US embassy cable - 04SANAA2521

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 002521 
 
SIPDIS 
 
ABU DHABI FOR MEPI OFFICE 
 
E.O. 12958: DECL: 09/28/2014 
TAGS: ECON, KMCA, KMPI, PGOV, YM, ECON/COM, DOMESTIC POLITICS 
SUBJECT: WHY ECONOMIC REFORM IS FAILING IN YEMEN 
 
REF: A. SANAA 1721 
     B. SANAA 1537 
     C. SANAA 122 
 
Classified By: DCM Nabeel Khoury for reasons 1.5 (b) and (d). 
 
1. (C) Summary and Comment: On September 25 Parliament and 
the Shura Council voted by a clear majority to reject the 
ROYG's five year economic plan, which included several hotly 
debated economic reform proposals.  The economic package 
failed because there was no presidential initiative, no 
strategy to offset the economic consequences of reforms, and 
parliament's ongoing frustrations over executive branch 
corruption.  At the same time, the UK's Department For 
International Development (DFID) released initial results of 
a study on the impact of reducing oil subsidies and found, 
contrary to ROYG claims, that the effects on the poorest 
Yemenis would be minimal.  After a summer of blackouts and a 
long military campaign in the north, the Parliament's 
reversal of a corrupt government oil deal, and a rumored 
cabinet shuffle may signal a new focus on reform.  Until 
Saleh commits to reducing corruption, however, and presents a 
comprehensive plan that faces harsh economic realities, 
cabinet shuffles and reform initiatives will do little to 
help the average Yemeni.  End Summary and Comment. 
 
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Economic Reform Proposals Flatly Rejected 
----------------------------------------- 
 
2. (C) On September 22, the first day of a two-day joint 
Shura Council and Parliament session to discuss the 
Government's five-year plan, Prime Minister Ba Jammal was 
ushered out of the building as body guards of MPs shouted 
angry slogans at the unpopular prime minister. Local press 
reported that the group shouted  "Down with Ba Jammal," Down 
with Salami" and "Oh Parliament, Oh Shura, Ba Jammal is the 
biggest swindler."  Returning to the joint session on 
September 25, Ba Jammal and his ministers attempted to 
explain the benefits of the reform package.  Members 
responded with harsh criticisms of government corruption, 
unemployment, and the state of the economy. 
 
3. (C) Background:  The economic reform plan (refs A and C) 
would have reduced diesel subsidies, rolled back customs 
fees, implemented a new General Investment Law, established a 
General Sales Tax, and streamlined the civil service.  The 
IMF, World Bank and most donors strongly encouraged the 
ROYG's adoption of the reforms.  In an attempt to provide 
political cover, the Cabinet asked Parliament to vote on the 
package in January.  Since February, however, Parliament, 
emboldened by their dominant speaker Sheikh al-Ahmar's 
absence from the country for medical treatment, has been 
asserting its role vis-a-vis the Executive on economic 
issues.  The Executive, on the other hand, has failed to make 
a convincing case for reform.  End Background. 
 
-------------------- 
No Push from the Top 
-------------------- 
 
4. (C) While economic reform was one of the most actively 
debated issues in the press and at qat chews over the past 
year, President Saleh made few public statements supporting 
the reforms, and never argued publicly to cut the diesel 
subsidy.  In talks with senior USG officials, Saleh often 
predicted "revolution in the streets" if the oil subsidies 
were reduced.  Former Member of Parliament Saad bin Talib 
commented to Emboffs that there was no push from the 
President for passage of the economic reform package.  Shura 
Council Member and former Minster of Labor Mohammed al-Tayyeb 
described a disorganized GPC effort, with only a few 
loyalists supporting the reforms.  Some observers commented 
that the ROYG miscalculated in its attempt to gain 
Parliamentary approval for the economic reform package. 
Talib said he was "shocked" that the economic reforms did not 
pass, commenting that previously Parliament would have 
"rubber stamped" any executive initiative. 
 
