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

Abstract 26

This paper comprises three main sections in addition to the Introduction, the Conclusion and the Recommendations. In the introduction, emphasis is made on factors leading to the deterioration of the economic situation and the prevalence of various imbalances, hence highlighting the urgent need for a reform program to resolve those imbalances. The introduction also reviews the main elements constituting the Economic Reform Program while examining major indicators of the past two years of the program. In addition, the introduction presents stages of adjusting oil products prices, which have taken place within the framework of the Reform Program.

Section One of the paper describes the subsidy mechanism being followed since the beginning of the 1990s and the continuous increase in subsidy allocation during the same period, with emphasis on factors influencing such increase. Those factors are:

Value of the Yemeni Rial vis-a-vis foreign currencies.

International oil prices.

Consumed quantity of oil products.

Also, when analyzing the effect of these factors on the total value of oil and gas consumed in the economy, indicators showed a respective decline of 64% and 30% of the value as a consequence of the first two factors, as well as a decline of 6% in the quantity of consumption.

However, in terms of efficiency of the current subsidy system in reaching targeted groups, the high-income group has been the first beneficiary of the system, whereas low-income groups received a very small proportion of the total subsidy.

Section Two analyzes the burden on the economy resulting from subsidy by relating the amount of total subsidy to the budget deficit. This relation has had detrimental effect on other macroeconomic indicators. The increase in domestic liquidity resulting from deficit financing through bank lending has led to high inflation. Therefore, and as a result of lifting subsidies there was some positive economic developments reflected in improving budget deficit, balance of payments, and domestic public savings.

The Third Section focuses on tracing the social impacts emanating from lifting subsidies. Directly by raising prices of subsidized goods, or indirectly by having to pay higher prices for non-subsidized goods and services. The end result is measured by both price and income effects.

When specifying various groups affected from lifting subsidies, it was clear that urban population was the most affected because of the population’s reliance on the different means of transportation. Also, within this group, poor families and low-income strata were the worst hit. Rural population has been basically affected as a result of the increase in diesel prices, taking into account that means of transportation are much less used in rural areas and considering the different mode of consumption. Hence, the impact of the increase in overall prices on rural population were limited compared to that on city dwellers, and regardless of the income differential between cities and rural regions.

Finally, the study concludes by showing that the consequences of lifting subsidies were relative. While social effects reflected the cost of the economic reform from the various aspects, an adequate policy should require a certain level of balancing between the economic objectives and Government’s commitment towards society. This can be achieved through redistributing the burden among the various groups on the one hand, and seeking a more efficient subsidy mechanism to target poor and deprived groups on the other.

The optimum balance, when lifting subsidy on oil products, can be reached by considering the following variables: the amount of oil products consumed, the various social groups, the level of income, and at the same time accounting for the peculiarity of each product. For instance, while the price of gasoline can be completely liberalized, since the high-income group represents the majority of its consumers, kerosene mainly consumed by low-income group can have a preferential policy to be considered as part of the social safety net targeting this latter group.