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2009 Investment Climate Statement - Yemen


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Openness To Foreign Investment

Yemen is one of the world’s least developed countries. As such, it offers investors opportunities such as untapped natural resources and inexpensive labor, but also challenges such as inadequate Intellectual Property Rights (IPR) protections and opaque dispute settlement mechanisms. Yemen requested accession to the World Trade Organization (WTO) to integrate more fully into the world economy, and gained observer status in 2002. In 2004, the United States Trade Representative, the Department of State, the Department of Commerce, and other key U.S. agencies began WTO membership talks under the bilateral Trade and Investment Framework Agreement (TIFA). Yemen’s preparation for WTO accession may facilitate a freer and more open investment climate for international investors. Despite significant reforms in the past decade, Yemen still has much ground to cover before meeting WTO membership standards, including the passage of a WTO-compliant customs valuation law.

3. In 1992, the government adopted a uniform investment code for both domestic and foreign investors which created a General Investment Authority (GIA) to coordinate work among eight government agencies. GIA is charged with publicizing investment opportunities and obtaining government ministry approvals on behalf of investors. In 2002, GIA worked with the World Bank's Foreign Investment Advisory service to update Yemen’s investment laws, reducing customs duties by 50 percent on imported raw materials and 100 percent on raw materials produced locally for agricultural and fisheries projects. Investments in the oil, gas, and mineral sector are subject to special agreements under the authority of the Ministry of Oil and Minerals and do not fall under GIA’s authority. Other sectors not covered by GIA include weapons and explosives manufacturing, banking and money exchange activities, and wholesale and retail imports. Potential investors can obtain information packets from GIA, including a copy of the investment law, an investment guide summarizing GIA activities, and an application form with instructions, from: 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: invest@giay.org, or m_muthana@giay.org; Website: www.giay.org).

In 2004, the government announced the creation of three industrial zones in Aden, Hodaida and al-Mukallah, focusing on the manufacturing sector. Little development has actually occurred since the announcement, and local business groups remain wary of the government’s role in creating the zones. In 2007, a Ministry of Industry and Trade official estimated that the cost of developing infrastructure for the Aden Industrial Zone would be USD 37 million and would employ more than 8,000 people. Also in 2007, the Minister of Industry and Trade announced plans to establish 11 additional industrial zones throughout Yemen, with an emphasis on Small and Medium Enterprises (SME’s).

Since the unification of North and South Yemen in 1990, Yemen has embarked on a series of reforms aimed at stabilizing the economy and increasing foreign investment. An International Monetary Fund (IMF) and World Bank-sponsored government economic restructuring program began in 1995. Reforms included the introduction of a General Sales Tax (GST) and a reduction in domestic petroleum subsidies. The IMF also helped introduce indirect monetary policy instruments, such as open market operations, rediscount facilities, and reserve requirements. Since then, Yemen’s macroeconomic factors have largely stabilized. Inflation, as measured by the Consumer Price Index (CPI), declined from 70 percent in 1994 to 15 percent in 2008.

These reforms helped Yemen accumulate foreign currency reserves that reached USD 8.2 billion by December 2008. The Paris Club has rescheduled most of Yemen’s external debt, which stood at USD 5.8 billion at the end of September 2008. In 2008, Yemen’s debt-to-GDP ratio was 31 percent, and its debt service-to-export of goods and services was 2.6 percent, according to the Central Bank of Yemen (CBY). Yemen’s commercial debt has largely been eliminated through a World Bank grant program.

With the implementation of tax incentives for both foreign and domestic investors, Yemen’s investment climate has improved steadily in the past decade, but privatization and regulatory reform remain areas for improvement. Between 2003 and 2004, eight companies were privatized, seven of them by public auction, with the remaining company being transferred to the Yemeni Economic Corporation (YECO). In 2007, the government announced the privatization of an additional 15 factories, but as of late 2008 their status was still pending.

In the past two years, CBY has made an effort to improve commercial banks’ accounting procedures and loan recovery rates. CBY raised capital requirements for each bank to YR 6 billion, or about USD 30 million. The banking system remains weak, however, with most commercial banks owned by large families who are reluctant to lend outside small circles. Roughly four percent of Yemenis have bank accounts and most financial transactions occur outside of the commercial banking system. CBY announced the first liquidation of a local bank, the Watani Bank, in 2006. 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.

