WORLD TRADE
ORGANIZATIONWT/L/296
19 March 1999
(99-1115)
Original:  English
YEMEN – REQUEST FOR OBSERVER STATUS
Communication from Yemen
The following communication, dated 11 March 1999 and addressed to the Director-General
has been received from the Minister of Supply and Trade of the Republic of Yemen.
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On behalf of the Government of the Republic of Yemen (GROY), I have the honour to submit
this application for an observer status in the General Council of the World Trade Organization
(WTO), and its subsidiary bodies.  In this respect I would like to state that it is the intention of the
GROY to apply for accession to the WTO in the near future.  In the meantime, we believe that
granting observer status would enable the GROY in its endeavour to reach that stage.
The GROY is quite willing to submit any relevant information pertaining to our foreign trade
regime or other economic aspects, as soon as it is made available to us.  Meanwhile, our Permanent
Mission to the UN in Geneva will be in constant contact with the WTO Secretariat in order to enhance
our mutual exchange of communication.
The GROY has embarked on a series of extensive economic and social reforms.  The goal is
to bring legislation and institutional entities into conformity with WTO agreements.
We kindly request you to consider this application in the General Council.WT/L/296
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OVERVIEW OF YEMENI ECONOMY AND THE
DEVELOPMENT OF THE TRADE SECTOR
1. Introduction
(a) The Republic of Yemen is located on the southern corner of the Arabian Peninsula.  The total
area is 550,000 square kilometres excluding Ar-rub-Al-Khali.  The coast area is about
3650 square kilometres.  There are more than 112 Yemeni islands scattered in the Red Sea.
(b) The Republic of Yemen is a low-income country with population growing at 3.7 per cent per
annum.  Rapid population growth in Yemen is a severe problem where according to estimates
Yemen will double in the next twenty years, unless effective population policies are
introduced.
(c) The resident population of the Republic of Yemen is 17.7 million, currently distributed
among (20) governates.  Population density varies from one governate to another;  however,
average population density is 28 per square kilometre.
2. Structure of the Economy
(a) Economic structure in Yemen witnessed changes in the course of the Development process.
Agriculture share to GDP dropped from almost 28 per cent  in 1990 to only 17 per cent in
1996.  On the other hand, agriculture dominates the economic activities in rural areas, and
employs more than 50 per cent of the total labour force.  Both manufacturing and extractive
industries recorded an increase in their shares due to the increased role of oil production and
refining, which reflects a clear structural transformation of the economy.  The share of the oilsector has increased from 12 per cent in 1990 to 17 per cent in 1997.  In the meantime, the
service sector has a large share in the economic structure, accounting for more than
70 per cent of GDP in 1997.
3. Macroeconomic Context
(a) The Republic of Yemen which came into being in 1990, encountered four difficult years of
transition to the new democratic system and the new approach to economic management,
where the transition period was characterized by  slow economic growth, high inflation and
high levels of unemployment, during the period (1990-1994).
(b) In general, that transition period mentioned earlier resulted in three fundamental problems.
Fiscal imbalance characterized by high govern ment budget deficits, sharp fluctuation in the
exchange rate, and a multi-system exchange rate for the Yemeni Rial.
(c) In the face of the above economic difficulties the Yemeni Government decided in
November 1994 to take remedial policy actions, and proposed a comprehensive Economic,
Financial and Administrative Reform Programme.  Over the last four years, Yemen has made
major progress towards achieving macroeconomic stabilization and has embarked upon
comprehensive reform designed to generate growth and employment opportunities.WT/L/296
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4. The Reform Programme
(a) Yemen's current economic reform and stabilization programme has been designed mainly in
response to the massive macroeconomic deterioration observed in 1991-1994.
(b) The Government embarked on the implementation of the remedial policies in early 1995
focusing on a number of policy instruments, including reduction of the Government budgetdeficit through reducing subsidies granted to public sector, enterprises (e.g. electricity, fuel
products, communications and social services).  Policy efforts were also devoted to correcting
the multi system exchange rate by moving towards a unified independently floating regime.
Monetary and credit policy instruments were introduced through liberalizing interest rates.
On the external front, efforts were activated to reduce foreign indebtedness and finally, the
government initiated a privatization programme.
