers for water supply projects. The National Electricity Corporation has a training center for electricians and the Swedish Technical Assistance Mission also runs a training course for electricians, while the British-Yemeni Agricultural Center conducts some training for operators of power pumps and agricultural machinery. Other training institutions being planned are: a fisheries Development Training Center, under the Ministry of Agriculture, which will train fishermen in boat building, gear technology and engine operation and maintenance and a Workers' Cultural Center to be established with Algerian asssistance under the Ministry of Labor and Social Services, which would include instruction of unskilled labor in technical occupations and training in some trade specialization.

21. Agricultural education is not yet formally established in YAR. All Yemeni experts and technicians have been trained abroad. Under IDA's first education credit, an agricultural training center at Ibb has commenced its work in 1977. The Center offers (a) a three-year upper secondary agricultural service course; (b) a one-year course (grade 10) for training animal health assistants; (c) a one-year post primary course (grade 7) to train prospective young farmers on a pilot basis; (d) experimental short courses of I to 2 weeks duration for adult farmers; and (e) in-service training of 2 to 3 weeks duration for officials of the Ministry of Agriculture. The Center is under the responsibility of the MOE in close cooperation with the Ministry of Agriculture.

22. Until 1974, there was no agricultural extension service in the country. The first extension program was established for Ibb and Taiz under a UNDP/FAO project. The same project set up an Extension Training Center in Taiz. The Center offers a one year post preparatory course to train extension agents until the Ibb agricultural school starts turning out graduates. In Tihama, an extension agent's training course of 7 months duration (plus two months field training) is being carried by the Tihama Agricultural Development Project. Moreover, the Agricultural Services Project (UNDP/FAO) which aims to strengthen the organization of the Ministry of Agriculture in the Governorate of Hodeidah, is also training extension agents (one month pre- service, one month on-the-job training) to be stationed in the Governorate's extension centers.

23. Commercial education started in 1969/70 with one school in Sana'a and an enrollment of 5 students. Presently, there are 3 schools, one in each of the cities of Sana'a, Taiz and Hodeidah enrolling 218 male students (no female enrollment). Commercial schools buildings are parts of secondary schools in the above mentioned cities. Education in these schools extends to three years above preparatory level and leads to a secondary school certificate that permits its holders to enter the school of Commerce and Economics -173- ANNEX III-2 Page 7

in Sana'a University. Up until 1974/75, 79 students have graduated from these schools and almost all of them have either found a job or proceeded to Sana'a University.

(7) Higher Education

24. Sana'a Unversity was established in 1970/71 with an initial enrollment of 61 students in the Schools of Law and Sharia (Islamic Law), Sciences and Arts. The Schools of Education and Commerce and Economics commenced in 1973/74. Total enrollment in that year reached 932 students, of whom 60 percent were enrolled on a full-time basis. During 1975/76, total enrollments reached 2,304 of whom about 71 percent were full-time students. The distribution of students and staff is given in Table 5 below. Higher education is open to all holders of the secondary school certificates and a large number of these enroll at Sana'a University. Nonetheless, an increasing number of high school graduates are still seeking education abroad (para. 27).

Table 2: STUDENTS AND FACULTY AT SANA'A UNIVERSITY, 1975/76

Students Faculty Student/ School M F M F Faculty

Education 601 63 /1 /1 ) Arts 288 94 27 5 ) 19 Sciences 52 13 26 1 ) Commerce & Economics 800 75 11 - 80 Law and Sharia 299 19 7 - 45

TOTAL 2,040 264 71 6 30

/1 Although the School of Education is independent, its students attend classes at the schools of Sciences and Arts, depending on their specialization.

25. The State of Kuwait is financing the development of the University and most of its recurrent expenses. It is also financing the construction of a new campus where equipment, books and references are expected to be adequate for all schools, particularly for the School of Sciences. Two more schools, Medicine and Engineering, are expected to commence with the academic years 1979/80 and 1980/81, respectively. The overall student-teacher ratio is 30:1. However, the ratio differs among schools, it ranges from a low of 19:1 in the schools of Arts, Sciences and Education, to 45:1 in the School of Law and Sharia, and to 80:1 in the School of Commerce and Economics. Finally, the university curriculum is being altered in favor of a credit system which is expected to facilitate the enrollment of working students and reduce the repeater and dropout rates.

26. Of the 264 female university students in 1975/76, 143 (53 percent) were Yemeni. Almost 40 percent of these Yemeni females were enrolled in the School of Education as fulltime students. University officials are encouraging -174- ANNEX III-2 Page 8 female enrollmentsby providing room and board and by facilitatingthe accept- ance of girls into the University. Although female universityenrollments have been increasing,they still constitutea relativelysmall portion of total enrollments in Sana'a University. However, the trend of rising female enrollments is likely to continue. It is expected that most of the future female enrollmentswould be absorbed by the School of Education because it offers a guaranteed teaching job for its female graduates,who may otherwise have difficultiesin finding jobs elsewhere.

27. Since the late sixties bilateral and multilateralfunds have provided fellowshipsabroad for a large number of Yemeni students. In 1976/77, there were 2,314 Yemenis receivinghigher education abroad versus the 3,014 Yemeni and expatriatesenrolled in Sana'a University (expatriatestudents make up about 15 percent of total enrollments). Table 10.8 of the Statistical Appendix indicates that about two thirds of the Yemenis studying abroad are enrolled in Arab universities,particularly in Egypt where 657 students were enrolled in medicine (128), commerce (127), engineering (123), agriculture (109), and other subjects (170). Other major Arab countries that host Yemeni studentswere, Saudi Arabia (282, of whom 68 in law and sharia and 46 in engineering),Iraq (173, of whom 52 in economics and political sciences and 30 in medicine) and Syria (109, of whom 25 in agricultureand 24 in engineering). Socialist countries host 707 Yemeni students, or about 31 percent of the total. The majority of these students (476) were in Russia with 124 in medicine and 158 in engineering. The P.R. of China had 77 students, 70 of them were in engineering. Western countries train only 44 Yemenis, about half of them in the F.R. of Germany. 1/ Iran comes at the top of the non-Arab developing nations and trains 32 Yemenis, of them 17 in medicine. Of the students sent abroad, the majority specialized in subjects related to engineering,medicine, agricultureand economics.

1/ The geograhicaldistribution of Yemenis studying abroad is misleading since a large number of US AID supported students are enrolled at universities in Egypt, Lebanon and Turkey. -1 7;- ANNEX III-3 Page 1

FOREIGN ASSISTANCE IN EDUCATION

1. Foreign assistance to the education sector amounted to YR 148.4 million, or 84 percent of total capital expenditures on the sector, during the 3-Year Program period, 1973/74-1975/76.

Capital Expenditures on Education, by Source, During the Three-Year Program, 1973/74-1975/76 (YR Million)

Source Amount Percent of Total

Yemeni Sources 28.1 15.9

Foreign Assistance 148.4 84.1

Total 176.5 100.0

An even larger amount (YR 357) is expected to be provided by foreign donors during the Five-Year Plan (see Tables 10.10, 10.12, 10.14 of Statistical Appendix). Below is a brief discussion of the major contributors.

International Development Association (IDA)

2. IDA is currently financing two education projects as follows:

(a) Fifst Education Project - A $10.8 million credit of a total project cost of $16.95 million. The project provides for (i) building and equipping one secondary and three primary teacher training institutes, three upper secondary schools, two vocational and one agricultural training center; and three non-formal basic training centers; (ii) equipping of three primary teacher training institutes, three upper and lower secondary schools; and (iii) establishing of the Project Unit and providing technical assistance for Project implementation. A key feature of the project is the establishment of a UNDP/UNESCO Task Force to advise the Govern- ment on the restructuring of the Ministry of Education and in developing a long-term strategy at all educational levels.

(b) Second Education Project - An $8.0 million credit of a total project cost of $11.9 million. The project provides for (i) constructing, furnishing and equipping (a) two primary teacher training institutes for girls; (b) four district training centers; (c) village level training facilities to be financed under a basic training fund; (d) two vocational training centers; and (e) one educational materials production centers; (ii) equipping four existing primary teacher institutes for boys; and (iii) related technical assistance. -176- ANNEXIII-3 Page 2

3. The physical implementationof IDA's First Education Project is proceeding satisfactorilyafter initial delays in staffing the Project Unit and the UNDP/UNESCO Task Force. Constructionof all project institutions is presently under way and expected to be completedby Fall 1978. However, the realizationof the Projects' objectives continues to be constrainedby the uncertainty of the funding of technical assistance costs resulting from the UNDP financial crisis. As a result, further recruitmentof Yemenis for training abroad and expatriatesfor the constructed institutionshas been temporarily suspended. The YAR Government is aware of the seriousnessand urgency of the problem and is actively seeking funds from other sources. As for IDA's Second Education Project, its physical implementationis proceeding on schedule despite the cost overruns resulting from the escalating constructioncosts.

UNDP and UNESCO

4. Of the four UNESCO technical projects only one large-scaleproject is presently under execution, the developmentof educationalprograms and institutions. The project is designed to support IDA's two educational projects. However, due to reductions in UNDP's financialresources the Yemeni Government is presently supporting the project while new sources are expected to be found to continue the project after 1977. The project's objectives are: (i) to assist in the reorganizationof the Ministry of Education; (ii) to help in developingnew curricula, teaching materials and methodology; (iii) to help in developingnew designs for new school buildings and prepare plans and procedures for their constructionand maintenance;and (iv) to study the requirementsfor non-formal education relevant to the Yemeni environment,to review advantages of multilateralsecondary schools vis-a-vis other alternatives,and to develop the most appropriateforms of women's education.

WFP and UNICEF

5. The education program receives substantialsupport from WFP and UNICEF. WFP has approved projects in the total amount of $3.2 million for providing food for school lunches. UNICEF, on the other hand, has been providing materials and incentive stipends for teachers and students involved with teacher training institutes and fellowshipsto study abroad for female students.

Federal Republic of Germany

6. The Federal Republic of Germany is a co-financierin IDA's first educationalproject. It contributed$0.6 million to provide staff and equipment for one vocational training center.

People's Republic of China

7. The People's Republic of China (PRC) established and financed Yemen's first technical school in Sana'a. The school trains middle level techniciansin a five-yearpost-primary course. The PRC is still supplying Chinese instructorsand training some of the school's graduates in China. -177- ANNEX III-3 Page 3

USSR

8. The USSR supports a technical school in Taiz, similar to the one supported by the PRC in Sana'a. Moreover, along with other Communist countries, the USSR supplies a large number of university scholarships for Yemeni student to study, particularly in medicine and engineering.

Arab Countries

9. The State of Kuwait has been financing most of the capital and operational expenditures of Sana's University. Presently, Kuwait is committed to finance the construction and equipping of a new campus for the university. The size of the funds, as most Arab educational assistance to YAR is not known. Another regular Arab aid comes from Abu Dhabi ($1 million) which is financing part of the oper-ationalcosts of IDA's First Educational Project.

10. Other Arab educational assistance to YAR has been substantial but unquantifiable. Most of Arab aid (mainly coming from Saudi Arabia, Kuwait, Libya, UAE, and Iraq) is directly allocated to executing the project with the related embassy as the executing agency. A large number of schools at all levels, particularly in the major cities, have been built by these kinds of grants. In addition, some of these countries provide the Yemeni Government with funds to hire teachers at all levels. Other countries, including Syria, directly provide teachers on grants bases. In all these cases there are no known records of the expenses. -178-

ANNEX IV - 1 THE PLANNING MACHINERY IN THE YAR Page 1

PRIME MINISTER

|COUNCILCo OF MINISTERS |

HIGHER MINISTRIES AND DEVELOPMENT GOVERNMENT COMMITTEE ...... tDEPARTMENTS

MINISTER OF DEVELOPMENT AND CHAIRMAN, CPO,

STATISTICAL TECHNICAL TEAMS OF & PLANNING ASSISTANCE EXPERTS IN UNITS UNITS SPECIFIC DEPUTY PROJECTS CHAIRMAN, CPO

IINTERNAL DEPARTMENTS ~~| ~OFCPO

BRANCHES OF CPO

PLANNING

PROJECTS

-FOREIGN AID

-STATISTICS

-ADMINISTRATION

* The CPO has two regional branches in the governorates. -179- ANNEX IV-2 Page 1

FUNCTIONS PRESCRIBED BY THE CPO FOR ITS 5 DEPARTMENTS

Planning Department

Conduct economic studies for the preparation of the development plans.

Prepare plans to achieve the general goals of economic and social development, having regard to the available resources and potential- i ties of the country.

Prepare economic and social policies and procedures which will help to develop the country and contribute to the achievement of the plans.

Projects Department

Study projects submitted by ministries, departments and public corporations, and determine project priorities in terms of the general plan.

Follow up on project implementation, according to agreed time- tables. Prepare reports on projects and their stage of implementation.

Determine the reasons for good project execution, or for shortfalls, and propose procedures for improved implementation.

Foreign Aid Department

Supervise the contracting of foreign loans and technical aid, and direct the utilization of loans according to the development plan. Formulate the necesssary procedures for the proper utilization of loans, and provide for their repayment.

Coordinate, according to the provisions of the development plan, the applications for technical assistance submitted by the ministries, departments and public corporations.

Statistics Department

Conduct the census, partial and comprehensive surveys. Collect statistical data, analyze and publish them. This department is the formal source of all statistical data in the country.

Assist the ministries and government bodies in establishing their own statistical and planning units.

Coordinate the work of these statistical and planning units, so as to facilitate the supply of data for planning by the CPO. -180- ANNEXIV-2 Page 2

Administration& Public Finance Department

Organize the internal regulations,finance and accounting procedures of the CPO. Prepare the CPO's yearly budget.

Preserve the CPO records and documentation.

Undertake the personnel functionsfor CPO staff.

Source: Central Planning Organization. -181- ANNEX LV-3

LIST OF AGENCIES OF THE CENTRAL ADMINISTRATION

1. Ministry of Foreign Affairs 2. t " Internal Affairs 3. i " Economy 4. i " Finance 5. i" Supply 6. " I Agriculture 7. "f Communications 8. o" Education 9. " " Health 10. I" Works and Municipalities 11. i" Social Affairs, Labor and Youth 12. " " Information 13. " " Justice 14. " " Religious Endowments 15. Highway Authority 16. Mineral ResourcesDepartment 17. Customs Department 18. Taxes Department 19. Zakat Department 20. Central Planning for Control and Accounting 21. Central Planning Organization 22. General Secretariatof the Prime Minister'sOffice 23. General Secretariatof the Council of High Command 24. Department of Possessions 25. Civil Service Department 26. National Institutefor Public Administration 27. General Secretariatfor Supreme Committee for Correction 28. AdministrativeSecretary 29. Punishment Court 30. Office for Governorate Affairs 31. Office of the Legal Adviser 32. Office of Tribal Affairs 33. Office of Direction and Guidance

Source: Civil Service Department -182- ANNEXV-1 Page 1

DEVELOPMENT OF FINANCIAL INSTITUTIONS

1. Few of YAR's modern financial institutions have been in existence for more than five years. Most of them have not had much operating experience; their activities are restricted to limited geographical areas; and their effectiveness is severely constrained by staff shortages. Following is a brief review of the present institutional set-up and its historic evolution.

(1) Government Budget

2. The first comprehensive government budget to be published in YAR dates back only to 1973/74. Before the 1962 Revolution, no distinction was even observed between the personal finances of the Imam and those of the State, and between 1962 an 1972, financial data were not available for either public enterprises or municipalities. The 1973/74 budget was the direct result of the budgetary reform initiated in 1972 by the Government with technical assistance from the IMF, which led to the establishment of the Central Budget Bureau. The functions of the Bureau, which was directly attached to the Prime Minister's office, included the formulation of budgetary policies and the development of proper financial practices and procedures. In 1974, the Bureau was absorbed by the newly-established Ministry of Finance, which replaced the old Ministry of Treasury, an institution with archaic structures and methods. Other major recent improvements include the introduction of a comprehensive system of budgeting and accounting, supported by regulations and a manual of instructions, and the issuance of separate budgets for public and mixed enterprises following the same classification as the general budget.

3. The process of budget preparation begins in January, six months prior to the start of each fiscal year (July 1), when the Ministry of Finance issues a circular to all Government entities, stating the basic guidelines for the preparation of revenues and expenditures estimates. Once received, those estimates are consolidated by the Ministry of Finance (Budget Department) and reviewed by a High Committee composed of the Ministers of Finance and Economy, the Heads of the Civil Service Commission and the Central Planning Organization (CPO), and various officials of the Ministry of Finance. The Ministry then submits the budget estimates to the Cabinet of Ministers and the Constituent Assembly for consideration and review, and, after their approval, the budget is presented to the President for final approval.

4. The final budget document is generally issued in June of each year and contains revenue estimates by department and by source, as well as expenditure estimates by department and by functional categories (defense, health, education, etc.). In addition, expenditures are also classified into five chapters: the first three cover current expenditures; the fourth, capital expenditures financed by the budget (substantial amounts of capital expenditures are made from external loans and grants on an extra budgetary basis); and the fifth, data on the Government's lending and borrowings, external grants, externally financed subsidy programs and subscriptions to the capital of regional and international organizations. -183- ANNEX V-1 Page 2

5. Budget accounts are recorded on a cash basis and kept within the Central Accounts Department of the Central Bank, which functions as the Gov- ernment's fiscal agent. All resources of the Government must be deposited with branches of the Central Bank and all expenditures must be authorized by budget officers permanently attached to those branches and responsible to the Ministry of Finance.

(2) Tax System

6. There is presently no consolidated General Tax Code in YAR, although one is under preparation and is expected to be ready in 1978. The YAR tax system is the outcome of many changes and piece-meal reforms, most of which were introduced during the last seven years. It is still marked by a multi- plicity of taxing authorities and a variety of old and new taxes. Recognizing the main constraint faced by the Government in the development of a modern tax system, i.e. a severe shortage of skilled and experienced manpower, the IMF in a report on tax reform in the YAR (1974) emphasized the need for simplifica- tion in order to facilitate tax administration. Attachment A shows a summary of the tax system, as prepared by the IMF in 1974, and revised to take into account recent modifications.

7. The Religious Tax (Zakat), which is a traditional obligation levied in Moslem societies, takes the form of various wealth and poll taxes on agricultural crops, cattle and some personal property, still collected partly in kind, and is assessed on a voluntary basis. Since 1977, three-fourths of the Zakat receipts is turned over to local development associations to help finance expenditures for education, roads, public health, etc. The administration of the Zakat is under the-responsibility of an independent Government agency, the traditional Tax Department.

8. Income taxation is characterized by a schedular system, which dif- ferentiates between sources of income. Taxes on wages and salaries are with- held by the employer and based on a progressive rate scale (15 percent for higher brackets); the burden is, therefore, relatively higher on Government employees for whom assessment and collection are easier. Corporate tax rates are rather low (25 percent on higher brackets for non-concessionary enterprises and 35 percent for concessionary ones) and compliance is impaired by difficulties in assessment and collection (particularly in the case of small enterprises, which do not keep accounts on a regular basis). The IMF proposals (see paragraph 6 above) include replacement of the progressive rate scale by a uniform 40 percent flat rate regardless of the corporation's form and size of profits and lowering of personal exemptions for small businessmen.

9. More recently, the Government passed a law (No. 22, February, 1976) instituting a 1 percent turnover tax on transactions exceeding YR 100,000. Turnover tax payments are allowed as credit against the corporate tax; however, any amount exceeding the corporate tax obligation will be kept by the Treasury.

10. In the field of import taxation, which at present is by far the highest yielding form of taxation in YAR, important reforms were introduced -184- ANNEX V-1 Page 3 in 1972, leading to the current tariff schedule based on the Brussels Tariffs Nomenclature (BTN). Originally, all imports were subject to duties (at rates ranging from 1 percent to 167 percent), but foodstuffs were exempted in 1975. The Customs Department, which has been in existence for a longer period than the Tax Department, suffers to a lesser extent from the lack of competent and experienced staff, but has obvious difficulties in facing the recent increase in the volume of imported goods. Smuggling (mainly from Saudi Arabia, where duties are substantially lower) has only been curbed partially, due to the difficulties in effectively controlling the borders.

11. Excise taxes are levied on specific products and services, such as cigarettes, hydrocarbon oils and motor vehicles. In addition, fees are charged for passports, driving licenses, identification cards and stamp duties are applied to juridical acts and other official papers. Finally, the Government has promulgated in January 1977, in an effort to curb real estate speculation, a decree imposing a 10 percent tax on sales of residential land and real estate in all major urban areas.

(3) Banking Sector

12. Prior to 1964, the only legal tender in YAR was the Maria Theresia Thaler 1/ which in the nineteenth century had become accepted as the principal medium of exchange in the Red Sea area. In February 1964, a law established the Yemen Currency Board and vested it with the exclusive right of issuing currency and enforcing exchange control regulations, while the Yemen Bank for Reconstruction and Development (see para. 15) acted as the Government's fiscal agent. The law designated the Yemeni Rial (YR) as YAR's currency and defined its value as equalling 0.829 g. of pure gold.

(a) Central Bank

13. A law promulgated in July 1971 revoked the gold parity provision and created the Central Bank. Established with the assistance of IMF experts, it now assumes all customary central banking functions, previously performed by the Yemen Currency Board and the YBRD. In addition to issuing currency, it regulates banking and credit and acts as a banker to the Government. The authorized capital of the Central Bank is YR 10 million.

14. The Central Bank's management is vested in a Board of Directors consisting of a Governor (presently the Prime Minister), a Deputy Governor, a representative each from the Ministry of Finance and the Ministry of Economy, and three other directors nominated by the Minister of Finance. Both the Governor and the Deputy Governor are appointed by the President of the Republic for an initial period of four years and are eligible for reappointment. The Governor is the Chief Executive Officer and is responsible for implementation

1/ The Thaler is an Austrian silver coin with a metal composition of four- fifths silver and one-fifth copper; its value in the immediate post-World War II period varied between US$0.75 and US$0.95 depending on the market price for silver. -185- ANNEX V-1 Page 4 of the policies determined by the Board, which meets at least once every two months. The Central Bank completed its internal organization by 1973/74 and comprises the following departments: Central Accounts; Government Accounts; Foreign Relations; Treasury; Legal; Research; Banking Control; Internal Audit. A Credit Department (responsible in particular for rediscounting operations) is also planned. A Clearing House was created in September 1975 to handle, under the supervision of the Central Bank, interbank transfers for the city of Sana'a. The Central Bank has its headquarters in Sana'a and branches in each of the ten Governorates 1/; branches are also planned in Mocha, Radaa and Salif.

(b) Commercial Banks

15. Although private banks had been operating intermittently in YAR before the revolution, a national banking system was started only in October 1962 with the establishment of the Yemen Bank for Reconstruction and Develop- ment. The YBRD was set up as a public sector institution, with a minority private Yemeni shareholding (49 percent), after the Government took over and renamed the National Commercial Bank (a Saudi private bank) which had been operating branches in Taiz, Hodeidah and Sana'a. It acted as the Govetnment's agent for monetary policy and only depository until the creation of the Central Bank in 1971 and it retained its monopoly position in the area of commercial banking until 1972 when four foreign banks were granted licenses to open branches in the country. Moreover, YBRD is still the major development bank in Yemen, although this function will progressively be taken over by the Agri- cultural Credit Bank, the Yemen Industrial Bank and the Housing Credit Bank.

16. Although it has lost its previous monopoly position, YBRD still remains the most important commercial bank in the country. With a capital of YR 100 million, it retained, as of December 31, 1975 the largest share of all commercial banks in both deposits (78 percent) and advances and loans (72 percent).. As the Government's principal development bank, it has a number of participations in public and mixed enterprises (for about YR 17 million): Yemen Petroleum Co., National Tobacco and Matches Co., Yemen Drug Co., Yemen Printing and Publishing Co., General Cotton Co., Mocha Agriculture Co., Yemen Foreign Trade Co., Mareb Insurance Co. YBRD has been continuously generating profits since 1962 and had accumulated YR 31 million in reserves as of December 31, 1975.

17. YBRD's Board of Directors consists of eleven members, six of whom represent the Government and are appointed by the Minister of Economy. The remaining five members are elected by the private shareholders. The Chairman of the Board, a Government appointee, is the chief executive. The organization of the Bank consists of the following departments: Research; Legal; Control and Inspection; Central Accounting; Administration; Credit; Foreign Relations; Investment. The YBRD has its headquarters in Sana'a and a network of six main

1/ A list of all branches of banks in YAR is given in Attachment B. -186- ANNEXV-1 Page 5 branches, which it intends to expand in the future; in addition, it provides limited banking facilities through its twelve agents located in smaller towns and villages. There are also plans for the opening of YBRD's first branch abroad, in Abu Dhabi. YBRD's staff includes approximately 1500 employees.

18. Seven foreign banks now operate in YAR. The first experiences of foreign commercial banks in Yemen were short-lived; in 1949 Banque de l'Indo- chine (French) opened a branch in Hodeidah without much success and closed it after two years; the National Commercial Bank (Saudi) was taken over by the Government in 1962 (para 15); finally, Bank Misr, an' Egyptian bank which had been operating in Sana'a from 1962, liquidated its activities in 1967 following the Egyptian disengagement from the war. The foreign banks presently functioning in YAR have come in two stages: in 1972 four banks--Habib Bank (Pakistan); United Bank (Pakistan); British Bank of the Middle East (U.K.); and Arab Bank (Jordan)--opened a total of six branches in Sana'a, Hodeidah and Taiz. In a second stage, three more banks followed: in 1975, the Bank of Credit and Commerce International (Saudi Arabian majority ownership) and the First National City Bank (U.S.) opened branches in Sana'a while the Banque de l'Indochine et Suez (French) opened a branch in Taiz; in 1976, the latter opened a second branch, in Hodeidah, and BBME its third branch, in Ibb. The Central Bank does not intend to grant licenses for new foreign banks in the near future, with the probable exception of Abu Dhabi Bank (as a reciprocity gesture for the opening of a YBRD branch in Abu Dhabi).

