Promoting Economic Resilience in Yemen

1. Domestic Revenue Mobilisation

Investments in human capital, education, skills development, healthcare, and social protection, alongside improvements in infrastructure, such as roads, energy, and telecommunications, are essential to restoring economic resilience and fostering long-term growth (Devarajan, Swaroop and Zou, 1996[8]). Public investment has historically been a major driver of economic development, with higher multipliers than public consumption (Auerbach and Gorodnichenko, 2012[8]).

Social spending and equitable taxation are also vital for poverty reduction and inclusive growth, even though their impact depends on improving access to quality education and healthcare. While fiscal policies can help reduce income disparities, Yemen’s heavy reliance on consumption taxes—rather than progressive income and property taxation—limits the redistributive effect of its tax system (GUPTA and JALLES, 2023[9])_. Moreover, Yemen’s fiscal constraints, combined with the war’s destruction of public services, have widened inequalities. More equitable (Jalles and de Mello, 2019[10]).

Nevertheless, years of conflict and economic instability have weakened the IRG’s capacity to mobilise revenue through taxation, customs, and debt. Revenue streams, along with the public deficit, have been deteriorating, which further constrain the ability of the government to provide essential services and support economic growth.

As part of the EU-OECD’s project on Promoting Economic Resilience in Yemen, the OECD carried out capacity-building activities, between 2022 and 2024, with Yemeni authorities, including the Ministry of Finance (MoF), which oversees tax and customs policy; the Ministry of Planning (MoPIC); the Ministry of Oil; the Yemen Tax Authority (YTA), responsible for tax implementation; and the Yemen Customs Authority (YCA), tasked with enforcing customs duties.

These exchanges allowed to identify progress and ongoing challenges in tax policy, tax administration, customs enforcement, as well as account management and budget planning. While limited tax and administration capacity hinder revenue collection in Yemen, the country’s overreliance on hydrocarbon revenues exposes it to both short- and long-term risks. Moreover, the IRG is also facing legal and institutional challenges to perform sound cashflow management and budget planning within central-level economic institutions, resulting in the deterioration of the country’s public deficit.

During the workshops, representatives of central-level Yemeni economic institutions identified reform priorities, including diversifying revenue sources, strengthening officials’ skills through capacity-building, and improving digital infrastructures. To enhance tax capacity, authorities should consider implementing a simple tax system in the short-term and introducing new taxes in the long run. Institutional reforms are also essential to increase the effectiveness of planning, monitoring, and implementing processes, and reinforce tax and customs policy-setting. Furthermore, restoring trust in public institutions and improving tax morale entail implementing fiscal rules to re-establish fiscal governance in the country. Finally, modernising Yemen’s cashflow and account management through co-ordination, pooling, and information sharing mechanisms will be key to reducing the country’s public deficit.

Context and Overview

Main sources of IRG revenues in 2023

Yemen’s public revenues, already below the average of Asian developing countries after the 2008 global financial crisis, have been severely impacted by ongoing conflict and economic instability (Figure 1.1). This decline has severely restricted spending on infrastructure, healthcare, and education, and challenges the government’s ability to pay public sector wages. Key revenue streams, particularly oil exports, tax collection, and customs duties have declined sharply since the beginning of the hostilities.

Figure 1.1. Yemen’s government revenue

As a percentage of GDP

Source : IMF, https://www.imf.org/external/datamapper/profile/YEM.

More specifically, the fiscal situation of the IRG deteriorated in 2023 (World Bank, 2024[11]). Between 2022 and 2023, total IRG revenues fell from Yemeni Riyal (YER) 2 774 billion in 2022 to YER 1 903 billion in 2023 (approximately from USD 1.84 billion to USD 1.26 billion at 2022 values), a decline of more than 31%. The tax revenue shortfall is multidimensional (Figure 1.2).

Crude oil export sales fell by approximately 97%, from YER 1 104 billion in 2022 to YER 38.5 billion in 2023 (approximately from USD 732.5 million to USD 25.5 million), because of the suspension of oil exports caused by attacks on oil facilities in the Hadramout and Shabwa governorates.

