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Cablegate: Yemen: Interest in Investment Stagnates As

VZCZCXRO0175
PP RUEHDE RUEHDH RUEHDIR
DE RUEHYN #1582 2370547
ZNR UUUUU ZZH
P 250547Z AUG 09
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC PRIORITY 2650
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SANAA 001582

SIPDIS

NEA/ARP FOR ANDREW MACDONALD
USAID FOR CHRIS KISCO
DEPT OF TREASURY FOR BRIAN MCCAULEY
USTR FOR JASON BUNTIN
DEPT OF COMMERCE FOR TYLER HOFFMAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN YM
SUBJECT: YEMEN: INTEREST IN INVESTMENT STAGNATES AS
INTEREST RATES FALL

1. SUMMARY: The Central Bank of Yemen (CBY) has reduced
interest rates in Yemen twice in the last six months,
ostensibly in an attempt to stem inflation. The reduction in
interest rates appears to have had little effect on
investment in Yemen. The ROYG has not shown an inclination
to introduce a policy of economic growth, investing more than
it saves (initially) in order to gain the capital to increase
production levels. END SUMMARY.

2. The Central Bank of Yemen (CBY) has reduced interest
rates in Yemen twice in the last six months, ostensibly in an
attempt to stem inflation. The CBY reduced interest rates
from 13 to 12 percent in January 2009 and reduced them again
to 10.5 percent in May 2009. Ibrahim al-Nahari, Sub-Governor
for Foreign Banking Operations at the CBY, told EconOff on
August 11 that the CBY is reducing interest rates to
sterilize excess liquidity in the market. According to
Nahari, the CBY has successfully managed to reduce the real
inflation rate from last year's 10 percent to the current
levels of 1.5 to 1.8 percent. Amin Mohie al-Din, Director of
the Central Statistical Organization (CSO), confirmed to
EconOff on August 23 that the Consumer Price Index (CPI) has
fallen in the last six months. (Comment: While the CBY and
CSO both conduct surveys of inflationary trends, there is no
smooth relationship between the two organizations or the
statistics that they produce. Since the numbers that they
produce differ, it is more useful to examine if their trends
are similar. End Comment.)

3. The reduction in interest rates appears to have had
little effect on investment in Yemen. Nahari told EconOff
that the CBY has seen steady growth in deposits over the last
year and a half. Specifically, deposits in commercial banks
have grown by 25 percent from January 2008 to June 2009. The
growing amount of deposits has not resulted in increased
loans. In fact, the amount of credit available has only
increased very minimally. According to Nahari, the volume of
trade has increased, signaling more integration with the
world economy. (Comment: While an increase in the volume of
trade is a positive sign, Nahari could not identify how much
trade had increased, which suggests that it was nominal at
best. End Comment.)

4. COMMENT: In the short-term, the CBY appears to have the
upper hand on curbing inflation by reducing interest rates.
In the long-term, interest rate reduction could lead to
capital flight. Yemen's deep-seated problems with low
investment levels are more often due to a poor investment
climate than interest rates. The ROYG has not shown an
inclination to introduce a policy of economic growth,
investing more than it saves (initially) in order to gain the
capital to increase production levels. END COMMENT.
SECHE

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