| Kippreport.com

Yemen seen struggling to keep currency afloat

January 20, 2011 11:00 by Reuters

SHALLOW RESERVES

Yemen’s government is being forced to spend more to prop up the currency and the economy at a time when it needs to improve its finances, depriving it of the firepower it would need to avert another currency crisis.

“Even if oil prices go to $100 (a barrel), there is a possibility that they will exhaust their foreign assets,” said John Sfakianakis, chief economist at Banque Saudi Fransi.

“Without any intervention, the currency may well go into a downward spiral.”

Ibrahim al-Nahari, the Yemeni central bank’s sub-governor, told Reuters that the central bank would not allow exchange rate moves that were not economically justified and was coordinating with the finance ministry to tackle the budget gap.

Yemen’s foreign currency reserves stood officially at $5.9 billion last month, down from $7.1 billion at end-2009, he said, but some analysts disputed the figure, saying it may be much lower.

Lacking access to international debt markets, the state has few options to plug a $1.5 billion budget hole other than to borrow from the central bank or to raise funds from donors.

The government, which relies on oil proceeds for 60 percent of its income, plans to sell $500 million worth of Islamic bonds this year but few believe that the issue can succeed.

Only a fraction of $4.7 billion promised at a donor conference in 2006 has been disbursed so far.

Moreover, the IMF, which expects a budget shortfall of 5.0 percent of GDP this year, has said it is not considering new loans for Yemen after a $370 million loan approved in August.

As part of economic reforms, Yemen has begun reducing fuel subsidies, a major burden on state finances, but is having to do this gradually to avoid stoking public anger. Previous moves to raise fuel prices provoked riots.

But the government’s commitment to improving finances remains in question after it announced this week that would cut income taxes for its employees to 15 percent from 20 percent.

Caught between spending to keep citizens happy and the need to conserve cash, Yemen has its hands tied.

“The Yemeni currency is in a very fragile situation,” said Mohamed al-Maytami, economics professor at Sanaa University.

“Looking at the central bank reserves and the budget deficit I do not know how long they will be able to withstand new currency weakness.”

(By Martin Dokoupil and Mohamed Sudam. Editing by Reed Stevenson and Alastair Macdonald)

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