Tax revenues fell by 3%, from YER 648 billion in 2022 to YER 629 billion in 2023 (approximately USD 429.85 million and USD 417.25 million, at 2022 values) and accounted for 33.1% of total public revenues and only 2.1% of GDP. Across the tax heads:

• Customs revenues fell by 20%, from YER 239 billion in 2022 to YER 191 billion in 2023 (approximately from USD 158.54 million to USD 126.70 million, at 2022 values).

• Taxes on goods and services fell by 17%, from YER 423 billion in 2022 to YER 350 billion in 2023 (approximately from USD 280.60 million to USD 232.17 million, at 2022 values).

• Income taxes increased by 24%, from YER 224 billion in 2022 to YER 278 billion in 2023 (approximately from USD 148.59 million to USD 184.41 million at 2022 values). Yemen’s personal and indirect tax rates are among the lowest in Central Asia and the Middle East (Verdier, G. et al., 2022[12]).

The main reason for the decline in tax and customs revenues on goods and services was the reduced volume of imports through the port of Aden and the other ports under the control of the IRG. These are the consequences of the geopolitical challenges in the region, as well as the lifting of restrictions on imports through the main port of Hudaydah, which is under the control of the Sana’a-based De Facto Authority (DFA).

• IRG revenues were also negatively affected by DFA’s revenue collection practices. These included issuing “Pendrol” stamps and collecting sales taxes on cigarettes manufactured in the northern regions and sold in the IRG-controlled territories, retaining overflight fees paid by airlines for crossing Yemen’s airspace, and collecting taxes and fees from DFA-headquartered telecommunications companies for services provided in the IRG territory.

• Domestic revenue losses were only partially compensated by a 43% increase in external grants, which went from YER 284 billion in 2022 to YER 407 billion in 2023 (approximately from USD 188.39 million to USD 269.98 million). These included YER 56.1 billion in in-kind grants consisting of oil derivatives for power generation and YER 351.2 billion in cash grants (approximately USD 37.21 million and USD 232.97 million, based on 2022 exchange rate). This increase was driven by Saudi support through the disbursement of the first USD 267 million tranche from its USD 1.2 billion budget support, announced in August 2023.

Figure 1.2. Actual revenues for FY2022 and FY2023 with 2023 forecast

Source: Yemen Ministry of Finance.

Even though they decreased in 2023, tax revenues and crude oil export sales represented, along with grants, the main sources of revenues for the IRG in 2023 (Figure 1.3). Customs revenue are also a vital component of Yemen’s fiscal system, given the country’s reliance on trade-related taxation. As a result of limited sources of revenues to finance expenditures and support the living conditions of the Yemeni population, IRG’s fiscal deficit expanded to approximately 3.9% of GDP in 2023 (on a cash basis) from 2.7% in 2022 (World Bank, 2024[11]). Due to these framework conditions, the EU-OECD project has focussed on capacity building in connection with fiscal and tax institutions and policies in Yemen (Box 1.1).

Figure 1.3. 2023 Revenue collections (per income category)

Source: Yemen Ministry of Finance.

Evolution of tax policy, tax administration, customs, and cash and account management in Yemen

Tax policy

The YTA Stakeholder Council (comprised of YTA senior leadership) is responsible for formulating IRG’s tax policy with the support of the YTA Planning and Regulatory Section. For 2022-2025, a strategy was developed to meet the objectives envisaged under the IRG’s Economic, Financial, and Monetary Reform Programme.

Two draft laws for introducing a Value Added Tax (VAT) and reforming excise taxes were prepared with the support of development partners and submitted to the MoF. According to YTA estimates, these reforms could result in a 50% increase in tax revenues on the sale of goods and services. However, due to the absence of a functioning Legislative Council, which has the Constitutional prerogative of passing the laws, the proposed new legislation has not been adopted yet.

