It is safe to say that the Transitional Government in Yemen, sworn into office in December 2011, faces daunting political and security challenges, let alone the economic and fiscal challenges that rarely make the headlines. One of the challenges at the top of the list is the fiscal imbalance caused by subsidizing fuel products in Yemen. This paper examines the current status of the fuel subsidies in Yemen, and proposes that an inclusive, participatory approach is best to address this challenge while minimizing the social unrest typically associated with lifting subsidies.

Yemen has the highest fuel subsidy in the MENA region, representing up to 9 percent of GDP.¹ According to the Central Bank Annual Report 2010, the fuel subsidy constituted 22.2% of the Government’s expenditure in 2009, while in comparison Capital Development Expenditures did not exceed 15%. ²

The Role of Fuel Products in the Economy

Fuel subsidies not only affect households through their direct consumption of fuel, but important activities such as transport and agriculture also indirectly use fuel. For many Yemenis, fuel subsidies are seen as an important, and sometimes essential, poverty reduction mechanism. Table 1 shows how the subsidy is used by different economic activities, which sheds light on how it affects household consumption:

Table 1: Role of Fuel Products in the Economy

An attempt to lift fuel subsidies in 2005 led to widespread riots, causing 26 deaths and over 300 injuries before the Government decided to reverse its decision and cut fuel prices down to the subsidized rate. Since then, the Government has taken steps to gradually reduce the subsidy, with the last increase in fuel prices taking effect in October 2010. However, these reductions are sporadic, are not part of a clear and publicized strategy to eliminate subsidies, and are typically followed by social unrest and riots in different parts of the country.

Fuel Subsidies: an Ineffective Tool for Poverty Reduction

Although the main objective of fuel subsidies is to assist in poverty reduction by lowering the price that the end consumer pays for fuel and all other products that use fuel as an input, it has proven to be an ineffective tool in achieving that goal. The subsidy scheme benefits the rich more than the poor, as fuel consumption of the rich is greater than that of the poor. The rich tend to consume more cooking gas and electricity, they have more cars, and they buy more products. Also, subsidies in any country most frequently lead to smuggling, where cheap local subsidized fuel is sold for higher prices in other countries. This is a problem that is often cited by the media and the Government in Yemen, and the losses to Yemen are estimated in the hundreds of millions of dollars, although no sound estimate or detailed figures are available.

Given the above, it is clear that Yemen needs to adopt an alternative method for poverty reduction that delivers assistance more effectively to the people that need it the most, while allowing the government to increase its investments in infrastructure projects that deliver long-term and sustainable poverty reduction.

Lifting Fuel Subsidies

When discussing ways to lift fuel subsidies in Yemen, two key considerations emerge. The first consideration is whether to lift the subsidy gradually (over a period of 2 to 5 years) or to immediately lift the full subsidy all at once. Analysts and researchers have studied these two options closely and have attempted to foretell the costs, benefits and impacts of each option as it relates to poverty reduction, as well as society’s response to each option.

The second consideration is what to do with the amounts saved by eliminating the subsidy. There are three potential areas where these amounts can be channeled: 1) Budget consolidation (reducing the budget deficit); 2) direct transfers to poor households; and finally, 3) productivity-enhancing infrastructure investments. The amount of money saved from lifting fuel subsidies can be split between any of the above three options, or utilized in a single option.

This paper will not focus on analyzing these two key considerations, as the authors of the ‘Petroleum Subsidies in Yemen’ report ³ present a good analysis of these different options. Based on their analysis, the best option is to gradually lift the subsidy (over a period of 3 years: 33% in the first year, 50% in the second year, and 100% in the third year), using 50% of the savings to reduce the budget deficit, while the remaining savings are split between direct transfers to the poorest of the poor and productivity-enhancing investments in infrastructure (such as roads and electricity).

Such a plan is forecasted to achieve an overall reduction of poverty of over 4% in 6 years (as opposed to a 3% increase in poverty if the status quo of the subsidy is maintained). It will mitigate some of the negative impacts on households from lifting the fuel subsidy, and it will provide Yemen with a base for sustainable development and poverty reduction based on economic growth and job creation.

Reducing Fuel Subsidies without Popular Unrest

This paper will provide a series of concrete steps that the Yemeni Government can undertake to implement the above plan, with maximum buy-in and minimum social unrest. The Yemeni Government must carefully balance the urgency of implementing these reforms for the recovery of Yemen’s economy, with the risk of losing popular support and dragging the country into further conflict. Therefore, the recommendations below are an attempt to start thinking of more creative ways to engage the public in implementing these reforms, especially given the spirit of the Arab Spring and the aspirations of the public for more transparency and inclusion in Yemen’s public policy and administration.

