VZCZCXYZ0000
RR RUEHWEB

DE RUEHYN #0087/01 0151120
ZNR UUUUU ZZH
R 151120Z JAN 08
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 8775
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC

UNCLAS SANAA 000087 
 
SIPDIS 
 
SIPDIS 
 
NEA/ARP FOR NATASHA FRANCESCHI, 
DEPT PLEASE PASS TO EB/IFD/OIA FOR J. NATHANIEL HATCHER AND 
ANN M. KAMBARA 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC YM
SUBJECT: PART ONE OF TWO: YEMEN'S 2008 INVESTMENT CLIMATE 
STATEMENT 
 
REF: SECSTATE 158802 
 
¶1.  SUMMARY:  In response to reftel, part one of Yemen's 
submission for the 2008 Investment Climate Statement follows. 
 This first section covers openness to foreign investment, 
conversion and transfer policies, expropriation and 
compensation, dispute settlement, performance requirements 
and incentives, and the right to private ownership and 
establishment.  END SUMMARY 
 
¶2.  Begin text of first section of Investment Climate 
Statement. 
 
------------------------------ 
OPENNESS TO FOREIGN INVESTMENT 
------------------------------ 
 
As one of the world's least developed countries, Yemen offers 
international investors natural resources and an inexpensive 
labor force.  On April 14, 2000, the government of Yemen 
requested accession to the World Trade Organization (WTO) to 
integrate more fully into the world economy, and gained 
observer status in 2002.  In November 2004, the United States 
Trade Representative, Department of State, Department of 
Commerce and other key US agencies began talks under the 
bilateral Trade and Investment Framework Agreement (TIFA). 
The United States anticipates that Yemen's preparation for 
WTO accession will further facilitate a free and open 
investment climate for international investors. 
 
Since the unification of North and South Yemen in 1990, the 
Republic of Yemen embarked on a series of reforms aimed at 
stabilizing the economy and increasing investment.  An 
International Monetary Fund (IMF) and World Bank-sponsored 
government economic restructuring program began in 1995. 
The IMF helped introduce indirect monetary policy 
instruments, such as open market operations, rediscount 
facilities and reserve requirements. Since then, Yemen's 
macroeconomic factors have stabilized somewhat. Inflation, as 
measured by the Consumer Price Index (CPI), declined from 70 
percent in 1994 to 11.8 percent in 2005 but increased to 
18.39 percent in 2006.  The World Bank estimated that the 
overall price inflation rate for 2007 would be 14 percent. 
 
These new policies helped create foreign currency reserves 
that by January 2006 reached USD 6.3 billion, or 19.1 months 
of imports.  As of June 14, 2001, the Paris Club rescheduled 
most of the external debt.  The external debt stood at USD 5 
billion at year-end 2006.   The commercial debt has largely 
been eliminated through a World Bank grant program.  In 2005, 
according to the World Bank, Yemen's debt-to-GDP ratio was 28 
percent and its debt service-to-export of goods and services 
was 2.6 percent.  At year-end 2006, the World Bank reported 
that Yemen's debt-to-GDP ratio was 26 percent. 
 
After adopting key economic reforms in the 90s, progress 
stalled in 2001.  In October 2004, a World Bank report noted, 
"because of the slackening pace of reforms (in Yemen) 
downside risks to medium-term macro-economic stability have 
increased."  In the summer of 2005, however, the ROYG took 
steps to restart reform, partially introducing a General 
Sales Tax (GST) and reducing petroleum subsidies, both part 
of the government's strategic plan to improve revenue 
mobilization in Yemen.  In 2005 the ROYG took the significant 
step of streamlining tariff policies and is in the midst of a 
number of administrative and legal reforms.   Since 2006 
under the National Reform Agenda, the ROYG has embarked on an 
extensive set of structural reforms in areas such as 
governance, public financial management, civil services 
administration, and general investment climate.  In April 
2007, Yemen officially joined the Extractive Industry 
Transparency Initiative (EITI) to improve transparency and 
accountability in managing hydrocarbon resources.  Yemen's 
Parliament passed a Public Procurement Law in July 2007 and a 
procurement manual and restructured High Tender Board are now 
in place.  The Cabinet also passed a new land registration 
law, and the Land Registration Authority is undergoing 
restructuring.  Work has also proceeded in various areas of 
public financial management, including the Automated 
Financial Management Information Management System (AFMIS) 
project, budget classification and reporting and preparation 
of a financial law.  In the area of civil services reform, 
good progress has been made towards establishing a biometric 
identification system (with current rate of completion of 80 
percent of civil servants) and he Civil Service Fund (CSF). 
A biometric identifcation system will eliminate the "ghost 
worker" henomenon, where one person holds multiple jobs an 
receives multiple salaries. 
 
