US embassy cable - 05SANAA93

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 000093 
 
SIPDIS 
 
STATE PLEASE PASS TO MCC 
 
E.O. 12958: DECL: 01/13/2015 
TAGS: PGOV, ECON, KMPI, YM, KGOR, ECON/COM 
SUBJECT: DEAL CUT ON YEMEN'S BUDGET -- FOR NOW 
 
REF: SANAA 37 
 
Classified By: DCM Nabeel Khoury for reasons 1.5 b, d. 
 
1. (C) Summary:  In a rare roll-call vote on January 5, 
Parliament approved Yemen's 2005 budget while striking a deal 
with the Government that postpones the lifting of oil and gas 
subsidies pending the Government's implementation of several 
wide-reaching economic reforms demanded by Parliament.  While 
the Arabic official press touts the budget agreement as "a 
victory for the people" and headlines, "No price hikes in oil 
and gas derivatives," the English official press banners the 
Government's success in pushing through reforms as suggested 
by the World Bank and warns, in this context, that "the 
capital braces for violence as demonstrations threatened to 
protest price hikes!"  The reforms demanded by Parliament are 
far too broad and sweeping for the ROYG to be able to 
realistically implement them in the near term. This suggests 
that the lifting of the subsidy will again be rejected by 
Parliament when the issue comes up before them again in six 
months. The donor community, meantime, is being set up to 
accept a further postponement of reform in order to avert the 
"threatened demonstrations and violence."  This duplicitous 
presentation of events, along with conversations we've had 
with MPs, ROYG officials and independent observers, leads us 
to believe that a political deal has been struck that will 
give each side something they want: tribes can keep smuggling 
oil; Parliament - as champion of the people - keeps the oil 
subsidy; and, the foreign community appreciates the calm 
maintained in the streets.  A clever deal that ultimately 
denies the country the reforms it so desperately needs. End 
summary. 
 
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Parliamentary Action 
-------------------- 
 
2. (SBU) In a briefing to donors on January 10, Deputy Prime 
Minister and Minister of Planning and International 
Cooperation Ahmed Sofan described negotiations between 
Parliament and the Ministers as "furious."  Sofan said after 
two weeks of intense negotiation that produced nothing, it 
became imperative the budget pass to start the ROYG's fiscal 
year, which began January 1, and so a vote was called.  Of 
the 301 members of Parliament, 161 voted for the bill, 25 
against, and six abstained.  Most who voted were members of 
the ruling GSP party.  During the vote, 109 members of the 
YSP and Islah parties walked out complaining to the press 
that the process was "disorganized." Deputy Finance Minister 
Ahmed Ghalib and Director General Ibrahim al-Nahari told 
Pol/Econ Deputy that parliamentarians individually all admit 
that economic reform must happen, they just do not want to 
stand up for it.  Sofan echoed a similar view and blamed 
Parliamentarians for playing politics with the budget. 
 
3. (SBU) In a move to promote the reforms to the average 
Yemeni, PM Ba Jammal and others held a January 8  press 
conference broadcast on Yemen TV to answer questions ranging 
from the price of bread to corruption.  Ba Jammal 
characterized himself as a crusader against corruption and 
trumpeted the necessity of economic reform.  (Comment: The 
press conference is remarkable in itself as a step forward 
putting the case for reform before the public.  End comment.) 
 
------------------------ 
What did Parliament Get? 
------------------------ 
 
4. (C) The list of reforms Parliament called for is lengthy. 
Essentially, it is a laundry list of outstanding demands 
ranging from anti-corruption measures, reform of notoriously 
poorly run ministries, and assistance to those most likely to 
be affected by a diesel subsidy reduction.  A range of 
contacts from the Foreign Ministry, Ministry of Finance and 
Ministry of Planning all confirmed that a deal was struck 
with Parliament to go forward with the budget with promises 
from the executive that pending reforms will come in the next 
three to six months.  Consensus is that the government will 
offer reforms focusing on customs, procurement laws, 
borrowing regulations and funding Local Councils.  In a 
budget briefing to donors, Sofan claimed incorrectly that the 
ROYG has already funding local councils and blamed budget 
increases of 25 percent in the last two years on money 
disbursed to local councils.  (Comment: Sofan's claim is 
blatantly misleading, most local councils are not funded and 
local councils funding currently accounts for only 1-3 
percent of the national budget.  End comment). Prime Minister 
Ba Jammal publicly announced that wage restructuring and 
civil service reform will be implemented by the government to 
demonstrate their commitment to reform.  Sofan claimed that 
all of these reforms requested by Parliament are "underway" 
and that the government is already working on its response 
Parliaments reform demands.  Ministry of Finance officials, 
however, are already blocking the wage restructuring.  Deputy 
Finance Minister Ghalib told Pol/Econ deputy that his 
ministry is drafting a letter to the Cabinet saying that 
civil service reform can only be implemented after the diesel 
subsidy is cut. 
 
