Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 36014-YEM

INTERNATIONAL DEVELOPMENT ASSOCIATION

COUNTRY ASSISTANCE STRATEGY

FOR

THE REPUBLIC OF YEMEN

FOR THE PERIOD FY2006-FY2009

May 17, 2006

Country Department III Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official Duties. Its contents may not otherwise be disclosed without World Bank authorization.

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The date of the last Country Assistance Strategy was September 5, 2002

CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 17, 2006)

Currency Unit = Yemeni Rials (YR) US$1 = YR 196.45

SDR 1 = US$1.49348

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Services LNG Liquefied Natural Gas APL Adaptable Program Lending MDG Millennium Development Goal CAE Country Assistance Evaluation NWSSIP National Water Sector Strategic

Investment Plan CASCR Country Assistance Strategy

Completion Report PEC Public Electricity Corporation

CBY Central Bank of Yemen PER Public Expenditure Review CFAA Country Financial Accountability

Assessment PRSC Poverty Reduction Support Credit

CPAR Country Procurement Assessment Report

PSD Private Sector Development

CPIA Country Policy and Institutional Assessment

PWP Public Works Project

CPR Country Performance Rating SFD Social Fund for Development DfID Department for International

Development SME Small and Medium Enterprise

ESW Economic and Sector Work TA Technical Assistance EU European Union UK United Kingdom GEF Global Environment Facility UNFPA United Nations Population Fund GPI Gender Parity Index UNICEF United Nations Children’s Fund IBRD International Bank for

Reconstruction and Development UNDP United Nations Development

Program IDA International Development

Association US United States

IEG Independent Evaluation Group VAT Value Added Tax IFAD International Fund for Agricultural

Development WBI World Bank Institute

IsDB Islamic Development Bank WHO World Health Organization

Vice President: Director: Task Team Leader:

Christiaan Poortman Emmanuel Mbi Gaiv Tata

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COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OF YEMEN

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY ..................................................................................... i II. COUNTRY CONTEXT.......................................................................................... 1 III. KEY CHALLENGES AND MEDIUM-TERM PROSPECTS .............................. 3

A. Progress Towards Poverty Reduction and Social Development............................. 3 B. Medium-Term Outlook......................................................................................... 17

IV. WORLD BANK ASSISTANCE STRATEGY .................................................... 19 A. Past Bank Assistance ............................................................................................ 19 B. Government’s Development Program and the CAS............................................. 22 C. Development Partners........................................................................................... 23 D. CAS Design: Pillars, Outcomes and Instruments ................................................. 25 E. Country Financing Parameters.............................................................................. 34 F. Lending Scenarios................................................................................................. 34 G. Results-Based Monitoring and Evaluation ........................................................... 34

V. MANAGING RISKS............................................................................................ 35

Figures Figure 1: Yemen’s Governance Indicators ....................................................................... 6 Figure 2: Ranking of Investment Climate Constraints ................................................... 10 Tables Table 1: Selected Macroeconomic Indicators ............................................................... 17 Table 2: Donor Partnerships.......................................................................................... 24 Table 3: Previous Lending Program and Impact on Country Development Goals....... 27 Table 4: New Lending Program and Impact on Country Development Goals ............. 29 Table 5: Economic and Sector Work and Impact on Country Development Goals ..... 31 Table 6: Proposed Technical Assistance and Implementation Support ........................ 31 Boxes Box 1: Short-term National Agenda for Reform/Matrix of Good Governance Measures ........................................................................................................... 8 Box 2: The Emerging Approach to Water.................................................................. 14 Box 3: Key Successes Under 2003-2005 Country Assistance Strategy .................... 21 Box 4: World Bank Support to Population Issues ..................................................... 26 Box 5: Learning from the 2003-2005 Country Assistance Strategy........................... 28

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Annexes Annex 1: CAS Results Chain Annex 2: CAS Results Matrix Annex 3: CAS Completion Report Annex 4: CAS Consultations Annex 5: CAS Instruments by Country Development Goals Annex 6: Doing Business Indicators Annex 7: Country Financing Parameters Annex A2: Country at a Glance Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: Proposed Lending Program Annex B4: Summary of Non-Lending Services Annex B5: Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Operations Portfolio (IBRD/IDA/Grants) Annex B8: Statement of IFC’s Held and Disbursed Portfolio Map IBRD Map No. 33513

ACKNOWLEDGEMENTS

This Country Assistance Strategy was prepared by a core team consisting of Torek Farhadi, Afef Haddad, Stephen Karam, Roseleen Mba-Kalu, Gail Richardson, Mustapha Rouis, T.G. Srinivasan, Gaiv Tata (Team Leader), Jean-Philippe Tre and Ayesha Vawda. The Government CAS team was led by the Vice Minister of the Ministry of Planning and International Cooperation, Yahya Al-Mutawakel, included Abdullah Al-Shater, Mutahar Al-Abbasi, Hisham Sharaf, Mohammed Al- Haweri and Khaled Mohamed Saeed and was supported by Taha Al-Fusail and Mustafa Al-Khameri. Government contribution was provided under the overall supervision of H.E. Ahmed Sofan, ex-Deputy Prime Minister and Minister of Planning and International Cooperation and H.E. Abdul Karim Al-Arhabi, Minister of Planning and International Cooperation. Significant contributions were provided by many members of the World Bank’s Country Team and officials from several Government ministries and agencies and are gratefully acknowledged. Administrative support was provided by Maria Luisa de la Puente and Irene Sitienei.

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I. EXECUTIVE SUMMARY i. Yemen represents the single largest development challenge in the Middle East: it is a country of deep rooted tradition endowed with limited resources notably scarce water, limited arable land and declining oil reserves; a country that has experienced dramatic internal and external shocks in the last two decades; the only low-income IDA country in a rich region; and a young country with nearly 50 percent of its population below 15 years and population expected to double in the next 20 years. Despite these constraints, Yemen developed a multi-party democratic system and a relatively free press ahead of other countries in the region. ii. After the civil war of 1994, Yemen undertook painful economic reforms and saw the benefits through a healthy growth in per capita incomes. With the slowdown in the reform process between 2000 and 2005, Yemen made limited economic and social progress over the period of implementing its first Poverty Reduction Strategy Paper (2003-2005). This limited progress is also reflected in the Bank’s program under the previous two CASs being rated as moderately unsatisfactory by IEG. External assistance in support of the Government’s program has been modest despite widespread recognition of assistance necessary to address the development-poverty-security nexus. Initially, this resulted from perceptions that Yemen could finance its development from its oil resources. More recently, aid levels have been lower due to governance concerns as well as shifting donor priorities. iii. Beginning with the implementation of delayed economic reforms in July 2005, the situation has begun to slowly improve. Two recent developments provide the first significant window of opportunity since the successful growth episode of 1995-1999. First, the Government has started implementing long delayed reforms and in particular is confronting the task of reforming Yemen’s governance systems; its success in doing so is crucial and must be both closely watched and supported by all development partners. Second, neighboring countries are offering Yemen the long-term prospect of regional integration and, during the transition period, funding to develop institutions, infrastructure and human capacities. International experience has demonstrated that, in addition to the economic benefits of regional integration, the process of integration has often been an incentive for reform. iv. This Country Assistance Strategy proposes that the World Bank should help the Government to make progress on four pillars: increasing non-oil growth; improving human development outcomes; improving fiscal sustainability; and addressing the resource sustainability crisis. The CAS also includes, under each pillar, upfront actions to improve economic governance which need to be implemented immediately even though the outcomes may only be visible in the medium-term. v. Based on Yemen’s IDA allocation, the World Bank will contribute - to Yemen’s development process - a modest financial amount of around US$400 million in IDA credits over the four year CAS period. Given the enormous development needs of

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Yemen, IDA disbursements will remain modest and annually contribute less than 7.5 percent of development expenditures. The World Bank’s larger contribution will therefore have to come from: a catalytic role in encouraging other donors to assist Yemen; providing technical assistance to the Government and working with other donors to define sector and thematic strategies and improve delivery mechanisms; helping in improving core Government systems; and exceptionally, using projects to demonstrate new implementation approaches that, if successful, can be mainstreamed by the Government and other development partners. This focus will be consistent with approaches that led to the few successes under the previous CAS. vi. The risks to the program will be significant and will encompass: development effectiveness; fiduciary management, macro economic and debt sustainability; realizing reform payoffs; and regional/internal security issues. These risks will be closely monitored and are being mitigated, wherever feasible. The Bank will remain closely engaged recognizing that, despite the high risks, there is also the potential for high reward to its assistance. vii. The following issues are suggested for the consideration of the Board. • Does the CAS design sufficiently incorporate the lessons learned from the

implementation of the previous CAS? • Is the focus on assisting Government to meet short- to medium-term crises

appropriate? • Does the CAS program realistically reflect the results that can be obtained from a

modest lending program and somewhat higher levels of non-lending assistance?

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II. COUNTRY CONTEXT 1. The Republic of Yemen was formed in 1990 by the unification of North and South Yemen. Yemen has a multi-party democratic system; two Parliamentary elections were held in the 1990s and the most recent Parliamentary elections were held in 2003. The current presidential system is based on direct elections and the current president was re-elected through a direct presidential election in 1999. The next presidential election will be held in September 2006. There is a relatively free press in Yemen. 2. Since unification, Yemen has coped with several shocks. At the time of the first Gulf war, the country coped with the return of around 800,000 Yemenis working in the Gulf countries and a temporary suspension of most foreign aid. Subsequently, it overcame a civil war in 1994. Yemen has experienced other internal security problems (e.g. terrorist attacks on the USS Cole in 2000 and the French tanker Limburg in 2002 and more recently conflict in the Sada’a governorate in 2005). Yemen is considered a Fragile State i.e. it is among a group of countries whose: policies and institutions are weak making them vulnerable in their capacity to deliver services to citizens, control corruption or provide for sufficient voice and accountability; and there are risks of conflict and political instability. Within the typology of Fragile States, Yemen exhibits most of the characteristics of a gradual reformer.1 3. Poverty is a nation-wide phenomenon with an estimated 42 percent of the population of 19.2 million (in 2004) living in poverty with a higher concentration in rural areas (where 73 percent of Yemenis live).2 For nearly a decade after unification, Yemen achieved a reasonable annual GDP growth rate (5.2 percent), securing a decent 2 percent per-capita growth. Several factors helped in achieving growth in this period, such as the increased market resulting from the integration of North and South Yemen, an eighty percent increase in oil production as new oil wells came on stream in 1994, steady decline in internal conflicts after the end of the 1994 civil war and a successful macroeconomic stabilization and reform program in the second half of the 1990s with the support of the international community. The reform program focused on inflation control, price and trade liberalization, reduction in subsides, unification of the exchange rate regime and financial sector reforms. All of these reform efforts were successful and private investment and growth responded well. The period 1995 to 1999 stands out clearly as a peak period of growth in post-unification Yemen. 4. Since 2000 GDP growth has steadily begun to slip as the Government became distracted from maintaining the momentum of reforms. First, pressures for fiscal

1 Yemen is among the initial group of countries where the OECD Principles for Good International Engagement in Fragile States are being piloted. The World Bank identifies Fragile States by weak performance (below 3.0) on the Country Policy and Institutional Analysis and as marginal Fragile States (if the CPIA is below 3.2). Using only CPIA benchmarks, Yemen would not be classified as a Fragile State as its CPIA rating is slightly above the marginal level. The typology of Fragile States consists of countries: in deterioration; prolonged crisis or impasses; post-conflict or political transition; and in gradual improvement. See Fragile States – Good Practice in Country Assistance Strategies, The World Bank, 2005. 2 Yemen Poverty Update, The World Bank, 2002. Poverty estimates based on 1998 Household Budget Survey.

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prudence lessened as revenues increased significantly from the dramatic increases in oil prices since 2000. Second, security concerns began to dominate both in Yemen and in the region after the September 11 events. Over this period, quality of governance also remained weak. Several reform initiatives floundered: the privatization process stalled, introduction of a General Sales Tax and the reduction in petroleum subsidies were repeatedly shelved, political commitment for legal and judicial reforms wavered, and the implementation of civil service modernization and health sector reforms slowed. Private investment slumped in 1999 and continued to fall steadily to reach a mere 10 percent of GDP, halving from the average during the period of reforms. 5. Yemen ranks 151st out of 177 countries on the 2005 Human Development Index. There has been an increase in average life expectancy (up from 41.6 years in 1970 to 63 in 2003) with women’s life expectancy mirroring the overall trends. Similarly, there has been a significant increase in enrollment rates in basic education (up from 3 million in 1996 to 4.1 million in 2004). However, there are many remaining areas of concern including: high fertility rates (population growing at over 0.5 million people per annum); infant and child mortality; maternal mortality; malnutrition (18 percent of the population or about 3 million people) particularly for children under 5; and low female literacy rates which stood at 28.5 percent in 2002. Hence, significant challenges remain despite achievements over the last three decades.

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III. KEY CHALLENGES AND MEDIUM-TERM PROSPECTS

A. Progress Towards Poverty Reduction and Social Development 6. Yemen’s long-term vision3 is focused on achieving social and development progress. Medium-term measures for progress in the Government’s First Poverty Reduction Strategy (2003-2005)4 are based on the Millennium Development Goals (MDGs).5 In support of these goals, the First PRSP was designed around five major pillars: achieving economic growth; developing human resources; improving infrastructure; granting social protection; and enhancing governance and participation. The Government’s First PRSP Progress Report (for 2003 and 2004) acknowledges that only limited progress was made towards achieving the long-term development goals. The main goal of reducing the percentage of the poor by 13 percent is not likely to have been met. There have been some successes in meeting targets for: basic education enrollment (for both boys and girls), road rehabilitation and maintenance, power supply and expanded coverage for social protection. Missed targets include: GDP growth, mortality indicators for infants, children and mothers, and access to water and electricity. As the main reasons for the weak performance, the APR identified: dampened investor interest in the region following the second Iraq war; internal security concerns; and a slowdown in economic reforms. 7. The May 2006 Bank/IMF Joint Staff Assessment of the PRSP progress report concurs that the very slow pace of structural reforms was the main cause of the poor progress under the PRSP. This report and the 2004 Country Policy and Institutional Assessment (CPIA) also identify insufficient action in public sector management and governance as impediments to growth. 8. As described in the paragraphs below, progress in achieving the MDGs has been limited and based on current trends, Yemen is unlikely to achieve the MDGs by 2015, with the possible exception of achieving universal primary education.6 Poverty Reduction 9. The last Household Budget Survey was undertaken in Yemen in 1998. The detailed analysis of the 1998 HBS data was undertaken in a 2002 Poverty Update which estimated that 42 percent of households were poor based on a lower poverty line (i.e. food and non-food expenditures of Rials 3,210 per person per month) which corresponded - based on the prevailing exchange rate at the time - to a US$0.80 per day poverty line. The major determinants of poverty were in line with other countries and showed that poverty status 3 Yemen Vision 2025, 2002. 4 The PRSP also overlapped with the 2nd Five Year Development Plan (2001-2005). 5 The MDG focus is expected to continue in the Second PRSP as Yemen is one of the pilot countries under the UN Millennium Project and considerable support has been provided by the UN system to the analysis and formulation of goals under the Second PRSP. 6 The assessment is based on emerging data from the new census which suggests that enrolment rates may be higher than previously estimated; this assessment will be confirmed at the next Joint Donor Education Review.

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was negatively influenced by: larger size of the household; larger number of dependents per household; younger age of the head of household; lower education attainment; employment status of the head of household; lower remittances; and particular geographical locations (which were considered a proxy for poor infrastructure). 10. Additional poverty analysis since that time has been based on partial analysis; poverty is assumed to have remained stagnant or decreased only slightly since the last survey. Work on a new Household Budget Survey commenced in July 2005 (after the completion of the 2004 Census) and the full year survey process will be completed by June 2006. A full update of the poverty situation is, hence, expected in 2007 and its findings would be presented in the 2008 CAS Progress Report. Macro-Economic Context 11. Fiscal revenues (38 percent of GDP) are heavily dependent on oil (which contributes about three-quarters of revenues). As the oil sector generates few jobs, the primary mechanism for transferring the benefits from oil revenues to the population are through: public transfers; public services and public investments. While safety net transfers are limited, fuel is being sold domestically below international prices and subsidies are now costing 10 percent of GDP. These subsidies, which are poorly targeted are as large as development expenditures and reduce the resources available for achieving the MDGs as well as for investing in infrastructure and public services necessary for supporting growth. With total Government expenditures at 40 percent of GDP, the primary fiscal account is nearly in balance. External balances are heavily dependent on oil; out of merchandise exports of US$ 6.6 billion in 2005, oil contributed US$5.8 billion. Imports stood at US$4.5 billion. At end-December 2005, foreign reserves stood at US$5.4 billion with the Central Bank of Yemen’s holdings accounting for over 9.4 months of import equivalent.7 12. In July 2005, the Government re-launched its macro-economic reform program. Prices of fuel products (diesel, gasoline, kerosene and Liquefied Petroleum Gas) were almost doubled reducing the overall fuel subsidy by 29 percent (estimated at world prices at the time). Unfortunately, the fuel price increase led to three days of rioting throughout the country, loss of life and property damage. The introduction of VAT at a 10 per cent rate was deferred to January 1, 2007 but was introduced at an interim rate of 5 per cent for local production and 8 percent for imported goods. Similarly, a new Customs Law was passed. 13. In addition to the ongoing challenges of managing the budget’s heavy dependency on oil, an additional challenge would arise as projections indicate that the oil production will decline and barring the discovery of major new oil reserves, Yemen could become a net oil importer by 2011. This may result in oil revenues reducing over the next decade and affecting the state’s ability to finance the current social compact. The key implications of this challenge for the fiscal situation; external balances; and public indebtedness are discussed further in Section B on the medium-term outlook. 7 The other major contributor was workers remittances which amounted to US$1.1 billion.

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14. Public Financial Management. The Yemen Country Financial Accountability Assessment (CFAA) identified serious weaknesses in the areas of: internal controls; internal and external audit; accounting and reporting; and financial and audit capacity. In addition to specific public sector issues, there is an overall context in which accounting and auditing practices in Yemen inadequately adhere to International Accounting Standards (IAS); and International Standards on Auditing (ISA). There is both a need for improved accounting education and training and a focus on professional ethics. In August 2005, the Cabinet approved a Ten Year Public Financial Management reform strategy to address these weaknesses including reforms and capacity building to increase the efficiency in managing public finances. The successful implementation of these measures would also improve fiduciary risk ratings in future assessments. The Government followed this up by preparing a detailed Action Plan to implement this strategy. It is currently finalizing the detailed financing arrangements with interested donors in the context of a Partnership Agreement. The development of a computerized system to institutionalize those reforms in key ministries is also proceeding and should be operational by FY 2008. Further efforts to strengthen the accounting and auditing profession will be needed to complement the PFM program; this would also have beneficial spillovers in improving the investment climate as well as strengthening fiduciary reporting on Bank projects. Governance and Public Sector Management 15. Good governance is a central element of the development process. Like in many developing countries, the Government has commenced the move to a system based on rule of law and predictable funding of local authorities based on legally defined responsibilities. This transition holds the promise of reducing opportunities for corruption and poor governance but it will be challenging to the status quo as it could impact on the role of “Shaykhs” who are community leaders playing an important role for the Government in conflict resolution and mobilizing local communities;8 and similarly, affect consensus building which is often achieved through a process of negotiation where allegiance is accorded to the state in exchange for benefits.9 Progress in governance is currently assessed on three broad dimensions: voice, accountability and political stability; government effectiveness, regulatory burden and rule of law; and control of corruption. Yemen ranks in the lowest 25th percentile on all areas in 2004 as shown in Figure 1. 10

8 Draft Country Social Analysis, The World Bank 2006 9 Yemen: Democracy and Governance Assessment, ARD Inc, February 2004 10 D. Kaufmann, A. Kraay and M. Mastruzzi, 2005 - Governance Matters IV: Governance Indicators for 1996-2004

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Figure 1: YEMEN’S GOVERNANCE INDICATORS 16. Decentralization. A 2000 Local Authority Law mandated decentralization to elected councils at governorate and district levels; local council elections were held for the first time in 2001 and are giving greater voice to citizens, especially those living in rural areas. By the end of 2005, there are local accountant offices at governorate and district levels and the local budgets for 2005 were prepared fully and directly by local authorities. The pace of implementation of the fiscal decentralization process has been slow and local governments have limited resources over which they have discretion. In order to make progress the Government would need to further explore revenue and expenditure assignments within the intergovernmental fiscal system. 17. Public Sector Reform. Government effectiveness indicators (which measure the competence of the bureaucracy and the quality of public service delivery) have remained low reflecting growing impatience of the public over the state of public administration. The Public Administration workforce is large (at 725,000 persons including civil servants, security forces and other employees)) and underpaid but the large wage bill (at about 13 percent of GDP) has meant substantially increasing pay scales would not be fiscally affordable without an effective Human Resource policy. After an initial implementation delay, there has been some progress recently. In July 2005, a comprehensive wage reform strategy was approved by Parliament and implementation has begun: most allowances were merged into a basic salary; around 60,000 individuals receiving salaries inconsistent with their jobs and qualifications were removed from the payroll; minimum salary levels were increased to slightly above the poverty line; and wage increases were provided only to those civil servants who have been confirmed not to be ghost workers. Work is well advanced on a civil servant identification system (utilizing biometric identification methods) which is expected to become operational in

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the second quarter of 2006 and thereafter result in further reduction of ghosts and double dippers. This has been complemented by sector reform activities; for example, a Cabinet approved regulation to tie teaching posts to the school rather than to the individual teacher (234,000 members of the civil service in 2004) should address a significant bottleneck to the delivery of quality education services in the rural areas. 18. Regulatory Reform. Low percentile rankings of regulatory burden indicators (which measure the incidence of market-unfriendly policies) and the rule of law indicators (which measure the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence) are confirmed by recent country sector work (the Investment Climate Assessment) which points to administrative burden and discretion in implementing regulation and taxation as among the top constraints to private sector development as has been noted in paragraph 23. 19. Anti-Corruption. Finally, Yemen has seen a deterioration in control of corruption indicators. Transparency International’s corruption perception index declined from 2.6 in 2003 to 2.4 in 2004 before recovering to 2.7 in 2005 when Yemen was ranked 103rd out of 159 countries. Clearly, the problems with administrative discretion described in paragraph 18 have a direct impact on corruption but grand corruption is also perceived to cause a major drain on public resources. In addition, weak Government procurement and financial management systems (as noted in the Country Procurement Assessment Review and Country Financial Accountability Assessment) also contribute to administrative corruption. 20. Commencing the Implementation of Good Governance Measures. The Government has begun to implement several delayed reforms over the past year including macro-economic reforms (paragraph 12); public financial management (paragraph 0); and public sector reform (paragraph 17). Finally, in January 2006, the Government has proposed a comprehensive governance reform agenda through a Cabinet approved National Agenda For Reform/Matrix of Good Governance Measures including: introducing an anti-corruption legislative framework consistent with commitments made under the UN Convention Against Corruption; joining the Extractive Industries Transparency Initiative; increasing transparency in public procurement and financial management; and ensuring greater independence of the judiciary and the supreme audit institution from the executive branch. This National Agenda for Reform has become a central focus of a new Cabinet appointed in February 2006 which is closely monitoring its implementation (see Box 1).

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Box 1: Short-Term National Agenda for Reform/Matrix of Good Governance Measures In January 2006, the Government adopted and commenced implementing its National Agenda for Reform which includes concrete actions in twenty focal areas including:

• Anti-Corruption. Laws on Anti-Corruption and Financial Disclosure to reduce conflict of interest and put in force commitments included in the UN Convention Against Corruption; National Corruption Record; and confidential reporting mechanism and protection for whistleblowers.

• Revenue Transparency. Join the Extractive Industries Transparency Initiative (EITI) which supports improved governance in resource-rich countries through the full publication and verification of company payments and government revenues from oil, gas and mining. Studies have shown that when governance is good, such revenues can foster economic growth and reduce poverty.

• Procurement reform. Cabinet approval of National Procurement Manual and Standard Bidding documents (completed); establishment of a tracking system to monitor all public procurement; invitation of international experts and local external observers to participate as observers in the High Tender Board; and amendment of the Public Tenders Law to better define the role of the HTB, require disclosure of public procurement information, mandate disclosure of income and assets of individuals with public procurement roles, require disclosure from bidders of close relationships with decision-makers in public procurement.

• Public Financial Management. Implement the Public Financial Management Strategy; amend the law of the external audit entity to ensure its independence from the Executive Branch and establish mechanisms for its reports to be published; and expedite Parliamentary approval of Public Debt Management Bill (completed).

• Civil Service Reform. Prepare an Action Plan to implement the Civil Service Reform strategy and publish guides for government services and fees.

• Private Sector Development. Revise laws and regulations to reduce cost and time required to establish a new business and prepare a comprehensive report of all changes required to improve government services provided to applicants for new businesses; reduce time taken for customs clearance and inspection procedures from 8 to 4 days; review and amend tax code to be in conformity with international norms; develop information system to automate transactions of the Tax and Customs Authority; and require the Central Bank to enforce compliance with Basel prudential guidelines.

• Judiciary. Amend the law of Judicial Authority to ensure: separation of powers from the executive and ensure administrative and financial autonomy of the justice system and develop and implement an action plan to improve court performance.

• Press. Complete the preparation of a new draft Press Law aimed at protecting rights and public liberties and take actions against those who harass or abuse journalists.

• Law and Order. Passage of Regulation of Weapons Possession Bill through Parliament.

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Growth 21. Yemen’s economy is dominated by oil (estimated at 27 percent of GDP and 90 percent of merchandise exports). Other economic activities in Yemen consist of services (38 percent of GDP); agriculture (15 percent); manufacturing, utilities and construction (10 percent); and Government services (10 percent).11 While the oil sector makes a substantial contribution to GDP it generates few jobs (21,000 jobs). The burden of job creation is, hence, on the agriculture (including fisheries), manufacturing and service sectors. Official unemployment figures (at 11.3 percent) are high and actual unemployment rates are likely to be even higher. With low domestic demand, there are additional challenges in developing an internationally competitive export sector given the “Dutch disease” effects of oil exports on the exchange rate. 22. In the 1990s, GDP growth in Yemen has been driven mainly by factor accumulation rather than productivity growth which was negative for most of the decade.12 Even this accumulation is at risk as private sector investment in Yemen is declining - falling from 20 percent of GDP in 1997 to 13 percent by 2004. 23. Private Sector Development. Yemen has been a difficult place for doing business; it ranked as 90th out of 155 countries in the overall ease of doing business but ranked as 151st on the ease of starting a business.13 The top investment climate constraints reported by domestic firms are shown in Figure 2.14 Specifically, • Macro-economic instability, tax rates, corruption, tax administration, anti-

competitive or informal practices and smuggling or dumping. • There is another set of constraints - less significant than the top ranked constraints –

but still identified as a problem by over a third to half of all firms surveyed: power, customs regulation, land and access to finance. Some of these constraints get a higher ranking by firms of different sizes or firms in particular locations.15

24. Agriculture. Agricultural activities are conducted in four agro-ecological zones; the majority of cultivated land is in the highlands and plateaus and a majority of agricultural households own livestock. Qat which is the major cash crop, represents only 15 percent of cultivated land but generates around a third of agricultural GDP; production increased over the past decade though profits have accrued primarily to larger farmers.16 About half of the cultivated land is under irrigation (spate, tube wells or spring) and the other half is under rainfed agriculture. There have been improvements in spate irrigation to better manage surface water but groundwater continues to be extracted at unsustainable

11 2005 estimates in Government PRSP Progress Report Table 3. 12 Economic Growth in the Republic of Yemen: Sources, Constraints, and Potentials; World Bank, 2002. 13 Doing Business 2006, The World Bank, 2005. 14 Draft Investment Climate Assessment, 2006. While the rankings are based on a survey of 488 formal firms in manufacturing, services and commerce in four locations, many of these constraints are also likely to affect firms of all sizes and rural enterprises and farms as well. 15 Land access is a significant problem for small firms; access and cost of finance for medium-sized firms; and worker skills and education for large firms. Electricity is a concern for firms in Al-Hodeida, access to land in Aden; “anti-competitive or informal practices” and “smuggling and dumping” in Taiz. 16 See draft Country Social Analysis, 2006.

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levels in part due to subsidized diesel prices. Agriculture (including fisheries) contributes 15 percent to GDP but provides employment for 55 percent of the active population; the discrepancy reflects seasonal employment, underemployment and low productivity. Low productivity results from: low yielding seed varieties; water shortages, problems with access to inputs and outputs (due to poor road infrastructure and institutions); post-harvest losses; and lack of quality assurance services, particularly for exports.

Figure 2: RANKING OF INVESTMENT CLIMATE CONSTRAINTS

25. Fisheries. With a coastline of 2,230 km, Yemen has a wealth of fisheries resources. Previously, Yemen allowed uncontrolled expansion of large foreign fisheries fleets in Yemeni waters which carried the risk of over-fishing and resulted in fish exports of only US$13 million. The Government has since discontinued the issuance of foreign fishing agreements. This has led to the fisheries sector becoming the most important source of non-oil export revenues (US$210 million in 2004). There is further potential to tap lucrative markets in Europe and elsewhere for fresh fish which conform to strict quality standards. The main constraints include: lack of planning information, research and fisheries management plans; lack of infrastructure; and institutional capacity. 26. Urban Growth. Yemen has the highest rate of urban growth in one of the fastest urbanizing regions (7 percent per annum). This has outstripped city capacity to provide services, resulting in a mushrooming of informal settlements and urban slums where residents lack tenure security and access to reliable and affordable infrastructure services.17 The Government is focusing on three major port cities (Aden, Al-Hodeidah and Al-Mukallah) to attract investment and stimulate economic growth. Formulation of city development strategies (including updating of physical and investment planning) is well underway and with small seed investments already made in Aden, there has been an 17 It is estimated that well over 10 percent of the housing stock in Taiz City is informal, while an estimated 65 percent is not legally registered and the cost of median housing to median income is in the range of 75:1.

12

15

23

2428

2831

31

34

37

40

4752

54

54

61

71

73

0 10 20 30 40 50 60 70 80

Percent of respondents evaluating constraints as "major" or "very severe"

Labor regulations

Transportation

Skills/education of workers

Business licensing/operating permits

Crime, theft & disorder

Access to finance ( collateral)

Regulatory policy uncertainty

Legal system/conflict resolution

Cost of financing

Access to land

Customs & trade regulations

Electricity

Smuggling or dumping

Anticompetitive or informal practice

Tax administration

Corruption

Tax rates

Macroeconomic Uncertainty

Leading Constraints: Yemeni Enterprises

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encouraging response by the private sector with investments (including FDI) approaching US$85 million in 2005 alone. The remaining challenges are: to replicate this approach in other cities; and to accelerate the private sector provision of infrastructure through enclaved industrial or export processing zones. In order to increase exports, it may also be necessary to complement this with addressing specific administrative and institutional constraints. 18 27. Natural Gas. Yemen has significant gas reserves (proven reserves of 17 trillion cubic feet). Currently, natural gas plays a small role in Yemen’s economy; most gas extracted with oil is re-injected. Production sharing contracts in Yemen have given no property rights over gas to the private sector which is not unusual in a country where there is no gas market or ability for export. There is significant potential for additional GDP, foreign exchange and Government revenues from the development of gas in the medium-term. Long-term contracts (25 years) have already been entered into for extraction and export of two-third of these reserves. Construction of a Liquefied Natural Gas (LNG) plant, associated pipeline and other facilities will cost $3.7 billion. Once exports commence – currently projected for 2009 - the gross annual value is estimated at around US$1.5 billion (in 2005 prices) or around one-fourth of crude oil exports. Net benefits would be lower as costs of development, transport, and liquefaction would need to be deducted but actual numbers have not yet been estimated. Further, given that the export of Liquified Natural Gas is likely to commence in the foreseeable future, the central issue for Government is to give the private sector appropriate incentives to explore, produce and utilize gas (including for power generation). 28. Financial Sector. The financial system in Yemen is underdeveloped and plays a limited role in the economy despite the adoption of a number of reform measures during the last decade. The predominant institutions in the system are the Central Bank of Yemen (CBY), fifteen commercial banks (two government, four foreign, and nine domestic private banks) and two public sector specialized banks. The four largest banks hold 65 percent of total banking system assets and branches are primarily in Sana’a and other large cities. Nonperforming loans are estimated at a quarter of total loans and there are concerns regarding adequate provisioning. Significant progress has been made in banking regulation and supervision, but much still remains to be done in enforcing the new prudential rules. While access to finance is currently extremely limited in Yemen, international evidence indicates that financial sector reforms are needed for growth and poverty reduction and also needed to reduce the frequency and cost of financial crises which require costly bailouts by Governments. Human Development 29. Education. The focus has thus far been on improving access to basic education. In 2004, gross enrollment in basic education had increased to 4.1 million children (or 76.4 percent). Gains in other sub-sectors were equally significant: between 1996 and 2004, access to secondary and tertiary education improved by more than 80 percent. This 18 Mitsubishi Research Institute: “Enhancing Yemen Export Competitiveness: Diagnosis and Policy Options”, 2005

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significant growth in access has been complemented with improvements in gender equity. Although low by international standards, the gender parity index (GPI) has improved substantially. Nevertheless, sustained focus is required on reaching those who are most likely to stay out-of-school or dropout before completing basis education. Yemen also faces challenges in improving the quality of learning and will benchmark the performance of its 4th and 8th grade students internationally by participating in the Trends in International Mathematics and Science Study in 2007. In post-compulsory education - secondary, vocational/technical, and higher education - the government is confronting the challenges of improving the relevance of curricula to changing labor market and social needs, and increasing the efficiency of public expenditure. The strategy for TVET focuses on increasing the participation of employers in program design and delivery. The strategy for secondary education would address the need to increase access for girls and develop more diverse, relevant and cost effective curriculum options. In the higher education sector, work is ongoing to finalize a national strategy that focuses attention to a leaner and more cost-efficient higher education system. 30. Health. The health status of the Yemeni population is poor as measured by all conventional indicators and Yemen is not on track to achieve health-related MDGs. Life expectancy (at birth) is only 63 years, while maternal mortality (365 per 100,000 live births), infant mortality (80 per 1000 live births), and under-five mortality (113 per 1000 live births) are among the highest in the region. Outcomes in rural areas are much worse than urban areas. With 64 percent of all health expenditures being private and 36 percent from public sources, Yemen has one of the lowest financial risk protection rates. Further, at 1.4 percent of GDP, absolute levels of public expenditures are also low in comparison with countries of similar income levels. 31. Nutrition. Malnutrition is widespread in Yemen, reflecting the high rates of poverty found in both rural and urban areas. Among children under five years, 46 percent are underweight while 52 percent are stunted (short for their age); these rates are even higher among the poorest population quintiles. Vitamin and mineral deficiencies are also widespread, resulting in an estimated loss of 1.3 percent of GDP. 32. The health sector in Yemen suffers from a number of serious challenges: inequitable and inadequate access to services; poor quality of services (in both the public and private sectors) due to a lack of essential drugs, poor facilities (many without water and sanitation), inadequate equipment, insufficient and inadequately trained staff, and high absentee rates among public employees. The 2000 Health Sector Reform has gone largely un-implemented, in part due to changes in the top management of the implementing Ministry. However, following the signing of a donor harmonization agreement in December 2005, the Government, with support from the development partners, has launched a major health sector review with the aim to revise the existing strategy for reform by September 2006. 33. Social Protection. Vulnerability in Yemen exists at individual, community and institutional levels. Since poverty is widespread, the social protection system is important for many households. Public and private transfers (including zakat, pensions, local and

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foreign remittances and government programs) provide substantial source of livelihood for the poor and they account for about 8 percent of total expenditures of the average Yemeni household. However, there are no comprehensive risk-reducing mechanisms (such as labor market policies and programs). Most of the existing public mechanisms have limited coverage, are not well targeted (with the exception of the Social Fund for Development and the Public Works Project) and are inefficient in terms of providing adequate protection for those in need. The Government is planning to undertake a comprehensive review of the social protection sector including existing cash benefits, pension schemes and other programs and plans to formulate its Social Protection Strategy outlining the main directions for sector reforms. 34. Children and Youth. Children and youth make up 76 percent of the total population, and the incidence of poverty among children is 21 percent higher than the adults. Around 60 percent of the children and youth in Yemen suffer from poor health and educational outcomes. The government recently endorsed a National Strategy for Children and Youth that provides a comprehensive and multi-sectoral framework to address risks that children and youth face along the life cycle stages, their consequence on subsequent years and their implications for reducing poverty and reaching the MDGs. This strategic framework is being incorporated into the Second PRSP and will also be used by line ministries to incorporate children and youth issues into sectoral strategies. Environmental Sustainability 35. Water. Water scarcity in Yemen is serious and getting worse; per capita availability of water in Yemen is at 2 percent of world and 10 percent of regional averages. Groundwater extraction has reached 130% of recharge with agriculture using about 90 percent of the groundwater and within that, qat has become a major source of water depletion. The consequent drop in aquifer levels has increased extraction costs. Urban and rural water supply and sanitation coverage are not keeping pace with the growth of the population. Yemen’s challenge is, hence, to better manage groundwater resources and slow depletion while simultaneously increasing access to water (and sanitation) services for both agricultural and potable uses for an under-served population. Realizing the challenges facing the water sector, the government’s 2004 National Water Sector Strategic Investment Plan (NWSSIP) and the World Bank’s supporting 2005 Country Water Resources Assistance Strategy have focused on groundwater management as a central challenge. This new approach is described in Box 2. 36. Population. Despite a 25 percent decline in the total fertility rate between 1960 and 2003, total fertility remains among the highest in the world. With 6.2 births per woman (down from 7.2 in 1993), corresponding to a growth rate of 3.0 percent, Yemen’s population is increasing by over 500,000 persons per year and is expected to double to 40 million by 2030. The causes of the persistently high fertility rates are myriad and complex. Among the most important are: low, but increasing, utilization rates of modern contraceptives (from 1 percent in 1979 to 23 percent in 2003); the cost of contraceptives; early age of first marriage; high infant mortality; high illiteracy rates among women; a preference for large families; and opposition to contraceptives among men, whose

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approval is needed for use by women. In addition, poor access, particularly in rural areas, to health care and family planning services is another important factor, which contributes not only to the low rates of breast feeding, but also to an estimated unmet need for family planning of 51 percent (in 2003; up from 39 percent in 1997).19 While Yemen has a National Population Strategy, which is supported extensively by a number of development partners, population growth remains a serious challenge. Infrastructure 37. Roads. Much of the rural population (accounting for over ¾ of the total population) lives in relative isolation due to geographical circumstances e.g. the rugged and mountainous conditions in the northwest of the country and poor condition of the rural roads network. By late 2004, Yemen has made good progress towards the PRSP output

19 Unmet need is the difference between the percentage of women who do not want to become pregnant in the next two years or do not want to become pregnant at all, but are not using contraceptives (Svanemyr (2006); Promoting the Demand for Family Planning in Yemen - an Assessment for the World Bank (draft)).