In the area of taation, the ROYG Tax Authority reached an 
agreemet with the local Yemeni business community on a ne 
mechanism for the implementation of the GeneralSales Tax 
(GST) in April 2007, whereby full implmentation of the GST 
for importers would be delayd until the end of December 
¶2008.  For these imprters, the agreement also sets new 
procedures fo:  a) dealing with arrears for the period from 
Dcember 15, 2006 to April 30, 2007, and b) GST filig and 
assessment for the transitional period fromMay 2007-December 
¶2008.  The new provisions appl only to importers, while for 
locally produced gods; the GST law is now being implemented 
fully ith payments based on actual selling invoices, 
sbmitted through monthly declarations.  The ROYG is also 
undertaking major revisions of the corporate income tax (CIT) 
law.  It is attempting to revise the current income tax law 
in order to modernize and simplify income tax administration 
and compliance. 
 
With the implementation of tax incentives for merchants, 
Yemen's trade environment is steadily improving but more 
government focus is needed on privatization and regulatory 
reform.  An April 2004 Presidential directive decreed that 
land be granted to investors at no cost and that the 
investment projects enjoy profit tax exemption if the project 
capital is more than 10 million USD.  A privatization program 
started in 1998 with sixteen enterprises in industry, 
tourism, and trade, came to a standstill in April 2001 when 
Parliament refused to approve a World Bank credit to fund a 
larger, long-term privatization program.  However, few years 
later, the government funded the privatization program. 
Between 2003 and 2004, 8 companies were privatized, 7 of 
which in public auction.  The remaining company was 
transferred to the Yemeni Economic Corporation (YECO).  Also, 
according to the technical Privatization Office, in 2005, the 
government privatized 2 enterprises and 3 more in late 2006. 
The Yemen government announced it would continue the process 
of privatization by privatizing 15 factories in 2007, which 
are suffering from economic stagnation but did not privatize 
any.  Airport services, cements, and medications are at the 
top of the privatization list. 
 
Despite significant progress in economic reform, Yemen still 
has some ground to cover in order to comply with WTO 
standards.  Yemen will need to revise several pieces of 
trade-based legislation in order to make them compliant with 
international standards, including passage of a WTO-compliant 
Customs Valuation Law. 
 
Commercial banks have also been required to improve their 
accounting procedures and loan recovery rates, and the 
Central Bank raised capital requirements to YR 6 billion, or 
about USD 30 million.  According to the CBY report for 2006, 
the balance sheet of the banking sector for 2006 to be around 
YR 950 billion (USD 4.79 million).  The banking system 
remains weak, however, with most commercial banks owned by 
large business families who are reluctant to lend outside 
small circles.  Roughly three percent of Yemenis have bank 
accounts and most financial transactions occur outside of the 
commercial banking system.  On January 2, 2006, the CBY 
announced the first liquidation of a local bank, the Watani 
Bank.  A CBY committee was assigned to evaluate the bank's 
assets and financial obligations in order to start 
distributing the available and collected funds to the 
depositors and creditors. 
 
The government adopted a policy of uniform treatment for all 
investors, domestic and foreign in 1992.  The lead government 
agency is the General Investment Authority (GIA), established 
in the same year.  The GIA coordinates between 8 government 
agencies to identify investment opportunities and viable 
projects for investors as well as obtains necessary approval 
needed by government agencies on behalf of investors.  Over 
the last decade, the GIA has cooperated with the World Bank's 
(WB) Foreign Investment Advisory service to update Yemen's 
Investment Law 22 of 1991 (as amended).  The alternative 
Investment Law Number 22 of 2002 was adopted by Parliament on 
June 2002 and signed by the President on July 20, 2002. 
Implementation began in October 2002. 
 
As written, the 2002 investment law safeguarded all 
exemptions and benefits called for in the previous investment 
law and mandates that the GIA de-emphasize licensing and 
focus on registration and promotion. The GIA published 
registration and tax exemption procedures as well as 
administrative appeals and disputes procedures on line for 
foreign and local investors. 
 
The law eliminated government and GIA intervention in 
investment projects and gave wider freedom to investors in 
running their projects.  The law canceled some legal 
provisions, which provided special exceptions for investors 
from obtaining import and export licenses from the Ministry 
of Industry and Trade.  The law is intended to encourage 
local production by reducing customs duties by 50 percent on 
imported raw materials and 100 percent on raw materials 
produced locally for agricultural and fisheries projects. 
Finally, the law canceled some tax categories.  This 
investment law falls under the government's financial, 
economic and administrative reform program, and is intended 
to encourage foreign investment. 
 