1. Establish a taskforce for fuel subsidy reform: This taskforce will have two main objectives: First, to design and implement the most effective “Fuel Subsidy Reform Plan”, and second, to design and implement a program to engage the public in this plan. This taskforce can be made up of cabinet ministers or deputy ministers from the Finance, Oil, Electricity, Media, Industry & Trade, and Agriculture ministries. The Prime Minister can chair this taskforce, which can also include technical experts and consultants as required. The high-level membership of this taskforce will signal the urgency and significance of the fuel subsidy reform and the priority that the Government is assigning to these reforms.
2. Implement a Deliberative Polling process. To achieve the second objective of public engagement, the taskforce can begin by implementing a Deliberative Polling process to understand public opinion on the issue of fuel subsidies, inform and educate the public on the trade-offs involved in this issue, and learn how public opinion would change if people were more informed about the issue. As a participatory strategy, Deliberative Polling originated in the work of Professor James Fishkin of Standford University in 1988.⁴ In Yemen, this process would start by contracting a specialized polling center to poll a random, representative sample of Yemeni citizens on the fuel subsidy issue. After establishing a baseline poll, members of the sample will be invited to gather at a single place for a weekend to discuss the issue. The participants will be given materials and presentations that explain all sides of the fuel subsidy debate in great depth. They will then participate in small group discussions with trained moderators before engaging in dialogue with experts and political leaders. Parts of the weekend events will be broadcasted on television for public viewing. After these deliberations, the same sample of people will again be polled on the fuel subsidy issue, and the changes in opinion would represent the conclusions many within the public would reach if they had opportunities to become more informed and more engaged by the issues.
3. Launch a public dialogue and deliberation campaign. Building on the lessons learned from the Deliberative Polling process, the taskforce needs to design a public dialogue and deliberation campaign to engage the public at the grassroots level. The taskforce should partner with civil society organizations to design and implement such a campaign across Yemen. The campaign must include a media component to educate and inform the public on the fuel subsidy issue, the proposed Fuel Subsidy Reform Plan, and the alternatives the Government is proposing to reduce the impact of lifting the subsidy. Given that over 70% of Yemen’s population live in rural areas, ⁵ and the only available media they can access is local television and radio operated by the Government, these two forms of media must be used heavily to deliver the information, along with other media outlets such as newspapers, online news websites and social media. Local dialogue and deliberation sessions should be held across the country, and coincide with the media campaign proposed above. Local civil society organizations and elected local councils must coordinate and implement these sessions with training and guidance from the taskforce. The sessions will start with a presentation on fuel subsidies in Yemen and its advantages and disadvantages, as well as the different approaches to address this issue and the preferred approach highlighted by the Government’s Fuel Subsidy Reform Plan. Led by trained moderators, participants will then “work through the issue by considering each approach; examining what appeals to them or concerns them, and also what the costs, consequences, and trade-offs that would be incurred in following that approach.” ⁶ This process is modeled after the National Issues Forums methodology.⁷ Civil society organizations will collect the output of these sessions and feed it back to the taskforce to finalize the design of the Fuel Subsidy Reform Plan before implementing it.
4. Establish a public board. The taskforce needs to establish a public board that could be named the “Fuel Subsidy Reform Public Board.” The board’s membership will consist of one member from each of the elected local councils across the country. The mission of this board should be to advocate for the Subsidy Reform Plan, address any concerns from citizens, and follow the implementation of the Subsidy Reform Plan on the ground. For example, if the plan ends up having a component of direct transfers to the poorest of the poor, the board can receive, investigate and work with the concerned authorities to rectify any complaints from poor families who were not included in the direct transfer program. The board and its members can also serve as a channel to continue delivering information and updates from the Government to the people and vice versa after the initial dialogue and deliberation sessions are completed.

Conclusion

In conclusion, fuel subsidies are a major challenge that the new Yemeni Government will need to address in order to lay the grounds for a prospering Yemeni economy. The main threat in addressing this challenge is the public uproar expected in response to increasing prices. That is why the recommendations presented in this paper focus on addressing this threat by proposing a deliberative and participatory approach that will include the public in the design and implementation of the Fuel Subsidy Reform Plan, and engage them in understanding the necessity of this reform for future growth. Being included and engaged will encourage citizens to believe that they have some control over policies that will affect them. This is important, since psychologists have shown that even small amounts of individual control over adverse stimuli will reduce a person’s opposition to these stimuli.⁸ Although some of the techniques recommended in this paper (such as Deliberative Polling and National Issues Forums) are new to Yemen, they will serve as a signal of change in the Government’s approach to public policy and a sign of commitment to transparency and inclusion, which will surely be welcomed by the Yemeni public.

* Rafat Al-Akhali is a youth activist and Executive Director of “Resonate! Yemen”, a youth-based foundation that aims to bring the voices and ideas of young Yemenis to Yemen’s public policy discourse.

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⁽¹⁾ The Government of Yemen, The World Bank, And The United Nations Development Program Yemen Poverty Assessment 2007, available at http://www.undp.org.ye/reports/Volume_I_Main_Report.pdf (accessed on Jan. 12, 2012).

⁽²⁾ Central Bank of Yemen, Annual Report 2010, available at http://www.centralbank.gov.ye/App_Upload/Annl_rep2010_en.pdf (accessed on Jan. 12, 2012).

⁽³⁾ Wilfried Engelke et al, Petroleum Subsidies in Yemen (Washington: IFPRI, 2012), available at http://www.ifpri.org/sites/default/files/publications/ifpridp01071.pdf (accessed on Jan. 10, 2012).

⁽⁴⁾ The Center for Deliberative Democracy, “Deliberative Polling: Toward a Better-Informed Democracy”, available at http://cdd.stanford.edu/polls/docs/summary/ (accessed on Jan.10, 2012).

⁽⁵⁾ Library of Congress – Federal Research Division. Country Profile: Yemen (Washington: Library of Congress, 2011) available at http://lcweb2.loc.gov/frd/cs/profiles/Yemen.pdf (accessed on Jan. 9, 2012).

⁽⁶⁾ Ibid.

⁽⁷⁾ National Issues Forums, About NIF Forums, (N.D.) available at http://www.nifi.org/forums/about.aspx (accessed on Jan. 11, 2012).

⁽⁸⁾ Robert J. Gratchel and J.D. Proctor, “Physiological correlates of learned helplessness in man.” Journal of Abnormal Psychology 85 (February, 1976), 27-34.