Boycott issues: Yemen has stated that it will not renounce the primary aspect of the Arab anti-Israel boycott absent an Arab League consensus. In the past, individuals and organizations have called for Yemenis to boycott U.S. and Danish products.

Conversion And Transfer Policies

The Yemeni Riyal is currently trading at 200YR/1USD. Most foreign currencies, especially U.S. 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 USD 10,000. Transfers above that amount must be approved by the Central Bank of Yemen.

CBY intervenes regularly in the currency market. In 2007, CBY sold USD 1.077 billion to control currency depreciation, a decrease from the USD 1.122 billion sold in 2006. By the end of 2008, the CBY had intervened at least six times, injecting approximately USD 1.1 billion into the exchange market.

Expropriation And Compensation

Since Yemen’s unification in 1990, there have been no cases of outright property expropriation, although a dispute with Yemen Hunt over the extension of a production sharing agreement is currently in arbitration. The government recognizes that expropriation, which existed in the former socialist Peoples’ Democratic Republic of Yemen (PDRY), 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. 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’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.

Yemen is a signatory to the 1965 Convention on the Settlement of Investment Disputes, but not to the 1958 New York Convention on Arbitration. Yemen is currently engaged in arbitration in Paris with U.S.-based Hunt Oil. The Paris international commercial court originally fined the Yemeni government USD 30 million, to be paid to Hunt Oil, which had originally asked for USD 3.5 billion in compensation after it accused Yemen of violating the terms of an oil exploration agreement in Mareb province. The final implementation of this dispute outcome is unknown.

Business disputes are generally handled by informal arbitration or within Yemen’s court system. In 1998, a private arbitration center, the Yemeni Center of Conciliation and Arbitration, was created by a group of lawyers, bankers, and businessmen as an alternative to the Yemeni court system. The Center has settled 52 disputes thus far in the areas of trade, finance, construction, and industry, and is gaining recognition as a viable alternative to the official courts in Yemen.

Outside investors are best served by establishing a partnership with a Yemeni entity that 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 lend primarily 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 holidays 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 Enterprise

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 commercial entities wishing to open branches in their own name must obtain a permit from the Ministry of Industry and Trade.

Under a 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 currently reviewing the laws in an attempt to remove inconsistencies. In March 2008, the government amended a 1991 investment law allowing foreigners to operate businesses in Yemen without a Yemeni partner.

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 government decree was issued in 2006 to merge agencies overseeing land tenure, registration and urban planning in one agency to avoid overlapping.

Protection Of Property Rights

Yemen has a record of inadequate protection of intellectual property rights (IPR), including patents, trademarks, designs, and copyrights. In late 2004 the Cabinet approved the Berne Convention for the Protection of Literary and Artistic Works, as well as the International Agreement on Protecting Intellectual Property Rights. Parliament has yet to ratify these agreements. Yemen has yet to accede to any international IPR conventions and its IPR Law Number 19 of 1994 is not TRIPS compliant. The Ministry of Industry and Trade drafted new laws dealing with patents, trademarks design and copyrights. As of December 2008, Parliament had not approved these draft laws. Yemen became a member of the World Intellectual Property Organization (WIPO) in 1999 and is now revising its laws with WIPO guidance. Yemen gained observer status in the World Trade Organization in 2002, holding WTO accession meetings in 2004 and 2005. As part of its accession requirements, Yemen will need to enact its recently revised IPR legislation and take concrete steps to enforce these laws adequately.

In 1999, a large U.S.-based multinational firm won a trademark infringement case in a Yemeni court. The ruling is now under appeal and the violator continues to infringe on the trademark despite the court ruling. A final resolution was expected by the end of 2000, but is still pending in the Supreme Court. The disputing parties agreed on an amicable arbitration due to the difficulty in enforcing the ruling. In a second case involving a U.S. company's trademark, a Yemeni appeals court handed down a final ruling in April 2001 in favor of the U.S. company. In August 2003, the Supreme Court rejected the appeal of the company producing the infringed products and ordered it to cease production and destroy the infringed trademark. However, this ruling has not been enforced.

