Page 1 1 PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB5892 Operation Name Fiscal Sustainability and Growth Region MIDDLE EAST AND NORTH AFRICA Sector Central government administration (60%); Private sector (20%); Other social services (20%) Project ID P122414 Borrower(s) REPUBLIC OF YEMEN Implementing Agency MINISTRY OF FINANCE Ministry of Finance P.O. Box 190 Sana’a, Yemen Tel: (973-1) 260 370 Fax: (973-1) 263 040 5 finance@gmail.com esharafi@mof.gov.ye Date PID Prepared August 3, 2010 Estimated Date of Appraisal Authorization August 17, 2010 Estimated Date of Board Approval October 26, 2010 1. Key development issues and rationale for Bank involvement Yemen is an oil-dependent economy that faces a rapidly declining oil production. On average, 85 percent of exports and 30 percent of fiscal revenues were derived from oil exports since 2000. The production peaked in 2001 and has since declined at a rate of about 3 to 4 percent per annum. The annual fiscal loss incurred since 2008, the year when the international price for petroleum peaked, amounts to 8 percent of GDP, or about 50 percent of 2008 oil revenues. 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, are maintained. Yemen’s fiscal sustainability is highly vulnerable to international prices for oil. After running a balanced budget (cash basis) in 2008, the country suffered a fiscal deficit (cash basis) of 8 percent of GDP in 2009. Barring fiscal correction, Yemen could be expected to experience an overall fiscal deficit of about 8 percent of GDP in 2010 without adjustment (commitment basis). The projected annual deficit, equivalent to US$2.4 billion, is currently largely financed through domestic sources. Program negotiations with the IMF led to measures which project a deficit for 2010 of about 5 percent. This Development Policy Grant operation would offer external budget support financing amounting together to 0.3 percent of GDP. Against this background, the IMF Board has approved an arrangement for Yemen under the Extended Credit Facility (ECF) on July, 30 th , 2010. Implementation of the ECF supported reform program aims to restore fiscal sustainability over the medium term through primarily strengthening the revenue base (application of the General Sales tax, elimination of tax exemptions) and reducing energy subsidies. The program is expected to maintain price inflation and help to stabilize the depreciation path of the Yemeni Riyal to adjust to the gradual reduction in oil exports. The proposed Development Policy Grant will help to focus on reforms critical to setting the conditions for non- hydrocarbon growth and supporting fiscal sustainability in Yemen and, while protecting the poor. These reforms are reflected in a set of prior actions to be completed before presenting the operation to the Board. They focus on: (i) enhancing non-hydrocarbon revenues and the strengthening of public financial management; (ii) improving the investment climate; and (iii) making the social protection system more effective. This selection is Page 2 2 consistent with the thematic areas of the Bank’s Country Assistance Strategy 2009-2012 for Yemen. The prior actions focus largely on institutions and processes. This is because many of Yemen’s institutions are weak and have limited capacity. 2. Proposed objective(s) The proposed operation is to mitigate the impact of the current fiscal crisis in Yemen and to support the Government’s medium-term economic reform program, thereby helping the country improve fiscal sustainability and set the conditions for enhancing growth in the non-hydrocarbon part of the economy. 3. Preliminary description Nine prior actions were selected for this Development Policy Grant (DPG) in support of the government’s program . This DPG contains a robust reform program that is adequate for Yemen’s situation, and which complements the structural reform agenda agreed upon with the IMF under the ECF arrangement which is expected to be approved by the IMF Board on July 28 th , 2010. Under Yemen’s circumstances, some process- oriented actions are crucial to paving the way for deeper reforms and institution building. The proposed program will therefore prepare the ground for even stronger policy reform actions as part of the Government’s reform program. The proposed program pillars are: (i) regaining fiscal sustainability, (ii) improving public financial management and governance; (iii) generating private sector growth and employment; and (iv) improving the efficiency and equity of the social protection system. All four areas are consistent with the Country Assistance Strategy (CAS), support key aspects of the Government’s reform program and reflect the Bank’s comparative advantage. They are underpinned by ongoing Bank-supported investment operations as well as past, current or planned Analytic and Advisory Activities (AAA) work. 4. Environment Aspects This operation is a development policy grant in support of a program of reforms for which the environmental requirements of Operational Policies/Business Process 8.60 apply. The proposed DPG is not expected to have significant effects on the country's environment, forests and other natural resources. The environmental and natural resource implications are driven to a large extent by the nature of an operation. In the proposed operation, none of the prior actions as listed in the policy matrix is expected to have environmental impacts or risks. None of the Bank’s safeguard policies are triggered by the proposed DPG. 5. T entative financing Source: ($ m) Borrower International Development Association 0 70 Total: 70 million 6. Contact point Wilfried Engelke Title: Senior Economist. Tel: 967-733-232-396 Email: wengelke@worldbank.org Location: Sana’a, Yemen (IBRD) Page 3 3