19. The foreign banks have not been as successful as YBRD in attracting deposits; this may be explained by: (i) YBRD's longer experience of operating in the country; (ii) restrictions imposed on foreign banks' branch expansion; and (iii) YBRD's monopoly on public enterprises' deposits. Foreign banks, on the other hand, play an increasing role in the financing of the private sector, due mainly to their knowledge and facilities in the foreign banking business (as of June 30, 1976, two-thirds of all outstanding loans to the private sector were made to finance imports). Particularly active are the British Bank of the Middle East and Banque de l'Indochine et Suez, which benefit from long existing business relationships with Yemeni businessmen previously settled in other areas of the Red Sea (Aden, Ethiopia, Djibouti) and now returning to YAR. Their staff includes respectively 120 employees (of which 11 expatriates) for BBME and 150 (7 expatriates) for Banque de l'Indochine et Suez.

20. The capital of a new privately owned Yemeni commercial bank, the National Bank of Yemen, is presently being subscribed among the Yemeni business community (YBRD may take a minority participation). This institution is still in the organizational stage, and it is assumed that its management would be composed of Arab Expatriates.

21. In recent years, substantial progress has been made in developing a system of specialized credit institutions. An Agricultural Credit Fund (ACF) was established in 1974, as an affiliate of the Central Bank, in connection with IDA's Tihama Development Project (IDA Credit No. 376-YAR). -187- ANNEX V-1 Page 6

Subsequently, an Agricultural Credit Bank (ACB) was established by the Govern- ment in September 1975, with the aim of ultimately extending agricultural credit to all regions of the country. More recently, in July 1976 and July 1977, the Government set up the Yemen Industrial Bank and the Hotusing Credit Bank as counterparts of the ACB for manufacturing and handicrafts and housing.

22. The Agricultural Credit Fund (ACF), established in 1974 under an agreement with IDA to administer credit provided in the Tihama Development Project, has since been selected as the financing channel for three other IDA Projects: the Southern Uplands Rural Development Project (SURDEP) (IDA Credit No. 545-YAR), the Grain storage and Processing Project (IDA Credit No. 636-YAR), and the Livestock Credit and Processing Project (IDA Credit No. 662-YAR). As of December 31, 1976, about YR 3.5 million had been provided to the Fund and loans disbursed were about YR 2.9 million, essentially under the Tihama and SURDEP Projects. Interest rates are 8 percent for long and medium- term loans, and 9 percent for short-term loans (up to one year); as a general rule, the loan applicant has to contribute 20 percent of the total investment costs in cash or kind, and has to provide the Fund with a certificate of land ownership as security.

23. The Fund's main policy making body is the Board of Directors of the Central Bank and its Chief Executive in title is the Governor of the Central Bank. The day-to-day management of the ACF is under the responsibility of the ACF Manager. The Fund's head office is in Sana'a but 26 of the 28 employees (including three expatriates) work in ACF's branches at Ibb, Wadi Zabid and Wadi Mawr. ACF also has a small office in Taiz.

24. The Agricultural Credit Bank (ACB) was established by the Government in September 1975, with a capital of YR 100 million (to be subscribed by the Government over a five-year period). The main objectives of the ACB are to extend credit in cash or kind to develop agriculture, irrigation, forestry, livestock production and agro-industries in all parts of the country (taking over, in particular, cotton crop financing, a function previously assumed by the Central Bank through the General Cotton Co.). It started operations in July 1976 and the first financial statements (audited by independent chartered accountants) were published in 1977. As of September 1978, ACB had committed YR 52 million (of which about half seasonal - short-term - loans). Until April 1978, interest rates were set at 8 percent for long and medium-term loans, and 9 percent for short-term loans. Presently, however, interest rates are set by the Central Bank at 6 percent and 7 percent respectively. Lending regulations are similar to ACF's, with the exception that the applicant must cover 25 percent of the investment cost with its own funds, instead of 20 percent required by ACF. In the future, ACB intends to accept deposits from farmers, although no decision has been taken yet as to the interest rates that would be paid.

25. ACB's policy making body is its Board of Management comprised of six official and one non-official members. The Chairman-Director is the Chief Executive and is assisted in the day-to-day management of the Bank by the Deputy General Manager. ACB's headquarters are in Sana'a and loans are processed through its own branches in Sana'a, Hodeidah and Beit-El-Faquih as well as through ACF's branches. The opening of a new branch in Damar is -_188- ANNEX V-1 Page 7 planned for July 1977, and ACB expects to have a branch in each Governorate before 5 years. The bank's staff presently numbers 59, including4 expatriates.

26. There is presently some duplication in the functionsperformed by both ACF and ACB, calling for the merger of those two institutions. (ACF was originallyintended, under the Tihama Project Agreement, to grow up ultimately into a permanent national agriculturalcredit institution). In January 1977, the Government proposed to incorporateACF within ACB and discussionsare presently underway as to the modalities of such a merger, with the aim of ultimately establishinga single, independent,and financially viable agriculturalcredit institution.

27. The Yemen IndustrialBank (YIB) was establishedby the Government in July 1976 and started operations in early 1978. Seventy percent of its authorized capital of YR 100 million will be subscribedby the Government (45 million within one year of establishmentand another 25 million according to the needs of the bank). The remaining30 percent of the capital is to be subscribed by the private sector (as of March 1977, YR 6 million had already been paid in). Commercialbanks have been specificallyinvited to participate in the capital subscription,but there is no indicationthat any of the foreign banks would respond,probably due to the lack of financial incentives (YIB's dividends at a guaranteedminimum rate of 6 percent are also limited to 10 percent by law).

28. The main objectivesof the bank are to encourage the development of new industrialprojects and the expansionof existing ones, and to promote local small industriesand handicrafts. YIB's participationin industrial ventures will be through: (i) medium and long-term loans (up to 10 years); (ii) equity contributions(not to exceed 25 percent of the capital of any one corporation);(iii) technicalassistance; (iv) providingguarantees and acting as a catalyst for the securing of financing from other sources. As of September 1978, the Bank has granted 20 loans totalling67 percent of its paid, capital (YR 64 million). Until March 1978, interest rates ranged from 7.5 percent to 9 percent for medium and long-termloans, Since then, the rates are set at 6 and 7 percent'respectively;but YIB is charging one percent study fee on financed projects. In order to qualify for financingby the YIB, ownership of the venture will have to be at least 51 percent Yemeni, whether private or public.

29. YIB's Board of Management consists of seven members, five of whom, including the Chairman, are Government appointees. The Chairman is the Chief Executive,assisted in the day-to-daymanagement by the General Manager. The headquartersof the Bank are in Sana'a and no other office is to be opened in the foreseeablefuture. The organizationof YIB consists of two main departments: the Research and Projects Department (includingthree divisions: Technical,Economic and FinancialAnalysis) and the AdministrationDepartment (includingthe AdministrativeServices Division and the AccountingDivision). The bank's staff presently counts 14 employees,a number of whom are still under training with the IndustrialBank of Jordan. -189- ANNEX V-1 Page 8

30. The Housing Credit Bank (HCB) was established by the Government in August 1977 with a capital of YR 100 million, of which the Government owns 70 percent. The remaining 30 percent is to be subscribed by the private sector. Lending rates range from 5-7 percent annually, and maturities between 7 years for institutions and up to 15 years for private citizens. For the latter group, preference will be given to borrowers who own a plot of land.

(4) Other Financial Institutions and Instruments

31. The insurance sector in YAR is in its early development stage. The only domestic insurance company is the Mareb Insurance Company, in which YBRD has a majority participation. Most of the trade insurance business (the only significant insurance business so far in the country), is still in the hands of foreign institutions, in spite of recent efforts by the Government to promote domestic insurance; as a consequence, the importance of Mareb Company as a financial intermediary is still negligible.

32. There is presently in YAR no capital market in the proper sense. There has never been any bond issue, either public or private, and there is no formal market for the shares held by the public in a handful of mixed enterprises (whose private shareholding is believed to be relatively concentrated). The offering of YIB shares to the public, presently underway, could be the first step towards a nucleus of a stock market; YIB has plans to market its shares directly to migrant workers in Saudi Arabia (through the Association of Yemeni Migrant Workers), which could lead to a relative dispersion in their ownership.

33. The most significant development, however, might stem from the Gov- ernment's recent request to IMF and IFC for a study of the possibilities to sell Government bonds to the non-bank public in order to tap the large amount of workers' remittances which are being hoarded mostly by the rural population. At this early stage of the study, it seems that the most promising scheme would consist in promoting bonds through the network of local money dealers-agents, who presently transmit most of the workers' remittances (in lieu of the banking system, which does not yet provide sufficient physical facilities). The agents would be remunerated by a commission, and the financial instrument itself would be simple and understandable, bearing in mind the traditional attitudes of potential buyers of such bonds.

34. Finally, it should be mentioned that there exists in YAR neither a national social security scheme, nor any system of pension funds (either public or private). Civil servants, however, receive free medical and social services under regular budgetary allocations. This situation is not likely to change in the near future.

(5) The Informal Sector

35. Despite the increasing role played by financial institutions, both private and public, the existence of a relatively important "informal" sector remains a main characteristic of YAR's financial system. Money dealers, who -190- ANNEX V-1 Page 9 before the establishment of the YBRD in 1962, were the main financial intermediaries in the country, still handle a significant proportion of all foreign exchange transactions, private as well as commercial. In particular, they play an essential role in the channeling of workers' remittances from abroad.

36. The following is the description of the mechanism by which most of those remittances are transferred into YAR: typically, a Yemeni migrant worker would give Saudi Rials to a Yemeni money dealer in Saudi Arabia, and get from him in exchange a draft drawn in Yemeni Rials that he sends (via mail or messenger) to his relatives in a rural YAR town or village; this draft is then presented to and honored by the money dealer's correspondent (agent) in YAR (who travels regularly to the villages in his area). On the other side of the transaction, the money dealer in Saudi Arabia transfers the equivalent amount in foreign currency to his account in a Yemeni bank in order to honor the draft subsequently presented by the agent; in a final stage, the Yemeni bank will convert into local currency with the Central Bank, the foreign currency it has received.

37. The services provided by the money dealer and his agents are remunerated through the spread of foreign exchange, and fees charged from the transmission of funds. There are reportedly about 15 money dealers in each of the three largest cities (Sana'a, Hodeidah, Taiz), who have established a solid business reputation. An additional function performed by the money dealers, which is worth mentioning, is their providing the worker's relatives with advances (often interest free), while they are waiting for the remittances to arrive. Overall, in spite of the problems stemming from the fact that this "informal" sector is substantially out of the control of the Govern- ment, it appears to provide a useful and efficient service; in any case, it is more than likely that it will retain a predominant role, as long as YAR's banking infrastructure remains weak. -191-

Attachzent A Page 1

Y,A.1 SMINA7Y OF TAX SYSTEM

(Amount. It Y_en Ri.)

Ta. Natur of Tax 2x1ption and Dedu-tion. ato.

1. TAXESON INCOXE AND WPITS 1. 1 Taons.. C4asae.. oar- Aai1 te on profit. realised Cooperatie -. aoitiona end Th. rate dilfer-tiaita bttween Forationo, and oterris Iro eotivittiea nrried op ether a.ooietiono not haviag corporation. with oosieetotb within Y.A.R. territorai. lucrativ purposes. Privet, and oth-r. For -onc-o.iooary 1.11 Tat on coioi nd ForeIgn oorparetion hbvie hoitale for ths firat five corporetione the following Iodotiriaiprfit.. po- - nt eatebliteloto are year.. Iarprieee benafit rate. ar applied: La Mo., I1 of i072, tsend on profit. only r-liiad fron the iaeextxnt law No. 30 ate effectiv J nury 1, by euch oatibliheeot.. Agri- of 1870 for the first fNo3 Tanbl profito 1973 cc profit, cultural aotivitite ar yea. Ar eweeo.n exceary (I. prxont) roaliiad dart.n 1972. aqolly uhbjct to thic ta to produce ena intai profit. Publit and mied curporetion. r dd-ucted. - 7,5100 20 ore a1io liabl. to the tax on 7,501 - 15,000 25 their profit. raali-ed from 15 001 - 22,500 30 tcacd ctivitis Declaration 22 501 aed ore 35 hould bh filad rot icier thee July of the folloing ye-r For oth.r corporations the rat.. Toe due o declared profit. is ar: payable whn the declaration ie filed. Corporation. re Teabla profits Rte tca d eeporatrly fron thbir (Ina srct) ehereholder.. The probl_ of double tt Ion of corporate - 7.500 7 profit. done not eate Iec 7 501 - 15,000 10 poreonl inco tone ar cur- 15,001 - 22 500 15 reotay levied cc Individulo 22,501 - 30,000 20 Capital gain. end Iee. ar 30,001 nd mor 25 treated a ordinary ie or I..... Losas including capitol oacee are carrind over for a n i of three years. Capital aeet re doprevittd rcording to retoa dotornicod by oniiet-r al dccrc. takiog into ccouat the nture of depreciated a.e.ta end corporate octivity.

1.2 Ta-ca on iodividuale Itnc Rate 1.21 Tax >noage.. ncd tru aad talurled corn-d in A eorthly ui.tct, percool Monthly tacoblo (It alorie., L NotIc.1 Yre Arab Republic by eceptioc of YR115O is (Ifter doductioc of p-rcont) of 1967 ce nodified oxployc.. In priva-t a'd elbowed rogrdlee. of tho the itni pereocal by Leu No. 25 of public .ectore. The too it nuber of depoudeoc and oooptioo) 1968, L6o No. 15 eithhbld ot eurce by on thb lvel of rand wag.. of i969 acd Lo pIlyore frot eonthly -ge* and aelaria. Expatrite. - 150 3 No. 26 of 1974. od aeartee. under bilteral technical 151 - 300 6 ceeteteoco. No dedctrio. 301 - 450 9 for pe.i.o. fund. are and. 451 - 600 12 ce-fit io kind .ce.pt free 601 and enre 15 honeig are eounptod. 1.22 Tao on rental icoa An etalt t he gro Yrl 2,000 t% oll:vwd a a 80.3 portent of grosa rnt cod 4.2 per- LaNticN 4 of 1966 ond rot and inputad root Iro oIns per,onal e ,ptin cent of inputrd rnt. La No. 21 of 1976 owcor-occupled buildiog cod for indiv idu l with i tpurod attahad urhac Saod located rect regrdle. of the nveahr It urban cotcre vith 10,000 of their depo1dnct.t cod oro inhabitrnt. Land Etoptio. nay be granted for uaed for canrcial end two yn_ra in c.ee of a newly Inducrial ourpo.ea t1 ola coontru-ted bildilg a- wall- rand. Oontat valuc 1a oa the attached urban laod. ueaoaead aeccally by co- leoN bulding, and attachd lnd oeieloc locar.d In each teed by indutry nd poultry and diatrio. The .eoseant coo cattle rtxein my benefit fron be rev ewed upon tho requeet thren ye-ra eoi `ption f Con- of the ner by 00 ppoal con- plet. eeptio La granted for oalon. Monmboe of the tw proportiee owned by diplomtic cnie.iona ore public offi- corp. end tutrodational craa- cc,l. The tc bend on tho oearionai Publicly owd eao. ammot is poid on a 9uar- buildinge. ad lend are tot tcoy bait without flIoa. Itablo to te.. declarotion.

1.23 Tao or c-roil end Pcofite of ttdiuiduala fron A nininw pareon lnseption of The *aa ratae a. apied to corpora- icduertial prnfitt Onerril und indYRcIiol YIl 7,500 re.grdlaea of the tione othbr th.n tho conr.tcJnry for Law No 11 of 1972 aoticitiee re aubjact to tho comber of dopond-et. Aricul- ona but aftar th. a1lovaere *v_tion of ocd L 0No. 22 of 1976 e-n tao l vied on corporation. tural ectiviitaia era nvspted the nitiwn poracocl eith oioor difference. contrary to the cue, of coR- TIl 7,500 (ee 1.11). A 1I Dec arrton nesheuhd ba fled poraitonn. turnover tea te tpeod cc cot boor cha April. ttiaated tranaactiooe -edio; YlIa profitr for individu le cot 100,000, alod as a cdit kheepig rglr arcoutre would igatnet ten ebeeqwently celclared he the tenable baea for five or three yere acordiog to the ""nt of table profit during the b..e year A tax ravie nd appel r_itt_c h.a beau ectabitehed to ettli I itiat ione. et 1.24 Tara or profa..ional Ac ancual itco t- oc net pro- A iino per.o._l oxptiioof Tahble profitc poofittfir fro corraogtdepo- RIte 3,000 r-gardlce at the t a t door prof .a on. itc loer Arab ai of t-able inco nd the Republic snd on other proflte otber of toopeyera dpennt.. - 3,000 6 .hb_h era eno ublrt tcc the A11 o-p- .. e .n.ee..ry to produc 3.001 - 6,000 tan" oncirciel and Indua- . ad %aintain Profita are deducted. 6,001 -9.050 1 trial profit. Profit. fIr ao_ prf e..one Day 9.001 - 12,000 12 be .nomptad far tha firet thr.e 12.001 and ore is yeare provided that a un-veretty d.greo tn requirad to e_.roja thean prof.a.ioo, -192-

Aettch;ent A

LA, 1iu. On TAXli u

Tax Mature of Tax 8xo ticn end Deductions Rates

2. tA ON01 COODSAND vUVIQS

2.2 Selective ism#

2.21 Cigarettes An excise Isvdp on tbe qonpuep- None. 2 bukeha per packet of 20 Cigarettes Law No. 13 of 1969 tion of locally produced as 1 bukeha par packet of 10 cigarettem well as impertd cigarttee. It to aseeed and collected by the Taz Department

1.22 Soft drirke A specific tax on locally pro- Non. I bukaha per bottle, (A gcverinnt duced coft drink.

2.23 Hydrocarboc oils Specific tax on petrol ebm B nein: 10 bukab per liter Law No. 4 of 1968 products conDe d in Y_mn. Kerocine, 3 bukaha per liter as mended by Ascesed and collectedby Terpentine 2 bukeba per liter Law go. It of 1969. Tax Deprtmnt although Cee oil and grease: 9 bukeba par kilo Law No. 4 of 1973. tbhre is no refinery in Pul oil and other producte: 3 bukeha the ountry. per liter. 2.3 Selective excins on services

2.31 Transportation A tax no the purchase of Tickete issued for goverment Ylla 2 par ticket. Los No. 13 of 1969 oversas ticketsreprd- _loyees an official treoel less of the value of the and for students studying ticket. abroad.

2132 Tax on entertainent A secific tax on admission Non. Movice: 2-5 bukaha Low. No. 13 of 1969 to novies and stage plays. Theter: 15 percent of the value of the ticket.

2.15totor vehicle texas An annual tax levied on metor Vehicles orned by goverqnnt. Private ars: Ydl 55 for cars with Law No. 27 of 1968 vehicles and bicycles at rates amers of diplomtic corps, five sats or less plus Yils 25 for varying aceording to the and officials of intermntional each additional set usage and nmber of set. organieations. sccordisg to Taxis: lila 125 perfrehicle with speific rules five sats or less pius YRIs 25 for Vebicles omd by hospitals and each additional seat. sedical missions. Busos: IRls 25 per seat. Trucks: YUle 150 par torgs. provided capacity does not exceed 1 1/2 tos. For ech additional ton the rate is YUlS 350. Bicycles: from Ylls 10-25.

3. TAXESON ITXNSETIONAL TRADE AND TRASACrIONS

3.1 Taxs on isnorts

3.11 Customs duties Virtually all imports (excluding ieports by govern_nt, nmicipali- Rates range from 1 percent to 107 percent Lw Mo. 56 of 1972 foodstuffs) are subject to the ties and diplintic corpg. depending on the necesity to consumers rates iscorporated in the fxmption for five yers for and the need for industrial devlepmsnt. customs tariff consisting of raw matrials, capital equip- Rates on cigarettes and tobacco are one column and based on the sent, and machinery used by 167 and 107 percent. respectively. Brussels nnaeclature. enterprias benefiting fro Dutiable ba" is c.i.f. value as the investnt low. chocked against aduinistrative values determined by the Custoe Departmnt with the collaboration of other ralated agencies. Rates are ad valorem with no differen- tiation according to the origin. Y_mn is not a umber of the CATT and consequently ths nost favored notion clause is not applied.

3.12 Defaces tax An additional tax levied on all S as under custms duty. 5 percent of c.i.f. value or the Law No. 7 of 1969 imports. Procedures of assess- adeinistretive value. ant and collection ar the me- as those of custo duty.

3.13 Statistical tax An additional duty levied on Sam under customs duty and 2 percent of c.i.f. value of the Law No. 8 of 1969 iuports. defense tax. administrative value. -193-

Atta-hent A Page 3

T.A.I.;g S*Y OF TAXST (

(Anounts in Yemen Bial)

Ta, Nature of Tax *mptions and Deductions Rates

3.2 Tw on axrt

3.21 Zxport duties Levied only on Qat. on All exports otbhr than Qt. 12 percent La No. 56 of 1972 f.o.b. basis

3.22 Defense tax An additional duty levied o all None. 5 percent Law No. 7 of 1969 exports including those ex- mted frce *xport duty based on the f.o.b. value. The procedurs for aesasmnt and collection are-the _ as those for export duties.

4. OTiR TAnS

4.1 Relisious tax (Eakat) In traditional Koolan oceeties ZEkat is a religious oblietine (lard) levied on oslms only And is next in iwportance to prayer. The term covers a n_iber of different taxes ranging frin a poll tex to a tax on capital. The procedure. of essmse_ntad collection do not lend themelvag to coeprbhensive analysis but thV very considerably according to the nature of each Zakat. Collection is in cash or kind. 4.11 Agricultural Zakat An annual levy on agricultural None 10 percent of thg value of crop crops. Following the 1962 frie Land watered by rain, end revolution it it assessd on 5 percent of crops frm lend a seIf-basis since taxpayers irritd by hn ffort have to declare their annual agricultural crop. 4.12 Cattle Zaket An annual tax on cows, clsi, Cattle urnd in agricultural ha-d for each tyP of cattle, sheep, and gnats, activity subject to the abowv- aIthough it increases according mentioned Zakat. to the mmber of taxed cttle. 4.13 Wealth Zakat An annual tax levied on gold, Gold less than 20 diner. 2.5 psrcent of value. silver, and cepital used in Silver less than 200 oz. business provided that they Personal jewlry. Loans are oned for at least one contracted in obtaining business year. capital. 4.14 Poll tax An annal tax levied on gvry Noe- adult Mosls and his depen- dents. Payableat the end of Ranadan. 4.2 St_n duties The stA"p duty is applied to a11 None The rates whicb can be specific, Law No. 18 of 1963 Paper on which are drawn civil proportinal or progrersive are as asndad Low No. by 5 and juridical acts. It is POutitned in tebls of 1964 Ptt chad to nd Lo No. 14 also levied on certain trans- th duty sp cifying of 1969 the n ture actibns, registratin end of th duty to he collect dand printed natters. Payent of the rate on sech transaction. tbs duty is vide nced by a Table I stipulates documents stamp or sons other _athod. subject to stamped papera and their tise. Table 2 covers pro- porttioa and Progressiveduties. Tables 3 end 4 deal with duties On documsntdrelated to adverti,USn end transportation.Table 5 incor- porates the specific st_mP duties. 4.3 3ggj,jegt ieggo t The tax is applied to transac- Agricultural lend. 10 percent of valu. Decre of Jan 24,977 tione on all non-cgricultural land within a sopcified radius of the city center, which varies fron 20 miles for Nodaidhb and 10 wiles for SAne's, to 2 miles for Dhmar. The Ministries of Public Works and Justice now require evidenceof tax payment before authenticating transfer dseds. -194-

Attech ent A Page A

S_on Arab Raub ,icSuimrv of Tax S6vste

TAX INCEIVZ

Name Conditions for Approval Benefits to be Accorded

Inysetsot of foreino *ad national capital Enterprises carrying on activities in industry, Import duties and taxes agriculture, mining, tourim or any other Lav No. 12 of 1970 activity necessaryfor strengthening the Complte exeption from all duties and taxes national sconasy and increasing the national on Imports levied for the b.m fit of the ineoe my apply for benefits accorded under central goverment budget on capital equip- this law. ment,machinery, and spareparts. The exmption is for the first five years. Enterprisesto be approved should carry on activities relatedto utilization of local A reduction in the rate of import duties and primarymterials, eneouragingimport sub- taxes levied on rew materials necessaryfor stituting industries or increasing exports. production, provided that the reduced rate They also should employ Y.A.R. nationals should not exceed 10 percent of the c.i.f. and train thm for higher technical respon- value. sibilities. Minimu invested capital should be YRls. 100,000 and YRTl 150,000 for No exemption from port foes and charges levied national and foreign enttrprisesrespectively, by iunicipelities. and YRl,. 250,000 for tourim enterpries. Profits tax

A complete exmption for the first five years fro the tax on comercial and industrial profits. Enterprires with invested capital exceedingTim. 2 million may be granted a 50 percont reduction for a period not exceeding 5 years folloving the expiration of the above-mntioned exmption period. Other benefits

Profits realized by approved enterprises can be transferred abroad in the original currency and at the prevailing rate of exchange.

Expatriatesemployed by *pproved enterprises can transfer abroad up to 50 percent of their wages and salaries.

jfll: eDI DRAIHES OF FINANCIL INSTITtrnIOS IN Y .A.. (As of 12/31/1976)

Sean Dazer Ibb Tos godeida-h ehweit HalLa Saeda Mareb Beidab Rades Mocha S.lif Belt el Faqlh Uadi Zabid Wadi Hevr

Central Snk Head Off. *rench Branch Branch Branch Brench Branch Dreach Branch Branch Brnch* Branch* Branch* - - -

Cowmrciel Banks: Head Off. . S R. D.1 Branch, 2 Off. Branch Branch Branch Brancb - - - - Branch

British Bank of the W.E. _ _ Dranch Branch Dead Off. ------

Banque de L Indochine He d et Sues - - - Off. Branch ------

First DationalCLty Bak Reed Off.

United Snk e"d Off.

Arab Dank esd Off. - - - Branch ------_-

DabJbBank - - - - Hed Off.

Bank of Credit and Coerce International Head Off.