Transparency Of Regulatory System

Implementation and enforcement of Yemen’s environmental protection regulations and labor laws are inadequate and non-transparent. Health and safety standards are rudimentary and not enforced. Customs tariff regulations and tax laws remain inconsistent and smuggling is common, but the government has taken steps in recent years to standardize the process with Automated System for Customs Data (ASYCUDA) systems and a WTO-compliant valuation methods.

Efficient Capital Markets And Portfolio Investment

In the 1990s Yemen’s banking system suffered from a large volume of non-performing loans, inadequate loan provisioning, low bank capitalization, and weak enforcement of prudential standards. Under a 1997 World Bank-sponsored financial sector reform program, the government took actions to address these problems. A bank reform law was passed in 1998 to update, strengthen, and regulate the industry. By 2000, CBY had circulated strict regulations pertaining to credit risk management, liquidity, insider lending, foreign exchange exposure, financial leasing and external auditors. Banks are required to reach a capital adequacy ratio of eight percent and meet new classification and provisioning standards for loan portfolios and most comply. Nevertheless, commercial banks still suffer from extremely low capitalization rates and are often owned and operated by large trading families to service their own business needs. The consolidated balance sheet for all commercial banks operating in Yemen as of October 2008 stood at only YR 1.452 trillion (USD 7.263 billion).

In 2000, President Saleh signed a law granting CBY greater independence in order to stabilize prices, limit public sector financing to emergency loans, and increase accountability among commercial banks. The CBY is now authorized to inspect bank implementation provisioning and capital increase schedules, and enforce penalties and corrective measures accordingly. In 2003, the Parliament passed a money laundering law, which CBY has begun to enforce. The Cabinet sent Parliament an enhanced anti-money laundering bill in November 2007; as of late 2008, the bill’s status was still pending in Parliament.

Inter-bank activities are limited, and there are no equity or bond markets. Elements in the government still hope to establish a stock market in Yemen to promote a private sector-led growth strategy. Most domestic and foreign observers, however, believe that the country lacks the expertise to establish a stock market, and that there are insufficient Yemeni investors to sustain an active stock market. CBY has issued USD 3.2 billion of treasury bills since 1997. Commercial bank purchases of treasury bills account for 38% of this total. The interest rate on these treasury bills has gradually decreased from a high of 23 percent in 1999 to about 12 percent in 2008 in order to encourage borrowing.

Political Violence

Yemen faces significant, recurring problems with terrorism and tribal violence. The country has suffered from a number of terrorist attacks, including the September 2008 suicide attack on the U.S. Embassy in Sana’a in which 18 people were killed and the October 2000 attack on the U.S.S. Cole in Aden harbor, in which 17 U.S. servicemen and women were killed.

Many attacks have occurred on Westerners and foreign missions in Yemen. On March 18, 2008, mortars fired at the U.S. Embassy hit a neighboring girls’ school, injuring several Yemeni girls. On January 18, 2008, two Belgian tourists and their Yemeni driver were killed in Hadhramout governorate in eastern Yemen. On July 2, 2007, eight Spanish tourists and two Yemenis were killed in a suicide car bomb attack on their convoy in Marib governorate. In a significant blow to counter-terrorism efforts, 23 convicted terrorists, including those behind the Cole bombing, escaped from a prison in Sana’a in February 2006.

Terrorists have also sought economic targets, specifically in the petroleum industry, which provides 70 percent of Yemen’s revenue. On September 15, 2006, two significant attacks were carried out on oil installations. The first involved two explosive-laden trucks detonated at the Canadian Nexen oil pumping facility at Ash Shahir in the eastern governorate of Hadhramout, resulting in one death and two injuries among the local guard force. The second attack occurred at the Safer oil pumping facility in Marib, where two trucks carrying explosives detonated. In October 2002, a French oil tanker was bombed off the coast of Mukallah, a port city on the Red Sea.

Yemen continues to be plagued by tribal violence. Kidnappings have traditionally been used as a means for tribes to pressure the government to accede to their demands for resources or improved services. Although a government crackdown in recent years has reduce the number of kidnappings, a couple of high-profile cases occurred in December 2008: three Germans were kidnapped in the Beit Bous area of Sana’a and released after one week in captivity and a South African woman and her two sons were kidnapped in Abyan governorate in southern Yemen and released unharmed a few days later.

