Yemen's slashed fuel subsidy and disappearing welfare payments

SANA'A, 25 August 2014 (IRIN) - A sharp increase in fuel prices threatens to plunge hundreds of thousands of Yemenis into poverty and food insecurity in the Arab world’s poorest country - particularly if regular welfare payments to Yemen's poorest people continue to be dispersed erratically, aid organizations have warned.

The government’s decision to slash fuel subsidies has set off a wave of discontent, with major protests in the capital Sana’a over the past week calling for the cuts to be reversed and the government to be dissolved.

While the cuts were widely seen as a necessary step in order to avoid economic meltdown, a government commitment to use the savings to boost welfare spending has so far not materialized, with the welfare payments over six months late.

Fuel subsidies are among the few widely available social goods in Yemen, and are said to keep down the cost of transport, water, and food while supporting local industry. But they have also proven extremely expensive in recent years, costing US$3bn-3.5bn in 2013, more than a fifth of all state spending, during a period when the government has moved heavily into the red, running successive record deficits and leaning heavily on financing from the increasingly saturated local banking sector. 

In July, the government increased the price of gasoline by 60 percent and diesel by 95 percent as part of a package of reforms aimed at unlocking foreign funding and easing pressure on the budget, which has seen growing deficits since the country’s 2011 youth-led uprising. The decision sparked major protests in Sanaa, while the price of transport and bread have risen at least 20 percent in recent weeks. 

In an internal document seen by IRIN, Yemen’s Ministry of Planning and International Cooperation (MoPIC) estimates that the decision to cut fuel subsidies could lead to an additional 500,000 Yemenis falling under the breadline. More than half of Yemen’s population - in excess of 12.5 million people - currently lives in poverty. 

Payments delayed

To prevent such a disastrous situation the government had promised to redirect any savings made from cutting subsidies - which historically benefited the country’s wealthiest people - towards welfare payments for the poorest. Sana’a announced in early August that it would add 250,000 people to the list of those receiving unconditional cash transfers from the Social Welfare Fund (SWF) - the state-run body that organizes the payments - bringing the total number of people covered by the fund to 1.75 million. Individuals would receive quarterly handouts up to YR12,000 ($60).

But SWF, which is supported by a number of foreign governments and international institutions including the World Bank, has not made regular payments to its beneficiaries since the beginning of the year, SWF officials confirmed to IRIN. In early August the fund finally made its first payment in 2014, providing people with money that was due in January.

Who is responsible for the delay is a matter of dispute, with Abdulkarim Salah, director of policy at SWF, telling IRIN that budgetary shortfalls were to blame. “The Finance Ministry does not have enough money to pay [SWF] so our payments have been delayed,” he said, adding that they had received assurances from the Finance Ministry that the cash required to make the next two quarterly payments should be made available within the next month. “We are not sure if it will come,” he added.

This is despite increased support from Yemen’s oil-rich neighbour Saudi Arabia, which is believed to have provided the country with several hundred million dollars specifically to cover the costs of the payments in June. Although government sources have informally confirmed that Riyadh provided $2bn in assistance, the Sanaa government has not publicly confirmed the influx of cash, in part so as not to raise expectations in the civil service or among ordinary Yemenis. 

“The agreement was that the increase in fuel prices would be compensated by an increase in grants to the poorest Yemenis through the Social Welfare Fund” says Julien Harneis, the UN children’s rights and emergency relief organisation (UNICEF) representative in Yemen. “But the SWF payments haven’t been regular. That is obviously a big issue.”

“We don’t have enough to eat”

On a recent afternoon in the upmarket Hadda District of Sana’a, the impact of the late payments was laid bare. At 2pm Houria Hamoud, a 55-year old mother of eight, was sitting outside the home of a Yemeni businessman known for giving handouts of cash and food to the poor. She had been there since 7am, and the businessman was yet to appear.

“We don’t have enough to eat,” she said, pointing out that her husband’s heart condition made it impossible for him to find regular work. “We try to collect food from restaurants or on the street [but] the situation has become worse and worse. We used to get some money from the government, but these last few months there has been nothing.”

The increase in the fuel price, she said, meant that what little money she was able to earn from begging was stretched even thinner, leading her to make tough choices. “[My children] just started school again,” she said. “They need bags, shoes and I have no money. I told my daughters to stop school because we cannot afford even stationery for them.”

The increase is also impacting farmers, who account for the bulk of jobs in rural Yemen - still home to more than 60 percent of the population. Before the subsidy was cut, Yemen faced severe fuel shortages, and diesel was largely absent from the official fuel market, with many farmers - who use the fuel for tractors and water pumps - turning to the black market for fuel. By liberalizing the fuel price, the government effectively brought the cost of diesel to parity with black market prices.

“During Ramadan, many farmers didn’t plough their fields because they couldn’t afford the cost of the diesel, and even if they could they couldn’t afford the cost of water for irrigation,” said Colette Fearon, Yemen country director for Oxfam. “Farmers are planting less, and that is really translating to less employment, to the shops taking a hit because people have less money.”

Higher prices for basic commodities during a period of diminished economic activity will cause many of Yemen’s poorest people to begin selling off what few assets they have including livestock that could be a future source of income, UNICEF’s Harneis says. Many of the country’s poor already sold off what little they had in 2011 and 2012, with organizations like UNICEF and Oxfam only just beginning to help people rebuild. “That’s why it’s so important that the SWF money comes in,” Harneis says. “If it does, people will be able to feed their families, pay for medical services and keep their children school. If it doesn’t it is the children who will suffer.”

Safety net preparations lacking

SWF and local and international NGOs have generally been supportive of the subsidy cuts but have questioned the speed with which the cut was made and the lack of preparations made to ensure the necessary safety nets were in place. During discussions with the International Monetary Fund (IMF) in May for a $560m loan, the government agreed to cut the subsidy by between 20 and 40 percent as part of a phased programme of cuts, starting in October. IMF had pushed the government to start easing the subsidy earlier so as to ease its financing requirements for the year, but had not requested a deeper initial cut. 

“We knew that this had to happen, and I am not surprised by the increase,” Salah says. “But we had talked to the Finance Ministry, the Planning Ministry and the World Bank about it and we didn’t expect this big of an increase.” 

Due to the rising cost of living, even if regular payments are made by SWF, they will not be enough to cover basic living costs, added Salah, who for some time has advocated an increase in the welfare payment. “The principle of this fund, when it was set up in 1996, was to help people buy basic items,” he said. “But year on year, prices have gone up. We negotiated with the government to increase the money we dispersed [by 50 percent] but there has been no response from the government side, and now they want to increase the number of people covered by 250,000 even when we have no money.”