2009 Index of Economic Freedom

Quick Facts

Population:

• 21.7 million

GDP (PPP):

• $49.2 billion
• 3.2% growth
• 4.1% 5-year compound annual growth
• $2264 per capita

Unemployment:

• 16.5%

Inflation (CPI):

• 12.5%

FDI Inflow:

• $-384.7 million

Yemen's economic freedom score is 56.9, making its economy the 103rd freest in the 2009 Index. Its score is 3.1 points higher than last year, reflecting large improvements in business and trade freedom. Yemen is ranked 13th out of 17 countries in the Middle East/North Africa region, and its overall score is lower than the world average.

Yemen scores about the world average in five of the 10 economic freedoms, including fiscal freedom and trade freedom. Its economy remains dependent on the oil sector, which accounts for about one-quarter of GDP, but efforts to diversify the economic base have resulted in a growing services sector in recent years. The regulatory environment has also become more efficient and streamlined.

Yemen is weak in financial freedom, monetary freedom, property rights, and freedom from corruption. Court rulings are subject to state demands, and enforcement of contracts is not reliable. Political interference lingers in the financial sector, which remains underdeveloped and not subject to standard oversight and international regulations. Corruption pervades the civil service.

Background Back to the top

A difficult and sometimes violent struggle for union between North and South Yemen ended with the collapse of southern resistance and the capture of Aden in 1994, and the government of the unified Republic of Yemen (formally established in 1990) has exercised control as a multi-party democracy since that time. President Ali Abdallah Saleh's government continues to face intermittent challenges from often unruly tribes and Islamic extremists who oppose economic reform and cooperation with the United States in the war against terrorism. Yemen, which is endowed with few natural resources, is one of the poorest countries in the Arab world. The government began an economic reform program in 2006 to strengthen the non-oil sectors and attract foreign investment, but declining oil production, terrorist attacks, clashes between Sunni and Shia Muslims, and kidnappings have undermined tourism and foreign investment.

Business Freedom 74.9 Back to the top

The overall freedom to conduct a business is relatively well protected under Yemen's regulatory environment. Starting a business takes an average of 13 days, compared to the world average of 38 days. However, the entry cost of launching a business is high. Obtaining a business license takes less than the world average of 18 procedures and 225 days. Bankruptcy proceedings are relatively straightforward.

Trade Freedom 76.2 Back to the top

Yemen's weighted average tariff rate was 6.9 percent in 2006. Some import bans and restrictions, import taxes, some import licensing requirements, weak enforcement of intellectual property rights, inefficient customs administration, and corruption add to the cost of trade. Ten points were deducted from Yemen's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 83.2 Back to the top

Yemen has a low income tax rate but a burdensome corporate tax rate. The top income tax rate is 20 percent, and the top corporate tax rate is 35 percent. Other taxes include a property tax and a fuel tax. In the most recent year, overall tax revenue as a percentage of GDP was 7.1 percent.

Government Size 57.1 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 37.8 percent of GDP. Yemen's economy remains dependent on oil. Improved fiscal governance could help diversify the economy and dictate spending allocations more effectively.

Monetary Freedom66.5 Back to the top

Inflation is high, averaging 13.8 percent between 2005 and 2007. The government controls the prices of pharmaceuticals and petroleum products and influences prices through regulation, subsidies, and state-owned enterprises and utilities. Ten points were deducted from Yemen's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

The government officially permits foreign investment in most sectors and grants equal treatment to domestic and foreign investors. Foreign investment in the oil, gas, and minerals sector is subject to production-sharing agreements. Foreign investment is not permitted in the arms and explosive materials industries, industries that could cause environmental disasters, or wholesale and retail imports. Investment-related laws and regulations can be non-transparent and inconsistently applied. Dispute resolution and contract enforcement are unreliable. Foreign exchange accounts are permitted. There are no restrictions on payments and transfers, and capital transactions are subject to few restrictions.

Financial Freedom30.0 Back to the top

Yemen's small financial system remains underdeveloped and dominated by the state. Financial regulation is rudimentary, but the government is taking some steps to strengthen the supervisory framework. Credit to the private sector accounts for less than 10 percent of GDP, and the limited availability of financing instruments precludes more vibrant entrepreneurial activity. The banking sector is inefficient and burdened with non-performing loans. The government has total ownership of the National Bank of Yemen and majority ownership of three other specialized banks. Commercial lending is limited to a small circle of clients, party because of legal inability to collect overdue debts. The insurance sector is small, capital markets are not fully developed, and there is no stock market.

Property Rights30.0 Back to the top

The judiciary is subject to government pressure and corruption. Contracts are weakly enforced. Foreigners may own property, but foreign firms must operate through Yemeni agents. Protection of intellectual property rights is inadequate.

Freedom From Corruption25.0 Back to the top

Corruption is perceived as pervasive. Yemen ranks 131st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. One of the poorest countries in the world, with a hugely overstaffed and underpaid civil service, Yemen has a significant and widely acknowledged corruption problem. Illicit activities include soliciting and paying bribes to facilitate or obstruct projects, leveraging dispute settlements, skewing taxation and customs tariff augmentations, and engaging in family or tribal nepotism.

Labor Freedom75.8 Back to the top

Yemen's relatively flexible labor regulations facilitate overall employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be burdensome. Regulations related to the number of work hours are relatively flexible.