---------------------------------- 
Budget Passed, Reforms Put on Hold 
---------------------------------- 
 
5. (C) The most pressing economic reforms: Diesel subsidy 
reductions (the cost of diesel would rise from 17 Riyals per 
liter to 33 Riyals, and Gas from 35 riyals to 45 riyals per 
liter), initiating a general sales tax, customs reform, 
investment law implementation, and civil service reform have 
all been delayed until Parliament is satisfied with the 
executive's response to their demands.  Finance official 
al-Nahari characterized the reforms as "cut and paste" and 
noted that many of the demands actually implement policies 
that the government wants to promote, but feared would be 
rejected by Parliament.  For instance, in the case of customs 
valuation, the government requested several specific 
reductions on cars and a few other heavily smuggled goods. 
Parliament carried it further, calling for wide ranging tax 
cuts in line with WTO and GCC countries customs rates. 
Nahari said the Ministry of Finance is happy to comply, but 
noted it was a strange procession of events.  On the General 
Sales Tax, a type of VAT levied at the company level, Deputy 
Finance Minister Ghalib said that businessmen have largely 
dropped their opposition and implementation will begin this 
summer. 
 
------------------------ 
Will Saleh Save the Day? 
------------------------ 
 
6. (C) Parliamentarians are concerned that now that they have 
passed the budget, President Saleh will sweep in three months 
from now and cancel implementation of the tough economic 
measures promised by the government.  Former MP and 
Parliament watcher Saad Talib reports that President Saleh is 
worried about the 2006 election, and may be setting the stage 
for himself to emerge as the champion of the common man by 
canceling the plan for subsidy reduction.  This theory was 
given more credence over the weekend when the English 
language Yemen Observer, which has a direct line to the 
President, predicted widespread rioting if the subsidies are 
lifted.  The government daily al-Thawra took a more 
reassuring tone, reporting that no immediate price hikes are 
expected.  The English press is leaving the door open for 
Saleh to claim to the donor community that the reforms are 
unpopular and a threat to internal security, a point 
President Saleh has made repeatedly to Western diplomats. 
 
7. (C) In contrast, Deputy Foreign Minister Noman told 
Pol/Econ Chief that he believes President Saleh now 
recognizes the need to support economic reform.  Noman said 
that President Saleh is rumored to have threatened Speaker of 
Parliament Sheikh Al-Ahmar to vote for reforms or be replaced 
as speaker, pointing out that Ahmar was the only Islah member 
to vote for the package.  Noman characterized the budget 
debate as a "tough fight," but remained skeptical about the 
actual implementation of reforms.  Noman discounted the Yemen 
Observer's and opposition press' predictions of widespread 
riots, saying Islah is the only party that has the ability to 
organize riots, but has nothing to gain from them. 
 
---------------- 
Will they Stick? 
---------------- 
 
8. (C) Comment: As expected, the Ministry of Finance is 
unable to support all the reforms demanded by Parliament and 
offered by PM Ba Jammal.  The PM may have cut a deal he knows 
his long-time rival Deputy Prime Minster and Finance Minister 
Salami will not accept.  While Parliament may have passed the 
budget, the future of economic reform remains uncertain and 
Parliament may have just punted the issue six months into the 
future.  Despite several assurances that the push for 
economic reform comes from the top, the jury is still out on 
whether Saleh has the political will to follow through with 
unpopular reforms.  As long as both the legislative and 
executive fail to fully recognize rapidly dwindling water 
recourses, growing population and declining oil production, 
the long-term stability of Yemen continues to hang in the 
balance.  End comment. 
 
KRAJESKI