Yemen struggles towards fuel price reform as finances crumble

by Shelton on August 3rd, 2014

filed under Finances

* Fuel subsidy cuts vital to strengthen state finances

* Could allow government to ease fuel shortages

* Austerity announcement seeks public support for reform

* But public anger makes reform risky

* Opposition from entrenched interests, not just the poor

By Yara Bayoumy and Martin Dokoupil

SANAA/DUBAI, July 21 (Reuters) – A clampdown on state
spending was an effort by Yemens government this month to win
public support before its biggest economic reform in years:
higher fuel prices. But an angry public may not be won over.

In the capital Sanaa, where roads to petrol stations have
been choked for months by queues of cars waiting for scarce fuel
supplies, the frustration is palpable.

Ive been standing in line for six hours … By the time I
arrived at the front of the queue, they told me there was no
fuel left, doctor Waddah Hashed said.

Our lives have become hell.

Taxi driver Mohammed al-Heemi has organised a group of his
colleagues to exchange information on which pumps in the city
happened to have petrol.

One day we work, the next day we stand in a queue. This has
been our life for the past four months, he said. It is obvious
the government wants to persuade us of the need for the price
rise, but the people cannot take this anymore.

The people will go out … to bring down the government if
the price of fuel is raised.

The public mood is a big risk for the government as it tries
to shore up its rickety finances. One of the poorest countries
in the Arab world, Yemens economy has always struggled, but
political instability since the regions Arab Spring uprisings
in 2011 have left it particularly vulnerable.

The government has been trying for more than a year to
secure a loan of at least $560 million from the International
Monetary Fund (IMF), which is pressing for reforms such as cuts
in subsidies which keep down prices of petrol and other fuel.

In the long run, reducing the subsidies would be good news
for the state budget; they cost about $3 billion last year, or a
third of state revenue. Some of the money freed up by the reform
could be used to increase fuel supplies, easing the shortages
which anger the public.

But the immediate impact of the reform would be to raise
fuel prices for Yemeni consumers – potentially, a politically
explosive step. A previous attempt by the government to cut
subsidies in 2005 led to unrest which left some 20 people dead
and over 300 wounded. The reform was cancelled.

More civil unrest in the country of 27 million would feed
into general instability which a range of anti-government forces
could try to exploit, including al Qaeda-affiliated militants.

With something like fuel subsidies, theres never a good
time, so you have to look for the least bad time, Jane
Marriott, Britains ambassador to Yemen, told Reuters in May.

From all the ministers, president and people Ive spoken
to, everyone knows that it needs to be done, she said. But for
the plan to work, Yemen has to ensure there is enough fuel to
satisfy demand at the higher prices, she said.

If people still have to queue after the subsidies are
reduced, that will be a recipe for disaster, Marriott said.

AUSTERITY

Pumps in Sanaa sell a litre of petrol – when they have it –
at an official, subsidised price of 125 rials ($0.58), below
roughly 300 rials charged on the black market, where prices have
risen sharply because of the fuel supply crisis.

Yemeni officials refuse to say publicly when the subsidies
will be cut, or how deep the reductions will be. But a senior
oil ministry official, speaking on condition of anonymity
because of the sensitivity of the issue, told Reuters that an
announcement might be made as soon as the end of this week.

He said the government wanted to lift official prices of
both petrol and diesel to 200 rials per litre. The price of
diesel, widely used for generating electricity, is now 100 rials
per litre officially and 250 rials on the black market.

The approach of the reform explains the timing of the
austerity package ordered this month by Yemeni president Abd
Rabbu Mansour Hadi. The steps include curbs on foreign travel by
government officials, who must fly economy class, a freeze on
recruitment and car purchases by ministries, and a review of the
viability of state-owned firms.

The aim of the measures … based on President Hadis
orders was to convince people to accept the lifting of
subsidies, by showing that the government has begun austerity on
itself, Yemeni political scientist Ali Seif Hassan said.

The urgency of subsidy reform has increased in recent months
as militant attacks on oil pipelines have hurt Yemens export
earnings. Sanaa earned a mere $671 million from exporting crude
oil in January-May, down nearly 40 percent from a year earlier.

Foreign donors, who pledged $7.9 billion in aid in 2012,
have hesitated to send the funds, discouraged by corruption and
the poor security situation. Only a third of that aid package
has arrived, an IMF official said in May.

The IMF, which forecast in April that the Yemeni government
faced a 2014 budget deficit of 6.7 percent of gross domestic
product, says it supports a gradual reduction of subsidies
combined with welfare transfers to the poorest people.

Fuel subsidy reform would hurt not only Yemens poor but
also relatively affluent people. A July IMF report estimated 40
percent of fuel subsidies went to the richest 20 percent of
households, while only 25 percent went to the bottom 40 percent.

The reform could also hurt some businessmen who have
profited from the system, for example by obtaining fuel at
subsidised prices to sell on the black market. A report by
research institute Chatham House last year called fuel subsidies
a key source of corruption and patronage.

There will be key people within the system who will lose a
lot of money, said Marriott.

But she said that in the absence of reform, the worst-case
scenario is that salaries dont get paid, the economy starts to
grind to a halt. Yemenis are incredibly resilient and
resourceful. But everybodys got a breaking point.
($1 = 214.8 Yemen rials)

(Additional reporting by Mohammed Ghobari; Editing by Andrew
Torchia and Louise Ireland)