Macroeconomic developments in Yemen

The opening of the migrant labor market in the Gulf States in the 1970"s has absorbed as much as 15% of the Yemeni population, much of it from traditional rural communities. A slack in the demand for this market in the early 1980"s caused a drop in worker remittances and a surge in foreign borrowing, leading to increases in foreign debt and fiscal deficits. Government attempts to rectify the situation by restricting foreign exchange transactions have strangled the flow of imported inputs needed by industry and agriculture and led to an excess capacity in manufacturing. The government"s foreign exchange reserves are critically low, and government restrictions have stifled the growth of foreign currency deposits in domestic banks. The latter are also weak in their ability to mobilize domestic savings. While oil revenues will help resolve some of these problems, there is need for immediate reform of the exchange and trade regimes, medium-term improvement of tax collection measures, and changes in the domestic banking system.