By Martin Dokoupil and Mohamed Sudam
DUBAI/SANAA (Reuters) - Yemen's economy appears on the brink of collapse after three months of street protests and political stalemate that have swollen budgetary deficits and are driving off urgently-needed foreign aid.
Western and Gulf donors are wary of stepping in before a conclusion of a deal for the peaceful departure of President Ali Abdullah Saleh -- something the longtime ruler has resisted.
"If there is no injection from outside ... the Yemen economy will collapse, definitely," said Mohamed al-Maytami, economics professor at Sanaa University.
"The rial will collapse, inflation will rise to a level Yemen had never witnessed, the most needed food will not be available for majority of people who are poor," he said.
Yemen has allies with a strong interest in saving the country.
Allies in Washington and Riyadh fear a protracted standoff could prompt clashes between rival military units in the capital, and worry the ensuing chaos could benefit an active al Qaeda branch in the country that also targets Saudi Arabia.
Worried by protests that have drawn tens of thousands to the streets in cities across Yemen, the cash-strapped cabinet has vowed to raise wages, create jobs and distribute handouts worth an estimated 3.5 percent of economic output, or $1.1 billion (681.1 million pounds).
But as hard currency reserves dry out, the government has little room to manoeuvre. Yemen will need at least $2 billion in the next six to 12 months from donors to keep basic public services running, Maytami estimates.
Yemen relies on oil for 60 percent of its income. Yet robust oil prices above $95 per barrel offer little respite as oil exports dropped and a serious shortage forced the government to import crude and fuel, draining its funds.
As a result, the budget shortfall may shoot up to between $4 billion and $5.3 billion this year, a level unseen since a 1994 civil war with southern separatists, from an original plan of $1.5 billion, economists predict.
The finance ministry declined to comment on the budget situation in Yemen, whose nominal GDP of $31 billion amounts to only over half of annual spending of oil giant Abu Dhabi.
Yemen's foreign minister urged foreign donors in March to inject up to $6 billion into state coffers over the next five years to boost economic development.
DONOR AID
But potential donors including wealthy Gulf neighbours, which have pledged $20 billion for Bahrain and Oman, both hit by sustained protests in the wake of revolts elsewhere in the Arab world, are not seen rushing in with aid before Saleh leaves.
"They are not going to reward the regime with economic assistance. It hinges on a peaceful and successful transfer of power," Yemeni political analyst Abdul-Ghani al-Iryani said.
In a last minute reversal, Saleh refused to sign a Gulf-brokered deal in April that would ease him out of power within a month after nearly 33 years. His move upset Saudi Arabia, which had long backed Saleh to fight al Qaeda militants.
The IMF, which made $35 billion available for protest-hit countries, has said it was ready to discuss aid for Yemen, where over a third of the population is unemployed, when the situation allows. It approved a $370 million loan in August 2010.
Before anti-Saleh protests gained steam in February, the government planned to take a stab at raising funds through $500 million in Islamic bonds this year to combat slow-in-coming donor aid.
Only a fraction of $4.7 billion promised at a donor conference in 2006 has been disbursed so far in Yemen, one of the world's poorest countries with per capita income of $2,600, roughly 10 times less than that of Oman next door.
Yemen's economy was struggling even before thousands of students, activists and tribesmen took to the streets, battered by fights against northern rebels, southern secessionists and al Qaeda in a country awash with weapons.
ECONOMIC COLLAPSE?
But months of protests, in which more than 170 people have been killed, have brought the economy to the brink of collapse after growing 8 percent last year.
"The biggest problem is that basic needs are difficult to find. The situation is getting more and more difficult by the day," said economics professor Taha al-Fusail, who estimates that the economy has lost $5 billion or more.
Trucks and buses at petrol stations queue for hours, while water supply shortages and power blackouts are a daily norm.
Fuel supplies diminished when a refinery closed after tribesmen attacked a pipeline, causing losses of around $300-400 million a month. Yemen normally exports 105,000 barrels per day out of 280,000 produced.
"The increase of prices of food supplies increased the already existing suffering because the monthly salary is not enough," said Hisham al-Zabeidi, a government employee in Sanaa.
"Severe shortages of gasoline and gas cylinders added more pain," said Zabeidi, living on a salary of around $333 a month.
Prices of gas cylinders, which many use for cooking, have shot up five to seven times to $21 to $29 on the black market. Some food staples are hard to find with prices up by 10 to 20 percent, according to the latest street prices.
Some economists estimate inflation is currently running at up to 30 percent, double January's 13 percent.
With dollars hard to buy, some shopkeepers now request payment in greenbacks to be able to import and as the rial lost around 14 percent in value to 243 a dollar during the protests.
Economists say the rial, near historic lows of 250 a dollar seen last August, would probably weaken more if the central bank were not restricting the dollar supply as demand stays high. The rial currently stands at around 230 to the dollar.
Officially, foreign currency reserves dropped to around $5.1 billion from $5.9 billion at end-2010 but economists dispute that figure, saying they believed reserves were lower at around $4.4 billion or less.
Economic hardship was part of the impetus that drove many to protest -- some 40 percent of Yemen's 23 million people live on less than $2 a day and a third face chronic hunger.
"The severity of poverty is getting worse. Many stocks are now draining out and if there is no import it may happen that within few weeks these stocks are depleted," Maytami said.
(Writing by Martin Dokoupil; Editing by Cynthia Johnston and Ralph Boulton)