Specialized Credit Institutions:

Agricult. Credit Fund (ACF) Head Off. - Office ------Office Office

AgricuIt. Credit Bank (ACS) mead Off. Branch* - Branch Branch Drench-- Ye- n Industrial Bank Heed Off. _ _

* Plnnc:d

II 1-RD .]so has 12 aesxnts In smller CoWns and v1ll.ses. -196- ANNEXVI-l Page 1

STATISTICS FOR FOREIGN TRADE AND PAYMENTS

1. A basic constraint to an analysis of the YAR's balance of payments is lack of a homogenous time series. Available information does not extend much before 1971/72. Even the more recent data suffer from a number of deficiencies. The very openness of the economy plus the freedom of men, money, and material to flow across national borders inhibit precise measurement. Equally important, the Central Bank of Yemen was established only as recently as in July 1971 and has yet to evolve a more sophisticated system of data collection and reporting.

2. Published data on the balance of payments relate only to transactions settled through the Central Bank of Yemen. And since trade is virtually unrestricted 1/ and there has never been any system of exchange controls, leakages through unrecorded trade and private transfers vitiate published data. A complicating circumstance is that private worker remittances are still for the most part handled by the Yemen Bank for Reconstruction and Development (YBRD) which till recently was also the channel for all conversions of foreign exchange into local currency by the numerous aid agencies operating in YAR; the Central Bank now handles the latter transactions.

3. Data on "invisibles" are not broken down into "public" and "private"; hence, any attempt at separating them out is largely judgmental. Information on private capital transactions just does not exist. Consequently, the item "Errors and Omissions" includes unidentified and unidentifiable amounts of private capital flows.

4. The Central Bank has endeavoured to correct some of these deficiencies through various adjustments; but these are for the most part based on subjective judgment. Thus the statistics of recorded imports which are based on Customs data and relate exclusively to private imports are inflated by 10 percent for balance of payments purposes to allow for imports financed by foreign sources. To these figures are then added the Central Bank's estimates of imports on public account; the latter are merely the counterpart of the drawings on foreign commodity and project loans and grants plus some Govern- ment purchases. But the data are not broken down either by type of commodity or by donor as in the case of private imports. Similarly, export data are also adjusted to allow for unrecorded exports. Except for cotton and cotton- seed exports on which data are firm, all other exports are inflated by a factor of one-third to allow for such unrecorded exports. But no adjustment is made for any leakage in YAR's most important single source of foreign exchange earnings i.e. worker's remittances.

1/ Under the new law (No. 23) enacted in 1975, the issuing of licenses for exports and imports has been transferred from the Central Bank to the Ministry of Finance. The latter will be guided by the national interest in the issue of such licenses. -197- ANNEX VI-i Page 2

5. Furthermore,the Central Bank's method of evaluating foreign currencies, other than the US dollar to which it has been pegged (presentlyat YR 4.5625 to $1) through a system of cross-rates,results in differencesin valuation. More significantly,inconsistencies arise in the case of capital transactions: whereas the original amounts of foreign loans are computedas of the exact date of transactions,service payments are based on the exchange rates that prevail on the last day of the quarter in which they fall due. Thus, for example, a payment due, say, July 1 would be expressedin terms of the rate prevailing on September30. Distortionsof these kinds account for differencesin IBRD data on service payments on external debt and for differences in the valuation of foreign assets as between the Central Bank of Yemen and the IMF. The Central Bank's presentationof data on foreign exchange reserves in its balance sheet differs from what is shown elsewhere. The dis- crepanciesarise not merely from differencesin classificaitonas between "convertible"and "other foreign exchange"reserves, but also because the balance sheet data are on a gross basis and do not include the YAR gold tranche position in the IMF. Per contra, the figures on YAR's foreign exchange reserves are on a net basis and include the gold tranche in the IMF. -198- ANNEXVI-2 Page 1 II. COUNTRYPROJeCTS

As OF 30 JUNE 197&

EstIrmal-odrDiC,cost Projectnumbs *nd (tie do ExftuIl#~g Del. tted _ (US dollar qJiv0lent) , Pmjsctnunf and tme Code Ec.1ftutiflo Oats Compl,llon _ Uo5V em,. t goe sMe dele UNDP COMrpr

YEM-67-SO1 SURVEY OF lHE AGRICULTURAL POTENTIAL OF THE WAOI ZADID 50 FAO 0L/67 06/74 1,146,379

YEM-68-006 PLANT PRODUCTION ANO PROTECTION 10 FAO 05/69 01/77 326,720

YEM-69-020 COFFEE PPOOUCTION 10 FAO 09 70 04V5 132192

YEM-TO-509 HIGHLADOS FARM DEVELOPMENT 60 FAO 01/70 01/75 748,464 124,Q

YEM-71-005 FORESTPYCONSULTANCY 40 FAO 06/71 04/74 84,142

YEM-71-511 LOWLANOS FARM DEVELOPMENT 50 FAO 06/11 01/76 4709932

YEM-71-512 FARM OEVELOPMENT Of THE MTOLANDS 50 FAO 06/71 07/75 582.237 242.85

YEM-71-513 FOO0 AND NUTRITION PROGRAMME 60 FAD 01/71 12/75 1,576,6AC 3,402,285

*YEH4-73-OO5 INSTITUTIONAL SUPPORT TO 7HE 60 IBRO 0n/73 05/79 1,429.7 636,890 MINISTRY OF AGRICULTURE

YEM-73-O01 ESTABLISHMENT OF AGRICULTURALSERVICES 60 FAO 08/73 01/80 2.961.115 414,25I AND OP A CENTRAL RESEARCH ORGANIZATION

YEM-73-011 ESTABLISHEMENT OF AGRICULTURAL SERVICES 60 FAC 08/73 02/79 1.798,358 :.oi,e9 IN THE TIHAMA REGION

YEM-73-012 COTTON ADVISER 10 FAD 09/73 01/17 72,50 26,17

YEM-74-003 FISHIERIES DEVELOPMENT 30 FAO 11/74 03/76 527,49 147,41

YEM-74-004 COFFEE CONSULTANCY 10 FAO 02/75 05/15 19,00

YEM-69-i00B TEACHER TRAINING 22 UNESCO 1Z/48 03/76 237,531

YEM-70-0(3 EDUCATIONAL PLANNING 10 UNESCO 01/71 s04/74 IHs1 9

YEM-72-004 II1P. EDOCATIONAL PLAN. SPECIALISTS 10 UNESCO 04/72 07/74 9013

fEN-73-0i.4 D.9L.1PMENT'0F EOUCAT IuNAL 10 UNESCO 12173 01/78 2,194,34 2,.S1i PROGAMMES AND INSTITUTIONS

YE --- 0143 S?ATISTICS 11 UN 09/69 01/75 85.95

YEM-68-013 IAXATION 20 UN 07/69 02/76 143,50

|YE-71-008 LAW DRAFTING 20 UN 02/72 o1/76 101,56.

*YEN-72-01o UN VOLUNTEERS SUPPORT PROJECT 20 UNOP 10/72 01/77 708G3-1

'YEM-72-901 PROGRAMMING MISSION - 1 UNOP 10/72 11/73 4,12

*YEM-73-00h INSTITUTIONAL SUPPORT TO THE 20 UN 08/73 01/7716.48 MINISTRY OF PUBLIC WORKS

*YEM-73-007 INSTITUTIONAL SUPPORT TO THE 20 UN d073 01/78 6Z6,65 91,60 MINISTRY OF ECONOMY

YEh-73-013 DIRECTOR OF CENTRAL STATISTICAL II UN 1)/73 01/17 135,30 86,48 DEPARTMENT IOPASI SANA'A

YEM-73-018 PROCUREMENT OF PROJECT VEHICLES 20 1 UNOP 01/74 01/78 447,27

*YEM-74-901 SPECIAL F NANCIAL MEASURES 20 UNOP 06/74 01/75 98,29

YFM-7s-0l1 PRESS INSTALLATION AND OPERATION AT THE NATIONAL 20 UNDP 05/75 07/75 8,00 INSTITUTE OF PUBLIC ADMINISTRATION

YEM-75-O21 ASSISTANCE IN DEVELOPMENT PLANNING 10 UNDP 03/76 06/79 218,05 51 94

*PROGRAMME RESERVE PROJECT **SPECIAL MEASURES FDR LOC PROJECT

328 -199- ANNEXVI-2 Page 2

AS Of 30 JUNE 1976

Estirnateproject cost

Prolecttlamber and ie Fdo Executing Oils completioniGvrmnEsimated (US dollar equivalent) Pnqe,ctbtle number and moonagarcyCoco approveda ~~~~dateUNDP' counterpart contribution - UNFDTH4 -2S _ _ _

YE'-70-507 WATER SUPPLY SANAA AND HODEIOA 70 WHO 06/70 01/76 917,841 1,758

YEM4-71-515 INSTITUTE OF HEALTH MANPOWER 30 WHO 01/71 12/77 756,04

YEM-72-COS WATFR SUPPLY AND SEWERAGE SYSTEMS 70 WHO 02/73 01/77 701.37 36.70 FOR SANA*A ANC hODEIDA

YfE-73-017 RURAL WATER SUPPLY 70 WHO 01/74 01/79 374,24 278.461

YLM-74-001 HOSPITAL ADMINISTRATION AND NURSING 10 WHO 11/74 01179 553,96 1,871,582 SERV ICfS

YEM-74-002 HEALIH MANPOWER INSTITUTE-PHASE 11 30 WHO 09/74 C9/79 2,755,10 391,92

INfilleTRY ('45001 1.412agA940

*YEP-71-803 COMPLEX SERVICE TEAM IN MAINTENANCE 30 UNIDO 08/71 02/75 120,00 AND REPAIR OF INDUSTRIAL EQUIPMENT

YEt-72-012 INDUSTRIAL PROMOTION AND ADVISORY UNIT 10 UNIDO 09/73 10/77 457,7e 43.e41 7

*YEK-73-911 AUTO REPAIR WORKSHOPS IN SANA'A 30 UNOP 01/72 09/78 759,60 15975 AND TAIZ

YEM-74-008 ESTABLISHMENT OF MODERN BAKERIES 24 FAO 09/74 07/74 2,50 AND GRAIN STORAGE FACILITIES

*YEM-74-016 DEVELOPMENT OF SOFT DRINKS INDUSTRY 24, UNI1O 01/75 05/75 9000

*YEM-74-019 DEVELOPMENT OF WHEAT MILLING INDUSTRY 24 UNIDO 01/75 06/75 1200

*YEM-75-003 ASSISTANCE TO THE FEDERATION OF INDUSTRIALISIS 30 UNIO 01/75 05Z75 9.00 AND CHAMBERS OF CCMMERCE

*YEM-75-004 EXPERT IN TEXTILE TECHNOLOGY 30 UNIOO 01/75 06/75 10.00

5VEM-75-005 nFVELOPMENT OF THF PRINTING INWUSTRY 74 UNIDO 01/75 05/75 9.OO

5YEM-75-012 ESTABLISHMENT OF BUILDING MATERIALS INDUSTRIES 21 UNIDO 06/75 10/75 12,00

*YEM-75-013 ASSISTANCE TO THE LEATHER INDUSTRY 21 UNIDO 06/75 10/75 12,00

INTFRNATIaNAl TRADF I40n)I

YEM-71-011 TOURISM DEVELOPMENT 32 UN 01172 Qe/75 37,15

EARnuB. MANACFMyNT£f NIYE tfll

YEM-68-001 CLEhICAL AND SECRETARIAL TRAINING 50 ILO 05/69 07/75 151.29

YEt-71-007 LABOUR ADMINISTRATION 70 ILO 12/71 01/77 93,42

&UE .TVI In.ontu

*YEK-75-030 YEMEN FLOOD RELIEF ACTION 40 UNOP 01/76 12/75 20,00 2,19

%CTFMCF ANn TFE41LDGY 16 229Q0

YEM-73-004 ESTABLISHMENT OF METEOROLOGICAL 50 WMO 06/73 01/79 79,09 SERVICES

YEM-74-006 ESTABLISHMENT OF METEGROLOGICAL SERVICES 50 WNO 01/75 11/80 947,40 22.03

5OfeL SF=lTy Abn_2DNF 217%F007

YEM-69-013 TOWN PLANNING 30 UN 06/69 01177 265,87

TPANSPDRT AIJO COMMULNICATIDN9 (TSoot ... L113

YEM-68-009 7ELECOMMUNICATIONS 50 ITU 01/70 01/78 322,50

YEN-71-001 CIVIL AVIATION TRAINING 40 ICAO 02/71 12/75 5,04

YEM-71-510 VOCATIONAL TRAINING PROGRAMME FOR REPAIR AND MAINTENANCE OF 20 ILO 01/71 07177 988,77 103,321 HEAVY ROAD BUILDING EQUIPMENT

VEM-71-701 ROAD IMPROVEMENT ITAIZ-TURBA) 20 IBRO 06J71 06/75 252,480

YEM-73-003 CIVIL AVIATION ORGANIZATION 40 ICAD 06Z73 07/77 1,599,17 115t41 AND ADMINISTRATION

*PROGRAMME RESERVE PROJECT **SPECIAL MEASURES FOR LOC PROJECT

329 -200- ANNEXVi- 2

YEMEN (CONTINUEO) Page 3 It. COiUNTRYPRCJECTS AS OF 30 JUNE 1976

Ea...Etimdprojct cost ~~~~~~~~~~~~~~~Date ~Esiao ~ ~~~~~~~~~~~Exeuttlng(USdollare taet f Proect umbr and DtO Code agncy approved cotmle UNtP 5o

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~____.O _ ___~ ,YEtM-73-008 SANA'A - MARI8 ROAD 20 UNOP 08/73 0t/75 27-.OO

YEN-73-016 TELECOMMUNICATIONSFEASIBILITY STUDY 50 ITU 06/74 01/76 61,95 2052 YEM-74-007 INVESTMENTFEASIBILITY STUDY FOR 30 ItRD 10/74 04/76 139,00 PORTS DEVELOPMENT *YFM-14-007 PORTS DEVELOPMtENT 30 [BRD 03/75 05/76 250,00

YEN-7T--Oil TRAINING IN TELe'EOMMUNICATIONSYSTEMS TECHNOLOGY 50 ITU 02/75 05Z76 68,40 AND ADMINISTRATION

YEM-74-021 NATIONAL PLAN FOR AVIATION 40 ICAO 02/75 01/79 145,00

TOTAL 30,231,546 10,03ie,sg

OF WHICH IPF PROJECTS ___24MAAagj PROGRAMMERESERVE PROJECTS .. 1..*1

SPECIAL MEASURES FOR LOC PROJECTS ---- 2.Zia

* I

*PROGRAAMERESERVE PROJECT

330 Source: United Nations Development Programme; Compendiun of Approved Projects as of June 30. 1976. -201- ANNEX VI-2 Page

la: VW Approved Projects as of June 30, 1976

- millions of U.S. Dollar Equivalent -

Sector Estimated Project Cost oSWerof Financed by Government Total Cost Paojects UNDP Counterpart of Projects $ Contribution $ $ Agriculture,Forestry and Fisheries 14 11.88 6.89 18.77

Education 4 2.46 -- 2.46

Gen. Economic & Social Policyand Planniug 12 2.67 0.24 2.91 PublicHealth 6 6.06 2.59 8.65 Industry 11 1.41 0.06 1.47

InternationalTrade 1 0.04 -- 0.04

LaborMJnag.ment and auployient 2 0.29 -- 0.29

ReliefActivities 1 0.02 -- 0.02

Science & Teckmology 2 1.03 0.02 1.05

Social Security & O.her SocialServices 1 0.27 -- 0.27

Transport& Caanoicatims 11 4.11 0.24 4.35

Total 65 30.23 10.03 40.27

N.B. Totals may not add up because of rounding.

Source: Uhited Nhtlon Deelopqent Programe; Ccupendium of Approved Projects as of Jun. 30, 1976. -202- ANNEX VIII-1 Page 1

PRINCIPAL NATURAL REGIONS IN YAR

GeographicalRegions

1. The Tihama Coastal Lowlands. This 20,000 km2 region is a 30 to 60 km wide area paralleling the Red Sea and the foothillsof the central mountain range. The elevation ranges from sea level to 200 m at the foothills. The annual rainfall ranges between 50 mm to 300 mm, with adequate rainfall for millet and other drought resistant crops in one out of 3 years. The region has 70,000 ha under spate irrigationand 25,000 ha under well irrigation. The area is thought to have at least 200,000 ha of land that is potentiallyirrig- able from improved diversion of wadi flows and through further exploitationof groundwater. The region is intersectedby seven major wide shallow wadis, which are from North to South, Wadi Mawr, Wadi Sordud, Wadi Siham, Wadi Rima, Wadi Zabid, Wadi Risyan and Wadi Mawza.

2. The Foothills and Middle Heights of the Western Slopes. This 55,000 km2 region lies between the Tihama coastal plains and the Highlands. The elevation ranges from 200 m to 1,500 m. The topographyis very rugged, cut by deep wadis running through narrow gorges with very steep slopes. All the cultivated land on the slopes is terraced. In the south middle heights of this region drainage is to the south and east into the Gulf of Aden. The main wadis flowing to the Gulf are Wadi Bana and Wadi Tuban.

3. The Central Highlands. This 35,000 km2 region comprises the higher reaches of the central mountain range extending from Ibb in the south to Saudi Arabia in the north. The highest part of the region lies between Ibb and Sana'a where mountain peaks exceed 3,000 m. The western part of the region is rugged with steep slopes where most of the cultivable land is terraced. The region includes the so-called IntermontanePlains, a high plateau area above 2,000 m elevation. These high plains areas encompassmost of the Governorates of Rada'a, Sana'a and Saada. The southern part of the region has the highest and most dependable rainfall and best climate of the country and good soils. In the northern part of the region rainfall is less and more erratic.

4. The Eastern Slopes, comprising 80,000 km2, are the largest region but poorest in agriculturalpotential. The land slopes gently eastward toward the empty quarter from about 2,000 m to 1,000 m elevation. Temperaturesare high and rainfall is only about 100 mm to 200 mm. The main Wadis of the area are Wadi Al Jouf, Wadi Abidah and Wadi Harib.

Rainfall Conditions

5. In the Tihama along the coast, the average annual rainfall as recorded over a long period is only about 100 mm. Heavy rains of 50 to 125 mm in this region are a rare phenomenon. Further inland the rainfall increases to about 200 mm annually. -203- ANNEX VIII-1 Page 2

6. The western slopes region, i.e. the mountainous escarpment extending from the Central Highlands down to the Tihama, receives the highest rainfall within Yemen. At the base of the escarpment the average annual precipitation ranges from 250 to 300 mm. The amount of rainfall increases as the elevation increases up to an average annual of 800 mm at an elevation of about 2,300 m. An average rainfall of 1,100 mm recorded in 1970/73 at the town of Ibb is considered to be the maximum on the Western slopes. In p.articularlywet years, annual rainfall up to 1,400 mm has been recorded.

7. The Central Highlands which may be described as mountain tablelands, have erratic rainfall within the year as well as wide variations from year to year. The lower one-third of the Highlands receives an average annual rainfall of about 250 mm. The rainfall in the northern two-thirds of the High- lands rapidly decreases to about 100 mm.

8. Very little rainfall data is available on the Eastern Slopes Region. The region may be characterized as semi-desert to desert. The drainage pattern indicates a rapid decrease of rainfall from the Central Highlands in the direction from south to north and from west to east.

9. The Taiz province which typifies the southeastern and northern slopes of the Central Highlands, has the most favorable climate in all the country for agriculture. This humid-subtropical area receives abundant rainfall from the summer monsoon winds. The average annual rainfall of over 600 mm is normally well distributed over the seven months from April to October. This concentration of rainfall is in contrast to the two distinct wet seasons elsewhere in Yemen, as noted above. -204- ANNEX VIII-2 Page 1

FOREIGN ASSISTANCE IN AGRICULTURE

InternationalDevelopment Association (IDA)

1. IDA is currently engaged in four major investment and one technical assistanceprojects as follows:

(a) Tihama DevelopmentProject - A US$40.8 million project to provide for (a) the improvementof existing spate irrigationin Wadi Zabid covering 17,000 ha, together with establishingagricultural research,plant protection and extension services and (b) a feasibility study in Wadi Mawr for the developmentof surface and groundwaterirrigation to serve 60,000 ha. The feasibilitystudy includes the drilling of about 60 test tubewells. Work started on the project in 1973 and is scheduled to be completedat the end of 1978.

(b) Southern Uplands Rural Development Project - A US$23.2 million, five-yearproject to improve the standard of living of some 21,000 farm families by increasing the crop production on 35,000 ha of farmland. The project provides credit for production inputs and farm investments,for rural works (includingfeeder roads),village water supply systems and irrigationworks, and for technical services. The credit became effective on December 31, 1975, and the project is scheduled for completionin September 1981.

(c) Grain Storage and ProcessingProject - A US$21.8 milion, five-year project which became operationalin October 1976. The project will provide (a) a 20,000-tonport silo at Hodeidah with ship unloading and bagging equipment; (b) six regional warehouses with a total capacity of 18,000 tons; (c) two government-operatedbake- ries; (d) a bakery credit component to provide loans to private sector bakers; (e) a study to provide a nationwide storage investment program; and (f) a nutrition component.

(d) Livetock Credit and Processing Project - A US$32.1 million investment that will be disbursed over a six-year period. The project will provide for: (a) the formation of a national LivestockDevelopment Corporationwhich will set up eight 50-cow dairy farms, a livestock fattening dairy production farm, five milk collectioncenters and a poultry feed mill complex; (b) the developmentof three urban slaughterhousesand 154 municipal retail market stalls; (c) support of animal health services; (d) supervised credit to smallholder livestockand poultry owners and irrigated fodder crop producers and credit to retail butchers; and (e) establishmentof a livestock and range improvementcenter. -205- ANNEXVIII-2 Page 2

(e) InstitutionalSupport to the Ministry of Agriculture- Through a UNDP-financedand Bank-executedproject commenced November 1973 and due to end September 1978, the 7-man expert team provided by the project includes 2 agriculturists,an irrigation engineer,a livestockdevelopment specialist, an agricultural economist,a statisticianand an administrativeand finance officer.

FAO and UNDP

2. FAO-executedUNDP technicalassistance projects have been considerably curtailed over the past two years due to reductions of UNDP's financial resources. Only two large-scaleprojects remain approximatelyat full scheduled expert strength. One formerly large-scalefisheries project has only one developmentadvisor and a UN volunteer assistant on fish preservation and handling. One FAO expert for vocational agricultureis assigned to the UNESCO-executedproject on Developmentbf EducationalProgramme and Institu- tions. One expert in agro-meteorologyis working with the WMO team assisting the Civil Aviation and MeteorologicalAuthority. The two nearly full-strength FAO-executedprojects are:

(a) Central AgriculturalResearch and Training Organization- A nine- expert team is providing technicalassistance support to the Bank's Uplands Rural DevelopmentProject as well as providing major institutionalbuilding support for the Ministry of Agri- culture. The present phase of the project is due to terminate in September 1978. The specializationof the experts includes soils, horticulture,extension training,sorghum breeder, wheat breeder, statisticsand plant pathology. Nine UN volunteers are assistingthe experts on the project.

(b) Establishingof AgriculturalServices in the Tihama Region. A four-yearduration project due to terminateat the end of 1977. The project has provided experts for periods of one to four years in agricutluralextension, cotton agronomy, crop protection, irrigationpractices, horticulture, tobacco and farm management.

Federal Republic of Germany

3. Germany has been giving technicalassistance to the agricultural sector since 1967. The Shoub Research Farm in Sana'a was reopened by Germany in 1969. German operationof the Shoub Farm is planned to continue over a ten-year period. In addition to carrying out experimentaltrials on crop varieties,vegetables and potatoes, the Shoub Farm is used as a center for extensionand promotionalwork by the German team.

4. A first major effort of a German team of four experts stationedat the Shoub Farm was on the promotionof fertilizeruse. Approximately6,000 tons of fertilizer (2G-20-0)were distributedthrough contractingwith local -206- ANNEX VIII-2 Page 3 merchants. The merchants advanced the fertilizer to farmers for small fixed mark-up in price over their costs. Repayments by farmers exceeded 92 percent of advances.

5. The Shoub Farm is now being used to produce vegetable seedlings, tomatoes, onions, lettuce, cauliflowerand cabbage. Approximatelyhalf a million vegetable seedlingsare distributedeach year. In 1974, ten tons of seed potatoes were imported and planted on 86 farmer plots. Yields obtained ranged from 13 to 31 tons per ha.

6.: The major emphasis of the German team in the future will be on plant protection. Insecticidesare imported and distributedthrough local merchants. Six German experts are now (April 1977) stationedon the Sana'a Farm.

United Kingdom

7. The essentialbeginning of a veterinary service for the Ministry of Agriculturewas commenced in December 1972 by British technicalassistance. A team of veterinary specialistsand a laboratorytechnician were provided to investigateanimal diseasesand to advise and assist the Government of Yemen to carry out disease control measures. A diagnostic laboratorywas established to support the field activities of the team. The laboratorywas equipped to do all diagnosticwork except virology. A major campaign was carried out in 1974 in the vaccinationof cattle for Rinderpest. Rinderpest control has been expanded since with success in preventing any major outbreak of this disease. Further British veterinary assistancehas been includedas a part of the Bank's LivestockCredit and ProcessingProject.

8. A second major technicalassistance effort of the British has been in the field of farm mechanization. Work was started with a small team in 1975 and plans are now to have a six-man team stationed at Taiz. A new headquarters building is being constructedadjacent to the Central Research and Training Organization. One of the successfulefforts of the team thus far has been the testing of a newly-designedhand-powered thresher for cereal grains. The British team will be extension oriented with emphasis on assistingfarmers in selecting the machinerybest adapted for their circumstancesand in teaching farmers how to use the equipment.

United States

9. USAID operations in Yemen were resumed in 1973 and have grown from an annual program of $1.7 million in 1973 to $16 million in fiscal year 1977. Their current program is concentratedon agricultureand nutrition in the rural areas, on domestic water supply developmentin rural and urban areas, and manpower training for a wide spectrum of developmentactivities. Their two main ongoing agriculturalprojects are:

(a) Sorghum and Millet Improvement. Following the completion of three years of basic research on sorghum and millet varieties, and expanded project was begun in 1976. The initial project -207- ANNEX VIII-2 Page 4

tested about 5,000 varieties, of which 50 showed a potential for increased yields. The new project will consist of continued adaptive research coupled with farm demonstration and extension. A research station is in operation in Sana'a (Bir al Ghoun) and one is planned for the Tihama.

