US embassy cable - 05SANAA2062

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 002062 
 
SIPDIS 
 
E.O. 12958: DECL: 07/27/2015 
TAGS: PGOV, PREL, PHUM, ECON, EINV, ENRG, KMPI, KMCA, YM, ECON/COM, DOMESTIC POLITICS 
SUBJECT: SALEH "RESCUES" YEMEN FROM PRICE HIKES 
 
REF: A. SANAA 1976 
     B. SANAA 2022 
     C. SANAA 1959 
     D. SANAA 2032 
 
Classified By: CDA Nabeel Khoury for reasons 1.4 b and d. 
 
1. (C) Summary.  Following a week of protests against the 
ROYG's decision to partially lift fuel subsidies, on July 25 
President Saleh ordered the Cabinet to reduce prices by seven 
to 22 percent.  The President reached his decision after 
consulting with tribal leaders, who in return agreed to lift 
a blockade of fuel shipments to Sanaa.  The Ministry of 
Finance is linking revenue from reduced subsidies to civil 
service wage increases, set to take effect over several 
months.  In rolling back the price hikes, Saleh is responding 
to some real domestic pressures.  Far from emerging the hero, 
however, there is now real dissatisfaction both in the street 
and inside the Government with the ROYG's handling of the 
entire affair.  End summary. 
 
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Saleh Takes the "Middle Way" 
---------------------------- 
 
2. (U) On July 25, President Saleh issued an order to the 
Government to lower the just raised fuel prices on both 
diesel and gasoline.  The ROYG's decision to lift fuel 
subsidies one week earlier led to rapid inflation and 
prompted riots throughout the country (ref A).  Saleh came to 
his decision following negotiations with tribal leaders from 
Mareb, al-Jawf, and Sa'ada, some of whom were responsible for 
a blockade of the Mareb-Sanaa road (ref B).  The roadblocks 
prevented critical shipments of diesel and cooking gas from 
reaching the capital, leading to shortages and long lines. 
The government-controlled newspaper al-Thawra reported that 
the President also held meetings with the Parliament, 
business leaders, and local council members to explain the 
economic necessity of lifting subsidies. 
 
3. (SBU) The Cabinet formally endorsed the President's 
decision on July 26, rolling back gas prices from 65 YR 
(approximately 33 US cents) to 60 YR (31 cents) per liter, 
and diesel from 45 YR (23 cents) to 35 YR (18 cents) per 
liter.  The Cabinet announced that the ROYG's annual subsidy 
for gas now totals 50 billion YR (260 million USD) and 165 
billion YR (855 million USD) for diesel.  (Note: Even after 
the partial lifting of subsidies, fuel prices in Yemen are 
less than half the world average.  End note).  ROYG officials 
sought to explain the sudden change of course by emphasizing 
Saleh's compassion.  "The President saw that the price was 
too high for the people and decided to take the middle way," 
said Deputy Minister of Oil Abdulmalik Alama. 
 
4. (U) The Cabinet also announced measures to cut government 
spending on conferences, travel, and celebrations, as well as 
on diplomatic missions abroad.  The Cabinet required that 
ministries "strictly observe laws and regulations" in the 
handling of foreign assistance and loans.  At the same time, 
the ROYG linked the reduction in fuel prices to government 
salaries.  The Salary and Wages Law, recently approved by the 
President, included a monthly minimum wage increase from 7000 
YR (approximately 32 USD) to 16,000 YR (85 USD) and to 20,000 
YR (104 USD) by the end of 2006.  It is now widely reported 
that Cabinet will balance the President's decision on fuel 
prices by limiting the increase to 15,000 YR (78 USD). 
 
------------------- 
ROYG Was Unprepared 
------------------- 
 
5. (C) Ibrahim al-Nahari, Director General of External 
Relations at the Ministry of Finance, echoed the thoughts of 
many in the donor community, saying that it was unwise of the 
ROYG to introduce major policy changes without a clear 
"education plan" for the public.  In his view, it was not 
clear to Yemenis what benefits they would derive from lifting 
fuel subsidies.  Only in the days following the riots, said 
Nahari, did ROYG ministers issue public statements defending 
the new policies (ref A).  Nahari also noted that despite 
anticipating widespread demonstrations against the price hike 
months ago, security forces appeared wholly unprepared for 
the July 20 riots.  Policemen were not in position to protect 
government buildings and reinforcements did not arrive until 
the following day. 
 
6. (U) The decision to lift subsidies cannot be separated 
from goals of civil service reform, explained Nahari. 
Government revenue derived from the removal of subsidies will 
be used primarily to fund salary increases and to offset lost 
revenue from the lowering of tariffs (ref C).  Nahari said 
the ROYG is currently in the final stages of implementing a 
biometric system to identify all civil service and security 
employees, and to eradicate duplications.  Ministries will 
receive increased salaries for staff retroactive to August 
2005, on the condition that they utilize the new biometric 
system for salaries. (Note:  The biometric system is designed 
to avoid mistakes arising from human error, such as the 
spelling of names.  End note). 
--------------------------------------------- ----------- 
Comment:  Political Maneuvering Dictates Economic Policy 
--------------------------------------------- ----------- 
 
7. (C) Saleh's decision to reduce fuel prices after a week of 
unrest revealed the ROYG's cynicism and confusion in 
implementing economic reform.  By delivering Yemenis from the 
burden of high fuel prices, Saleh sought to distance himself 
from the government and his own GPC party, and to further his 
image as the "President of all Yemenis" (ref D).  This 
distinction may be lost on average Yemenis.  When asked who 
was responsible for the unrest, one taxi driver responded, 
"The Government belongs to the President.  The President 
controls the tanks."  Reformist counselors to the President 
are equally frustrated.  Saleh's decisions first raising, 
then quickly lowering of fuel prices were both arbitrary and, 
de-linked from civil service or other economic reform 
measures.  ROYG officials were unable to explain whether 
lower prices would be supported by renewed subsidies or price 
controls.  While the former seems likely, the figures offered 
for this year's subsidies are identical to those agreed upon 
in Parliament several weeks prior to the riots.  In reality, 
the Cabinet is scrambling to provide economic justifications 
for the President's political maneuvering.  End comment. 
Khoury