Box 2: The Emerging Approach to Water

The development of water resources and services has played an important part in driving Yemen’s growth over the last thirty years. As problems with high levels of groundwater extraction and urban and rural water supply and sanitation began to accelerate by the late 1990s, Government and donors were spurred to change. The National Water Resources Authority (NWRA) was created; projects to improve irrigation efficiency were implemented and autonomous urban water utilities introduced. In 2003, Government passed a water law, reorganized the sector under a single Ministry of Water and Environment (MWE), and began an integrated approach to basin management. In 2004, Government formulated the National Water Sector Strategy and Investment Program (NWSSIP) with Yemeni and donor stakeholders as an integrated approach to the water sector. The new approach involves a multi-sectoral framework including key policy and institutional changes and is supported by the new generation of Bank projects currently under implementation (Sana’a Basin, Groundwater and Soil Conservation, Urban Water Supply, Irrigation Improvements, and Rural Water Supply and Sanitation). This approach is facilitating the dialogue with the Government and is now focused on developing policies for: improved management of aquifer recharge; better capture and use of run-off from rainfall; enhanced efficiency of both urban utilities and irrigators; expanded coverage of safe water supply and sanitation in rural areas; and evolution of wastewater treatment and recycling options that are appropriate for Yemen. The new approach focuses on the major elements below: • Building local consensus through a process of monitoring depletion rates, communicating the results to

stakeholders, and improving irrigation efficiency; • Institutionalizing the existing (informal) usage of pricing mechanisms to set the ground rules for transferring

water from rural to urban use; • Managing water and sanitation services at the lowest appropriate level, through the continued decentralization

of service provision to the local corporations and water user associations and private sector participation, where feasible;

• Providing water and sanitation services based on local preferences and willingness to pay; and • Redefining the mandates of the water authorities to one of regulating providers, facilitating investments and

disseminating knowledge, rather than being involved in direct service provisioning. There have been signs of improvement: Investments in irrigation have shown that water use efficiency can be considerably improved, and some water conservation has been achieved. A number of autonomous Local Corporations have been created for urban water and a major urban water investment program is underway. The rural water institution has been restructured, a rural water sub-sector strategy has been prepared, and demand responsive approaches are being implemented.

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targets for the transport sector with 900 km/year of paved roads being added. Overall, the length of the paved road network has doubled in the period between 1990 and 2003. During the past years, funding for the road sector has been about US$100 million per year, with roughly half coming from external sources. The capability to plan and implement programs in the road sector has also seen improvement. The remaining challenges relate to: insufficient coverage of rural areas with all-weather roads (only 28 percent of households); institutional challenges in particular, deficiencies in budget allocation processes which are being addressed through a parallel system of Rural Accessibility Planning which has proved successful in its pilot phase; and inadequate maintenance of the road network due to underfunding (less than half of the required US$26 million per year is available) and a backlog of road rehabilitation works. 38. Power. Yemen is the least electrified country in the MENA region with only about 40 percent of the total population having access to electricity; in rural areas, the electrification rate is even lower at only about 20 percent. The state owned Public Electricity Corporation (PEC) owns and manages generation plants which are old and in need of significant rehabilitation. By the end of 2005, load shedding was over 20 percent of peak demand due to lack of generating capacity and high losses from the transmission and distribution network. The tariff structure provides a subsidy to a large part of the consumers and tariffs have not increased regularly in the past years and generally fall short of covering costs. Despite this, PEC’s financial position has improved somewhat with limited investments and better collections; revenues covered 90 percent of operating costs in FY04 as compared with 77 percent in FY00. The short-term priorities are: increase in generation capacity through the installation of small diesel plants, major overhaul of several power stations; and continued reduction of transmission and distribution losses. For the medium-term, the Government will be generating additional power using natural gas; a 741 MW gas fired generation is expected to be commissioned in two phases by 2010. 39. Land. As a critical input into all economic activities (rural and urban), land allocation and titling remains a major challenge for the Government where little progress has been made in the recent past. Moreover, a significant proportion of court cases involve land-related disputes which stem from an inefficient public land administration system and weak land titling and registration systems. Over the medium-term, reforms will be needed to: strengthen and clarify the legal and regulatory framework concerning land related issues; streamline and rationalize the roles and mandates of institutions dealing with public land management; and provide an operational framework for strengthening land titling and registration through a proposed series of pilot activities intended to improve the land registration capture rate in the pilot areas. 40. ICT. Currently Yemen has limited fixed line infrastructure (with 4 percent coverage as compared to the MNA average of 9 percent), somewhat better mobile coverage (9 percent though the rate is among the lowest in the region) and very limited Internet usage (0.51 percent of the population). Availability of services in rural areas is even lower. Prices of international voice and Internet services are higher than in other MNA countries. These problems arise from: monopoly of service provision for the fixed

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network; and regulation being performed by the same Ministry which is a market player in fixed and mobile service provision. The postal sector shows similar weaknesses: monopoly service provision, no regulation and a chronic structural deficit. International experience indicates that improving sector structure and regulatory reform could have substantial impact on improving access to services and reducing end user prices. Qat 41. Cultivation and chewing of qat is pervasive in Yemen. There are several negative impacts: qat consumes one-third of the abstracted groundwater; household expenditures are diverted from food consumption; time devoted to the daily qat chewing session represents at least a 25 per cent productivity loss; and there are also adverse health effects. However, qat is far too well integrated into the Yemeni economy and society for significant reductions in its cultivation and use to occur in the short-term. The PRSP focused on the impact of qat cultivation on the scarce water resources but stopped short of defining a specific program to deal with this issue.20 Given lack of domestic consensus on addressing this issue, priority needs to be given to re-engaging society on the negative impact of qat. Avian Influenza 42. While there have been no reported cases in the country so far, Yemen lies on the main bird migratory routes between Central Asia, Eastern Europe and Africa. Poultry meat currently represents 65% of total meat consumption with the local poultry sector supplying more than half of the demand. A Rapid Assessment has been conducted and results are being finalized. Assistance, if needed, will require a multisectoral approach integrating animal health, public health and communication components. Gender 43. Yemen has significant gender inequality and the Government has included progress in gender equality as part of its key PRSP goals. Many of the activities in the Bank program directly (e.g. increased classrooms for girls’ education) and indirectly (e.g. increasing water availability which in turn allows girls to attend school) impact on gender issues. The activities have led to some progress: between 1996 and 2004, the Gender Parity Index improved from 0.39 to 0.66 for basic, from 0.27 to 0.45 for secondary and from 0.21 to 0.35 for university education. There are still large remaining challenges for the economic empowerment of women; the draft Investment Climate Assessment shows that women constitute only 10 percent of entrepreneurs and 6 percent of the workforce. Addressing the main constraints to growth of all businesses as identified in paragraph 23 will help women entrepreneurs even more as they have identified these constraints to be even more binding to growth of their businesses.

20 Yemen PRSP, 2002.

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B. Medium-Term Outlook 44. Economic growth picked up in 2005, but exchange rate and inflationary pressures were present. Oil production declined by less than one percent as a result of further drilling in existing wells, while overall GDP was boosted by higher activity in agriculture, construction, and transport. The Yemeni rial experienced downward pressure in mid-year, as the government struggled to pass several key reforms. Inflation was on a downward trend during January-July, but spiked in August-October following increases in domestic fuel prices. 45. As noted in Table 1 below, the short run situation looks manageable because of high oil prices and one-off investment activities related to the construction of the LNG plant. Although oil production is expected to decline, non-oil growth is expected to be strong in part due to construction of the LNG plant. Inflation will remain at current levels (around 15 percent) in 2006 before beginning to average about 12 percent for the remainder of the CAS period. The central government’s projected budget deficit for 2006, at 3.0 percent of GDP, should not significantly complicate macroeconomic management due to better than budgeted oil revenues and restraint on expenditure.

Table 1: SELECTED MACROECONOMIC INDICATORS 2001 2002 2003 2004 2005 Est. 2006 Proj. 2007-10

Real Sector (annual % change)Real GDP 4.6 3.9 3.1 2.6 3.8 3.9 3.7Real oil GDP 1.3 0.4 (1.8) (6.9) (0.9) (6.3) (6.4)Real non-oil GDP 5.2 4.6 4.0 4.1 4.5 5.4 4.8CPI inflation 1 10.7 6.8 11.9 12.0 14.6 15.7 11.8Investment (% of GDP)Total investment 18.9 20.8 22.1 23.0 22.3 29.0 30.2 Private Investment 11.8 13.4 13.3 13.8 14.0 14.5 21.8Government finance (% of GDP)Revenue (including grants) 35.3 33.6 30.9 32.0 38.1 36.1 29.9 Oil & Gas 25.3 22.3 22.1 23.1 29.0 25.8 16.8 Non-oil 9.8 9.7 8.5 8.1 9.1 9.8 12.5 Grants 0.3 1.6 0.4 0.7 0.0 0.6 0.6Total expenditure and net lending 32.8 34.8 35.7 34.2 40.5 39.1 34.9Overall balance (deficit(-)) (commitment basis) 2.6 (1.2) (4.8) (2.3) (2.4) (3.0) (4.9)Non-Oil primary balance (20.5) (21.5) (25.1) (23.2) (28.9) (26.4) (19.0)External sector (US $ million)Current accountExports of goods 3302 3584 3923 4654 6624 7026 6028Imports of goods 2771 3083 3557 3858 4338 6198 6280 Service (net) (718) (633) (748) (757) (976) (1220) (1029)Gross reserves 2 3569 4056 4445 5108 5370 5762 3979Gross reserves (months of imports) 12.5 12.1 12.5 12.6 9.6 9.8 7.1Current account balance (% of GDP) 5.3 5.4 (0.1) 1.9 4.7 (4.6) (6.0)Memorandum items:Crude oil produciton (1000 barrels per day) 189 433 425 396 393 368 309Average oil export price (US$/barrel) 3 23.0 24.6 27.9 36.6 51.5 58.3 59.5

1/ Core CPI is defined as CPI excluding qat.2/ Gross reserves less commercial bank & pension fund foreign exchange deposits at Central Bank.

Source: World Bank and IMF Staff Estimates.

3/ Oil price differs from WEO price as Yemeni oil is traded at a discount.

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46. Medium-term prospects are more worrisome but can be managed through a set of policy measures and reforms which will need to include rationalization of government expenditure (particularly the reduction of energy subsidies and controlling the wage bill), an increase in the tax effort, and structural reforms to facilitate the adjustment to lower oil revenues, as well as to enhance the effectiveness and credibility of public financial management, and boost prospects for economic growth. This package of measures is under discussion and is expected to be reflected in the Second PRSP document. 47. Medium-term debt sustainability. Yemen currently has significant foreign exchange reserves and a positive trade balance. However, with heavy dependence on a single commodity, the projected decrease in oil production will translate into lower foreign exchange revenues in the medium-term and additional debt will most likely need to be raised domestically; Debt Sustainability Analysis undertaken as part of the Development Policy Review reveals that Yemen faces a moderate risk of debt distress. Under the baseline all the relevant debt distress indicators stay below their respective thresholds. But, several stress tests show that: the baseline would be vulnerable to further shocks to the country’s weak and barely diversified export base; lower than anticipated future oil prices would lead to a rapid deterioration of Yemen’s prospects for external debt sustainability; and fiscal sustainability could be easily imperiled by slippages in the fiscal adjustment program.

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IV. WORLD BANK ASSISTANCE STRATEGY

A. Past Bank Assistance 48. The 2003-2005 World Bank Country Assistance Strategy for Yemen was designed to support the Government’s first PRSP and the four pillars of the CAS were consistent with the five key areas in the PRSP. Seven projects (and commitments of US$387 million) were added to the portfolio of projects under implementation. Over the period of the previous CAS, disbursements remained fairly constant (at around 16 per cent or approximately US$85-95 million per annum). The quality of the portfolio improved significantly during the last year (with unsatisfactory projects and projects at risk as a percentage of the portfolio declining from 20 percent in June 2004 to 6 percent in June 2005). Several non-lending activities were undertaken though only a limited number were publicly disseminated. 49. Country Assistance Evaluation FY99-FY05. The CAE (undertaken by the Independent Evaluation Group of the World Bank) covers the last two Country Assistance Strategies and rates the overall outcome as moderately unsatisfactory. It concludes that there was unsatisfactory progress on governance; moderately unsatisfactory progress on the investment climate and on water resource management; and moderately satisfactory progress on social sector/gender issues. The principal lessons and recommendations are that the future Bank program should:

• learn local conditions by conducting adequate research and developing issue-specific knowledge to have country specific solutions (e.g. as in the water sector);

• moderate optimism by making more realistic assessments of ownership, speed of implementation and likely outcomes;

• upgrade governance as a central constraint to delivering public services and as a cross-cutting theme in its program;

• conserve water - Bank support to help conserve groundwater is essential;

• counteract qat by helping to investigate the economic, social and resource implications of producing qat and support education and public awareness campaigns.

• improve population policy by assisting in accelerating the demographic transition in Yemen.

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50. CAS Completion Report. The CAS Completion Report (Annex 3) also indicates that outcomes were unsatisfactory for governance and private sector development; moderately unsatisfactory for environmental sustainability and moderately satisfactory for the human development pillar. In addition to the lessons from the IEG CAE, there are four other lessons drawn by the CASCR: 21

• CAS Results Selectivity: Given that donor assistance to Yemen is extremely limited, donor projects need to balance competing goals of delivering immediate results (essential to build confidence in public service delivery) and improving the long-term delivery capacity of Government’s systems;

• Long-Term Partnerships: The optimal approach - adopted for education, water and PFM - was to assist the Government in developing a sector strategy (through non-lending assistance); aligning donor support around the sector strategy and designing IDA projects within this broader harmonization context;

• Strengthening state capacity and accountability: In the context of weak capacity, actions to move away from PMUs and mainstream implementation need to be considered on a sector-by-sector basis taking into account the pace of actions to strengthen fiduciary systems (procurement and financial management) and implementation capacity (progress in sector level civil service restructuring). An alternative approach is to formalize and provide greater autonomy to enclave entities (e.g. the Social Fund for Development and the Public Works Project).

• Greater Implementation Focus: For lending activities, new projects need to be: (a) not too complex for the implementing environment; and (b) subject to rigorous criteria to ensure that they are ready for implementation prior to effectiveness to reduce implementation delays. For non-lending activities, a country level approach to managing the portfolio of non-lending activities is required to reduce fragmentation and ensure a focus on dissemination/leveraging support to major Government reform priorities.

51. Despite the moderately unsatisfactory rating of the CAE and the unsatisfactory rating of the CASCR, both evaluations recognized that there had been substantial progress made in education and social development and that by not lending, the Bank had assisted in the transformation of the fisheries sector (Box 3). Further, despite limited impact achieved under the 2003-2005 CAS, many of the building blocks for the next CAS were finally put into place during the last twelve to eighteen months of the previous CAS. These included: public financial management; civil service reform; water resource management; and support to urban economic development in the port cities particularly in Aden. In these key areas, there are locally owned reform strategies and the challenge for the next CAS would be on supporting implementation.

21 The lessons in the CASCR are consistent with international experience with gradual reformers as noted in Fragile States – Good Practice in Country Assistance Strategies, World Bank, 2005.

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Box 3: Key Successes under 2003-2005 Country Assistance Strategy

Basic Education: Fixing Government Delivery Systems. The significant improvements in the education sector provide a good illustration of the optimal approach to achieving impact in Yemen. First, there was demonstrated Government commitment: through budgetary allocations (6.8 percent of GDP or 22% of total government expenditures in 2004) and strong leadership at the Ministry of Education. Second, donor harmonization is working well with the education sector being the furthest along with a formal partnership of 12 donors which worked with the government in drafting the Basic Education Development Strategy and, since 2005, has been reviewing the strategy annually. Multi-donor financing arrangements are in place both through the global EFA-FTI Catalytic Fund; and through a country specific multi-donor Trust Fund being implemented in conjunction with ongoing World Bank projects. Third, the Bank invested heavily in the strategic planning and analytical phases and its work provided the basis for the systemic changes (e.g. rationalizing teacher deployment and the inspectors’ corps in coordination with the civil service reform process; building national capacity for education assessment and international benchmarking of the learning achievements of Yemeni students; and utilizing school mapping in making school construction decisions). Fourth, Bank projects supported clear and simple implementation arrangements with a focus on capacity building which has led to satisfactory performance even in difficult implementing environments. This success has had spillover effects as a similar approach has been adopted for secondary education, technical and vocational training, higher education and a children and youth strategy. Social Fund for Development and Public Works Program: Successful Enclave Approaches. The Yemen Social Fund for Development was established in 1997 to strengthen the social safety net and adapt the demand-driven approach in community development. The Bank has itself provided $165 million through three IDA credits (two closed with highly satisfactory ratings and one under implementation since August 2004); led donor coordination efforts to increase coverage of SFD activities; and played a role in assisting the SFD in improving quality and efficiency of service delivery; decreasing unit costs of school construction; ensuring community participation; and a demand driven approach to service delivery. An Impact Evaluation Study on SFD projects during 1998 – 2003 concluded that: the project targeting worked well with 40% of resources going to the poorest three deciles and only 4% to the top decile; girls’ enrollment increased from 42% in 1999 to 58% in 2003; sick individuals receiving health care rose from 55% to 68%; access to household tap water increased by 35%, distance for fetching water reduced by 19% and time needed to fetch water by 14%; and rural roads projects reduced journey cost and time by 40%, daily in-and-out-trips increased by 180%. The Public Works Program was established in 1996 as a semi-autonomous implementing entity in the Ministry of Planning and International Cooperation. The Bank has itself provided $120 million through three IDA credits (two closed with highly satisfactory ratings and one under implementation since July 2004); led donor coordination efforts and raised an additional $90 million from other donors to increase coverage of PWP activities. PWP has provided small scale infrastructure and community assets to deprived and poor communities throughout Yemen, including schools, health clinics, water harvesting and water supply/sanitation infrastructure, and paved roads. Over 7 million Yemenis have benefited from PWP-financed activities in addition to thousands of temporary man days created through its labor-intensive works (a minimum of 30% labor content is required for all PWP activities). The Bank’s Independent Evaluation Group (IEG) has assessed the PWP as a highly successful project. Fisheries Sector: Achieving Development Impact By Not Lending. The Bank had supported the fisheries sector in Yemen through five loans up to 1999. However the sector framework was not conducive to maximizing the poverty reduction impact of the sector with large foreign industrial vessels undertaking unsustainable exploitation of fish stocks, low economic benefits with exports of only US$13 million and the crowding out of small-scale artisanal fishing. On the basis of sector work (a Fisheries Sector Strategy Note), the Bank decided to postpone further lending until the sector framework was changed. When the sector framework was changed with the discontinuation of licensing in 2002 and 2003, there was a dramatic impact. Fish production from small-scale fisheries, fish exports, and sector employment all started growing at double digit rates and by 2004 fish exports reached a level of about $210 million. In view of the more favorable policy framework, the Bank has recommenced lending under the 2006-2009 CAS with an IDA credit about $25 million.

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B. Government’s Development Program and the CAS 52. The Government is currently in the process of preparing its Second Poverty Reduction Strategy (2006-2010). Priorities in the new plan continue to have a high degree of continuity from the previous PRSP and Development Plans.22 The strategic focus of the Second PRSP can be clustered into: growth; improving human development; and improving governance/fiscal sustainability. 23 53. The CAS is based on the Government’s Second PRSP. Since mid-2005, the Government has undertaken extensive country-wide consultations in preparing its Second PRSP. Further, the Government has widely discussed its main thinking with all stakeholders particularly donors. These consultations have also benefited the preparation of the Bank’s Country Assistance Strategy which was sequenced to follow the PRSP preparation processes. 54. CAS preparation has involved the Government, civil society, the private sector and donor partners. The Government established a CAS counterpart team which the Bank has worked closely with throughout the preparation process. In November 2005, extensive consultations were held in Sana’a and Aden with central and local government officials, civil society, private sector and donors. Follow-up consultations were held in early March 2006 with members of the newly appointed Cabinet to discuss and validate the selection of strategic priorities under the new CAS. Several multilateral and bilateral donors were designing their country assistance programs in late 2005/early 2006 and there was considerable collaboration in the analytical and priority setting phases of CAS preparation. 55. The Second PRSP document together with the Joint Staff Assessment is expected to be presented to the Executive Directors in January 2007. It was considered prudent to proceed with the CAS ahead of the JSA for three reasons: first, the priorities in the Second PRSP are clear and are not expected to change as the document is finalized, translated and then reviewed by Bank and IMF staff. Second, a recent Progress Report on PRSP implementation has recently been circulated to the Executive Directors in May 2006. Third, given declining CPIA ratings and reduced IDA allocations, there is urgent need to have a clearly defined strategy to prioritize World Bank interventions. Further, early action would also allow the Government to seek alternative financing for activities that the Bank is unable to finance.

22 The second PRSP will also serve as the 3rd Five Year Development Plan and in order to produce one document, the period for both has been aligned. 23 Focus on growth is through pillars on stimulating economic growth; enhancing economic reform; and integrating with regional and international economies. There is a pillar on improving human capital to achieve the MDGs. Fiscal sustainability issues are identified under pillars on enhancing good governance; and supporting decentralization for local and rural development. There is a pillar on strengthening partnerships with the private sector, civil society and donors in order to implement the PRSP. Finally, the empowerment objectives of a poverty reduction strategy are embedded within other goals.

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C. Development Partners

56. Yemen benefits from support from a small group of bilateral donors (France, Germany, Italy, Japan, the Netherlands, United Kingdom and United States) and multilateral donors (regional financial organizations such as the Arab Fund for Economic and Social Development; the Islamic Development Bank and the Saudi Fund; European Union; OPEC Fund for International Development; United Nations agencies and the World Bank). The International Monetary Fund does not currently provide financial support but provides Technical Assistance and annually conducts Article IV consultations. Donor support for meeting external financing needs has been modest at around US$12 per capita. Annual donor inflows amount to around US$200 million (1.25 percent of GDP or less than 15 percent of development expenditures) and IDA disbursements at around US$100 million (less than 0.625 percent of GDP or less than 7.5 percent of development expenditures). While it is likely that some donors, such as the Arab Funds, DfID and USAID may increase their support over the CAS period, the level of support is unlikely to return to higher levels that prevailed during the second half of the 1990s. 57. Recent Decline in Aid Allocations. Several bilateral donors (including IDA) have begun to utilize the World Bank computed Country Policy and Institutional Assessment (CPIA) to calculate their aid allocations. The CPIA evaluates country performance on four dimensions: economic management; structural policies; policies for social inclusion/equity; and governance/public sector management. The CPIA rating for Yemen declined between 2003 and 2004 primarily due to a reduction in governance/public sector management ratings which resulted in a decline in aid allocations; for example, Yemen’s FY06-08 IDA allocation declined to SDR 187.9 million for the three year period which represents a 34 percent reduction from its FY05-07 allocation. The CPIA rating remained unchanged from 2004 to 2005. The major issues that have led to lower CPIA ratings are being addressed through the actions contained in the National Agenda for Reform (Box 1). Hence, if suitably implemented, these actions may be expected to improve future CPIA ratings. 58. Donor Coordination. Given the small size of the donor community, donor coordination efforts have been progressing well with the World Bank and the UN Resident Coordinator chairing quarterly in-country donor coordination meetings. In January 2005, several bilateral and multilateral donors (European Union, France, Germany, Italy, Japan, the Netherlands, United States, World Bank, United Kingdom, United States and United Nations) signed a harmonization agreement to implement the February 2003 Rome Declaration’s commitments on harmonization. Further, in 2005, Yemen was also selected among the initial group of pilot countries where the OECD Principles for Good International Engagement in Fragile States are being implemented. These principles can be clustered into four themes: a long-term focus on state capacity and accountability; recognition of political, security and development linkages; close partnerships between international actors to ensure delivery of results; and donor organizational responses must be calibrated to the specific needs of countries. The United Kingdom and the UN system have been supporting this effort. An Aid Harmonization

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Assistance unit has been established in the Ministry of Planning and International Cooperation and is now leading the Government’s donor coordination effort. 59. Sector/Theme Partnerships. In addition to country level coordination work, there has been substantial progress in coordinating efforts at the level of sectors and themes (Table 2). These partnerships are working well; all of the projects approved under this CAS in FY06 have been co-financed by other donors and given IDA constraints, this will continue to remain a central thrust of the Bank’s approach.

Table 2: DONOR PARTNERSHIPS

Sector/Theme Other Donors Involved Coordination arrangements Civil Service Reform Netherlands, UK Ongoing coordination Education France, Germany, ILO, Netherlands,

UNICEF, UK, WFP Partnership Agreement signed in 2004. Joint Annual Reviews.

Financial sector USAID Ongoing coordination Health EU, Germany, Netherlands, UK,

UNFPA, UNICEF, US, WHO Partnership Agreement signed in 2005.

Procurement Netherlands Ongoing coordination Public Financial Management France, Germany, Italy, Netherlands,

UK, UNDP, US Partnership Agreement signed in 2006.

Public Works Program Arab Fund, EU, France, IFAD, Italy, US

Ongoing coordination

Rural Roads Arab Fund, IFAD, Saudi Fund, Qatar Fund, EU and USAID

Ongoing coordination

Social Fund for Development Arab Fund, EU, Germany, Kuwait, IFAD, IsDB, Netherlands, OPEC, Saudi Arabia, UK, US

Joint Assessment Reviews

Urban and Local Development

Cities Alliance, UN Habitat, UNDP Joint Workshops/Coordination on Decentralization, training curriculum and delivery strategies

Water Germany, Netherlands Joint Assessment Reviews 60. Recent Developments. Neighboring countries of the Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and the Sultanate of Oman) are offering Yemen the long-term prospect of regional integration and substantial short-term assistance is likely to be provided to develop the institutions, infrastructure and human capacities during the extended transitional period of getting there. These discussions are progressing well and the Government is planning to convene – with assistance from the Department for International Development of the United Kingdom (DfID) and the World Bank - a Consultative Group Meeting in November 2006 and an Investor’s Conference - with IFC’s assistance – in February 2007. 61. World Bank Country Office. The Country Office plays a key role in donor coordination. Further, in many sectors/themes, field based Bank staff have been taking the lead on policy dialogue with the Government. There have been two major constraints. First, difficulties with attracting internationally recruited staff to be based in Sana’a – which is a problem affecting most donor partners. Second, administrative costs associated with placing a large number of international staff in the field. Given the

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potentially positive impact of day-to-day dialogue with the Government, the UK Government will be financing, initially for a period of three years, four internationally recruited specialists in the World Bank Country Office – in macro-economic management, public sector management, education and water. The education specialist is already on board and the remaining specialists would be in place by the end of 2006.

D. CAS Design: Pillars, Outcomes and Instruments 62. The CAS pillars are consistent with the key focal areas in the Government’s Second PRSP (i.e. diversifying growth; human development; and fiscal sustainability). Further, the CAS has elevated resource sustainability to a pillar; the issues (water and population) are part of the activities under the Second PRSP and consolidating them under a pillar emphasizes their critical importance for long-term sustainability. In order to prioritize activities under each pillar, the analysis (under the Development Policy Review, Country Social Analysis, Investment Climate Assessment, IEG Country Assistance Evaluation and CAS Completion Report) was utilized to narrow down the issues (see Box 5). 63. Pillar One: Diversifying growth through better governance and better delivery of public services. Based on the key constraints analyzed in paragraphs 21 to 28, this pillar would focus on four outcomes: • Improving the business regulatory environment including: new business registration;

tax policy and administration; customs and inspections; and land titling and registration.

• Improving road and power infrastructure – this outcome would also support the human development pillar.

• Improving skills through technical education and vocational training and higher education

• Improving regulatory frameworks and making appropriate public investments in key sectors (rainfed and irrigated agriculture; fisheries; manufacturing; and gas sector).

64. Pillar Two: Improving human development through more efficient service delivery and improved safety nets. Based on the key constraints analyzed in paragraphs 29 to 34, this pillar would focus on four outcomes: • Improving access, equity and quality of basic education; • Improving access and quality of health; • Improving safety net programs; and • Improving water supply and sanitation 65. Pillar Three: Increasing fiscal sustainability through improved public expenditure management. Based on the key constraints analyzed in paragraphs 11 to 20, this pillar would focus on five outcomes: • Improving revenue transparency • Improving expenditure management (including through reducing fuel subsidies) • Public Sector Reform • Improving public procurement • Improving public financial management

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66. Pillar Four: Increasing resource sustainability through improved management of water resources and reduced population pressure. Based on the key constraints analyzed in paragraphs 35 and 36, this pillar would focus on two outcomes: • improved water resource management • improved control over population growth. 67. Short-Term Priorities on Economic Governance. The CAS recognizes the importance of upfront actions to improve economic governance; these actions need to be implemented immediately even though the outcomes may only be visible in the medium-term. Across the four pillars, the following are the key short-term actions on improving economic governance together with the rationale for their selection:

• oil revenue transparency - would ensure better use of oil revenues and also lead to increase willingness to be taxed.

• improved expenditure management - would ensure that expenditure cuts do not fray the safety nets, jeopardize the delivery of basic services or result in the deferment of public investments needed to support private sector development. This will need to include reduction in fuel subsidies which will also have an impact on individual incentives for extraction of scarce water resources.

• improved business regulatory environment including improving predictability in macro-economic management, regulation, taxation and inspections.

• improved institutional arrangements and public service delivery mechanisms for groundwater resource management and controlling population growth.

68. CAS Instruments. The outcomes supported by the CAS would be achieved through a number of instruments: a significant ongoing portfolio of IDA credits (approved under previous CASs) will continue to be implemented under this CAS period; new IDA credits would be provided during the CAS period; and a focused program of non-lending services would also be provided. The use of a mix of instruments to support one particular outcome is highlighted in Box 4 which describes the approach adopted to help the Government with improving control over population growth.

Box 4: World Bank Support to Population Issues

The Bank’s involvement in the Population sector has included considerable analytical and advisory support including a 2002 Population Policy Note on Demographic Trends, 2004 Technical Assistance to support the preparation of the Government’s Five-Year Plan on population and reproductive health and assistance to the National Population Council (NPC) in the costing of its three-year Population Action Plan. More recently, in April 2006, the Bank completed a Yemen Population Policy Paper and a study on Promoting the Demand for Family Planning in Yemen. The findings and recommendations from these outputs provide a sound basis for understanding the underlying determinants of the high fertility rate as well as priority policies and actions needed by the Government and the partner agencies to address the high population growth rate in Yemen. During the CAS period, the Bank will restructure its on-going Health Reform Support Project to expand its support to family planning and reproductive health programs, including a major investment in the contraceptive commodity supply for 2008. In addition, the restructured project will also place greater emphasis on basic child and maternal health programs that over the longer term will contribute to the reduction in total fertility rate through reductions in infant, child, and maternal mortality rates. An updated strategy is expected to result from the ongoing Health Sector Review and to form the basis for the planned Population II project.

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Table 3: PREVIOUS LENDING PROGRAM AND IMPACT ON COUNTRY DEVELOPMENT GOALS

The table above shows that the earlier portfolio was heavily focused on the human development goal and had a limited focus on the three other goals. 69. Existing Portfolio. At the start of the new CAS period (July 2005), the Bank had 17 active IDA credits in Yemen with an undisbursed balance of US$567 million; approximately US$116 million has already been disbursed during the first ten months of FY06. There is only one project (Health Reform Support) rated unsatisfactory for achievement of Development Objectives as well as on Implementation Progress; after extensive discussions with the Government, this project is being formally restructured to reflect the revised strategic approach and better address implementation capacity constraints. 70. New Lending. The total volume of lending based on Yemen’s IDA allocations is declining. IDA allocations are determined utilizing a Country Performance Rating that takes into account the country’s policy performance (as measured through the Country Policy and Institutional Assessment); the country’s governance environment; and the performance of the existing IDA portfolio. The FY06-08 IDA allocation was determined based on Yemen’s calendar year 2004 CPIA ratings and 2004 portfolio performance. Given reduction in 2004 Country Performance Rating, Yemen’s IDA allocation declined to SDR 187.9 million for the three year period which represents a 34 percent reduction from its FY05-07 allocation. Given that the FY07-09 IDA allocation is not yet available, the lending program has been designed on the basis of earlier allocations and set at US$100 million per annum or a total of US$400 million over the CAS period. The IDA

Country Development Goals: 2006-09 CAS Existing Portfolio at start of 2003-05 CAS

FY appr

FY close Non-oil growth Human

Development Fiscal

Sustainability Resource

Sustainability Southern Governorates Agricultural

1998 2006 X

Civil Service Modernization 2000 2008 X Child Development 2000 2006 X Basic Education Expansion 2001 2007 X Rural Access Improvement APL I 2001 2006 X X Rural Water Supply & Sanitation 2001 2008 X Irrigation Improvement APL I 2001 2007 X Taiz Municipal Development & Flood Protection

2002 2007 X X

Health Reform Support 2002 2008 X Higher Education 2002 2007 X Port Cities APL I 2003 2007 X X Sana’a Basin Water Management APL I

2003 2009 X X

Urban Water Supply & Sanitation APL I

2003 2008 X X

Social Fund For Development III 2004 2009 X Third Public Works 2004 2009 X Groundwater & Soil Conservation 2004 2010 X X Basic Education Expansion 2005 2010 X

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three year lending allocation will be updated annually and improvements (or deterioration) in policy performance or portfolio implementation will directly increase (or decrease) the amount of new lending. 71. Lending selectivity and focus. The focus of the lending program for the CAS period relative to the country development goals is shown below (Table 4). There are two key constraints affecting selectivity. First, the limited annual lending allocation has led to an average of three IDA credits being provided each year. Second, Yemen has a relatively large portfolio of Adaptable Program Loans (APLs)24; during CAS preparation, the Bank and the Government discussed the need for decisions on future phases of existing APLs to be taken in an informed manner. 25 While it has been agreed that two APLs would be consolidated, the Government has indicated its preference to proceed with all existing APLs provided triggers to move to subsequent phases are met and the merit of such phases is justified through project appraisal. While acknowledging the

24 Under such an instrument, the Bank and the Government agree to a longer-term program (an initially approved project and one or two follow-on projects if specific triggers are met). 25 The discussions drew upon the findings of the Fourth Review of Adaptable Lending (July, 2005)

Box 5: Learning from the 2003-2005 CAS

The design of the new CAS learns from the unsatisfactory results under the previous CAS. While the four pillars are similar to the four pillars of the last CAS, there are important differences: • Priorities within each Country Development Goal are narrowed down and achievable goals

have been set. The IEG CAE and the CASCR commended the last CAS for having focused the Bank’s broad priorities appropriately. This CAS takes the focus further down to fifteen key CAS outcomes and results have been set commensurate with the Bank program.

• Short-term focus on critical reforms. There is a focus on short-term actions needed to stimulate growth and improve economic governance. The Government’s program is being supported by both lending instruments (an Institutional Reform Credit) and non-lending assistance.

• Readiness for implementation. At the start of the previous CAS, many activities were awaiting the formulation of action plans. Under the new CAS, the Bank is supporting: (i) the National Reform Program to improve governance which is already under implementation; (ii) sector and thematic programs already under implementation for education, water resource management and urban development; (iii) programs where design has been completed and implementation is about to commence (public financial management, procurement, civil service reform). There are three areas where program design needs to be completed: regulatory streamlining; improving the reproductive health and population program; and improving the targeting efficacy of the safety net system. Bank analytical support is being provided in all three areas early in the CAS period.

• Improving Government systems. There is a clearer recognition (particularly given IDA constraints) that the best approach for results selectivity is to develop long-term partnerships with other donors and to build state capacity through supporting programs to improve Government systems (procurement, financial management and civil service reform).

• Implementation focus. While emphasizing the improvement of Government systems, there is recognition that, in the short-term, implementation will occur largely through the Bank’s project portfolio. Hence, the Government is improving portfolio performance with the assistance of the World Bank’s Country Office; the Country Portfolio Performance Review process has been rejuvenated. Close attention has been given by the leadership of the Ministry of Planning and International Cooperation and the Ministry of Finance and at the Cabinet level. This emphasis has already shown results; in the first ten months of FY06, IDA disbursements in Yemen exceeded US$116 million (a disbursement ratio of 20.5 percent) as compared with a disbursement ratio of 16 percent for the previous CAS period.

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constraint this presents for the lending program, the Bank agreed that the original objectives of these programs remain priorities in the context of the new CAS. This heightened the importance of selectivity in any new lending beyond subsequent phases of these APLs, and such lending will therefore focus on non-oil growth.