Under amended Law 22 of 2002, the GIA registers and promotes 
investment opportunities.  The GIA provides potential 
investors with an information packet that includes a copy of 
the investment law, an investment guide summarizing GIA 
activities, and an application form with instructions. 
Packets may be obtained from the promotion section, General 
Investment Authority, P.O. Box 19022, Sanaa, Republic of 
Yemen (Telephone:  967-1-262-962/3 or 268-205; Fax: 
967-1-262-964, E-mail: mohdhussein@yahoo.com;  Website: 
www.giay.org). 
 
The GIA welcomes investment in all sectors with the exception 
of arms and explosive materials, industries that could cause 
environmental disasters, banking and money exchange 
activities, and wholesale and retail imports.  Investments in 
the exploration and production of oil, gas and minerals are 
subject to special agreements (e.g., production sharing 
agreements) under the authority of the Ministry of Oil and 
Minerals and do not fall within the purview of the GIA. 
Investment is open to Yemeni, Arab, or foreign investors 
acting solely or in partnership on any project. 
 
Boycott issues:  Occasional violations have reportedly 
occurred due to Yemeni companies' use of old purchase order 
forms that contain prohibited language.  Yemen has stated 
that it will not renounce the primary aspect of the boycott 
absent an Arab League consensus.  Individuals or 
organizations will occasionally call for boycotts of U.S. 
products. 
 
In November 2004, the government created three industrial 
zones in Aden, Hodaida and al-Mukallah that concentrate on 
manufacturing.  The Executive Order provides for the 
regulation, management, and supervision of industrial zones. 
In conjunction with the establishment of the industrial 
zones, the government is lobbying industrialists to invest in 
these zones, construct its infrastructure, and manage 
operations.  However, the private sector, represented by the 
chambers of commerce in major cities, has repeatedly 
expressed their concern towards the government's shifting the 
infrastructure responsibility over the private sector's 
shoulders.  Little has occurred in the industrial zones in 
Aden, Hodaida and al-Mukallah since November 2004.  In July 
2007, the Ministry of Industry and Trade's Director of 
Industrial Zones Department Saleh Al-Sanabani stated that 
three European and Asian companies are qualified to develop 
the Aden Industrial Zone.  He estimated the cost of 
infrastructure development in the Aden Industrial Zone at USD 
37 million, which will employ more than 8,000 people.  On 
November 24, 2007, the ROYG Minister of Industry and Trade 
Yahya al-Mutawakel announced that ROYG plans to establish 11 
additional industrial zones throughout Yemen, indicating that 
Small and Medium Enterprises (SMEs) are the targeted 
organizations which will play a major role in the development 
of these industrial zones.  The industrial zones would 
promise several benefits, including tax-free business 
operations. 
-------------------------------- 
CONVERSION AND TRANSFER POLICIES 
-------------------------------- 
 
The Yemeni Riyal is currently trading at 199 YR/1USD. Most 
foreign currencies, especially US dollars, are readily 
available and trade freely at market rates.   Investors may 
transfer funds in hard currency from abroad to Yemen for the 
purpose of investment and may re-export invested capital, 
whether in kind or in cash, upon liquidation or project 
disposal.  Net profits resulting from investment of foreign 
funds may be transferred freely outside of Yemen.  Cash 
transfers are limited to 10,000 USD.  Transfers above that 
amount must receive approval from the Central Bank of Yemen. 
 
The Central Bank of Yemen intervenes regularly in the 
currency market.  At the end of 2005, the Central Bank of 
Yemen (CBY) infused USD 476 million into the market in order 
to control currency depreciation.   In January 2006, the CBY 
added another USD 65 million into the market.  One month 
later, another USD 96 million was pumped into the market.  In 
October 2006, the CBY pumped USD 54 million to the market in 
order to stabilize and improve the deterioration of the 
currency.  Altogether, the CBY intervened in the exchange 
market at least 14 times in 2006 pumping at least USD 1.45 
billion.  In 2007, the CBY intervened in the exchange market 
at least 14 times pumping USD 987 million.  On January 5, 
2008, the CBY added an additional USD 123 million in order to 
keep exchange rates stabilized.  The CBY said that it would 
continue to monitor the exchange market and take necessary 
steps to ensure a stable exchange rate. 
 
