US embassy cable - 05SANAA1959

C O N F I D E N T I A L SANAA 001959 
 
SIPDIS 
 
PLEASE PASS TO MCC FOR A. BAYLOR 
 
E.O. 12958: DECL: 07/19/2015 
TAGS: PREL, PGOV, ECON, EFIN, EINV, KMCA, KMPI, YM, ECON/COM 
SUBJECT: SALEH AUTHORIZES ECONOMIC REFORMS: ROYG BRACES FOR 
DEMONSTRATIONS 
 
REF: SANAA 1919 
 
Classified By: CDA Nabeel Khoury for reasons 1.4 b and d. 
 
1. (C) Summary.  On July 18, President Saleh approved 
long-delayed portions of the economic reform package.  A 
reduction or elimination of the fuel subsidy is likely to 
accompany this decision, and some fear it will lead to civil 
unrest.  Several reports indicate that the security forces 
will employ harsh tactics to control demonstrations should 
they erupt.  The ROYG canceled permits for the diplomatic 
community to travel outside the capital city for "the next 
few days."  Lifting of the fuel subsidy may result in the 
scapegoating and possible removal of prominent government 
officials, first among them, the Minister of Finance.  End 
summary. 
 
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ROYG Prepares to Employ "Strict Measures" 
----------------------------------------- 
 
2. (C) Interior Minister Alimi recommended that foreign 
diplomats remain in Sanaa and restricted their in-country 
travel for the next few days for fear of demonstrations to 
the lifting oil subsidies (reftel).  All ROYG ministers and 
many other officials have been instructed not to leave the 
country.  Removal of oil subsidies is highly unpopular with 
Yemenis.  There is as yet no word about the exact timing of 
price hikes in fuel, but indications point to the next few 
days. 
 
3. (C) A source at the Ministry of Interior said President 
Saleh summoned police officials to his palace to prepare for 
civil unrest.  He handed out riot batons to those in 
attendance, raised one above his head, and instructed them to 
use force in the event of demonstrations. 
 
--------------------------------------------- - 
Economic Reform: "The Sweet Before the Bitter" 
--------------------------------------------- - 
 
4. (SBU) Removal of the fuel subsidy was preceded by passage 
of three key elements of the long awaited economic reform 
package.  In the words of a UN official, the ROYG "supplied 
the sweet before the bitter."  On July 18, Saleh issued 
presidential decrees authorizing the general sales tax (GST), 
the customs tariff law, and the law for employment, wages, 
and salaries.  The new GST law reflects the input of business 
leaders in private meetings with Saleh, and will come in the 
form of a five percent levy on all imported and locally 
produced goods (reftel).  The law represents a major 
departure from the IMF-WB recommended value added tax and 
passed by Parliament exempting basic goods including wheat, 
rice, medicine, baby milk, raw gold, and cashing money. 
Tobacco products, qat, weapons, phone service, and jewelry 
will be taxed at different rates. 
 
5. (SBU) The Customs Tariff Law ratifies amendments to the 
Customs Law that bring Yemen's tariffs in line with the World 
Customs Organization, a positive step toward WTO accession. 
The Employment, Wages, and Salaries System Law re-classifies 
salaries and provides pay increases to public employees 
compatible with a minimum wage and above the poverty line. 
The law is part of a larger program of civil service reform, 
headed by the Ministry of Civil Service, which proposes to 
reduce government payroll and increase efficiency. 
 
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Top Ministers May Pay the Price 
------------------------------- 
 
6. (C) Comment: Speculation is the subsidies will be lifted 
on Friday afternoon (July 22), when most Yemenis have already 
returned home from prayer and are the least likely to take to 
the streets.  Minister Alimi told CDA that the opposition is 
on board with the reforms but that there is no guarantee they 
will not call for the demonstrations anyway, adding, "Maybe 
you can help us with them!"  The lifting of subsidies may 
also be used to conduct a long-anticipated cabinet shake-up, 
depending on the strength of the public reaction.  Prominent 
figures such as Prime Minister Bajamal may take the fall for 
an unpopular Presidential decision.  According to prominent 
businessman Fatti Fahem, Minister of Finance Salami, 
currently receiving medical attention in Frankfurt, has 
already unofficially resigned.  End comment. 
Khoury