Tax administration

Tax registration

The YTA head office is in Aden, the temporary capital of the IRG. It hosts a centralised national database with information on taxpayers in the provinces under the authority of the IRG. The database contains accurate and reliable identification elements for all taxpayers with a tax number (including name, address, contact details, and type of business/activity).

The central YTA office in Aden liaises with other government agencies to detect unregistered individuals, businesses, and properties and local tax offices conduct continuous investigations in the field. Due to the lack of intranet systems for communication between different parts of the administration and the government, this process is paper-based and highly time- and resource-consuming.

Tax compliance

Tax compliance rates in Yemen are significantly lower than in other countries in the region and beyond. In 2023, only 52% of all IRG-registered large taxpayers filed tax returns for the fiscal year 2022 (i.e. 301 out of 578), 24% of the registered medium taxpayers (i.e. 1 383 out of 5 666), and 9% of the registered small taxpayers (i.e. 9 696 out of 100 249).ⁱ

Tax returns cannot be filed, and taxes cannot be paid through electronic means. Filings are paper-based, and payments are in cash. If a taxpayer fails to meet their obligations, the case is referred for a deemed profit basis assessment, the imposition of late payment fines and penalties, and the application of administrative sanctions (e.g. suspension of the tax registration).

Only about 3% of tax arrears are generally collected. To reduce tax arrears, the MoF Decree No. 76 of 2023 provided simplified procedures to collect taxes due by large and medium taxpayers for the taxable years up to 2019 and allowed delinquent taxpayers owing taxes for the years preceding 2020 to regularise their position by the payment of reduced penalties.

Tax audit

Tax audit activities are carried out in line with the annual plan set by the YTA and according to the procedures provided under MoF Decision No. 280 of 2011. The audit process starts one month after the deadline for filing with an analysis of the tax returns against pre-determined risk assessment criteria. Tax offices have three months to complete this analysis and then start audit activities for the selected taxpayers. Tax audits for income and sales taxes are conducted separately but simultaneously. With the support of the IMF’s Middle East Centre (MITAC), the YTA formulated a proposal for updated audit guidelines, which are being reviewed before adoption under the Yemeni law.

Customs

The YCA is responsible for border control, inspection of goods entering the country through land, sea, and air, detection of smuggling practices, and collection of customs duties and other import taxes. The YCA also co-ordinates with the customs authorities in neighbouring countries to facilitate the movement of goods and persons across borders.

Since the transfer of the capital to Aden in 2015, the YCA has been working on establishing new customs entry points and re-establishing the operation of damaged ones in the territory under the IRG’s control. The YCA fostered the use of the Automated System for Customs Data (ASYCUDA) across existing and new customs entry points. The ASYCUDA system – developed by the United Nations Conference on Trade and Development (UNCTAD) – facilitates customs declarations, along with accounting and transit, and generates trade data that can be used for statistical economic analysis. The YCA also promoted the implementation of the Authorised Economic Operator (AEO) programme, which provides simplified customs procedures for pre-approved economic operators who have an established compliance track record and meet a range of security conditions.

In 2022, the YCA received the ISO 9001 certification and, in 2023, achieved significant results, including numerous seizures of prohibited goods. The Council of Ministers’ Decision No. 2 of 2024 established the Supreme Ministerial Committee to Combat Smuggling, which is responsible for the adoption of reinforced anti-smuggling policies and practices and the co-ordination of implementing authorities.

Cash and account management

Government deficits are managed through direct lending from the CBY-Aden to the IRG or through sovereign bond issuance. Although the CBY-Aden halted currency printing in recent years, the IRG’s account exposure is high due to past years’ arrears accumulation. Limited information is available about the public finances of the DFA. However, the DFA is unable to print currency and operates a strict cash budget. When revenues are insufficient to finance expenditures, it accumulates arrears – for example, in salary payments to public employees.

Cash management duties are performed by the CBY-Aden and the MoF of the IRG. The CBY-Aden oversees resource allocation and government payments. Decisions are made by the board of directors after considering technical investigations from various sectors. The IRG MoF houses a cash management unit and a committee that considers revenues and expenditures for cash flow management purposes.