--------------------------------------------- -- 
Impact on Poor Minimal -- Cost to Military High 
--------------------------------------------- -- 
 
5. (C) Across town at the Ministry of Planning, initial 
results of the UK's DFID study on the impact of reducing the 
diesel subsidy in Yemen were released to donors and the ROYG 
on September 22.  According to the study, the poorest twenty 
percent of the population would see only a four percent rise 
in prices.  The DFID study cites price gouging by merchants 
as a more serious problem.  Noting the negative effects on 
farmers who rely on diesel to power water pumps, the study 
also points out significant fears among the populace as to 
the consequences of ending the diesel subsidy.  It quotes one 
participant in the study as saying if the diesel subsidy were 
eliminated, "I would die." (Note: Fifty percent of Yemenis 
are employed in the agricultural field).  To counter this 
widespread misperception, the study recommends implementing 
an effective public awareness strategy on the true effects of 
the subsidy, as well as enhancing the social safety net. 
 
6. (C) Beneath the surface of debate on the effects on the 
poor, is the reality that diesel smuggling in Yemen is big 
business.  In arguing for the reform package, Deputy Prime 
Minster and Minister of Finance Salami said as much as 70 
percent of diesel is smuggled out of the country and high oil 
prices have pushed the ROYG to spend 5 percent of its GDP 
(more than is spent on education or health care) to maintain 
the subsidy.  Parliament is also actively discussing a nearly 
1 billion USD budget supplement, largely to offset losses 
from the diesel subsidy. 
 
7.  (C)  World Bank and Ministry of Finance sources all point 
to the military as the largest smuggler of diesel.  Many 
suspect the dire predictions of senior officials of the 
negative consequences of ending the subsidy are overstated, 
and hold that the military's reliance on diesel smuggling is 
likely the real reason behind ROYG reluctance to push for 
this reform.  (Comment:  along with tribal support, loyalty 
of the armed forces has always been one of the mainstays of 
the Saleh regime.  End Comment). 
 
------------------------------- 
"The al-Houthi Cabinet Shuffle? 
------------------------------- 
 
8. (C) Rumors that a cabinet reshuffle is in the works 
continue, including rumors that Ba Jammal will be the first 
to go.  Some newspapers point to three leading candidates to 
succeed the Prime Minister: Governor of Aden Shuaibi, Deputy 
Prime Minister Sofan, and rector of Sanaa University Salah Ba 
Sura.  Ministry of Planning Senior Advisor Jalal Yaqoub 
referred to possible changes as the "al-Houthi cabinet 
shuffle." Insiders and observers alike point to corruption, 
daily blackouts in the city of Sanaa, and frustration over 
stagnant economic growth to be the issues fomenting a cabinet 
change.  Prominent GPC leader and Shura council member 
Mohammed al-Tayyeb, however, told Pol/Econ Deputy he did not 
think a change in government is likely for at least six 
months, believing that Saleh would wait until this cabinet 
had served two years to make sweeping changes. 
 
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Comment 
------- 
 
9. (C) While Parliament is slowly finding its democratic 
legs, it is unfortunate that it chose to flex its muscles by 
voting to reject an otherwise desirable economic reform 
package.  The fault lies mainly in the ROYG's poor strategic 
economic planning.  For seven years the ROYG has been 
grappling with the diesel subsidy, without making any serious 
attempt to "spin" the changes or investigate ways to mitigate 
the effects of doubling the price of diesel and gas.  Three 
projects to build energy plants have languished in corrupt 
tendering processes for years which, had the ROYG moved 
forward on, could have easily small farmers' reliance on 
diesel.  Parliament's protest vote rejecting economic reform 
demonstrates strong opposition to the status quo, 
particularly what is widely understood as pervasive 
government corruption; it did not offer and alternative 
package, nor does it currently possess the power to carry one 
through.  Economic reform in Yemen will likely continue to 
stagnate until the President commits to follow through on 
vague promises to reduce corruption and focus on painful, 
long-term economic solutions.  End comment. 
KRAJESKI