Yemen: Economy

At unification, both the YAR and the PDRY were struggling, underdeveloped economies. In the north, disruptions of civil war (1962-70) and frequent periods of drought had dealt severe blows to a previously prosperous agricultural sector. Coffee production, formerly the north's main export and principal form of foreign exchange, declined as the cultivation of qat increased. Low domestic industrial output and a lack of raw materials made the YAR dependent on a wide variety of imports.

Remittances from Yemenis working abroad and foreign aid paid for perennial trade deficits. Substantial Yemeni communities exist in many countries of the world, including Yemen's immediate neighbors on the Arabian Peninsula, Indonesia, India, East Africa, the United Kingdom, and the United States. Beginning in the mid-1950s, the Soviet Union and China provided large-scale assistance to the YAR. This aid included funding of substantial construction projects, scholarships, and considerable military assistance.

In the south, pre-independence economic activity was overwhelmingly concentrated in the port city of Aden. The seaborne transit trade, which the port relied upon, collapsed with the closure of the Suez Canal and Britain's withdrawal from Aden in 1967. Only extensive Soviet aid, remittances from south Yemenis working abroad, and revenues from the Aden refinery (built in the 1950s) kept the PDRY's centrally planned Marxist economy afloat. With the dissolution of the Soviet Union and a cessation of Soviet aid, the south's economy basically collapsed.

Since unification, the government has worked to integrate two relatively disparate economic systems. However, severe shocks, including the return in 1990 of approximately 850,000 Yemenis from the Gulf states, a subsequent major reduction of aid flows, and internal political disputes culminating in the 1994 civil war hampered economic growth.

After the conclusion of the war, the government entered into agreement with the International Monetary Fund (IMF) to institute a structural adjustment program. This IMF program included major financial and monetary reforms, including floating the currency, reducing the budget deficit, and cutting subsidies. Difficulties implementing the reform program led the agreement to lapse In August of 2010, a new IMF program was implemented where Yemen received an Extended Credit Facility worth approximately $370 million that would be disbursed over three (3) years. In order to receive the funds, Yemen agreed to implement various economic reforms in the areas of revenue diversification/tax system reform, subsidy reductions and governmental spending. Due to the political instability that erupted in early 2011, that program has been put on hold.

The World Bank also is present in Yemen, with 20 active projects (as of 2011) in the areas of public sector governance, water, and education. Since 1998, the government of Yemen has sought to implement World Bank economic and fiscal recommendations. In subsequent years, Yemen has lowered its debt burden through Paris Club agreements and restructuring U.S. foreign debt.

Current U.S. Government commercial activities are focused on advocating on behalf of U.S. companies, protecting existing American business interests in the country, and diversifying Yemen’s economy toward non-petroleum sectors of the economy.

While Yemen is a relatively minor oil producer when compared to its Gulf neighbors, energy exports generate the majority of governmental revenue. Production peaked in 2001 at approximately 440,000 barrels per day (bbl/d) and has declined since. In 2010, the country produced, on average,approximately 260,000 bbl/d. Following a minor discovery in southern Yemen in 1982, an American company found an oil basin near Marib in 1984, and a small oil refinery began operations two years later. A Soviet discovery in the southern governorate of Shabwa proved only marginally successful.. A Western consortium began exporting oil from Masila in Hadramaut governorate in 1993, and production there reached 420,000 bbl/d in 1999. There are new finds in the Jannah (formerly known as the Joint Oil Exploration Area) and east Shabwah blocks.

In November 2005, Hunt Oil’s 20-year contract for the management of Block 18 fields ended. Despite agreement with the Government of Yemen on a 5-year extension, the Republic of Yemen Government abrogated the agreement via a parliamentary vote that was not called for in the contract. The U.S.-based Hunt Oil company sued Yemen in a Paris-based International Chamber of Commerce commercial arbitration court in 2005. The court’s decision has been kept confidential, according to both sides’ wishes. Hunt Oil continues to operate in Yemen, although in a much smaller oil exploration block.

Yemen's oil exports in 1995 generated approximately $1 billion in revenues. By 2010, oil exports had grown to approximately $5.5 billion and comprised roughly 70 percent of governmental revenue. Crude oil production has declined steadily in past years due to dwindling reserves, lack of maintenance on some equipment, and a lack of new investment in exploration activities.

Oil located near Marib contains associated natural gas. Yemen’s natural gas reserves are currently being exported in the form of liquefied natural gas (LNG), and projects are underway that utilize Yemen’s LNG to fuel several natural gas-fired power plants. The Yemen LNG project at the port of Balhaf on the Gulf of Aden became commercially operational in October 2009 and will generate much needed revenue to partially offset declining oil revenues.

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