US embassy cable - 05SANAA2957

C O N F I D E N T I A L SECTION 01 OF 03 SANAA 002957 
 
SIPDIS 
 
E.O. 12958: DECL: 10/10/2015 
TAGS: PREL, PGOV, EFIN, ECON, KMCA, KMPI, YM, DOMESTIC POLITICS 
SUBJECT: RECORD OIL REVENUES FOR YEMEN -- WHERE HAS THE 
MONEY GONE? 
 
REF: A. SANAA 1976 
     B. SANAA 1919 
     C. SANAA 2920 
     D. SANAA 2844 
     E. SANAA 1446 
 
Classified By: A/DCM Thomas Burke for reasons 1.4 (b) and (d). 
 
1. (C) Summary.  In September, the Ministry of Finance (MOF) 
submitted a record supplementary budget to Parliament for 
approval, totaling 50 percent of the original 2005 budget. 
As a result of higher than expected oil revenues and the 
lifting of fuel subsidies, Yemen is showing a revenue surplus 
of approximately 400 billion Yemeni Riyals (USD 2.07 
billion).  The budget provoked outrage in Parliament, where 
MPs accused the ROYG of spending the money illegally and 
wasting Yemen's windfall through corruption and 
mismanagement.  It also appears that Government expenditures 
have exceeded surplus revenue, creating a fiscal crisis 
instead of an opportunity for investment.  The crisis 
highlights the growing influence of Parliament in budgetary 
oversight and the dire need for financial accountability at 
the MOF.  End summary. 
 
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Record Oil Prices Lead to Record Spending 
----------------------------------------- 
 
2. (SBU) In September 2005, the Ministry of Finance submitted 
to Parliament a record supplementary budget of 451 billion 
Yemeni Riyals (YR) -- 50 percent of the original 2005 budget. 
(Note: The exchange rate as of October 10 was USD 1 to YR 
193.  End note.) 
This is the sixth consecutive year that the ROYG has 
requested supplementary spending.  The original 2005 budget 
conservatively estimated oil revenues at USD 30 per barrel, 
but with the world market averaging double that price the 
ROYG is showing a surplus of YR 400 billion.  This still 
leaves a gap of YR 51 billion, which MOF claims it is filling 
with additional tax and customs revenues, as well as some 
spending cuts. 
 
3. (SBU) The bulk of supplementary spending is proposed for 
fuel subsidies, at YR 237 billion, which were reduced but not 
completely eliminated in July.  This is in addition to YR 44 
billion already set aside for subsidies in the annual budget. 
 Additional military expenditures cover increased shipping 
and operations costs created by higher fuel prices.  Over YR 
87 billion is allocated for capital expenditures, with the 
largest percentage being applied to the Public Works Program 
to complete road construction projects.  Of note is YR 3.82 
billion, set aside to reimburse the Crest company for its 
share in the Block 53 oil production agreement, cancelled by 
Parliament amidst charges of corruption.  (Note:  Crest, a 
UAE-based company with strong ties to ROYG officials, was a 
proposed partner in the Hunt Oil extension agreement in Block 
18, also blocked by Parliament.  End note.) 
 
4. (C) The budget allocates YR 32 billion for the first phase 
of the new wages strategy, which proposes to increase 
salaries for government employees eightfold over an 
unspecified period.  The ROYG and Parliament have yet to 
agree on a minimum wage or an overall wage scale, and delays 
have led to growing frustration among civil servants.  Public 
pressure is forcing the ROYG to increase salaries as a quid 
pro quo for lifting fuel subsidies in July. (Ref A) In 
September, for example, over 200 military personnel protested 
in Sanaa for higher wages without a permit, and were quickly 
whisked away by military police. Without a commitment to 
civil service reform, however, including incentive-based pay 
and removal of "ghost workers," the strategy promises to 
inflate ROYG expenditures for many years to come. 
 
-------------------------------------- 
Some Question ROYG's Budget Priorities 
-------------------------------------- 
 
5. (C) According to Saadaldin Taleb, a former MP and current 
advisor to the National Democratic Institute, a majority of 
parliamentarians appeared ready to reject the supplementary 
budget without sending it to committee.  In their view, the 
budget is in violation of the Constitution and the Financial 
Law, which stipulate that in the case of a surplus, each 
government body must apply to MOF for a spending increase, 
which must be approved by Parliament.  Such procedures were 
ignored in this case, and according to Parliament, the ROYG 
already committed the money without approval.  Islahi MP 
Abdul Rahman Bafadel said Parliament was further outraged by 
what it calculates to be a fifty percent reduction in the 
investment budget.  Taleb concurred, pointing to reductions 
in health and education spending, despite increases in 
expenditures on the military and road construction. 
 
6. (C) MOF admits to spending surplus funds without approval, 
saying that Yemen's development needs require immediate 
action.  Dr. Fadl al-Shoaiby, Deputy MOF for the Budget 
Sector, said the ROYG had to spend the money quickly before 
it was devalued by inflation. Shoaiby also contended that 
Parliament forced as much as seventy percent of the spending 
by opposing further reduction in fuel subsidies, demanding 
extensive wage increases, and obstructing implementation of a 
general sales tax. (Ref B) Ibrahim al-Nahari, MOF Director of 
External Relations, disputed the accusation that the ROYG cut 
the investment budget.  According to Nahari, the Cabinet 
simply halted new projects until those currently under 
construction are completed.  In fact, said Nahari, the 
supplemental budget adds YR 112 billion to overall 
development spending (much of it for electricity). 
 
