US embassy cable - 05SANAA1446

UNCLAS SECTION 01 OF 02 SANAA 001446 
 
SIPDIS 
 
PLEASE PASS TO MCC FOR A. BAYLOR; DEPARTMENT OF TREASURY 
FOR M. GRIFFERTY 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, PGOV, KMCA, KMPI, YM, ECON/COM 
SUBJECT: DONORS ADDRESS THE KEY TO REFORM IN YEMEN: PUBLIC 
FINANCE MANAGEMENT 
 
REF: SANAA 328 
 
1. Summary: The donor community sponsored a workshop in May 
on the critical but oft-neglected subject of public finance 
management (PFM).  In an effort to develop a work plan for 
rationalizing the budgeting process, currently a source of 
extensive corruption and mismanagement, the Ministry of 
Finance (MOF) and donors discussed reforms in procurement, 
tendering, and budget classification.  Finance management 
reform is directly related to post's proposed MCC and 
Department of Treasury programs, and is critical to broader 
good governance objectives.  End Summary. 
 
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Donors Follow the Money 
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2. For the ROYG and the donor community, May was the month to 
talk about how Yemen manages its money.  On May 19, econoff 
attended a donor coordination meeting to discuss the outcome 
of a May 16-18 workshop on public finance management in 
Sanaa.  Held under the auspices of the MOF and organized by 
the World Bank, the UK's Department for International 
Development (DFID) and the Royal Netherlands Embassy (RNE), 
the workshop's objective was to encourage the ROYG to 
implement a transparent and effective budgeting and 
accounting system.  Key aspects of this process include 
tendering, procurement, budget classification, and adoption 
of the AFMIS computer system for accounting in key 
ministries.  Also present at the donor meeting were 
representatives of the German and French embassies, UNDP, the 
World Bank, IMF, DFID, and GTZ. 
 
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Reforms at MOF Require Full Court Press 
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3. Donor representatives agreed that the workshop was an 
important first step in the difficult process of 
rationalizing fiscal policy in Yemen.  There was high-level 
ROYG attendance and participants appeared serious about 
advancing reforms.  Nevertheless, no clear action plan 
emerged from the sessions, and it will be necessary for 
donors to maintain pressure on the MOF to put theoretical 
discussions into practice.  The workshop produced an Aide 
Memoire that MOF will submit to the Cabinet for endorsement, 
however, the donor group expressed concern that the process 
will end there.  This was especially important to the World 
Bank, which identified progress in PFM reform as essential to 
reinvigorating its efforts in Yemen. 
 
4. To keep the process moving forward, representatives agreed 
to maintain a coordinated donor working group that will begin 
by issuing a draft partnership agreement on PFM.  The 
document, to be drafted by DFID, the Dutch Embassy, and post, 
will establish benchmarks for monitoring ROYG progress.  The 
partnership agreement will also map existing donor 
investments in the area of reform and good governance, and 
suggest areas for targeted donor technical assistance.  At 
the same time, DIFD, the World Bank, and the RNE will work 
with the MOF over the next year to formulate and implement an 
action plan for PFM reform.  The donor group agreed that the 
process will require regular high level consultations with 
the ROYG to make sure it remains on track. 
 
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Changes at the Top Slow Change 
------------------------------ 
 
5. Recent changes at the Deputy Ministerial level at MOF have 
delayed progress, and it is not clear who will champion the 
process among the new leadership.  With growing rumors that 
Finance Minister Alawi al-Salami may soon be replaced in a 
cabinet reshuffle (reftel), the situation could become still 
more confused.  On the other hand, donors unanimously agreed 
that change at the very top could provide new enthusiasm for 
PFM reform by removing some of the more difficult obstacles 
to the process.  UNDP, for instance, contended that fiscal 
decentralization to local government is an integral part of 
the PFM process, but MOF opposed inclusion of this item in 
the workshop.  Donor's believe that new leadership at MOF 
would provide a window to convey the decentralization message 
to fresh ears.  (Note: USAID provided 1.6 million USD over 
two years for the UNDP decentralization program.  End note.) 
 
6. Comment.  The PFM process lies at the heart of donor 
activities in Yemen, making it both extremely important and 
difficult to implement.  The ROYG is reticent to surrender 
its discretion in the use and distribution of public funds, 
which is a source of large-scale corruption and 
mismanagement.  This strategy has the potential to be a 
strong area of donor coordination, providing a unified and 
pointed message to the ROYG about the necessity of good 
governance.  The PFM effort complements many existing Mission 
programs, including the MCC Threshold focus on parliamentary 
oversight of the budgeting process.  The MEPI-funded 
Department of Treasury regional office in Abu Dhabi also 
proposes to work with the MOF on related issues, specifically 
in debt management.  Post will continue to work with the 
donor group to coordinate these efforts, which offer some 
promise for reducing corruption and fiscal mismanagement at 
the ROYG's core.  End comment. 
Krajeski