Recent gains in Yemen's currency from a record low and an increase in its foreign exchange reserves are early signs that tough economic reforms are starting to pay off for the impoverished Arab state, a senior IMF official said on Friday.
The appreciation of the rial currency follows months of interventions by the government in the exchange rate market to halt its free-fall, which drained up 20 percent of the country's reserves. IMF mission chief to Yemen, Hassan Al-Atrash, told Reuters the government had not intervened in the market in the past month to support the currency, a sign the situation was stabilising.
"I suspect there was an overshooting of the currency and therefore this recent appreciation is to be welcomed," al-Atrash said in an interview.
The IMF approved a $370 million loan for Yemen in early August, the first IMF program in a decade, to help shore up an economy that has increasingly been weakened by a fragile security situation.
Yemen is struggling to cement a fragile truce against rebels in the north and curb an increasingly violent separatist movement in the south, while also fighting a resurgent regional al Qaeda wing in the country. The United States has pressured the government to crack down on al Qaeda.
As the currency tumbled to historic lows, the government intervened twice in July to inject $80 million and $57 million to support the rial. It has intervened nine times this year.
The currency has since strengthened against the US dollar and stood at 218 to the dollar on Thursday after soaring to 250 on August 1. Al-Atrash said the rial's sharp depreciation was in part due to expansionary fiscal policies by the government, which was printing money to finance the deficit. The government has blamed the numerous security challenges for the weakening in the currency.
In recent weeks, however, the currency has recovered some of its losses as the authorities tightened fiscal policy, while central bank financing of the deficit had subsided.
"These measures have contributed to the stabilisation of the exchange rate and the safeguard of foreign exchange reserves," al-Atrash said, noting that the government had built up about five-months of reserves. Since a failed Christmas Day attack on a US airliner by a Yemen-based al Qaeda militant, the international community has honed in on addressing the chronic poverty in the country.
One in three of Yemen's 23 million people suffer chronic hunger and more than one in 10 Yemeni children are acutely malnourished, according to UN aid agencies.
Faced with falling oil income, water shortages, large population growth and dilapidated infrastructure, Yemen's cash-strapped economy has struggled to stay afloat.
Al-Atrash said the IMF-backed program was focused on trying to restructure Yemen's public finances by cutting fuel subsidies, imposing a general sales tax and reducing exemptions on income and customs taxes. All of these will allow for more revenue to boost social and capital spending.
He said, however, the country needed more foreign aid if it was going to tackle poverty and make a successful transition away from dependency on oil, which accounts for 50 to 60 percent of government revenues and 90 percent of exports.
"This is a country that is facing serious economic challenges," said al-Atrash. "The choices they have are difficult and it will really be important to have donor assistance to help them with this transition," he added. A donor meeting on the sidelines of UN meetings in September is expected to come up with aid pledges for Yemen.
In January, Yemen said it needed $2 billion in aid and double that to turn its economy around. "Lack of donor support would imply difficult years ahead for Yemen from an economic perspective," he added.
Al-Atrash said economic growth would likely reach 8 percent this year, boosted by a new natural gas project. Next year, overall growth is set to moderate, although non-hydrocarbon growth is likely to accelerate due to increased capital spending on roads, electricity and sanitation.
He applauded the government for taking tough economic measures in a difficult environment.
"It is important to maintain this momentum, particularly as oil revenues go down. These are not easy measures but if there is donor assistance it'll help in reducing the impact of these reforms on the poor," al-Atrash added. He said without economic reforms, the mismatch between revenues and expenditures would worsen as income from oil declines further.
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