In December 2005, a retired German diplomat and his family were kidnapped and released unharmed several days later. Soon after, four Italian tourists were kidnapped by a tribe in the Marib region, and released after several days of negotiations. The last incident of tribal violence involving Americans took place in December 2002, when three American doctors were killed near the southwestern city of Ibb.

Tribes have been known to hijack automobiles and other expensive equipment owned by foreign companies and diplomatic missions in order to pressure the government to agree to the tribes’ demands. Attacks on oil pipelines and vehicles are commonplace in Yemen. These types of attacks occur most frequently in areas of oil and mineral extraction, including the outlying governorates of Marib and Shabwa. Tribes in these regions claim they are not getting their fair share of economic activity in their areas, and investors should be sensitive to the need to build strong community relations. The provision of community-based services, such as healthcare and education, contribute to protecting investments in isolated areas.

The conflict between the government and the al-Houthi rebels in the northern Saada governorate has continued on an intermittent basis since 2004. The most recent round of fighting, which began in March 2008, was the most violent yet, resulting in the deaths of thousands of rebel and government forces and displacing up to 70,000 civilians. The government declared a tentative cease-fire in July, but many sources believe the conflict is likely to reignite in 2009. Foreigners have not been targeted in the conflict, but access to Saada has been severely restricted by both sides.

Since early 2007, the southern governorates have witnessed a series of political demonstrations protesting a lack of jobs and resources for the South. Although retired military officers and civil servants of the former People’s Democratic Republic of Yemen (PDRY) initiated the demonstrations, the movement spread to a wider section of the southern populace in 2008. In November 2008, a teenager was shot and killed by police forces during a demonstration at a voter registration center in Dhale’ governorate.

Corruption

Yemen ranked 131st out of 179 countries and territories on Transparency International’s latest available corruption perception index (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 facilitating or obstructing projects, leveraging dispute settlements, skewing taxation and customs tariff augmentations, and engaging in family or tribal nepotism. The government recognizes that it must enact civil service and administrative reforms to create new disincentives to corruption, but progress has been slow. In 2003, a new Minister of Civil Service was appointed who initiated several programs to improve the civil service.

Parliament approved the creation of an 11-member Supreme National Authority for Combating Corruption (SNACC), an independent body with the authority to track down corrupt public officials and retrieve funds obtained through corrupt practices. SNACC is charged with drafting and implementing anti-corruption policies and collecting financial disclosure forms from senior government officials. SNACC can investigate individuals involved in financial crimes and public corruption and refer them to the judiciary for prosecution. Since its creation in 2007, SNACC has collected more than 15,000 financial disclosure forms from public officials and sheikhs and has referred five corruption cases to Yemeni prosecutors for trial. None of the five cases had resulted in convictions as of December 2008.

Bilateral Investment Agreements

The US and Yemen signed a Trade Investment Framework Agreement in 2004. According to GIA, Yemen signed three agreements in 2003 and one in 2004, bringing the total number of bilateral treaties to 35. Yemen has bilateral investment treaties with Algeria, Austria, Bahrain, Belarus, Belgium, Bulgaria, China, Djibouti, Egypt, Ethiopia, France, Federation of Russia, Germany, Hungary, India, Indonesia, Iran, Jordan, Kuwait, Lebanon, Malaysia, Morocco, the Netherlands, Oman, Pakistan, Qatar, South Africa, Sudan Sweden, Syria, Tunisia, Turkey, the UAE, Ukraine, and the United Kingdom. Yemen has signed initial agreements with Croatia, Mongolia, and Romania, but these agreements have not yet entered into force. For more information on Yemen’s bilateral investment agreements, please see: www.giay.org or www.investinyemen.gov.ye.

OPIC And Other Investment Insurance Programs

Yemen and the United States signed an investment guarantee agreement in 1972. As of October 1997, OPIC and EXIM Bank provide guarantees for both private and public sector projects of short and medium duration (up to seven years). Yemen is a member of the Multilateral Investment Guarantee Agency (MIGA).

