The Second Yemeni Economic Conference
Sana'a  18 - 20 April, 1998

Abstract 22

Since 1995 the Republic of Yemen has embarked on implementing a serious program of financial and administrative reform. In collaboration with the International Monetary Fund and the World Bank, a group of economic policies and laws, as well as some monetary and financial measures have been put to effect with the general aim of putting an end to economic deterioration. This objective could only be achieved through controlling high inflation rates, depreciation of the domestic currency, reducing budget and balance of payments deficits, achieving real GDP growth, and creating job opportunities.

These measures, however, need to be associated with a program that restructures the Yemeni economy, whereby the role of the state in economic activities is to be reduced, the administrative apparatus to be reformed, and administrative measures to be simplified, facilitated, and clarified. The private sector and individual projects are to be given greater role to play, while market forces will represent the mechanism and tool to achieve economic growth.

The major objective of the study is to attempt to identify a logical and constant relation between the group of basic economic variables and the monetary variables in a dynamic framework. Hence, this study focuses on the monetary and financial aspects of the reform program, as well as on the role of the banking system in its implementation. The paper also highlights the relations and the theoretical link between some macroeconomic variables such as the GDP, the labor force, and the general price level, and then explains the interchangeable influence between the monetary variables, the most important of which are the interest rate, the inflation rate, the exchange rate, the quantity of money and its composition.

Also, for that purpose, the paper presents a macro model that exhibits the nature of the relation between macro variables and monetary variables. Hence, based on the theoretical analysis and the available estimates one can use the model as an indicator and a guide for designing a proper monetary policy. The conclusion shows the results that have been achieved, the rate of success, and the side effects of the application of these policies and measures.