Additionally, revenue monitoring and forecasting from large taxpayers are performed by the MoF to ensure their accurate integration into the overall budget. The MoF also assists the IRG with the issuance of Sukuk and government bonds.

Box 1.1. Tax capacity-building activities implemented under the EU-OECD Project on Promoting Economic Resilience in Yemen (2022-2024)

Training workshops

Two in-person workshops (Amman, Jordan, October 2022 and Cairo, Egypt, June 2023) and a virtual event (June 2024) were organised to provide training opportunities on key concepts in international taxation relevant to protecting Yemen’s tax base (i.e. tax treaties and anti-abuse provisions, transfer pricing and related risk management strategies, and exchange of information).

Peer-learning exchanges

In 2023 and 2024, two peer-learning exchanges were conducted with Egypt and the Kingdom of Saudi Arabia (KSA). These exchanges focused on several tax and customs-related issues, including automation of tax processes, tax and customs risk assessment and audit, dispute resolution, simplified customs clearance processes, and experiences in implementing reforms on income taxation, Value Added Tax, and excise taxes.

Tax Inspectors Without Borders

The abovementioned training and peer-learning events were complemented by three workshops organised under the joint OECD/UNDP Tax Inspectors Without Borders initiative, which provided hands-on assistance on risk assessment and transfer pricing audit. This included support to review draft regulations on tax risk identification and mitigation strategies and to improve tax audit approaches in the oil and gas sector.

E-learning in Arabic

Four e-learning modules were developed in Arabic covering fundamental concepts in international tax co-operation, namely: i) tax treaties; ii) transfer pricing; iii) exchange of tax information; and iv) strategies to combat money laundering and terrorism financing.

Multi-stakeholder dialogue

A multistakeholder dialogue was facilitated to promote a reflection with and among Yemeni authorities on the latest developments, challenges and progress in taxation, to identify short/medium-term and longer-term priorities and suggested actions to enhance Yemen’s domestic resource mobilisation. This work culminated with a meeting held in March 2024, attended by representatives from different parts of the government.

Current Challenges

Mobilising domestic revenues and reducing the public deficit is a critical challenge for Yemen. OECD’s consultations with Yemeni stakeholders allowed to identify that a limited tax base, capacity issues, the country’s heavy reliance on hydrocarbon revenues, along with obstacles to sound cashflow and account management, limit the governments’ ability to collecting and managing public funds efficiently.

Constraints resulting from limited tax capacity due to structural and conflict-induced conditions

Low tax capacity hinders revenue mobilisation in Yemen. Structural conditions, including low-income levels, high informality, and a large agricultural sector, compounded by the intensification of the conflict, limit the country’s tax base. Moreover, as most large taxpayers operate out of Sana’a, the IRG has no control over their tax base since the de facto partition of the country.

Challenges resulting from weakened tax and customs administrations’ capacity

With the onset of the conflict in Yemen, most of the tax administrative and technical capacity remained in Sana’a. The YTA and the YCA must overcome a significant lack of qualified personnel, physical infrastructure and equipment, as well as digital tools.

This weak capacity hinders revenue collection by making it more difficult for authorities to detect unregistered individuals and carrying out tax audit activities. Households and businesses also face challenges in filling tax returns and paying their taxes as reflected by the abovementioned compliance rates.

The lack of capacity results in inefficiencies in customs administration, including longer import clearance times and less streamlined tax compliance processes compared to similar economies. Even though Yemen’s tariff structure is less complex than in some peer countries, inefficiencies, along with smuggling and competing tax collection by De Facto Authorities, lead to customs revenue losses (Verdier, G. et al., 2022[12]) .

Risks resulting from heavy dependence on oil and gas revenues

While oil and gas revenue has traditionally been an important source of public finance, Yemen’s heavy reliance on hydrocarbons exposes it to significant risks. On the short term, oil and gas revenues change depending on commodity price volatility, the fossil fuel demand could decline on the long term due to climate policies. This vulnerability has been compounded by conflict and instability in the global economy. Attacks on oil facilities, such as in the Hadramout and Shabwa governorates in 2023, led to the suspension of oil exports, resulting in a decline in related revenues.