LABOR

The Yemeni government generally follows International Labor Organization (ILO) standards regarding labor laws and worker rights. In 1999 it ratified ILO conventions on the elimination of the worst forms of child labor and the minimum work age for employment. As in other areas, enforcement of labor laws is weak. Child labor is an issue of special concern. Some children work with their families in agriculture. To address this issue, the government signed an agreement to cooperate with the International Program on Elimination of Child Labor (IPEC) in 2000. After ratification of the ILO conventions, the government established the Child Labor Unit at the Ministry of Social Affairs and Labor to implement and enforce child labor laws and regulations. Investors find the local pool of skilled labor for technology intensive ventures limited.

Yemen's overall illiteracy rate for persons age 15 and older is 45 percent, according to a late 2008 Ministry of Education estimate: 28 percent for men and 68 percent for women. In 2008, the Ministry of Labor and Social Affairs estimated that Yemen needs at least 300,000 new jobs annually to meet the demands of a rapidly expanding population. Yemeni government agencies differ over exact unemployment figures, but the Ministry of Labor and Social Affairs estimates the rate of unemployment for 2008 to be 20 percent. Many local and international organizations estimate the unemployment rate to be as high as 40 percent or higher.

Those who complete secondary education and university studies in Yemen often do not possess the same professional standards as their counterparts from Western educational institutions. University graduates also experience difficulty finding appropriate employment and are sometimes unwilling to accept lower skilled jobs. The government is beginning to focus on increasing access to and improving the quality of vocational training as a means to develop a cadre of skilled laborers in high demand fields such as construction workers, medical technicians, electricians, mechanics, plumbers, and carpenters.

Foreign-Trade Zones/Free Ports

The Yemen Free Zone Public Authority was established in 1991 to develop the Aden Free Zone. Yeminvest, a joint venture between the Port of Singapore Authority (PSA) and the Bin Mohfoud Group of Saudi Arabia, was awarded the concession to develop the area. The government bought out the Yeminvest contract in October 2003 and Overseas Port Management is temporarily operating the Aden Container Terminal (ACT).

In its first phase of development, ACT planned to handle up to one million twenty-feet Equivalent Units (TEUs) annually on its two-berth, 700 meter quay. Those plans have been scaled back, and current capacity is 650,000 TEUs annually. The 35 hectare container yard can store 10,000 boxes. Yemen Ports Authority constructed a new 270-meter long and 12 meter-deep dock assigned for unpacking the wheat-loaded vessels. The dock will alleviate burdens of the other seven docks in the port.

An industrial and warehousing estate called Aden District Park (ADP) was launched in November 2002. The Aden Container Terminal and the Aden Free Zone are promising areas for investment. Opportunities in light industry, repackaging and storage/distribution operations are welcomed. Future plans include development of heavy industry and more extensive tourist facilities in the greater Aden area. Dubai Ports World (DPW) signed a contract with the Yemeni government to assume management of the Aden container terminal in November 2008 through a joint Yemeni-DPW venture.

Free zone incentives include the possibility of 100 percent foreign ownership, no personal income taxes for foreigners, and a corporate tax holiday for 15 years (renewable for 10 additional years), 100 percent repatriation of capital and profits, no currency restrictions, and no restrictions on, or sponsoring required, for the employment of foreign staff. Aden’s main selling point is its strategic location – nine days steaming from Europe and seven from Singapore. It is four nautical miles off the main Far East - Europe sea route. For further information, contact: Free Zones Public Authority (AFZPA), (Main Center) P.O. Box 5842 Khormaksar, Aden, Republic Of Yemen, Telephones: 967-2-234484/5/6, Fax: 967-2-235-637, E-mail: adenfz@y.net.ye; Website: www.aden-freezone.com.

In May 2001, a new terminal at Aden International Airport was officially opened. In addition, a study was completed in August 2001 for future plans for the airport to include a duty free zone and cargo village to facilitate transit trade with the Aden Free Zone port facilities.

Foreign Direct Investment Statistics

According to GIA, foreign direct investment in Yemen for 2008 was approximately USD 1.947 billion, 70 percent of total investment. Most U.S. investment in Yemen is in oil exploration and production, natural gas, and oil field services

Web Resources

United States Embassy in Sana’a, Yemen
http://usembassy.state.gov/yemen/

The U.S. Embassy website provides Embassy updates, reports, travel warnings, warden messages, visa information, and events.

Export.gov
http://www.export.gov/

Export.gov provides online trade resources and one-on-one assistance for U.S. businesses who would like to start or expand global sales.




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