Table 4: NEW LENDING PROGRAM AND IMPACT ON COUNTRY DEVELOPMENT GOALS

Country Development Goals: 2006-09 CAS Lending assistance under 2006-09 CAS

FY

Non-oil growth

Human

Development

Fiscal

Sustainability

Resource

Sustainability

Fisheries 2006 X Rural Access Improvement APL II 2006 X X Power Sector 2006 X Rainfed Agriculture & Livestock 2007 X X Second Vocational Training 2007 X X Social Development 2007 X Institutional Reform Credit (DPL) 2007 X X Urban Water Supply APL II 2008 X X Rural Energy 2008 X X Girls Secondary Education 2008 X X Population II 2009 X X Port Cities APL II 2009 X X Poverty Reduction Support Credit I 2009 X X

72. Portfolio Management. The Country Portfolio Performance Review process would continue and would be expanded to cover both lending and non-lending activities. The total volume of projects in the portfolio will decline from 18 at the start to 12 by the end of the CAS period. This smaller portfolio will allow the Bank to focus its efforts and will, over time, free up additional administrative budget resources for other activities – particularly non-lending assistance. Further, by continuing with the same implementation arrangements for several of the new projects (particularly for APLs), project implementation is expected to continue smoothly without the start-up lags that were experienced under many of the projects under the previous CAS. 73. Addressing fiduciary risks in Bank projects. Yemen is a high risk-weak control environment country for fiduciary risks in Bank projects; the main fiduciary weaknesses relate to accounting and reporting, budgeting systems, internal controls and procurement and result from weak capacity (within project units and in external auditors) and high turn over of fiduciary staff. Consequently, careful attention has been provided to fiduciary aspects during preparation of all projects under the new CAS. Specifically, procurement activities have been carefully reviewed and suitable low thresholds have been applied for prior review to ensure that any risks are identified before contracting has been undertaken. Similarly, reducing project’s complexity and ensuring that suitably trained

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financial management staffs and systems are being put in place during project preparation; projects are not considered ready for implementation until this has occurred. 74. Development Policy Lending. There are two development policy loans in the lending program. The Institutional Reform Credit (in the second year of the CAS period) would focus on improving governance (including for growth). The Poverty Reduction Support Credit (in the last year of the CAS period) would commence programmatic lending after an extensive program to reduce fiduciary risks has been undertaken and after a rigorous assessment conducted to confirm that key fiduciary risks have been lowered . Specifically, • To assist the Government in dealing with the immediate reform agenda, the

Institutional Reform Credit would primarily support the Government’s National Agenda For Reform (including actions on governance, public sector reform and private sector development actions) as well as sector-specific actions supporting improved governance. The emphasis will be on a credible program of prior actions and establishment of specific financing needs for the program (e.g. with regard to the costs of retrenchment in support of the civil service reform program).

• To assist the Government in dealing with the longer-term development agenda, the Poverty Reduction Support Credits would be based on the Government’s Second PRSP and its translation into a prioritized program in the context of a Medium-Term Expenditure Framework planning process and strengthening of procurement and financial management systems (in line with existing Government plans supported by donor funding). An assessment of progress will be made in the context of several upcoming pieces of Economic and Sector Work (PER, CFAA and CPAR) prior to the final decision to move to programmatic lending in FY09. Four key fiduciary risks in the Government’s systems would need to be reduced from current High Risk ratings (budget transparency; internal auditing; preparation of final accounts; and external auditing). As has been the case with PRSCs in other countries, in addition to the overall emphasis on addressing fiduciary risks, each PRSC would focus in depth on one or more sectors. Specifically, given the importance of rural water issues (irrigation, groundwater management and water supply and sanitation), the First PRSC would commence with this sector in FY09. Subsequently, beyond the CAS period, the Second PRSC could have an additional focus on education sector. This sequencing is determined in part by the closure of existing Bank projects providing support in these two areas.

75. Non-lending assistance - Economic and Sector Work and Technical Assistance. In designing the non-lending assistance, priority was given to Economic and Sector Work which is considered to be part of the core country diagnostics and needs to be updated at least once every four to five years. Further, given past fragmentation of the program, further attention was given to narrowing down the list of studies and Technical Assistance activities. 76. Non-Lending Assistance - World Bank Institute. Yemen is one of the WBI focus countries in MNA and has therefore been receiving a higher level of support. The focal areas are expected to continue including: human development (health; education and

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children and youth); governance; and water. As in the past, the program of assistance will be closely linked with operational activities undertaken under the new CAS (e.g. the restructuring of the health sector reform project has been assisted through a Rapid Results Approach workshop).

Table 5: ECONOMIC AND SECTOR WORK AND IMPACT ON COUNTRY DEVELOPMENT GOALS

Country Development Goals: 2006-09 CAS Economic and Sector Work under 2006-09 CAS

FY Non-oil growth

Human Development

Fiscal Sustainability

Resource Sustainability

Development Policy Review 2006 X X X X Investment Climate Assessment 2006 X Country Social Analysis 2006 X Poverty Assessment 2007 X Public Expenditure Tracking Surveys

2007 X

Taiz Urban Poverty Analysis 2007 X Gas Incentive Framework Policy Note

2007 X

Qat Survey and Policy Note 2007 X X Social Protection Strategy 2007 X X Public Expenditure Review 2008 X Country Procurement Assessment 2008 X Country Financial Accountability Assessment

2008 X

Overall Education Strategy 2008 X Transport Sector Policy Note 2008 X X Gender Report 2009 X Early Childhood Review 2009 X Table 6: PROPOSED TECHNICAL ASSISTANCE & IMPLEMENTATION SUPPORT

Country Development Goals: 2006-09 CAS

Technical Assistance Support under 2006-09 CAS

FY

Non-oil growth

Human Development

Fiscal Sustainability

Resource Sustainability

PRSP Support 2006-09 X X X X Statistical Master Plan 2006-09 X X X X Qat 2008-09 X X Strategic Communications 2007-09 X X X X Procurement 2006-09 X PFM Action Plan 2006-09 X EITI 2007-09 X Land Management & Urban Upgrading Pilots

2008-09 X

Private Sector Support 2007-09 X Health Sector Review 2006-07 X Children & Youth Strategy 2006-09 X National Water Strategy 2006-09 X Environment 2006-09 X

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77. The proposed lending and non-lending programs are summarized by goal in Annex 5; in addition to the CAS period, the Annex also lists the pipeline of lending and non-lending activities in the outer years (i.e. beyond the CAS period). This has been done for three reasons. First, some activities are programmed for the year beyond the CAS but will be in the fifth year of the PRSP (i.e. PRSC-II; PER- II and Transport Policy Note II). Second, some important lending activities (Integrated Urban Development, Higher Education and Solid Waste Management) could not be included under the CAS program due to IDA constraints and are shown in the outer years. If IDA allocations should increase significantly as the result of greatly improved performance or if projects currently considered priority should not be prepared, then consideration would be given to accelerating these projects. Finally, a non-lending activity on decentralization has been kept in the outer years. While decentralization issues would be addressed through other ESW (including the PER, the CFAA and CPAR), if the Government should seek further advice on fiscal decentralization, then this task would be implemented in the CAS period. This approach would avoid the problems under previous CASs where significant fiscal decentralization related lending and non-lending activities were initiated but never brought to closure. 78. IFC program. Yemen is one of IFC’s “frontier” countries in the MENA region, and it is making an extra effort to develop the private sector as well as promote south-to-south investments into Yemen. The main challenge has been finding strong local sponsors who are able to implement large projects. IFC’s current investment portfolio is a modest US$9 million for 3 companies; however, its portfolio is expected to grow in the near future as, in FY06, a strong pipeline of projects in oil refining, ports, and construction materials has been developed.

• In May 2006, IFC approved an investment of US$50 million (US$45 million loan and US$5 million equity) in the Ras Issa Refinery. The investment is in a 60,000 barrel per day refinery, including the relevant offsite infrastructure on the Ras Issa peninsula on the Red Sea coast. The project is in line with the Government’s newly created framework to establish two new private sector owned and operated refineries to efficiently supply the eastern and western markets of Yemen.

• IFC is also considering an investment in a greenfield cement plant. The plant would have a capacity of 1.2 million tons per annum, and would address a supply gap as over 60% of the annual consumption of 4.0 million tons is currently imported.

• IFC is also considering potential participation in a project for the expansion, operation, and maintenance of the Aden Container Terminal and of the Ma’alla Container Terminal.

In addition to the investment pipeline above, IFC’s focus in the future would be in the financial sector, including leasing and microfinance. Finally, IFC is keen to support the private sector’s participation in the development of the domestic gas sector including for power generation (see paragraph 27). 79. In parallel, IFC has also increased technical assistance activities through the Private Enterprise Partnership-Middle East & North Africa (PEP-MENA) and has placed staff in

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Sana'a, co-located with the World Bank. The focus is on four main areas: financial markets; SME development; gender; and Business Enabling Environment.

• In financial markets, IFC has been active in leasing programs (including work with the Central Bank on leasing registration and legislation and the organization of an international leasing conference in-country) and is initiating microfinance TA to support the initiatives of the second largest Yemeni bank to service this sector.

• In SME development, IFC has focused on management training through Business Edge, including Train-the-Trainer programs for companies in Yemen, Chambers of Commerce, and the Social Fund for Development.

• IFC’s gender program work has included a scoping and analysis exercise and is preparing to launch a two-year TA program focusing on gender and entrepreneurship.

• In Business Enabling Environment, IFC is initiating a “Business Start-Up Simplification” project which will focus on simplifying administrative procedures to start new businesses. This work is linked to the planned simplification efforts under the Port Cities Development Program. In addition, the Government has requested PEP-MENA assistance to improve the policy framework for private investments in mining. This work would be carried out in close collaboration with other units of the World Bank Group, and include assistance to the Granite and Marble Association to strengthen SMEs in the industry.

80. Gender. The operational mainstreaming of gender issues in human development will continue in the new CAS. Outcomes for education include a focus on gender equity including increasing girl’s enrolment in basic education and increasing female completion ratios in secondary education. Health and population outcomes also emphasize improvements in maternal health. Further, though there are no separate gender specific outcomes, improvements in water supply (particularly in rural areas) are also likely to primarily benefit women and girls. The main focus of efforts for the economic empowerment of women will be on addressing the top ranked investment climate constraints; the ICA findings reveal that female entrepreneurs are affected to a greater extent by these top ranked constraints. The IFC gender program will also provide targeted support for the economic empowerment of women (paragraph 79). Finally, through periodic stocktaking (e.g. as undertaken as part of the 2006 IEG CAE and in a proposed FY09 Gender Report), the Bank would assess how well this mainstreaming is working and make recommendations for improvement. 81. Qat. The CAS has addressed this difficult multi-sectoral issue differentially across its many dimensions. First, CAS activities that focus on improving the economic viability of other agricultural and off-farm activities – including through improving the productivity of water use - will begin to narrow the profitability differential vis-à-vis qat. Second, given that there is limited social consensus on the negative health and social impact of chewing qat, the CAS will continue to invest in the long-term process of raising social awareness of qat’s negative impacts. Specifically, a survey on qat use will be undertaken and its findings will be used to re-engage Government and civil society on a public dialogue on the impact of qat.

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E. Country Financing Parameters

82. New Country Financing Parameters were introduced for use in the IDA portfolio in Yemen as of October 2005. The new policy is expected to increase the flexibility of the use of IDA loan proceeds, reduce transaction costs to the country and the Bank, and enable harmonization of donor procedures around country systems. It rests on three guiding principles: (i) the expenditures financed from IDA loan proceeds are productive; (ii) the impact of operations financed under such credits on the borrowing country’s fiscal sustainability is acceptable; and (iii) oversight arrangements on the use of Bank funds are acceptable. Under the new financing policy parameters, the Government will have flexibility in allocation of management and resources in: overall cost sharing; local cost financing; recurrent expenditures; and financing of taxes and duties. Further details are provided in Annex 7.

F. Lending Scenarios 83. Indicative scenarios and triggers. With the upcoming disclosure of CPIA ratings and the new IDA14 grants system, Yemen’s IDA allocation would vary annually and would be based on its annual Country Performance Rating (CPR). Consequently, the amounts shown for FY07 and beyond are indicative only. Actual allocations will depend on: Yemen’s performance relative to the performance of other IDA countries; the amount of overall resources available to IDA; and changes in the list of active IDA-eligible countries. Further, based on these new rules, the CAS would not contain trigger-based high-base-low cases for modulating the size of the financial envelope. However, de facto such changes will occur through improvements to the CPIA and the portfolio performance of existing IDA projects. It is anticipated that Yemen will use its IDA allocations during the CAS period in their entirety provided that the implementation of the Second PRSP remains broadly on track and in particular, the Government’s National Agenda for Reform (Box 1) is appropriately implemented.

G. Results-Based Monitoring and Evaluation 84. Country level systems for poverty, economic and human development monitoring are not yet robust. Consequently, a two-pronged strategy will be adopted to monitor overall results under the Second PRSP and results under this CAS. First, a program for improvement to country level systems has been developed (a Statistical Master Plan) and the Bank will be providing Technical Assistance to ensure that the financing arrangements are in place and subsequently to assist the Government in supervising the implementation of this plan. Simultaneously, sector and thematic monitoring systems have been or are being established in the context of World Bank (or other donor) projects. The CAS results framework has ensured that the targets for intermediate outcomes can be monitored based on existing systems or those that will be in place in the near future. Hence, for example, education information systems are already in place to gather detailed information on access and quality information whereas the system to monitor the depletion of groundwater in key basin areas is currently being put in place and therefore other intermediate indicators would be utilized until the new system is operational.

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V. MANAGING RISKS

85. Development effectiveness. Given the poor performance under the previous CAS, low development effectiveness remains a continuing risk. The main measures being taken to mitigate this risk have been noted earlier and include: an upfront focus on improving governance (particularly through the National Agenda For Reform); more realistic targets in the CAS; and closer monitoring of the lending portfolio (which is already beginning to show results in FY06). In addition to top-down accountability, the Bank program will also utilize strategic communications to increase demand from communities and civil society constituencies for greater development effectiveness. 86. Safeguard and fiduciary risks. At the country level, fiduciary risks remain high and key mitigation measures have already been designed and are under implementation (i.e. procurement and public financial management reforms). Implementation will be closely monitored during the CAS period by both the Bank and the Government particularly as improvement in fiduciary systems is a key requirement for programmatic development policy lending. At the project level, all new projects are reducing fiduciary risks by: ensuring sound implementation arrangements and specific capacity strengthening prior to the commencement of project implementation; use of specific disbursement arrangements and tailoring of Statement of Expenditure threshold; and significant percentages of project procurement being subject to prior review. Finally, there is increased monitoring by Bank fiduciary staff based in the Country Office. 87. Macro-economic risks including medium-term debt sustainability and single commodity risks. As discussed in the Medium-Term Outlook section, as oil revenues will decline there will need to be a commensurate adjustment process in order for Government to maintain macro-economic stability. Measures will need to include: increasing non-oil revenues; decreasing non-essential expenditures and reducing/eliminating fuel subsidies. The World Bank and the IMF are assisting the Government in identifying and implementing an appropriate package of measures. There may, however, be resistance to implementing reform measures – as was the case in July 2005. While the risks remain high, the CAS design does address many key aspects of making the reforms successful (focusing on growth to increase the fiscal base; public expenditure management to gain greater efficiency from existing expenditures; and improving social protection for the vulnerable). There also could be spillover effects on external debt sustainability. As noted in paragraph 47, under the baseline scenario for debt sustainability analysis, all the relevant debt distress indicators stay below their respective thresholds. However, stress tests show vulnerability to: lower than anticipated future oil prices (representing single commodity risks); and further shocks to the country’s weak and barely diversified export base. 88. Reform payoffs materializing. The medium-term projections assume that the Government’s program will result in increased investments from private sector investors (both local and foreign) responding to a more favorable investment climate. Similarly, the projections also assume that higher levels of donor assistance will result from improved CPIA ratings. Even if the Government implements its program well, there are

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risks that the market response may be limited due to factors outside the Government’s control or that donors may not increase aid levels from their currently low levels. 89. Regional/Internal Security Risks. There are risks that regional or internal security conditions could put country development objectives at risk by leading to social instability, interruption of Government reform programs or fiscal unsustainability due to increased expenditures on defense and internal security. Further, such conditions would also impact on the Bank’s ability to implement its programs and/or result in security related cost escalations. While these risks are not considered significant at this time, they will be closely monitored throughout the CAS period.

Paul Wolfowitz President

by Graeme Wheeler Managing Director

Washington, DC May 17, 2006

- 1 -

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X 1

Pill

ar 3

: In

crea

sin

g f

isca

l su

stai

nab

ility

th

rou

gh

imp

rove

d p

ub

lic e

xpen

dit

ure

man

agem

ent

Pill

ar 1

: D

iver

sify

ing

Gro

wth

th

rou

gh

b

ette

r g

ove

rnan

ce a

nd

bet

ter

del

iver

y o

f p

ub

lic s

ervi

ces

Pov

erty

Red

uctio

n

Pill

ar 2

: Im

pro

vin

g

Hu

man

Dev

elo

pm

ent

Th

rou

gh

Mo

re E

ffic

ien

t S

ervi

ce D

eliv

ery

&

Imp

rove

d S

afet

y N

ets

Pill

ar 4

: In

crea

sin

g r

eso

urc

e

Su

stai

nab

ility

Impr

ove

cont

rol o

ver

po

pula

tion

grow

th

Impr

ove

safe

ty n

et

prog

ram

s

Impr

ove

acce

ss,

equi

ty &

qua

lity

of

basi

c E

duca

tion

Impr

ove

acce

ss a

nd

qual

ity o

f he

alth

Impr

ove

wat

er s

uppl

y an

d sa

nita

tion

Impr

ove

busi

ness

en

viro

nmen

t

Impr

ove

road

&

pow

er

Infr

astr

uctu

re

Impr

ove

skill

s (T

VE

T &

H

ighe

r E

duca

tion)

Impr

ove

Pub

lic

Pro

cure

men

t

Impr

ove

Wat

er R

esou

rce

Man

agem

ent

Impr

ove

Reg

ulat

ory

fram

ewor

k &

m

ake

publ

ic

inve

stm

ents

in

sel

ecte

d se

cto

rs

YE

ME

N C

AS

RE

SU

LT

S C

HA

IN

Pri

vate

se

ctor

incr

ease

s le

vels

an

d pr

oduc

tivity

of

inve

stm

ent

Impr

ove

Pub

lic

Fin

anci

al

Man

agem

ent

Pub

lic S

ecto

r R

efor

m

Impr

ove

Exp

endi

ture

M

anag

emen

t

Impr

ove

Rev

enue

T

rans

pare

ncy

- 1 -

AN

NE

X 2

Y

EM

EN

200

6-20

09 C

OU

NT

RY

ASS

IST

AN

CE

ST

RA

TE

GY

: C

AS

RE

SUL

TS

MA

TR

IX

C

ount

ry

Dev

elop

men

t Goa

ls

Issu

es a

nd

Obs

tacl

es

CA

S O

utco

mes

/ In

dica

tors

M

ilest

ones

B

ank

Prog

ram

and

Pa

rtne

rs

PIL

LA

R 1

: DIV

ER

SIFY

ING

GR

OW

TH

TH

RO

UG

H B

ET

TE

R G

OV

ER

NA

NC

E A

ND

BE

TT

ER

DE

LIV

ER

Y O

F PU

BL

IC

SER

VIC

ES

(i)

(a) I

mpr

ovin

g B

usin

ess R

egul

ator

y En

viro

nmen

t: N

ew B

usin

ess R

egis

tratio

n O

ngoi

ng A

ctiv

ities

: In

crea

sing

non

-oil

grow

th

as m

easu

red

by g

row

th ra

te

of n

on-o

il G

DP

Hig

h m

inim

um c

apita

l re

quire

men

t (27

00%

of p

er

capi

ta G

DP)

; hig

h co

st

(240

% o

f per

cap

ita G

DP)

an

d tim

e (6

3 da

ys) t

o re

gist

er

Red

uctio

n of

min

imum

ca

pita

l req

uire

men

ts to

re

gion

al a

vera

ge a

nd ti

me

to re

gist

er to

less

than

30

days

Rev

ise

law

s and

regu

latio

ns to

redu

ce c

ost a

nd ti

me

requ

ired

to e

stab

lish

a ne

w b

usin

ess

Impl

emen

t stre

amlin

ed sy

stem

s pr

oced

ures

and

re

vise

regu

latio

ns if

nec

essa

ry b

y D

ecem

ber 2

007

Lend

ing:

Por

t Citi

es

Dev

elop

men

t APL

I, H

ighe

r Ed

ucat

ion

LIC

, Sou

ther

n G

over

nora

tes,

IIP

APL

I,

Sana

’a B

asin

Wat

er

Man

agem

ent,

Rur

al

(i)

(b) I

mpr

ovin

g B

usin

ess R

egul

ator

y En

viro

nmen

t: Ta

x Po

licy

and

Adm

inis

tratio

n A

cces

s APL

Pha

se I,

SFD

III

Ex

empt

ions

and

poo

r tax

ad

min

istra

tion

(wid

espr

ead

evas

ion

lead

ing

to

corr

uptio

n an

d lo

w le

vel o

f ac

tual

reve

nue

colle

ctio

n).

Incr

ease

in re

venu

es

repo

rted

for t

ax p

urpo

ses

from

45%

(in

last

ICA

)

Am

ende

d ta

x co

de a

nd In

trodu

ctio

n of

new

Tax

C

ode

Proc

edur

es A

ct in

con

form

ity w

ith

inte

rnat

iona

l nor

ms:

C

ondu

ct c

ompr

ehen

sive

revi

ew o

f cor

pora

te ta

x po

licy

and

ince

ntiv

es

Non

-Len

ding

: In

vest

men

t Clim

ate

Ass

essm

ent,

IFC

PEP

-M

ENA

Adv

isor

y Se

rvic

es,

FIA

S

(i)(c

) Im

prov

ing

Bus

ines

s Reg

ulat

ory

Envi

ronm

ent:

Cus

tom

s and

Insp

ectio

ns

Leng

thy

cust

oms

proc

essi

ng ti

me

(8 d

ays)

an

d ex

cess

ive

num

ber o

f in

spec

tions

(16

days

per

ye

ar)

Incr

ease

d ef

ficie

ncy

(4 d

ays

cust

oms c

lear

ance

and

50%

re

duct

ion

in n

umbe

r of d

ays

of in

spec

tions

)

- Gov

ernm

ent p

olic

y on

stan

dard

s and

freq

uenc

y of

in

spec

tions

- I

mpl

emen

tatio

n of

cus

tom

s ref

orm

pro

gram

New

Act

iviti

es

Lend

ing:

Rur

al A

cces

s A

PL- I

I, Fi

sher

ies,

R

ainf

ed A

gric

ultu

re a

nd

(i)

(d) I

mpr

ovin

g B

usin

ess R

egul

ator

y En

viro

nmen

t: La

nd T

itlin

g an

d R

egis

tratio

n Li

vest

ock

Dev

elop

men

t,

W

eak

prop

erty

righ

ts

prot

ectio

ns a

nd h

igh

leve

ls

of c

onfli

ct a

nd fr

aud

Impr

oved

pro

perty

righ

ts

for l

and

as m

easu

red

by

20%

incr

ease

in la

nd

regi

stra

tion

capt

ure

rate

and

20

% d

ecre

ase

in la

nd

rela

ted

cour

t cas

es in

two

pilo

t citi

es

Rev

ise

land

regi

stra

tion

law

to b

ette

r def

ine

proc

ess a

nd m

ake

it le

gally

con

clus

ive;

St

reng

then

adm

inis

tratio

n of

land

allo

catio

n an

d re

gist

ratio

n st

artin

g w

ith u

rban

are

as

Initi

ate

syst

emat

ic la

nd ti

tling

in p

ilot a

reas

Im

prov

e le

gal f

ram

ewor

k to

faci

litat

e gr

eate

r use

of

land

as c

olla

tera

l

Inst

itutio

nal R

efor

m C

redi

t, V

ocat

iona

l Tra

inin

g II

,

Pow

er S

ecto

r, R

ural

Ene

rgy

Acc

ess,

Rur

al E

lect

rific

atio

n an

d R

enew

able

Ene

rgy

Dev

elop

men

t (G

EF),

PR

SC-I

- 2 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

(ii) (

a) Im

prov

ing

Roa

d In

fras

truct

ure

1

Lo

ng ti

me

and

high

cos

t of

trans

port

lead

to la

ck o

f ac

cess

to m

arke

ts, h

igh

cost

of c

onsu

mab

les a

nd

inab

ility

to a

cces

s soc

ial

serv

ices

Impr

oved

rura

l acc

ess a

s m

easu

red

by re

duce

d is

olat

ion

for 1

mill

ion

pers

ons i

n ru

ral a

reas

(per

bas

elin

e an

d ta

rget

s in

Rur

al A

cces

s Pro

gram

)

Impr

oved

pol

icy

fram

ewor

k an

d in

stitu

tions

in ro

ad

cons

truct

ion

and

mai

nten

ance

thro

ugh:

intro

duct

ion

of o

utpu

t bas

ed c

ontra

cts f

or ro

ad m

aint

enan

ce

(950

km

of p

rimar

y an

d se

cond

ary

road

s); p

lan

prep

ared

for d

evel

opm

ent o

f roa

d se

ctor

co

ntra

ctor

s and

con

sulta

nts;

est

ablis

hmen

t of

mod

ern

road

man

agem

ent s

yste

m.

Publ

ic in

vest

men

ts in

rura

l roa

ds

Non

-Len

ding

: G

as In

cent

ive

Fram

ewor

k St

udy,

Te

chni

cal A

ssis

tanc

e fo

r La

nd R

egis

tratio

n,

Inve

stm

ent C

limat

e A

sses

smen

t Upd

ate

(ii

) (b)

Impr

ovin

g Po

wer

Infr

astru

ctur

e 2

Lega

l fra

mew

ork

rais

es

acco

unta

bilit

y an

d tra

nspa

renc

y is

sues

&

disc

oura

ges p

rivat

e in

vest

men

t Lo

wes

t ele

ctrif

icat

ion

rate

in

MN

A re

gion

(40%

) and

in

rura

l are

as (2

0%).

Sign

ifica

nt R

enew

able

En

ergy

reso

urce

s rem

ain

unut

ilize

d.

Mor

e re

liabl

e po

wer

supp

ly

on m

ain

grid

as m

easu

red

by h

ighe

r cus

tom

er

satis

fact

ion,

smal

ler

fluct

uatio

ns a

nd re

duce

d su

pply

failu

res (

per b

asel

ine

& ta

rget

s def

ined

in P

ower

Pr

ojec

t) Im

prov

ed e

lect

rific

atio

n ra

tes f

or ru

ral a

reas

D

emon

stra

ted

use

of

rene

wab

le e

nerg

y

Impr

oved

lega

l and

regu

lato

ry fr

amew

ork

thro

ugh:

(i)

regu

lato

ry a

rran

gem

ents

to b

e es

tabl

ishe

d af

ter

new

Ele

ctric

ity la

w a

ppro

ved

by P

arlia

men

t; (ii

) N

atio

nal R

ural

Ele

ctrif

icat

ion

Stra

tegy

by

end

2006

; (iii

) Ren

ewab

le E

nerg

y St

rate

gy (i

n 20

06)

and

Act

ion

Plan

(in

2007

). In

vest

men

ts in

mod

el se

rvic

e de

liver

y sy

stem

s in

rura

l ele

ctrif

icat

ion

to st

art t

here

afte

r. Pi

lot/d

emon

stra

tion

sche

mes

on

win

d en

ergy

and

PV

bas

ed S

olar

Hom

e Sy

stem

s. Pu

blic

inve

stm

ents

in g

rid p

ower

supp

ly.

Don

or A

ctiv

ities

: EU

fis

herie

s pro

ject

, IFA

D

Agr

icul

ture

, Is

lam

ic

Dev

elop

men

t Ban

k po

wer

se

ctor

pro

ject

, Fr

ench

su

ppor

t & e

xpec

ted

US

supp

ort t

o ju

dici

al se

ctor

re

form

, Y

et-to

-be-

iden

tifie

d D

onor

Tru

st F

unds

for L

and

(ii

i) (a

) Im

prov

ing

Skill

s Thr

ough

Tec

hnic

al E

duca

tion

and

Voc

atio

nal T

rain

ing

Publ

ic in

vest

men

t not

m

atch

ing

dem

and

or

recu

rren

t fun

ding

cap

acity

; pr

ivat

e se

ctor

invo

lvem

ent

negl

igib

le; l

ack

of e

ffec

tive

mec

hani

sms f

or e

mpl

oyer

pa

rtici

patio

n.

Empl

oyer

-res

pons

ive

train

ing

prog

ram

s in

publ

ic

train

ing

inst

itute

s.

Stre

ngth

ened

priv

ate

sect

or

capa

city

to id

entif

y, fi

nanc

e an

d m

eet i

n-se

rvic

e tra

inin

g ne

eds (

base

line

and

targ

ets

to b

e es

tabl

ishe

d un

der

Seco

nd V

ocat

iona

l Tra

inin

g Pr

ojec

t)

Fina

ncia

l and

eco

nom

ic a

naly

sis o

f the

sect

or

cond

ucte

d.

Skill

s Dev

elop

men

t Fun

d w

ith o

pera

tiona

l au

tono

my

unde

r priv

ate

sect

or le

ader

ship

. In

crea

sed

invo

lvem

ent o

f em

ploy

ers i

n ne

w p

re-

and

in-s

ervi

ce tr

aini

ng p

rogr

ams.

1 O

utco

mes

supp

ort b

oth

grow

th a

nd h

uman

dev

elop

men

t out

com

es

2 Out

com

es su

ppor

t bot

h gr

owth

and

hum

an d

evel

opm

ent o

utco

mes

- 3 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

(iii)

(b) I

mpr

ovin

g Sk

ills T

hrou

gh H

ighe

r Edu

catio

n

H

ighe

r edu

catio

n no

t de

liver

ing

qual

ity

prof

essi

onal

s. La

ck o

f stra

tegi

c vi

sion

.

Con

stra

ints

on

univ

ersi

ties

to im

prov

e se

rvic

e qu

ality

.

Hig

her e

duca

tion

refo

rm

stra

tegy

dev

elop

ed w

ith

chan

ges i

n fin

ance

, go

vern

ance

and

qua

lity

assu

ranc

e m

echa

nism

s ful

ly

artic

ulat

ed

App

rova

l of a

stra

tegi

c pl

an a

nd m

ulti-

year

de

velo

pmen

t pro

gram

- D

evel

opm

ent p

lans

and

link

ed p

rogr

am b

udge

ts

for S

ana’

a an

d A

den

univ

ersi

ties

(iv

) (a)

Impr

ovin

g R

egul

ator

y Fr

amew

ork

and

Publ

ic In

vest

men

ts in

Key

Sec

tors

: Irr

igat

ed A

gric

ultu

re

Low

pro

duct

ivity

resu

lting

fr

om in

adeq

uate

m

aint

enan

ce o

f and

low

fa

rmer

invo

lvem

ent i

n an

d co

ntrib

utio

n to

spat

e irr

igat

ion

Incr

ease

d pr

oduc

tivity

of

irrig

ated

agr

icul

ture

in

90,0

00 h

ecta

res o

f spa

te

irrig

ated

land

s (pe

r bas

elin

e an

d ta

rget

s in

Irrig

atio

n Im

prov

emen

t Pro

ject

)

Effe

ctiv

e Pa

rtici

pato

ry Ir

rigat

ion

Man

agem

ent

asso

ciat

ions

for s

pate

irrig

atio

n es

tabl

ishe

d th

roug

h fo

rmat

ion

of S

chem

e W

ater

Use

r Fed

erat

ions

and

W

ater

Use

r Ass

ocia

tions

Pu

blic

inve

stm

ent i

n sp

ate

reha

bilit

atio

n

Incr

ease

d ef

ficie

ncy

of a

nd h

ighe

r ret

urns

to

agric

ultu

ral w

ater

use

in th

e Sa

na’a

bas

in.

(iv

) (b)

Impr

ovin

g R

egul

ator

y Fr

amew

ork

and

Publ

ic In

vest

men

ts in

Key

Sec

tors

: Rai

nfed

Agr

icul

ture

and

Li

vest

ock

Lo

w re

venu

es fr

om ra

infe

d ag

ricul

ture

resu

lting

from

lo

w y

ield

ing

seed

var

ietie

s;

lack

of o

rgan

izat

ion

to

prod

uce

and

mar

ket c

rops

or

live

stoc

k pr

oduc

ts (f

resh

or

pro

cess

ed) a

nd la

ck o

f liv

esto

ck q

ualit

y se

rvic

es

Incr

ease

d ho

useh

old

reve

nues

for s

uppo

rted

rura

l fa

mili

es th

roug

h ca

sh o

r in

kind

ben

efits

from

ag

ricul

ture

& li

vest

ock

(bas

elin

e an

d ta

rget

s to

be

defin

ed in

impl

emen

ting

RA

LD p

roje

ct)

Impr

oved

loca

l pol

icy

fram

ewor

k an

d in

stitu

tions

th

roug

h ef

ficie

nt li

vest

ock

serv

ices

del

iver

y,

effe

ctiv

e se

ed g

row

ers a

ssoc

iatio

ns, f

unct

ioni

ng

rura

l pro

duce

r gro

ups a

nd fu

nctio

ning

par

a-ve

terin

ary

prof

essi

onal

s in

5 go

vern

orat

es.

(iv

) (c)

Impr

ovin

g R

egul

ator

y Fr

amew

ork

and

Publ

ic In

vest

men

ts in

Key

Sec

tors

: Fis

herie

s

Lo

w p

rodu

ctiv

ity d

ue to

la

ck o

f pla

nnin

g, re

sear

ch,

fishe

ries m

anag

emen

t, in

fras

truct

ure

and

inst

itutio

nal c

apac

ity

Incr

ease

d pr

oduc

tivity

as

mea

sure

d by

ave

rage

fish

si

ze a

nd p

rices

for f

ish

(per

ba

selin

e an

d ta

rget

s in

the

Fish

erie

s Pro

ject

).

Impr

oved

pol

icy

fram

ewor

k an

d im

plem

enta

tion

arra

ngem

ents

thro

ugh

9 G

over

nora

te F

ishe

ries

Man

agem

ent P

lans

; 70

fish

auct

ion

site

s are

m

anag

ed b

y lo

cal c

oope

rativ

es; a

nd in

crea

sed

inve

stm

ent i

n 20

fish

ing

site

s.

(iv

) (d)

Impr

ovin

g R

egul

ator

y Fr

amew

ork

and

Publ

ic In

vest

men

ts in

Key

Sec

tors

: Gas

Sec

tor

Lack

of c

larit

y in

pro

perty

rig

hts o

ver g

as e

xtra

cted

an

d la

ck o

f gas

mar

kets

.

Impr

oved

lega

l and

re

gula

tory

fram

ewor

k

Impr

ovem

ents

in le

gal a

nd re

gula

tory

fram

ewor

k to

en

cour

age

grea

ter p

rivat

e se

ctor

par

ticip

atio

n in

ex

plor

atio

n, p

rodu

ctio

n, d

istri

butio

n an

d do

mes

tic

utili

zatio

n of

gas

.

- 4 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

(iv) (

e) Im

prov

ing

Reg

ulat

ory

Fram

ewor

k an

d Pu

blic

Inve

stm

ents

in K

ey S

ecto

rs :

Urb

an M

anuf

actu

ring

Job

crea

tion

does

not

kee

p pa

ce w

ith h

igh

urba

n gr

owth

of 7

%

Priv

ate

sect

or c

omm

itmen

t to

dev

elop

ing

at le

ast o

ne

indu

stria

l est

ate

Impr

oved

pol

icy

fram

ewor

k an

d in

stitu

tions

in

indu

stria

l est

ate

deve

lopm

ent t

hrou

gh re

gula

tory

fr

amew

ork

for I

ndus

trial

Est

ates

St

rate

gic

inve

stm

ents

in p

ort c

ities

clu

ster

s

PIL

LA

R 2

: AC

CE

LE

RA

TIN

G H

UM

AN

DE

VE

LO

PME

NT

TH

RO

UG

H M

OR

E E

FFIC

IEN

T S

ER

VIC

E D

EL

IVE

RY

AN

D

IMPR

OV

ED

SA

FET

Y N

ET

S

(i) Im

prov

ing

acce

ss, e

quity

and

qua

lity

of B

asic

Edu

catio

n O

ngoi

ng A

ctiv

ities

Impr

ovin

g H

uman

D

evel

opm

ent a

s mea

sure

d by

pro

gres

s tow

ards

ac

hiev

ing

rele

vant

M

illen

nium

Dev

elop

men

t G

oals

Alth

ough

enr

olm

ents

hav

e be

en in

crea

sing

stea

dily

, un

iver

sal a

cces

s goa

ls st

ill

not a

chie

ved.

Sig

nific

ant

gend

er d

ispa

ritie

s es

peci

ally

in ru

ral a

reas

an

d am

ong

disa

dvan

tage

d.

Qua

lity

rem

ains

poo

r and

ill

itera

cy ra

tes r

ank

amon

g hi

ghes

t in

wor

ld.

Impr

ovin

g ac

cess

, equ

ity

and

qual

ity o

f edu

catio

n &

tra

inin

g as

mea

sure

d by

:

- Inc

reas

ing

gros

s en

rolm

ent r

atio

s to

84%

- I

ncre

asin

g ra

tio o

f girl

s to

45%

of e

nrol

men

ts.

- Gra

de 9

fem

ale

com

plet

ion

ratio

s inc

reas

ed

to 5

0%

Con

stru

ctio

n of

3,2

93 sc

hool

s;

Reh

abili

tatio

n of

2,1

00 sc

hool

s;

Ret

rofit

ting

3,29

2 sc

hool

s for

the

hand

icap

ped;

St

uden

t-tea

cher

ratio

(pub

lic sc

hool

s) in

crea

sed

to

28:1

; N

on-w

age

expe

nditu

res i

ncre

ased

to 2

0% o

f re

curr

ent s

pend

ing;

In

clus

ive

educ

atio

n m

issi

on st

atem

ent d

evel

oped

.

Lend

ing

Act

iviti

es: C

hild

D

evel

opm

ent,

Bas

ic

Educ

atio

n Ex

pans

ion,

Bas

ic

Educ

atio

n D

evel

opm

ent,

Hea

lth S

ecto

r Ref

orm

Su

ppor

t, Th

ird S

ocia

l Fun

d fo

r Dev

elop

men

t, T

hird

Pu

blic

Wor

ks P

roje

ct, U

rban

W

ater

Sup

ply

APL

Pha

se I,

R

ural

Wat

er S

uppl

y an

d

(ii) I

mpr

ovin

g A

cces

s and

Qua

lity

of H

ealth

Sa

nita

tion

La

ck o

f acc

ess t

o an

d us

e of

bas

ic h

ealth

serv

ices

, es

peci

ally

due

to th

e po

or

qual

ity o

f mat

erna

l and

ch

ild h

ealth

and

re

prod

uctiv

e he

alth

se

rvic

es, a

nd in

adeq

uate

de

sign

and

impl

emen

tatio

n of

pub

lic h

ealth

pro

gram

s to

add

ress

prio

rity

com

mun

icab

le d

isea

ses

affe

ctin

g th

e he

alth

of

mot

hers

and

chi

ldre

n.

