Unified Yemen: The First Rocky Months

By John Egan

Saddam Hussain's invasion of Kuwait has thrown Yemen into an economic crunch which could cripple the newly unified country. The invasion sent the price of crude oil, Yemen's most important export, skyrocketing. Income from oil exports could double from year-earlier levels if oil prices stay high. But expatriate remittances—Yemen's second-largest source of cash—started plummeting in October when Saudi Arabia revoked the special residency privileges of the estimated 2 million Yemenis working in the kingdom.

For years, Yemenis had been exempt from Saudi laws which require a local sponsor for business ventures. Yemenis will now be subject to the same laws which apply to other non-Saudis operating in the kingdom. About 600,000 Yemenis left the kingdom in October. Many sold their businesses for a small percentage of real value, say angry Yemeni officials.

The Saudis say Yemen is supporting Saddam Hussain, a charge Yemeni officials deny. Yemen opposes Iraq's invasion and occupation of Kuwait, but it also opposes the introduction of foreign forces in the region, according to Yemeni President Ali Abdullah Saleh. Although Yemen, which occupied one of the rotating seats on the 15-nation UN Security Council at the time of the Iraqi invasion, voted for corrective action against Iraq, Yemen has declined to send military units to join soldiers from other Arab countries in the US-led military buildup.

To Saudi charges that Yemen hoped to occupy territory in southern Saudi Arabia if Saddam Hussain attacked Saudi Arabia from the north, President Saleh responded to The New York Times that Saudi Arabia was "completely terrified by our freedom and democracy." He admitted, however, that his country "is currently facing economic difficulties because of the Gulf crisis and the return of thousands of expatriates from Saudi Arabia." Added another Yemeni official: "For years the only way the Arab world could interact with the US was through oil or arms. We have tried to broaden our ties."

It has been a turbulent six months for the Republic of Yemen. On May 22, 1990, after several false starts over the previous two decades, North Yemen and South Yemen became one country, capping two years of hard work by leaders from both countries.

Merging the ministries of both countries will take another two years. Ali Abdullah Saleh, the former president of North Yemen, is now president of the Republic of Yemen. Ali Salem Al-Beidh, formerly secretary-general of South Yemen's ruling Yemen Socialist Party, is Yemen's new vice president. Saleh traveled to Washington shortly before Yemeni unification to meet with President Bush.

In some ways, North and South Yemen make a sensible fit. North Yemen has sizable proven oil reserves but only one small refinery. It exports crude oil and imports refined products like gasoline and diesel fuel. South Yemen has a large (but aging) refinery and potentially even more oil reserves than North Yemen. But the lack of pipelines and other oil production equipment has meant that South Yemen has been able to pump only about 10,000 barrels of oil per day (b/d).

Two decades of rigid Soviet-style central planning blunted development of South Yemen's oil and gas reserves. But cutting aid to pro-Soviet states has been part of Mikhail Gorbachev's perestroika, and when South Yemen began to feel the economic bite of reduced Soviet aid, its leaders re-examined the benefits of the long-pending unification with North Yemen.

South Yemen, once a UK colony, turned to the Soviet Union shortly after the British left in 1967. North Yemen, by contrast, was never colonized by any Western power and, although it has accepted Soviet military and economic assistance, it has been generally pro-Western.

The opposite foreign policies of the two Yemens, however, mask a host of economic similarities. Neither has a strong industrial sector. Both have substantial trade deficits, heavy foreign debt burdens and scant hard currency reserves.

Each has failed to attract foreign capital and both suffer a shortage of paved roads, electricity and telephones. Although a majority of their labor force works in the agricultural sector, both North and South Yemen have had to import nearly all of their food.

Thus unification brought together two of the world's poorest countries. The new government will sit in North Yemen's former capital, Sana'a, while the commercial center will be in Aden, the old capital of South Yemen. The new country sits astride the Bab El Mandeb, which links the Red Sea and the Gulf of Aden, one of the world's busiest shipping lanes.