------------------------------ 
EXPROPRIATION AND COMPENSATION 
------------------------------ 
 
In the Republic of Yemen's seventeen-year post-reunification 
history, there have been no cases of outright property 
expropriation, although a dispute with the Jannah Hunt Oil 
Company over the extension of a production sharing agreement 
is in arbitration at the International Commercial Court in 
Paris and a ruling is expected on the case in  February or 
March 2008.  The government recognizes that expropriation 
(which existed in the former socialist Peoples' Democratic 
Republic of Yemen (PDRY) until reunification in 1990) is 
contrary to its economic aspirations.  Most of the lands 
expropriated by the PDRY were returned to the rightful 
owners.  Land registration, however, is in its infancy and 
disputes over both residential and commercial plots are 
frequent and nearly impossible to adjudicate legally (see 
Dispute Settlement section).  Since deed information is 
inexact, owners can sell multiple copies of a deed, and 
commercial suit options are extremely time-consuming, prone 
to corruption, and judgments are often not enforced. 
 
Yemen's investment law stipulates that private property will 
not be nationalized or seized, and that funds will not be 
blocked, confiscated, frozen, withheld or sequestered by 
other than a court of law.  Real estate may not be 
expropriated except in the national interest, and 
expropriation must be according to a court judgment and 
include fair compensation based on current market value. 
 
------------------ 
DISPUTE SETTLEMENT 
------------------ 
 
Yemen is a signatory to the Convention on the Settlement of 
Investment Disputes, but not the 1958 New York Convention on 
Arbitration.  Yemen is still engaged in arbitration in Paris 
with the American Jannah Hunt Oil Company.  Yemen is expected 
to abide by the arbitration decision. 
 
Yemen's judicial system is inefficient and subject to 
influence from bribes or family connections.  While Yemen,s 
investment-related laws are generally sound, enforcement 
remains problematic at best.  The government has special 
commercial courts which provide a mechanism for commercial 
dispute resolution, but they are generally considered 
unreliable. 
 
Business disputes are generally handled by informal 
arbitration or within Yemen's court system.  In 1997, the 
Yemeni Center of Conciliation and arbitration, a private 
arbitration center, was created by a group of lawyers, 
bankers, and businessmen as an alternative to the courts.  As 
of 2007, the center has settled about 82 disputes so far in 
the areas of trade, finance, construction and industry, and 
is gaining recognition as a viable alternative to court 
battles. 
 
Most investors are best served by establishing a partnership 
with a Yemeni who knows the system, and by including an 
international arbitration clause in their contracts.  In 
cases involving interest, most judges use Shari'a (Islamic) 
law as a guideline, under which claims for interest payments 
due are almost always rejected.  Local commercial banks are 
sensitive to this problem, and therefore lend almost 
exclusively to large established trading houses well known to 
them. 
 
--------------------------------------- 
PERFORMANCE REQUIREMENTS AND INCENTIVES 
--------------------------------------- 
 
Yemen's investment law does not specify performance 
requirements as conditions for establishing, maintaining or 
expanding investment.  Incentives permitted under the law 
include, but are not limited to:  exemption from customs fees 
and taxes levied on fixed assets of the project; tax holiday 
on profits for a period of seven years, renewable for up to 
18 years maximum; the right to purchase or rent land and 
buildings; and, the right to import production inputs and 
export products without restrictions and registration in the 
import/export register. 
 
-------------------------------------------- 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
-------------------------------------------- 
 
While foreigners may own property, Yemen's commercial law 
requires foreign companies and establishments to operate 
through Yemeni agents.  Law 23 of 1997 (as amended) regulates 
agencies and branches of foreign companies and firms and 
outlines the requirements for establishing a Yemeni agent. 
Chapter 3 of Law 23 permits foreign companies and firms to 
conduct business in Yemen by establishing foreign-owned and 
managed branches.  Foreign establishments wishing to open 
branches in their own names must obtain a permit by decree 
from the Minister of Industry and Trade. 
 
Under the 2002 investment law, foreigners can own 100 percent 
of the land and can execute projects without a Yemeni agent 
and without obtaining import/export license from the Ministry 
of Industry and Trade or implementing Law 23 of 1997 (the 
investment law implemented in October 2002 has precedence 
over other laws).  This is contradicted by the commercial 
law, however, which limits foreign ownership to 49 percent. 
The government is reviewing the laws in an attempt to remove 
inconsistencies. 
 
Mortgage lending in Yemen is rare because of the 
unwillingness of the court system to uphold the payment of 
interest or to accept land as a form of collateral.  In 
addition, Yemen has a long history of incomplete or 
inaccurate land records and frequent land ownership disputes, 
making the use of real estate as collateral difficult.  While 
the General Survey Authority is working to establish a just 
and legally defensible land registry system, implementation 
remains years away.  A republican decree was issued in 2006 
to merge agencies overseeing land tenure, registration and 
urban planning in one agency to avoid overlapping. 
 
¶3.  End text of first section of Investment Climate Statement. 
 
SECHE