7. (C) Bafadal ridiculed this claim, saying the ROYG "refuses 
to allocate the full investment budget and then calls it 
savings."  He continued his attack saying that MOF 
intentionally underestimates the price of oil, in order to 
give the appearance of fiscal restraint when examined by the 
IMF.  MOF then uses supplementary budgets to cover 
expenditures they don't want the public to see.  Dr. Mohamed 
al-Mansoob, Assistant Deputy Minister of Finance, confirmed 
many of these accusations, admitting to Econoff that there 
are a number of hidden costs that indicate a lack of spending 
discipline.  These include an estimated YR 70 billion spent 
on the May Unification Day celebration in Mokhallah.  Another 
YR 70 billion is dedicated to military spending, said 
Mansoob, without oversight or audit. 
 
--------------------------------------- 
Budget Provokes Parliamentary Crisis... 
--------------------------------------- 
 
8. (C) Sheikh Abdullah al-Ahmar, Speaker of Parliament, 
defended the supplementary budget in the legislature and 
demanded that it be passed immediately, without discussion. 
The members responded with outrage, with one MP screaming at 
the Speaker from the floor, "You are a tyrant!"  Al-Ahmar 
eventually retracted his position, allowing for debate on the 
budget and opening the door for serious dissent.  Bafadel and 
others argued that any extra oil income should be put in a 
special account, to be accessed only with explicit 
Parliamentary consent. 
 
9. (C) Prime Minister Bajammal, recognizing a possible crisis 
in the works, called a meeting with the GPC members in 
Parliament.  According to Taleb, Bajammal and GPC MPs cut a 
deal in a private session.  The PM agreed to Parliament's 
demands to question a number of ministers on issues of 
corruption and in return, the budget would be sent to the 
Finance Committee. (Ref C) Committee Chairman Ali Ahmed 
al-Imrani, known as an honest GPC parliamentarian and a 
reformer, suddenly found himself in an impossible position. 
By recommending the budget for approval, Imrani could appease 
the ROYG and remain loyal to his party, while provoking the 
ire of reform-minded parliamentarians.  Alternatively, he 
could oppose the budget, making him a hero to Parliament 
while bringing the full wrath of the ROYG down on himself. 
 
----------------------------- 
...Becomes Third Rail for MPs 
----------------------------- 
 
10. (C) By his own admission, Imrani then did the only 
reasonable thing:  he fled to his village in Abyan claiming 
his mother was ill.  The Chairman did not return to Sanaa 
until after Parliament went to recess, leaving the 
supplementary budget in limbo.  Imrani is resentful that the 
ROYG does not respect Parliament's role in the budgeting 
process, dumping the supplementary budget on the Committee at 
the end of the fiscal year.  When Parliament returns, it will 
also have to consider the proposed 2006 budget and the final 
spending statement from 2004.  Imrani pleaded with post to 
provide the Finance Committee with the training and technical 
assistance necessary to analyze and evaluate Yemen's budgets. 
 
11. (C) Imrani expressed his hope that Parliament would be 
able to compromise by approving only part of the budget, but 
admitted that this tested the previous limits of 
Parliamentary power.  In the case of the annual budget, 
Parliament is not permitted to amend the budget -- only to 
recommend changes.  It is not clear at this time if MPs have 
broader powers over a supplementary budget.  Without such a 
compromise, however, Imrani fears that the budget will face 
rejection on the floor.  "There are too many signs of 
corruption in this budget," lamented Imrani, adding:  "I will 
resign as Chairman as soon as possible." 
 
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Comment: "A Program of Corruption" 
---------------------------------- 
 
12. (C) The supplementary budget offers clear indications of 
runaway spending at MOF.  Despite higher than expected oil 
revenues, the ROYG is still running in the red.  Minister 
Salami has been applying pressure on all Government 
ministries and agencies to contribute to the treasury.  This 
has resulted in poor decisions on a recent telecommunications 
tender and near panic at the Customs Authority, where 
officials are attempting to enforce new import fees on 
automobiles. (Ref D) Nahari admitted that even with the 
supplementary budget, the ROYG will only manage to maintain 
last year's deficit level of 1.5 percent.  The GPC-controlled 
Parliament is likely to approve the budget at the end of the 
day, but the sheer size of the request has provoked 
incredulity among MPs.  "This is a program of corruption, not 
reform," said one parliamentarian. 
 
13. (C) The core issue is lack of accountability in the 
budgeting process.  Efforts by the World Bank to install 
budgeting software (AFMIS) at MOF and other agencies have run 
into delays and corruption -- the program is led by Minister 
Salami's nephew.  The Central Organization for Control and 
Audit, Yemen's monitoring body for corruption, is flawed in 
that it reports to the President's office and has no 
authority over military spending.  Recognizing systemic 
problems at MOF, post is participating in a donor working 
group on public finance management reform, with the aim of 
rationalizing the budgeting process and opening it to public 
scrutiny. (Ref E)  As part of this effort, strengthening 
parliamentary oversight of Government finance would help 
create a check on corruption and allow for broader input into 
the ROYG's investment priorities. 
Krajeski