All the economic infirmities of the two former States along with the new State have been inherited by the new State economy. For instance, the Second Gulf War and Unification harmed the economy. The unification cost was steeper and during the period
1991 to 1994 the public outflow and expenditure were relatively high, amounting to 44.07 in 1991 and 119.88 in 1995. The direct cost of unification is evident from the increased budget expenditure. The cost of employing new public that were appointed for certain political reasons was represented by the increased budget expenditure.
Moreover, the cost of military spending as well as the political promotion campaign also represented the cost of unification. In comparison to the direct cost, the indirect cost was much more. Although no exact data were available regarding the cost, an estimation can be made about it. According to the government‟s claim, the total cost of the civil war was around 12 billion Dollars. By adding the cost of human harm and losses to the $12 billion, we can obtain the total indirect costs, which would be much more.
Distorted and biased new laws, rules and regulations and establishments were the other components of indirect costs. The joint committees, which were given the responsibility for the laws and regulation and unified constitution did not have enough time and right to make the most appropriate and unbiased laws and regulations. That is the reason their works were imperfect, incomplete, contradictory and contained ambiguity as they reunited the institutions, regulations and laws of the two former States.
The national interest and concern was completely overlooked and it made the Government choose a pro Gulf States and Saudi stance because these were the States that hosted more than 2 million Yemeni workers. Furthermore, substantial aid and support as well as loans for development were also given to Yemen by the pro Saudi and Gulf States.
The Government and the IMF generally believed that the massive inequities and imbalances in the aggregate/cumulative accounts caused the economic decline, which became apparent in 1995, when the government actually looked at the economic condition seriously. In order to handle this serious situation, the Government as well as the IMF identified the remedy, which was to come up with a policy and course of action that would enable them to reduce the budget deficit and thus help to stabilize the economy. This would help to bring back the economic growth and prosperity by achieving the equity in accounts. This view is clearly reflected in the policies of free economic reform (Al-Asaly, 2000).
The Government made links with the IMF as well as World Bank seeking their support and aid, which was due to the need for international assistance as well as inadequate local resources. In the negotiations, the opposing parties were not included and the results of the negotiations were productive in a sense that it produced agreements that were significant to economic reform.
Being comprehensive, the reform program comprised restructuring as well as stabilization policies. Measures and stabilization policies were taken to cut down the general expenditure, raise the public revenue and redesign the budget. Limits were imposed by the IMF on its finances as well as on the budget deficit. According to the IMF, the budget deficit must not exceed 3% of GDP. Moreover, the budget deficit must be covered by public borrowing and not by borrowing from Yemen‟s Central Bank. In addition, the Government decided to reduce the direct as well as indirect transfers, as well as the salaries and wages. As the major revenue is earned through taxes, the
Government had to change the tax code and make an effort to improve the tax collection systems of the Tax Authority (World Bank, 2002).
Figure 2.1 shows the economy‟s performance during the period, in a summarized manner. This figure measures the economic growth and performance as well as other significant macro variables. According to all economic indicators, during the period 1990 to 1995 Yemen‟s economy was on the verge of decline. The oil sector‟s growth was positive whereas the non-oil sectors faced a very low growth. Looking at their growth rates, the real oil GDP grew at a rate of 7% on average, whereas, on average, the real non-oil GDP growth rate was near to zero. The real GDP growth rate was 1.4% on average.
Figure 2.1 Developments in main macro indicators
Sources: Al-Asaly, 2000
If we look at the non-oil sector closely (Table 2.1), we will find that, mostly, the sectors faced either fluctuated or negative growth rates with only some of the service
sectors having a substantially positive growth, however, these growth rates were not stable. That is the reason why the economy did not witness transient shocks and underwent permanent, deep and long lasting structural problems, which left a bad impact on almost all of the economic indicators (Al-Asaly, 2000). In addition, investments were stagnant and there was a decline in the private per capita consumption. Not only the domestic savings were negative but also the national savings were low.
After the conflict and period of unification, although the biggest challenge for the Government was to swiftly grow the economy, Yemen‟s government inherited an over centralized public sector. This resulted in the dominant, inefficient and over regularized public enterprises and a number of private sector activities were restricted (Freeman et al., 2004).
Table 2.1: Macroeconomic Indicators in Yemen, 1991-2000 Year GDP
The condition of Yemen‟s economy deteriorated and it was not taken seriously by the Government until 1995, when the government realized and made efforts to eliminate the problem. With the coordination between Yemen‟s Government and the IMF, inequities in the aggregate account were observed and they believed that only free economic policies could bring stability in the economy and further improve it.
Negotiations took place between the Yemen Government, IMF and the World Bank for getting aid and support in order to enhance the economic growth. The negotiations were settled by signing a contract concerning economic reform. The particular elements included reducing the expenditure, raising the public revenue as well as restructuring the budget (Al-Asaly 2001).
The privatization program started in 1995, in Yemen, with the help of the IMF and World Bank. Privatization was found to be a significant factor in economic reform that targeted on privatizing 70% of the State owned enterprises (SOE) employment by 2000. However, the large ventures remained under the control of the Government (World Bank 2002). Although the program moved at a slow pace, by 2007, more than 100 ventures were privatized.