Impr

oved

acc

ess t

o an

d ut

iliza

tion

of b

asic

hea

lth

serv

ices

and

pub

lic h

ealth

pr

ogra

ms f

ocus

ed o

n m

ater

nal,

repr

oduc

tive

and

child

hea

lth. a

s mea

sure

d by

: %

of f

ully

imm

uniz

ed

child

ren

12-2

3 m

onth

s in

crea

sed

by 5

% (f

rom

a

base

line

of 5

0%).

Con

trace

ptiv

e Pr

eval

ence

R

ate

incr

ease

d by

5 %

(b

asel

ine

to b

e es

tabl

ishe

d du

ring

HR

SP re

stru

ctur

ing)

.

In p

roje

ct in

terv

entio

n ar

eas:

%

of d

eliv

erie

s atte

nded

by

skill

ed b

irth

atte

ndan

ts

incr

ease

d by

5%

(fro

m a

bas

elin

e of

22%

). %

of h

ouse

hold

s with

at l

east

one

inse

ctic

ide-

treat

ed n

et (I

TN) i

ncre

ased

by

5 %

(bas

elin

e to

be

esta

blis

hed

durin

g H

RSP

rest

ruct

urin

g).

Incr

ease

d ph

ysic

al a

cces

s to

and

utili

zatio

n of

m

ater

nal a

nd c

hild

hea

lth se

rvic

es (b

asel

ine

and

targ

et to

be

esta

blis

hed

durin

g H

RSP

re

stru

ctur

ing)

.

Non

-Len

ding

Act

iviti

es:

Wat

er T

echn

ical

Ass

ista

nce,

W

BI

New

Act

iviti

es

Lend

ing:

Soc

ial

Dev

elop

men

t, PR

SC-I

(ii

i) Im

prov

ing

Safe

ty N

et P

rogr

ams

Safe

ty n

et p

rogr

ams a

re

limite

d in

scop

e an

d Im

prov

ed sa

fety

net

ta

rget

ing

as m

easu

red

by

40 p

erce

nt o

f Soc

ial F

und

for D

evel

opm

ent

reso

urce

s go

to lo

wes

t thr

ee in

com

e de

cile

s N

on-L

endi

ng: T

echn

ical

A

ssis

tanc

e on

Chi

ldre

n &

- 5 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

co

vera

ge a

nd n

eed

targ

etin

g im

prov

emen

t La

ck o

f a c

ompr

ehen

sive

un

ders

tand

ing

of th

e cr

oss-

cutti

ng n

atur

e of

dis

abili

ty

issu

es

amou

nt o

f res

ourc

es

trans

ferr

ed to

low

est t

hree

in

com

e de

cile

s and

im

prov

ed ta

rget

ing

cate

goriz

atio

n St

rate

gic

fram

ewor

k to

ad

dres

s dis

abili

ty is

sues

6.8

perc

ent i

ncre

ase

in in

com

e fr

om sh

ort-t

erm

em

ploy

men

t thr

ough

PW

P pr

ogra

m

You

th, T

echn

ical

Ass

ista

nce

on D

isab

ility

, Soc

ial

Prot

ectio

n ES

W, G

ende

r St

atus

Upd

ate

(FY

09),

WB

I

(iv

) Im

prov

ing

Wat

er S

uppl

y an

d Sa

nita

tion

Low

acc

ess t

o w

ater

and

sa

nita

tion

serv

ices

Im

prov

ing

acce

ss to

urb

an

wat

er su

pply

and

sani

tatio

n se

rvic

es b

y 20

%

Acc

ess t

o im

prov

ed w

ater

se

rvic

es in

crea

sed

from

68

% to

73%

in ru

ral a

reas

. A

cces

s to

impr

oved

sa

nita

tion

serv

ices

in

crea

sed

from

20%

to 3

0%

in ru

ral a

reas

Loca

l wat

er a

nd sa

nita

tion

corp

orat

ions

est

ablis

hed

and

finan

cial

ly v

iabl

e in

San

a’a,

Tai

z, H

odei

dah

and

Muk

alla

h N

ew R

ural

Wat

er S

uppl

y &

San

itatio

n (R

WSS

) St

rate

gy, b

ased

on

Dem

and

Res

pons

ive

App

roac

h (D

RA

), ap

prov

ed.

Long

-term

nat

iona

l RW

SS in

vest

men

t pro

gram

re

ady

for i

mpl

emen

tatio

n.

Wat

er U

ser A

ssoc

iatio

ns in

5 g

over

nora

tes

effic

ient

ly m

anag

ing

rura

l wat

er su

pply

sche

mes

Don

or A

ctiv

ities

: EU

, G

erm

any,

Net

herla

nds,

UK

, U

NFP

A,

UN

ICEF

, US,

W

HO

, Ara

b Fu

nd, K

uwai

t, IF

AD

, IsD

B, N

ethe

rland

s, O

PEC

, Sau

di A

rabi

a an

d U

S), W

FP, F

ranc

e, IL

O

(v) C

hild

ren

& Y

outh

Chi

ldre

n &

You

th S

trate

gy

to p

rovi

de in

tegr

ativ

e fr

amew

ork

O

utco

mes

for c

hild

ren

&

yout

h ar

e in

clud

ed in

re

leva

nt H

D o

utco

mes

Chi

ldre

n &

You

th S

trate

gy is

impl

emen

ted

thro

ugh

vario

us B

ank

proj

ects

in re

leva

nt p

rogr

ams a

nd

Early

Chi

ldho

od D

evel

opm

ent S

trate

gy &

Pla

n an

d Y

outh

Em

ploy

men

t Pla

n pr

epar

ed b

y 20

08.

(v

i) G

ende

r

Impr

oved

gen

der p

arity

as

mea

sure

d in

oth

er H

D

outc

omes

abo

ve

Impr

oved

gen

der o

utco

mes

from

var

ious

Ban

k pr

ojec

ts in

rele

vant

pro

gram

s

- 6 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

PI

LL

AR

3: I

MPR

OV

ING

FIS

CA

L S

UST

AIN

AB

ILIT

Y T

HR

OU

GH

IMPR

OV

ED

PU

BL

IC E

XPE

ND

ITU

RE

M

AN

AG

EM

EN

T

(i)

Impr

ovin

g R

even

ue T

rans

pare

ncy

Ong

oing

Act

iviti

es

Incr

easi

ng fi

scal

su

stai

nabi

lity

as m

easu

red

by re

duce

d no

n-oi

l prim

ary

fisca

l def

icit

Publ

icat

ion

of o

il re

venu

e da

ta is

und

erta

ken

with

out

form

al o

vers

ight

by

civi

l so

ciet

y

Publ

icat

ion

of o

il an

d ga

s re

venu

e da

ta in

line

with

EI

TI re

quire

men

ts

Take

nec

essa

ry st

eps f

or Y

emen

to jo

in th

e Ex

tract

ive

Indu

strie

s Tra

nspa

renc

y In

itiat

ive

and

ther

eafte

r mee

t EIT

I pub

licat

ion

requ

irem

ents

Lend

ing

Act

iviti

es: I

rrig

atio

n Im

prov

emen

t Pro

ject

APL

Ph

ase

I, R

ural

Wat

er S

uppl

y an

d Sa

nita

tion,

Civ

il Se

rvic

e M

oder

niza

tion

Proj

ect,

(ii) (

a) Im

prov

ing

Expe

nditu

re M

anag

emen

t Po

rt C

ities

Dev

elop

men

t

Lack

of a

Med

ium

-Ter

m

Expe

nditu

re F

ram

ewor

k lin

king

bud

gets

to P

RSP

H

igh

prop

ortio

n of

fund

s ap

prov

ed th

roug

h su

pple

men

tary

bud

gets

Ex

pend

iture

out

com

es n

ot

syst

emat

ical

ly tr

acke

d

Impr

oved

pub

lic

expe

nditu

re o

utco

mes

: - M

ediu

m-T

erm

Ex

pend

iture

Fra

mew

ork

cons

iste

nt w

ith P

RSP

- i

mpr

oved

bud

get

com

preh

ensi

vene

ss a

nd

trans

pare

ncy

(as m

easu

red

by P

EFA

indi

cato

rs)

Impr

oved

med

ium

-term

exp

endi

ture

pla

nnin

g in

lin

e w

ith P

RSP

Im

prov

ed p

erio

dic

eval

uatio

n of

out

com

es o

f pu

blic

exp

endi

ture

R

educ

e su

bsid

ies t

o an

d co

ntin

gent

liab

ilitie

s of

publ

ic e

nter

pris

es (p

artic

ular

ly P

ublic

Ele

ctric

ity

Cor

pora

tion)

R

educ

e go

vern

men

t con

tribu

tion

for s

pate

irr

igat

ion

to z

ero

RW

SS sc

hem

es a

re re

cove

ring

user

cha

rges

for

adeq

uate

O&

M

Prog

ram

, Pu

blic

Wor

ks

Proj

ect I

II, T

aiz

Mun

icip

al

Dev

elop

men

t & F

lood

Pr

otec

tion

Proj

ect

Non

-Len

ding

Act

iviti

es:

Wat

er S

ecto

r TA

(ii

) (b)

Impr

ovin

g Ex

pend

iture

Man

agem

ent:

Red

uced

fuel

subs

idie

s

Fu

el su

bsid

ies a

re h

igh

(at

10%

of G

DP)

R

educ

ed su

bsid

ies i

n lin

e w

ith m

acro

-eco

nom

ic

fram

ewor

k in

PR

SP

Red

uced

ince

ntiv

es to

ove

r-ex

tract

wat

er b

y fu

rther

re

duct

ions

in d

iese

l sub

sidi

es (f

or ir

rigat

ion)

N

ew A

ctiv

ities

: Le

ndin

g: I

nstit

utio

nal

Ref

orm

Cre

dit,

PRSC

-I

(ii

i) (a

) Pub

lic S

ecto

r Ref

orm

– C

entra

l Gov

ernm

ent

Low

gov

ernm

ent

effe

ctiv

enes

s and

per

vasi

ve

corr

uptio

n re

sulti

ng fr

om

inef

fect

ive

man

agem

ent

syst

ems,

larg

e an

d un

derp

aid

civi

l ser

vice

, un

focu

sed

man

date

s and

in

effe

ctiv

e bu

sine

ss

proc

esse

s in

gove

rnm

ent

min

istri

es a

nd a

genc

ies.

Impr

oved

abi

lity

to m

anag

e hu

man

and

fina

ncia

l re

sour

ces t

hrou

gh th

e de

velo

pmen

t of a

med

ium

-te

rm h

uman

reso

urce

st

rate

gy.

Net

redu

ctio

n of

Gov

t.

empl

oym

ent b

y 5%

.

Impr

oved

serv

ice

deliv

ery

in se

ven

min

istri

es

mea

sure

d th

roug

h se

rvic

e

HR

dat

abas

e in

clud

ing

biom

etric

ver

ifica

tion

and

linke

d to

pay

roll

is o

pera

tiona

l H

R re

sour

ce st

rate

gy id

entif

ying

func

tions

and

op

timal

num

ber o

f civ

il se

rvan

ts.

New

wag

e st

ruct

ure

redu

cing

com

pres

sion

&

incr

easi

ng w

ages

with

in fi

scal

aff

orda

bilit

y O

rgan

izat

ion

stru

ctur

es st

ream

lined

and

bus

ines

s pr

oces

ses i

mpr

oved

in se

ven

pilo

t min

istri

es

New

cen

ter o

f exc

elle

nce

train

ing

inst

itutio

n to

he

lp w

ith c

hang

e m

anag

emen

t pro

cess

. N

ew L

aw o

n an

ti-co

rrup

tion

and

Fina

ncia

l

Non

-Len

ding

: Pu

blic

Ex

pend

iture

Rev

iew

, EIT

I Te

chni

cal A

ssis

tanc

e, P

FM

TA, P

rocu

rem

ent T

A, W

BI

- 7 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

de

liver

y su

rvey

s St

reng

then

ed in

stitu

tion

man

agin

g pu

blic

sect

or

refo

rm p

roce

ss

Dis

clos

ure

Bill

app

rove

d; in

depe

nden

t nat

iona

l an

ti-co

rrup

tion

entit

y es

tabl

ishe

d; N

atio

nal

Cor

rupt

ion

Rec

ord

func

tioni

ng; H

otlin

e to

repo

rt ca

ses o

f cor

rupt

ion

and

prot

ect w

hist

eblo

wer

s M

anua

ls/g

uide

s for

gov

ernm

ent s

ervi

ces a

nd fe

es

publ

ishe

d Fu

ll im

plem

enta

tion

of b

iom

etric

syst

em

Wel

l fun

ctio

ning

civ

il se

rvic

e fu

nd fo

r re

trenc

hmen

t of s

urpl

us w

orke

rs

Impl

emen

tatio

n of

pilo

t min

istry

re-e

ngin

eerin

g st

udie

s in

2-3

key

min

istri

es a

nd c

usto

ms

(ii

i) (b

) Pub

lic S

ecto

r Ref

orm

– L

ocal

Gov

ernm

ent

Wea

k lo

cal c

ounc

il an

d ad

min

istra

tion

capa

city

to

fulfi

ll fu

nctio

ns u

nder

the

Loca

l Adm

inis

tratio

n La

w

(200

0)

Poor

urb

an p

lann

ing

re

sulti

ng in

spr

awl a

nd

high

er c

ost o

f in

fras

truct

ure

serv

ices

.

Impr

oved

Loc

al

Adm

inis

tratio

n pl

anni

ng

capa

city

as m

easu

red

by

prep

arat

ion

of p

lans

for

2007

and

ava

ilabi

lity

of

adm

inis

trativ

e pr

emis

es b

y 20

07

Com

plet

ion

of u

pdat

ed c

ity m

aste

rpla

ns a

nd

mul

tiyea

r cap

ital i

nves

tmen

t pla

ns in

Tai

z,

Hod

eida

, Muk

alla

h an

d A

den

by

Dec

embe

r 200

6 A

dopt

ion

of N

atio

nal T

rain

ing

Prog

ram

Stra

tegy

&

Cur

ricul

um fo

r Loc

al A

dmin

istra

tions

by

Dec

embe

r 200

6; a

nd c

apac

ity b

uild

ing

plan

s for

50

loca

l cou

ncils

. Ta

iz lo

cal g

over

nmen

t cap

acity

to d

eliv

er b

asic

se

rvic

es (A

sset

Man

agem

ent U

nit o

pera

tiona

l, so

lid

was

te m

anag

emen

t stra

tegy

ope

ratio

nal D

ec 2

006)

15

Loc

al C

ounc

il B

uild

ings

bui

lt an

d fu

rnis

hed

by

Dec

embe

r 200

6.

Oth

er D

onor

s:

Net

herla

nds,

UK

Citi

es

Alli

ance

, UN

Hab

itat,

UN

DP

Fran

ce, G

erm

any,

Ital

y,

Net

herla

nds,

UK

, UN

DP,

US

(iv

) Im

prov

ing

Publ

ic P

rocu

rem

ent

Leng

thy

proc

urem

ent

proc

esse

s, pa

ymen

t del

ays,

conf

lict o

f int

eres

t, in

adeq

uacy

of c

ompl

aint

m

echa

nism

to re

port

pote

ntia

l fra

ud/c

orru

ptio

n ca

ses a

nd w

eak

capa

city

Impr

oved

pub

lic

proc

urem

ent p

roce

sses

as

mea

sure

d by

-

lega

lly e

stab

lishe

d an

d w

ell f

unct

ioni

ng

rest

ruct

ured

and

au

tono

mou

s HTB

- U

NC

ITR

AL

type

ar

bitra

tion

prov

isio

ns

adop

ted

- p

ublic

dis

clos

ure

of

proc

urem

ent d

ecis

ions

and

fin

anci

al d

iscl

osur

e by

Nat

iona

l Pro

cure

men

t Man

ual a

nd S

tand

ardi

zed

Bid

ding

Doc

umen

ts a

ppro

ved

for u

se b

y al

l pub

lic

agen

cies

M

onito

ring

and

track

ing

syst

em to

enh

ance

tim

elin

ess a

nd tr

ansp

aren

cy o

f ten

derin

g pr

oces

s. Pu

blic

Ten

der L

aw a

men

ded

to re

stru

ctur

e th

e H

igh

Tend

er B

oard

to se

para

te re

gula

tory

and

po

licy

func

tions

; inc

orpo

rate

UN

CIT

RA

L pr

ovis

ions

; and

inst

itutio

naliz

e pu

blic

dis

clos

ure

of

proc

urem

ent,

finan

cial

dis

clos

ure

of o

ffic

ials

and

re

porti

ng o

f con

flict

of i

nter

est.

Proc

urem

ent s

kills

cap

acity

bui

ldin

g co

mm

enci

ng

in F

Y07

- 8 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

pr

ocur

emen

t off

icia

ls

(v

) Im

prov

ing

Publ

ic F

inan

cial

Man

agem

ent

Im

prov

ed p

ublic

fina

ncia

l m

anag

emen

t inc

ludi

ng

- ac

coun

t pre

para

tion

and

inte

rnal

aud

iting

; - e

xter

nal s

crut

iny

and

audi

t Pr

ogre

ss to

be

mea

sure

d ut

ilizi

ng P

EFA

indi

cato

rs

Stre

ngth

enin

g of

A

ccou

ntan

cy a

nd A

uditi

ng

Prof

essi

on (a

s per

RO

SC

reco

mm

enda

tions

).

Publ

ic D

ebt M

anag

emen

t Bill

app

rove

d Ex

tern

al a

uditi

ng la

w a

men

ded

to e

nsur

e C

OC

A’s

in

depe

nden

ce fr

om th

e ex

ecut

ive

bran

ch.

Mec

hani

sms e

stab

lishe

d to

hav

e C

OC

A re

ports

re

leas

ed to

the

publ

ic

Impl

emen

t Pub

lic F

inan

ce M

anag

emen

t stra

tegy

Fu

ll im

plem

enta

tion

of A

ccou

ntin

g an

d Fi

nanc

ial

Man

agem

ent I

nfor

mat

ion

Syst

em (A

FMIS

) Im

plem

ent R

OSC

reco

mm

enda

tions

, afte

r di

scus

sion

, inc

ludi

ng im

prov

ing

lega

l fra

mew

ork

cons

iste

nt w

ith In

tern

atio

nal S

tand

ards

- 9 -

Cou

ntry

D

evel

opm

ent G

oals

Is

sues

and

O

bsta

cles

C

AS

Out

com

es/

Indi

cato

rs

Mile

ston

es

Ban

k Pr

ogra

m a

nd

Part

ners

C

OU

NT

RY

DE

VE

LO

PME

NT

GO

AL

4: I

NC

RE

ASI

NG

RE

SOU

RC

E S

UST

AIN

AB

ILIT

Y T

HR

OU

GH

IMPR

OV

ED

M

AN

AG

EM

EN

T O

F W

AT

ER

RE

SOU

RC

ES

AN

D R

ED

UC

ED

PO

PUL

AT

ION

PR

ESS

UR

E

(i)

Impr

oved

Wat

er R

esou

rce

Man

agem

ent

Ong

oing

Act

iviti

es:

Incr

easi

ng re

sour

ce

sust

aina

bilit

y G

roun

dwat

er b

eing

ex

tract

ed a

t rat

es h

ighe

r th

an a

quife

r rec

harg

e In

suff

icie

nt in

volv

emen

t of

com

mun

ities

in lo

cal w

ater

re

sour

ce m

anag

emen

t Fl

ash

flood

ing

in T

aiz

with

lo

ss o

f life

and

pro

perty

Incr

ease

d nu

mbe

r of w

ater

ba

sin

com

mitt

ees a

nd

com

mun

ity-le

vel u

ser

asso

ciat

ions

par

ticip

atin

g in

w

ater

con

serv

atio

n; a

nd

incr

ease

d in

vest

men

t in

irrig

atio

n im

prov

emen

t te

chno

logi

es in

all

basi

ns

[bas

elin

es a

nd ta

rget

s to

be

com

pute

d du

ring

the

CA

S cy

cle

thro

ugh

on-g

oing

LE

N a

ctiv

ities

]. R

educ

ed im

pact

of f

lash

flo

odin

g on

citi

zens

, pr

oper

ty a

nd in

fras

truct

ure

in T

aiz

(per

bas

elin

e an

d ta

rget

s in

Taiz

Mun

. Dev

. &

Floo

d Pr

otec

tion

Proj

ect.

Esta

blis

h a

grou

ndw

ater

man

agem

ent f

ram

ewor

k an

d in

stitu

tion

to m

anag

e lo

cal w

ater

reso

urce

s su

stai

nabl

y th

roug

h ca

paci

ty b

uild

ing

of

gove

rnm

ent i

nstit

utio

ns a

nd c

omm

unity

gro

ups

Acc

eler

ate

aqui

fer r

echa

rge

in S

ana’

a ba

sin

by

slow

ing

wat

er ta

ble

decl

ines

Im

prov

e w

ater

use

eff

icie

ncy

and

incr

ease

farm

er’s

re

turn

s to

wat

er th

roug

h ad

optio

n of

wat

er sa

ving

te

chno

logi

es, r

ehab

ilita

tion

of sm

all t

o m

ediu

m

spat

e irr

igat

ion

sche

mes

, ter

race

reha

bilit

atio

n,

bank

pro

tect

ion

wor

ks a

nd o

ther

wat

er a

nd so

il co

nser

vatio

n ac

tiviti

es

Impr

oved

soil

cons

erva

tion

and

wat

er h

arve

stin

g in

ra

infe

d ar

eas

Com

plet

ed d

rain

age

inve

stm

ents

in C

ity o

f Tai

z.

Lend

ing:

San

a’a

Bas

in

Wat

er M

anag

emen

t APL

Ph

ase

I, G

roun

dwat

er &

So

il C

onse

rvat

ion,

Tai

z M

unic

ipal

Dev

elop

men

t &

Floo

d Pr

otec

tion,

RA

LD,

TA,

Hea

lth R

efor

m S

uppo

rt

Non

-Len

ding

: H

ealth

Sec

tor

TA

New

Act

iviti

es:

Wat

er S

ecto

r TA

Le

ndin

g: P

opul

atio

n II

, G

irls S

econ

dary

Edu

catio

n,

PRSC

-I

(ii

) Im

prov

ed c

ontro

l ove

r pop

ulat

ion

grow

th

Lack

of a

cces

s to

cont

race

ptiv

es, l

ow st

atus

of

wom

en a

nd h

igh

fem

ale

illite

racy

rate

.

Con

trace

ptiv

e Pr

eval

ence

R

ate

incr

ease

d by

5 %

(b

asel

ine

to b

e es

tabl

ishe

d du

ring

HR

SP re

stru

ctur

ing)

. Sh

are

of g

irls i

n gr

ade

10-

12 e

nrol

lmen

ts in

crea

sed

to

37%

Popu

latio

n m

ilest

ones

des

crib

ed in

Pill

ar 2

, CA

S O

utco

me

2.

Seco

ndar

y Ed

ucat

ion

Stra

tegy

is a

dopt

ed;

Prog

ram

dev

elop

ed to

incr

ease

supp

ly o

f fem

ale

teac

hers

for r

ural

are

as.

Life

skill

s and

oth

er a

pplie

d su

bjec

ts in

clud

ed in

se

cond

ary

curr

icul

um.

Non

-Len

ding

: Girl

s Se

cond

ary

Educ

atio

n St

rate

gy, W

BI

Oth

er D

onor

s:

Ger

man

y, N

ethe

rland

s

- 1 -

ANNEX 3 CAS COMPLETION REPORT

Country: YEMEN Date of CAS: August, 2002 Period covered by CAS Completion Report: FY03-05

CAS Completion Report Completed by: Afef Haddad and Gaiv Tata, with contributions from from Core CAS Team members ______________________________________________________________________________

I. INTRODUCTION

1. This document reviews the experience implementing the International Development Association’s (IDA) Country Assistance Strategy for the period FY2003-2005 (Report 24372-YEM) dated August 6, 2002 which was endorsed by the Board on September 5, 2002. The document assesses the effectiveness of IDA’s strategy in (i) aligning its objectives with Yemen’s long-term strategic goals; (ii) setting relevant, measurable and realistic CAS outcomes; and (iii) achieving its expected outcomes in an efficient and sustainable way. Furthermore, this document evaluates IDA’s performance in designing its strategy taking past assessments and lessons into consideration (such as IEG Evaluations); and presents a set of lessons for subsequent CAS design. In addition to discussions with the country team and government counterparts, this assessment is based on reference documents such as the CAS, Project Appraisal Documents, Implementation Status and Results Reports, supervision reports (Aide-Memoires, and Back-to-office Reports), reports related to Economic and Sector Work, Implementation Completion Reports, and IEG reports and Project Assessments.

II. YEMEN’S LONGER TERM STRATEGIC GOALS

2. The 2002 CAS focused on supporting the main objectives of the Second Five Year Plan (SFYP) for the period 2001-2005 and Yemen’s First PRSP for the period 2003-2005. Yemen’s First PRSP defined the country’s key development challenges as: (i) high population growth, particularly its geographic distribution away from water resources, the problems of urbanization and poor labor market demand, limited opportunities for women, and the rapid rise of child labor; (ii) water scarcity, exacerbated by population growth, and poor waste treatment, and the related negative impact on agriculture; (iii) weak human resources, linked with poor health conditions, lack of education standards and adequate vocational training, and lack of capabilities and opportunities for women; and (iv) weak institutional capacity of the state including overstaffing, that led to a heavy wage bill, corruption, and weak judiciary system.

3. The PRSP proposed four strategic pillars of intervention: (i) Achieving economic growth through following macro and micro-economic policies suitable for poverty reduction, and also through job creation and expansion of the economic opportunities of the poor by addressing the structural causes of poverty, focusing on its prevention, and providing sustainable means of livelihood; and through conserving, protecting the environment, and improving water availability, distribution, and management; (ii) Developing human resources by managing population growth through increased awareness of reproductive health and family planning, improving primary health care, in rural areas in particular; controlling endemic diseases that

- 2 -

represent major reasons for continued poverty; improving literacy rates, especially for women; and promoting technical and vocational training; (iii) Improving infrastructure through enhancing potable water supply, increasing electricity coverage for rural population, and improving rural roads; and (iv) Ensuring social protection through social safety nets and social security programs, particularly the pension programs.

III. YEMEN’S PROGRESS TOWARDS ACHIEVING ITS DEVELOPMENT GOALS

4. The long term strategic goals for the country remained relevant throughout the CAS. The Government’s First PRSP Progress Report (for 2003 and 2004) – and the associated Bank/IMF Joint Staff Assessment - acknowledges that only limited progress was made towards achieving the long-term development goals. However, despite that achievements in the first two years have not been positive across all objectives, the government has made a good start in linking financial resources to development plans and establishing monitoring and evaluation mechanisms to review and revise their plans, as needed. There have been some successes in meeting targets for: basic education enrollment (for both boys and girls), road rehabilitation and maintenance, power supply and expanded coverage for social protection. The main goal of reducing the percentage of the poor by 13 percent is not likely to have been met. Missed targets also include: GDP growth, mortality indicators for infants, children and mothers, and access to water, roads and electricity. As the main reasons for the weak performance, the Progress Report identified: dampened investor interest in the region following the second Iraq war; internal security concerns; and a slowdown in economic reforms. While concurring that the very slow pace of structural reforms was the main cause of the poor progress under the PRSP, the JSA also identified insufficient action in public sector management and governance as impediments to growth.

Table 1: KEY INDICATORS OF PRSP PROGRESS Goal Indicator Base in 2000 Target in 2005 Actual 2004 28

Reduce poverty Poverty Incidence (total) 41.6 35.9 40.1 Increase real GDP Real GDP growth rate 5.1 5.4 3.5 Control of Population Growth Population Growth rate 3.5 3.0 3.0 Health services Coverage rate 50 65 63 Education Enrolment Basic Education Enrolment 62 69.3 68.9 Increase Water and Sanitation - urban ( percent of pop with access)

- rural ( percent of pop with access) 64 --

69 65

62.4 34.0

Increased Electricity Service Percent of pop. with access 30 40 37 Expansion of the Roads Network Km of roads built

Km of roads rehabilitated 1250

2586 1436 7873

Social Welfare & Assistance No of beneficiaries 450160 600610 650000 Gender Gap GDI 0.428 0.427

5. Changes in major assumptions. There were two major assumptions made in the CAS which did not materialize to the extent predicted: reduction in oil’s contribution to GDP and fiscal revenues; and the pace of decentralization of service delivery to governorates and local governments. First, oil prices moved up starting in 2004 and the higher prices led to better GDP

28 Most recent data available per Yemen PRS Progress Report for 2003 and 2004.

- 3 -

and fiscal outcomes than expected. However, the high oil prices in Yemen also reduced the sense of urgency that was perceived domestically regarding the impending growth and fiscal crisis and led to greater resistance to reform. The package of reform measures remained before Parliament for a long period of time and when approved in July 2005, right after the end of the CAS period, were only partially implemented. Second, the CAS was designed under the assumption that broad consensus had been achieved around the decentralization agenda embedded in the 2000 Local Government Law, which was described as having “set in motion a radical shift of power from the central government to local authorities governed by councils elected in February 2001”. In fact, though local councils were elected in 2001, the fiscal decentralization that was required to underpin the devolution of power to the local councils did not progress much at all. Further, there were clearly issues with regard to the Bank recommendations on decentralization not being acceptable to the Government, particularly the Ministry of Finance. 6. Recent achievements. Since the end of the CAS period, progress has been made in macroeconomic reform, public sector reform, and public financial management. In addition, the government adopted in January 2006 a National Agenda for reform consisting of good governance measures. Those achievements have not been factored into this evaluation because they occurred after the CAS period.

IV. ASSESSMENT OF PROGRESS AND ACHIEVEMENTS OF COUNTRY ASSISTANCE STRATEGY OUTCOMES

7. Consistent with PRSP’s pillars, the 2002 CAS focused on one main objective that covers all four pillars: sustainable poverty reduction. To achieve this objective, the Bank’s strategy was structured around four main pillars: (i) improving the delivery of public services through stronger economic governance; (ii) strengthening the enabling business environment; (iii) building and protecting human resources; and (vi) sustaining and protecting natural resources.

A. Assessment Methodology

8. While the CAS was prepared prior to the current emphasis on results based approaches, it contained 65 program indicators/benchmarks. In the context of the glossary currently in use with regard to Results-Based CASs, the indicators/benchmarks in the CAS are a mixture of CAS outcomes (i.e. country results deemed achievable in the CAS period and which the Bank expects to influence through its interventions) and milestones (progress markers of CAS implementation). Based on the information contained in the CAS, this evaluation has attempted on an ex-post basis to demarcate the indicators into CAS outcomes and milestones, including cross-sectoral outcomes, and to build a Results Chain based on the text of the CAS and the Program Matrix. It should be noted that the CAS did not include a system for Monitoring and Evaluation of each CAS outcome, and several indicators of success that were identified in the CAS were imprecise or missing baseline and target values (e.g. one indicator was: water table declines are slowed or reversed), which made it difficult to evaluate the achievement of each pillar compared to CAS baselines and targets. Consequently, where indicators are inadequate or missing, the evaluation can only make qualitative judgments on progress.

- 4 -

9. This evaluation:

• uses the Results Chain (Appendix 1) established during CCR preparation to discuss the achievement of each one of CAS outcomes as part of one of the four proposed pillars;

• discusses the overall progress made under each pillar and the relevance of the lending and non-lending instruments to the pillar;

• discusses in detail whether, how, and why the assistance program did or did not achieve each of the CAS outcomes; and

• draws lessons of experience under each pillar and provides recommendations for the new CAS.

10. As with regards to the instruments that will enable the achievement of CAS outcomes, it should be noted that the CAS document mapped some activities to more than one pillar; in this case, the activity is discussed under the pillar to which it was considered to contribute the most. In deciding on this primary classification, this evaluation utilized Annex A1 of the CAS and mapped CAS activities to their primary theme based on MNA regional strategy.

B. Assessment Summary 11. Overall, performance under the 2002 CAS is rated Unsatisfactory. The following table summarizes the ratings for each Strategic pillar and outcome: 12. It is important to note that unsatisfactory performance should not be interpreted as a need to dramatically change the priorities of the next CAS but be viewed as the result of an appropriately focused strategy which suffered from a number of shortcomings that the new CAS should take into consideration and address, to make it more successful. Those shortcomings are: (a) ambitious targets (both in the PRSP and the CAS); (b) Inappropriateness of the assistance program given the outcomes sought; (c) delayed implementation of the lending program; (d) delivery of key activities in the non-lending program during the last year of CAS implementation; and (e) discrepancy between planned objectives and actual achievements. Specifically,

(a) Ambitious targets. Many of the targets set were extremely ambitious given the size of the CAS program. It would appear that the CAS took on the targets specified in the Government’s PRSP but in the absence of full funding, these targets were difficult to influence and achieve. In addition, targets for reducing poverty and improving service delivery in percentage terms could be considered to be ambitious even in the context of a stagnant population but in the context of one that grew by over 1.5 million people during the course of the CAS period, the challenge was even greater.

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(b) Inappropriate instruments. In several cases, the instruments were either inadequate or too modest to achieve the outcomes sought. For example, the Bank’s support to the Government in improving macroeconomic stability was only through Economic and Sector work, which is insufficient. Similarly, given the ambitious program to improve the regulatory environment which is listed in the CAS, the Bank only provided support through an Investment Climate Assessment – which is merely a diagnostic tool for analyzing private sector development constraints. (c) Slow implementation. There were considerable delays in implementing ongoing and newly approved projects. There were delays resulting from procurement packages not being ready at the time of credit effectiveness which led to slow start-up; delays resulting from the slow pace of the procurement process itself due to the need to involve institutions responsible for Government procurement into the procurement activities at the project level, and to the weak procurement capacity; and delays resulting from a complex design given the local implementation capacity. (d) Fragmented and delayed non-lending program. Some key think pieces that influenced Government strategic choices (e.g. the Public Financial Management Reform; the Country Water Resources Assistance Strategy; the Urban Land Policy and Administration Note) were delivered late in the CAS period and others (the Development Policy Review and the Investment Climate Assessment) slipped beyond the end of the CAS period. Hence, the impact of these activities on influencing systemic changes had to be rated low during the CAS period but their availability should allow for a greater focus on implementation during the next CAS. (e) Discrepancy between planned objectives and actual achievements. This is partly due to over-optimism related to country’s implementation capacity; and partly due to the fact that, in many instances, recommendations made by the Bank were not systematically implemented, either due to disagreements at the technocratic and policy levels or due to non-approval by the legislature. The discrepancy between planned objectives and actual achievements is also partly due to the fact that, despite its selectivity, the strategy was not implemented in an efficient way that aligns tasks with CAS objectives given the resources allocated and given the high-risk country environment. The subsequent CAS should be more realistic than the previous CAS in its risk assessment. It should build constituency for changes through an effective communication and outreach strategy, and should describe how the implementation should be organized given the scarcity of resources. In addition, it should be built on the country’s readiness and commitment to move the assistance program forward. 13. Rapid Implementation versus Institutional Development. Despite the slow implementation noted earlier, the Bank portfolio made liberal use of Project Management Units (PMUs) though some projects did attempt to work with Government institutions directly (e.g. the Port Cities Project used Local Development Departments). There were two major reasons for the use of PMUs: first, adequately addressing fiduciary requirements; and second, the inability of the Bank – under its own guidelines - to compensate civil servants which, coupled with lack of progress on civil service reform, (particularly continuing low pay) would have resulted in limited motivation for implementation. The alternative also utilized was the use of two enclave

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entities – the Social Fund for Development and the Public Works Program. These projects, which are legally established enclaves that bypass the constraints affecting the mainstream civil service, demonstrated the potential for efficient service delivery in a low capacity environment. However, their experience is not more broadly replicable due to cost considerations and further, as these institutions have grown in scale, the challenge of coordinating with Government ministries has grown.

Table 2: SUMMARY RATINGS

CAS Strategic Pillars/Ratings

CAS Outcomes

Improved enabling environment for civil servants and enhanced fiduciary accountability of government at the central and local levels. Skilled and more credible Judicial System that leads to enforcing service delivery standards.

I. Improving the delivery of public services through stronger economic governance: Unsatisfactory

Better revenue and expenditure management.

Better investment climate through macro stability, improved business regulatory environment, enhanced security, more secure property rights, improved access to finance; and through improved physical infrastructure (water, power & roads).

II. Strengthening the enabling business environment: Unsatisfactory

Reducing the role of the state in commercial activities including the financial sector. Increased access and quality to education at all levels, with emphasis on girls and women. Improved coverage and quality of health services.

III. Building and Protecting Human Resources: Moderately Satisfactory

Cross Sectoral Outcomes: Contribution of Infrastructure to Health and Education Safety Nets Community Development Gender Improved conditions for water availability in place, through strengthened water depletion mitigation measures.

IV. Sustaining and protecting Natural Resources. Moderately Unsatisfactory

Efficient mitigation measures against depletion of other natural resources (petroleum and coastal fisheries) and against pollution in place.

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Table 3: SUMMARY OF KEY STRENGTHS AND SHORTCOMINGS

C. CAS Strategic Pillar I: Improving the delivery of public services through stronger economic governance: Unsatisfactory 14. This pillar included three CAS outcomes: Improved enabling environment for civil servants (better salary and performance management), and enhanced fiduciary (including financial) accountability of government at the central and local levels; Skilled and more credible Judicial System that leads to enforcing service delivery standards; and Better revenue and expenditure management.

15. Pillar achievements as compared to CAS goals. Overall, limited or no progress was made against the indicators established to measure achievements in these outcomes (details for each outcome are discussed in the following sections). The number of civil servants increased rather than declined by 30,000 over three years, real pay levels declined rather than raised and decompressed; and civil service restructuring did not progress. Service delivery continued to remain centralized and limited programs were undertaken for local authority capacity building.

