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IMF Executive Board approves three-year $552.9 million facility with Yemen

September 3, 2014

The Executive Board of the International Monetary Fund (IMF) has approved a three-year Extended Credit Facility (ECF) arrangement with the Republic of Yemen for an amount equivalent to SDR 365.25 million ($552.9 million; or 150 per cent of Yemen's quota) to help maintain macroeconomic stability and promote inclusive growth.

As a result of the Board's decision, an amount equivalent to SDR 48.75 million (about $73.8 million) is available for immediate disbursement. The remaining amount will be phased in semi-annual disbursements, subject to six reviews.

Naoyuki Shinohara, IMF Deputy Managing Director, and Acting Chair, said, "The Yemeni authorities have made commendable efforts to support macroeconomic stability and growth. Nonetheless, political and security challenges have continued to weigh on the policy environment and economic outcomes. In particular, fiscal and external balances have weakened due to delays in key reforms and increased sabotage of oil facilities. Looking ahead, the main challenges are to improve the fiscal and external positions, as well as support inclusive growth and job creation.

"The authorities have launched an ambitious economic programme to meet these challenges and durably reduce Yemen's high unemployment and widespread poverty. The authorities' program, to be supported by a three-year arrangement under the Fund's Extended Credit Facility, is designed to address balance of payments needs, close the fiscal financing gap, and maintain macroeconomic stability while protecting the most vulnerable groups.

"The centerpiece of the authorities' reform package is phasing out large and inefficient fuel subsidies. A first step in this direction has already taken place and will be complemented by well targeted social transfers to the poor. Additional fiscal measures will aim at reducing the budget deficit over the medium term by reforming the civil service and improving tax compliance. These measures will also free budgetary resources for needed infrastructure and social spending.

"To preserve macroeconomic stability in the near term, the central bank needs to adjust monetary policy as needed to limit the impact of subsidies reform on inflation. It should also continue to improve its monetary framework to strengthen policy transmission and support greater exchange rate flexibility. The financial sector reforms planned by the authorities aim at strengthening bank regulation and supervision as well as at enhancing market infrastructure."

Key elements of the Fund-supported programme are to:

Strengthen fiscal adjustment and protect the poor. This is to be achieved through reforms to reduce untargeted subsidies, contain the wage bill, and enhance compliance of large tax payers. Targeted cash transfers to the poor will be increased by 50 percent following the adjustment in the fuel prices. Infrastructure investment will be gradually increased in order to boost job creation and potential growth. The government will also improve public finance management.

Maintain prudent monetary and exchange rate policies. These will aim at containing inflation, enhancing competitiveness, and avoiding exchange rate volatility while preserving foreign exchange reserves.

Reform the financial sector, improve governance, and encourage inclusive, private sector-led growth. Primary reforms aim at strengthening consolidated and cross border supervision, developing regulation to address risks specific to Islamic banking, and strengthening the Central Bank of Yemen's powers to resolve banks. Governance reforms include improving the business environment, transparency and accountability. Additional reforms are aimed at enhancing the government implementation capacity to help mobilize donor support and improve public infrastructure investment.

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Source: CPI Financial

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