(b) Poultry Planning. This project was initiated in 1975 to demonstrate the economic and technical feasibility of poultry production and to develop and extend appropriate techniques to rural areas. A demonstration/training center has been built in Sana'a and another is planned for Taiz. The center consists of several laying and chick-raising houses, a hatchery and feed mill. Hatching eggs are imported by airplane from England, Kenya and Italy. The project is now operating with two expatriate specialists and five counterparts. Trainees are brought in from the villages; and, after training, are returned with units of 50 birds as a nucleus for expanded poultry production.

USSR

10. A 1,000 ha experimental farm at Sordud in the Tihama was developed by USSR and a two-man team of mechanical engineers continues to assist in management of the farm, which is in full production. This farm was laid out for large-scale mechanization with a surface canal irrigation system. The farm has its own generation plant which is used for operation of irrigation pumps.

China

11. The Chinese are developing a 20-ha research farm near Hoth (El Bahana). The farm is being fully equipped and completely developed by level- ing and laying out an irrigation system. The farm is being used for introduction of new crop varieties. From six to eight experts have now been working for 18 months under a two-year agreement. The Ministry of Agriculture has one BS degree counterpart at the farm.

Netherlands

12. The Department of International Technical Assistance, Ministry of Foreign Affairs, The Netherlands, engaged ILACO of Arnhem to prepare a plan for rural development of the Rada area in 1976. The project area comprising some 2,600 km2 is principally the Rada Nahiya which was the former Rada Sub- district of the Al Bayda Governorate in southeastern Yemen. The district has a population of about 65,000 with 7,000-8,000 adult males working out of the country. The project is scheduled for a five-year implementation period at a cost of US$17 million. A 20-ha research and training center will be established at al Khabar (5 km south of Rada). A revolving fund would be established for supervised credit. Major civil works would include domestic water supply systems and feeder roads (271 km). -208- ANNEX VIII-2 Page 5

Future Projects

13. Other rural development projects under consideration for the 5-Year Plan include:

(a) Hajjah Integrated Rural Development (British aid);

(b) Wadi Rima Rural Development (IDA);

(d) Wadi Siham Rural Development (Kuwait Fund and Abu Dhabi Fund);

(e) Mahweet Rural Development (Arab Agricultural Development Organization);

(f) Sa'ada Rural Development (Arab Agricultural Development Organization);

(g) Wadi Sordud Rural Development (German aid);

(h) Afforestation Project (Saudi Fund studying);

(i) Fisheries Project (IDA); and

(j) Wadi Mawr Development (IDA).

14. USAID has approved a fruit development project which will be a part of the Plan to take field trials of imported high-production plant materials and to improve cultural practices on existing orchards. The project has taken over the 8-ha Bir Al Shaif farm in Sana'a which was formerly operated with the assistance of Syria. An additional farm of about 50 ha at Sordud will give major emphasis to bananas and citrus, with minor emphasis on dates, papayas and mangoes. The Sana'a station will be devoted to grapes, apricots and selected nut crops, probably almonds, walnuts and pistachios. -209-

STATISTICAL APPENDIX

Table No.

I. HUMANRESOURCES

1.1 EnumeratedResident Populationby Age Group and Sex, 1975 1.2 EnumeratedResident Populationby Sex and Governorate,1975 1.3 Estimated Employmentby Sector, January 31, 1975 1.4 Distributionof Resident Labor Force by Educational Status and Sex, 1975 1.5 Modern Sector Non-farm Employment, 1975 1.6 GovernmentEmployees by Ministries, Governoratesand Sex, 1975 1.7 EducationalStandards of GovernmentEmployees, 1975 1.8 Manpower Demand by Sector and SpecializationDuring the Plan Period (1976/77 - 1980/81) 1.9 Manpower Demand and Supply during the Plan Period (1976/77 - 1980/81)

II. NATIONAL ACCOUNTS

2.1 Gross Domestic Product at Current Prices 2.2 Gross Domestic Productionat Constant 1971/72 Prices 2.3 Expenditureson Gross National Product at Current Prices 2.4 Gross Investmentat Current Prices

III. BALANCEOF PAYMENTS

3.1 Summary Balance of Payments (YR million) 3.2 Summary Balance of Payments (US-million) 3.3 Commodity Compositionof Recorded Exports 3.4 Commodity Compositionof Private Imports 3.5 Aggregate Imports of Governmentand Private Account on a Payment Basis 3.6 GeographicalDistribution of Exports 3.7 GeographicalDistribution of Imports 3.8 Service Receipts and Payments 3.9 Technical AssistanceReceived 3.10 Official Loans and Credits 3.11 Central Bank Reserves -210-

IV. EXTERNAL DEBT

4.1 External Public Debt Outstanding as of June 30, 1977 4.2 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt as of June 30, 1977

V. PUBLIC FINANCE

5.1 Summary of Government Finances 5.2 Government Revenues 5.3 Government Expenditures 5.4 Gross Savings of Public and Mixed Enterprises

VI. MONETARY STATISTICS

6.1 Monetary Survey 6.2 Composition of Money and Quasi-Money 6.3 Commercial Bank Advances and Investments 6.4 Interest Rate Structure

VII. AGRICULTURAL STATISTICS

7.1 Major Land Use by Governorates 7.2 Cultivated Land and Irrigation by Source of Water 7.3 Value of Agriculture Production 7.4 Area and Production of Main Agricultural Crops 7.5 Variability of Rainfall by Months, Southern Uplands 7.6 Variability of Rainfall by Months, Tihama Coastal Plains 7.7 Variability of Rainfall by Months, Central Highlands 7.8 Mean, Maximum and Minimum Monthly Rainfall at Selected Stations 7.9 Motor Pumps and Fuel Consumption 7.10 Fertilizer and Insecticide Imports 7.11 Comparison with Other Countries of Average Fertilizer Use per Hectare of Arable Land and Land Under Permanent Crops, 1974 7.12 Manpower Trained for Ministry of Agriculture Through June 30, 1976 7.13 Estimated Requirements for University Trained Manpower by Specialization over Next 5 Years 7.14 Estimated Additional Trained Manpower Required For Ministry of Agriculture over Next 5 Years -211-

7.15 Anticipated Number of Agriculture Students Returning by Years and Specialization 7.16 Terms of Agricultural Credit Fund Medium and Long-Term Loans 7.17 Lending Activities of Agricultural Credit Fund and Agricultural Credit Bank 7.18 Agricultural Production Targets During the Five- Year Plan, 1976/77-1980/81 7.19 Agricultural Input and Yield Targets During the Five-Year Plan, 1976/77-1980/81 7.20 First Five-Year Plan for Irrigation 7.21 Long-Range Irrigation Targets 7.22 Target for Expansion of Flood Irrigation 7.23 Target for Expansion of Perennial Irrigation 7.24 Target for Expansion of Well Irrigation

VIII. OTHER SECTORS

8.1 1975 Structure of Manufacturing Industry 8.2 Major Manufacturing Enterprises 8.3 Paved and Gravel Roads, 1977 8.4 Ports Traffic in YAR: 1969 - 1976 8.5 Sana'a International Airport Traffic, 1974-1976 8.6 Passengers carried by Yemen Airways

TX. PRICES

9.1 Consumer Price Index for Sana'a City

X. EDUCATION AND HEALTH

10.1 Primary Level Education 10.2 Primary School Teachers by Sex, Status and Educational Attainment 10.3 General Preparatory Level Education 10.4 General Secondary Level Education 10.5 Enrollments in Teachers Institutes 10.6 Subjects Studied at the Three Levels of Education 10.7 Enrollments in Technical and Commercial Schools 10.8 Distribution of Yemeni Students Abroad by Country and Specialty, 1976/77 10.9 Projected Student Enrollments During Five-Year Plan 1976/77-1980/81 10.10 Capital Expenditures on Education During the Plan Period 10.11 Distribution of the Ministry of Education Capital Expenditures by Level and Type of Education, During The Plan Period, 1976/77-1980/81 -212-

10.12 Capital Expendituresby the Ministry of Education and Sana'a University by Source of Finance, During the Five-Year Plan, 1976/77-1980/81 10.13 Training of Yemenis Abroad during the Five-Year Plan, 1976/77-1980/81 10.14 Foreign Grants on Manpower DevelopmentOriented Current Expenditures,by Source of Supply, During the Five-Year Plan, 1976/77-1980/81 10.15 Public Expenditureson Education 10.16 Medical Personnel, 1976 10.17 Health Establishmentsby Governorates,1976 -213-

Table 1.1: ENUMERATED RESIDENT POPULATION BY AGE GROUP AND SEX (Preliminary Results of February 1975 Census; in Thousands)

Age Group Males Females Total

0 - 4 387 385 772 5 - 9 418 389 807 10 - 14 286 252 538 15 - 19 158 200 358 20 - 24 116 180 296 25 - 29 116 167 283 30 - 34 116 154 270 35 - 39 115 140 255 40 - 44 104 123 227 45 - 49 86 104 190 50 - 54 70 84 154 55 - 59 57 65 122 60 - 64 45 48 93 65 - 69 33 35 68 70 - 74 23 23 46 75 - 79 14 13 27 80 + 11 10 21

TOTAL 2,155 2,371 4,526

Source: CPO, An Analysis of Manpower Situationin YAR (December1976) -214-

Table 1.2: ENUMERATEDRESIDENT POPULATIONBY SEX AND GOVERNORATE (Preliminary Results of February 1975 Census)

Governorate GovernorateCapital Population Sex Ratio 1/ Percent of Population Sex Ratio 1/ Governorate (000) (percent) Total Pop. (000) (percent)

Sana'a 807,269 95.2 17.8 134,588 131.9 Damar 455,132 87.3 10.0 19,167 105.8 Ibb 789,518 88.4 17.4 19,066 116.1 Taiz 873,876 83.6 19.3 78,642 132.2 Hodeidah 676,693 102.2 15.0 80,314 145.0 Mahweet 174,639 85.7 3.9 2,421 109.2 Hajjah 396,578 95.8 8.7 5,813 107.3 Sa'adah 154,361 90.5 3.4 4,252 110.7 Marib 40,896 98.3 1.0 292 -- Beida 157,764 81.5 3.5 5,975 82.6

TOTAL 4,526,326 90.9 100.0 350,831 130.4

1/ Male/Female

Source: CPO, An Analysis of Manpower Situation in YAR (December1976) -215-

Table 1.3: ESTIMATED EMPLOYMENT BY SECTOR, JANUARY 31, 1975 (in Thousands)

Sector

Agriculture (incl. forestry, livestock & fishing) 785 Manufacturing (incl.mining, quarrying,power and water) 39 Construction& Building 47 Trade, Restaurants& Hotels 72 Transport, Storage & Communication 26 Finance, Insurance,Real Estate & Business Services 2 Community, Social & Personal Services 101

1,072 1/

1/ Excludingunemployed (64,000).

Source: CPO. An Analysis of Manpower Situationin YAR_(December1976) -216-

Table 1.4: ' DISTRIBUTIONOF RESIDENT LABOR FORCE BY EDUCATIONALSTATUS AND SEX (February1975)

Males Females Total

Illiterate 778,678 134,394 913,072 Unable to read and write 667,473 132,727 800,200 Can read only 111,205 1,667 112,872 Literate 219,277 3,378 222,655 Can read and write 198,882 1,943 200,825 Finished primary 4,766 86 4,852 Finished preparatory 4,367 194 4,561 Finished secondary 5,046 599 5,645 Finished university 4,342 319 4,661 Not Stated 1,874 237 2,111 TOTAL 997,955 137,772 1,135,727

Source: CPO, An Analysis of Manpower Situation in YAR (December1976) -217-

Table 1.5: MODERN SECTOR NON-FARM EMPLOYMENT, 1975

Economic Sector

Agriculture 200 Mining and Quarrying 51 Manufacturing 8,473 Electricity, Gas & Water 870 Construction 7,950 Wholesale and Retail trade 27,570 Transport, Storage & communications 1,047 Finance, Insurance and Real Estate 1,126 Community and Personal Services 5,422

Total Private Sector 52,709 l/ Total Government Sector 31,315

GRAND TOTAL 84,024

1/ In the cities of Sana'a, Taiz, Hodeidah, Ibb and Dhamar.

Source: CPO, 1975 Manpower Survey (May 1976) Table 1.6: GOVERNMENTEMPLOYEES BY MINISTRIES, GOVERNORATESAND SEX (1975)

TOTAL Sana'a Taiz Hodeidah Ibb Damar Hajja Saada Beida Mahweet Mareb M F T

Offices of the President 700 - - _ _ _ _ - _ - 682 18 730 & Prime Minister Interior 1/ 11,615 - - 11,615 - 11,615. Justice 364 128 83 112 61 121 62 22 28 - 986 - 986 Education 1,452 934 639 373 221 321 76 81 86 55 4,147 291 4,438 Health 907 581 381 144 79 70 17 20 - - 1,783 416 2,199 Agriculture 189 68 158 13 - - - 1 - - 420 9 429 Public Work 592 413 292 19 4 15 - - - - 1,321 14 1,335 Municipalities 826 319 608 146 56 64 13 47 18 5 1,833 269 2,102 Communications 816 264 181 124 47 45 29 7 - - 1,484 29 1,513 0 Local Administrations 187 178 78 190 67 102 96 34 34 18 976 2 978 Information 291 75 11 6 3 2 1 3 - - 385 7 392 Foreign Affairs 187 ------176 11 187 Economy 123 14 13 3 ------150 3 153 Finance 1,186 500 426 275 148 305 159 75 56 24 3,141 13 3,154 Supply 87 39 42 10 11 15 3 3 9 - 217 2 219 Social Affairs 100 15 8 6 ------129 - 129 Waqf 75 46 30 74 13 9 11 - - - 258 - 258 Central Planning organization 140 ------128 12 140 Central Bank of Yemen 240 54 53 15 10 5 7 4 - - 328 60 388

TOTAL 20,077 3,628 3,003 1,510 714 1,279 474 297 231 102 30,159 1,156 31,315

1/ Nc regional distribution of employment available

Source: CPO, 1975 Manpower Survey (May 1976) -219-

Table 1.7: EDUCATIONALSTANDARDS OF GOVERNMENT EMPLOYEES(1975)

Government Employees Total Males Females

Illiterate 5,160 4,518 642

Informal Education (read and write) 21,178 21,106 72 Primary Education 1,584 1,425 159 Preparatory Education 1,162 1,062 100 Secondary Education 1,284 1,115 169 Post Secondary Educ'n 256 251 5 College or University Degree 691 682 9

TOTAL 31,315 30,159 1,156

Source: Central Planning Organization, 1975 Manpower Survey, (May 1976). Table 1.8: MANPOWERDEMAND BY SECTOR AND SPECIALIZATION DURING THE FIVE-YEAR PLAN (1976/77-1980/81)

High-Level Cadres Medium-Level Cadres Basic-Leval Cadres Technical Agricul- Techni- and turists & Medicine cal General Engi- Veteri- and Assis- Secondary Skilled Unskilled neers nariarns Pharmacy Others Total tants School Total Labor Labor Total TOTAL

Agriculture 128 328 - 83 539 560 998 1,558 19,120 1,334 20,454 22,551

Mining & Quarrying 20 - - 29 49 38 52 90 238 31 269 408

Manufacturing 248 6 6 347 607 558 1,432 1,990 6,909 774 6,683 10,280

Electricity & Water 40 - - 75 115 106 294 400 559 179 738 1,253

Building & Construction 268 2 11 197 478 209 1,24S 1,454 17,168 1,325 18,493 20,425

Trade 21 - - 170 191 47 265 312 770 161 931 1,434 Transport & Communication 116 - - 233 349 672 593 1,265 2,352 605 2,957 4,571 Finance &

Banking 4 5 - 121 130 11 157 168 231 - 231 529 Education 21 75 - 1,622 1,718 5,696 - 5,696 32 604 636 8,050 Health - - 233 62 295 1,142 76 1,218 2,469 22 2,491 4,004

Social Affairs - - 1 158 159 50 94 144 259 - 259 562 Information &

Culture 16 - - 274 290 70 132 202 458 27 485 977 Public Administration 2 - 2 944 948 360 2,251 2,611 3,429 19,278 22,707 26,266

TOTAL 884 416 253 4.315 5.86678 95519 7.58 .34 78.334

Source: CPO, First Five-Year Plan, 1976/77-1980/81. -221- 1 of 2 pages

Table 1.9: MANPOWER DEMAND AND SUPPLY DURING THE PLAN PERIOD (1976/77 - 1980/81)

Domestic Balance Demand Supply (Deficiencies)

I. High-Level Cadres

Engineers 884 345 539 Agricultural Sciences 360 146 214 Veterinary Sciences 56 6 50 Medicine & Pharmacy 1/ 253 253 - Natural Sciences 1/ 507 291 216 Economics & Commerce 1/ 1,461 1,126 335 Social Sciences 1/ 2,008 1,434 574 Other Sciences 339 7 332

Total High-Level Cadres 5,868 3,608 2,260

II. Medium-Level Cadres

(i) Technical Assistants: Mechanical 343 2 341 Chemical 184 2 182 Electrical 388 57 331 Civil Engineering 422 13 409 Agricultural & Veterinary 294 2 292 Health 1,249 773 467 Others 2/ 6,639 2,985 3,654

Total 9,519 3,834 5,685

(ii) Technical & General Secondary Schools Graduates: Industrial 2,542 481 2,061 Agricultural 919 69 850 Commercial 871 325 546 General 3,257 3,257 _

Total 7,589 4,132 3,457

Total Medium-Level Cadr,c. 17,108 7,966 9,142 -222- 2-of 2 pages

Table 1.9: MANPOWERDEMAND AND SUPPLY DURING THE PLAN PERIOD (1976/77 - 1980/81)

Domestic Balance III. Basic-Level Cadres Demand Supply (Deficiencies)

(i) Skilled Labor: Production 22,474 17,247 5,227 Mechanical 1,953 951 1,002 Electtical 1,094 1,094 Construction 13,535 480 13,055 Drivers 3/ 5,976 - 5,976 Health Care 1,474 1,164 310 Public Administration 4,821 4,765 56 Services 2,667 1,910 757

Total 53,994 27,611 26,383

(ii) Unskilled Labor 24,340 24,083 257

Total Basic-Level Cadres 78,334 51,694 26,640

Total, All Cadres 101,310 63,268 38,042

1/ The balance for each profession does not indicate the exact high-level cadres needed because the numbers are aggregates and, therefore, do not show shortages in some specialties and excess in others.

2/ Mainly includes primary and secondary schools teachers.

3/ Includes drivers of all kinds of automotive engines such as trucks, buses, cisterns, tractors, cement mixer, etc. It is unlikely that no drivers can be supplied domestically, in spite of emigration.

Source: CPO, First Five-Year Plan, 1976/77-1980/81 Table 2.1: GROSS DOMESTIC PRODUCT At CURREr1T PRICES (YR Million)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76

Commodity Sectors 884 1,143 1,324 1,532 1,977 2,760 2,834

Agriculture, Fishing & Forestry 742 969 1,113 1,263 1,582 2,335 2,305 Industry, Mining & Electricity 66 87 109 142 213 249 302 Construction 76 87 102 127 182 176 227

Distribution Sectors 331 3(6 453 577 795 1,060 1,512

Trade 283 . 360 460 629 826 1,220 Finance & Banking 13 19 25 40 57 96 141 Transport & Communication 35 47 68 77 109 138 151

Services Sectors 184 237 314 405 488 654 835

Government 91 127 185 252 291 401 509 Housing 64 73 83 94 118 150 199 Other Services 29 37 46 59 79 103 127

GDP at Market Prices 1,399 1,746 2,091 2,514 3,260 4,474 5,181

Net Indirect Taxes 50 75 113 151 202 283 453

GDP at Factor Costs 1,349 1,671 1,978 2,363 3,058 4,191 4,728

Source: CPO and ECWA. National Accounts of YAR, 1969/70 - 1975/76 Table 2.2: GROSS DONESTIC PRODUCT AT CONSTANT 1971/72 PRICES (YR Million)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76

Commodity Sectors 1,004 1,283 1,24 1,449 1,376 1,667 1,604

Agriculture, Fishing & Forestry 832 1,091 1,113 1,208 1,091 1,401 1,305 Industry, Mining & Electricity 87 98 109 126 148 153 165 Construction 85 94 102 115 137 113 134

Distribution Sectors 388 416 453 491 513 557 677

Trade 322 337 360 386 394 411 511 Finance & Banking 21 26 25 32 41 59 75 Transport & Communication 45 53 68 73 78 87 91

Services Sectors 264 295 314 337 354 397 426

Government 146 169 185 201 212 247 271 Housing 78 81 83 86 89 92 94 Other Services 40 45 46 50 53 58 61

GDP at Market Prices 1,656 1,994 2,091 2,277 2,243 2,621 2,707

GDP Deflator (1971/72 = 100) 85 88 100 110 145 171 191

Source: CPO and ECWA. National Accounts of YAR, 1969/70 - 1975/76 Table 2.3: EXPENDITURES ON GROSS NATIONAL PRODUCT AT CURREN'IPRICES (YR Million)

1969/70 1970/71 1971/72 1972/73 1973/'4 1974/75 1975/76

Consumption 1,639 1,839 2,160 2,607 3,38 4,422 5,581

Private 1,523 1,678 1,926 2,290 3,015 3,91D4 4,900 Government 116 161 234 317 365 518 681

Gross Investment 78 259 329 499 630 1,077 1,170

Gross Fixed Capital formation 162 235 324 342 472 586 '73 Change in Stocks -84 24 5 157 158 491 :.97

Net Exports of Goods and N.F.S. -318 -352 -398 -592 -750 -1,025 -1, 70

Exports of Goods & N.F.S. 30 40 87 94 175 221 .93 Imports of Goods & N.F.S. -348 -39' -485 -686 -925 -1,246 -1J 53

GDP at Market Prices 1,399 1,746 2,091 2,514 3,260 4,474 5,1 1

Net Factor Income 220 230 293 505 528 914 2,1'7

GNP at Market Prices 1,619 1,976 2,384 3,019 3,788 5,388 7,3__

Memorandum Item

Gross Domestic Savings -240 -93 -69 -93 -120 52 -400

Gross National Savings -20 137 224 412 408 966 1,757

Source: CPO and ECWA, National Accounts of YAR, 1969/70-1975/76 and balance of payments data (Table 3.1) Table 2.4: GROSS INVESTMENT AT CURRENT PRICES (YR Million)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76

Agriculture -117 .35 50 123 90 482 313 Fixed Capital Formation -17 30 87 27 27 95 106 Change in Stock -100 5 -37 96 63 387 207

Industry 11 15 16 28 37 47 61 Fixed Capital Formation 7 9 10 18 23 35 51 Change in Stock 4 6 6 10 14 12 10

Construction 4 4 5 10 . 4 25 Fixed Capital Formation 1 1 1 2 .2 6 10 Change in Stock 3 3 4 8 17 -2 15

Transport & Communication 48 64 67 73 124 153 233 Fixed CaDital Formation 47 62 63 72 120 149 232 Change in Stock .1 2 .4 1 4 4 1

Housing 111 99 128 183 250 235 286 Fixed Capital Formation 111 99 128 183 250 235 286 Change in Stock - - _ _ _ _

Other Sectors 21 42' 63 82 110 156 252 Fixed Capital Formation 13 34 35 40 50 66 88 Change in Stock 8 8 28 42 60 90. 164

TOTAL 78 259 329 499 630 1.077 1,170 Fixed Capital Formation 162 235 324 342 472 586 773 Change in Stock -84 24 5 157 158 491 397

Memorandum Items Gross Public Investment 77 117 .36 161 234 247 356 Gross Private Investment 1 142 i94 338 396 830 814

Source: CPO & ECWA, National Accounts of YAR, 1969/70-1975/76 ,227_

Table 3.1: SUMMARYBALANCE OF PAYMENTS (YR million)

Fiscal Years Ending June 30 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

1. Trade Balance -391 -539 -811 -1,105 -1,666 Z3.L0Q Exports f.o.b. 42 34 62 58 55 84 Imports c.i.f. -433 -573 -873 -1,163 -1,721 -3,284 (Government) (-85) (-73) (-159) (-163) (-269) (-292) (Private) (-348) (-500) (-714) (-1,000) (-1,452) (-2,992)

2. Service Balance -7 -53 85 135 196 197

3. Private Transfers,Net 293 505 504 859 2,057 3,791 Receipts1/ 328 564 595 1,013 2,363 4,561 Payments 35 59 91 154 306 770

4. Current Account Balance -105 -87 -222 -111 587 788 (1 + 2 + 3)

5. M< Capital, Net 174 105 277 566 712 659 Official Grants 74 67 148 419 513 470 Official Loans, Net 100 38 129 147 199 189 (Disbursements) (129) (58) (144) (164) (213) (208) (Repayments) (-29) (-20) (-15) (-17) (-14) (-19)

6. Other Capital,Z/Net 52 120 51 -15 -11 566 4/

7. Change in Reserves 3/ -121 -138 -106 -440 -1,288 -2,013 (increase= -)

1/ Largely workers¶remittances.

2/ Including errors & omissions.

3/ Held by Central Bank of Yemen; excludingbalances with Central Bank of Egypt.

4/ Largely net borrowingsby private banks.

Source: Central Bank of Yemen and IMF. -228_

Table 3.2: SUMMARYBALANCE OF PAYMENTS (US$ million)

Fiscal Years Ending June 30 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

1. Trade Balance -78 - 11 -180 -245 -370 -711 Exports f.o.b. 8 7 14 i3 12 19 Imports c.i.f. -86 - 120 -194 -258 -382 -730 (Government) (-17) (-15) (-35) (-36) (-60) (-65) (Private) (-69) (-il5) (-159) (-222) (-322) (-665)

2. Service Balance -1 -1 19 29 43 44

3. Private Transfers,Net 58 105 112 191 457 842 Receipts 1/ 65 118 132 225 525 1,013 Payments 7 13 20 34 68 171

4. Current Account Balance -21 -18 -- -25 130 175 (1 + 2 + 3)

5. M< Capital, Net 34 22 62 126 158 146 Official Grants 15 14 33 93 114 104 Official Loans, Net 19 8 29 33 44 42 (Disbursements) (25) 12) (32) (37) (47) (46) (Repayments) (-6) (-4) (-3) (-4) (-3) (-4)

6. Other Capital,!./Net 11 25 11 -3 -2 126

7. Change in Reserves3/ -24 -29 -23 -98 -286 -447 (increase= -)

1/ Largely workers' remittances.