What Worked? Why? What did not Work? Why?

Strategic Pillar I.

- Adequacy of pillar and outcomes with PRSP

- Bank’s timely advice on oil prices

- Relevance to government priorities

- Civil service reform

- Decentralization.

- Complexity of design

- Changes in TTLs - lack of ownership of fiscal decentralization

Strategic Pillar II.

- Better focus on removing private investment constraints than previous CAS.

- Relevance of proposed assistance program.

- Private sector participation

- Major instruments not sufficient to achieve outcomes

- Most proposed lending and non-lending not delivered

Strategic Pillar III.

- Education access

- Reduction in gender disparities

- Government commitment

- Clear and Simple Implementation Arrangements with Focus on Capacity Building

- Donor Harmonization and - Resource Mobilization - Bank Leadership in Supporting Analytical and Strategic Work - SFD and PWP efficiency (due to incentives, autonomy)

- Institutional capacity in health sector - Improved health facilities not being used - Implementation delays

- Complexity of design (Health & Child Development Projects)

- Weak Implementation capacity (Health)

Strategic Pillar IV.

- Focus on groundwater exhaustion

- Analytical work: Water CAS - Institutional framework.

- Strategic focus and selectivity - Qat issues still not adequately addressed

- Some Planned analytical work not conducted

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Some training was undertaken for the judiciary but overall systemic changes were not undertaken. Finally, aggregate fiscal indicators were partially achieved (fiscal deficit was 2.8 percent in FY04 as compared to a target of 4 percent) but indicators for social sector spending did not increase by the substantial levels projected (share of social expenditures was 8.6 percent in FY04 as compared to a projected 13.2 percent of GDP). Given limited progress, CAS outcomes under this pillar cannot be considered sustainable and overall achievement made under this pillar is unsatisfactory.

16. Bank Assistance. As indicated in the following table, this pillar was expected to be supported by two ongoing projects; three new loans (of which none were delivered) and nine non-lending activities (of which only six were delivered).

Table 4: BANK ASSISTANCE UNDER PILLAR I

Ongoing Lending at start of CAS

Actual Lending Actual ESW/TA

Planned lending not delivered

Planned ESW/TA not delivered

1. Civil Service Modernization 2. Legal and Judicial Development

None 1. CFAA 2. Public Financial Management,

3. Procurement Cap. Building (IDF) 4. Budget/ Poverty impacts of petroleum pricing 5. Budget & expenditure streamlining 6. Public expenditure management

1. Local and Community Development 2. Civil Service Modern. II 3. Poverty Reduction Support Credit

1. Monitoring and Evaluation 2. CPAR 3. Public Services Delivery (IDF)

Outcome I.1: Improved enabling environment for civil servants and enhanced fiduciary

accountability of government at the central and local levels 17. Improving the enabling environment for civil servants through the Civil Service Modernization Project was relevant to the strategy and to the government’s concerns. Complexity of design led to several implementation delays that hindered the full achievement of the expected outcome. The project was too complex in light of the institutional environment with separate demanding components under the Ministry of Civil Service and the Ministry of Finance, respectively. It went into problem status and remained problematic through most of the CAS period. In November 2004, the Bank indicated to the Government that if no significant progress was achieved in the next six months, the project would be cancelled. The Government made a credible effort to turn the project around and many delayed activities are now being implemented which led to the project being upgraded. The government initiated measures to improve accountability and oversight with an effort to establish a high-level steering committee to oversee the link between the Accounting and Financial Management Information System (AFMIS) and the broader reform agenda in the Ministry of Finance. Reengineering of major agencies and creation of a biometric identification system, both prerequisites for civil

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service rationalization have made progress. The civil service fund, to be used for severance compensation, has been created. However, the development impact from this project (which has been extended up to December 2007) did not materialize during the CAS period. As a result of the earlier implementation problems, the Second CSMP (envisaged for FY05) was not prepared during the CAS period.

18. The objective of enhancing the fiduciary accountability of government at the local level was not achieved. The Bank aimed at providing an operational framework for the Government’s ambitious decentralization agenda with the aim of enhancing local revenue collection and improving local budgetary planning and expenditure management. It also aimed at incorporating more participatory and responsive approaches to community-level development, as measured by improved local authorities’ financial management and accountability. The District and Community Development Project (FY04) that was expected to support this effort was dropped. The project was eventually designed in the form of a Learning and Innovation Credit, but never advanced beyond the appraisal stage. A key aspect of the project design was for the Credit to finance a portion of the operating and maintenance costs of 20 pilot districts, which was intended to trigger additional resources transfers from Ministry of Finance (MOF). However, MOF expressed concerns with this approach viewing it as a precedent on the basis of which all other districts in the country might want increased central transfers to cover their operating costs. Despite strong support for the project from the Ministry of Local Administration, lack of Government consensus on the appropriate approach eroded support for the Project and by November 2004, the Bank decided to drop the project.

19. To support the decentralization agenda, the Bank assisted the city of Taiz in its development29. Through Bank support, the city completed an updated city master plan. It has developed and adopted a solid waste management strategy, improved management of city assets (having established recently a new Asset Maintenance Unit) and has actively engaged city residents through the launching of a public awareness campaign and various other initiatives aimed at improving city services and reducing poverty. A newly-established Task Force on urban poverty, including city officials, NGO representatives and the private sector, was launched in June 2005 with Bank-support. Survey work is underway with the aim of developing more appropriate and effective approaches to tackling urban poverty focusing, in particular, on the role of the local city administration. Despite the lack of progress at the national level, some 15 new Local Council buildings are being constructed and equipped under Bank’s support in an attempt to help consolidate local-level administration.

20. Non-Lending Activities made progress late in the CAS period and did not result in the expected policy changes during the CAS period. A Multi-Year Review of Public Sector Management under Decentralization was expected to be initiated in FY03. The objective of this review was to lay the groundwork for capacity building in governance and identify some key “entry points” and local “champions” to lead the effort. Eventually, in FY05, a report on Budget Reform and Decentralization (FY05) was prepared. However, the Government did not agree with the Decentralization chapter of the report and implementation actions were not undertaken.

29 Support was through the Local Government Capacity Building Component of Taiz Municipal Development Project.

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21. Based on a an analytical piece on Public Expenditure Management processes in FY05, the Cabinet approved the Public Finance Management (PFM) Reform Strategy on August 9, 2005, and established a Ministerial committee to oversee implementation of the PFM action plan which is supported by a Memorandum of Understanding between the Government and donors who would support implementation of the Action Plan. The adoption of the IMF’s General Finance Statistics (GFS) 2001 budget classification system is part of the PFM action plan and will be utilized in preparing the 2007 budget during calendar year 2006. While these developments represent significant progress, given that the plan was prepared late and approved after the end of the CAS period, there was no implementation.

22. Following Bank’s advice under the Country Financial Accountability Assessment (CFAA), the government has made some steps in addressing corruption by establishing an anti-corruption commission. However, the CFAA (FY05) suggested that increased transparency in the activities of this commission is needed, along with a stronger message that the government is against corruption and that it put in place measures to punish corruption. The CFAA also suggested revisions to the Financial Law to provide for a modern internal control framework in compliance with international standards, and full implementation of modern internal audit across Government.

Outcome I.2: Skilled and more credible Judicial System that leads to enforcing service delivery standards 23. The assistance program for the judicial reform was extremely modest given the outcomes sought. Only modest amounts of training were delivered (approximately 26 courses) and the impact of these training activities could not be evaluated due to absence of baseline or end of project surveys. Beyond training, the CAS had no support to improve other indicators of improved judiciary performance. The training was conducted under the ongoing Legal and Judicial Development Learning and Innovation Credit (LIC) of US$2.4 million – of which eventually only USUS$1.9 million was actually disbursed. The LIC had been designed to be followed up with an Adaptable Program Credit (APC) but the CAS did not contain any follow-up operations.

Outcome I.3: Better revenue and expenditure management

24. Expected outcome was not realistic, but unplanned, proactive advice was timely. The achievement of this outcome was expected to be measured through a significant shift in public expenditures (by approximately 4 percent of GDP) to the social sector expenditures. However, the outcome was supported primarily by public expenditure analysis which is not sufficient to achieve a change in allocations by US$400 million (in 2005 GDP terms) over three years. The Poverty Reduction Support Credit of US$70 million also envisaged for FY05 to provide a quick disbursing budget support was not prepared given that the triggers for the high case scenario (which focused primarily on governance and macro indicators) were not achieved.

25. Following the increase of the fiscal cost of the domestic subsidy for fuel products to 6 percent of GDP by 2004, and based on Bank’s advice, Yemen increased its oil prices. The Bank’s advice was based on an unplanned study on the Budgetary and Poverty Impact of Petroleum Pricing (FY05). The main recommendations of this work were to slowly raise prices

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while simultaneously implementing measures to protect the poor from the impact of the price rises. While Yemen followed the Bank’s recommendation to increase oil prices, it did not raise the prices gradually as suggested in the report, nor deal with the safety net issues. It raised the price of diesel in one step from YR 17/litre to YR 45/litre without accompanying pro-poor measures designed to mitigate the social impact of price increase. These increases resulted in demonstrations, riots, the loss of life and destruction of property, and the government rolled back the price increase to YR 35/litre. Future adjustments to and the long-run elimination of fuel products subsidy also remains uncertain as a result.

D. CAS Strategic Pillar II: Strengthening the enabling business environment Unsatisfactory

26. The second major pillar of the CAS was to support Yemen in creating an environment conducive to private investment that will create more jobs, and contribute to sustainable poverty reduction. IEG’s 2001 CAE for Yemen was critical of the Bank’s strategy for improving the investment climate. It stated that “a second weakness of the assistance strategy is the relatively low priority given to removing constraints to private sector development, a priority for Yemen's future”.

27. The CAS addressed this concern by making private investment one of its major pillars. To achieve the expected results, the CAS aimed at supporting the government in key reform areas while addressing specific constraints that hinder the promotion of private investment. The CAS, hence, sought to focus on improving security; macro-stability; improved regulatory environment; improved land tenure; improved financial system; and improved physical infrastructure.

28. Pillar achievements as compared to CAS goals. In summary:

• private investment to GDP ratio of 18 percent was not met, neither was the commercial long-term lending rising by 50 percent. The indicator of rising the long-term lending by 50 percent is not justified as an important measure of achieving this CAS outcome;

• Inflation targets (of below 10 percent) were not achieved but the actual inflation remained in a reasonable range of the target never exceeding 12 percent by June 2005;

• progress was made in achieving infrastructure outcomes (for roads and power) though private sector participation goals for the power sector were not met. Again, the expected increase in electricity coverage (40 percent) and the goal of private participation (introduced in the Sana’a Emergency Power Project in 1999) were highly ambitious. By 2002, international experience clearly showed that private participation in the power sector in Yemen was not a feasible option; and

• there was limited progress in the financial sector with the passage of a Banking Law amendment and anti-money laundering legislation.

29. Bank Assistance. Two CAS Outcomes were sought under this pillar: (i) Better investment climate through improving business regulatory environment, macro stability, enhanced security and physical infrastructure (water, power & roads); and more secure property

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rights and improved access to finance; and (ii) Reducing the role of the state in commercial activities including the financial sector.

30. In retrospect, the assistance program to achieve CAS outcomes was relevant. As Table 5 indicates, this pillar was expected to be supported by three ongoing projects; three new loans (of which only one was delivered) and thirteen non-lending activities (of which only seven were delivered).

Table 5: BANK ASSISTANCE UNDER PILLAR II Ongoing Lending at start of CAS

Actual Lending

Actual ESW/TA

Planned new lending not delivered

Planned New ESW/TA not delivered

1. Sana’a emergency power 2. Seeds and Agricultural services 3. Southern Governorates Agricultural privatization

1. Port Cities Development

1. Sources of Growth 2. Urban Land policy & Administration 3. Rural Development Strategy Implementation & Agri. promotion

4. ROSC-AA 5. Financial Sector Dialogue 6. Restructuring Ministry of Agriculture & Irrigation 7. Power sector reform

1. District and community development 2. Power restructuring and expansion (high case)

1. DPR(*) 2. Investment climate (*) 3. Integrated framework for trade 4. Infrastructure for mineral exports 5. Agricultural and Maricultural Export strategy 6. Tourism development

(*) DPR and Investment Climate were undertaken but not completed by the end of the CAS period. Outcome II.1: Better investment climate through macro stability, improved business

regulatory environment, enhanced security, more secure property rights, improved access to finance; and through improved physical infrastructure (water, power & roads)

31. The outcome was relevant to the country’s long-term strategic goals and to the strategic pillar, but major instruments were not sufficient given the outcomes sought. First, the Bank’s support to the Government in improving macroeconomic stability was only through Economic and Sector work, which was insufficient. Second, given the ambitious program to improve the regulatory environment which is listed in the CAS, the Bank only provided support through an Investment Climate Assessment – which is merely a diagnostic tool for analyzing private sector development constraints. Third, Bank’s contribution to non-oil production and diversification was very modest.

32. Outcome achievements under the CAS can be described as follows: In the Power sector, the Bank contributed to addressing the sector's significant electricity shortages which was extremely urgent given power supply bottlenecks, high energy losses, and poor maintenance. Following Bank’s support, Public Electricity Corporation’s (PEC) overall energy losses were reduced from 40 percent to 33 percent and the quality of service to consumers has improved, as confirmed by the beneficiary survey carried out as part of the independent Impact Assessment Study conducted as part of the Implementation Completion Report (ICR) of the Sana’a Emergency Power project. Over a third of those surveyed expressed a willingness to pay more for better electricity supply with fewer interruptions. The total incremental generation capacity resulting from the project was about 35MW and will rise to about 40MW in mid 2006.

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However, progress in sector reforms has been very modest and the objective of introducing private sector participation was not fulfilled. The overall achievements under this assistance were marginally satisfactory. In addition, since the high case scenario did not materialize, the new Power Sector Restructuring and Expansion project was not delivered during the CAS period.

33. The development of the fisheries sector can be considered as a success story under the CAS and came from the Bank not lending until the appropriate policy framework had been put in place (Box 1).

34. In micro-finance, the Bank contributed to laying the foundation of an emerging micro finance industry, through the SFD. This is a major achievement in a country where the concept and practice of microfinance did not exist prior to SFD’s inception and more impressively where the client base (borrowers and savers) of micro finance programs established with SFD2 support increased considerably. The SFD provided financial and technical assistance to 10 micro finance programs which by the end September 2005 had 23,856 active borrowers and 26,815 savers, mostly women. About 72,970 loans totaling YR 2,180 million have been provided. Loans averaged YR 27,000 which suggests that microfinance programs have been effective in targeting the poorest and neediest groups. The total outstanding loan portfolio is estimated at YR 456.51 million. Across the Micro Finance Institutions (MFI), portfolio at risk at 3-4 percent, with only two MFIs at 10 percent and three MFIs have reached perfect repayment rates. Of the 10 microfinance programs, 50 percent have reached operational self-sufficiency and there are good indications which suggest that the remaining programs, over time, are likely to achieve financial sustainability.

35. In Ports, and through its support to Aden, Hodeidah and Mukallah30, the Bank contributed to enhancing their potential as engines of growth. It prompted national level reforms, such as reinitiating the process of concessioning the Aden Container Terminal to the private sector and adoption of an open skies policy in 2005. The open skies policy would improve Yemeni city competitiveness by increasing air traffic volume and providing regional and international carriers greater access to Yemen, particularly important for Yemen’s air cargo shipment needs (fresh seafood) to European, Asian and Gulf destination markets. It also fostered decentralization reforms, including devolution of master planning and private sector investment project approval to the city level; assisted in integration of the Aden Free Zone and Container Terminal into city investment and service provision planning; conducted a Gas Utilization Study which is leading to a privately financed extension of the gas pipeline and power generator in Aden; renovated city assets being utilized by functioning Governorate Departments; and assisted in promoting public-private partnerships. Over US$85 million in new private capital investments in Aden alone over the past year have created an estimated 1,800 new employment opportunities.

30 Adaptable Program Credit for Port Cities Development Project.

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Box 1: THOROUGH ANALYTICAL WORK AND POLICY FRAMEWORK AS PREREQUISITES FOR LENDING IN THE FISHERIES SECTOR PAY OFF

The Bank prepared a Fisheries Sector Strategy Note that pointed out that since 1994 the Government of Yemen (GOY) had allowed licensing of 113 large foreign industrial vessels. These along with other vessels were leading to the unsustainable exploitation of fish stocks. The report pointed out that the expansion had several undesirable effects: official exports at about USUS$13 million was well below its potential, while the growth of poverty alleviation oriented small-scale artisnal fisheries was being constrained. The report recommended that the reduction of such excessive effort to sustainable levels should have a priority to allow fisheries stocks to recover. Initially GOY was reluctant to change the fisheries sector policy which favored licensing of large numbers of foreign industrial vessels. As the policy framework was not supportive of further investments in artisanal fisheries, the Bank decided to discontinue lending to fisheries sector until an appropriate policy framework had been put in place. Following internal discussions and a change of Minister in-charge of the Ministry of Fish Wealth, GOY decided to discontinue giving out licenses to large foreign industrial fishing vessels in 2002 and by 2003 most old licenses were phased out. This had an immediate and favorable impact on fish stocks. The fish production from small-scale fisheries, fish exports, and sector employment all started growing at double digit rates and by 2004 fish exports reached a level of about USUS$210 million. In view of the more favorable policy framework, the Bank restarted fisheries sector lending in Yemen with an IDA credit about USUS$25 million in 2005.

36. In the Agriculture Sector, Bank’s achievements in increasing private sector participation were modest, though changes were made to legislation and institutional arrangements through the issuance of the seeds law and its by-laws under the Seeds and Agricultural Services Project. The main shortcoming was related to slippage in the program for privatization of the major entities; though privatization has been approved, the transactions have not yet been completed. However, The Southern Governorates Agricultural Privatization project is expected to meet its development objectives though this is occurring 3 years later than the originally planned closing date. Further, given the problems with the Government providing land free of claims, this component of the project was downsized to around 10 percent of the original land development area and the balance has been reallocated to spate irrigation and/or cancelled.

37. Bank’s achievement of outcomes through analytical work was modest. First, the Land Registration ESW was undertaken in FY05 as planned and was entitled the Urban Land Policy and Administration Note. It made recommendations for: improving the demand for the land registration system and for reducing land disputes in the court system; and for improving the management of state lands in urban areas. These recommendations were considered at a workshop in September 2005 and a Task Force was assigned the responsibility of implementing the action plan. Since that time a proposal to merge all land related agencies (public land administration, land survey and registration, and mapping) into a single agency to enhance efficiency in the sector was submitted, and the World Bank provided its input in December 2005 on the approach going forward. Second, the Report on the Observance of Standards and Codes-Accounting and Auditing (ROSC, FY05) helped bring to the government’s attention significant weaknesses in the Auditing and Accounting system. Among others, the ROSC suggested the need to close the gap between the international standards and the actual auditing and reporting practices. The Central Bank of Yemen issued guidelines to banks and auditors on corporate financial reporting, but these guidelines were not in line with international accounting standards.

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38. Two key non-lending products were delayed. First, the preparation of the Development Policy Review commenced in FY05 but was not completed before the end of the CAS period. Therefore its recommendations were not available for implementation during the CAS period. Second, the firm survey underlying the Investment Climate Assessment was undertaken in FY05 but the survey results and the final report were not completed by the end of the CAS period.

Outcome II.2: Reducing the role of the state in commercial activities including the financial sector 39. With Privatization Support Project never becoming effective as it was not approved by the Parliament, there was no appropriate instrument to provide significant support to this outcome, except for one ESW that aimed at privatizing financial institutions. The Financial Sector Dialogue which was satisfactory focused on (a) strengthening central bank capacity to enforce regulations and the new prudential rules, (b) modernizing corporate accounting and audit standards, and (c) supporting the government in privatizing public financial institutions. This was a continuation of the reforms undertaken in the context of the successful Financial Sector Adjustment Credit (1997-1999), mainly with respect to restructuring four public banks and modernizing the payments system. The restructuring is still at its very early stages of planning, and in this context, the Bank recently provided the government with terms of reference of the financial audits of the banks, and the terms of reference for the operational restructuring.

E. CAS Strategic Pillar III: Building and Protecting Human Resources. Moderately Satisfactory

40. Human Development Indicators in Yemen are very low and this pillar is relevant to the country’s long-term strategic goals. The CAS supported and complemented government’s strategy. While expecting the government to focus on public campaigns to reduce population growth to the targeted 3 percent in 2005, the CAS focused mainly on basic education, and on girls’ and women education, in particular (in Yemen, fewer than 40 percent of girls under 12 attend schools). In addition, the CAS envisaged building human capital through improving health and nutrition; enhancing early childhood development; and improving access to information and communication technology. However, despite its focus on education, the CAS did not highlight the multi-sectoral dimension of this pillar in designing its interventions. For instance, with the exception of the Child Development Project, the CAS did not highlight the linkages between drinking water scarcity and the consequent chronic health and therefore education constraints31.

31 In the case of Morocco, for example, where drinking water scarcity is also a major problem, an increased water access of population from 20 to 50 percent in 27 rural provinces led to a reduction in water transport time. The saved water transport time spurred a rise in girls’ primary enrollment from 30 to 51 percent.

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41. Pillar achievements as compared to CAS goals. Achievements under this pillar are rated Moderately Satisfactory because of the major achievements in the education sector in general (Box 2), and achievements in narrowing the gender gap in particular, and because of the unsatisfactory achievements in the health sector. Gross enrollment rates of girls exceeded their target and reached 62 percent in 2005 in targeted areas as compared to 51 percent in 1999-2000. In secondary education, total rural enrollments increased by 38 percent in 2002-2003 (compared to 1998-1999 baseline). However, while attention to access was adequate and resulted in exceptional increases in enrollment rates in rural areas, attention to the quality of education was modest and substantial work remains to be done. Despite the fact that quality of basic education is expected to improve as a result of training 95 percent of the teachers (as compared to a target of 80 percent), it is important to note that not enough teachers were assigned to rural areas. Health outcomes were not achieved due to the ambitious design of the Bank’s assistance given the weak local implementation capacity. Health service coverage was not expanded to 65 percent of the population, as projected; Government expenditure on health was only 1.5 percent in 2003, lower than the targeted 2.2 percent of GDP; and fertility rates and child and maternal mortality did not decline.

42. Bank Assistance. The assistance consisted of nine ongoing projects, six new projects (of which three were delivered) and twelve non-lending services (of which seven were conducted). The following table lists the operations proposed to support pillar III of the CAS.

Table 6: BANK ASSISTANCE UNDER PILLAR III

Ongoing Lending at start of CAS

Actual Lending Actual ESW/TA

Planned new lending not delivered

Planned New ESW/TA not delivered

1. Higher Education 2. Health Reform Support 3. Basic Education Expansion Project (BEEP) 4. Child Development 5. Social Fund II 6. Public Works II 7. Vocational Training 8. Education Sector Investment Project 9. Rural Access I

1. Basic Education Development 2. Social Fund III 3. Public Works III (not programmed)

1. Poverty Update 2. EPI and Public Health Programs 3. Women in the local economy of Aden 4. Gender Note 5. Vocational Training Strategy 6. Develop. Information Center 7. Population Policy Note

1. Girls’ secondary education project 2. Vocational Training II 3. Rural Access II

1. Secondary Education Review 2. Children at Risk 3. Violence against women 4. Development Research Forum 5. M&E capacity building

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Box 2: WHY DOES THE EDUCATION SECTOR CONTINUE TO DELIVER RESULTS IN YEMEN AND NOT OTHER SECTORS?

Lessons behind the Results on the Ground

Government Commitment: The Government of Yemen has historically given priority to education. The share of GDP going to education increased from 5.2 percent in 1997 to 6.8 percent in 2004, with education accounting for 22 percent of total government expenditures. Strong leadership of the Ministry of Education has maintained the focus on expanding educational access to the entire country, with particular attention to disadvantaged groups. While equitable expansion remains a high priority, the government is committed to promoting sound strategies at all levels to respond more flexibly to evolving demand for education and training.

Clear and Simple Implementation Arrangements with Focus on Capacity Building: In 1999, the education sector assistance strategy of the Bank laid the foundations for the design of the BEEP, based on simple implementation procedures. The preparation of the subsequent Basic Education Development Project (BEDP) was supported by a number of studies, including a review of cost effective construction to enhance efficiency. The strong performance of the BEEP and EFA-FTI Catalytic Fund in the most difficult districts is attributed in part to the clear and simple implementation arrangements that have been put into place. The pace of implementation and relative transparency in procurement were achieved through heavy investment by the project unit in ensuring that the rules of the game were well understood and followed. In the 2004 Independent Procurement Review for Yemen, the BEEP was the only one of the seven projects reviewed to be rated Satisfactory on general transparency. The same level of support continues under the BEDP which covers 10 new governorates and for which the Ministry is recruiting procurement specialists to train governorate staff. On a systemic level, efforts are on-going to rationalize teacher deployment and the inspectors’ corps in coordination with the civil service work in progress; to build national capacity for education assessment and international benchmarking of the learning achievements of Yemeni students; and to utilize school mapping in making school construction decisions.

Donor Harmonization and Resource Mobilization: The education sector is the furthest along in Yemen in donor harmonization and resource mobilization, with a Partnership Declaration signed by 12 donors. The education donors worked as partners with the government in drafting the Basic Education Development Strategy and they review the strategy annually with the government (the second annual exercise is planned for May 2006). There are two cases of multi-donor financing arrangements: through the EFA-FTI Catalytic Fund; and through the multi-donor Trust Fund resources (non-pooled funding by DfID and NL) under the Basic Education Development Project (BEDP). The BEDP is a pre-SWAp operation which KfW is joining in 2006 and the Canadians have expressed interest in joining. Donors participate in BEDP missions and meet monthly to review progress on donor harmonization. Yemen’s success in joining the first group of countries to benefit from the EFA-FTI Catalytic Fund, followed by its demonstrated ability to use the funds for educational advancements, enabled the country to build on its success and qualify for two further grants. The country received a lot of international recognition, which fostered a positive trend to deliver more. The continuation of the Ministry leadership has of course helped tremendously in maintaining the momentum on achieving results.

Bank Leadership in Supporting Analytical and Strategic Work: The Bank has been the lead agency in the country providing analytical support for the development of educational strategies which have been used as a basis for systemic changes supported by the entire donor community. Intensive support was provided to the articulation of the Basic Education Development Strategy and the development of Yemen’s Credible Plan, which formed the basis for receiving financing from the EFA-FTI Catalytic Fund. The Bank has also been supporting the government’s development of strategic priorities for vocational training, secondary and higher education. The resulting strategies will form the basis for donor financing and support in these sub-sectors. The Bank is leading a study on the issue of teacher absenteeism to support improved teacher management in the education system. The Bank is also leading support to the Government to formulate a children and youth strategy and action plans to translate that strategy into concrete actions as well as linkage with all sectors. In sum, the Bank’s role has been one of central importance both for the development of policy and for attracting donor funding to augment IDA’s limited envelope.

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Outcome III.1: Increased access to and quality of education at all levels, with emphasis on girls and women

43. The Bank program supported education development through Education Sector Projects, the Child Development, Social Fund and Public Works projects. Both basic (Grades 1-9) and secondary education (10-12) were supported and there was increased access (as measured by enrolment rates) at both levels of education.

44. Basic Education. The basic education sector was the first sector in Yemen to adopt a Sector Wide Approach and over a period of several years, the Government defined its sector strategy and donors began to align their programs with this strategy. The World Bank’s contribution included: its support to the Government in implementing the sector-wide approach, its assistance in fund raising from the Education For All Fast Track Initiative (EFA-FTI) and other donors and through IDA projects.

45. Outcomes achieved are summarized as follows: Gross enrollment rates of girls in four targeted governorates reached 62 percent exceeding its target of 57 percent. Ninety-five percent of teachers in grades 1-6 have participated in annual refresher training (vs. a target of 80 percent). A Girls Education Sector Department has recently been established in the Ministry of Education, and 98 percent of the US$10 million grant of the Education For All Fast Track Initiative (EFA-FTI) Catalytic Fund was spent satisfactorily within the twelve month period set for implementation.

Table 7: PROGRESS ON BEEP OUTCOME INDICATORS

46. The new Basic Education Development project planned in FY04 was delayed but was eventually approved in FY05 and will continue to improving enrollment and completion rates in basic education with particular attention to girls’ education beyond the CAS period - it became effective only in March 2005 and was implemented for only a few months before CAS completion. In addition, 470,000 children were enrolled in Basic Education through the support of the Second Social Fund for Development32; and an additional 26,317 children were enrolled through the Second Public Works Project which constructed 825 classrooms.

47. Secondary Education. The Bank contributed to a substantial expansion in secondary enrolments particularly in girls’ secondary enrolments as noted in the Table 8.

32 SFD I closed at the end of June 2003 but was largely disbursed by June 2002 and therefore is not taken into account for this CASCR.

Progress on BEEP Outcome Indicators

Baseline 1999/2000

Target (2005/2006)

Progress as of September 2005

Gross Enrollment Rate for girls in grades 1 to 6 51 percent 57 percent 62 percent Girls’ share in increased enrollments is at least 60 percent

- 60 percent 55 percent

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Table 8: SECONDARY EDUCATION ENROLLMENTS

Enrollments in Grades 10-12 Rural 2002/03 percent increase compared to

1998/99 Girls 60,406 120 percent Total 292,081 54 percent percent Girls 21 percent 43 percent Urban 2002/03 percent increase compared to

1998/99 Girls 101,218 53 percent Total 257,282 38 percent percent Girls 39 percent 11 percent

Enrollments in Grades 7-12 2002/03 percent increase compared to

1998/99 Girls 533,777 224 percent Total 1,364,129 116 percent percent Girls 39 percent 50 percent Source: Education Sector Investment Project ICR

48. The main IDA support in secondary education was provided through the Education Sector Investment Project. The project helped improve girls’ access to secondary education by creating 17,500 new places through the construction of classrooms and the training of 250 female teachers in math, science, and English. After overcoming initial implementation problems due to complex and ambitious design and substantial restructuring, the project eventually achieved results although it was extended and then closed in September 2004 – three years later than the original closing date. The Secondary Education Review (FY04) which aimed at identifying the needs for assistance at the secondary level, especially for girls, was delayed until FY06. This review was a collaborative effort with the Ministry of Education, and the priority for the Ministry's capacity in FY04-05 was to meet the demands of launching the new Basic Education Development Project. In line with the timing of the sector work, the proposed Girls’ Secondary Education Project (FY05), which was intended to support the expansion in primary education to enable them to move to secondary education has been delayed till FY07.

49. Vocational Training. The Bank succeeded in initiating the policy dialogue between the government and the private sector on sector reforms and helped endorse a Vocational Training (VT) strategy that makes VT system a demand-driven one in accordance with country’s needs. In addition, the government issued a decree that provides more autonomy to the VT centers.

50. The main IDA support for VT was provided through the VT Project which closed in December 2003 and disbursed only limited funds (approximately US$1 million out of US$15 million) during the CAS period. The project focused on (i) strengthening the management of the VT system by providing a major role to the private sector in policy-making, management and financing of the VT system; and (ii) improving the quality and relevance of VT through the enhancement of programs in existing centers33. However, the project was complex (involving

33 Due to delays in Government action, funding from the Dutch and the Japanese did not eventually become available and a third component to reorient adult education and training (AET) programs for women through

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several ministries) and focused on reforming the delivery system (which had not been the previous focus). While the project enhanced the capacity for developing curricula and train trainers, including training of handicapped people, within the industry, other crucial sectors such as agriculture, commerce, and trade were not involved. Furthermore, private sector involvement was limited; the expected establishment of women’s vocational training center was cancelled, and adult education programs for women were not achieved.

51. Bank’s contribution to improvements to Community Colleges led to achieving a high employment rate of graduates. A tracer study of the first 100 graduates of the two colleges financed by the Education Sector Investment Project showed graduate employment rates of more than 80 percent, with a high satisfaction of employers with the graduates’ skills. Building on the success of this initiative, the project established an institutional basis for further expansion.

52. Improving the links between the supply and the demand for technical skills was the main focus of a Vocational Training Strategy (FY04), and will be further accomplished through the Second Vocational Training Project (FY07). The strategy was delivered in October 2004 and the project was delayed from FY05 to FY07. The main issue raised during project preparation was related to the approach to the institutional basis for the Skills Development Fund (SDF) component of the proposed project. This was due to disagreements among stakeholders concerning the governance and operating procedures of the Fund. The issue was finally resolved with the Bank’s support at a Policy Forum in July 2005 and project processing has resumed after the end of the CAS period.

53. Higher Education. The CAS established an ambitious outcome indicator of a 25 percent increase in enrollment in science, technology, and foreign languages with a view of supporting capacity across public and private sectors, which was not achieved within the CAS period. However, the Bank succeeded in developing a national strategy for higher education which was then finalized beyond the CAS period and will be endorsed at a national workshop in early 2006. The strategy emphasizes the critical role of higher education in relation to supporting economic development of growth in Yemen as well as improving the quality of the education system itself. The program to support this outcome was reflected in the modest Higher Education Learning and Innovation Credit of US$5 million which became effective at the start of the CAS period (September 2002). In addition to developing a national strategy for higher education, the project aimed at building capacity and piloting a number of innovations to build the foundation, and inform the design of a comprehensive higher education operation. However, the project faced implementation challenges during its first two years of implementation (primarily problems with retaining a project manager and lack of familiarity with IDA procurement procedures).

Outcome III.2: Improved coverage and quality of health services

54. Implementation of health projects in Yemen has been challenging, and since 1989, none of the five approved projects achieved their intended objectives, with the exception of Health Development I (FY90 exit). Most of the projects had similar objectives and while a limited amount of infrastructure, equipment, and training was provided, none of those efforts was

community participation was dropped as were plans under the second component for selective expansion of two pilot centers.

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sustainable and none of the projects had any substantial institutional development impact. Achievement of this outcome was expected to be measured by: increase in health service coverage (to 65 percent of the population); increase in Government expenditure on health to 2.2 percent of GDP; reduction in child and maternal mortality; and increase in contraceptive use and reduction in fertility rates. The choice of these indicators needs to be reviewed from two perspectives. First, given the primacy of the issue of population control, the narrow focus on reducing fertility rates through higher use of contraceptives was inadequate. Greater focus should have been undertaken to the multi-sectoral nature of the solution (e.g. the long-term impact of girl’s education particularly secondary education in reducing fertility rates). Second, the achievement of these indicators was predicated on a fundamental shift towards integration of service delivery. This integration did not occur, largely because the health reform program which was to provide the framework for integration was never adopted in earnest. Moreover, the Government's decentralization program continues to challenge the ability of the Ministry of Public Health and Population (MOPHP) to effectively manage the delivery of health services: investment decisions are made by the local authorities, leaving the central MOPHP to equip, staff, and run the facilities which may not be in areas considered priority by the MOPHP. Given this lack of strategic framework, and the inability of the central MOPHP to control investment decisions, the improvement in indicators in the PRSP progress report toward achieving coverage targets (63 percent) may not reflect on the ground realities. Finally, the PER for the Health Sector (2005) found Government expenditures on health to be 1.5 percent of GDP in 2003 (significantly less than the 2.2 percent of GDP target of the CAS program).

55. Bank’s achievement of this outcome is currently unsatisfactory due to the ambitious design of the ongoing Health Reform Support Project. The Bank’s project was expected to provide a Package of Integrated Maternal and Child (PIMAC) health services to 1.5 million people (in 8 districts in 4 governorates); and improve effectiveness of national public health programs and resource allocation within the public health sector. With regard to PIMAC, to which over 70 percent of the project resources were allocated, there were two implementation problems: first, efforts to integrate services which had traditionally been provided through vertical programs did not succeed. Second, translating selection criteria into agreement on the actual districts where the project would be implemented took until September 2004 (i.e. two and a half years into implementation). Given extremely slow progress and low disbursements (less than 10 percent of the credit amount of US$27.53 million), the Mid-term Review of the project in July 2005 was used as the basis for restructuring the component. A decision was taken to scale back to selected vertical programs (including immunization), minimize investments in facilities and limit integration of services at the point of service delivery and defer actual program integration to a future Health Sector Review process. An organization and management study to guide the overall development of the health system in project governorates/districts was also recommended. While these restructuring decisions are being implemented, the project’s implementation and development objective were still rated as “Moderately Unsatisfactory” in February 2006.

56. As noted earlier, the Bank attempted to include health, nutrition, water and education within one project umbrella (The Child Development Project) in targeted districts in 6 selected governorates. However, although the explicit recognition of the multi-sectoral linkages was a laudable approach, the Bank has not succeeded in addressing the complexity of implementing several diverse components through one single project. This resulted in unsatisfactory

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outcomes and close to US$6 million (20 percent of the credit) being undisbursed when the project closed as of December 31, 2005. This multi-sectoral approach should have been established in a strategic and integrated manner in the context of the CAS framework as a whole. The CCR attempts to address this aspect by highlighting some cross-sectoral outcomes in the following section.

57. Two other projects also contributed to health sector outcomes. First, SFD II was involved with the construction of health facilities and it is estimated that close to an additional one million people gained access to health units. However, given the problems with the functioning of the health system, the gain from these additional facilities is questionable. Second, PWP II financed construction of 92 rooms in health centers and modest amounts of immunization against tetanus (475 women) and hepatitis (812 persons) and vaccination against six childhood diseases (1550 children).

CROSS-SECTORAL OUTCOMES Infrastructure Support to Education (Outcome III.1) and Health (Outcome III.2) 58. In addition to the availability of education and health facilities, in the context of Yemen’s isolated rural communities it was also necessary to focus on rural access roads. These access roads assisted not only access to facilities but also access to markets for village agricultural outputs as well as for incoming essential commodities.

59. The first phase of the Rural Access Adaptable Program Credit (APC) which commenced in 2001 and was to be implemented throughout the CAS period, is well on its way to achieving its outcome indicators of piloting rural access roads in 4 poverty affected areas and developing low-cost standards for rural roads construction. The intermediate outcome of developing institutional capacity for rural roads program management has also been achieved. The project was extended for 10 months (up to October 31, 2006). At the end of the ten year program, the program was expected to reduce rural access times by 30 percent, costs of transport by 30 percent, prices of essential commodities by 15 percent and to improve poverty and gender outcomes. The triggers for the second phase of the Rural Access Adaptable Program Credit were not met during the CAS period.

