THE REPUBLIC of YEMEN Unlocking the Potential for Economic Growth Currency Equivalents (As of April 30, 2015)
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Report No. 102151-YE Report No. 102151-YE THE REPUBLIC OF YEMEN Unlocking the Potential for Economic Growth A Country Economic Memorandum October 2015 Middle East and North Africa Region Macroeconomics and Fiscal Management Global Practice THE REPUBLIC OF YEMEN Unlocking the Potential for Economic Growth for Economic Growth the Potential YEMEN Unlocking THE REPUBLIC OF Document of the World Bank Currency Equivalents (As of April 30, 2015) Currency = Yemeni Rial (YER) USD 1 = YER 214.9 Abbreviations and Acronyms CEM Country Economic Memorandum PSA Production-sharing agreement DFID U.K. Department for International SOE State-owned enterprise Development EITI Extractive Industries Transparency TEVT Technical education and vocational training Initiative GCC Gulf Cooperation Council WDI World Development Indicators GDP gross domestic product WTO World Trade Organization OECD Organisation for Economic Co-operation and Development World Bank DFID Vice President Hafez Ghanem Director Lindy Cameron Senior Director Marcelo Giugale Deputy Director Beth Arthy Head of Office; DFID Country Director Asad Alam Juliette John Yemen Economic Advisor and Practice Manager Auguste Tano Kouame Matthew Short Team Leader Task Team Leader Guido Rurangwa Programme Manager Helena Almeida Disclaimer This Country Economic Memorandum was undertaken in May 2014 before the situation in the Republic of Yemen began deteriorating significantly in September 2014. Though the cutoff date of the analysis was December 2014, most of the data used in the analysis date from no later than 2013. TABLE OF CONTENTS Acknowledgments ......................................................................................................................................... v Executive Summary .................................................................................................................................... vii Introduction ................................................................................................................................................... 1 PART I. OVERVIEW OF THE ECONOMY ............................................................................................... 3 Chapter 1: Growth Performance ................................................................................................................... 5 1.1. Overview of the Country’s Progress in Development ....................................................................... 5 1.2. Drivers of Growth .............................................................................................................................. 9 1.3. Macroeconomic Performance .......................................................................................................... 16 1.4. Conclusion ....................................................................................................................................... 19 PART II: GROWTH: THE DRIVERS AND THE CROSS-CUTTING CONSTRAINTS ........................ 21 Chapter 2: The Political Economy of Growth ............................................................................................ 23 2.1. Elite Bargaining, Rent Sharing, and Their Implications .................................................................. 23 2.2. Fragmentation among the Population .............................................................................................. 28 2.3. Collective Action and the Yemeni Elite .......................................................................................... 31 2.4. Persistent Fragmentation and Federalism: The Republic of Yemen since 2011 .............................. 32 2.5. Conclusion ....................................................................................................................................... 34 Chapter 3: Removing the Obstacles to Competitiveness ............................................................................ 35 Introduction ............................................................................................................................................. 35 3.1. The Structure and Performance of the Private Sector ...................................................................... 35 3.2. The Regulations and Institutions Governing Business and Trade ................................................... 36 3.3. The Business Environment in Practice ............................................................................................ 40 3.4. Realizing the Potential for Exports .................................................................................................. 49 3.4.1. Export performance................................................................................................................... 49 3.4.2. Productivity and cost competitiveness ...................................................................................... 53 3.4.3. Exchange rate dynamics and competitiveness .......................................................................... 58 3.5. Conclusion ....................................................................................................................................... 60 Chapter 4. Human Capital ........................................................................................................................... 63 Introduction ............................................................................................................................................. 63 4.1. Demographics and Labor Force Trends ........................................................................................... 63 4.2. There Are Important Gaps in Education and Health Outcomes....................................................... 64 4.3. Women’s Limited Economic Participation Is a Lost Opportunity ................................................... 67 4.4. The Opportunity for Yemenis to Work in the GCC Countries ........................................................ 68 4.5. Conclusion ....................................................................................................................................... 73 PART III. SECTORAL CONSTRAINTS AND SOURCES OF GROWTH ............................................. 75 Chapter 5. Developing Agriculture and Fisheries ....................................................................................... 77 i 5.1. The Importance of Agriculture ........................................................................................................ 77 5.2. Key Constraints on Agricultural Growth: The Scarcity of Water and Land .................................... 78 5.3. Other Weaknesses in Agriculture: Low Productivity and Lack of Diversification ......................... 82 5.4. Policies to Enhance the Growth of Agriculture ............................................................................... 83 5.5. Conclusion ....................................................................................................................................... 88 Chapter 6. Oil and Gas ................................................................................................................................ 91 6.1. Overview of the Oil and Gas Sector ................................................................................................ 91 6.2. Boosting Exploration and Production .............................................................................................. 96 6.3. Refining, Distribution, and Subsidies .............................................................................................. 99 6.4. Fiscal Federalism and Natural Resource Management .................................................................. 102 6.5. Conclusion ..................................................................................................................................... 105 Epilogue and Conclusion of the Report .................................................................................................... 107 References ................................................................................................................................................. 111 LIST OF TABLES Table 1. Private Enterprises, by Size ........................................................................................................ 8 Table 2. Average Growth, Investment, and Productivity, 2006–09 ........................................................ 11 Table 3. Decomposition of Per Capita GDP, by Product of Labor, Employment Ratios, and Sectoral Employment Shifts, 1994–2010 ................................................................................................ 13 Table 4. Contribution to Growth of the Public and Private Sectors, 1990–2010 .................................... 15 Table 5. The Republic of Yemen and the Region: Doing Business Indicators, 2015 ............................. 39 Table 6. Perceptions of the Business Climate Have Deteriorated Significantly ..................................... 40 Table 7. Perceptions of Bribery in Government Services Are Widespread ............................................ 41 Table 8. The Need to Reform Tax Enforcement Is Evident .................................................................... 42 Table 9. Access to Finance by Large, Medium, and Small Enterprises .................................................. 47 Table 10. Size and Depth of the Financial Sector, Median Values ........................................................... 48 Table 11. Major