This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 02 SANAA 001877 
 
SIPDIS 
 
PLEASE PASS TO MCC FOR A. BAYLOR 
 
E.O. 12958: DECL: 07/11/2015 
TAGS: ECON EFIN EINV EPET KMPI KMCA YM ECON COM
SUBJECT: JEFFREY SACHS VISITS SANAA, WARNS OF ECONOMIC 
CRISIS 
 
REF: SANAA 1875 
 
Classified By: CDA Nabeel Khoury for reasons 1.5 b and d. 
 
¶1. (U) Summary.  Jeffrey Sachs, Director of the UN Millennium 
Project, projected a bleak future for Yemen without dramatic 
policy changes and a significant increase in foreign 
assistance during a visit to Sanaa, July 1-4.  In Sachs's 
view, poor economic performance, declining natural resources, 
and a looming demographic crisis put Yemen on a direct course 
for economic collapse and social unrest.  Sachs's agenda was 
to create a greater sense of urgency within the ROYG and to 
pressure donors to increase aid, but his conclusions matched 
those of other international observers, which indicate that 
Yemen may be on the verge of becoming a failed state.  End 
summary. 
 
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Yemen:  One of the Most Difficult Challenges in the World 
--------------------------------------------- ------------- 
 
¶2. (U) On July 2, Sachs made a presentation to the donor 
community in which he characterized the situation in Yemen as 
"one of the most difficult challenges in the world."  (Note: 
Yemen is one of eight pilot project countries selected by the 
UN as a target for the Millennium Development Goals Project. 
End note.)  He contended that there were serious problems 
with the ROYG's current strategy for poverty alleviation and 
development, as the country is struggling simply to maintain 
existing economic level.  With estimates that that the 
population will double by 2028, rapidly depleting water 
tables, and no prospects for replacing diminishing oil 
resources, Sachs predicted a rapid decline in GDP and a 
"pressure cooker" situation for Yemeni society. 
 
¶3. (U) Sachs attacked the IMF's plan for Yemen as "baby 
economics."  He said it offered the country nothing more than 
an austerity program without a real development strategy, and 
would lead to a collapse of living standards for most 
Yemenis.  He was also highly critical of donor countries for 
not providing sufficient funds to stem the negative trends, 
saying aid levels need to reach per capita USD 90 if Yemen is 
to have a "fighting chance."  Consistent with his global 
campaign to assist developing nations, Sachs called for 
immediate improvements to health, family planning, education, 
and agriculture.  He stressed that to attract foreign 
investment, Yemen needs to develop the production sector and 
anti-corruption programs within it.  Sachs specifically 
highlighted Aden Port, tourism, and natural gas as areas for 
targeted improvement. 
 
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Growing Consensus:  Yemen Faces Economic Crisis 
--------------------------------------------- -- 
 
¶4. (U) Sachs's conclusions echo recent reports from a number 
of organizations.  The World Bank, in its Spring 2005 
Economic Update, characterized Yemen's macroeconomic position 
as increasingly fragile.  The Bank reported decelerating GDP 
growth (now about 3 percent) and consistently declining per 
capita GDP, as well as high inflation and dwindling current 
account surpluses.  The anticipated decline of oil production 
over the coming decade (7.5 percent in 2005) will put 
increased pressure on the ROYG to tap alternate sources of 
revenue to maintain basic services.  Even with the projected 
removal of fuel subsidies and the introduction of a sales tax 
(septel), the Bank projects a large fiscal deficit and 
balance of payments gap that the ROYG will be unable to fill 
without extensive administrative reforms and growth in the 
non-oil production sector.  The ROYG has shown little 
progress in improving administrative efficiency or in 
developing a more diversified economy. 
 
¶5. (U) Similarly, the IMF concluded in its March report on 
Article IV consultations with the ROYG that without a 
complete program of policy adjustments, Yemen will face 
calamity in the near future.  The IMF projects that the share 
of oil revenue to GDP will drop from 25 to 8.5 percent and 
the budget deficit will increase to 21.9 percent of GDP by 
¶2009.  In addition, the IMF predicts a current account 
deficit to exceed 13 percent of GDP and depleted 
international reserves within five years.  As a result of 
these trends, as well the possibility of a currency crisis 
(reftel), it will become increasingly difficult for Yemen to 
service its public debt. 
 
¶6. (U) Poor economic indicators are coupled with sobering 
social and political realities.  In its annual Failed States 
Index, the NGO Fund for Peace ranked Yemen the eighth most 
fragile state in the world, in more danger of collapse than 
Haiti, Afghanistan, Rwanda, and North Korea.  (Note:  The 
index was based on twelve indicators, including demographic 
pressures, emigration, economic development, and the 
criminalization of the state.  End note.) 
 
¶7. (U) Comment:  Sachs met with President Saleh for nearly 
two hours but, as in the aftermath of similar encounters, 
there seems to be little indication that Saleh absorbed the 
immediacy of Yemen's economic problems.  Parliament's recent 
decision to enact elements of the long-awaited economic 
reform package, including a sales tax and the lifting of the 
fuel subsidy (septel), give some cause for hope.  Sachs is 
correct, however, that such austerity measures without an 
effective program for economic development will have a 
devastating effect on the populace and would likely bring 
social unrest.  With rampant corruption and inefficient 
administration, it is unclear whether Yemen would be able to 
absorb successfully the quantity of foreign aid suggested by 
Sachs.  Nevertheless, without some form of immediate 
international intervention, Yemen is facing an economic 
collapse that could have a broad ripple effect on regional 
and international security.  End comment. 
Khoury