60. Bank’s achievement of infrastructure outcomes through the SFD and PWP is satisfactory. First, the SFD’s impact on feeder roads was assessed as highly satisfactory ; SFD II connected 76 networks i.e. feeder roads which provided access to primary and secondary schools and health clinics. As a result of the project, travel time and costs were reported to be reduced by 40 percent on average. The strong community organization structure in Yemen and the major community participation dimension in this project will help sustain the maintenance of the roads. Eighty-six percent of the beneficiary community of rural roads signed an agreement on road maintenance of completed sub-projects. In addition, road maintenance follow-up committees have been established. Second, through the PWP, more than 16 percent of Yemen’s population corresponding to about 5000 communities are now benefiting from the infrastructure improvements brought by the project. The impact of PWP on infrastructure services is not only highly satisfactory but also sustainable. Assurances that future maintenance of sub-projects will be provided were obtained before approval. The substantial institutional set-

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up of the project and the significant community participation were fundamental for its sustainability.

Safety Nets 61. Under PWP II – 92000 person months of work were provided. SFD II promoted labor-intensive activities and generated about 2.4 million person-days in temporary employment and about 11,000 additional permanent jobs. The 2002 Poverty Report assessed that the targeting impact of SFD improved between SFD-I and SFD-II with more funds reaching the poor. However, the PWP funds were not as well targeted being spread across both the poor and the non-poor.

Community Development 62. The SFD benefited about 40 percent of the total population (7 million people) of which 49 percent are female, and generated 8,000 permanent jobs. By making poor communities as part of the solution, SFD projects contributed substantially to meeting CAS outcome. SFD undertook a participatory outcome-based approach to implement three main programs: community development related to social development and infrastructure, capacity building, and micro-finance. In essence, it is more about helping the poor help themselves rather than simply focusing on providing assistance. SFD’s approach based on evaluations at every stage of the project cycle to assess processes and outcomes and take timely and effective corrective measures, helped achieve the intended results satisfactorily. SFD’s value-added lies in cost effective innovations in school design, water harvesting, rehabilitation of traditional water systems, and outreach to special needs groups.

63. SFD II established a demand-driven mechanism that: improved the living conditions of the poor through community development services and supported income-generating activities through the development of small and micro-enterprises. The project targeted the poorest households, with 17 percent of its resources benefiting the poorest decile, 31 percent benefiting the poorest quintile, and 44 percent benefiting the poorest three deciles.

Gender 64. Girls Education. The CAS helped provide the enabling conditions for Girls’ education and contributed to reducing the gender gap, but sustainability remains an issue. In the SFD beneficiary communities, girls’ enrollment rates were almost 20 percent higher than in the comparison group, the proportion of girls enrolled increasing from 42 percent in 1999 to 56 percent in 2003. The Child Development project focuses on improving the ratio of girls to boys enrolled in grade 1 reaching grade 6 by at least 15 per cent in the 6 pilot governorates and improving the minimum level of learning of girls by at least 80 percent.

65. Gender analytical work has made a significant difference in including gender issues in the national dialogue. Through a Gender Assessment Note, it assisted the government in developing a National Gender Strategy approved by the Prime Minister. Despite its use in the national strategy, the Gender Note was never finalized and publicly issued. Gender issues were also addressed in the context of other initiatives: for example, in the context of the Port Cities

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Development project, a note was prepared on Women in Local Economic Development in Aden and was published in December 2006. Similarly, in the context of IFC’s Private Enterprise Partnership (PEP MENA) Program, a women entrepreneur’s training workshop was held in June 2005.

Children At Risk

66. The grant to develop programs that will support Children at Risk (FY04) did not materialize and the objective of implementing programs to deal with children at risk, including housing for 2,500 homeless children and care centers for 6,750 was not achieved. However, analytical work on children at risk provided the basis to initiate dialogue at a national level on sensitive issues such as the magnitude and situation of child laborers, HIV/AIDS; and provided the basis to begin the mainstreaming process and integration of specific activities for at-risk children in the SFD and Basic Education Enhancement Projects.

Research and Knowledge Sharing

67. With the support of the Bank and other donors, a Development Research Forum (FY03) was to be established as an independent Think Tank to Monitor and Evaluate the PRSP, and engage in policy research. None of those expected results was achieved.

68. A Development Information Center (FY04) was to be established in order to bring Yemen closer to the rest of the world in terms of information sharing, training, and research. The Bank signed a three-year agreement with the National Information Center (NIC) to establish a Development Information Network (DIN), specifically a Public Information Facility (PIF) - where Bank publications would be made available to the public - and a Distance Learning Center (DLC) - where training, meetings, etc. could take place over video conference with other countries. The Bank also signed an agreement with the University of Sana’a to establish a Public Information Center which is now operational. The DLC is not yet operational due to high monthly costs which the Telecommunications Ministry would charge the NIC; this matter is still to be resolved.

F. Strategic Pillar IV: Sustaining and Protecting Natural Resources. Moderately Unsatisfactory 69. The CAS identified five major areas of intervention: addressing depletion of groundwater through efficient irrigation technology and better management of groundwater; addressing the loss of soil and watershed through extending modern techniques to rainfed farms and livestock management, and through reduction of flood incidence; reducing pollution through regulation and sanitation investments; mitigating the risk of depletion of fish stocks through better stock management; and mitigating the risk of depletion of petroleum through power sector reform, and through non-oil exports promotion. This evaluation focuses on the first three outcomes (which are considered as one integrated set of water and sanitation outcomes) and on the fourth outcome on fish resources. The fifth outcome on diversification (petroleum depletion and non-oil exports) has been considered in the context of the investment climate outcomes. The CAS should have integrated this outcome under pillar II of business environment.

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70. Pillar Achievements as compared to CAS goals. The institutional framework for water sector development improved during the CAS period, although modestly. A water law was passed and provided a legal basis for treating irrigation and municipal water as a single source. Satisfactory progress towards sustainable water use through rehabilitation and modernization of infrastructure, and through participatory irrigation management was made. Exhaustion of groundwater and soil is being addressed appropriately, but it is too early to evaluate the final achievement at this stage. In Urban Water Supply and Sanitation, availability of piped water increased from once a week to once every four days, and urgent needs of 7,500 and 5,000 households for sewer and water systems respectively were addressed.

71. Bank Assistance. The achievement of pillar IV outcomes depended on the success of four ongoing projects, three new projects (all delivered) and five ESW activities (of which four were delivered):

Table 9: BANK ASSISTANCE UNDER PILLAR IV

Ongoing Lending at start of CAS

Actual Lending

Actual ESW/TA

Planned New Lending not delivered

Planned New ESW/TA not delivered

1.Taiz Municipal development 2. Rural water supply & sanitation 3. Sana’a water supply & sanitation 4. Irrigation Improvement

1. Sana’a Basin Water management 2. Ground water & soil conservation 3. Urban water supply & sanitation

1. Country Water Resources Assistance Strategy 2. Coastal Aquifers Development Strategy 3. Environmental Safeguards 4. Rural Energy (ESMAP)

None 1. Fisheries Management Support

Outcome IV.1: Improved conditions for water availability in place, through strengthened

water depletion mitigation measures 72. Water scarcity being a major environmental/sustainability challenge in Yemen is an issue that has been known since the 1970s. The PRSP correctly noted that one of the key solutions to raising incomes and reducing poverty is agriculture water use efficiency. As most of the water used for irrigation is pumped out of the aquifer, the subsidized prices of diesel play a key role in water over use. While increasing the price of diesel would normally be expected to move farmers towards higher value added crops, the problem in Yemen is the dominance of qat as probably the highest value added crops34. There was also the need to improve traditional systems of rainfed agriculture in order to prevent the significant soil erosion that occurs. Hence, the focus of the CAS on groundwater exhaustion was relevant.

73. However, water conservation (primarily in the agriculture sector which accounts for 90 percent of water use in Yemen) needs to be accompanied by increasing water supply (and importantly also sanitation) to a largely under-served population. This dual challenge is not clearly acknowledged in the CAS outcome which focuses on water use outcome only. It is, however, unclear how the human development outcomes could have been achieved without the water supply and sanitation services. The scale of the water supply and sanitation problem is 34 This problem was highlighted in the Bank’s 1999 Agriculture Strategy document.

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large; for example, in order for Yemen to achieve water and sanitation MDGs, substantial increases in rural coverage will be necessary as shown in Table 10.

Table 10: WATER AND SANITATION INDICATORS AND MDGS

Base (2000-2003) MDGs (2015) Rural water supply coverage target

25 percent 65 percent

Rural sanitation coverage target 20 percent 52 percent Population served Water supply Sanitation

3.4 million 2.8 million

13.6 million 10.9 million

Total rural population 13.8 million 20.9 million Source: CWRAS, 2005 74. Achievements under this outcome can be summarized as follows: The institutional framework for water sector development improved during the CAS period in part due to the Bank’s assistance through its interventions. A Water law was passed in FY03 and provided better clarity on the priorities and regulatory framework of the sector. The law also defined the role of the National Water Resources Authority (NWRA) in water resources management, and reinforced decentralization. However, although public awareness was judged to be high, the impact on change in people’s behaviors was negligible due to subsidized diesel prices. A new Ministry of Water and Environment (MWE) to unify agencies dealing with water issues was created; the water sector was reorganized; and an expectation that the ongoing reforms would have a higher impact was raised. The National Water Sector Strategic Investment Plan was formulated in 2004 and provided a sector investment framework for the first time.

75. The Country Water Resources Assistance Strategy (CWRAS, FY05) identified the Bank’s proposed operational response to seven ongoing reforms: (i) Incentive structure; (ii) Urban water supply and sanitation reforms; (iii) Water conservation in agriculture; (iv) Improvement of public expenditure quality; (v) Decentralization, community partnership, and self-regulation; (vi) Water policy and strategy; and (vii) Rural water supply and sanitation. The Bank therefore has the opportunity to continue the dialogue on water issues beyond the CAS period on the basis of sound analysis (CWRAS). Sector work and Monitoring and Evaluation Framework for its implementation were good steps forward. Although it is too early to assess the impact of the new CWRAS, it is worth noting that this is the first time the Bank undertakes a program approach to the water sector in Yemen considering the linkages between rural and urban uses, and institutional reforms.

76. Public expenditures in the irrigation and urban water sector. On the expenditure side, the Bank’s Public Expenditure Review (PER) had a positive impact on the quality of public expenditures in the irrigation and urban water sector. Some results are noteworthy: with regard to depletion of water, recommendations were made to eliminate public support for groundwater in favor of investments in water use efficiency and in improving sustainable spate schemes; and industry benchmarks were introduced for urban water. The PER concluded that many resources were wasted in developing small dams whose design was not sound and did not improve basin efficiency.

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77. Spate Irrigation. Through the Irrigation Improvement Project (FY01) the Bank is making satisfactory progress towards sustainable water use in two spate irrigation schemes (in Tuban and Zabid), covering 26,000 ha, through rehabilitation and modernization of infrastructure, and through participatory irrigation management (PIM) with the establishment of Water User Associations and Irrigation Councils. Sustainability of the schemes would be ensured through Government budget and user contributions. Further, Bank’s support is expected to increase agricultural productivity and rural incomes through implementation of an intensive demonstration program. The Irrigation Improvement Project is the first phase of an adaptable program credit (APC) to be completed by June 2006 and now extended to June 2007. The second phase of the APC would be initiated when the triggers are met and it would cover the remaining five spate irrigation schemes. The Southern Governorates Agricultural Privatization project was also involved with the improvements to spate irrigation structures, affected 3,530 hectares (and over 14,000 farmers), and erosion control and wadi protection activities affected another 9,000 hectares benefiting 57,000 people.

78. Groundwater and Soil Conservation. Although no measurable outcomes are available at this stage, as Bank’s interventions started later than planned, it is noteworthy that the CAS adequately highlighted the exhaustion of groundwater and soil as key issues, and that the proposed assistance is relevant to addressing those issues. The ongoing Groundwater & Soil Conservation project addresses the issue of aquifer exhaustion from excessive agricultural use and the associated deteriorating recharge conditions in the watershed. This project’s development objective is to help improve water use efficiency through: (i) introducing water saving technologies (improved groundwater conveyance systems for 27,000 hectares and localized on-farm irrigation for 1,700 hectares); (ii) increasing surface and groundwater availability through rehabilitation of small to medium spate irrigation schemes, terrace rehabilitation, bank protection works and other water and soil conservation activities; and (iii) establishing a groundwater management framework and institution to manage local water resources sustainably through capacity building of government water institutions and community groups. The institutional component addresses some of the criticisms of the CAE and supports the institutional development of key sector institutions such as the Ministry of Agriculture & Irrigation; the Ministry of Water & Environment; and the National Water Resources Authority. The institutional development activities supported include: demonstration farms and wells; the establishment of an Irrigation Advisory Service; a public awareness campaign and the establishment of Water User Associations. The project will be implemented through October 2009.

79. The Sana’a Basin Water Management Project is an Adaptable Program Credit (APC) operation, over 15 years, to be implemented in three phases. The Program Objective is to seek long-term solutions and promote sustainable groundwater management in the Sana'a Basin. Ultimately, given the recharge of the deep aquifer is very limited, the key goal is to extend the life span of the aquifer through reductions in groundwater abstractions through irrigation efficiency improvements. The first five-year phase of the Project (approved in late FY02 and to be implemented through the end of FY09) focuses on: increasing the efficiency of agricultural water use within the Sana'a Basin; and accelerating aquifer recharge to allow for a gradual shift to a less water-based rural economy. The objectives will be attained through the following components: (i) demand management and irrigation improvement; (ii) supply management and recharge improvement; (iii) institutional development and capacity building (improving the

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analytical data base for water resources management); (iv) information and public awareness; (v) environmental management and mitigation program; (vi) project management and monitoring; and (vii) follow-on-project preparation. The objective of this project is also relevant to the CAS and PRSP, and addresses CAE’s concern as it focuses on demand management and on institutional capacity building, through the improvement of the analytical and database for water resources management. Despite some implementation delays, the project’s outcomes are likely to be achieved on the grounds that irrigation improvement efforts are in place and farmer demand for efficient irrigation technology is rising. There is however a concern that the equity in benefits for the irrigation investments to poor farmers may not be addressed.

80. Rural Water Supply and Sanitation. Bank program for the Rural Water and Sanitation sector was implemented through the ongoing Rural Water Supply and Sanitation Project (RWSS, approved in FY2001), and the activities under the SFD II, Public Works II and Child Development Projects.

81. The RWSS Project introduced a demand-driven and participatory approach designed to ensure RWSS schemes coverage in six governorates; and assisting the government in strengthening local capacity. The project has been extended by eighteen months to June 2007 and is likely to achieve its development objective for construction and/or rehabilitation of 130 RWS projects serving a total of 400,000 people in six governorates. The associated rural sanitation and hygiene education are more modest and also likely to be achieved.

82. Similarly, the SFD II also funded water harvesting schemes. However, its projects have been less successful in improving the well-being and economic integration of its target population. Women and children still have to collect and carry water from most of SFD II water schemes, and the water from open cisterns and dams is unsuitable for drinking without treatment35.

83. Urban Water Supply and Sanitation. Three projects supported this outcome: the Sana’a Water Supply and Sanitation Project (SWSSP) which closed in June 2003; Taiz Municipal Development Project; and the Urban Water Supply and Sanitation APC Phase I. Under Sana’a Water Supply and Sanitation Project, Bank’s intervention contributed to: increasing the availability of piped water from once a week to once every four days; reducing unaccounted for water; and addressing the urgent needs of 7,500 and 5,000 households for sewer and water systems respectively. It also contributed to transforming the Sana’a Water and Sanitation Authority into an efficient and technically and financially well performing corporation but the corporation could not comply with the project’s revenue covenants. However, its progress laid the ground to corporatize other branches of the Authority. Due to lack of specific attention to water resources management, IEG rated the outcome of this intervention (SWSSP) as Moderately Satisfactory36.

84. Bank’s assistance under the Urban Water and Sanitation Project APC (UWSS, FY03) sought to achieve four objectives: a significant increase in water supply and sewerage services in project cities; establishment of a sectoral regulator and local corporations in Al-Hodeida, Al- 35 Source: SFD II ICR 36 “abstraction of groundwater was 1.5 times recharge, and the water table was declining at about 6 meters per annum.” PPAR on water.

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Mukalla and Taiz; increase in private sector participation in Sana’a; and improved eligibility of the project cities for on-lending under the second phase of the project. The assistance remains relevant to the CAS and PRSP. The project is currently undergoing its Mid-Term Review and is reviewing the impact of accumulated implementation delays, and the progress towards the triggers to move to phase 2 of the APC.

85. Flood Protection. Over the past three years, the loss of life due to flooding has been reduced by 50 percent in Taiz and eliminated altogether in project-affected areas. Damages to residences have been reduced by 98 percent over the past three years and damages to businesses reduced by 50 percent city-wide. Those achievements were accomplished through the Taiz Municipal Development and Flood protection Project that financed 8 km of flood protection structures to protect city residents and businesses from seasonal flash floods.

THE ISSUE OF QAT 86. This was a difficult issue with many implications – on water use, on health and on productivity of the workforce – and the 2001 CAE criticized the Bank for not taking sufficient actions on the qat issue. The CAE noted that “IDA could have argued that qat production should be neither protected nor subsidized; it could have urged import liberalization for qat as part of trade liberalization”. The PRSP did not identify the production and consumption of qat as an issue except with regard to the high usage of irrigated water. In line with the PRSP, the CAS program matrix did not identify any direct actions on qat production and consumption37. The only project to directly address this issue was the Groundwater and Soil Conservation Project but its contribution was limited to excluding qat farms from those farms that could benefit from project activities. The new CAS should address this question more substantively. The challenge is that there is little social consensus in Yemen around the need to address this problem and it is likely that an extended period of changing social attitudes may be necessary.

Box 3: QAT CHALLENGES Qat plays a major economic role in the Yemeni economy. Qat’s contribution to GDP of 10 percent, including direct and indirect effects, equals two-thirds that of oil. One-third of agricultural GDP, the main source of income in the rural Yemen, is from Qat. Qat is the second largest employer, employing one in every seven working Yemeni, even surpassing employment in the public sector. The negative effects of Qat are grave. It depletes scarce water resources, deprives agricultural exports, lowers domestic savings, wastes human resources, and damages health. Since Qat is an irrigated crop with unmatched profitability, one-third of all ground water abstraction for all other uses (agricultural, industrial and residential) is utilized for Qat cultivation. The area under Qat has expanded 13-fold in the last three decades, displacing areas that could have been planted with exportable coffee, fruits and vegetables. If the expenditures on Qat were to be saved, savings would have been higher by 5 percentage points of GDP. If the poor families put the money spent on Qat to good use, the percentage of poor would be lower by 6 percentage points. The culture of spending extended afternoon hours chewing Qat is inimical to the development of a disciplined work ethics, with nearly one-quarter of usable working hours wasted. The adverse health effects of Qat are many: high blood-pressure, under-weight children (when pregnant women chew Qat), and cancer (from pesticide residues). Overcoming the obsession of chewing Qat is a critical and complex task for Yemenis. It is far too well integrated into the Yemeni economy and society to be abruptly ended without serious short-term adverse effects. Beyond prohibiting chewing Qat in government offices, the government and all other stakeholders in development must set up a campaign and rehabilitation policy that help Yemenis realize their full development potential. Source: DPR, 2006

37 Production of qat accounts for one third of agricultural GDP, and absorbs a significant quantity of Yemen’s scarce water.

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Outcome IV.2: Efficient mitigation measures against depletion of other natural resources (coastal fisheries) and against pollution in place 87. Under this outcome, the Bank conducted an environment Safeguards Review that aimed at strengthening the capacity of the Ministry of Environment.

88. The Fisheries Management Support and Agricultural and Maricultural Exports studies were not delivered as planned, and the expected delegation of coastal stock management duties to cooperatives and associations, along with the training programs were not achieved.

V. MEASURING BANK PERFORMANCE A. Quality of Products and Services A. 1: Volume, Lending Instruments, and Costs 89. The CAS projected IDA credits with a total Base-case amount of US$410 million. Actual IDA credits during FY03-05 totaled US$387.4 million representing 6 investment projects out of the planned 11 projects, and 1 not initially planned investment project [Public Works III]. Of the 6 projects, 1 was an Adaptable Program Credit [Urban Water Supply and Sanitation]. Although 5 projects were not delivered, the small gap between the planned IDA amount and the actual amount is explained by the increase in the credit amounts of 2 projects [Groundwater and Soil conservation; and Second Basic Education Expansion], and by the addition of the Public Works III project. 3 projects were rescheduled for FY06-07 and 2 projects were dropped [CSMP II; and District and Community Development]. The total cost of dropped projects stood at US$300,000 with the District and Community Development project contributing US$220,000. Average preparation costs were the highest in the region in FY03 (at US$619,000), but declined in the following years of the CAS period to below MNA’s average costs.

A. 2: Analytical and Advisory Services (AAA) 90. The CAS highlighted the need for an increased focus on knowledge products and services to support long-term reform programs mainly in the area of public sector governance, and advocated the initiation of the Programmatic Non-Lending Services. Several activities were planned in the CAS, however the lack of a monitoring system to track their delivery and dissemination made it difficult to get an accurate evaluation of the actual number of AAA and their impact. In the new CAS period, there is room for improvement in dissemination and internal record-keeping.

91. Most of the actual non-lending activities made progress late in the CAS period and therefore did not achieve their expected results; however, several unplanned activities were undertaken. The unplanned “Budgetary and Poverty Impact of Petroleum Pricing” study made a significant impact, albeit with some disconnect in implementing the study’s recommendations. Other achievements made through AAA are in the Public Finance Management (PFM), anti-corruption, and gender. A PFM reform strategy was approved by the cabinet and a Ministerial committee was established to oversee the implementation of the PFM action plan; an anti-

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corruption commission was established following the CFAA’s recommendations; and analytical work on gender helped the government develop a National Gender Strategy. However, 2 key products were delayed: the Development Policy Review and the survey results of the Investment Climate. In addition to focusing on the strategic relevance, coherence, and cross-sectoral integration of the AAA, the new CAS should also ensure that inputs and processes are adequate, that timing is appropriate for maximum impact, and that dissemination and follow-up take place and are adequately monitored.

A. 3: Responsiveness to Clients 92. The Country Office in Yemen played a major role in coordinating CAS activities and following-up on portfolio performance. However, experienced Task Team Leaders need to be closer to the client to support implementation of reforms. Most complex projects such as the Civil Service Modernization and Health projects, could have benefited from a greater presence in the field. Total staff in Yemen declined from an average of 26 during CAS99 period to 19 at end CAS02, but the presence of fiduciary staff was strengthened by the assignment of an International Procurement Specialist. In the area of portfolio management, the Country Manager in Yemen and other staff are members of a Country Portfolio Performance Review (CPPR) follow-up committee involving senior officials from the Ministry of Planning and International Cooperation, and the Ministry of Finance.

A. 4: Coordination with Development Partners, Harmonization, and Trust Fund Activities

93. Donor support to Yemen stood at around US$200 million during the FY03-05 period and IDA resources constituted roughly half of this amount. Other donors included the Arab Funds, European Union, Germany, the Netherlands, the United Kingdom, and the UN system. The relatively small number of donors and the focus of each donor on particular sectors/themes (e.g. the water sector dominated both German and Dutch assistance) facilitated a high degree of collaboration between donors. Donor experiences with project implementation in particular sectors were largely similar to those reported in the CAS completion report.38 While the IMF did not have a PRGF program, it regularly undertook Article IV consultation and was involved with providing a substantial program of Technical Assistance which progressively diminished by FY2005. 39

94. Harmonization around government strategies focused on education, water and public financial management, and accelerated at the country level towards the end of the CAS period in the context of the Fragile States Initiative. The new CAS will benefit from greater harmonization efforts as all donors are preparing their strategies at the same time.

95. Thirteen Trust Fund activities with a total amount of US$125.7 million became effective during the CAS period aiming at supporting project preparation, capacity building, and project implementation.

38 This was revealed through donor meetings during the first round of CAS consultations as well as was based on the following evaluation reports. 39 An evaluation conducted by IMF’s Independent Evaluation Office rated the TA as unsatisfactory.

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A. 5: Portfolio Performance and Risk Management 96. Portfolio performance improved over the CAS period. At end-FY05, Yemen’s portfolio (17 projects) was the second largest in MNA, with two major sectors (Water Supply and Sanitation, and Education) accounting for 40 percent of the commitments. Frequency of CPPRs and follow-up to CPPR recommendations contributed to manage portfolio risks and reduce commitments at risk from an average of 12 percent in CAS99 to 8 percent in FY05. More focus on quality at entry and readiness for implementation resulted in a reduction of effectiveness delays from 7.6 months before FY00 to 5.3 months during CAS02. The target in 2005 CPPR was to reduce effectiveness delays to less than three months. While Realism index remained the same as in previous CAS period (83 percent), Proactivity declined from 72 percent to 58 percent due to the long-term problem status of the Civil Service Modernization Project. Disbursement ratios were above MNA’s ratios in CAS99 period, but declined from 17 percent in FY02 to 15.8 percent in FY05, slightly below MNA’s ratio of 16.3 percent. It was reported that heavy disbursement procedures hinder effective project management.

97. Average Supervision resources increased from US$54,000 in FY03 to US$103,000 in FY05, bringing the average resources for CAS02 period to US$77,000 slightly above MNA’s average of US$73,000. The increase in supervision efforts did not result in an improvement in supervision quality as IEG ratings for Bank Performance at Supervision show a decline from 92 percent in CAS99 to 62.5 percent in CAS02. However, the average six-year trend (FY00-05) shows a ratio of 80 percent “Satisfactory”.

98. Outcomes are Moderately Satisfactory but Sustainability is of concern. Yemen’s percentage of “Moderately Satisfactory” to “Highly Satisfactory” Development Outcomes (75 percent) of projects that exited during CAS02 period is higher than the overall regional average. The FY00-05 trend shows a similar result of 75 percent. When evaluating the success in achieving development outcomes, it is important to note that, with the exception of Public Works project with a “Highly Satisfactory” rating, all other projects that exited in CAS02 period were rated “Moderately Satisfactory” for Development Outcomes. More efforts are indeed warranted to achieve fully satisfactory results. Although Monitoring and Evaluation is rated “Satisfactory” or “Moderately Satisfactory” in all ISRs, Performance Indicators to track the progress towards the achievement of projects’ development objectives (PDO) need more clarity for better measurement. In some cases, where indicators are well defined, they are not used in the PDO’s rating explanation. In other cases, a long list of indicators makes it difficult to track the essential intermediate indicators through which the PDO rating should be justified. Sustainability declined from 75 percent in CAS99 to 67 percent in CAS02, bringing the Sustainability level below the Bank’s average of 78 percent.

99. Development Impact Risk is high since project implementation arrangements do not support Institutional Development objectives. Despite recommendations emphasizing the need to enhance the Institutional Development Impact of the Bank’s interventions in Yemen (e.g. highlighted in IEG’s CAE99), the percentage of closed projects with “Substantial” Institutional Development Impact declined further from 33 percent at the CAS99 period to 25 percent during CAS02. The institutional development objectives are evaluated from two perspectives: first, the extent to which projects focused on capacity building goals (for Government and public sector

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entities, non-governmental and community-based organizations and the private sector) and second, the extent to which project implementation was mainstreamed40.

100. Of the seven projects approved during the CAS period, the three water projects all focused on strengthening the role of community organizations (i.e. Water User Associations) and the Urban Water Supply project also focused on strengthening the role of corporatized water entities. The Social Fund and the Public Works Projects continued with established procedures for community development as part of program delivery. The Port Cities Development project focused on building the capacities of Local Economic Development departments in the cities included under the program. The Basic Education Development Project includes activities to support the restructuring of the Ministry of Education and to enhance community participation in the education sector.

101. Implementation Arrangements. Enclave project entities performed two functions in Yemen’s context. First, given weak fiduciary systems in Yemen, some units ensured compliance with World Bank procurement and financial management requirements (some units were called Credit Administration Units to highlight this role). Second, given the lack of progress on pay reform and performance management initiatives under the Civil Service Reform program, there were concerns that mainstreaming activities into relevant Government ministries and agencies would lead to slow or limited implementation progress during the project period. This led to the use of Project Implementation Units which made operational decisions and undertook or managed implementation41. The evaluation focused on whether the designed use of the PIU model diminished in new projects developed during the CAS period and the conclusion is that to a greater or lesser degree all seven projects continued to use this approach. Two projects (SFD III and PWP III) were designed to be implemented by legally enclave entities. The three water projects (Urban Water, Sana’a Basin and Groundwater) were designed to be implemented through the extensive use of PIUs. The Education project was mainstreamed to a large extent and the Port Cities Development Project was designed to be implemented through the Local

40 Given weak fiduciary systems in Yemen, it is assumed that there was a continuing need during the CAS period to enclave procurement and financial management activities in World Bank projects. 41 As the PAD for a project put it “ …the reason for this business approach is that the project starts-up rapidly …..the PMU will be dissolved at the end of the project”.

75%

75%

67%

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Outcome % Satisfactory

Sustainability % Likely

Inst Dev Impact %

Substantial CAS99

CAS02

IEG Assessments

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Economic Development Departments of the concerned cities. With the exception of only one project, all new projects did not include specific future arrangements for integration of the PIUs into their line ministries to ensure sustainability and retain the capacity in the government.

A. 6: Fiduciary and Safeguards: Assessment and Recommendations for the New

CAS 102. Given the high fiduciary risk in Yemen, this CCR highlights the areas of improvement and proposes specific recommendations for the new CAS.

Financial Management

103. The Financial Management (FM) Project Risk as per the Risk Management tool (RapMan) is one of the highest in the region (41 percent). The main systemic FM issues are related to Internal Controls, Staffing, Auditing and Reporting. The suggestions for the new CAS include a comprehensive supervision plan to be prepared to include technical audits for the projects on the watch list, and combined ex-post reviews and SOE reviews by the fiduciary team. In addition, there is still a need to address country systems’ improvements.

Procurement 104. The limited capacity in project implementation was partly linked to the equally limited capacity in procurement. Most projects suffered from: (i) inadequate staffing of the procurement function, (ii) lengthy contract processing periods taking longer than bid validity periods, which impacted bid prices and confidence of bidders; conflict of interest; and payment delays to contractors and consultants. Recommendations for the new CAS include:

• Lowering procurement thresholds, conducting joint Procurement and FM ex-post reviews of contracts below the prior review thresholds to help ensure consistency; and introducing technical/operational audits prior to the mid-term review of all projects.

• Agreeing with the government on a Memorandum of Understanding that enforces a strict adherence to procurement processing schedule and prevents delays in contract processing.

• Enhancing disclosure through more structured public postings of annual procurement plans, procurement audit reports, and mid-term review reports.

• Enhancing procurement post reviews with new techniques on fighting fraud and corruption.

Safeguards 105. The Bank conducted a safeguards portfolio review, including a field review of risky projects conducted over the CAS period, and provided Technical Assistance (TA) to the Environmental Protection Authority (EPA). The TA aimed at (i) reviewing existing laws, bylaws, and regulations, (ii) providing assistance in preparing sectoral guidelines, and (iii) training EPA staff. At the project level, the review showed that many category B Project Management Units do not identify specific staff responsible for implementation of safeguards

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mitigation measures. In addition, Safeguards appear to be a high priority only in project preparation, but not during supervision. Recommendations for the new CAS include:

• Strengthening national Safeguards compliance through (i) improving line ministries’ capacity to comply with national laws; and (ii) direct support to the EPA to enhance its capacity to monitor and enforce compliance.

• Increasing supervision focus on Safeguards and enhancing monitoring and reporting on Safeguards compliance.

B. Building Capacity in Yemen: The role of World Bank Institute (WBI).

106. The CAS acknowledged that the most formidable challenge to Yemen’s development is weak institutional capacity; and it envisaged a more integrated approach to capacity development calling upon the intervention of WBI as a full-fledged partner in support of the realization of CAS objectives. In response, at the launch of the WBI Focus Country initiative in FY03, Yemen was one of the countries to be selected as part of the pilot phase. This allowed the country to benefit from customized and strategic support to the government’s capacity building needs through the Country Team’s lending and non-lending program. The first two years under this program, WBI took the opportunistic approach of inviting Yemenis to participate in regional and global events that pertained to their development challenges. This served as an effective means of orienting the participants to WBI’s programs, and allowed the institute to better understand capacity issues in the country.

107. To further enhance the program, WBI consolidated its interventions and adopted a multi-year country focus program in FY05. The multi-year program for Yemen was closely aligned with the FY03-05 CAS focusing on each of the four CAS pillars. The interventions provided tailored knowledge sharing focused on decentralization and local government capacity building; health sector reform; access to education through the “Education For All” program; Pension management; and Water resources management in the context of developing the National Water Strategy. Although WBI had planned to deliver a Financial Sector Capacity Enhancement Program, the program was canceled due to timing and readiness in the country. WBI complemented these programs with regional/global programs to facilitate exchanges of knowledge and strengthening communities of practice.

108. While modest in size, WBI was able to make a number of achievements through the multiyear country focus program. Evidence of the change is marked by a steady increase in participation of Yemenis to WBI activities growing from an annual average of 68 participants in FY03 to 398 in FY 06. The Level 1 evaluation results of three activities implemented in FY05 indicated the programs to be of relevance ranking above the FY04 benchmark of all WBI programs. The results also indicated that the activities’ average “overall usefulness” to be at 80 percent, meeting the exact benchmark set for WBI FY 05 programs.

109. Amongst the country focus multi-year interventions, deliveries include:

• “National Water Sector Strategy and Investment Plan (NWSSIP) workshop” as part of the MNA Region’s programmatic ESW assistance. The workshop met its

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objective of presenting the final policy matrix for the national plan to key stakeholders and providing a forum for discussion and development of a monitoring and evaluation program for the water strategy plan. The workshop held discussions on the advisability and feasibility of establishing a Groundwater Task Force to oversee the rapidly diminishing groundwater resources of the country. A series of facilitated working groups addressed the various key issues and provided a framework for the establishment of a practical monitoring and evaluation program.

• Education program on Strengthening EFA Implementation which was delivered through a series of 6 video conference events with the main objective of helping the participants gain an understanding of the Fast Track Initiative (FTI) in terms of how it operates, and changes it has faced since its inception in 2002. The program, delivered in Arabic, also introduced participants to best practices from other countries.

• The Senior Policy Seminar on Analyzing Health Sector Performance was prepared in close collaboration with the Ministry of Health and the American University of Beirut. The main objective was to support the MOH in thinking through the formulation of its next 5-year plan and assist in prioritizing interventions. High level government officials from various ministries and several donors attended the seminar. The donors showed interest in the possibility of implementing the different Flagship modules and customize them for Yemen.

• Decentralization and Improving Governance: WBI conducted needs assessment of training needs for local government in FY05. It will continue to assist the Ministry of Local Administration on the development and implementation of its national training program for building capacity of local administrations in FY06, in close alignment with the Taiz Municipal Development and Flood Protection Project.

C. International Finance Corporation (IFC)

110. IFC’s portfolio during the CAS period included three operations but none of them was approved during the CAS period: Radfan ceramics and porcelain manufacturing (FY 98), Aden Company for Silos and Mills (FY 99), and Al-Ahlia Mineral Water Company (FY02). All investments have contributed to employment generation and poverty reduction, in line with the objectives of the 2002 Yemen CAS. The bottled mineral water produced by Al-Ahlia supplies several cities in Yemen, including the capital city Sana'a, as a quality import substitution product, and the operation contributed to creating 100 jobs.

D. Multilateral Investment Guarantee Agency (MIGA)

111. MIGA has had no activities in Yemen and none were under preparation during the CAS period.

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VI. LESSONS LEARNED AND RECOMMENDATIONS FOR SUBSEQUENT CAS DESIGN

112. Yemen is considered to be a Fragile State i.e. it is among a group of countries where: (a) state policies and institutions are weak making them vulnerable in their capacity to deliver services to citizens, control corruption or provide for sufficient voice and accountability; and (b) there are risks of conflict and political instability. Yemen is in the initial group of pilot countries where the OECD Principles for Good International Engagement in Fragile States are being implemented and an Aid Harmonization Assistance unit in the Ministry of Planning and International Cooperation is leading this effort. There are twelve principles that can be clustered into four themes. First, a long-term focus on state capacity and accountability is critical. Second, political, security and development linkages are particularly important. Third, particularly close partnerships between international actors are needed to ensure delivery of results. Fourth donor organizational responses must be calibrated to the specific needs of fragile states particularly with regard to acting faster and more flexibly, staying engaged for the long-term and addressing problems of aid orphans and aid volatility. Within the typology of Fragile States, Yemen exhibits most of the characteristics of a gradual reformer. 42 A recent Bank-wide review of progress in the implementation of CASs in Fragile States drew several lessons which are similar to those identified under this Completion Report.

113. CAS Results Selectivity: Striking the correct balance. Given that donor assistance to Yemen is extremely limited, donor projects need to balance competing goals of delivering immediate results (essential to build confidence in public service delivery in a Fragile State) and improving the long-term delivery capacity of Government’s systems. The Bank will need to continue balancing two competing priorities:

• Deploying its instruments to achieve the best balance between improving country systems (and thereby leveraging Yemen’s own substantial resources) and, given pervasive capacity and governance weaknesses, focusing on delivering more immediate results through its own interventions;

• Deploying its instruments to assist the Government in dealing with a shorter-term growth (and fiscal crisis) and with long-term development challenges (improving human capital and managing scarce water resources).43

114. It is noteworthy that in supporting the Government in improving country systems and in addressing the shorter-term crisis, the Bank program primarily consisted of non-lending

42 The World Bank typically considers countries as Fragile States if the CPIA is below 3.0 and marginal Fragile States if the CPIA is below 3.2. Yemen’s CPIA rating is slightly above the marginal level. The typology of Fragile States consists of countries in deterioration; prolonged crisis or impasses; post-conflict or political transition; and in gradual improvement. See Fragile States – Good Practice in Country Assistance Strategies, The World Bank, 2005. 43 The growth crisis (rapid depletion of oil resources) was to be addressed through enhancing non-oil growth through improving productivity via short-term measures (improving the environment for private investment) and long-term measures (improving human capital) and translating any given level of growth into higher per capita growth by controlling population growth (an increase of 500,000 persons per year). The associated fiscal crisis was to be dealt with through increased fiscal revenues from non-oil sources and decreased expenditures (both subsidy reduction and wage bill management).

