US embassy cable - 05SANAA1976

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 001976 
 
SIPDIS 
 
E.O. 12958: DECL: 07/23/2015 
TAGS: PGOV, PREL, PINR, PHUM, ECON, EINV, ENRG, KMPI, YM, ECON/COM, ENERGY 
SUBJECT: REMOVAL OF FUEL SUBSIDIES SPARKS RAPID INFLATION, 
RIOTS 
 
REF: A. SANAA 1959 
     B. SANAA 1875 
     C. SANAA 1877 
 
Classified By: CDA Nabeel Khoury for reasons 1.4 b and d. 
 
1. (C) Summary.  On July 23, Rioting and unrest had abated, 
following a weekend of explosive demonstrations against the 
lifting of fuel subsidies.  On July 23, the ROYG confirmed 22 
people killed, but the number is reportedly closer to 40. 
Demonstrators lashed out against the ruling elite across 
Yemen, angered by government corruption and the rising cost 
of living.  A brief crisis involving a Hunt Oil facility in 
the Mareb region has been resolved.  ROYG policy on lifting 
fuel subsidies is now at the center of political debate, with 
opposition parties accusing security forces of using harsh 
tactics against demonstrators and the press.  Rumors 
regarding imminent Cabinet changes continue, while the ROYG 
attempts to justify the policy decision to Yemenis. 
International observers welcomed the removal of subsidies, a 
severe impediment to Yemen,s economic development, but 
expressed disappointment at the ROYG's failure to prepare the 
public.  There is additional concern that the additional 
revenue will not be used effectively to spur economic 
development and create jobs.  End summary. 
 
--------------------- 
Calm Returns to Yemen 
--------------------- 
 
2. (SBU) A sense of calm has returned to the streets of Sanaa 
after a weekend of riots and unrest.  On July 20, angry 
demonstrators in Sanaa reacted to sharp price hikes caused by 
the ROYG's decision to lift the fuel subsidy, barricading 
most major streets, lighting tire fires, and converging on 
Government buildings (ref A).  Similar demonstrations took 
place in Sa'ada, Mareb, Aden, Taiz, Hodeidah, as well as 
other parts of the country.  The Government acknowledged the 
death of 22 people including six policemen, and 375 injuries 
including 255 security personnel, but other sources report 
higher casualty figures.  Poor weather and military 
reinforcements helped bring the protests under control in 
Sanaa by July 22. 
 
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Hunt Facility is Free, Fuel Remains Hostage 
------------------------------------------- 
 
3. (C) Other parts of the country appear less secure.  The 
GPC website, al-Muatamarnet, reported that on July 22, 
tribesmen from Mareb surrounded the Jana Hunt oil refinery 
and disrupted transport from the site (septel).  The seige 
has ended, but the Mareb-Sanaa road remains blocked, 
preventing diesel and propane deliveries to Sanaa.  Ralph 
Gonzales, head of Hunt security, confirmed that President 
Saleh would visit the region shortly to negotiate an end to 
the standoff with tribal sheikhs.  If a solution is not 
reached, said Gonzales, Hunt will be forced at great expense 
to cease production, denying the capital of critical fuel 
supplies.  There are reports of continued protests in Mareb, 
al-Jawf, and elsewhere, but for the time being they remain 
peaceful. 
 
------------------------------- 
Class Warfare, Attacks on Press 
------------------------------- 
 
4. (C) The unrest in Sanaa appeared spontaneous and 
uncoordinated.  Many of the rioters were reportedly young 
boys caught up in the anarchic spirit.  Any symbol of wealth 
and influence served as a focus for demonstrations, 
regardless of party or tribal affiliation.  Mobs attacked the 
Ministries of Oil and Finance, as well as the offices of 
Sabafon, owned by Yemen's premier sheikh, Abdullah al-Ahmar. 
Demonstrators ransacked the International Bank of Yemen, 
mistaking it for the World Bank.  Angry protestors threw 
rocks at passing cars, assuming that anyone wealthy enough to 
afford gas was part of the corrupt elite responsible for 
their hardship.  Yemenis on the street were both saddened by 
the riots and angry with the ROYG for its lack of compassion. 
 "I can't believe how my people are destroying the country," 
said one Yemeni.  He then qualified, "But you must understand 
why the people are so angry." 
 
5. (C) Several sources report a harsh crackdown on 
journalists covering the unrest.  An al-Jazeera TV team was 
reportedly assaulted by security forces, and two of its crew 
detained.  The ROYG banned correspondents from satellite 
channels from covering the events, and transmission of all 
footage was also banned.  There were other reported incidents 
concerning journalists from the independent al-Ayyam 
newspaper, the Nasserite weekly al-Wahdawi, the Yemen Times 
and al-Khaleej. 
 