2/ Includingerrors & omissions.

3/ Held by Central Bank of Yemen; excluding balances with Central Bank of Egypt.

4/ Largely net borrowingsby private banks.

Source: Central Bank of Yemen and IMF. Table 3.3: COMMODITY COMPOSITION OF RECORDED EXPORTS (YR thousands)

Fiscal Years ending June 30 71/7? 72/73 73/74 74/75 75/76 76/77

Agricultural 22,703 23,693 51,648 41,982 41,582 43,205 Raw Materials Cotton 10,799 12,891 37,053 30,954 24,583 24,953 Cotton Lint ( 9,912) (10,785) (35,180) (28,188) (94,?21) (24,593) Cotton Seeds (887) (2,036) (1,873) (2,766) (362) (-) Coffee 5,534 5,469 6,461 4.972 7,588 10,223 Hides& Skins 3,2721 3,325 6,941 14,404 8,o40 6,129 Dried Fish 58 382 781 736 325 56 Live Animals 341 768 643 4143 6 _ Potatoes 239 394 195 141 135 17 Fruits 66 224 143 116 164 26 Tob cco 25 44 74 172 389 668 Others 2,370 266 57 44 359 1,133

Processed Agricultural 100 1,143 1,896 3,453 4,322 5,640~ Products '0 Cotton Products 100 317 325 1,590 1,384 637 Fabrics - - - (1,193) (775) (165) Sheets (100) (317) (325) (257) (609) (472) Yarn - - - (140) (-)

Bisauits 636 1,315 1,'31 9,093 3,156 Confectionery - 119 54 582 845 724 Oil Seed Cakes 71 20? 150 - 1,123

Non-AgriculturalExports 1,898 433 1,838 7,531 4,159 1,689

Salt 1,419 27 26 - 1 _ Metal Scrap 247 102 356 9 343 - Others 239 304 1,456 7,52? 3,815 1,689

TOTAL 24,701 25,269 55,382 52,966 50,063 50,534

Source; Central Bank of Yemen. Page 1 of 2

Table 3.4: COMMODITY COMPOSITION OF PRIVATE IMPORTS (YR million)

Fiscal Years ending June 30 71/72 72/73 73/74 74/75 75/76 76/77

Foodstuffs: 93.- 181.5 367.3 422.9 748.6 879.6

Cereals & Products 45.0 74.3 154.4 165.1 ?35.1 296.7 Sugar & Products 20.7 40.8 101.7 119.4 242.1 166.6 Fruits & Vegetables 9.1 18.6 32-3 43.5 70.4 180.4 Margarine & Edible Oils 9.6 22.3 33-8 4O.5 95.0 75.3 Coffee, Tea, & Spices 5.9 16.4 23.4 24.7 48.1 29.1 Dairy Products & Eggs .? 7.3 1)4.6 20.4 34.6 69.5 Meat & Live Animals 0.3 0.7 0.7 2.2 13.3 44.3 Fish & Fish Products 0.3 1.1 5.6 4.6 7.1 16.7 Others 0.1 .. 0.8 1.8 9.9 1.0

Tobacco & Beverages 8.7 14.1 13.1 29.1 44.4 52.2 Tobacco & Products 7.9 13.7 T7' 27.9 43.0 45.8 Beverages 0.8 0.5 o.6 1.? 1.4 6.4

Manufactured Consumer Goods: 23.7 61.8 114.1 151.3 271.? 425.9

Textiles 11.1 27.5 48.7 75.4 142.3 171.4 Clothing 3.2 10.4 22.7 ?9.5 51.0 94.1 Footwear 3.4 7.3 11.3 11.6 32.9 31.6 Soap & Cosmetics 3.3 9.4 20.3 20.7 22.9 42.5 Furniture & Lighting fixtures 1.8 3.7 5.9 5.8 10.7 35.5 Watches, jewelry, photo- graphic supplies, sound recorders, toys. 0.9 3.5 5.? 8.3 12.1 50.8

Mineral Fuel, Gas, & Lubricants 12.5 19.1 33.9 36.8 82.4 61.1

Chemicals: 6.o 16.1 25.3 45.0 57.? 112.8 Medicines 10.5 T32 39.6 56.1 Fertilizers o.6 0.4 1.3 6.6 6.8 1.4 Pesticides o.6 1.? 2.1 1.9 4.o 12.4 Others 1.9 4.0 5.6 10.9 13-8 42.9 Page 2 of 2

Table 3.4: COVMDITYCONPOSITION OF PRIVATEIMPORTS (YR million)

Fiscal Years Ehding 71/79 72/73 73/74 74/75 75/76 76/77 June 30 - -

Rubber, Wood, Leather & Paper Products 11.1 16.7 33.7 52.1 70.6 186.0

Construction Materials 14-3 19.0 30.29 40.6 24.3 141.6

Cement 9.0 9.6 12.1 6.3 17.3 57.9 Iron Bars & RTods 4.1 6.6 12.° °7.8 16.0 54.6 Iron Pipes 1.? ?.8 5.9 6.5 11.0 29.1

Machinery and Ehuipment 25.° 56.5 85.9 149.6 289.6 965.6 Transport Equipment 13.5 ?7.9 2.9 70.9 191.4 527.2 Non-electricalMachines 8.3 17.9 25.9 50.? 123.5 333.4 ElectricalMachines 3.3 10.8 17.2 28.5 44.7 105.0

Other Products 9.7 . 25.9 41.5 54.3 99.9 262.7

Total Private TIports (Customsbasis) 204.4 410°.7 745.0 981.0 1708.2 3087.5

Source: Central Bank of Yemen, Annual Reports. Table 3.5: AGGREGATEIMPORTS OF GOVERNMENTAND PRIVATE ACCOUNTON A PAYMENTBASIS (YR million)

Fiscal Years &idinT 71/72 79/73 73/7 7a/75 75/76 June 30

Goverlnment Imports T?'inan3cd out of:

Grauatsin k2.~nd 7.' .L30.-0 30.0 5. Projoot, & (',)mmorLity 59.6 57.6 l'35.6 1315.24 2153.1 LT ans

Goverrnment's onip accnunt 8.G 7.5 0.9 l8.0 o.6 16364 268.9 Total Government Imports 85.2 73.5 158.5

Private Import Payments 32476 259965 71h.8 ]000.0 14152.24

Total Import Paymento ),32.9 573.0 873.3 1163-.4 1721.3

Scurce: Central Bank c,fYemen, Annual Reports. Table 3.6: GEOGRAPHICAL DISTRIdUTION OF EXPORTS (YR million) Fiscal Years ending June 30 71/7? 72/73 73/74 74/75 75/76 76/77

Arab Countries 7.85 8.47 7.89 13.98 13.13 17.17 PDR of Yemen -6.2 T1.7 -3 6.35 TT37.49 12.59 Saudi Arabia 1.06 3.41 3.59 2.54 4.59 4.51 Somalia 0.01 .. .. 4.90 0.09 Egypt .. 0.02 .. 0.03 - Others 0.36 0.56 0.47 0.16 0.02 0.07

Asian Countries 11.t48 12.71 35.9? 29.86 24.90 25.54 Japan 1.30 o.67 6.96 7 96 0.15 0.20 China PR 9.91 11.72 3.00 22.09 24.63 24.94 Singapore - 0.31 5.93 0.51 0.1? _ Others 0.27 0.01 0.03 - -

African Countries o.68 0.82 0.97 0.92 0.77 0.85 Djibouti 0hj0 0.76 o.4s -0-.7 O.53 o 85 Others - 0.06 0.48 o.49 o.?4h

EEC 1.30 1.o6 8.16 6.83 10.55 7.08 ' Italy 1.13 0.91 4.96 4.34 .67-9 5.99 Germany FR 0.02 0.03 0.15 1.26 0.33 0.43 Netherlands 0.08 0.01 0.10 0.85 0.37 0.60 FFance - 0.02 2.79 0.32 0.69 0.06 UK 0.05 0.03 0.11 0.09 0.47 - Belguim - 0.07 0.06 0.0? - Others in EEC 0.02 - - -- -

Other 3urope 0.96 0.53 0.94 0.06 0.07 0.08 Greece 062 - - - Switzerland 0.10 0.36 0.09 - _ Norway - 0.12 O.8'? 0.06 0.07 0.08 Malta 0.?3 0.05 - -- - Other - - 0.03 -

COMECON ?.42 1.67 1.°4 1.01 - USSR 2.14? 1777.24 1.01 -

western Hemisphere 0.02 0.01 0.27 0.26 0.64 0.22 0.0? 0.01 0.27 0. 0.22

TOTAL 24.70 25.27 55.38 52.97 50.06 50.53

NB: Totals may not add up because of rounding.

Source: Central Bank of Yemen, Annual Reports. Table 3.7: GEOGRAPHICALDISTRIBUTION OF IMPORTS Page 1 of 2 (YR million)

Fiscal Years ending June 30 71/72 72/73 73/74 74/75 75/76 76/77

Arab Countries 57.45 95.35 131.27 149.99 238.55 576.21 Saudi Arabia 10.52 29.62 36.30 575 118.85 374.28 PDR of Yemen 34.55 36-83 42.43 47.24 84.30 138.66 Fgypt 8.99 17.09 18.09 18.92 16.11 8.08 Sudan 0.30 4.38 14.00 5.27 0.07 7.54 Iraq 1.99 2.13 14.31 5.28 2-56 3.94 Lebanon 0.37 2.o5 0.89 3.12 3.53 0.40 Others 0.73 3.25 5.25 13.41 13.13 43.31

Asian Countries 42.44 130-03 221.70 388.64 702.31 1,076.00 Japan 197T5 59.99 170.71 239.59 409.97 PR of China 5.57 21.46 30.87 114.09 139.36 134.47 India 2.13 9.25 15.10 27.06 146.95 178.22 Singapore 5.88 9.99 22.34 26.06 57.77 143.62 Hongkong 2.35 11.09 26.74 24.80 43o33 53.84 Sri Lanka 2.79 11.04 13.84 9.31 36-24 14.78 Pakistan 1.89 6.12 7.46 8.13 6.89 16.71 Thailand 1.10 0.17 3.35 6.69 4.45 1.21 Others 0.21 o.o8 5.12 1.46 27.73 123.18

African Countries 7.07 27.52 93.37 68.89 138.25 198.72 Djibouti 7.7 20.40 39.55 2B.91 77-1T 129.27 Ethiopia 1.50 5.22 40.32 28.35 34.07 17.97 Kenya 0.58 1.80 12.82 12.17 19.75 51.44 Others 0.15 0.10 o.68 0.16 7.30 0.40

EEC, 51.60 97.86 202.50 222.19 406.44 737.60 Netherlands 4.16 9.74 35.93 37.42 105.B0 109.45 F1 19.88 22.02 26.75 49.67 89.96 169.57 FR o Genrma- 6.72 25.64 38.52 59.4^ 80.25 177.35

((;ont)inuei Table 3.7: GEOGRAPHICALDISTRIBUTION OF IMPORTS Page 2 of 2 (YR million)

Fiscal Years ending June 30 71/72 72/73 73/74 74/75 75/76 76/77

France 12.60 25.24 49.59 29.58 56.06 117.01 Italy 7.31 10.90 23.58 24.96 40.86 121.88 Belguim 0.56 4.15 27.25 19.59 26.76 21.88 Others 0.37 0.17 0.88 1.55 6.75 20.46

COMECON 15.40 15.14 32.71 63.14 47.62 88.36 USSR 8.45 10.47 21.087 50.90 29.37 41.76 Czechoslovakia 5.74 3.22 6.71 10.30 9.25 12.23 Romania 0.08 o.63 2.64 0.07 565° 22.71 Others 1.13 0.82 2.28 1.87 3.50 11.66

Other Europe 0.43 1.61 5.66 3.89 16.36 109.64 Switzerland 0.12 0.36 0.44 1.82 475 5.48 Sweden 0.28 0.20 1.43 o.63 2.38 22.79 Greece .. .. 0.15 0.10 2.10 24.13 Others 0.03 1.05 3.64 1.34 7.13 57.24

North America 1.08 4.81 18.81 38.85 21.84 84.73 USA 1.08 4.78 15.15 22.14 21.83 83.97 Canada - 0.03 3.66 16.71 0.01 0.76

South America - 11.37 7.59 - 0.03 1.01 Argentina - 11.37 7.59- - - Others - - - - 0.03 1.01

Australia & New Zealand 28.57 26.94 29.60 44.17 133.86 160.06 Australia 26-94 29.60 44.1717 133-30 160.06 New Zealand - - - 0.56 -

Others 0.37 0.06 0.83 0.25 _

Grand Total 204.43 410.67 744.98 981.00 1,706.89 3,032.33

Source: Central Bank of Yemen, Annual Reports. -236-

Table 3.8: SERVICE RECEIPTS AND PAYMENTS (YR million)

Fiscal Years Ending June 30 1973/74 1974/75 1975/76

InvestmentIncome Receipts 29.1 60.6 104.9 Payments -4.8 -6.3 -5.4

Transportation Receipts 14.0 24.2 33.7 Payments - .8 -5.7 -6,1

Travel and Tourism Receipts 9.5 15.2 30.0 Payments -10.7 -19.2 -24.0

Other Servicesi/ Receipts 89.3 123.6 174,2 Payments -40.9 -57.8 -111.4

Total Services2/ Receipts 141.9 223.6 342.8 Payments -57.2 -89.0 -146.9 Net Receipts 84.7 134.6 195.9

1/ Mostly governmentn.i.e.

2/ Excludingworkers' remittances.

Source: Central Bank of Yemen and IMF estimates. Table 3.9: TECHNICAL ASSISTANCE RECEIVED (YR Million)

Fiscal Years Ending June 30 1973/74 1974/75 1975/76 Fellow- Equip. Fellow- Equip. Fellow- Equip. Experts ships & Sup. Total Experts ships & Sup. Total Experts ships & Sup. Total

Education 33 3 8 44 35 6 6 47 41 5 7 53

Public Health 18 - 3 21 21 1 4 26 25 - 3 28

Public Administration 5 - 3 8 10 - 5 15 13 - 4 17

Agriculture 15 0 1 16 19 - 1 20 20 1 - 21

Construction 8 - 2 10 11 - 2 13 14 - 2 16

Industry 8 - 1 9 8 - - 8 9 - - 9

Transport & Communications 1 - - I 1 1 2 4 4 - - 4

TOTAL 88 3 18 109 105 8 20 133 126 6 16 148

Source: Unpublished data provided by the Central Planning Organization. -238-

Table 3.10: OFFICIAL LOANS AND CREDITS (YR million)

Fiscal Year Ending June 30 1973/74 1974/75 1975/76 1976/77

Disbursementson Project and CommodityLoans 125 115 213 Cash Loans 19 49 Total Disbursements 144 164 213 of which from: MultilateralLoans 6 68 113 IDA (6) (19) (59) Arab Fund .. (49) (54) BilateralLoans 138 96 100 Arab Countries (43) (16) (36) CMEA Countries (12) (7) (36) PR of China (22) (29) (8) FR of Germany (61) (44) (20) Others ..

Total Repayments 15 17 14 of which to: MultilateralAgencies Arab Countries 14 13 9 CMEA Countries 0 1 2 PR of China .. FR of Germany .. 2 2 Others 1 1 1

Net Drawings 129 147 199

Source: Central Bank of Yemen. Table 3.11: CENTRAL BANK RESERVES (YR million)

End of Fiscal Year, June 30 1971 1972 1973 1974 1975 1976 1977

Convertible Reserves 35.7 157,6 295.4 401.0 841.4 2,129.4 4,141.9

SDRs 5.3 11.6 11.6 11.6 11.6 11.6 11.6 Reserve Position in IMF 7.5 8.1 13.8 13.8 14.1 13.1 24.0 Gold, Silver & Convertible Currencies in Hand 0.2 0.2 0.3 0.7 1.1 1.1 4.5 Convertible currency balances and securities abroad 22.7 137.7 269.7 374.9 814.6 2,103.6 4,101.8

Balances with the Central Bank of Egypt in Sterling Account 364.2 344.1 322.1 286.2 252.8 207.4 188.8

Source: Central Bank of Yemen and IMF. Table 4.1 EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUN. 30, 1977

INCLUES C#LY CEBT CCMMITTEC JAN. 1, 190C - JUN. 30. 1977 DEBT REPAYABLE IN FOREIGN CURRENCY AFC GCOOS (IN THGUSANOS OF U.S. OCLLARS)

_ E 8 T O U I S T A N D I N G : I N A R R E A R S TYPE CF CRECITCR ______CREDITCR COUNTRY DISBURSED :UNCISBURSED: TCTAL . PRINCIPAL 5 INTEREST

SUPPLIERS CREDITS - GERPANY, FEO.tEP. OF 2,430 - 2,430 - - ITALY 270 - 270 - TOTAL SUPPLIERS CRECITS 2,700 - 2,700 - -

MULTILATERALLCANS ARAP FUND EC SOC CEV 22,500 33.931 56,431 - a - ICA 35,300 74,450 1099750 OPEC FUNC 1,125 1,125 2,250 - - TOTAL MULIILATERAL LEANS 589,25 IC9.506 168,431 - -

BILATERAL LCANS ABU OHABI 1,610 5,700 11.310 - - ALGERIA 4,000 1,000 5,000 - - CHINA, P.R. CF 47,07C 31.821 71,891 2,925 - g GERMAN DEN. REP. 5,847 1,163 71,G10 2.123 - GERPANY, FED.REF. OF 63,777 11,622 75,399 - - IRAQ 5,828 15,351 21,179 - - KUWAIT 25,580 S,410 34,S90 2,000 130 NETHERLANDS - 71280 7,280 - - SAUCI ARAEIA - IC,160 10,160 - - UNlIEO STATES - 1,360 1,360 - - USSR 16,240 25,063 105,303 169704 30 TCTAL BILAFTERAL LCANS 2299952 127,930 357?E82 23,752 160

TOTAL EXTERNAL PUBLIC DEeT 291,577 231,436 529,C13 23,152 160

NOTES: (1) CNLY DEBTS I17H AN ORIGINAL OR EXTENDED MATURITY OF CVER ONE YEAR ARE INCLUDED IN THIS TABLE. ------r21-DEBT-OUTSTANOING INCLUDES PRINCIPAL IN ARREARS BUT EXCLUDES INTEREST IN ARREARS. Table 4.2: SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUN. 30, 1977

INCLUDES CNLY CEB1 CCMMIITED JAN. 1, 190C - JUN. 30, 1S77 DEBT REPAYABLE IN FOREIGN CURRENCY ANC GCUDS llN THCUSANDS CF U.S. COLLARS) ICTAL YEAR : DEeT OUTSTANDING Al 1 R A N S A C T I 0 N S C U R I N G P E R I 0 D OTHER CHANGES : BEGII"NIKG CF PERICC :

: DISBURSED : INCLUDIhG : CCNMIT- : DISBURSE- : S E R V I C E P A V M E N T S : CANCEL- 3 ADJUST- : ONLY :UNDISELRSEC: PENTS : PENTS - ---- :------:------: LATIONS : HENT : : : : PRINCIPAL : INTEREST : TOTAL 5 s 2 ( :s1) (2) (3) : (4) : (5) : (6) : (7) t 11 * (9I

1969 - 4,COO - - - - - _ 1970 - 4,000 ------1971 - 4,CCC ------1972 - 4,000 7,70C 230 - - - - 1973 230 11,700 32,213 24,747 6,013 743 6,156 - 283,172 1974 182,307 321,C72 56,353 56,977 8,6E5 707 9,572 - 6,329 1975 235,65S 374,889 71,296 22,606 2,986 773 3,759 - -6,209 1976 249,978 436,S9C 86,033 43,139 4,123 1,122 5,245 23,922 7,779 1977-1 274,439 502,751 31,705 22,747 1,508 444 1,952 - -3,941 1577-2 291,577 529,C13

^ * * * *4* THE FCLLCWING FIGURES ARE PRLJECTEOD * * * * S

1977-2 291,'77 529,C13 - 55,655 10,454 704 11,158 - -27,752 1978 30S,C26 4SC,8C7 - 39,831 17,124 1,826 18,950 - 1 1979 331,730 473,684 - 39,436 17,625 2,323 19,948 - - 1980 353,54C 456,C5S - 31,466 20,142 2,983 23,125 - 2 1931 364,E65 435,51S - 20,215 22,896 3,925 26,821 - -1 1982 362,184 413,C22 - 19,855 22.S64 3,851 26,815 - 4 1983 359,C77 390,062 - 12,927 25,833 3,896 29,729 - - 1984 346,1e 364,229 - 8,789 28,814 3,873 32,687 - 2 1985 326,143 33',417 - 5,816 28,060 3,658 31,718 - 3 1986 303,899 307,360 - 3,461 19,ES7 3,445 23,342 - 5 1987 281,4tE 261,46e - - 20,555 3,353 23,908 - 3 1988 26t,916 266,916 - - 12,v62 3,136 15,998 - 2 1989 254,C56 254,056 - - 12,1770 2,935 15,705 - 3 1990 241,289 241,285 - - 12,274 2,734 15,008 - 3 1991 229,C18 229,C18 - - 12,274 2,536 14,810 - 1 1992 216,745 216,145 - - 12,261 2,336 14,597 - 5 1993 204,4es 204,489 - - 12,61L 2,136 14,797 - 1994 1591,28 11y,82E - - 10,760 1,941 12,701 - 6 1995 181,074 181,C14 - - 10,302 1,767 12,069 - 4 1996 17C,776 17C,776 - - 8,755 1,612 10,367 - I

* THIS COLUMN SHOWS THE APCUNT CF ARIll,ETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNOISBURSEO FRCM CNE YEAR TO THE NEXT. THE MOST COMMCh CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTS FROM ONE CATEGCRY TO ANETHER IN 1FE TABLE. Table 4.2: SERVICE PAYMENTS, CONMITEMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUN. 30, 1977

INCLUDES ChL* OE8T CCPHITTEC JAN. 1, 1900 - JUN. 30, 177

FCTACTE: OUETS EXCLUCEC BECAUSE REPAYMENT TERMS UNKNOWh.

YEAR s CEET CUTSTANOING AT 3 8EGIVhING CF PERICO

s OISEUPSED 2 IbCLUCING Os LY SUNDISBURSED

1977-2 .000 4,000

* THIS COLUMN SHOWS THE AMOUNT CF ARIlHMETIC IMBALANCE IN THE ANCUNT OUTSTANDING INCLUDING UNDISOURSED FROM ONE YEAR TO THE NEXT. THE POST COMCPN CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTS FROM ONE CATEGCRY TG ANClHEP IN lIE lABLE. -243-

Table 5.1: SUMMARY OF WOVERNMENT FINANCES (YR Million)

Actuals Fiscal Year Ending June 30 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

Domestic Revenues-/ 97.4 151.3 199.0 276.8 381.1 564.5 1292.8 Tax Revenue 73.6 122.9 158.4 227.4 301.1 498.3 1074.4 Nontax Revenue 23.8 28.4 40.6 49.4 80.0 66.2 218.4

Current Expenditurel1/ 170.7 228.3 271.5 322.5 472.3 603.5 841.0 Defense and Public Order and Safety 92.6 105.2 136.4 187.1 269.3 363.1 524.0 Health and Education 14.5 17.9 26.6 30.7 43.8 68.7 92.9 Other 63.6 105.2 108.5 104.7 159.2 171.7 224.1

Balance on Current Operations - 73.2 - 77.0 - 72.4 - 45.7 - 91.2 - 39.0 451.8

Development Expenditures 83.2 55.8 56.9 139.3 184.7 339.9 462.5 Finance by External Loans.d 83.2 55.8 56.9 125.6 115.4 213.1 188.1 Budgeted ... .;. ... 13.7 69.3 126.8 274.4

Overall Deficit (-) - 156.4 - 132.8 - 129.3 - 185.0 - 275.9 - 378.9 10.7

Financing of Deficit 156.4 132.8 129.3 185.0 275.9 378.9 10.7

External Financing (Net) 119.2 170.6 116.5 238.5 536.3 609.0 606.1 Commodity and Project Loans 83.2 55.8 56.9 125.6 115.4 213.1 188.1 Cash Loans 36.0 59.4 0.8 18.8 48.9 30.4 19.5 Less Repayments ...... - 15.1 - 16.9 - 14.1 - 19.4 Cash Grants n. a. 55.4 58.8 109.2 388.9 379.6-/ 417.9

Domestic Financing (Net) Increase in Deposits (-) 37.2 - 37.8 12.8 - 32.0 - 231.3 - 245.0 - 531.9 Central Bank 32.7 - 39.8 31.3 -468 -210.4 - 257.7 -484.7 Commercial Banks 4.5 2.0 - 18.5 14,8 - 20,4 12.7 - 47.2

Statistical Adjustment- ...... - 21.5 - 29.1 14.9 - 63.5

1/ Excludes grants for budgetary support from revenues, and loan repayments from expenditures. 2/ Equals drawings on commodity and project loans. 3/ Includes part of the arrears on loans contracted in the late 1950s and early 1960s. 4/ Differs by about YRls 78.4 million from the figures given for the balance of payments, as this amount was not allocated to budgetary accounts. 5/ Deposits as reported by the Central Bank to IMF Data Fund; they exclude a foreign currency time deposit of the Ministry of Education associated with an external loan (about US$8-US$9 million), and also exclude Central Bank profits allocable to the Government as of June 30. 6/ Reflects lags in recording, exchange rate valuation adjustments associated with external financing and other errors and omissions.