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services44. The Bank’s lending program was focused on delivering more immediate results and in addressing the long-term development challenges of improving human capital and managing scarce water resources45. The new CAS would need to consider whether country system improvements and addressing the short-term growth crisis requires lending assistance. This could consist of making investments in productive sectors in urban and rural areas (particularly for the poorer part of the population) and policy based lending to support fiscal reform.

115. Developing Long-term partnerships: Working within the context of a Government led program with other donors. Bank programs that have experienced some success in Yemen have been supported through an appropriate sequencing starting with assisting the Government in formulating a sector strategy and financing plan; working with other donors to ensure that the plan is adequately funded; and providing IDA loans in the context of this financing plan. This takes much longer than going directly to providing financing but attempts to deviate from this sequencing have been less than satisfactory. The education sector is a good example of where this sequence has worked although it has taken about five years to get from the broad vision to successful implementation. The Public Financial Management (PFM) thematic area is another good example; where a PFM Plan was approved by the Cabinet, endorsed and funded by key partners and where the Bank’s CSMP will help to implement a key part of the plan. The water sector is moving along a similar path with the NWSSIP, the CWRAS and intensive discussions among donors to move to a coordinated financing plan and implementation approach.

116. Strengthening State Capacity and Accountability. In a Fragile State environment, the Bank’s approach to mainstreaming its activities into Government ministries is an extremely contentious issue particularly given the Bank’s international commitments to move away from PIUs. On the one hand, experience clearly showed that in Yemen, it was only enclave institutions that consistently delivered outputs (the Social Fund and the Public Works Program) and to a lesser degree of consistency, PMUs delivered outputs. On the other hand, the Bank reacted to criticism from OED and other in-country donors that it was not “building capacity” and attempted in its newer projects to move to lighter coordination structures and transfer more implementation responsibilities to the line ministries. However, in the absence of clear incentives for service delivery (both low pay and the absence of performance measurement/incentive systems), projects that attempted to “mainstream” ran into problems. For example, the Health Reform Support Project chose a lighter project coordination structure (an IDA Credit Administration Unit) and attempted to implement activities through relevant departments. However, civil servants who normally work only half the day, were expected to stop moonlighting and focus on credit implementation for the entire day could not be motivated, according to the Bank’s rules, through additional payments to keep them on the job. The lessons for the new CAS are that actions to move away from PMUs and mainstream implementation need to be considered on a sector-by-sector basis taking into account the pace of actions to strengthen fiduciary systems (procurement and financial management) and implementation capacity (progress in sector level civil service restructuring). An alternative 44 The Port Cities Development project and the Civil Service Modernization project (the latter being a large Technical Assistance project) were the only lending activities supporting the growth/fiscal agenda. 45 Infrastructure investments (rural roads and power) were undertaken more in support of long-term challenges rather than as an integral part of the growth strategy of the CAS. Similarly, the focus on secondary education was not based on its impact on population control but as part of the long-term human development.

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approach is to formalize and provide greater autonomy to enclave entities (e.g. the Social Fund for Development and the Public Works Project) bearing in mind the need to ensure sustainability of results.

117. Greater Readiness and Implementation Focus: non-lending products. In the preparation of the CASCR (and in the IEG completion of the CAE and during the CAS consultations in November 2005), it was noted that several pieces of Economic and Sector Work had been initiated, reached a stage where the work was discussed with the Government counterparts but the reports were never publicly disseminated46. Four problems were identified: inadequate management of analytical and advisory services by the Bank which led to fragmentation and lack of publication of several reports; recommendations made by the Bank were not systematically implemented (either due to disagreements at technocratic or policy levels or due to non-approval by the legislature); there was no process of periodically reviewing progress in implementing policy recommendations before making new ones; and the Bank did not effectively leveraged its Economic and Sector Work to influence key stakeholders outside the Government through wide spread dissemination. The lessons for the new CAS are: to ensure a clear process of managing the portfolio of AAA (in a manner similar to lending with a country level oversight process similar to the CPPR); and to better utilize the institutional infrastructure (the Public Information Centers (PICs) and the Development Information Network), focus on disseminating individual reports and on the re-packaging of key messages of reports into “popular versions” which can be more readily disseminated to the population at large.

118. Greater Readiness and Implementation Focus: Lending program. Most of the new projects prepared during the CAS period suffered from over-optimism about their readiness to be implemented: this related in part to under-designed projects (e.g. the Health Reform Support project); complex projects (e.g. the Child Development Project which attempted to coordinate education, health and water activities within the same project); or projects that had been suitably designed but where necessary implementation pre-requisites (e.g. procurement bid packages) were not adequately addressed. The lessons for the new CAS are to ensure a more systematic application of available “readiness filters” particularly with regard to ensuring that procurement packages are ready for issuance prior to project negotiations and Board presentation.

119. Monitoring and Evaluation for Development Effectiveness. The CAS did not have a Sound Results Framework that could be monitored to take timely corrective actions and ensure results on the ground. In addition to designing a Results Framework, the new CAS should explicitly set the mechanisms for Monitoring the framework, the responsibilities for reporting on progress towards achievements of CAS outcomes, and the use of evaluation information for decision-making.

46 The Bank’s external website leads users to less than 5 reports on Yemen for the CAS period.

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owth

B

ette

r inv

estm

ent c

limat

e th

roug

h m

acro

stab

ility

, im

prov

ed

busi

ness

regu

lato

ry e

nviro

nmen

t, en

hanc

ed se

curit

y, m

ore

secu

re

prop

erty

righ

ts,

impr

oved

acc

ess

to fi

nanc

e, a

nd p

hysi

cal

infr

astru

ctur

e (w

ater

, pow

er &

ro

ads)

(II.1

) R

educ

ing

the

role

of t

he st

ate

in

com

mer

cial

act

iviti

es in

clud

ing

the

finan

cial

sect

or (I

I.2)

Impr

oved

con

ditio

ns fo

r w

ater

ava

ilabi

lity

in p

lace

, th

roug

h st

reng

then

ed w

ater

de

plet

ion

miti

gatio

n m

easu

res (

IV.1

) Ef

ficie

nt m

itiga

tion

mea

sure

s aga

inst

dep

letio

n of

oth

er n

atur

al re

sour

ces

(pet

role

um a

nd c

oast

al

fishe

ries)

and

aga

inst

po

llutio

n in

pla

ce (I

V.2

)

Pilla

r IV

: Su

stai

ning

and

pr

otec

ting

Nat

ural

R

esou

rces

- 41

-

App

endi

x 2.

CA

S C

ompl

etio

n M

atri

x

2002

CA

S St

atus

at C

ompl

etio

n (F

Y 0

5)

Les

sons

Lea

rned

and

C

onsi

dera

tions

for

new

CA

S C

ount

ry D

evel

opm

ent G

oals

Th

e 4

goal

s lis

ted

in th

e ne

xt

colu

mn

aim

ed a

t sup

porti

ng th

e fo

llow

ing

chal

leng

es:

• H

igh

popu

latio

n gr

owth

, pa

rticu

larly

its g

eogr

aphi

c di

strib

utio

n aw

ay fr

om

wat

er re

sour

ces.

• W

ater

scar

city

and

poo

r w

aste

trea

tmen

t, an

d th

e re

late

d ne

gativ

e im

pact

on

agric

ultu

re.

• W

eak

hum

an re

sour

ces,

linke

d w

ith p

oor h

ealth

co

nditi

ons,

lack

of

educ

atio

n st

anda

rds a

nd

adeq

uate

voc

atio

nal

train

ing,

and

lack

of

capa

bilit

ies a

nd

oppo

rtuni

ties f

or w

omen

. •

Wea

k go

vern

ance

and

in

stitu

tiona

l cap

acity

of t

he

stat

e in

clud

ing

over

staf

fing,

th

at le

d to

a h

eavy

wag

e bi

ll, c

orru

ptio

n, a

nd w

eak

judi

ciar

y sy

stem

. •

Fast

dep

letin

g oi

l res

erve

s.

• H

igh

fisca

l sus

tain

abili

ty

risk.

Goa

ls:

• A

chie

ving

eco

nom

ic g

row

th

• D

evel

opin

g hu

man

reso

urce

s •

Impr

ovin

g in

fras

truct

ure

• En

surin

g so

cial

pro

tect

ion

Lim

ited

prog

ress

was

mad

e.

• Po

verty

inci

denc

e: fr

om 4

1.6

to

40.1

•

Rea

l GD

P gr

owth

per

ann

um:

2.8

perc

ent (

com

pare

d to

a ta

rget

of

5.4

per

cent

) •

Popu

latio

n gr

owth

: fro

m 3

.5

perc

ent t

o 3

perc

ent

• p

erce

nt o

f pop

. with

acc

ess t

o ur

ban

wat

er: f

rom

64

perc

ent t

o 62

.4 p

erce

nt

• p

erce

nt o

f pop

. with

acc

ess t

o ru

ral w

ater

: fro

m 5

5 pe

rcen

t to

33.8

per

cent

•

Num

ber o

f ben

efic

iarie

s of

soci

al w

elfa

re a

nd a

ssis

tanc

e:

from

450

160

to 6

0061

0.

• Li

mite

d re

sour

ces a

nd w

eak

gove

rnan

ce h

ave

mad

e it

even

m

ore

chal

leng

ing

to a

ddre

ss

the

high

pop

ulat

ion

grow

th.

• O

il de

pend

ency

agg

rava

ted

Yem

en’s

situ

atio

n an

d w

ill

incr

ease

its v

ulne

rabi

lity

even

m

ore

as o

il re

venu

es d

eclin

e.

The

new

CA

S sh

ould

add

ress

th

e no

n-oi

l gro

wth

and

its

impa

ct o

n th

e ec

onom

y, a

nd

cont

inue

its c

all f

or e

xpor

t di

vers

ifica

tion.

•

The

slow

dow

n of

eco

nom

ic

refo

rms a

ffec

ted

the

gove

rnm

ent’s

abi

lity

to

achi

eve

its g

oals

.

• Th

e go

vern

men

t per

ceiv

es

corr

uptio

n as

a se

rious

issu

e an

d is

con

side

ring

join

ing

the

Extra

ctiv

e In

dust

ries

Tran

spar

ency

Initi

ativ

e. T

he

new

CA

S sh

ould

con

side

r thi

s as

an

oppo

rtuni

ty to

add

ress

go

vern

ance

.

- 42

-

20

02 C

AS

Stat

us a

t Com

plet

ion

(FY

05)

L

esso

ns L

earn

ed a

nd

Con

side

ratio

ns fo

r ne

w C

AS

CA

S O

utco

mes

(G

iven

that

the

2002

CA

S di

d no

t hav

e a

resu

lts fr

amew

ork

with

cle

ar o

utco

mes

and

in

dica

tors

, the

CC

R

atte

mpt

ed to

bui

ld a

res

ults

fr

amew

ork

on th

e ba

sis o

f the

te

xt o

f the

CA

S an

d its

A

nnex

1).

• Pi

llar1

. Im

prov

ing

the

deliv

ery

of

publ

ic se

rvic

es th

roug

h st

rong

er

econ

omic

gov

erna

nce

o

Impr

oved

ena

blin

g en

viro

nmen

t for

civ

il se

rvan

ts

and

enha

nced

fidu

ciar

y ac

coun

tabi

lity

of g

over

nmen

t at

the

cent

ral a

nd lo

cal l

evel

s. o

Sk

illed

and

mor

e cr

edib

le

Judi

cial

Sys

tem

that

lead

s to

enfo

rcin

g se

rvic

e de

liver

y st

anda

rds.

o

Bet

ter r

even

ue a

nd

expe

nditu

re m

anag

emen

t. •

Pilla

r 2.

Str

engt

heni

ng th

e en

ablin

g bu

sine

ss e

nvir

onm

ent

o

Bet

ter i

nves

tmen

t clim

ate

thro

ugh

mac

ro st

abili

ty,

impr

oved

bus

ines

s reg

ulat

ory

envi

ronm

ent,

enha

nced

se

curit

y, m

ore

secu

re p

rope

rty

right

s, im

prov

ed a

cces

s to

finan

ce; a

nd th

roug

h im

prov

ed

phys

ical

infr

astru

ctur

e (w

ater

, po

wer

& ro

ads)

. o

R

educ

ing

the

role

of t

he st

ate

in c

omm

erci

al a

ctiv

ities

in

clud

ing

the

finan

cial

sect

or.

• Pi

llar

3. B

uild

ing

and

Prot

ectin

g H

uman

Res

ourc

es

o

Incr

ease

d ac

cess

and

qua

lity

to

educ

atio

n at

all

leve

ls, w

ith

emph

asis

on

girls

and

wom

en.

o

Impr

oved

cov

erag

e an

d qu

ality

of h

ealth

serv

ices

. o

C

ross

sect

oral

Out

com

es:

R

ural

Roa

ds

Sa

fety

Net

s

Com

mun

ity

Dev

elop

men

t

Pilla

r 1.

Uns

atis

fact

ory

• N

umbe

r of c

ivil

serv

ants

in

crea

sed

rath

er th

an d

eclin

ed.

• R

eal p

ay le

vels

dec

lined

rath

er

than

rais

ed a

nd d

ecom

pres

sed.

•

Civ

il se

rvic

e re

stru

ctur

ing

did

not p

rogr

ess.

•

Serv

ice

deliv

ery

rem

aine

d ce

ntra

lized

. Som

e tra

inin

g un

derta

ken

for t

he ju

dici

ary

but

over

all s

yste

mic

cha

nges

wer

e no

t und

erta

ken.

•

Agg

rega

te fi

scal

indi

cato

rs

parti

ally

ach

ieve

d (f

isca

l def

icit

was

2.8

per

cent

in F

Y04

. In

dica

tors

for s

ocia

l sec

tor

spen

ding

did

not

incr

ease

by

the

subs

tant

ial l

evel

s pro

ject

ed.

Pilla

r 2.

Uns

atis

fact

ory

•

Priv

ate

inve

stm

ent t

o G

DP

ratio

of

18

perc

ent w

as n

ot m

et.

• C

omm

erci

al

long

-term

le

ndin

g ris

ing

by 5

0 pe

rcen

t w

as n

ot

met

. •

Infla

tion

targ

ets

(of

belo

w 1

0 pe

rcen

t) w

ere

not

achi

eved

but

th

e ac

tual

infla

tion

rem

aine

d in

a

reas

onab

le r

ange

of

the

targ

et

neve

r exc

eedi

ng 1

2 pe

rcen

t.

• Th

ere

was

a p

rogr

ess i

n ac

hiev

ing

infr

astru

ctur

e ou

tcom

es b

ut p

rivat

e se

ctor

pa

rtici

patio

n go

als f

or th

e po

wer

se

ctor

wer

e no

t met

.

• Li

mite

d pr

ogre

ss in

the

finan

cial

se

ctor

with

the

pass

age

of a

• Su

cces

s of p

rogr

ams h

as b

een

linke

d w

ith a

ppro

pria

te

sequ

enci

ng st

artin

g w

ith

assi

stin

g th

e G

over

nmen

t in

form

ulat

ing

a se

ctor

stra

tegy

an

d fin

anci

ng p

lan;

wor

king

w

ith o

ther

don

ors t

o en

sure

th

at th

e pl

an is

ade

quat

ely

fund

ed; a

nd p

rovi

ding

IDA

lo

ans i

n th

e co

ntex

t of t

his

finan

cing

pla

n.

• Th

ere

is a

nee

d fo

r don

ors t

o ba

lanc

e co

mpe

ting

goal

s of

deliv

erin

g im

med

iate

resu

lts

(ess

entia

l to

build

con

fiden

ce

in p

ublic

serv

ice

deliv

ery

in a

Fr

agile

Sta

te) a

nd im

prov

ing

the

long

-term

del

iver

y ca

paci

ty o

f Gov

ernm

ent’s

sy

stem

s. •

Ther

e is

a n

eed

to c

onsi

der

whe

ther

cou

ntry

syst

em

impr

ovem

ents

and

add

ress

ing

the

shor

t-ter

m g

row

th c

risis

re

quire

s len

ding

ass

ista

nce.

•

Act

ions

to m

ove

away

from

PM

Us a

nd m

ains

tream

im

plem

enta

tion

need

to b

e co

nsid

ered

on

a se

ctor

-by-

sect

or b

asis

taki

ng in

to

acco

unt t

he p

ace

of a

ctio

ns to

st

reng

then

fidu

ciar

y sy

stem

s (p

rocu

rem

ent a

nd fi

nanc

ial

man

agem

ent)

and

impl

emen

tatio

n ca

paci

ty

(pro

gres

s in

sect

or le

vel c

ivil

serv

ice

rest

ruct

urin

g).

- 43

-

20

02 C

AS

Stat

us a

t Com

plet

ion

(FY

05)

L

esso

ns L

earn

ed a

nd

Con

side

ratio

ns fo

r ne

w C

AS

G

ende

r •

Pilla

r 4.

Sus

tain

ing

and

prot

ectin

g N

atur

al R

esou

rces

o

Im

prov

ed c

ondi

tions

for w

ater

av

aila

bilit

y in

pla

ce, t

hrou

gh

stre

ngth

ened

wat

er d

eple

tion

miti

gatio

n m

easu

res.

o

Effic

ient

miti

gatio

n m

easu

res

agai

nst d

eple

tion

of o

ther

na

tura

l res

ourc

es (p

etro

leum

an

d co

asta

l fis

herie

s) a

nd

agai

nst p

ollu

tion

in p

lace

.

Ban

king

Law

am

endm

ent a

nd

anti-

mon

ey la

unde

ring

legi

slat

ion.

Pi

llar

3. M

oder

atel

y Sa

tisfa

ctor

y •

Gro

ss e

nrol

lmen

t rat

es o

f girl

s ex

ceed

ed th

eir t

arge

t and

re

ache

d 62

per

cent

in 2

005

in

targ

eted

are

as a

s com

pare

d to

51

perc

ent i

n 19

99-2

000.

•

In se

cond

ary

educ

atio

n, to

tal

rura

l enr

ollm

ents

incr

ease

d by

38

per

cent

in 2

002-

2003

(c

ompa

red

to 1

998-

1999

ba

selin

e).

•

Qua

lity

of e

duca

tion

did

not

impr

ove.

•

Hea

lth se

rvic

e co

vera

ge w

as n

ot

expa

nded

to 6

5 pe

rcen

t of t

he

popu

latio

n, a

s pro

ject

ed.

• G

over

nmen

t exp

endi

ture

on

heal

th w

as o

nly

1.5

perc

ent i

n 20

03, l

ower

than

the

targ

eted

2.2

pe

rcen

t of G

DP.

•

Ferti

lity

rate

s and

chi

ld a

nd

mat

erna

l mor

talit

y di

d no

t de

clin

e.

Pilla

r 4.

Mod

erat

ely

Uns

atis

fact

ory

• Pr

ogre

ss to

war

ds su

stai

nabl

e w

ater

use

was

mad

e.

• In

Urb

an W

ater

Sup

ply

and

Sani

tatio

n, a

vaila

bilit

y of

pip

ed

wat

er in

crea

sed

from

onc

e a

wee

k to

onc

e ev

ery

four

day

s, an

d ur

gent

nee

ds o

f 7,5

00 a

nd

5,00

0 ho

useh

olds

for s

ewer

and

w

ater

syst

ems r

espe

ctiv

ely

wer

e

• T

here

is a

nee

d to

ens

ure

a cl

ear p

roce

ss o

f man

agin

g th

e po

rtfol

io o

f AA

A, a

nd to

be

tter u

tiliz

e th

e in

stitu

tiona

l se

t-up,

and

a n

eed

to fo

cus o

n di

ssem

inat

ing

indi

vidu

al

repo

rts th

roug

h a

stra

tegi

c co

mm

unic

atio

n an

d ou

treac

h.

- 44

-

20

02 C

AS

Stat

us a

t Com

plet

ion

(FY

05)

L

esso

ns L

earn

ed a

nd

Con

side

ratio

ns fo

r ne

w C

AS

addr

esse

d.

• M

itiga

tion

mea

sure

s aga

inst

de

plet

ion

of o

ther

nat

ural

re

sour

ces s

uch

as c

oast

al

fishe

ries,

and

agai

nst p

ollu

tion

wer

e no

t met

.

Cou

ntry

Issu

es

• W

eak

gove

rnm

ent c

omm

itmen

t and

fr

eque

nt c

hang

es o

f off

icia

ls.

•

Gov

erna

nce

rem

ains

wea

k an

d sc

ores

for c

orru

ptio

n ris

k an

d bu

reau

crat

ic q

ualit

y ar

e de

clin

ing.

Y

emen

is c

urre

ntly

rank

ed 1

06 o

ut

of 1

59.

• Fi

duci

ary

risk

is h

igh.

•

Inst

itutio

nal c

apac

ity is

low

and

ci

vil s

ervi

ce is

inef

ficie

nt.

• Th

e sa

me

issu

es a

re st

ill

pred

omin

ant b

ut th

e go

vern

men

t is

mor

e op

en to

refo

rms,

and

mor

e re

cept

ive

to d

onor

s’

assi

stan

ce.

The

new

CA

S sh

ould

: •

Bui

ld a

con

stitu

ency

for

chan

ge th

ough

a

com

mun

icat

ion

and

outre

ach

stra

tegy

. •

Emph

asiz

e th

e ne

ed fo

r a

clos

e fo

llow

-up

on th

e go

vern

men

t’s a

ctio

n pl

an

rece

ntly

agr

eed

upon

(N

atio

nal A

gend

a fo

r ref

orm

) an

d th

at fo

cuse

s on

addr

essi

ng k

ey is

sues

, in

clud

ing

gove

rnan

ce.

• Em

phas

ize

capa

city

bui

ldin

g an

d ta

rget

a m

ore

subs

tant

ial

inst

itutio

nal d

evel

opm

ent

impa

ct o

f Ban

k in

terv

entio

ns.

Ban

k Pe

rfor

man

ce

Ban

k Pe

rfor

man

ce: 9

2 pe

rcen

t C

omm

itmen

ts a

t Ris

k: 7

.5 p

erce

nt

Rea

lism

: 50

perc

ent

Proa

ctiv

ity: 5

0 pe

rcen

t

IEG

ratin

gs fo

r Ban

k Pe

rfor

man

ce a

t Su

perv

isio

n sh

ow a

dec

line

from

92

perc

ent i

n C

AS9

9 to

62.

5 pe

rcen

t in

CA

S02.

C

omm

itmen

ts a

t Ris

k: 3

.6 p

erce

nt

Rea

lism

: 100

per

cent

Pr

oact

ivity

: 75

perc

ent

• Fr

eque

nt C

PPR

s and

follo

w-

up o

n C

PPR

re

com

men

datio

ns h

elpe

d im

prov

e po

rtfol

io

perf

orm

ance

. Th

e ne

w C

AS

shou

ld e

mph

asiz

e th

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ed fo

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ring

of th

e po

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w

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-up

com

mitt

ee.

• Th

ere

is a

nee

d fo

r bet

ter

diss

emin

atio

n an

d in

tern

al

- 45

-

20

02 C

AS

Stat

us a

t Com

plet

ion

(FY

05)

L

esso

ns L

earn

ed a

nd

Con

side

ratio

ns fo

r ne

w C

AS

reco

rd-k

eepi

ng o

f AA

A.

Aid

Coo

rdin

atio

n

• D

onor

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rdin

atio

n w

as st

ruct

ured

. Fo

rmal

coo

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atio

n am

ong

dono

rs

has b

een

inte

nsifi

ed in

the

cont

ext o

f th

e Po

verty

Red

uctio

n St

rate

gy.

• Su

bgro

ups f

or c

ivil

serv

ice

refo

rm,

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er, h

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and

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catio

n ha

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been

set u

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A c

haire

d th

e su

bgro

up o

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vern

ance

.

Don

or su

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t sto

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und

US$

200

mill

ion

durin

g th

e FY

03-0

5 pe

riod

and

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s con

stitu

ted

roug

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• Th

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cont

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and

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sam

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- 46 -

Appendix 3: Planned Lending Program and Actual Deliveries FY02-05

FY IDA IDA2003 130.00 130.00

Port Cities Development Program 23.00 23.4040.00 24.0035.00

228.00 177.402004 30.00

20.00 60.0060.000.00 40.00

110.00 100.002005 0.00 65.00

30.00 0.0022.00 0.00

15.00 0.005.00 0.00

72.00 65.00

45.00

410.00 387.40

Additional Actual Projects:

Sana'a Basin Water ManagementGroundwater & Soil Conservation

Subtotal:

District & Community Development DroppedSubtotal:

Moved to FY05

Subtotal:

Groundwater & Soil Conservation Actual

Social Fund For Development III Actual

Urban Water Supply & Sanitation

Third Public Works (2/26/2004)

Total:

CAS PLANS (08/01/2002) Base Case

Actual

Second Basic Education Expansion

DroppedSecond Civil Service Modernization

Total:

ACCOMPLISHMENTS (FY03-05)

Moved to FY07

Moved to FY06

Name changed to Basic Edu. Dev. Prog.

Actual Moved to FY 2004

Actual

Second Basic Education Expansion Girl's Secondary Education Moved to FY07

Second Vocational Training

Second Rural Access Program

47

FY03

Public Financial Management Delivered

FY03

Not initially Planned Restructuring Ministry of Agriculture and Irrigation

FY04Not delivered in FY04 but Final delivery to client in FY06

Gender Mainstream (3/31/04)

Sources of Growth

FY04

FY05

FY05

Not initially planned

Not initially planned

Not initially planned

M&E Capacity Building

Infrastructure for Mineral ExportsPower Sector Reform Delivered

Urban Land Policy & Administration

Investment Climate

Country Water Resources Assistance Strategy Delivered

Not initially planned Women in the Local Economy of Aden (Final delivery to Client: 12/10/05)

Household Budget Survey (Draft delivery to client: 6/24/05)

Not initially planned

Agricultural & Maricultural Exports Strategy

Development Policy Review Ongoing but not delivered by end FY05Economic Monitoring

M&E Capacity Building

Delivered

Not initially planned ROSC - Accounting & Auditing

Not initially planned Gender Note (initially planned for FY03)

Delivered in FY05Delivered (6/7/04)

Vocational Training StrategyPopulation Policy NoteCountry Water Resources Assistance Strategy

Children at Risk (JSDF)

Not initially plannedNot initially planned

Statistical Capacity Building (Delivery to client: 4/14/05)Public Expenditure Management (Delivery to client: 5/31/05)

Not initially plannedSupport to National Commissions (Draft delivery to client: 5/30/06)Coordinating Environmental Health (Final delivery to client: 1/2/06)

Delivered

Delivered 3/4/04

Technical AssistancePublic Service Delivery (IDF)Tourism Development (IDF)

Children at Risk (JSDF)

Economic Sector Work

Country Social Assessment (Final delivery To client 3/15/06)Not initially planned

Public Service Delivery (IDF)Tourism Development (IDF)

Procurement Capacity Building (IDF) Delivered (10/10/03)Technical Assistance

Technical Assistance

Procurement Capacity Building (IDF)Budget & Expenditure Streamlining

Development Research ForumDevelopment Information Center

Environmental Safeguards

Power Sector ReformPoverty UpdateSecondary Education Review

Ongoing Delivered (Budget Reform and Decentralization, FY05) but not published

Fisheries Management Support

M&E Capacity Building

Public Service Delivery (IDF)

Financial Sector DialogueTourism Development (IDF)Violence Against Women (JSDF)

Not initially planned Petroleum Pricing Reform (Final delivery to Client: 2/28/05)Not initially planned Budget/Poverty Impacts of Petroleum Pricing

Rural Energy (ESMAP)

Actual carried out in FY 2004

Delivered

Investment Climate Assessment

Undertaken in FY05 but report and results not completed by end FY05

Infrastructure for Mineral Exports

Coastal Aquifers Development Strategy

Delivered in FY03Not delivered during CAS period but delivered in FY06DeliveredDelivered

Economic MonitoringEconomic Sector Work

Urban Land Policy & Administration Actual carried out in FY 2005

Not initially planned EPI & Public Health Programs

Not initially plannedNot initially planned

Rural Development Strategy Implementation and Ag. PromotionPoverty Update (initially planned for FY04)

Gender NoteCountry Water Resources Assistance Strategy

Investment ClimateIntegrated Framework for Trade

Economic MonitoringCountry Procurement Assessment Report

CAS PLANS (FY03-05) Product ACCOMPLISHMENTS (STATUS)

Delivered

Public Expenditure Management Delivered Economic Sector Work

Country Fin. Accountability Assessment Delivered 06/30/04

Appendix 4: Planned Non-Lending Services: FY03-FY05

48

Appendix 5: IDA Portfolio Assessment

FY03 FY04 FY05Number of projects under implementation 18 19 17Average implementation period (years) 3.8 4.0 3.5Percent of unsatisfactory projects by number 5.6 21.1 5.9Percent of unsatisfactory projects by amount 4.4 12.4 4Percent of projects at risk by number 11.1 21.1 5.9Percent of projects at risk by amount 7.5 12.4 4Disbursement Ratio (%) 16.4 16.2 15.8

- 1 -

ANNEX 4

YEMEN CAS 2006-2009: CAS Consultations 1

1. As inputs into the preparation of the Country Assistance Strategy for Yemen, the World Bank held four workshops in Yemen during the period November 19-22, 2005. These CAS consultations with various stakeholders (Government, donors and Civil Society) represent the first phase of the CAS preparation to be followed by further consultations in March with a clear Bank program for support to the second PRSP. The consultations are meant to provide a forum for participants to exchange views on how they see the main priorities (social and economic) for the country over the next 5 years and what role they envisage for the donor community in assisting Yemen.

2. The participants. Nearly 150 people—almost everyone who was invited—attended the workshops. Each workshop was confined to about 30-40 participants, a size considered to be optimum from the point of view of active participation by everyone. Participants were drawn from different categories of the stakeholders. In most cases, they were selected on the basis of their ability to contribute to the discussion. The profile of participants is shown in Figure 1 and by location the split was Sana’a (70 percent) and Aden (30 percent). Government officials, at the central and local levels, were high and middle cadre. The category “others” includes researchers and academicians, businessmen, parliamentarians and members of the Shura Council, journalists, associations and NGOs (local and international). A special effort was made to ensure adequate representation of women in the workshops; with one in four being a woman.

Figure 1: Composition of Participants Participation Composition

Total Participation Survey Participation

6%

43%35%

16%

Government Donors Others Academia

6%

14%

52%28%

Government Donors Others Academia

1 This Annex summarizes the findings of a paper on the CAS Consultations prepared by Mustapha Rouis, Country Manager.

2

3. The Approach. Each workshop was organized in three parts: discussions of the key factors shaping the context in which the CAS is being prepared, followed by group discussions and exchange of views between participants; and then a survey. To enrich the discussions, a number of background papers were prepared and circulated before and during the workshops. The survey consisted of 6 sets of questions: priority areas, obstacles to renewed growth and employment, engine of growth, role of the donor community and the World Bank in particular, and questions related to the workshop itself. Participants were asked to rank the priorities and rate the importance/relevance of each variable. The survey was meant to be indicative and may not be statistically robust (in design or selection of the sample). It was designed to analyze the information by affiliation and location.

Key Conclusions From Discussions 4. There are five critical areas for which there seems to be a broad agreement to tackle under the CAS. These are: governance, capacity building, human development and population, water management and macroeconomic stability. These priorities seem to fit broadly within government’s overall priorities in the Development Plan/PRSP.

5. Governance. There was a consensus among all participants that governance and public sector management should be high on the development agenda. This perception is consistent with the CPIA (2004) ratings and the ICA 2005, where corruption was listed as obstacle number three to PSD. The CPIA rating is based on a host of indicators, including corruption perception index by Transparency International and various WBI indices. Several participants looked up for the Bank to help government prepare a credible anti-corruption action plan. Others suggested building, as part of the CAS, a strong monitoring and evaluation system. There has to be better government accountability in the implementation of donor-funded projects.

6. Donors and some government officials noted that the improvement of governance would lead to more financial support by donors. IDA allocation and the Millennium Challenge Accounts were two cases pointed, where poor governance led to reduction in IDA allocations and to the postponement of Yemen’s access to the MCA (Yemen missed the threshold). Where there was success, it was stated by some participants that it was largely due to the strong commitment and integrity of the individuals involved. Several participants felt that empowerment of the civil society for playing a more meaningful role in advocacy and watchdog as well as providing support to the community was essential. 7. Macroeconomic stability. The need for maintaining macroeconomic stability was said to be a pre-condition for economic renewal. Reducing inflation, stabilizing the exchange rate, and mobilizing non-oil revenues were identified as key policy areas. A number of participants emphasized the need to streamline the tax system which is cumbersome and excessive. According to “Doing Business” report, Yemen is one of only three countries in the world with a cumulative tax burden exceeding earnings. This has induced tax evasion and pushed businesses into the informal sector. “It is not

3

profitable to work legally” as one participant put it. One participant stressed that macro stability, while important, should not be carried out at the expense of political and social stability and job creation. The causality runs both ways. 8. Capacity building. Participants felt strongly about the need to better balance between economic reform and institutional reform. Strengthening the civil service, parliament, judicial system and land registration were listed as priority areas. Private sector development will continue to be impaired if the institutional capacity (public and private) is not adequately developed. Also, several participants emphasized the need for government and donors to ensure that donor-funded projects are well designed and ready for implementation and to establish a clear monitoring and evaluation system.

9. Human Development and Population. While Yemen has made good progress on basic education, a lot remains to be done despite the fact that the country spends over 8% of its GDP on education. Health is another area where progress has been painfully slow. It is well established that investment in education leads to growth and reduction in the fertility rate, which both would in turn lead to poverty reduction. Also, investment in people would lead to strengthening the institutional capacity. A few participants voiced concern about the fact that too much resources is going to HRD and little to the real sectors and infrastructure. Others emphasized the need to invest more in vocational training (Aden) as a prerequisite for PSD. The issue of population control was accepted by most participants as an important challenge to be tackled if the government is to be able to provide basic social services (education, health, drinking water, etc.)

10. Water Resources Management. There was recognition by participants, particularly donors that Yemen suffers from low endowments in water resources and deficient use of those resources. Improvement in water demand management would require significant support from the donor community, including the Bank. Survey Results and Interpretations

11. According to the survey results, the three top priority reform areas identified by participants were: governance, security and human development in that order of priority. These were followed closely by macroeconomic stability. The ranking varies slightly across categories. For government participants macroeconomic stability came ahead of security; for the civil society (“others”, including academia) macro stability was ranked ahead of human development; and for donors water management was ranked ahead of macro stability. This ranking is largely consistent with the discussions, with the exception of the fact that institutional building and population were listed among the priority areas in the discussions and security not.

12. It is interesting to note that security was ranked relatively low on the scale of priorities by donors. The civil society and the Aden participants rated security on the top of the agenda. This is rather surprising as government has made good progress on this score. It is quite likely that security here was interpreted in the broad since to include lack

4

of enforcement of the rule of law and weak judicial system. This issue did not surface during the actual discussions; expect that it was mentioned as an impediment to private sector development. But the ICA survey ranks “crime, theft and disorder” low on the list of constraints to growth.

13. According to the survey, the three major obstacles to Yemen’s economic development were: weak commitment to reform, weak institutional capacity and lack of security in the country. This ranking cuts across all groups, except donors, who surprisingly put resource constraint ahead of security. It is also interesting that government participants ranked lack of commitment to reform as the second most important obstacle. This finding is broadly consistent with the findings of existing studies as well as the first annual PRSP Progress Report. It should be noted, however, that government has made good progress on improving security in the country over the past three years. Regarding capacity building, most participants stressed the critical importance of administrative reform (at the central and regional level), judicial reform, and institutional support to parliament and local councils. Conclusion

14. There was a lively discussion, with active participation of almost every participant. Participants were thankful to the World Bank for organizing such workshops and suggested holding similar workshops in other parts of the country. The overall rating of the workshops was 4.8 (1 being low and 6 high), with only a handful of participants rating it less than 3. The local press reported about the workshops.

15. The main messages expressed by most participants during the discussions and through the survey which was conducted at the end of each workshop are: • The economic outlook for Yemen is bleak and the main sources of growth and

employment are labor-intensive industries (SMEs), rural development and energy. Tourism, fisheries and transport (Aden Container Terminal) were also mentioned;

• The top priority areas over the medium term are: governance (with emphasis on PSD), institutional building (linked to human development), water resources management, population, and macroeconomic stability;

• The three major obstacles to Yemen’s economic development are weak commitment to reform, weak institutional capacity and lack of security;

• Improved design and readiness of Bank-funded projects were singled out as contributing factors to slow pace of implementation;

• The perceived role for donor community is to provide institutional building (training, TA) and analytical work. The role of the World Bank is perceived in the same way, with the addition of lending; finally

• While there does not seem to be an information gap among the participants about government’s economic reform program - a reflection of the fact that participants were selected precisely because of their knowledge of the issues and capacity to contribute to the discussions - there was a consensus that public awareness of the scope and depth of government reform program is limited. Government needs to intensify its effort to communicate with the people.

- 1 -

Annex 5

CAS Instruments: Contributions to Country Development Goals

1. This Annex provides further details on the use of CAS instruments to support each pillar and achieve the CAS Results identified in Annex 2. Country Strategy, Analysis and Outcome Monitoring 2. Some key activities are being undertaken which will have an impact across all of the different CAS pillars. • The Development Policy Review would be completed in FY06 and has informed both

the Government’s Second PRSP and the Bank’s CAS; • There would also be ongoing support to PRSP implementation. • The FY06 Country Social Analysis has also informed the country strategy work. • Upon the conclusion of the ongoing Household Budget Survey, a National Poverty

Assessment would be undertaken in FY06 and the report completed in early FY07 and would be complemented by an Urban Poverty Analysis for Taiz (FY07).

