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Cablegate: Part One of Two: Yemen's 2008 Investment Climate

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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

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