Economic performance

Given the slowdown in oil production, real GDP growth is estimated to have decline to 2,7% in 2004, compared with 3,1% in 2003. Non-oil GDP growth is estimated to have reached 4,1% in 2004, supported by stronger activity in the construction, transportation and trade sectors, and fueled by domestic demand stemming from continued fiscal expansion and high public sector wages.
The inflation increased from 12,1% in 2003 to 14,5% in 2004, owing basically to expansionary fiscal and monetary policies as well as higher food prices caused by adverse weather conditions.
The 2004 fiscal deficit was estimated at 4,5% of GDP, about 1% higher than the original budget. The larger than expected deficit is explained by higher development spending and larger petroleum subsidies. An increase in imports and strong capital inflows mitigated most of the export gains resulting from higher oil prices, leaving the current account balance broadly unchanged.

Because of higher oil exports and strong capital inflows, international reserves increased to about $1,5 billion or 16,4 months of imports at end-2004.
Some progress has been made in structural reforms, The revised General Sales tax, submitted to parliament in late 2004, included several improvements. Macroeconomic indicators and indicative ceilings were used fir the first time in the preparation of the 2005 budget. Strong foundations were laid for the civil service reform.
Agricultural activities still dominate the economy and the sector employs more than half of the country's total workforce. Agriculture is therefore considered as the key element affecting the economic and social life of the people. The future of the sector is hampered however by the rapid depletion of groundwater resources.
The country offers wide scope to further develop the industrial sector. Major opportunities exist in the field of food and beverages and the production of textiles and leather products. Manufacturing industries can also benefit from the wide range of locally available raw materials, especially for the production of building materials and activities in the field of iron and metal working.

Future Prospects
International experts believe that Yemen is at a crucial crossroads, facing the long-term challenges arising from the rapid decline in oil production. A comprehensive strategy is to be implemented aimed at promoting growth and diversification of the productive base. Other reforms are needed to ensure fiscal adjustment and external sustainability, with polices guided by long-term considerations and strengthening of the non-oil sector.
The movement to promote private sector led growth directly through privatization will also continue. Privatization is considered to be one of the main components of the economic reform programme and the objective is to embark on a profound redefinition of the role of the public sector, to disengage the state from some economic activities and to reduce the pressure on public spending.
The investment law has granted projects that produce for export a set of inducements and additional advantages. Customs duties can thus be imposed or increased in the import of good and commodities that compete with local produce, provided that domestic production meets the need of the market, adheres to quality and price criteria and does not create a monopoly. Within the frame work of bilateral cooperation, the Republic of Yemen has signed investment promotion and protection agreements with a series of Arab countries as well as with the United Kingdom and the Netherlands. It is expected that negotiations with other partners will increase the number of countries interested in tightening economic relations with Yemen.
An important element in Yemen's efforts to move to a market-oriented economy is to encourage investment through instituting a regulatory and legal framework appropriate for a market economy. While these steps move forward, the government is developing the Aden Free Zone as a test case.

The development of the port of Aden is indeed a major feature in the economic and industrial development of the country. Strategically located, the port is expected to be capable of attracting massive investments from abroad and there are good prospects for the refinery of the city to become once more an important center for the refining activities on behalf of customers from the Gulf region. Projects in Aden should push the port back up again among the top 20 ports in the world, having a strong effect on the country's economy. Full development of the industrial zone and the airport are in the pipeline and will take several years to materialize.
An important part of the country's economic potential lies with the tourism industry. The diversity of the natural environment (plains, mountains and deserts) may be in common with many countries, but in Yemen it is unique. The country's cultural and historical heritage is at least as impressive. The tourism industry is now under development and in the years ahead, tourism will further expand and form a major contribution to the economic and social development of Yemen.

In late 2001, the Gulf Cooperation Council agreed to allow Yemen membership of its health, education, labour and soccer institutions. This was in response to a long-standing request of Yemen to join the Council. However, full membership would still appear to be some way off.
Yemen was granted observer status at the World Trade Organisation in 1999 and the government announced early 2000 that it would apply for full members. A working group was set up with the WTO to discuss membership. The country's desire to join the organization stems from its interest to develop into a regional trade hub and its belief that membership is essential be able to compete with other regional centers.

Basic Economic and Financial Indicators, 2000-2004

Sources.: Yemeni authorities and International Monetary Fund