Although increased trade could bolster the Yemeni economy, the loss of expatriate remittances imperils the financial health of the newly unified country. Remittances mirror the rise and fall of crude oil prices. In 1982, when prices were high, Yemenis working in Saudi Arabia and other Gulf countries sent home about $1.4 billion. But soft oil prices cut remittances to about $330 million in 1988, says the US Commerce Department. Despite current increases in oil prices, remittances from Saudi Arabia's dwindling Yemeni work force could fall even lower for 1990 and 1991.

Yemen has one of the world's most sought-after grades of crude oil. First discovered by Dallas-based Hunt Oil in 1984, Yemeni crude is light and virtually sulfur free. Refiners will pay a high price for such a clean crude oil, which can produce a high proportion of gasoline from each barrel.

North Yemen earned about $448 million from crude oil exports in 1988, its first full year of petroleum exporting. Higher prices and increased production boosted oil export earnings to about $560 million in 1989. North Yemen produced about 180,000 b/d in 1988 and 200,00 b/d in 1989. Production now totals about 220,000 b/d. South Yemen, which developed its reserves more slowly, produced about 10,000 b/d last year, about enough to satisfy domestic needs.

"Petroleum income is very important to [Yemen] and figures prominently in planning for economic development," says a US Commerce Department report. As expensive oil-related projects are paid off, oil export earnings could rise in the next few years.

Unfortunately, North Yemen has already spent a lot of that income: Shortly after oil was discovered, the government increased spending dramatically, in anticipation of oil revenue. So a good bit of that future oil income will go to debt service.

Foreign aid, which once ran as high as $462 million in 1982, fell to $111 million in 1988, according to the US Commerce Department. As remittances and aid have declined, Yemen broadened its ties with foreign oil companies. Occidental Petroleum signed a joint production agreement with Yemen in October. Oxy will join Chevron, Exxon, British Petroleum, Crescent (s United Arab Emirates firm), Total (a French firm)and a Soviet concern in exploring for oil in Yemen.

North Yemen has about 1 billion barrels of proven oil reserves, enough to maintain current production for about 11 years. But estimates of South Yemen's oil reserves are hard to find: Some analysts estimate that up to 3 billion barrels of high-grade crude could be recovered there.

Another 5 billion barrels of oil could lie in the former neutral zone dividing North and South Yemen, where most oil companies are now exploring. A pipeline expansion had already missed its original in-service date, and some forecast a mid-1992 on-line date.

Yemeni officials are also trying to develop their huge natural gas reserves, estimated by some at up to 20 trillion cubic feet. "They have a heck of a lot of gas—they don't even know how much they have," says one US energy expert familiar with Yemen. (The US, by comparison, used about 18 trillion cubic feet of natural gas last year.)

There is as yet no economically efficient way to use or sell the gas, however. Yemen has scant residential demand and no large industrial or chemical plants which could use gas as a feedstock. Gas can be liquefied and exported by LNG tanker, but liquefaction facilities and refrigerated tankers are expensive to build and operate. Asian countries, particularly Japan, buy large quantities of liquefied natural gas, but the high capital cost to build LNG facilities may prevent Yemen from exporting its natural gas reserves. Similar woes have prevented Qatar from fully exploiting its large natural gas reserves.

But oil and gas can't do it all. Yemeni officials know it and are trying to boost tourism by extolling their country as one of the oldest settled areas on earth. Sana'a was said to have been founded by Shem, Noah's son, and archaeologists have traced Yemeni civilization more than 3,000 years into the past.

Once home to the Queen of Sheba, Yemen was also a major commercial crossroad: spices and silts from China and India were off-loaded at Yemeni ports and loaded onto camel caravans which traversed the Arabian peninsula and beyond. The Romans reached Yemen hundreds of years before Islam, and called it Arabia Felix, "Happy Arabia." The area was subsequently traveled by Marco Polo (in the 13^th century), and by British and Dutch explorers 400 years later. Newly unified Yemen could be the perfect week-long getaway for the well-heeled British or American tourist.

John Egan, a Washington-based freelance writer, is a former managing editor of the Washington Report on Middle East Affairs.