DUBAI/SANAA (Reuters) - A deal to remove Yemen's leader from power may pave the way for flows of desperately needed foreign aid into the country, after aid slowed to a trickle this year because of political violence.
Ten months of unrest demanding the removal of President Ali Abdullah Saleh, and deteriorating security around the country, have deterred international donors from providing help needed to finance food imports and government operations.
Saleh agreed in November to step down after ruling for 33 years, with presidential elections set for February 21 next year. This could encourage donors to chip in to support the transition to a new government -- but continuing violence between Saleh's supporters and his foes threatens the agreement.
If aid is delayed further, the economic crisis is likely to worsen in Yemen, where some 42 percent of the population of 24 million lives on under $2 a day, according to World Bank data.
"I expect that the international community recognizes the need of Yemen for urgent aid...The suffering and shortages are acute," said Motahar Alsaeedi, economics professor at Sanaa University and a member of the Shura Council, a chamber of parliament.
Yemeni officials held talks with the International Monetary Fund in Jordan in November; afterwards, the IMF declined to comment on the situation in Yemen. It approved a $370 million loan for Yemen in 2010, and has said it is ready to discuss fresh aid when the situation allows. But it may not be willing to provide money until Yemen has a stable government that can push through economic reforms -- something which may have to wait at least until after the February elections.
"The IMF stands ready to assist Yemen, including by providing new loans once the political crisis is resolved and the parties are able to implement a program of reforms that is consistent with inclusive growth, low inflation, and lower poverty," Hassan al-Atrash, the IMF's head of mission to Yemen, told Reuters in July.
Another potential source of aid is wealthy Gulf states which have an interest in keeping the region stable. In June and July, Saudi Arabia and the United Arab Emirates announced they would provide supplies of crude oil and fuel to Yemen, but they have been silent on the possibility of monetary aid. Last month, Yemen's prime minister designate said Riyadh and Abu Dhabi would provide more oil and electricity, but he did not give details.
"Resources should be first coming from Riyadh because...for Saudi Arabia, stability of Yemen is a strategic interest," said Ibrahim Sharqieh, a conflict resolution expert at the Brookings Doha Center in Qatar.
Yemen's foreign minister urged foreign donors in March to provide up to $6 billion to his government over the next five years to boost economic development. That sum may not be enough, some analysts think. Mohamed al-Maytami, economics professor at Sanaa University, estimates Yemen needs at least $5 billion in aid over one year, mostly to finance the state budget; Sharqieh said that amount was needed in each of the next three years.
"I believe that without third-party support from outside, Yemen can't survive," said Maytami.
Only a fraction of $4.7 billion promised at an international donor conference in 2006 has been disbursed so far to Yemen, one of the world's poorest countries with per capita income of $2,500, roughly a tenth of the level in neighboring Oman.
As political protests spread this year, the government vowed to raise wages, create jobs and distribute handouts worth an estimated 3.5 percent of economic output, or $1.1 billion.
But attacks by tribesmen on a key oil pipeline this year were a heavy financial blow for the government, which relies on oil sales for 60 percent of its income. With the central bank's hard currency reserves falling, the cabinet has little room to maneuver; the IMF has predicted Yemen's gross official reserves will drop to $2.7 billion this year from $5.1 billion in 2010.
In a sign of fiscal strain, electricity is only available for several hours a day in some parts of the country. Development projects have been halted and thousands of public sector employees have not received salaries.
The damage to the pipeline cut oil exports and forced Yemen to import crude oil and fuel; Aden's oil refinery halted operations in November after crude supplies ran out.
The IMF forecast in October that the government's budget deficit would reach 7.1 percent of economic output in 2011, or $2.6 billion, above the cabinet's initial plan for a $1.5 billion deficit. The finance ministry and central bank did not reply to Reuters questions.
Yemen's economic output is projected by the IMF to shrink 2.5 percent this year, the first fall since the north and the south of the country unified in 1990, after an 8 percent jump in 2010. Unemployment shot up this year as businesses closed down and analysts estimate half of the labor force is jobless, up from around 35 percent in 2010.
"For five months, I have been without work. I live with my family on advances or aid from my friends and can no longer pay the rent of my house," said Ali Abdul Rahman, who lost his job when a humanitarian organization closed over security concerns.
Shortages of electricity, water and fuel have sent prices soaring, with the inflation rate estimated by Maytami at between 50 and 60 percent, levels unseen since 1995, a year after a civil war with southern separatists ended. The IMF estimated inflation was 11.2 percent last year.
Some staples such as rice saw prices jump by up to 120 percent, while the price of the volume of water which a family needs to cover basic needs for one week quadrupled to about 4,000 rials ($19 at the official currency rate). The rials market rate fell around 14 percent to as low as 243 against the dollar during the political unrest, nearing a record low of 250 hit in August last year. It is now around 230.
"Customers are not buying anything anymore apart from dry batteries to receive electricity at home after several months of blackouts in Sanaa," said Anas Abdul Majed, owner of an electronics shop in the capital.
Some analysts fear foreign donors, deterred by corruption and waste as well as the security situation, may wait to see who wins the elections before committing funds. This could condemn the economy to at least three more months of turmoil.
"The current 'wait-and-see' approach to the situation...will hamper a swift and effective response to the economic crisis, and is likely to exacerbate the human cost of the crisis," analyst Peter Salisbury wrote for London's Chatham House think tank in October.
Editing by Andrew Torchia