• There would also be advisory support for the implementation of the Statistical Master Plan which encompasses the monitoring and evaluation systems of the Government.

• A key challenge facing Yemen is that domestically there is little sense of urgency in dealing with the impending crises. A key area of new support (starting in FY07) would be to improve the outreach capacity of the Government to formulate and disseminate reform messages domestically. The CAS preparation process has already been utilized to facilitate dialogue on the key issues facing Yemen; this would be reinforced during CAS implementation by engaging various audiences and institutions. Concrete discussions would be held in the context of Bank lending and non-lending programs (e.g. engaging civil society in dissemination of knowledge products in order to facilitate dialogue on the key issues facing Yemen). The objective will be to reach beyond traditional audiences and engage different stakeholder groups by re-packaging messages in a manner that can be understood and debated more widely.

• One issue on which the Bank will continue to provide support relates to an ongoing contractual dispute between the Government and a foreign contractor under a now closed IDA-financed project. An arbitration award was rendered in favor of the contractor. With the support and encouragement of the Bank, a technical opinion has been prepared by independent experts on the level of contribution that IDA could finance out of the value of the disputed claims. The Government has accepted the opinion and the Bank expects to continue its effort to support both parties in reaching a satisfactory solution.

Growth 3. Bank Program. The Bank program would consist of: • Two existing projects which would continue to be implemented during the CAS

period with the Southern Governorates Agricultural Privatization project closing in

2

FY06 and the first phase of the Port Cities Development APL closing mid-way through the CAS period.

• An Investment Climate Assessment would be delivered in FY06 and inform the priority setting process for private sector development issues.

• There would be six new investment loans (Fisheries; Rainfed Agriculture and Livestock; Rural Energy Access, Power Sector, Phase II of the Port Cities Development APL and Second Vocational Training). These loans would address constraints to growth noted earlier.

• While the FY07 Institutional Reform Credit would primarily support the Government’s National Agenda For Reform (including actions on governance, public sector reform and private sector development actions), it would also include actions supporting improved governance in the private, financial and other sectors.

• Policy advice provided under the FY07 Gas Incentive Framework study would assist the Government in ensuring that the rules of the game in this key growth sector would be appropriately set to maximize growth and fiscal benefits.

• Focused transport sector work would be undertaken in FY08. • Finally, periodic support would be provided to the Government in hosting events for

new investors highlighting Yemen’s investment potential. 4. IFC program. Yemen is one of the “frontier” countries in the MENA region, and IFC is dedicating an extra effort to develop the private sector in the country. IFC’s current investment portfolio is US$9 million for 3 companies. In FY06, IFC has developed a strong pipeline of projects in sectors such as oil refining, ports, and cement, which could be committed between FY06-07. In addition to the investment pipeline above, IFC’s focus in the future is in the financial sector, including leasing and microfinance. In parallel with this investment program, IFC has also increased technical assistance activities through PEP-MENA and placed staff in Sana'a, co-located with the World Bank. The focus of the TA program in the country is on four main areas: financial markets, SME development, gender, as well as Business Enabling Environment (BEE). • In financial markets, IFC has been active in leasing programs (including work with

the Central Bank on leasing registration and legislation and the organization of an international leasing conference in the country) and is initiating a microfinance TA to support the initiatives of the second largest Yemeni bank to service this sector.

• In SME development, IFC has focused on management training through Business Edge, including Train-the-Trainer programs for training companies in Yemen, Chambers of Commerce, and the Social Fund for Development.

• IFC’s gender program work has included a scoping and analysis exercise and is preparing to launch a two-year TA program focusing on gender and entrepreneurship.

• In coordination with the Bank-financed Port Cities Development Program, IFC is initiating a “Business Start-Up Simplification” activity that would focus on simplifying administrative procedures at the central Government level as well as the implementation of reforms at the local level in selected port cities. PEP-MENA will also be focused on responding to a Government request to improve the country’s policy framework to promote private investment in mining, including assistance to the Granite and Marble Association which would strengthen SMEs in that industry.

3

Human Development 5. The program would consist of: • Eight ongoing projects (with around US$250 million undisbursed at the start of the

CAS period) which would provide support to programs in basic education, health, rural roads and social development and a small Learning and Innovation Credit for higher education.

• There would be four new investment loans: Girls Secondary Education; a Second Population Project (which would possibly utilize alternative delivery mechanisms such as Community Driven Development interventions); the second phase of the Rural Access Program; and a social development loan. With regard to the social development loan, support would be provided to the highly successful Social Fund for Development (SFD). Further, the institutional framework for provision of infrastructure for basic services would be rationalized to eliminate overlaps between line ministries, the Public Works Program and the SFD.

• Given the Government’s desire to contribute additional resources to the programs of the Social Fund for Development, a portion of the local currency equivalent of funds disbursed under the Institutional Reform Credit could be passed through to the SFD for implementation of agreed programs.

• In the near-term, the non-lending focus will be on gaining consensus around the health sector reform process which is also expected to support the Government in the development of a Nutrition Strategy.

• In FY07, the Disability Situation Analysis and Strategic Framework carried out in FY06 would be finalized and is expected to contribute to the development of a National Strategy for Disability.

• The qat survey which is being undertaken in FY06-07 will be completed and its findings used to re-engage on a public dialogue on the impact of qat.

• In the medium-term, based on the updated poverty data in the National Poverty Assessment, the Social Protection Strategy would be reviewed and updated in FY07.

• With the completion of sub-sectoral analysis (basic education, secondary education, TVET and higher education), the various pieces would be consolidated into an Overall Education Strategy. In FY09, ESW on Early Childhood Development would be undertaken.

• In FY09, a Gender Status Update is planned in order to take stock of progress in improving gender outcomes.

• Throughout the CAS period, ongoing support would be provided to the Children and Youth Strategy which the Government is implementing through mainstreaming into the Second PRSP.

• Beyond the end of the CAS period, the Second PRSC would be expanded to the education sector starting with basic education in FY10.

Fiscal Sustainability 6. The program would consist of: • An ongoing Technical Assistance project supporting the public sector reform pillar

which is projected to be completed mid-way through the CAS period. An FY07 Institutional Reform Credit would support the Government in implementing (as prior actions) the activities contained in the Government’s National Reform Program; these

4

actions encompass both public sector reform and private sector development. Further, the IRC would support the implementation of the Civil Service Reform program – particularly in financing retrenchment of civil servants. These activities would be complemented with governance related technical assistance from yet-to-be-identified grant funding (from donors and potentially from Bank-financed grant facilities). In case the above efforts should not result in the appropriate level of funding, the Bank would revisit, in partnership with other donors, the need for further support to civil service reform at the time of the 2008 CAS Progress Report.

• Technical Assistance would be provided to Yemen in joining the Extractive Industries Transparency Initiative and subsequently, in participating in the EITI.

• Following up the Urban Land Policy and Administration Policy Note, Technical Assistance would be provided to: strengthen the legal and regulatory framework for land; support the Government’s effort to improve institutional arrangements relating to public land management and land administration, and initiate land registration pilot projects. The objective would be to complement these activities with (yet to be identified) donor funding for any physical investments and technical assistance/information system support.

• A Public Expenditure Review would commence in FY07 and be completed by FY08; the goal would be to assist the Government in evaluating sectoral expenditures (and outcomes) and supporting medium-term expenditure planning processes. The Public Expenditure Tracking Survey work – which has commenced in FY06 and would be completed in FY07 – would supplement the PER.

• Ongoing Technical Assistance on procurement reforms would continue under the new CAS and assist the Government in implementing the significant agenda defined in the National Agenda For Reform. With the completion of these activities, a Country Procurement Assessment Review would be undertaken in FY08 to assess progress and provide guidance on the next phase of the reform. Similarly, implementation support will be provided under the CAS to the implementation of the Ten Year Public Financial Management Strategy and associated Action Plan. An assessment on progress would be made through a Country Financial Accountability Assessment in FY08. The results of these assessments would also be utilized to strengthen Government fiscal management and fiduciary systems in the context of the FY09 First PRSC.

Resource Sustainability 7. The program would consist of: • Six ongoing projects (with around US$250 million undisbursed at the start of the

CAS period) which would support the environmental sustainability pillar including groundwater management, irrigation and urban and rural water supply.

• There will a new second phase APL provided for the Urban Water Supply and Sanitation program in FY08.

• Further, rural water supply would be supported through a series of programmatic development policy loans commencing in FY09 with the First Poverty Reduction Support Credit. This would allow consolidation of currently separate projects (including APLs) for rural water supply and sanitation, groundwater management and irrigation programs.

5

• In continuation of the work undertaken previously under two Global Environment Facility (GEF) Medium Sized Projects, there could be follow-up GEF support to integrated coastal zone management. The proposed GEF activity would be developed in conjunction with the Port Cities Development Program to integrate global environmental issues into local development planning and with the Fisheries Project to improve sustainable management of marine resources.

• There will be ongoing TA support to the implementation of the NWSSIP and the Country Water Resource Assistance Strategy and to addressing selected issues (e.g. desalination).

• Finally, the Population II Project and the Girls Secondary Education Project (discussed under the Human Development pillar) would also be important elements in addressing resource sustainability issues.

8. The proposed lending and non-lending programs are summarized in the Tables overleaf. The Tables also show the pipeline of lending and non-lending activities in the outer years (i.e. beyond the CAS period). This has been done for three reasons. First, some activities are programmed for the year beyond the CAS but will be in the fifth year of the PRSP (i.e. PRSC-II; PER- II and Transport Policy Note II). Second, some important lending activities (Integrated Urban Development, Higher Education and Solid Waste Management) could not be included under the CAS program due to IDA constraints and are shown in the outer years. If IDA allocations should improve significantly or if projects currently considered to be priority should not be prepared, then consideration would be given to accelerating these projects. Finally, a non-lending activity on decentralization has been kept in the outer years. While decentralization issues would be addressed through other ESW (including the PER, the CFAA and CPAR), if the Government should seek further advice on fiscal decentralization, then this task would be implemented in the CAS period. This approach would avoid the problems under previous CASs where significant fiscal decentralization related lending and non-lending activities were initiated but never brought to closure.

6

TABLE A: Proposed Lending Program by Fiscal Year

FY06 $mm FY07 $mm FY08 $mm FY09 $mm Outer Years

1 Rural Access APL II

40 Rainfed Agriculture & Livestock

20 Urban Water Supply APL II

50 Population 25 PRSC II

Fisheries 25 Vocational Training II

15 Rural Energy

35 Port Cities APL II

35 Solid Waste Management

Power Sector

50 Social Development

15 Girls Secondary Education

15 PRSC I 40 Integrated Urban Development

Institutional Reform

50 Higher Education

Total 115 100 100 100

TABLE B: Proposed Economic and Sector Work by Fiscal Year

FY06 FY07 FY08 FY09 Outer Years Development Policy Review

Poverty Assessment

Public Expenditure Review

Gender Report Public Expenditure Review II

Investment Climate Assessment

Public Expenditure Tracking Surveys

Country Procurement Assessment

Early Childhood Education Review

Transport Sector Policy Note II

Country Social Analysis

Taiz Urban Poverty Analysis

Country Financial Accountability Assessment

Investment Climate Update

Decentralization Review

Gas Incentive Framework Policy Note

Overall Education Strategy

Development Policy Review Update

Social Protection Strategy

Transport Sector Policy Note

Qat Survey and Policy Note

Rural Land Tenure Study

1 Outer years column includes activities that are expected to occur after the CAS period – some of these activities are being deferred due to resource constraints (either IDA allocation or administrative budget) and might be accelerated if such constraints are alleviated.

7

TABLE C: Proposed Technical Assistance & Implementation Support by Fiscal Year

Activity Fiscal Years Overall Support PRSP Support Throughout Statistical Master Plan Throughout Qat FY08-09 Strategic Communications FY07-09 Public Sector Management Procurement Throughout Public Financial Management Action Plan Throughout Extractive Industries Transparency Initiative FY07-09 Land Management & Urban Upgrading Pilots FY08-09 Private Sector Development Private Sector Support (including through potential investors’ meetings) Throughout Human Development Health Sector Dialogue and Consultation FY06-07 Children & Youth Strategy Throughout Disability Situation Analysis and Strategic Framework FY07 Resource Sustainability National Water Strategy Throughout Environment Throughout

ANNEX 6

ANNEX 7

CAS Annex A2 Page 1 of 2

Yemen, Rep. at a glance 4/28/06

M. EastPOVERTY and SOCIAL & North Low-

Yemen Africa income2004Population, mid-year (millions) 19.8 294 2,338GNI per capita (Atlas method, US$) 550 2,000 510GNI (Atlas method, US$ billions) 10.9 589 1,184

Average annual growth, 1998-04

Population (%) 3.0 1.8 1.8Labor force (%) 2.8 -1.3 2.1

Most recent estimate (latest year available, 1998-04)

Poverty (% of population below national poverty line) 42 .. ..Urban population (% of total population) 26 56 31Life expectancy at birth (years) 63 68 58Infant mortality (per 1,000 live births) 75 45 79Child malnutrition (% of children under 5) 46 .. 44Access to an improved water source (% of population) 69 88 75Literacy (% of population age 15+) 52 69 61Gross primary enrollment (% of school-age population) 83 100 94 Male 98 104 101 Female 68 94 88

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1984 1994 2003 2004

GDP (US$ billions) .. 3.8 10.8 13.1Gross capital formation/GDP .. 21.0 24.4 23.3Exports of goods and services/GDP .. 51.2 38.0 38.6Gross domestic savings/GDP .. 13.6 20.5 25.9Gross national savings/GDP .. 27.6 23.5 27.1

Current account balance/GDP .. 6.6 -0.1 2.0Interest payments/GDP .. 1.3 0.5 0.5Total debt/GDP .. 161.4 47.7 42.4Total debt service/exports .. 3.6 3.2 3.4Present value of debt/GDP .. .. 34.9 29.4Present value of debt/exports .. .. 69.5 60.5

1984-94 1994-04 2003 2004 2004-08(average annual growth)GDP .. 5.0 3.1 2.6 3.3GDP per capita .. 2.0 0.0 -0.5 0.2Exports of goods and services .. 2.8 2.5 -8.1 5.7

STRUCTURE of the ECONOMY1984 1994 2003 2004

(% of GDP)Agriculture .. 23.6 14.4 13.8Industry .. 25.1 40.6 40.9 Manufacturing .. 14.2 4.7 4.5Services .. 55.7 45.0 45.3

Household final consumption expenditure .. 67.6 62.4 60.3General gov't final consumption expenditure .. 18.8 16.7 16.2Imports of goods and services .. 58.7 41.4 38.3

1984-94 1994-04 2003 2004(average annual growth)Agriculture .. 4.4 -4.6 2.4Industry .. 5.6 -7.8 0.3 Manufacturing .. 7.7 -4.0 3.1Services .. 4.6 20.6 5.2

Household final consumption expenditure .. 3.6 2.0 6.1General gov't final consumption expenditure .. 6.3 3.2 6.3Gross capital formation .. 5.4 16.9 4.9Imports of goods and services .. 1.5 8.1 0.6

Note: 2004 data are preliminary estimates.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

-40

-20

0

20

40

60

99 00 01 02 03 04

GCF GDP

Growth of capital and GDP (%)

-40

-20

0

20

40

60

99 00 01 02 03 04

Exports Imports

Growth of exports and imports (%)

Yemen, Rep.

Low-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Yemen, Rep.

Low-income group

Economic ratios*

Trade

Indebtedness

Capital formation

Domesticsavings

CAS Annex B2 Page 2 of 2

Yemen, Rep.

PRICES and GOVERNMENT FINANCE1984 1994 2003 2004

Domestic prices(% change)Consumer prices .. 49.4 11.9 12.0Implicit GDP deflator .. 25.8 12.6 16.0

Government finance*(% of GDP, includes current grants)Current revenue .. 13.4 30.2 32.0Current budget balance .. -11.5 4.2 7.3Overall surplus/deficit .. -14.7 -4.8 -2.3

TRADE1984 1994 2003 2004

(US$ millions)Total exports (fob) .. 1,796 3,923 4,662 Crude oil (government share) .. 753 1,828 2,233 Crude oil (company share) .. 862 1,624 2,026 Manufactures .. 11 139 150Total imports (cif) .. 1,522 3,557 3,858 Food .. 458 1,398 1,557 Fuel and energy .. 84 582 528 Capital goods .. 332 1,033 1,168

Export price index (2000=100) .. 61 102 132Import price index (2000=100) .. 114 103 110Terms of trade (2000=100) .. 54 99 120

BALANCE of PAYMENTS1984 1994 2003 2004

(US$ millions)Exports of goods and services .. 1,944 4,226 4,997Imports of goods and services .. 2,226 4,608 4,958Resource balance .. -282 -382 39

Net income .. -532 -827 -1,063Net current transfers .. 1,064 1,201 1,280

Current account balance .. 250 -8 256

Financing items (net) .. -398 591 505Changes in net reserves .. 149 -583 -761

Memo:Reserves including gold (US$ millions) .. 357 4,445 5,108Conversion rate (DEC, local/US$) .. 80.8 186.2 183.0

EXTERNAL DEBT and RESOURCE FLOWS1984 1994 2003 2004

(US$ millions)Total debt outstanding and disbursed 3,001 6,125 5,375 5,473 IBRD 0 0 0 0 IDA 294 780 1,568 1,701

Total debt service 120 106 172 219 IBRD 0 0 0 0 IDA 3 13 34 41

Composition of net resource flows Official grants 251 82 129 73 Official creditors 230 66 58 44 Private creditors 12 -5 0 0 Foreign direct investment (net inflows) 7 16 6 144 Portfolio equity (net inflows) 0 0 0 0

World Bank program Commitments 59 33 47 210 Disbursements 45 37 89 92 Principal repayments 1 7 23 26 Net flows 45 30 66 66 Interest payments 3 6 11 15 Net transfers 42 24 55 52

Development Economics 4/28/06

*Ratios refer to central government finances alone and do not include subnational governments.

-20

-10

0

10

20

30

40

99 00 01 02 03 04

GDP deflator CPI

Inflation (%)

0

1,000

2,000

3,000

4,000

5,000

98 99 00 01 02 03 04

Exports Imports

Export and import levels (US$ mill.)

-4-202468

10121416

98 99 00 01 02 03 04

Current account balance to GDP (%)

G: 298

D: 483

C: 376

B: 1,701

F: 77

E: 2,538

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

Composition of 2004 debt (US$ mill.)

CAS Annex B2

Indicator 2003 2004 2005 2006Jul 05-Apr 06

Portfolio AssessmentNumber of Projects Under Implementation a 18 19 17 18Average Implementation Period (years) b 3.2 3.3 3.4 3.7Percent of Problem Projects by Number a, c 5.6 21.1 5.9 5.6Percent of Problem Projects by Amount a, c 4.4 12.6 4.0 3.8Percent of Projects at Risk by Number a, d 11.1 21.1 5.9 5.6Percent of Projects at Risk by Amount a, d 7.5 12.6 4.0 3.8Disbursement Ratio (%) e 20.0 16.5 15.8 19.8Portfolio ManagementCPPR during the year (yes/no)Supervision Resources (total US$) 1,251.4 1,605.4 1,898.9 1,915.0 Average Supervision (US$/project) 54.4 76.4 94.9 85.0

Memorandum Item Since FY 80Proj Eval by OED by Number 107 12Proj Eval by OED by Amt (US$ millions) 1,451.8 306.8% of OED Projects Rated U or HU by Number 26.7 25.0% of OED Projects Rated U or HU by Amt 21.7 17.2

Note: Supervision Resources and Average Supervision Costs for FY06 are projected

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

As of Date 04/20/2006

Last Five FYs

Selected Indicators* of Bank Portfolio Performance and ManagementRepublic of Yemen - CAS Annex B2

CAS Annex B3Page 1 of 1

Proposed IBRD/IDA Base-Case Lending Program a

Fiscal year Proj ID US$(M)Strategic

Rewards b (H/M/L)

Implementation b Risks (H/M/L)

2006 Second Rural Access Improvement [approved] 40.0 H MFisheries Res. Mgt & Conservation [approved] 25.0 M LPower Sector 50.0 M LResult 115.0

2007 Rainfed Agriculture and Livestock 20.0 H MSecond Vocational Training Project 15.0 M MSocial Development 15.0 M LInstitutional Reform Credit 50.0 H HResult 100.0

2008 Urban Water Supply APL Phase II 50.0 M LRural Energy Access 35.0 M LGirls Secondary Education 15.0 H LResult 100.0

2009 Yemen Population II 25.0 H HPort Cities APL Phase II 35.0 M LFirst Poverty Reduction Support Credit 40.0 H HResult 100.0

415.0

high (H), moderate (M), or low (L)

Republic of Yemen: CAS Annex B3 - Proposed Lending ProgramAs of Date 04/20/2006

a. This Table presents the proposed program for four fiscal years.

b. For each project, indicate whether the strategic rewards and implementation risks are expected to be

Overall Result

CAS Annex B4 Page 1 of 1

CompletionFY

Recent completionsUrban Land Policy & Admin 2005 125 Government, Bank Problem solving, Knowledge generationWater Sector Reform 2005 71 Bank, Government Knowledge generation, Problem solvingPublic Expenditure Mgt. 2005 125 Bank, Government, Donor Knowledge generation, Problem solvingWomen in Local Economy 2005 3.5 Bank, Government Knowledge generationStatistical Capacity Building (TA) 2005 39 Bank, Government Knowledge generationRural energy (TA) 2005 21 Bank, Government Knowledge generationNational Strategy Child & Youth 2005 88 Bank, Government, Donors Knowledge generation, problem solvingPetroleum Pricing Reform 2005 102 Bank, Government, Donors Problem solving, Public disseminationEnvironment Capacity 2005 13 Government, Bank, Donors Problem solving, Knowledge generationRural Dev. Agric. 2005 53 Government Problem solving, Knowledge generationCountry Social Analysis 2006 150 Bank, Government Knowledge generationSecondary Education 2006 100 Bank, Government Knowledge generation, problem solving

OngoingEducation for All 2006 123 Bank, Government Knowledge generation, Problem solvingDevelopment Policy Review 2006 200 Bank, Government Knowledge generationInvestment Climate Assessment 2006 300 Bank, Government, Donors Knowledge generation, Problem solvingCountry Assistance Strategy (CAS) 2006 100 Bank, Government Knowledge generation, Public disseminationAssistance on Water Strategy Impl 2006 65 Government, Bank Problem solving, Knowledge generationHousehold Budget--2005/2006 2006 80 Government, Bank Problem solving, Knowledge generationNational Disability Study 2006 25 Government Problem solving, Knowledge generation

PlannedPoverty Assessment 2007 150 Government, Bank Knowledge generation, Problem solvingPublic Expenditure Tracking Surveys 2007 100 Bank, Government, Donors Knowledge generation, Problem solvingTaiz Urban Poverty Analysis & Strategy 2007 100 Bank, Government Knowledge generation, Problem solvingSocial Protection Strategy 2007 150 Government, Bank Problem solving, Knowledge generationQat Survey & Policy Note 2007 50 Government Problem solving, Public disseminationGas Sector Incentive framework 2007 50 Government, Bank Knowledge generation, Problem solvingPublic Expenditure Review 2008 200 Bank, Government Knowledge generation, Problem solvingOverall Education Strategy 2008 100 Government, Bank, Donors Problem solving, Knowledge generationCountry Procurement Assessment Review 2008 150 Bank, Government, Donors Problem solving, Knowledge generationCountry Financial Accountability Assessment 2008 150 Bank, Government, Donors Problem solving, Knowledge generationTransport Sector Policy Note 2008 100 Government Problem solvingGender Report 2009 100 Government Problem solving, Public disseminationEarly Childhood Development Review 2009 100 Bank, Government, Donors Knowledge generation, Problem solvingCountry Assistance Strategy (2010-2014) 2009 150 Bank, Government Knowledge generation, Problem solvingDevelopment Policy Review Update 2009 100 Bank, Government, Donors Knowledge generation, Problem solvingInvestment Climate Assessment Update 2009 100 Government Knowledge generation, Problem solving

a. Audience = Government, donor, Bank, public dissemination.b. Objective = Knowledge generation, public debate, problem-solving.

Republic of Yemen: CAS Annex B4 - Summary of Nonlending ServicesAs Of Date 04/20/2006

ProductCost

(US$000) Audience a Objective b

CAS Annex B5 Republic of Yemen - Social Indicators

Millennium Development Goals, 1990-20041,2 1990 1994 1997 2000 2003 2004 1.Eradicate extreme poverty and hunger Percentage share of income or consumption held by poorest 20% Population below $1 a day (%) Population below minimum level of dietary energy consumption (%) Poverty gap ratio at $1 a day (%) Poverty headcount, national (% of population) Prevalence of underweight in children (under five years of age) 2. Achieve universal primary education Net primary enrollment ratio (% of relevant age group) Primary completion rate, total (% of relevant age group) Proportion of pupils starting grade 1 who reach grade 5 Youth literacy rate (% of age group 15-24) 3. Promote gender equality and empower women Proportion of seats held by women in national parliament (%) Ratio of girls to boys in primary and secondary education (%) Ratio of young literate females to males (age group 15-24) Share of women employed in non-agricultural sector (%) 4. Reduce child mortality Immunization, measles (% of children aged 12-23 months) Infant mortality rate (per 1000 live births) Under 5 mortality rate (per 1000) 5. Improve maternal health Births attended by skilled health staff (% of total) Maternal mortality ratio ( per 100,000 live births)3 6. Combat HIV/AIDS, malaria and other diseases Contraceptive prevalence rate (% of women aged 15-49) Incidence of tuberculosis (per 100,000 people) Prevalence of HIV, (% of population aged 15-49) Tuberculosis cases detected under DOTS (%) 7. Ensure environmental sustainability Access to an improved water source (% of population) Access to improved sanitation (% of population) CO2 emissions (metric tons per capita) Forest area (% of total land area) GDP per unit of energy use (2000 PPP $ per kg oil equivalent) 8.Develop a global partnership for development Aid per capita (current US$) Debt service (% of exports) Fixed line and mobile phone subscribers (per 1000 people) Internet users (per 1000 people) Personal computers (per 1000 people) General indicators Adult literacy rate (% of people aged 15 and over) Fertility rate, total (births per woman) Life expectancy at birth (years) Population, total (millions) Roads, Paved (% of total roads)

51.7

50.0

4.0

9.3

69.0 98.0 142.0

1400.0

9.7 137.6

69.0 21.0 0.7 1.0 2.8

34.1 7

11.0

7.5 52.2 11.9 9.1

39.0

8.0

31.0 89.0 126.0

121.8

0.7

3.4

11.5 4

12.4

40.0 6.5

14.8 8.1

7.44 15.7 36.0 4.5

41.85 46.1

57.4 57.8

1.0 50.0

7.4

46.0

21.6

20.8 111.1

30.0

0.8

3.6

22.2 4

14.1 0.2 1.2

6.4 55.0 16.1 8.1

33.06

67.1 57.9 74.5

1.0 55.6

6.7

71.0 84.0 117.0

570.0

101.4

54.3

0.5 0.9 3.7

15.1 5

20.6 0.8 1.9

46.0

17.5 11.5

36.0

71.8 65.5

67.97

1.0 60.8 60.3 6.1

66.0 82.0 113.0

23.0 92.5 0.1

43.3

69.0 30.0

3.7

12.7 4

48.9

7.4

49.0 6.0

57.7 19.2

65.5

0.0

6.1

66.0 82.0 113.0

23.0 92.5 0.1

43.3

12.7 4

6.0 57.7 19.8 12.0

1 Data refers to the nearest available year. 2 The table is based on World Development Indicators Database of the World Bank. 3 No national data on maternal mortality available. Estimates derived from model.. 4 Survey year: 1998. Refers to consumption shares by percentiles of population. Ranked by percapita consumption. 5 Data refers to 1998 Household Budget Survey (HBS) conducted in Yemen. 6 1999-2001 average. 7 UNESCO Institute of Statistics estimates, data for 2000-04.

CAS Annex B6

Yemen, Rep. - Key Economic Indicators

Actual Estimate ProjectedIndicator 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

National accounts (as % of GDP)Gross domestic producta 100 100 100 100 100 100 100 100 100 100 Agriculture 14 15 15 14 14 14 14 14 14 15 Industry 46 41 39 40 41 39 38 36 35 34 Services 40 44 47 45 45 47 48 49 51 52

Total Consumption 75 80 80 79 76 71 72 73 75 79Gross domestic fixed investment 18 19 22 23 23 21 22 32 34 26 Government investment 7 7 9 10 9 7 7 9 9 9 Private investment 11 12 13 13 14 14 15 23 26 17

Exports (GNFS)b 42 37 39 38 39 45 42 36 30 30Imports (GNFS) 37 39 40 41 38 39 42 41 40 35

Gross domestic savings 26 20 20 20 26 29 28 27 25 21Gross national savingsc 33 27 26 23 27 26 26 26 26 22

Memorandum itemsGross domestic product 9514 9653 10314 11104 13031 14293 16399 17764 19212 20853(US$ million at current prices)GNI per capita (US$, Atlas method) 430 470 490 520 570 600 650 680 720 760

Real annual growth rates Gross domestic product at market prices 4.4 4.6 3.9 3.1 2.6 3.8 3.9 2.5 3.0 4.5 Gross Domestic Income 4.6 2.9 5.3 3.5 5.5 10.7 6.4 3.0 3.5 5.3

Real annual percapita growth rates Gross domestic product at market prices 1.3 1.4 0.7 (0.1) (0.6) 0.6 0.8 (0.6) (0.1) 1.4 Total consumption (3.5) 8.8 0.6 (0.8) 2.9 6.5 4.5 (2.1) 1.3 0.7 Private consumption (5.4) 7.8 (1.1) (1.0) 2.9 0.1 2.0 2.0 1.5 1.5

Balance of Payments (US$ millions) Exports (GNFS)b 4015 3470 3857 4226 4997 6845 7448 6951 6377 6572 Merchandise FOB 3805 3302 3584 3923 4654 6624 7026 6415 5825 6339 Imports (GNFS)b 3475 3657 3989 4608 4958 5535 7839 8275 8690 6894 Merchandise FOB 2635 2771 3083 3557 3858 4338 6198 6593 7031 5687 Resource balance 540 (187) (132) (382) 39 1310 (392) (1325) (2313) (322) Net current transfers 1400 1273 1384 1201 1280 1171 1221 1332 1350 1380 Current account balance 1266 507 534 (8) 256 709 (794) (1483) (2190) (360)

Net private foreign direct investment (11) 92 39 (131) 193 (146) 1847 857 882 (288) Long-term loans (net) (46) 94 53 126 96 89 146 82 63 35 Official 55 32 57 58 44 61 196 205 205 208 Private (101) 62 (4) 68 52 28 (50) (123) (142) (173) Other capital (net, incl. errors & ommissions) 217 69 126 596 134 (194) (968) 92 121 125 Change in reservesd (1427) (762) (752) (583) (679) (458) (231) 452 1124 488

Memorandum itemsResource balance (% of GDP) 5.7 (1.9) (1.3) (3.4) 0.3 9.2 (2.4) (7.5) (12.0) (1.5)Real annual growth rates ( YR90 prices) Merchandise exports (FOB) 0.0 (0.8) 5.9 (1.2) (2.0) 3.2 (9.8) (2.2) (1.8) 17.2 Primary (2.6) (0.8) 3.2 (0.8) (2.8) 0.2 (10.6) (2.9) (2.9) 17.2 Manufactures (36.5) 43.7 168.4 (13.8) 9.6 92.4 12.0 9.0 11.4 12.7 Merchandise imports (CIF) 19.5 5.8 12.1 15.1 1.5 17.2 33.5 5.5 7.4 (18.8)

Public finance (as % of GDP at market prices)e

Current revenues 39.2 35.3 33.6 30.9 32.0 38.1 36.4 32.2 28.6 28.6 Current expenditures 25.8 25.2 27.7 26.7 24.7 31.5 32.3 28.4 26.4 26.4 Current account surplus (+) or deficit (-) 13.4 10.1 5.9 4.2 7.3 6.6 4.1 3.8 2.2 2.2 Capital expenditure 5.4 7.5 7.1 9.1 7.9 9.3 8.8 8.7 8.8 8.8 Foreign financing 0.7 0.3 0.6 0.8 1.1 0.8 1.7 1.6 1.1 1.1

Monetary indicators M2/GDP 21.5 23.8 25.6 26.1 26.2 23.5 22.3 25.0 24.2 23.4 Growth of M2 (%) (13.4) 15.4 17.5 18.3 19.6 9.4 18.4 19.4 10.3 13.7 Private sector credit growth / (7.1) (25.7) (16.1) (5320.7) (175.9) (10.6) 100.0 78.0 81.0 61.3 total credit growth (%)

Price indices( YR90 =100) Merchandise export price index 124 111 115 124 150 207 243 227 210 195 Merchandise import price index 95 94 94 99 106 106 109 110 109 108 Merchandise terms of trade index 131.6 119.0 122.2 125.0 141.7 194.7 223.7 207.1 193.0 180.0 Oil price index 127.0 112.8 117.0 126.1 154.1 216.3 255.9 237.9 219.2 202.7 Real exchange rate (US$/LCU)f 64.0 62.5 62.4 58.5 56.3 53.4

Real interest rates Consumer price index (% change) 10.0 10.7 6.8 11.9 12.0 14.6 15.7 11.8 11.7 12.0 GDP deflator (% change) 21.7 0.8 6.3 10.5 11.4 11.8 15.9 10.4 10.3 10.6

a. GDP at market pricesb. GNFS denotes Goods and Nonfactor Services.c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Central government finances excluding subnational governments. FY08 and FY09 figures averaged across the two years.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

CAS Annex B7

Actual Estimate ProjectedIndicator 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total debt outstanding and 4870 4973 5301 5335 5218 4959 5053 5129 5208disbursed (TDO) (US$m) a

Net disbursements (US$m) a -167 53 126 96 89 146 82 63 35

Total debt service (TDS) 219 146 143 162 227 242 275 270 243(US$m) a

Debt and debt service indicators (%) TDO/XGS b 141.7 129.8 126.7 107.4 75.5 67.7 74.6 82.6 77.2 TDO/GDP 51.1 50.5 44.2 39.4 34.0 30.5 28.6 26.7 23.4 TDS/XGS 6.4 3.8 3.4 3.3 3.3 3.3 4.1 4.3 3.6 Concessional/TDO 85.9 88.8 87.3 88.2 88.1 87.9 88.1 88.0 88.0

IBRD exposure indicators (%) Preferred creditor DS/public 62.4 65.3 61.6 66.8 52.5 DS (%) c IDA TDO (US$m) d 1237 1384 1568 1701 1803 1873 1919 1979 2056

a. Includes public and publicly guaranteed debt, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

Yemen, Rep. - Key Exposure Indicators

CAS Annex B8Page 1 of 2

Active Projects

Project ID Project Name Development Objectives

Implementa-tion Progress Fiscal Year IDA Cancel. Undisb. Orig. Frm Rev'd

P070092 Taiz Municipal Dev & Flood Protection HS S 2002 45.2 19.27 13.71 3.21P043255 Basic Education Expansion Project S S 2001 56 14.13 5.58 -6.28P076183 Higher Education MS MS 2002 5 4.88 3.38P057602 Urban Water Supply & Sanitation [APL] MS MS 2003 130 4.74 112.13 56.04P085231 Second Rural Access S S 2006 40 38.24 0.50P076185 Basic Education Development Program S S 2005 65 62.66 3.97P050706 Civil Service Modern S MS 2000 30 14.92 12.73P086886 Fisheries Res. Mngmnt & Conservation S S 2006 25 24.93P074413 Groundwater & Soil Conservation S S 2004 40 35.58 12.58P043254 Health Reform Support Project (HRSP) MU MU 2002 27.53 27.95 10.29 -0.17P062714 Irrigation Improvement S S 2001 21.3 12.94 10.73P065111 Port Cities Development Program S S 2003 23.4 19.93 12.30 6.25P070391 Rural Access Improvement Program S S 2001 45 8.30 1.34 2.07P005906 Rural Water Supply & Sanitation S S 2001 20 11.62 8.98 -0.44P064981 Sana'a Basin Water Mgmnt Project S S 2003 24 21.48 5.55P082498 Social Fund For Development III S S 2004 60 40.01 19.40P005902 Southern Gov Agric. Privatization MS S 1998 24.7 4.01 0.28 4.64P082976 Third Public Works S S 2004 45 31.82 1.48Overall Result 727.13 8.75 501.10 183.20 4.64

IBRD/IDA *Total Disbursed (Active) 261.25 of which has been repaid 0.00Total Disbursed (Closed) 1,569.44 of which has been repaid 213.13Total Disbursed (Active + Closed) 1,830.69 of which has been repaid 213.13

Total Undisbursed (Active) 501.10Total Undisbursed (Closed) 6.67Total Undisbursed (Active + Closed) 507.77

Difference BetweenLast PSR Expected and Actual

Supervision Rating

YEMEN - CAS Annex B8Operations Portfolio (IDA)

As Of Date 04/10/2006

Closed Projects: 116

Disbursements a/

Note: The ratings of Project Implementation Progress (IP) and Development Objectives (DO) are classified as follows: HS = Highly Satisfactory, S = Satisfactory, MS = Moderately Satisfactory, U = Unsatisfactory, MU = Moderate unsatisfactory, and HU = Highly Unsatisfactory.

a/ Intended disbursements to-date, minus actual disbursements to-date as projected at appraisal.

CAS Annex B8Page 2 of 2

Republic of Yemen: CAS Annex B8Statement of IFC's Held and Disbursed Portfolio

As of 12/31/2005(In US Dollar Millions)

Held Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1999 ACSM6.86

0.0 0.0 0.06.86

0.0 0.0 0.0

2002 Ahlia Water1.36

0.0 0.0 0.01.36

0.0 0.0 0.0

1998 Radfan0.31

0.0 0.0 0.00.31

0.0 0.0 0.0

8.53 0.0 0.0 0.0 8.53 0.0 0.0 0.0Total Portfolio: