Yemen’s finance minister describes energy subsidies as biggest burden

AMMAN — Yemen hopes a loan deal from the International monetary Fund (IMF) that will allow it to start cutting costly energy subsidies that sap expenditure and are exploited by smugglers, but are relied on by the poorest in the country, will be sealed this month, the finance minister said.

The impoverished Arabian Peninsula nation has been holding technical talks with IMF officials for several months and is expecting to hold detailed negotiations in Jordan this week, Sakher Ahmed Al wageh said.

He indicated that Yemen was seeking "substantially more" than the $560 million, over three years, that the IMF has proposed, without giving details.

"We hope before May [ends] matters will have been cleared and we will have entered the programme," Alwageh said noting that the IMF board was expected to meet in July to finalise the deal.

Alwageh added that the talks centred on cutting the energy subsidies that cost the state $3.07 billion last year, equivalent of 30 per cent of state revenues and 21 per cent of expenditure, swallowing funds Yemen needs to invest in education, infrastructure and health after its 2011 uprising.

He indicated that almost 30 per cent of total domestic fuel consumption, especially diesel, was smuggled to countries in east Africa where smugglers benefit from price differentials.

However, removing subsidies is highly sensitive in a country where a third of the 25 million population live on less than $2 a day. It has in the past led to violent disturbances, such as in 2005 when dozens were killed.

"The biggest burden will fall on the poor and that is why there must be successful solutions to ease the impact... the problem is not in eliminating subsidies but finding another package that will deal with the impact," he said.

Alwageh added that cutting the subsidies would be a requirement of the deal, along with expanding capital investment and widening those benefiting from a Social Welfare Fund that helps poor households with the money saved.

"These are measures we need to take whether we enter an IMF programme or not," he remarked

Fuel shortages

The IMF says even a small start in reducing mainly energy subsidies, say by 10-15 per cent, would be sufficient to increase the average monthly allowances paid by the Social Welfare Fund.

The IMF said this month Yemen had a more urgent need for financial aid in 2014 than last year to fund spending as currency reserves shrink and donor aid is slow to arrive in the country that came close to economic collapse after the uprising that later eased out veteran ruler Ali Abdullah Saleh.

Yemen's finances have been strained by frequent attacks on oil pipelines blamed by the government on militants and disgruntled tribesmen.

Saudi Arabia, the United Arab Emirates and Oman have supplied Yemen with fuel in the past. Nonetheless, the capital Sanaa has suffered severe fuel shortages for the past month, with Yemenis spending hours queuing to fill their vehicles with just 20 litres of petrol.

Any decision to reduce energy subsidies would have to be approved by the government and parliament.

"Of course this matter would be debated from the point of view of the national interest as to whether there is a benefit for Yemen from entering the programme or not," Alwageh said.

"Such decisions in countries going through transition are exploited and capitalised politically by playing on people's emotions that could bring some unrest. That's why everyone seeks consensus on this," added the minister, who has been in Jordan for IMF-sponsored conference in Amman.

Since a UN-backed transitional government took office in 2012, there have been signs of recovery and stabilisation, according to the IMF.

The IMF expects Yemen's budget deficit to shrink to 6.7 per cent of gross domestic product this year from 7.1 per cent in 2013, the biggest gap since 2009.

Alwageh said growth was forecast at around 4 per cent this year, a far cry from a massive 12.7 per cent contraction in 2012, while inflation had halved to around 9 per cent from a high 20 per cent at the peak of troubles in 2011.

The government's move to alter gas prices sold to Western oil firms in Yemen had boosted state coffers, he noted.