Yemen Running out of Oil and Water

Article Summary
Yemen is quickly running out of oil, which accounts for 75% of state revenues. In the face of undeveloped alternative sectors and a mounting humanitarian crisis in its poorest regions, Yemen also faces acute water shortages. One solution to these woes is the development of the natural gas sector, writes Denise Yammine - but will it be enough?

For weeks, international organizations have been showering Yemen with grave population [surveys] and economic reports, raising the alarm over the significant deterioration in the country's living conditions and development. This deterioration is due just as much to decades of oppressive policies [under the rule of Ali Abdullah Saleh] as it is to the bloody protests that paralyzed the country last year.

The United Nations Children's Fund (UNICEF) has declared that Yemen has the second highest rate of chronic child malnutrition in the world - after only Afghanistan. The rate of stunted growth is 58%, and 30% of children in certain parts of the country are acutely malnourished. These rates are similar to those in southern Somalia. The non-governmental organization Oxfam warns of a serious humanitarian crisis in the region's poorest country, and fears an increase in the infant mortality rate. The Gulf Cooperation Council Assistant Secretary General for Negotiations and Strategic Dialogue, Dr. Abdelaziz Abu Hamad Aluwaisheg, announced last month that "the signals are very serious," pointing to the collapse of the Yemeni economy due to the depletion of natural resources (oil and water), and an increase in the unemployment rate to 53%. [All of this is taking place] in an area where a person [often] lives on less than two dollars a day.

Those frightening numbers add to the risks surrounding the current political transition, where Yemenis are preparing to elect Abed Rabbo Mansour Hadi - the vice president of the isolated president Ali Abdullah Saleh - as the country's president on February 21 according to the terms of the GCC-sponsored power transfer agreement. Declining oil production; low foreign reserves for Yemen's Central Bank; fuel shortages that have paralyzed local businesses and caused banks and currency exchange bureaus to stop buying Yemeni Riyals - all are enormous challenges noted in a comprehensive report by the Middle East Institute entitled "Crisis in the Yemeni Economy." But Yemeni leaders have shown no urgency in confronting these challenges. To the contrary "the Yemeni elite is turning Sana'a into Beirut 1975."

According to the report, the Yemeni economy faces two fundamental challenges. The first is a decline in oil production and revenues. The second is the scarcity of natural resources - especially water - key to agricultural production. In addition, remittances from Saudi Arabia have dropped, after the kingdom shut the door in the face of Yemeni workers for reasons more political than economic (the GCC countries fear the arrival of Yemeni workers as they would be arriving from a political environment friendly to elections, democracy, and human rights. Some Yemeni workers are also being kept out because of a lack of training and alleged inefficiency).

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The report says that "Yemen’s poverty is not particularly intense by world standards," as Yemen’s debt is about US $6 billion and its poverty rate is lower than Mozambique's or sub-Saharan Africa's. In addition, Yemen’s GDP per capita is higher than that of Kenya ($760), Vietnam ($930) and Pakistan ($1000). Moreover, the report asserts that the Yemeni economy is in desperate need of revival in order to break the circle of oil dependency and find alternative sources for economic development.

Yemen's Oil - and its Curse

Yemen has never been a major oil producer by international standards. Yemen was producing around 350,000 barrels of oil per day in 1995, a figure which rose to 450,000 in 2001 (comparatively, Saudi Arabia can produce 12 million barrels per day). After this, production gradually started to decline. However, Yemen was lucky. As its oil production started to decline, global oil prices rose sharply, reducing the economic impact of decreased production. As oil production declined, oil revenues rose. Over the the past few years, Yemen's oil revenues have been more closely correlated with volatile global oil prices than with local oil production levels. Oil has transformed the Yemeni economy: Production represented a small segment of the Yemeni economy in the 1990s [but] increased significantly between 2000 and 2010, becoming the country's primary export and [currently] accounting for 75% of state revenues.

But now, with the growing fear that Middle Eastern oil production will be disrupted in light of turbulence in the region, oil prices are on the rise again. This highlights the negative impact that declining oil production has on Yemen and on other Arab countries. But what is the cause of Yemen’s "oil woes"?