Sources: Ministry of Finance and Central Bank of Yemen. -244-

_Table 5.2: GOVERNMENT REVENUES (YR Million) Actuals Fiscalyear endingJune 30 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77

Tax revenue 73.6 123.6 158.4 227.4 301.1 498.3 1,074.4

Taxes on incomeand profits 2.2 3.3 6.9 19.0 16.9 24.0 40.3 Tax on wages and salaries 1.8 1.9 2.9 9.7 4.6 8.4 15.6 Tax on commercialand industrial profits -- -- 6.4 10.4 12.8 21.7. Tax on monopoly profits 0.3 1.2 3.1 0.8 0.4 - -- Tax on rentalincome 0.1 0.2 0.9 1.3 1.3 2.1 2.3 Other ------0.8 0.2 0.7 0.7

Taxes on goods and services 10.1 19.7 22.4 27.9 38.7 46.0 38.2. Selectiveexcises on goods 8.1 15.9 19.6 21.5 30.9 34.0 2T6. Tobaccoand cigarettes n.a. (0.8) (2.0) (2.6) (2.2) (5.0) (4.1) Petroleumproducts (8.1) (14.6) (17.5) (18.0) (27.9) (28.0) (21.2) Soft drinks n.a. (0.5) (0.1) (0.8) (0.8) (1.0) (1.5) Selective taxes on services -- 0.5 0.2 1.0 0.6 0.8 0.7 Transporttax -- n.a. n.a. (0.6) (0.2) (0.4) (0.1) Cinematax -- n.a. n.a. (0.4) (0.4) (0.4) (0.6) Motor vehicletaxes 2.0 3.3 2.6 3.0 3.6 6.7 9.5 Other taxes -- - -- 2.4 3.6 4.5 1.2-

Taxes on internationaltrade 52.7 77.0 113.0 155.5 222.2 394.0 928.9 Importduties and taxes 52.7 75.8 112.0 155.2 222.0 393.2 928.6- Customs duties (35.3) (55.7) (82.0) (108.9) (160.6) (283.0) (675.0) Defensetax (11.8) (11.8) (19.5) (31.9) (43.8) (76.7) (176.0) Statisticaltax (5.6) (5.5) (9.0) (12.6) (16.5) (30.7) (68.9)

Other -- (2.8) (1.5) (1.8) (1.1) (2.8) (8.7) Export duties and taxes -- 1.2 1.0 0.2 0.2 0.8 0.3

Other taxes 8.6 23.4 16.1 24.9 23.3 34.3 67.0 Religious taxes (Zakat) 7.2 10.7 11.9 15.7 14.7 21.0 32.8 Agricultural Zakat (4.7) (6.7) (6.4) (8.0) (8.4) (13.5) (22.6) Cattle Zakat (0.6) (0.8) (0.8) (1,1) (1,4) (1,0) (2.3) Wealth Zakat (0.3) (1.0) (1.7) (2.1) (0.8) (1.7) (3.6) Poll Zakat (1.6) (2.2) (3.0) (4.5) (4.1) (4.8) (4.3) Stamp taxes -- 0.7 4.2 9.2 8.6 13.3 34.2

Nontax revenue 23.8 28.4 40.6 49.4 80.0 66.2 Property income 3.2 6.1 9.6 15.8 38.5 39.3 157.2 Administrative fees and charges 20.6 22.3 31.0 27.5 33.8 15.6 47.1 Fines and forfeits n.a. n.a. n.a. 2.8 3.3 9.4 14.1 Other 1/ ------3.3 4.4 1.9 --

Total revenue 2/ 97.4 151.3 199.0 276.8 381.1 564.5 1,292.8

1/ Includes small maounts of "capital revenues" derived from the sale of property. These amounted to YRls 1.6 million and YRls 1.5 million in 1973/74 and 1974/75, respectively. 2/ Excludes grants for budgetary support.

Source: Ministry of Finance. Teble 5.3: GOVERlNMENTEXPRlDITURES (YR 9Milliae)

1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 Cr 7Di737_ Curret De-lope-t Curet Oeveiejent Current DnvIlpinet Curret DveInpeent Fiscal Year Ending June 30 Total Tatel Tatel Expenditure Expenditure Tatel Expenditure Kcpenditare Tatel Expenditure Expenditure Tatal Expenditure Expenditure Tatel

Generel Ad1Pbli S-etie 71.93/ 116.13/ 139.22/ 108.6 8.4 117.9 184.3 46.9 231.1 184.4 56.7 241.5 A35. 93.6 328.9 G-1eral Adei.i.tt.tion 57.9- 97.6- 10i.0- 77.7 7.0 84.7 122.7 44.0 166.7 119.7 45.5 165.2 141.8 77.6 219.4 Public Order -ad Sefoty 13.9 18.5 38.2 30.9 1.4 32.3 61.6 2.8 64.4 65.1 11.2 76.3 93.5 16.0 109.5

Defense 78.8 86.6 98.6 156.2 ___ 156.2 207.7 11.0 218.7 298.0 29.2 327.2 430.5 58.4 488.9

Educ tion 10.0 10.7 17.2 18.0 0.6 18.6 27.5 2.6 30.1 46.6 8.6 55.3 63.3 32.7 96.0

Pealth 4.5 7.3 9.4 12.7 0.4 13.1 16.3 1.0 17.3 22.1 3.3 25.4 29.6 7,9 37.5

Co,nitv hbd Social Servicee n.. n.e. n.e. 7.2 0.5 7.7 8.5 2.5 11.0 14.5 4.5 19.0 17.0 12.3 25.3 Recrestion-l and Related Activities c.a n.a. 0.6 --- 0.6 1.3 0.3 1.6 3.2 1.4 4.6 7.1 4.9 12.0 Bro-d..sting, Press end Infer-setion n.e. n.a. n.a. 4.0 0.1 4.1 4.6 1.4 6.0 7.5 3.1 10.6 5.5 2.2 7.7 Religion n.a. n..a. 2.6 0.4 3.0 2.6 0.8 3.4 3.8 --- 3.8 4.4 5.2 9.6

Econenie Servieca 3.6 7.6 7.4 8.6 3.7 12.3 24.0 4.9 28.9 34.0 24.5 5.5 54,7 69_ 124.2 Agriculture n.e. v.a. n.e. 1.6 0.1 1.7 2.1 1.6 3.7 2.7 4.6 7.3 4.0 15.1 19.1 N) Mining n.e. n.e. n.e. ------0.2 --- 0.2 0.4 --- 0.4 0.7 0.2 0.9 48 Construetien 2.9 3.8 4.4 1.2 0.7 1.9 1.4 0.9 2.3 18.4 9.1 27.5 33.2 37.2 70.4 Ul Tranuport and Coeuaicetioa 1.6 3.8 3.2 5.2 2.9 8.1 6.8 2.2 9.0 11.1 10.7 21.8 14.9 15.8 30.7 Touriss n.e. n.a. n.e. 0.1 --- 0.1 0.2 0.1 _ 0.3 0.2 --- 0.2 - - - CEserce n.e. n.e. n.e. 0.5 --- 0.5 1.0 --- 1.0 1.2 0.1 1.3 1.9 1.2 3.1 Other n...... ------12.3 --- 12.3 ___ - - -

Usslloceble end Other Purrones 1.4 n.a. n.e. 11.2 _____ 11.2 4.0 0.6 4.6 3.5 -_-- 3.5 10.6 _10. Pu,lic Debt Intetret ... 3/ n.-. n.e. 4.5 --- 4.5 2.9 --- 2.9 3.5 --- 3.5 10.6 - 10.6 Otber. 1.4- n.a. n.e. 6.7 --- 6.7 1.1 0.6 1.7 ------

SubtotIas 170.7 228.3 271.5 322.5 13.7 336.1 472.3 69.3 541.6 603.5 126.8 730.4 D 41u 274. 4 1.115U

Developeet gpenditures Financed Eeterstllyl 83.2 55.8 56.9 --- 125.6 125.6 --- 115.4 115.4 --- 213.1 213.1 - 18.1 158.1

Tetel 253.9 294.1 328.4 322.5 139.3 461.7 472.3 184.7 657.9 603.5 339.9 943.5 .41jJ 662.5 1.303.5

/ Pinanced by externl comnedity end project loan. / Includee interest pey-ente, peymesst to the trihee end unsegregated relief payments end other o.tlayu related to the civil a. 3/ Includes sabseriptioy to interned anal oranisetiesse

Seurce: Mlinistry at PiFance. -246-

Table 5.4: GROSS SAVINGS OF PUBLIC AND lIxfE ENTERPRISES (YR Million)

Enterprise Capital Net Profits Depreciation Dividends Gross Savings

Y.B.R.D. a/ 10.0 - 1974 6.1 2.6 2.0 6.7 - 1975 10.7 2.6 2.0 11.3

Yemen Airways b/ 0.9 - 1974 3.2 0.5 - 3.7 - 1975 20.6 0.4 - 21.0

Yemen Petroleum Company c/ 10.0 - 1974 4.9 1.1 n.a. 6.0 - 1975 9.2 0.9 n.a. 10.1

Yemen Drug Co. 2/ 2.1 1975 1.1 0.1 n.a. 1.2

Yemen Cotton Company d/ 1.8 - 1973/74 0.9 0.03 n.a. 0.9 - 1974$75 2.6 0.03 n.a. 2.6

Yemen Cement Ind. b/ 50.9 - 1973/74 0.5 4.1 0.3 4.3 - 1974/75 3.2 3.4 1.9. 4.7

Nat'l Tobacco Company ci 5.1 - 1975 1.7 0.5 n.a. 2.2

Yemen Genl. Electric b/ 41.0 - 1975/76 3.1 1.8 - 4.9

Yemen Textile Company bi/ 17.6 - 1974 2.9 2.1 - 5.0 :. 1975 1.6 2.0 - 3.6

TOTAL (1975): 56.7 a/ Government: 51%, Private: 49% b/ Government: 100% ci Government: 40%, YBRD: 35%, Private: 25% d/ Government: 51%, YBRD: 30%, Private: 19% ei Government: 26%; YBRD: 25%, Private: 49% Table 6.1: MONETARY SURVEY (YR Million)

June 30 June 30 June 30 June 30 June 30 June 30 June 30 1971 1972 1973 1974 1975 1976 1977

Foreign Assets (net) 432.1 539.5 609.1 692.4 1,182.3 2,606,8 4,106.4 Assets 692.4 751.8 1,256.1 2,804.2 4,555.2 Liabilities -83.3 -59.4 -73.8 -197.4 448.8

Domestic credit 196.3 211,8 270.2 307.2 232.6 159.5 535.1 Claims on Government (net) 141.2 103.4 69.7 -161.6 -406.6 -939.2 Claims on nongovernment sector 55.1 108.4 168.5 237.5 394.2 566.1 1,474.3 Credit to public enterprises Jnd )(206) (31.5) (57.1) (64.8) (108,7) (102,5) (78.0) Investment in mixed enterprises ( ( Credit to private sector (34.5) (76.9) (111.4) (172,7) (285.5) (463.6) (1,396.3)

Assets - Liabilities 428.4 751.3 879.3 999.6 1,414.8 2,766.3 4,641.5

Money and quasi-money 305.2 400.7 599.0 756.3 1,141.9 2,509.1 4,370 Money 269.1 348.2 488.7 639.5 964.0 2,028.4 3,516.0 Currency outside banks (230.5) (295.7) (412.8) (543.4) (794.0) (1,680.5) (3,020.9) r Demand deposits (38.6) (52.5) (75.9) (96.1) (170.o) (347.9) (495.1) ; Quasi-money 36.1 52.5 110.3 116.8 177.9 480.7 854.4

Other items (net) 323.2 350.6 280.3 243.3 272.9 257.1 257.1

Source: CentralBank of Yemen and IMF -248-

Table 6.2: GOEPOSITION OF MONEY AND QUASI-MONEY (YR Million)

Amounts as of June 30 Changes During 1974 1975 1976 1977 1974/75 1975/76 1976/77

Currency outside banks 543.4 794.0 1,680.5 3,020.9 250.6 886.5 1,340.4 Central Bank issue 549.0 804.0 1,708.6 3,067.3 255.0 904.6 1,358.7 One, five and ten rial notes (270.5) (372.8) (363.7) (352.2) (102.3) (-9.1) (-11.5) Twenty rial notes (99.2) (166.2) (188.5) (295.2) (67.0) (22.3) (106.7) Fifty rial notes (179.3) (261.0) (730.4) (997.1) (81.7) (469.4) (266.7) Hundred rial notes (--) (--) (420.8) (1,415.7) (--) (420.8) (994.9) Coin and other 1/ (--) (4.0) (5.2) (7.1) (4.0) (1.2) (1.9) Treasury Currency 4.5 4.5 4.5 4.5 ------Less: Cash in banks -10.2 -14.6 -32.7 -50.9 -4.4 -18.1 -18.2

Nongovernment deposits 2/ 212.9 347.9 828.6 1,349.5 135.0 480.7 520.9 Demand deposits 96.1 170.0 347.9 495.1 73.9 177.9 147.2

Foreign currency deposits 16.6 23.6 60.8 70.9 7.0 37.2 10.1

Time deposits 37.3 87.4 211.0 402.9 50.1 123.6 191.9

Savings deposits 12.0 19.1 46.9 74.0 7.1 27.8 27.1

Earmarked deposits 50.9 47.8 162.0 306.6 -3.1 114.2 144.6

Money and quasi-money 756.3 1,141.9 2,509.1 4,370.4 385.6 1,367.2 1,861.3

1/ Reflects retirement of temporary issue ("supporting currency") in 1973/74 and issue of new decimal coins from 1974/75.

2/ Deposits of residents other than Government and banks with commercial banks. Central Bank holds only government and bank deposits.

'Sources: Central Bank of Yemen and IMF. l/ Table 6.3: COMMERCIALBANKS ADVANCESAND INVESTMENTS (YR Million)

December 31, June 30, June 30, June 30, June 30, June 30, June 30, 1971 1972 1973 1974 1975 1976 1977

Participation in Capital of Mixed Enterprises 9.2 10.2 13.8 15.5 18,9 9.1 14.7

Credit to Public Enterprises 17.7 28.9 38.6 40.7 70.4 65.6 59,3 Financing Exports 7.9 20.6 25.6 19.0 24.4 30.3 -- Cotton ( 7.9) ( 19.9) ( 24.8) ( 19.0) ( 24.4) ( 30.3) -- Rock Salt (.) ( 0.7) ( 0.8) -- ) ( -- -- Financing Imports (including Imports of Industrial Equipment) 4.2 4.5 3.0 16.4 38.4 34,8 __ Other 5.6 3.8 10.0 5.3 7.6 0.5 --

Credit to Private Sector 43.2 68.8 113.9 172.5 285.6 463.2 1396.3 Financing Imports 26.7 54.6 65.5 125.5 226.5 318.8 -- Financing Exports 2.4 2.2 2.5 0.9 2.1 3.4 -- Financing Trade in Locally 'Manufactured Goods ... -- -- 4.3 3.2 5.9 -- Financing IndustrialEnterprises 0.5 1.6 2.1 -- -- Financing Other Business Enterprises 7.0 7.3 28.2 28.2 38.6 74.9 Private and Professional Loans 6.6 3.1 15.6 13.5 15.2 60.2 --

OtherY ... 0.1 0.1 0.2 0.2 0.4 --

Total 70.0 108.0 166.4 228.9 375.1 538.3 1470.3

1/ Excluding advances to Government.

2/ Participation of the Yemen Bank for Reconstruction and Development in Union des Banques Arabes et Franc4ises,

Source: Central Bank of Yemen. -250-

Table 6.4: INTEREST RATE STRUCTURE (in percent per annum)

June April Augul Jung, April April Changes effective from 1976-1/ 1972/ 1973_ 1974_/- 197r55/ 197Wfi

Currency Board/CentralBank Treasury bill interest and discounts 1 3 3 4 4 4

Commercial Banks Lending rates Advances to Government 4 4 4 4-6 4 4 Commercialand other advances5/ 8 8-10 10 10-12 12 10 Mortgage and personal loans 11 11 11 11-13 14 10 Deposit rates Demand deposits ------Fixed (time) deposits: Three months (and above one) 3 4.5 3-6.5 3-6.5 6 6.5 Six months (and above three) 3.5 5 6-7 6-7 7.5 7 Nine months (and above six) 4 5.5 6-7.5 6-7.5 8 7.5 Twelve months (and above nine) 4.5 6 6-8 6-8 9 8 Savings deposits 3 4 4-6 4-6 5 6

1/ Commercialbanks' rates are those of YBRD: its lending rates previouslywere 3 percent to Government,7 percent on commercialand other advances, and 10 percent on mortgage and personal loans, while its deposit rates were as shown.

2/ Treasury bill rate raised in January 1972. Deposit rates are minimum rates effective from April 1972.

3/ Minimum rates on commercialbank lending and permissible ranges on deposits.

4/ Prevailing rates reported.

5/ Excluding some cotton and manufacturingcredit.

6/ Fixed rates on commercial bank lending and minimum rates on deposits.

Source: Central Bank of Yemen. -251-

Table 7.1: MAJOR LAND USE BY GOVERNORATES ('000 hectares)

Total Cultivated Marginal Forest and Governorate Area Land Agriculture Shrubs Other

Sana"a 8,000 400 600 100 6,900

Hodeidah 3,500 235 500 450 2,315

Taiz 1,200 250 100 500 350

Ibb 1,300 300 50 400 550

Hajia 1,700 130 250 50 1,270

Saada 1,800 60 200 - 1,540

Dhamar 1,000 100 200 100 600

Beida 1,500 40 100 - 1,360

Total 20,000 1,515 2,000 1,600 14,885

Source: CPO,Statistical Yearbook , 1976 -252-

Table 7.2: CULTIVATEDLAND AND IRRIGATION BY SOURCE OF WATER

('000 hectares)

Cultivated Spate flood Governorate land Rainfed irrigated Perennial Wells

Sana'a 400 375 - 20 5

Hodeidah 235 105 100 5 25

Taiz 250 221 10 18 1

Ibb 300 279 - 20 1

Hajja 130 115 10 5 -

Saada 60 60 - - -

Dhamar 100 92 5 3

Beida 40 38 - - 2

Total 1,515 1,285 120 73 37

Source: CPO,StatisticalYearbook, 1976 -253-

Table 7.3: VALUE OF AGRICULTUREPRODUCTION (YRLs million at 1971/72 constant prices)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75-- 1975/76

Crops 676.6 871.2 821.1 1,024.9 920.8 1,186.2 1,090.5

Livestock 193.9 264.4 333.5 239.7 220.8 27-5.6 270.3

Fisheries 20.8 21.0 21.3 16.3 12.7 12.0 12.3

Forestry 45.9 44.6 43.3 42.0 40.7 39.5 38.3

Total 937.2 1,201.2 1,219.2 1,322.9 1,195.0 1,513.3 1,411.4

Source: CPO and ECWA, National Accounts of YAR, 1969/70-1975/76 Table 7.4: AREA AND PRODUCTION OF MAIN AGRICULTURAL CROPS (area: 'O0O hectares, production: '000 tons)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 Crow Area Production Area Production Area Production Area Production Area Production Area Production Area Production Cereals Sorghum & millet 886 610 973 730 920 627 1080 809 952 639 1215 1008 1145 859 1 Maize 4 8 16 30 20 16 50 70 52 80 50 79 50 72 Wheat 35 16 30 33 25 25 50 50 70 71 50 56 50 52 4> Barley 145 160 140 154 125 140 110 120 77 85 73 80 68 75 1 Legumes, Vegetables Legumes 50 50 50 60 60 60 60 56 65 64 71 71 76 76 Green vegetables 8 50 10 100 *15 137 17 150 16 150 18 168 20 183 Potatoes 4 20 6 55 5 58 6 64 6 64 7 71 7 76 Fruits, tree crops Fruits 4 23 5 25 5 28 10 60 10 60 12 60 12 65 Grapes 4 10 7 30 8 35 8 35 8 31 9 40 9 42 Dates - 3 - 5 _ 5-- 5 - - Coffee 5 4 5 4 5 4 5 4 5 4 4 3 4 3 Industrial Crops Cotton 5 2 10 10 15 15 20 19 20 20 28 27 14 13 Tobacco 4 2 4 3 4 5 4 5 4 5 4 5 5 6 Sesame 4 2 8 4 8 5 8 4 8 4 9 5 10 6

Source: Central Planning Organization--corrected series 1977.' Table 7.5: VARIABILITY OF RAINFALL BY MONTHS, SOUTHERNUPLANDS

(MM)

1st Rainy Season 2nd Rainy Season

Station/Year Jan Feb Mar Apr May June Total July Aug Sept Total Oct Nov Dec Annual U'

Al-Udein 1970 0 0 24 79 _ 48 _ 116 45 2 163 85 0 0 399 1971 3 0 22 3 77 77 157 43 85 79 207 3 10 0 -402 1972 1 1 6 86 34 66 186 86 51 27 164 13 - 371 1973 8 0 22 2 79 51 132 76 166 51 293 4 5 1 465 1974 0 28 38 36 80 93 209 40 23 36 99 12 0 22 408 1975 23 15 91 60 102 53 185 102 150 42 294 - - - 638 Ibb Town 1970 8 4 45 79 112 258 449 174 199 110 483 60 0 0 1,049 1971 8 0 34 45 213 215 473 202 240 115 559 16 24 12 1,124 1972 0 24 34 119 78 185 382 232 244 184 660 73 105 23 1,301 1973 43 0 0 50 202 190 442 195 364 165 724 58 3 0 1,270 1974 0 26 77 291 134 260 685 202 236 223 662 51 0 0 1,500 1975 5 23 60 164 248 367 772 414 40 221 685 50 22 34 1,648 1976 7 43 75 125 329 249 703 308 426 336 1,070 175 120 0 2,193

Source: Hydro-Meteorological Section, Tihama Development Authority Table 7.6: VARIABILITY OF RAINYALL BY MLNTHS, TIANWA COASTAJ PLAINS

1st Rainy Season 2nd Rainy Season

Station Jan Feb Mar Apr May June Total Jula2 Sept Total Oct Nov Dec Annual

Zahid Tovn 1970 15 0 0 2 0 0 2 8 16 63 87 29 0 0 133 1971 4 0 1 5 39 0 44 0 /0 29 29 0 38 5 121 1972 11 0 0 12 0 8 20 0 17 32 49 15 0 0 95 1973 6 0 1 0 11 0 11 4 6 57 67 6 1 0 92 1974 0 0 22 0 11 0 11 15 40 118 173 2 0 0 208 1975 0 0 0 28. 0 0 28 14 73 78 165 0 0 0 193

Wadi Zahid Camp 1970 3 0 0 3 0 1 4 41 34 173 248 124 0 0 379 11' 246 1971 10 0 12 16 49 0 65 2 12 100 114 24 10 1972 0 3 1 0 10 7 17 3 96 103 202 3 0 0 226 1973 22 0 0 0 51 3 54 25 79 93 197 35 7 0 315 546 1974 0 0 17 1 18 15 34 69 109 281 459 36 0 0 1975 0 2 0 80 32 5 117 8 206 68 282 36 0 0 437

Source: Hydro-Meteorological Section, Tihama Development Authority Table 7.7: VARIABILITY OF RAINFALL BY MONTHS, CENTRAL HIGH1ANDS

(mm)

1st Rainy Season 2nd Rainy Seasor

Station/Year Jan Feb Mar Apr May June Total July Aug Sept Total Oct Nov Dec Annual

Sana'a 1963 14.3 3.8 10.6 13.0 128.0 80.8 221.8 20.9 81.5 0.0 102.4 0.0 47.2 14.5 414.6 1964 2.2 4.0 1.7 38.3 12.5 8.0 58.8 39.9 8.2 5.1 53.2 0.0 1.6 10.9 132.4 1965 0.0 0.0 25.9 56.4 0.0 o.6 57.0 28.5 88.9 0.0 117.4 0.0 11.7 0.0 212.0 1966 3.9 11.3 9.5 35.3 7.2 0.0 42.5 24.3 65.6 4.3 94.2 0.2 1.1 0.0 162.7 1967 0.0 17.0 - - 1968 0.0 0.0 8.4 84.1 11.1 14.9 110.1 0.0 0.0 1.0 1.0 0.0 3.0 0.0 122.5 1969 9.0 16.4 1.1 25.2 13.5 0.0 38.7 19.4 28.5 0.0 47.9 1.5 0.0 0.0 114.6 1970 4.1 0.0 1.0 1.7 1.0 1.0 3.7 0.0 136.7 12.5 149.2 0.0 0.0 0.0 158.0 1971 23.9 0.0 23.8 21.5 4.9 0.0 26.4 17.3 9.0 0.0 26.3 0.0 10.2 0.7 111.3 1972 ,0.0 3.0 10.0 83.1 6.o 0.5 89.6 0.0 6.9 0.5 7.4 0.0 6.o 0.5 116.5 1973 0.0 0.0 0.5 5.6 10.0 3.0 18.6 36.0 101.0 5.0 142.0 0.0 0.0 2.0 163.1 1974 0.0 0.0 34.8 44.2 89.1 0.0 133.3 1.5 45.8 0.0 47.3 0.0 0.0 0.0 215.4 1 1975 1.0 2.0 35.8 109.4 0.2 1.9 111.5 84.5 102.0 13.8 200.3 0.0 0.0 0.0 350.6 Ln 1976 0.0 1.1 27.7 32.0 36.6 0.0 68.6 18.5 3.7 0.0 22.2 0.0 31.5 3.0 154.1

Ave. 1970-76 4.1 0.9 19.1 42.5 21.1 0.9 64.5 22.6 57.9 4.5 85.0 0.0 6.8 0.9 181.3

Yarim 1970 4.6 16.2 34.9 54.9 2.4 24.1 81.4 86.5 105,8 36.4 228.7 0.0 0.0 0.0 365.8 1971 0.0 5.2 104.6 35.7 178.3 56.5 270.5 68.9 134.5 65.2 268.6 0.0 19.0 0.0 667.9 1972 0.0 3.6 33.7 202.1 46.o 4.3 252.4 59.9 69.7 5.3 134.9 23.4 0.0 14.5 462.5 1973 0.0 0.0 2.4 21.0 48.9 61.7 131.6 61.6 138.2 54.5 254.3 0.0 0.0 7.9 396.2 1974 0.0 21.9 59.3 65.0 100.5 33.2 198.7 114.5 151.6 21.3 287.4 2.3 0.0 4.5 574.1 1975 9.1 37.2 43.2 72.9 11.4 109.5 193.8 4.3 242.3 57.0 303.6 - _ _ 586.9 1976 0.0 29.8 80.8 10.6 67.3 27.1 105.0 63.0 88.4 6.2 157.6 8.6 48.6 0.0 430.4