(c) The macroeconomic reforms stipulated in the Economic Financial, and Administrative
programme were designed to be implemented concurrently with a well articulated
development strategy in the form of the First Five Year Plan (1996-2000) which provided the
necessary medium and long-term planning for projects that would build the basic economic
infrastructure, and gradually remove bottlenecks in order to sustain growth in the Yemeni
Economy.
5. Success of reforms to date
(a) The Government programme has been successful.  Macroeconomic stabilization was
achieved.  The core inflation rate dropped from about 65 per cent in 1994 to around
12 per cent in 1996, and further to only 6 per cent in 1997.  The Yemeni currency (Rial)stabilized at about YR 130 to one US$.  Fiscal deficit was reduced from about 17 per cent of
GDP in 1994, to only about 1.8 per cent of GDP in 1997, through a combination of tax reform
and expenditure restraint, and by improvement in the price of oil.
(b) Similarly, the government has also made substantial progress in implementing structural
reforms in the area of trade policy.  Yemeni traders today face a more open and transparenttrade regime.  Reforms include a simplified and less protective tariff structure, elimination of
all import bans, export restrictions and import licensing, and streamlining of customs
procedures and documentation requirements.
6. External Sector
(a) The period 1991-1994 in terms of economic performance was affected by exogenous factors
as well as by domestic policy choices.  Crude oil production declined (1991-1993) producingan adverse impact on government revenue and balance-of-payments, but recovered strongly
in 1994 due to oil production increase.
(b) The said period was characterized by instability in growth rates, steadily rising inflation,
mounting fiscal deficits.  Consequently, the overall balance on the external accounts was
negative, relating essentially to the external debt.WT/L/296
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Amendments on Trade Sector
(a) In July 1995 an important step was taken to introduce interest rate reform by removing fixed
interest rate structure in Yemen, liberalizing commercial bank loan rates.
(b) Following the depreciation of the official rate (YR/US$) in January 1996, a freely floating
exchange regime was adopted, and by mid-1996 all government and Central Banktransactions were shifted to the freely floating rate.
(c) Treasury bills were introduced in December 1995 as government instruments to eliminate the
recourse to the banking system.
Trade and Tariff Reform
(a) Import licensing and import bans were removed in March 1996 with some exceptions,
including fruits and vegetables, and were replaced with tariffs.  In this context, import tariffswere realigned around a four-ban structure, entailing substantial reductions for some items.
(b) The excise tax rates were harmonized with the new import tariff structure, and excise taxation
was broadened in January 1997 to facilitate the introduction of a general sales tax system.
(c) The nominal free-market rate has considerably stabilized from 1995 onwards, stimulating
rapid growth of non-oil sector imports.  Furthermor e, the external trade data indicate that the
external sector is characterized by major structural weakness, namely the exceedingly low
ratio of non-oil exports to non-oil sector imports, which were only 6.3 per cent in 1997.  Thus,
the Yemeni economy is highly vulnerable to the weakening of crude oil production and/or
prices, and private transfers from abroad.
Trade Liberalization
(a) Yemen has prudently chosen a gradualist approach to external trade reforms, which involved
the removal of import restrictions except for items banned or licensed for security, public
health, and religious reasons.  With rates ranging from 5 to 30 per cent, a four-band tariff
structure was introduced.
(b) In the distant past, Yemen's agricultural output responded positively to the import ban on
fresh fruits and vegetables.  At present, domestic manufacturers are adversely affected by
relatively high tariffs on their imported inputs, which need to be lowered.
(c) To stimulate non-oil exports, the government authorities have introduced duty drawback
schemes, improved temporary admission systems, and implement zero rating of exports under
the modified excise tax legislation.  Further moderate reductions on tariffs would reduce the
remaining anti-export bias of the trade regime.
(d) The Ministry of Trade and Supply is mandated by the existing laws to regulate domestic
prices and trade monopolies, which restrict competitive conditions in the product markets.
However, the Yemeni authorities intend to remove restrictive trade practices in the domestic
market and eliminate the price-fixing cartel in  the trucking sector.  After implementing deeper
subsidy cuts in wheat and flour, and petroleum products, the government's programme hasalso already implemented the opening up of the wheat trade and distribution of petroleum
products to the private sector, which will broaden the room for market-based economic
activity in Yemen.WT/L/296
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Investment Incentives
(a) A number of amendments in December 1996 were introduced to the Investment law, which
now enables the General Investment Authority (GIA) to serve as a "one-stop shop" for the
rapid clearance of investment projects applying for income tax and import tariff exemptionoutside the crude oil and mineral extraction sector.