1 - In the Yemeni economy, the growth of the communications, transportation and trade sectors has outpaced the growth in the commodity sector.  The recent decline in oil production (from one third to 10% of GDP) has led to these three sectors dominating the economy. In contrast, the industrial sector shrank from 13% of GDP in 1994, to 7% in 1999 and to 5% in recent years. So even though Yemen has relied increasingly on its non-oil sectors, it has been unable to revive its economy [through them] because of a lack of investment competition in those sectors.

2 - Oil revenues have been heavily affected by Yemeni politics. Instead of increasing the capacities of this sector and regulating it through sales taxes or other measures, oil revenues - which made up 75% of state revenues [at one point]- were being spent erroneously (a few years ago, there were attempts to improve sales tax collection but the negotiations with the private sector were unsuccessful. The present crisis has further paralyzed these attempts).

3 - The International Monetary Fund has long called on Yemen to reduce its fuel subsidies, but the Yemeni government has never done so for domestic political reasons. First, the Yemeni opposition exploited the issue for political reasons (the Yemeni Congregation for Reform and the Muslim Brotherhood has played a significant and popular political role since 1997, when they won several parliamentary seats). The opposition claimed that for the government to lift the fuel subsidies would harm the people's interests, and would be tantamount to selling the country's sovereignty to the IMF. On another note, the subsidies also encouraged oil smuggling operations to Africa, where President Ali Abdullah Saleh, the First Armored Division commander Ali Mohsen, and many individuals from the Ahmar family were partners in the smuggling of "profitable and subsidized oil" to African customers.

The Water Crisis

Even though it rains several times a year in Yemen - unlike in other countries on the Arabian Peninsula - water is becoming increasingly scarce. There is no doubt that this is linked to a rise in the Yemeni population density and the limited means of supplying it with water. Egypt has the Nile, Iraq has the Tigris and the Euphrates, but Yemen has no rivers that supply it with water in its remote areas. Also, in contrast to the GCC countries, Yemen is not wealthy enough to build desalination plants. Yemeni agriculture consumes 90% of the country’s water. About half of Yemen’s agricultural land is rain fed (for corn and grain crops) and the other half is irrigated (Khat is a main agricultural product in Yemen. Its production uses 10% of the country’s agricultural land and accounts for 3% of GDP).

Experts are not exaggerating when they warn that Sana'a may become the first city in the world to run out of water in the next 10 years. Nature does not replenish the water taken from aquifers quickly enough to keep pace with the increasing water consumption of 23 million people. [What’s more], the population is expected to double in 20 years. The manager of the Water Resources Administration in Sana'a Khaled Zaid Al-Kharbi contends that the administration cannot supply more than half of the city's water needs saying "we have a problem supplying water to more than 60% of the capital. [This portion] is not served by the administration for its water and sanitation needs." A water expert with the German Agency for International Cooperation in Yemen, Anwar Shouli, says that "Yemeni officials do not yet realize the enormity of the problem. They are facing other problems right now - political and military - but they do not realize that the world's future wars will be over water."

A Lack of Alternatives

[Natural] gas production is one option to counter the reduction in oil and water in Yemen. [This strategy] has perhaps become the most popular option in the world in zones where conflicts revolve around energy resources. But the potential in that area does not seem reassuring for Yemen. If Yemen invests efficiently in the largest gas project in the country (the Yemen LNG project in Balhaf, southwest of Mukalla) and secures a means of transporting the gas from the Ma'rib gas fields to the market, the economy would receive an influx of 1 billion dollars annually. In addition, the government would benefit from an average of 100 million dollars in annual tax revenues over the next 25 years. Even though most of the revenues would go to foreign investors, such a project would supply the government a portion of the proceeds and [the ability to implement] progressive taxes.

But this alternative will not be realized without the necessary political will. It is also difficult to implement plans without a body of Yemeni specialists, an [effective] administration and institutions to safeguard the revenues and invest them in the correct manner. The Yemeni transitional phase is more about the people's livelihood than politics: Yemen is experiencing "economic disruption" as it has been forced to find an alternative to its oil dependency. Will the "old-new" regime [a reference to the upcoming administration that is to be led by the former vice president] be able to secure access to the national needs over which the people revolted in the first place?

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