Ave. 1970-76 2.0 16.3 51,3 66.o 65.o 45.2 176.2 65,5 132.9 35.1 233.5 4.9 9.7 3.8 497.7

Source: Sana'a 1963-66, 1974-76 Department of Meteorology, Civil Aviation Authority. S-na'a 1967-73 Statistieal Yearbook Of 1973, CPO Yarim 1970-76, Hydrology Section, Tihama Development Authority. Table 7,8: MUMY,1 AXflM( AND HIND=U MNDTHLY UAINPALLAT SULDCTE STATIOMU

(")

Station/Years Record Jan Feb Mar April May June July Aug Sept Oct Nov Dec Annual

Taiz (2 4 -yrs record) Mean 1.3 11.8 15.9 73.6 97.6 83.9 60.9 66.8 83.7 60.9 14.3 9.7 580.4 Maximum 15.2 84.6 60.9 138.6 213.4 149.8 134.7 141.7 137.1 130.0 53.9 36.5 831.4 (1966) Minimum 0.0 0.0 0.0 0.0 30.4 22.8 .10.2 25.4 25.4 5.6 0.0 0.0 308.9 (1976)

Zabid Camp (7 yrs 1970-76) Mean 5.0 0.7 5.4 21.9 29.1 4.4 35.7 80.7 128.4 36.9 2.4 1.6 352.2 Maximum 22.0 3.0 17.0 80.0 51.0 15.0 102.0 206.0 281.0 124.0 10.0 11.0 546.0 (1974) Minimum 0.0 0.0 0.0 0.0 0.0 2.0 12.0 68.o 0.0 0.0 0.0 0.0 226.0 (1972)

Sana'a (7 yrs 1970-76) Mean 4.1 0.9 19.1 42.5 21.1 O.9 22.6 57.9 4.5 0.0 6.8 0.9 181.3 Maximum 23.9 3.0 35.8 109.4 89.1- 3.0 84.5 102.0 13.8 0.0 31.5 3.0 350.6 (1975) Minimum 0.0 0.0 0.5 5.6 0.2 0.0 0.0 3.7 0.0 0.0 0.0 0.0 111.3 (1972)

Yarim (7 yrs 1970-76) Mean 2.0 16.3 51.3 66.o 65.0 45.2 65.5 132.9 35.1 4.9 9.7 3.8 497.6 Maximum 9.1 37.2 104.6 202.1 178.3 109.5 114.5 242.3 65.2 23.4 48.6 14.5 667.9 Minimum 0.0 0.0 2.4 10.6 2.4 4.3 4.3 69.7 5.3 0.0 0.0 0.0 365.8

Ibb (7 yrs 1970-76) Mean 10.1 17.1 46.3 124.7 219.2 246.2 246.7 250.0 193.5 68.9 35.8 9.9 1,468.4 Maximum 43.4 42.9 76.6 291.0 402.0 367.0 414.3 426.3 335.9 174.8 120.5 33.6 2,228.6 (1970) Minimum 0.0 0.0 0.0 44.6 77.5 185.5 174.2 199.2 109.8 15.5 0.0 0.0 1,050.1 (1976)

Sources: Taiz data from Department of Meteorology,Civil Aviation Authority; Sana'a data 1970-73 from CPO StatisticalYearbook, 1974-76 from Department of Meteorology, Civil Aviation Authority; Zabid Camp, Yarim and Ibb data from Hydro-MeteorologicalSection, Tihama DevelopmentAuthority. -259-

Table 7,9; MOTOR PUMPS AND FUEL CONSUMPTION

Total Year Pumps Fuel consumed Price cost of fuel (1,000Liters) (YRLs/Liter) (YRLs)

1969/70 1,264 12,640 0.380 4,803,200

1970/71 1,614 16,140 0.380 6,133,200

1971/72 2,014 20,140 0.430 8,660,200

1972/73 2,384 23,840 0.460 10,966,400

1973/74 2,900 29,000 0.630 18,270,000

1974/75 3,451 34,510 0.720 24,847,200

1975/76 3,951 39,510 0.810 32,003,100

Source: CPO and ECWA, National Accounts of YAR, 1969/70-1975/76. -260-

Table 7.10: FERTILIZER AND INSECTICIDEIMPORTS

- Fertilizers Insecticides Year Tons CIF Value Tons CIF Value (YRLs 1,000) (YRLs 1,000)

1969/70 1,997 900 118 300

1970/71 3,153 200 135 300

1971/72 4,046 500 218 500

1972/73 1,799 800 382 800

1973/74 4,256 1,500 375 1,200

1974/75 3,869 1,700 717 2,100

1975/76 7,932 1,400 2,510 2,900

Source: CPO and ECWA, National Accounts of YAR, 1969/70-1975/76. -261-

Table 7.11: COMPARISONWITH OTHERCOUNTRIES OF AVERAGEFERTILIZER USE PER HECTAREOF ARABLELAND AND LANDUNDER PERMANENT CROPS; 1974

Country Nitrogen Phosphate Potash Total ------kg per ha------

Y.A.R. 2.0 - - 2.0

Libya 4.0 1.6 0.6 6.2 Syria 4.5 2.2 0.3 7.0 Sudan 8.4 - - 8.4 Saudi Arabia 6.5 3.5 4.5 14.5 Bahrain 10.0 5.0 5.0 20.0

Egypt 126.1 22.8 1.9 150.8

Europe 78.4 55.6 57.2 191.3

The World 25.8 15.1 13.2 54.1

Source: FAO: 1975 Annual FertilizerReview, pp. 52-62. -262-

Table 7.12: MANPOWER TRAINED FOR MINISTRY OF AGRICULTURE THROUGH JUNE 30, 1976

For For Taiz For For Type of technician Ministry and Ibb Hodeidah Sana'a Remainder Total

University trained: AgriculturalEngineers 18 20 21 9 2 70 Veterinarians 1 - - 1 - 2

Techniciansfor: Plant Protection 2 2 2 10 - 16 Horticulture - 1 - 3 - 4 Forestry - - - 1 1 2 Mechanization 6 5 1 4 1 17 Extension /1 1 39 79 1 - 120 Veterinary 1 - - 1 - 2 Irrigation 1 3 1 - - 5 General agriculture 6 14 22 7 - 49 Statistics 1 1 - - - 2 Livestock - - 1 1 - 2

Technical laborers 5 - 1 12 - 18

Total 42 85 128 50 4 309

/1 Extensionworkers are preparatory level graduateswith short-term (6-9 months) training courses.

Source: PreliminaryWorking Paper by Ministry of Agriculture,September 1976. Table 7,13: ESTIMATED REQUIREENTS FOR UNIVERSITY TRAINED MlNPOWER BY SPECIALITION OVER NEXT FMVE YEARS

Plant Agricultural Irrigation Crops Livestock Fisheries Forestry Horticulture Protection Statistics Extension Mechanization General Engineers Veterinary Total w 49 1977 4 3 5 - 4 5 4 7 3 9 1 4 8 58 1978 4 4 6 3 6 4 6 6 1 5 5 65 1979 4 4 8 3 4 6 8 8 2 5 6 7 6 63 1980 4 4 8 4 5 8 8 6 2 5 3 1981 4 2 8 5 5 8 8 3 1 5 1 3 53 288 Total 20 17 35 15 24 31 34 30 9 29 16 28

Source: Preliminary Working Paper by Ministry of Agriculture, September 1976. Table 7,14: ESTThAIED ADDITIONAL TRAINED MANPOW;ERREQUIRED FOR MINISTRY OF AGRICULTURE OVER NEXT 5 YEARS

Technicians University Trained Manpower Mechanical Asency Agriculture Irrigation Veterinarv Total Agriculture Veterinary Irrigation Surveyors Engineering Mechanics Total Livestock Directorate 12 - 27 39 32 72 - - - - 104

Fisberies Directorate 35 - - 35 60 - - - - - 60

Irrigation Directorate 1 10 - 11 - - 20 10 - - 30

Planning & Statistics Directorate 26 - - 26 64 - - _ - - 64

Field Crops Department 20 - - 20 40 - - - - - 40

Agricultural Extension Department 30 - - 30 310 - - - - 310

Forestry Department 15 - - 15 31 - - 2 - - 33 Horticulture Department 24 - - 24 31 - - - - - 31 Plant Protection Department 30 - - 30 86 - - - 2 10 98 Agricultural Credit Bank 37 6 - 43 74 - - - - - 74

Mechanical Engineering Department 9 -- - 9 14 - - _ - - 14

Sordud Agriculture Corporation 5 - 1 6 5 2 - - - 2 9 Total 244 16 28 288 747 74 20 12 2 12 867

Source: Preliminary Working Paper by Ministry of Agriculture, September 1976. -265-

Table 7,15: ANTICIPATEDNUMBER OF AGRICULTURESTUDENTS RETURNING BY YEARSAND SPECIALIZATION

Specialization 1976 1977 1978 1979 1980 Total

General Agriculture 10 12. 32 43 13 110

Plant Protection 1 1 1 7 - 10

Agronomy 2 - - 3 2 7

Agri. Chemistry 1 - 1 - 2 4

Horticulture I - 1 3 - 5

Livestock - - - 4 - 4

Genetics - - - 2 - 2

Extension - - - 3 - 3

Soils - - - 4 - 4

Irrigation - - - - 2 2

Fisheries _ - _- _5_

Total 15 ]3 35 69 24 156

Source: PreliminaryWorking Paper by Ministry of Agriculture,September 1976. -266-

Table 7.16: TERMSOF AGRICULTURALCREDIT FUND

(Medium and Long-Term Loans)

Investment Categories Grace Period Repayment Total by Project (Years) Period (Years) ______(Years)

TDA project

GroundwaterDevelopment 2 8 10 Farm machinery 2 5 7 On-farm Development 2 8 10 Processing and storage 2 8 10

SURDEP

Wells, pumps 1 5 6 Orchards and coffee 4 6 10 Processing and storage 2 8 10

Grain Storage Project

Silo - YGGC 5 9 14 Warehouses- YGGC 4 10 14 Bakeries - YGGC 3 10 13 Private bakeries - new 3 5 8 Private bakeries - modernization 1 4 5

Livestock Credit Project

Livestock finishingfarm - LDC 5 5 10 Dairy farms - LDC 4 7 11 Milk colonies - LDC 5 4 9 Poultry - feedmillLDC 4 8 12 Village development 6 5 11 Landowners credit 2 4 6 Tenant credit 3 4 7 Small hold poultry fa 1 6 7 Batchers 1 1 2

YCGC - Yemen General Grain Corporation LDC = Livestock DevelopmentCorporation

Source: 'Activitiesof Aur and ACB', SupervisionReport, Agriculture-Division,EMENA (February1977). -267-

Table 7.17: LENDING ACTIVITIESOF AGRICULTURALCREDIT FUND AND AGRICULTURALCREDIT BANK

Lending by ACF for SURDEP up to 28 February 1977:

Purpose of Loan Applications Executed No. Amount No. Amount (1.000 YRLs) (1.000 YRLs)

Tractors and machinery 66 6,280 2 170 Irrigation,groundwater tree plantations 262 8,496 73 1,783 Seasonal 117 49 70 42

Total 445 14,825 145 1,995

Loans by ACF for TDA up to 31 January 1976:

Purpose Wadi Zabid Wadi Mawr No. Amount No. Amount (1.000YRLs) (1.000 YRLs)

Farm machinery 8 682 2 133 On-Farm development 30 183 16 96 Seasonal inputs 216 851 95 264

Total 254 1,716 113 493

Loans by ACB up to 1 February 1977:

Purpose/Branch No. Amount (1.000YRLs)

Seasonal loans at: Izbid 237 1,362 Wadi Mawr 37 36 Beital Fakhi 188 646 Sana'a 5 /1 2,519 Tractor, pumps, buildings 35 3,123

Total 502 7,686

/1 Includes a loan to General Cotton Company, a loan to Seyhan Cooperative and a YRLs 1.4 million poultry feed loan. Sources: AgriculturalCredit Bank and AgriculturalCredit Fund. -268-

Table 7.18: AGRICULTURALPRODUCTION TARGETS DURING THE FIVE-YEAR PLAN

------19/6/CD 98Dt81- ___

Production Percent Item 1975/76 1980/81 Increase (1,000 tons)

Crop Production

Cereal crops 1,058 1,363 29 Sorghum & millet 859 1,042 21 Maize 72 110 53 Barley 75 83 11 Wheat 52 128 136 Cotton 13 32 150 Oil crops 5.5 10.8 96 Dry beans 76 105 83 Tobacco 5.6 9.6 71 Vegetables 183 605 285 Tomatoes 76 360 374 Coffee 3 4 33 Fruits 112.4 142 26

Animal Production

Milk & products 331 367 11 Eggs (million) 210 230 12 Meat (tons) 39,738 46,840 18 Skins (tons) 7,230 7,953 10 Fish (tons) 11,525 17,288 50

Source: Central Planning Organization -269-

Table 7.19: AGRICULTURALINPUT AND YIELD TARGETSDURING THE FIVE-YEAR PLAN, 1916/77-1980/81

Percent Item Unit 1975/76 1980/81 Increase

Chemical fertilizers tons 7,000 27,000 286

Insecticides tons 210 1,100 412

Veterinarymedicines 1,000 YR 75 200 167

Feed concentrates tons - 17,500 -

Tractors no. 1,130 3,565 215

Tree seedlings Fruits 1,000 46 368 700 Forestry trees 1,000 400 2,000 400 Coffee 1,000 12 435 2,346

Flood irrigation 1,000 ha 120 136 13

Perennial irrigation 1,000 ha 73 79 8

Well irrigation 1,000 ha 37 83 124

Total irrigation 1,000 ha 230 298 30

Crop Yields

Sorghum tons/ha 0.75 1.00 33 Maize tons/ha 1.33 2.20 65 Barley tons/ha 1.10 1.32 20 Cotton tons/ha 0.93 1.30 40 Oil seeds tons/ha 0.56 0.80 43 Wheat tons/ha 1.04 1.60 54

Source: Central Planning Organization -270-

Table 7.20: FIRST FIVE-YEAR PLAN FOR IRRIGATION

('000 Riyals)

Total Expenditure Estimated Estimated before the Expenditure Expenditures Project Cost Plan during Plan after Plan

Projects in Tihama Wadi Zabid 149,500 32,000 117,500 - Wadi Mawr 250,000 18,000 175,950 56,050 Wadi Rima 175,000 10,000 112,100 52,900 Wadi Siham 200,000 - 66,975 133,025 Wadi Sordud 190,000 - 76,200 113,800 Wadi Rasyan 35,000 - 30,575 4,425

Sub-total 999,500 60,000 579,300 360,200

Projects for Eastern Wadis Wadi Al Kharid 110,000 - 31,650 78,350 Wadi Jawf 150,000 - 44,250 105,750 Wadi Abida Marib 50,000 - 3,450 46,550 Wadi Harib 30,000 - 450 29,550

Sub-total 340,000 - 79,800 260,200

Projects for other Wadis Wadi Bana 100,000 - 17,550 82,450 Wadi La'a 30,650 10,000 20,650

Dams Small dams 15,000 - 5,000 10,000 Storage dams 125,000 - 105,000 20,000 Sewerage Irrigationfor Sana'a 3,000 - 500 2,500 MaintenanceDiversion Structures 16,000 - 8,000 8,000 Ground Water Investigations 60,000 5,000 24,900 30,100 Hydro-MeteorologicalStations 1,500 50 1,000 450 InstitutionalSupport 5,000 - 3,300 1,700

Total 1,695.650 75,050 845,000 775,600

Source: From IrrigationDepartment, Ministry of Agriculture:Not Official -271-

Table 7.21: LONG-RANGE IRRIGATIONTARGETS

Flood Perennial Well Plan Period Irrigation Irrigation Irrigation ------1,000 ha------

Present irrigation 120 73 37

1st 5-Year (1976/81) 134 79 83

2nd 5-Year (1981/86) 148 89 144

3rd 5-Year (1986/91) 158 96 194

Source: Central Planning Organization -272-

Table 7.22: TARGET FOR EXPANSION OF FLOOD IRRIGATION

Wadi Present 1976/77 1977/78 1978/79 1979/80 1980/81

------… 1,000 ha------

Mawr 35 35.0 35.0 35.0 35.0 36.0 Sordud 15 15.0 15.0 15.0 15.0 16.0 Seyham 10 10.0 10.0 10.0 10.0 11.0 Rima 10 10.0 10.0 10.0 11.0 12.0 Zabid 11 11.0 11.5 13.0 14.0 15.0 Rasyan 2 Mawza 2 7.0 7.0 7.0 7.5 8.0 Mawiah 3 Bina'a 2 2.0 2.0 2.0 2.5 3.0 Marib 10 10.0 10.0 10.0 10.5 11.0 Gawf 10 10.0 10.0 10.0 10.0 11.0 Others 10 10.0 10.0 10.0 10.5 11.0

Total 120 120.0 120.5 122.0 126.0 134.0

Source: CPO, The Firt Five-Year Plan for Agriculture (Draft). -273-

Table 7.23: TARGET FOR EXPANSION OF PERENNIAL IRRIGATION

Wadi Present 1976/77 1977/78 1978/79 1979/80 1980/81 ------1,000 ha------

Mawr 15 15.0 15.0 15.00 15.50 16.0 Sordud 10 10.0 10.0 10.25 10.50 11.0 Seyham 5 5.0 5.0 5.00 5.25 5.5 Rima 2 2.0 2.0 2.00 2.25 2.5 Zabid 2 2.0 2.0 2.00 2.25 2.5 Risyan Mawzea 3 3.0 3.0 3.00 3.00 3.0 Mawiah Bina'a 8 8.0 8.0 8.00 8.50 9.0 Marib 5 5.0 5.0 5.00 5.00 5,5 Gawf 15 15.0 15.0 15.00 15.25 15.5 Others 8 8.0 8.0 8.00 8.25 8.5

Total 73 73.0 73.0 73.25 75.75 79.0

Source: CPO, The First Five-Year Plan for Agriculture (Draft). -274-

Table 7.24: TARGET FOR EXPANSION OF WELL IRRIGATION

Governorate Present 1976/77 1977/78 1978/79 1979/80 1980/81 ------1,000 ha …------______

Sana'a 5.0 6.0 7.0 7.0 9.0 10.0 Mahweit - - - - - Hodeidah 25.0 30.0 35.0 40.0 45.0 50.0 Taiz 1.0 1.0 1.5 2.0 2.5 3.0 Ibb 1.0 1.0 1.0 1.0 1.0 1.5 Hajja - 0.5 1.0 1.5 2.0 2.5 Sada'a - 0.5 2.0 3.0 4.0 5.0 Damar 3.0 3.0 3.5 4.0 4.5 5.0 Beida 1.5 1.5 2.0 2.25 2.5 3.0 Marib 0.5 1.0 1.5 2.0 2.5 3.0

Total 37.0 44.5 54.5 62.75 73.0 83.0

Source: CPO, The First Five-YearPlan for Agriculture (Draft). Page 1 of 2

Table 8.1: 1975 STRUCTURE OF MANUFACTURING INDUSTRY

Sector Countrywide industrial survey Significant operations estab. by end-1975a No. of establishments Labourforce Turnover No. of Labourforce Turnover Capital (YR million) Establishments (YR million)Investment (YR million) Food processing flour milling 6,1 04b 8,255 1 0 2 .0bc bread ( 298 2,610 81.5 ( biscuits and confectionery ( ( 2 444 22.7 9.9 vegetable oils 403 528 7.9 - - - -

Total (incl. others) 6,808 11,440 192.7 4 461 23.7 11.9

Soft drinks 6 207 12.7 4 160 10.0 7.4 Tobacco and cigarettes 70 462 18.9 1 214 11.7 5.0 Building materials cement 1 329 22.6 1 308 21.7 51.0 bricks 32 123 3.0 - - - - tiles and marble 13 122 4.4 - - - - m cement blocks 19 72 8.9 8 133 2.4 2.0

Total (incl.others) 1 0 7 d 7 4 8 d 4 1 .od 9 441 24.1 53.0

Textiles & related industries cotton ginning 1 550 28.9 1 138 34.5 2.0 cotton textiles 55 1,895 25.2 2 1,890 16.9 28.0 clothing 2,543 3,606 ... 4 63 1.3 0.4

Total (incl. others) 2,601 6,070 6 5 .3 e 7 2,091 52.7 30.4

Metal products general workshop.& 782 1,948 ... - - - - aluminium products 1 117 3.4 1 119 2.0 2.0 jewellery 368 502 10.4 - - - -

Total (incl. others) 1,158 2,819 63.9 9 238 3.3 8.5

/contd.... Page 2 of 2

Table 8.1: 1975 STRUCTURE OF MANUFACTURINGINDUSTRY

Countrywide industrial survey Significant operations estab. by end-l975a 6ector No. of establishments Labourforce Turnover No. of Labourforce Turnover Capital (YR million) Establishments (YR million)Investment (YR million)

Other manufacturing wood products 101 451 29.4 5 74 1.7 1.6 printing/publishing 42 246 1.1 8 204 2.5 3.2 pottery 170 283 4.5 - _ _ _ plasticsf 4 228 14.7 4 201 7.0 6.5

Total (incl. others) 337 1,331 72.4 22 528 14.1 12.8

GRAND TOTAL 10,587 23,076 4 6 6 .9 e 56 4,135 139.5 129.0

to3 a includes most firms with more than 10 workers, and some smaller ones b including coffee roasting c estimated d excluding the 780 employed in 250 small stone quarries (turnover 24.3 million YR) e including only some clothing f including artificial limbs

Source: The Countrywide Industrial Survey was carried out under Arab League auspices and is summarised in the 1976/77 Statistical Yearbook. Data on significant operations are from the Ministry of Economy. -277-

Table 8.2: MAJOR MANUFACTURING ENTERPRISES

Expansion Owner- Year Current Position Planned' Name/main products ship estab Location Invest- Turn- Labour Add. Add. ment over force Invest. labour (Mn YR) (Mn YR) (No.) (Mn YR) (No.)

Spinning & Weaving Corp Pub 1968 Sana'a 21.0 17 .0 b 1,5 0 0c 65 d 1,000d (cotton textiles) 1973 Bajil 8.0 1.4 135 -d - d Y. Co. for Ind. & Trade Ltd Pri 1971 Taiz - Biscuits and Sweets 80 0 c,e . 1,000 f 4009 - Plastic prods. and foam 25 .0c,e ... 350 f - Ghee substitute 60 .0c,e ... 180 f -

Cement Corp Pub 1973 Bajil 51.0 21.7 308 120 d 419d Tobacco Corp Pub 1971 Hodeida 5.0 11.7 214 3 ... (cigarettes) Cotton Corp Pub 1967 Hodeidah 2.0 34.6 138 12d ... (ginning) Printing & Publishing Corpi Pub 1963 Sana'a 2.0 1.0 132 ( ... 1963 Taiz 0.5 0.1 32 ( Aluminium metal products Pri 1971 Taiz 2.2 2.1 119 4 65

Pepsi Cola plant Pri 1970 Hodeida 2.9 3.2 1 0 0c j Balquis sweets factory Pri 1972 Taiz 0.9 1.4 94 4 102 Canada Dry plant Pri 1970 Hodeida 1.0 1.6 94 16 108 Maeen plastic shoes plant Pri 1969 Sana'a 1.0 0.9 42 1 6 Salah. Eddin aluminium and plastics Pri ... Hodeida ... 3 0c 8 62 Super and steam plant Pri 1968 Taiz 3.2 0.3 35 10 92 (soft drinks) Plastics products plant Pri 1974 Taiz 4.0 0.8 34 6 13 National paint factory Pri 1971 Taiz ... 7.0 25 f 36

Note: except where noted, data refer to end-1975 a In Five Year Plan unless stated f included in current position b 1976 g figure supplied by company c 1978 h being moved to Zabeed d Plan also includes new projects i new plant being built following fire e includes suppliers'credits for new expansion j new plant being built at Sana'a

Sources: For 1975 position, Ministry of Economy. Where more up to date data are given, these obtained from company concerned. -278-

Table 8.3 PAVED AND GRAVEL ROADS, 1977

(Km)

Road Paved Gravel Total

1. Primary Roads

Sana'a - Taiz 256 256 Sana'a - Sa'ada 242 242 Sana'a - Hodeidah 226 226 Km.16 - Krm.63 191 191 Km.63 - Taiz 63 63 Sana'a - Al Wadi 14 14 Sana'a - Haddah 8 8 Sana'a - Airport Road 10 10 Airport Road - Arhab 15 14 29 Al Maraba - Manakha 5 5 Hodeidah - Port 5 5 Hodeidah - Airport 4 4 Sana'a - Al Rawda 10 10

Sub-Total 1049 14 10k3

2. Secondary and Feeder Roads

Shibam - Al Ahjar 12 12 Jct. Sana'a-Sa'ada-Al Wadi 4 4 Km.63 - Al Mokha 44 44 Al Hawban - Mawiah 39 39 Taiz - Muzeikhera 37 37 Hadhran - Al Rawnah 27 27 Taiz - Sabir 14 14 Al Rahida - Haifan 14 14 Al Turbah - Sharjab 10 10 Taiz - Al Turbah-7'afrus 4 4 Taiz - Al Turbah-Jebal Habashi 8 8 Al Kadma - Maqbanah 6 6 Al Khushum - Hajjah 63 63 Junc. Hodeidah-Taiz-Lawia 9 9 Al Kubba - Al Ribat 8 8 Al Mansuriah - Sukhna 20 20 Haith - Al Khowkhah 29 29 Hodeidah-Taiz Junc.-Wadi Zabid 14 14 Zabid-Al Sowaik 18 18 Al Kadan - Al Mighlaf 10 10 Yarim-Rihab-Al Dalil 62 62 Kitab - Al Naderah-Demt 68 68 Yarim-Al Radmah-Demt 50 50 Ibb - Al Udain 31 31 Ibb - As Saddah 23 23 Ibb - Ba'adan 21 21 Al Qaidah-Thee Sufal 10 10 Ibb - Jiblah 6 6

Sub-Total 661 661

GRAND TOTAL 1049 675 1724

Source: CPO, YAR Statistical Yearbook (1976/77) Table 8.4: PORTS TRAFFIC IN YAR: 1969-1976 (Traffic Tonnage in '000 Tons) Through lodeidah Port Through Mocha Port Total YAR Ports Through Salif Port Exports ------Imports ------Liquid bulk Total No. of Ships Passenger Traffic General (Petroleum Total Total General Liquid (All General General Liquid (Hodeidah; (all at Hodeidah; in '000) Year Cargo Products) Imports Traffic Cargo bulk Imports Cargo Cargo Bulk Total arrivals) Arrival Departure

1969 - 212 63 275 275 - - - 0 - - - 1970 - 232 64 296 296 - 0 ------1971 2 372 90 462 464 - - - 0 - - - 367 - - 1972 8 385 122 507 515 - - - 0 - - - 506 - 1973 19 436 93 531 550 54 40 94 0 511 133 644 520 50 - '4 1964 23 464 114 578 601 56 36 92 0 543 150 693 453 55 16 1975 24 479 154 633 657 58 38 96 0 561 192 753 559 74 45 1976 26 634 250 884 910 50 - 50 75 785 250 1035 640 104 60 (partly estimated)

Notes: 1. "-" means insignificant or not applicable. 2. The table excludes the salt export traffic through Salif before 1974 (5,000 to 10,000 tons per annum). 3. The figures for 1976 include some traffic which is meant for re-exports by road to Saudi Arabia - estimated at about 80,000 tons in 1976. 4. At least 150,000 tons of the traffic waiting in ships at the end of 1976 would have been discharged in the YAR Ports during the year, if port facilitieswere adequate; this notional additional traffic is, however, not included in the above figures.