--------------- 
Heads Will Roll 
--------------- 
6. (C) The price hike was a severe shock to all but the most 
wealthy Yemenis.  The cost of diesel rose from 17 YR per 
liter (approximately nine US cents) to 45 YR (23 US cents); 
gasoline jumped from 35 YR (18 US cents) to 65 YR (34 US 
cents); and kerosene and butane, used for cooking, showed 
similar increases.  Widespread price gouging by 
small-business owners made matters worse.  Taxi fares costing 
300 YR (1.50 USD) on Tuesday shot up to 2000 YR (10.36 USD) 
by Wednesday, far exceeding the average rise in fuel prices. 
Seeing an opportunity for quick profits, stores doubled and 
even tripled prices on nearly every consumer item.  The ROYG 
and business leaders reached an agreement on July 19 in which 
both sides promised to take legal and disciplinary measures 
against those who sought to exploit the situation, but it had 
little effect.  Coupled with an inflation rate hovering 
around fifteen percent and a highly unstable currency 
exchange, Wednesday's inflationary shock was simply too much 
for many Yemenis to bear (ref B). 
 
7. (C) Political fallout from the decision has only just 
begun, but it is likely that the riots will mark an end to 
the careers of a number of prominent ministers.  Much of the 
demonstrators' anger was directed at Prime Minister Bajammal 
and the London based Arab weekly al-Quds al-Arabi reports 
that he is planning to flee Yemen.  The fate of Finance 
Minister Salami remains similarly in question (ref A). 
Opposition parties issued a joint statement denouncing the 
riots, but calling on the ROYG to rescind the "unjust 
measures" immediately.  MP Hamid al-Ahmar, son of Sheikh 
Abdullah, also condemned the ROYG's decision to lift 
subsidies.  Although calling for calm and condemning violent 
protestations, the opposition Islah party accused the ROYG of 
issuing "shoot to kill" orders to security forces, despite 
Government claims of restraint. 
 
--------------------------- 
Long-Run Benefit to Yemenis 
--------------------------- 
 
8. (SBU) The pressure to lift fuel subsidies dates back to a 
1995 agreement with the IMF in which Yemen agreed to a 
package of economic reforms, including a reduction of 
subsidies, in return for financial assistance.  According to 
the IMF, fuel subsidies cost the ROYG approximately six 
percent of GDP in 2004.  The cost was projected to rise in 
2005 to as much as 700 million USD as a result of rising 
world oil prices.  In addition, the subsidies led to a rent 
economy that allowed military officers and others to benefit 
from smuggling fuel.  Total annual loss to the economy may 
have been over a billion USD.  In recent years, declining GDP 
growth, a growing budget deficit, and diminishing oil 
reserves have made the development of a secure revenue base 
more urgent (ref C). 
 
9. (SBU) On July 19, the ROYG issued a list of benefits 
Yemenis will derive from the reduction of fuel subsidies. 
The Government promised to expand social insurance to 200,000 
additional citizens, channel revenue to welfare projects at 
the Social Fund for Development and Public Works, and to 
construct a natural gas pipeline from Mareb to Aden and 
Hodeidah to upgrade power stations.  The ROYG promised to 
protect existing subsidies for water, sanitation and 
electricity, as well as to protect domestic industries such 
as fishing and cotton production.  The plan also included 
measures to reduce government expenditures on diplomatic 
representation and official travel. 
 
10. (C) At the outbreak of the riots, ROYG reaction was 
generally terse and unapologetic.  The Prime Minister blamed 
violence on conspirators, while Minister of Civil Service 
al-Sufi was quoted on al-Jazeera, saying the killing of 
protestors was "a natural reaction" by the security forces. 
In the days that followed, however, ROYG public statements 
became more conciliatory, seeking to explain the benefits of 
the move to the public.  The revenue will, "lift six million 
people out of poverty," said al-Sufi.  Minister of 
Agriculture Suwaid added, "The new price policy will 
dramatically reduce water consumption," by forcing Yemenis to 
conserve diesel-powered irrigation in agriculture. 
 
--------------------------------------------- --- 
Comment:  Lack of Trust Between ROYG and Yemenis 
--------------------------------------------- --- 
 
11. (C) Lifting fuel subsidies was essential for long-term 
economic health.  The World Bank and others have long 
advocated the gradual introduction of such changes to prevent 
sudden inflationary shock and civil unrest.  After delaying 
action for several years, the ROYG finally bit the bullet, 
but there appears to have been almost no strategic plan for 
implementation.  By announcing a dramatic lift in fuel 
subsidies at 9:00 pm to go into effect at midnight, the ROYG 
sparked an inflationary panic that caused hysteria throughout 
the country.  In the months leading up to the decision, the 
ROYG took no ownership of the reform package, repeatedly 
shifting responsibility to Parliament and denying that any 
price hikes were planned.  The Cabinet did nothing to prepare 
Yemenis for the changes, nor did it explain the future 
benefits of increased revenue.  Few Yemenis understand the 
link between these programs and fuel subsidies, and those 
that do have little faith that the ROYG will deliver.  The 
ROYG's policy explanations that followed the riots were too 
little too late, and their first explanation - adjustments to 
world oil prices - was not credible.  Corruption and 
mismanagement have severely undermined the Government's 
credibility, and many Yemenis believe that officials will 
simply pocket the new revenue.  For the moment, Yemenis seem 
unwilling to make sacrifices for a government they do not 
trust.  End comment. 
Khoury