(b) In addition, exempting the customs duties on imported equipment (excluding passenger cars),
the new incentive system provides income tax holidays for at least seven years which can be
stretched up to 16 years subject to the Cabinet approval.
(c) After the termination of the income tax exemption period, the exporting projects will benefit
from further tax incentives.  The new system makes no discrimination between foreign and
domestic investment.
Reforming Tax System
(a) To improve the efficiency and fairness of the existing tax regime in Yemen prior to the
commencement of the programme, important amendments to the existing legislation will
become effective.  Those include:  (i) revised income tax law that will consolidate income,rationalize rates as well as brackets exemptions, deductions and income coverage, and reform
bank provisioning requirements in order to broaden the tax base, improve compliance and
reduce incentive distortions, and (ii) elimination of the remaining import surcharges and fees.
A General Sales Tax (GST) law will be adopted by June 1999 and become effective with the
2000 budget to replace the production exise tax by a value-added tax, with a basic rate of10 per cent, a tax credit mechanism, and zero rating for exports.  The revised income tax will
be further reviewed in 1999, with a view to fo rmulate by June 1999 a plan for phasing in the
harmonization of the top rate for wages and salary  income with the top rate for other personal
income and cooperate tax rate.
(b) The customs law will be amended during 1999 to underpin the ongoing customs
administration reform, and in particular to establish transparent and effective valuation
procedures and to bring customs regulations closer in line with WTO rules.
Tax and Customs Administration
(a) Historically, the tax system featured complicated rate structures, a wide range of exemptions,
and cumbersome filling and payments procedures, which tended to increase taxpayers'
compliance costs.
(b) However, Yemen has introduced significant changes into the excise tax system which
considerably streamline the import tariff system.
(c) The remaining tasks in the tax reform agenda include:  (i) the implementation of Tax Payer
Identification Number (TIN) system for all tax purposes;  (ii) reductions in the range of
income tax exemptions;  (iii) strengthening customs clearance and import duty collectionprocedures;  and (iv) reorganization of the Ta x Department along functional lines with the
primary objective of promoting voluntary compliance.WT/L/296
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(d) In the area of tax and customs administration, the government continues to implement a
comprehensive modernization programme supported with the International Monetary Fund
Technical assistance.
(e) In particular, the tax payers identification number (TIN) system will be expanded to key and
major tax payers, with adequate penalties for non-compliance, and the need forcomputerization to implement the new system will be reviewed.
(f) The cigarette banderole tax system for imported cigarettes has become fully effective since
late October to reduce smuggling, along with use by domestic producers of ink-stamped
packets and counters.
(g) Customs clearance procedures are being streamlined to facilitate trade and transparency and
to strengthen duty collection.  A side bene fit will be an improvement in the quality and
timeliness of trade data.
(h) The gradual elimination of generalized subsidies through annual price increases for
administered goods will continue.  Starting 1 January 1999, subsidy of wheat was totally
lifted.  All price, import and marketing controls for wheat will be completely eliminated,
thereby eliminating a major source of inefficiency and rent-seeking activities.
(i) To ensure that prices of petroleum products (except diesel and LPG) will remain above or in
line with world market prices, efforts are underway with the IMF on a price mechanism to
allow automatic regular adjustments of domestic prices to movements in world prices and the
exchange rate.
(j) The accounting of the purchases and sales of the domestic refineries (Marib and Aden) as
well as of the Electricity Company will be based on world market prices to ensure greatertransparency.
Regulatory Framework and Privatization
(a) An important element in Yemen's effort to move to a market-oriented economy is to
encourage investment through instituting a regulatory and legal framework appropriate for amarket economy.
(b) Before the commencement of the programme, amendments to the Trade and Agencies Laws
will eliminate provisions allowing for price and trade monopoly enforcement by the
Government.
(c) However, more fundamental reform of the regulatory and judicial structure is needed.  Efforts
will take place in the future by the Government to achieve this goal.
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