Sources: CPO, YAR statistical yearbook, 1976; Yemen Oil Corporation and PMAC. -280-

Table 8.5: SANA'A INTERNATIONALAIRPORT TRAFFIC, 1974-1976

Planes Planes Passengers Year Arrivals Departures Prop. Jet Arrivals Departures

1974 2141 2244 2748 1637 71,541 75,893

1975 2654 2586 2564 2676 121,249 119,712

1976 2275 2487 3989 773 102,241 132,584

Source: CPO, 1976/1977Statistical Yearbook -281-

Table 8.6: PASSENGERS CARRIED BY YEMEN AIRWAYS

Routes Year (1975) Total

1971 37,646 1972 48,660 1973 43,288 1974 71,098 1975 79,467 Sana'a-Hodeidah 21 Sana'a-Taiz 1132 Sana'a-Aden 1532 Sana'a-Abudhabi 4829 Sana'a-Asmara 119 Sana'a-Cairo 4885 Sana'a-Djibouti 337 Sana'a-Doha 690 Sana'a-Jeddah 30,908 Sana'a-Kuwait 802 Hodeidah-Sana'a 47 Hodeidah-Aden 2220 Taiz-Abudhabi 1863 Taiz-Aden 2397 Taiz-Cairo 1522 Taiz-Djibouti 1558 Taiz-Doha 563 Taiz-Jeddah 23,459 Taiz-Kuwait 583 1976 138,760

Source: CPO, 1976 StatisticalYearbook Table 9.1: CONSUMERPRICE INDEX FOR SANA'A CITY

(1972 - 100)

Calendar Years Fiscal Years Period averages Weights 1973 1974 1975 1976 1973/74 1974/75 1975/76 1976/77

General index 10,000 143 181 224 261 154 203 237 329

Foodstuffs 6,500 142 166 203 226 145 187 210 285 Cereals 1,735 147 176 172 160 156 185 169 159 Dry vegetables 130 126 175 245 325 142 209 280 331 Meat, fish and eggs 1,205 129 159 245 323 155 199 264 418 Vegetables 447 160 152 220 248 142 173 215 386 Dairy products 301 122 158 174 177 140 164 177 343 Oils and fats, edible 295 189 232 297 359 206 257 343 383 Fruits 513 175 123 205 237 123 169 221 247 Sugar and sweets 382 117 224 271 204 151 272 226 193 Soft drinks 148 123 175 185 228 140 179 202 383 Tobacco,etc. 967 133 137 148 176 134 141 158 297 Other 377 132 163 226 253 139 204 240 289

Clothes 581 126 210 249 280 155 229 263 435

Dwelling 1,946 155 227 299 391 186 259 337 500 Furniture 206 103 142 188 210 131 167 196 257 Durable goods 407 121 174 209 232 143 186 219 260 Rent and water 609 128 185 256 319 138 203 286 429 Fuel and lighting 724 212 318 421 593 266 374 487 766

Miscellaneous 973 132 169 196 219 152 180 206 274 Transportation 326 125 172 223 260 147 193 238 339 Education 87 121 155 180 213 143 170 205 239 Medical costs 268 156 177 185 193 166 181 188 263 Household cleaning items 166 123 168 181 199 153 172 191 216 Personal cleaning items 126 130 156 173 196 139 160 187 231

Source: Central Planning Organization. Table 10.1: PRIMARY LEVEL EDUCATION

Population Academic Age Group Enrollments No. of No. of Students No. of Teachers Year 6-11 Total M F Schools Per Classroom Total M F

1962/63 .. 61,335 59,555 1,780 919 1963/64 .. 57,894 55,030 2,864 895 23 1964/65 .. 62,836 59,714 3,118 934 24 1965/66 .. 69,139 65,683 3,556 997 26 1966/67 .. 63,508 59,608 3,900 709 30 1967/68 .. 66,830 62,212 4,618 749 48 1968/69 66,468 61,592 4,876 744 74 1969/70 .. 72,107 66,104 6,003 700 41 1970/71 .. 88,217 79,954 8,263 821 49 1971/72 .. 118,868 106,629 12,239 1,155 39 1972/73 153,807 136,177 17,630 1,442 49 .. 1973/74 .. 179,079 158,242 20,837 1,570 35 .. 1974/75 871,875 232,784 209,996 22,788 1,952 34 5,825 5,415 410 x 1975/76 .. 252,726 224,948 27,778 2,137 34 6,701 6,045 656

Governorate (1975/76)

Sana'a 142,976 75,419 68,599 6,820 687 37 .. Taiz 180,641 68,960 56,939 12,021 277 42 Hodeidah 130,148 24,041 20,218 3,823 159 34 .. Ibb 156,774 21,115 19,118 1,997 167 37 .. . Damar 85,855 20,110 19,326 784 238 25 .. .. Hajja 75,755 17,184 16,340 844 304 22 .. .. Beida 31,893 8,640 7,771 869 67 34 Saada 24,065 6,615 6,488 127 100 23 Mahweet 35,260 5,506 5,202 304 72 25 .. .. Marib 8,508 5,136 4,947 189 65 29 ..

Source: Ministry of Education -284-

Table 10.2: PRIMARY SCHOOL TEACHERS BY SEX, STATUS AND EDUCATIONALATTAINMENT (1975/76)-

PerVianent Temporary Appointment Appointment TOTAL M F M F

Primary Diploma or its Equivalent 905 21 1,926 103 2,955

PreparatoryDiploma or its Equivalent 350 6 798 79 1,233 SecondaryDiploma or its Equivalent 550 6 911 45 1,512 College Diploma o03its Equivalent 82 - - - 82

Teacher Training Lower Level 82 134 - 72 288 Higher Level 82 43 - 19 144

Training Sessions 89 - - - 89

TOTAL 2,140 210 3,635 318 6,303

Expatriates - - 270 128 398

GRAND TOTAL 2,140 210 3,905 446 6,701

Source: Ministry of Education Table 10.3: GENERAL PREPARATORY LEVEL EDUCATION

Academic Population No. of No. of Students No. of Teachers Year Age Group Enrollments Schools Per Classroom Total M F 12-14 Total M F

1962/63 .. 730 730 - 5 43 1963/64 .. 1,032 1,032 - 5 33 1964/65 .. 1,462 1,459 3 5 34 1965/66 .. 1,426 1,426 - 7 34 1966/67 .. 1,672 1,672 - 7 45 1967/68 .. 2,007 1,985 22 10 41 1968/69 .. 2,077 2,073 4 13 36 . 1969/70 3,118 3,028 90 20 37 .. 1970/71 .. 3,931 3,806 125 22 35 .. 1971/72 .. 5,768 5,732 36 47 35 .. 1972/73 . 7,306 7,212 94 59 33 .. 1973/74 9,362 9,229 133 81 33 ...... 1974/75 295,766 12,163 11,236 927 98 33 599 583 16 X 1975/76 .. 15,619 13,927 1,692 134 31 711 694 17 1

Governorates (1975/76)

Sana'a 49,696 4,124 3,760 364 18 39 213 203 10 Taiz 63,474 7,334 6,364 970 58 33 215 210 5 Hodeidah 44,204 2,087 1,833 254 17 32 114 112 2 Ibb 54,024 1,162 1,092 70 12 27 82 82 - Damar 28,952 378 363 15 12 15 24 24 - Hajja 23,034 209 195 14 5 15 24 24 - Beida 10,392 199 196 3 5 17 20 20 - Saada 8,838 43 43 - 2 11 7 7 - Mahweet 10,772 36 34 2 3 9 4 4 - Mareb 2,380 47 47 - 2 16 8 8 -

Source: Ministry of Education, except for age-group column which is a mission estimate from 1975 census results. Table 10.4: GENERAL SECONDARY LEVEL EDUCATION

Population Academic Age Group Enrollments No. of No. of Students No. of Teachers Year 15-17 Total M F Schools Per Classroom Total M F

1963/64 .. 84 84 - 3 28 .. 1964/65 .. 226 226 - 3 45 .. .. 1965/66 .. 433 433 - 3 27 .. 1966/67 .. 656 656 - 3 36 .. 1967/68 .. 711 711 - 3 44 .. 1968/69 .. 803 803 - 4 62 1969/70 .. 939 939 - 4 41 .. 1970/71 .. 1,189 1,164 25 6 35 1971/72 .. 1,496 1,488 3 6 35 .. 1972/73 .. 2,267 2,248 19 6 41 .. 1973/74 .. 3,098 3,094 4 13 36 1974/75 222,816 4,350 4,153 197 25 38 233 230 3 i 1975/76 .. 6,050 5,581 469 27 39 332 327 5 0,

Governorates (1975/76) Sana'a 35,123 1,896 1,771 125 4 53 88 84 4 Taiz 47,870 2,917 2,689 228 9 43 137 137 - Hodeidah 34,471 751 662 89 5 30 55 54 1 Ibb 38,410 301 278 23 5 17 27 27 - Damar 24,358 82 80 2 1 16 13 13 - Hajja 17,430 66 65 1 2 13 5 5 - Beida 7,490 37 36 1 1 12 7 7 - Saada 7,659 ------Mahweet 8,124 _ _ - _ - _ - _ Mareb 1,880 ------

Source: Ministry of Education, except for age-group column which is a mission estimate for 1975 census results. -287-

Table 10.5: ENROLLMENTSIN TEACHERS INSTITUTES

Prep. Teacher Training Secondary Teacher Training Enrollments Enrollments No. of Schools Males Females No. of Schools Males Females

1963/64 1 551 1964/65 1 24 - 1965/66 3 90 - 1966/67 5 163 27 1967/68 6 185 30 - - - 1968/69 6 402 84 2 37 51 1969/70 6 266 64 3 91 11 1970/71 4 161 124 2 111 16 1971/72 4 - 342 5 192 84 1972/73 4 - 590 6 185 148 1973/74 5 32 847 7 192 278 1974/75 7 307 336 7 107 180 1975/76 8 508 453 7 155 190 of which Sana'a 2 156 182 2 41 54 Taiz 2 235 142 2 89 92 Hodeidah 2 19 97 1 - 37 Ibb 2 98 32 2 25 13

Source: Ministry of Education -288-

Table 10t6; SUBJECTSSTUDTEf) AT THE THREE LEVELS OF EDUCATION - (hours taught per week; 1975/76)

SecondaryGrades Preparatory Litera- PrImMy aGyw es Grades ture Science Ist 2nd 374 4th 5th 6th 1st 2nd 3rd 1st 2nd 3rd 2nd 3rd

Religion 8 88 8 8 8 6 6 6 6 6 6 6 6

Arabic 9 9 9 9 8 8 6 6 6 6 8 8 5 5

Social Studies - - 2 2 4 4 4 4 4 1 3 1 1 1

Sciences 3 3 3 3 3 3 4 4 4 6 - 4 9 9

Mathematics 4 4 4 4 5 5 5 5 5 4 - - 7 8

Arts 2 2 2 2 1 1 1 1 1 1 1-

Vocational Training - - - 2 2 2 2 2 2 2 2 2 2

Physical Education 2 2 2 2 2 2 2 2 2 2 2 2 2 2

English - - - - - 5 5 5 6 7 7 5 5

Music ------1 1 1 - - - - -

History _ - - - - 2 3 3

Geography - - - - - 2 4 4

Economics ------2 -

Psychology - - - 3 -

TOTAL 28 28 30 30 34 34 36 36 36 36 36 36 36 36

Source: Ministry of Education (1974/75) -289-

Table 10.7: ENROLLMENTSIN TECHNICAL AND COMMERCIAL SCHOOLS

Academic Year Technical Commercial

1970/71 92 43 1971/72 180 60 1972/73 250 124 1973/74 292 174 1974/75 337 215 1975/76 348 218 of which Sana'a 348 64 Taiz - 36 Hodeidah 118

Source: Ministry of Education Table 10:8: DISTRIBUTION OF YEMENI STUDENTS ABROAD BY COUNTRY AND SPECIALTY, 1976/77

Economics Total Medicine Engineering Agriculture Services Commerce Pol. Sciences Arts Law & Sharia Education Others

Arab Countries, of which 1,521 202 248 193 68 221 119 87 139 64 180 Egypt (657) (128) (123) (109) (9) (127) (22) (34) (42) (11) (52) Saudi Arabia (282) (-) (46) (11) (12) (26) (18) (22) (68) (8) (71) Iraq (173) (39) (29) (21) (13) (-) (52) (5) - (8) (6) Syria (109) (15) (24) (25) (1) (16) (1) (9) (7) - (11) '.

Communist Countries, of which 707 204 264 89 51 - 15 7 6 4 67 USSR (476) (124) (158) (70) (44) - (11) (4) (1) (4) (60) China (77) (7) (70) ------Czechoslovakia (46) (20) (12) (5) (2) _ (1) (5) (1) Germany, D.R. (21) (14) (3) (2) ------(2)

Western Countries, of which 44 14 10 4 - 1 3 2 1 - 9 Germany, F.R. (21) (3) (5) (1) (1) - (2) (1) - (8)

Others, of which 42 24 9 - 1 - 3 3 - 2 Iran (32) (17) (7) - - (1) - (2) (3) - (2)

TOTAL 2,314 444 531 286 119 223 137 99 149 68 258

Source: Central Planning Organization. Table 10.9: PROJECTED STUDENT ENROLLMENTS DURING FIVE-YEAR PLAN, 1976/77-1980/81

Annual Percentage Actual Plan Targets Increase 1975/ 76 1976/77 1977/78 1978/79 1979/80 1980/81 (1976/77-1980/81)

Primary Education 252,726 286,940 315,690 339,590 285,250 426,860 11.0 Adult Literary Programs 5,731 n.a. n.a. n.a. n.a. 28,860 38.5

Preparatory 16,589 20,290 24,490 29,995 36,770 44,520 21.8 General (15,619) (19,400) (22,870) (27,670) (33,480) (40,300) 20.9 Teacher Training (970) (1,290) (1,620) (2,125) (2,710) (3,290) 27.5 Vocational - - - (200) (580) (930)

Secondary Education 7,016 7,854 10,578 12,955 15,809 18,980 29.5 General (6,050) (6,820) (9,350) (11,070) (13,110) (15,510) 29.0 Teacher Training (408) (550) (655) (845) (1,087) (1,364) 27.5 Vocational & Technical (348) (279) (293) (550) (811) (1,095) 25.5 Commercial (210) (205) (280) (400) (510) (535) 20.5 Agriculture - - - (90) (291) (476)

Higher Education 2,304 3,014 4,520 5,910 7,085 8,040 28.5 School of Education (664) (964) (840) (1,090) (1,420) (1,740) 21.3

TOTAL (excl. adult literacy programs) 278,635 317,508 254,298 286,540 439,594 491,550 12.0

Source: Ministry of Education, The First Five-Year Plan for Education 1976/77 - 1980/81 (draft) and CPO, The First Five-Year Plan, 1976/77 - 1980/81 -292-

Table 10.10: CAPITAL EXPENDITURESON EDUCATIONDURING THE PLAN PERIOD 1976/77-1980/81(YR million)

Financed by 1976/77 1977/78 1978/79 1979/80 1980/81 Gov't Foreign Private Total

Ministry of Education 38.3 65.8 89.8 122.7 167.9 231.4 253.1 - 484.5

Sana'a University 8.5 14.6 20.0 27.3 37.4 8.0 99.9 - 107.9

NIPA 0.9 1.6 2.2 2.9 4.0 7.3 4.4 - 11.7

Scientific Educational Commission 2.3 4.0 5.4 7.4 10.1 29.2 - - 29.2

Private Sector 0.4 0.7 0.9 1.3 1.7 - - 5.0 5.0

TOTAL 50.4 86.7 118.3 161.7 221.2 275.9 357.4 5.0 638.3

Source: CPO, The First Five-Year Plan. 1976/77-1980/81 -293-

Table 10.11: DISTRIBUTION OF THE MINISTRY OF EDUCATION CAPITAL EXPENDITURESBY LEVEL AND TYPE OF EDUCATION, DURING THE PLAN PERIOD, 1976/77-1980/81

Total Expenditures Percent of (YR million) Total

Primary Education 149.1 30.8 Preparatory (General& Teacher Training) 50.5 10.4 Secondary (General & Commercial) 60.6 12.5 Industrialand Vocational 91.6 18.9 Agriculture 18.7 3.9 Teacher Training (Secondary) 86.2 17.8 School Furniture and Equipment Production 3.6 0.7 National EducationalCenter 0.9 0.2 Informal Education and Literacy Programs 23.3 4.8

TOTAL 484.5 100.0

Source: CPO, The First Five-YearPlan, 1976/77-1980/81 TAble 10-12: CAPITAL EXPENDITURES BY THE MINISTRY OF EDUCATION AND SANA'A UNIVERSITY BY SOURCE OF FINANCE, DURING THE FIVE-YEAR PLAN, 1976177-1980/81 (000 YR)

School Prep. Education Secondary Industrial Secondary Furniture National Primary Informal (General and and and Agricultural Teacher Production Education Total MOE Sana'a Education Education Teacher Training) Commercial Vocational Education Training Center Center Expenditures University Total

Yemen Arab Republic Gov't. 111,591 17,000 19,019 35,076 21,570 13,792 10,7S1 1,729 864 231,422 8,000 239,422

Iraq 6,000 - 6,000 6,000 - - - - - 18,000 - 18,000 Kuwait 4,500 - 7,500 3,000 - - - - - 15,000 80,000 95,000 Libya 7,500 - 4,500 3,000 - - - - - 15,000 - 15,000 Qatar 1,500 - 3,000 1,500 - - - - - 6,000 - 6,000 t3 Saudi Arabia 7,500 - 3,000 4,500 - - - - - 15,000 - 15,000o UJAE 7,500 - 7,500 7,500 - - - - - 22,500 - 22500 1 Un-identified 3,000 1/ - - - 21,624 - 40,200 - - 64,624 5,000 69,624 Total Bilateral 37,500 - 31,500 25,500 21,624 - 40,000 - - 156,124 85,000 241,124

IDA - 6.337 - _ 48,402 2/ 4.880 35,391 3/ 1.935 - 96.945 14,263 111.808

TOTAL 149.091 23,337 50,519 60.576 91,596 18.672 86JE7 3664 4484, 491 1 5923

I/ Possibly from Iran 2/ YR 18,002 mln are not yet certain 3/ YR 12,406 mln are not yet certain

Source: CFO, The Five-Year Plan, 1976177-1980181 -295-

Table 10.13: TRAINING OF YEMENIS ABROAD DURING THE FIVE-YEARPLAN, 1976/77-1980/81 (Number of Trainees)

1977/78 1978/79 1979/80 1980/81 Total

Agriculture 77 91 98 83 349

Mining & Mineral Resources 8 3 2 - 13

Manufacturing 68 88 134 155 445

Electricity& water 22 22 18 18 80

Juilding & Construction 42 30 23 28 123

Trade 34 25 27 17 103

Transport & Comm. 136 175 200 148 659

Finance 23 21 18 14 76

Education 43 82 55 30 210

Health 28 49 31 47 155

Social Affairs 19 9 15 13 56

Information& Culture 54 52 44 45 195

Public Administration 86 79 64 59 288

TOTAL 640 726 729 657 2,752

Source: CPO, First Five-YearPlan. 1976/77-1980/81 -296,

Table 10.14: FORAIGN GRANTS ON MANPOWERDEVELOPMENT ORIENTED CURRENTEXPENDITURES, BY SOURCE OF SUPPLY, DURINGTHE FIVE-YEAR PLAN, 1976/77-1980/81 (000 YDR) Grants for 1/ Country/Organizattan Teachers Scholarships Others Total

1. Multilateral UNDP - _ 13,223 13,223 UNFPA - - 1,500 1,500 WFP - - 10,800 10,800 Central Protestant Agency - 665 - 665

TOTAL TOTAL - 665 15,523 2

2. Arab Countries Egypt 952 890 - 1,842 Iraq - 5,500 - 5,500 Kuwait 6,027 1,450 - 7,477 Jordan - 600 - 600 Libya 19,285 3,800 - 23,085 Qatar 4,821 1,950 - 6,771 Saudi Arabia 17,890 23,390 - 41,280 Sudan - 160 500 660 Syria 5,000 1,870 - 6,870

TOTAL TOTAL 53,975 39,610 500 94,085

3. Communist Cou~ntrie8 Bulgaria - 200 - 200 China, P.R. - 1,500 4,000 5,500 Czechoslovakia - 1,150 - 1,150 Germany, D.R. - 910 - 910 Hungary _ 700 - 700 Korea, North - 540 - 540 Poland - 480 - 480 Romania - 810 - 810 U.S.S.R. - 5,500 - 5,500 Yugoslavia - 55( - 550

TOTA4 - 12,340 4,000 16,340

4. Westerp Countries France - 4,200 1,000 5,200 Germany, F.R. - 1,300 - 1,300 Greece - 450 - 450 Iran - 850 - 850 Italy - 250 - 250 Netherlands - 3,500 - 3,500 Turkey - 450 - 450 U.S.A. - 2,150 - 2,150 U.S.A.I.D. _ 3,200 480 3,680

TOTAL - 16,350 1,480 17,830

GRAND TOTAL 53,97 8,965 154,443

1/ The funds under 'Others'are expected to be spent on educational developient (UNDP), population census (UNFPA), food for school children (WFP), school equipment (Sudan), vocational education (China,P.R.), local electric training (France) and population recor4ing (U.S.A.I.D.).

Source: CPP. First Five-Year Plan, 1976/77 - 1980/81 -297-

Table 10.15: PUBLIC EXPENDITURESON EDUCATION (YR million)

Actuals Estimates

1973/74 1974/75 1975/76 1976/77 1980/81

Public Expenditureson Education 19 34 56 101 188

Current 18 28 47 75 1101'

Capital 1 6 9 26!! 781/

Total Public Expendi- tures 335 441 748 928 1,742

Current 322 472 617 678 993

Capital 13 69 131 250 749

Gross National Product (GNP) 3,764 5,333 7,238 7,677 10,317

Public Expenditureson Education as Percent of Total Public Expen- ditures 5.7 7.7 7.5 10.9 10.8 Public Current Expen- ditures on Education as Percent of Public Current Expenditures 5.6 5.9 7.6 11.1 11.1

Public Expenditureson Education as Percent of GNP 0.5 0.6 0.8 1.3 1.8

l/Bank Estimates

Source: CPO, The Five-Year Plan, 1976/77-1980/81 -298-

Table 10.16: MEDICAL PERSONNEL, 1976

Medical Qualified Physicians Dentists Pharmacists Assistants Nurses Midwives

A B A B A B A B A B A B

Sana'a 54 58 1 5 6 5 114 1 113 63 5 5

Hodeidah 17 17 -- 1 1 1 67 2 15 14 3 3

Taiz 36 22 2 1 3 1 155 4 47 12 6 4

Al Beidha 6 1 -- -- 1 -- 12 -- -- 4 -- 1

Sa'ada 1 2 -- -- I 11 -- -- 3-- 3

Ibb 5 6 -- -- - 1 44 3 11 6 -- 3

Dhamar 3 4 ------6 -- 1

Hajjah 2 ------24 -- -- 1 --

Total 124 110 3 7 11 10 433 20 186 104 14 19

A - Yemeni

B - Expatriates

Source: CPO, 1976/77 Statistical Yearbook -299-

Table 10.17: HEALTH ESTABLISHMENTS BY GOVERNORATES, 1976

Health Rural Hospitals Dispensaries Health Sub- Health Drug Phar- No. Beds No. Beds Centers Centers Units Stores macies

Sana'a 5 900 1 20 6 -- 11 44 7

Hodeidah 3 340 4 160 2 8 16 31 4

Taiz 7 970 3 60 3 3 16 62 5

Ibb 4 232 1 30 1 -- 6 13

Dhamar 1. 55 ------6 6

Haijah 1 68 3 60 2 -- 6 1

Sa'ada 1 14 ------3 3

Al Beidha 2 58 ------3 6

Al Mahweet -- -- 1 -25 1 -- 4

Mareb -- -- - 1 -- 4

Total 24 2,637 13 355 16 11 75 166 16

Source: CPO, 1976/77 Statistical Yearbook -300-

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The World Bank Headquarters European Office Tokyo Office U 1818 H Street, N.W. 66, avenue d'Iena Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Telephone (202) 477-1234 Chiyoda-ku, Tokyo 100, Japan Cable Address INTBAFRAD WASHINGTONDC