The World Bank’s Board of Executive Directors approved today a Development Policy Grant for the Republic of Yemen, for the amount of US$70 million, in support of reforms critical to setting the conditions for non-hydrocarbon growth in Yemen, and for improving the protection of the poor and vulnerable.

Yemen is an oil-dependent economy that faces a rapidly declining oil production. On average, 85 percent of exports and 65 percent of fiscal revenues were derived from oil exports and domestic oil trade since 2000.

The production peaked in 2001 and has since declined at a rate of about 3 to 4 percent per annum. Yemen is forecast to become a net-importer of petroleum products in 4 to 5 years, if no new oil is found and current policies, including subsidizing domestic energy consumption, is maintained.

For the time being, Yemen’s oil sector remains the main source for foreign reserves and key for the fiscal balance. Oil production accounts for 10 percent of the country’s GDP.  Fiscal revenues from oil have dropped from 16 percent of GDP in 2008 to 7.4 percent of GDP in 2009, because of declining production and international prices. The non-hydrocarbon revenues run at about 8 to 9 percent of GDP.

Yemen’s prospects depend on the hydrocarbon sector for the short–term and on the identification of new sources of economic growth over the medium–term. While oil production is expected to continue to decline, the production and export of liquefied natural gas (LNG) via the Yemen LNG project (YLNG) will offer some cushion, but cannot compensate for the loss of oil exports over time.

Against this background, the World Bank’s Board of Executive Directors approved today a Development Policy Grant for the Republic of Yemen, in support of reforms critical to setting the conditions for non-hydrocarbon growth in Yemen, for strengthening public financial management and for improving the protection of the poor and vulnerable. The decision of the Bank’s Board complements the IMF Board approval of an arrangement with Yemen under the Extended Credit Facility (ECF) on July 30th, 2010,  which aims to restore fiscal sustainability over the medium term through primarily strengthening the revenue base and reducing energy subsidies.

“This new Private Sector Growth and Social Protection Development Policy Grant (PSG & SP DPG) from the World Bank will complement the program under the ECF through its focus on private sector development and improved coverage of the social protection net in Yemen.”, said David Craig, Director for Yemen at the World Bank.

Wilfried Engelke, Senior Economist at the World Bank, added, ”The main objective of the proposed Development Policy Grant is to foster private sector growth in the non-hydrocarbon part of the economy, to improve key aspects of the public financial management system, and to mitigate the impact of the ongoing fuel subsidy reduction on the poor by creating a more inclusive and more equitable cash transfer system”.

The responsibility for implementing this program rests with the Ministry of Planing and International Cooperation (MoPIC).  The MoPIC is responsible for the implementation of the PSG & SP DPG as well as for coordinating the actions among the concerned institutions (including Ministry of Finance, Central Bank of Yemen, and the Ministry of Labor and Social Affairs).

MoPIC and the Bank are looking forward to the lessons learned from this operation , and have agreed to monitor the progress in the program supported by the DPG and its evaluation will serve to inform the preparation of similar or other Bank operations, as well as for the mid-term review of the Bank’s assistance strategy for Yemen.