Moreover, Yemen’s dependence on oil revenues exposes the country to the “oil curse” risk. Many resource-rich countries have been plagued by the “oil curse”, where the resources from oil fail to translate into investment fostering long-term growth (Kakanov, Blöchliger and Demmou, 2018[13]). A range of factors may account for this paradox, including an excessive appreciation of the exchange rate that hampers the competitiveness of non-oil sectors, a crowding-out of other industries by the oil sector that prevents modernisation, and poor governance. Empirically, OECD estimates show that a 10-percentage point increase in the oil export share is associated with a 7% lower GDP per capita in the long run. Yemen’s performance was in line with the sample’s average before the war (Figure 1.4).

Figure 1.4. The “Oil curse”: Oil dependence and long-run GDP per capita growth

Note: Average annual growth of GDP per capita versus average share of oil in goods export revenue between 2000 and 2022.

Source: OECD (2024), OECD Economic Surveys: Norway 2024, OECD Publishing, Paris, https://doi.org/10.1787/cb13475f-en, based on Kakanov, E., H. Blöchliger and L. Demmou (2018), "Resource curse in oil exporting countries", OECD Economics Department Working Papers, No. 1511, OECD Publishing, Paris, https://doi.org/10.1787/a5012a3d-en.

Obstacles to efficient cashflow and account management

Yemen is also facing significant challenges to perform sound cashflow management and budget planning within central-level economic institutions in the IRG, resulting in the deterioration of the country’s public deficit.

• While both the CBY-Aden and the Ministry of Finance of the IRG are performing cash management duties, the absence of collaboration and co-ordination between them has led to inefficient cash management. Regarding data sharing for instance, daily updates and frequent reconciliations are proving difficult to obtain. Currently, data is received on a monthly basis, but more frequent updates would be needed to perform more effective and efficient budget management. The MoF expects the CBY to provide further assistance in the future to improve data collection and sharing systems. Moreover, subsequent frictions between CBY-Aden and the IRG MoF could arise from the fact that CBY-Aden oversees resource allocation for government payments, yet CBY-Aden is not the holder of the government budget, rather it is the government’s fiscal agent.

• The lack of financial management information system, containing historical and relevant timely data, along with the absence of automatic link to spending agencies or the CBY, prevent the MoF from performing effective cash planning and forecasting.

• Certain government units have independent accounts. The MoF has no control over these accounts and lacks information about these units’ revenues, further damaging its cash planning and forecasting capabilities.

• The government resources are not fungible, leading to financial revenues losses and overborrowing by Yemen’s government.

• De facto decentralised architecture prevents efficient and timely cash flow management, planning and commitment control capacity as there are no mechanisms and actions ensuring transactions are fully funded prior to their authorisation.

Policy Priorities

Based on the developments and ongoing challenges described above, multistakeholder consultations with and among the Yemeni authorities allowed identifying short-, medium- and long-term priorities and suggested actions to foster domestic revenue mobilisation and improve public resources management, with the aim of reducing the public deficit.

Reducing dependence on oil revenues

Ensuring fiscal stability, as well as sustainable and inclusive growth, requires diversifying revenue sources and managing the oil and gas revenues in a transparent and efficient way. The government could establish dedicated investment funds with clear mandates, such as infrastructure development, as some resource-rich countries like Chile and Norway have done. This is crucial from an economic stabilisation point of view, but also from a political point of view, as fights for the oil rent can hinder political stability (World Bank, 2023_[23]).

Strengthening capacity-building efforts

The capacity-building support provided by the EU-OECD Project, along with the support of other development partners such as the World Customs Organization (WCO) and USAID, has led the YTA and the YCA to strengthen their human and technical capacities. The YTA has finalised a human resources development plan and set up a training centre hosted at the Aden Tax Office. YTA staff attended several internal and external training initiatives, including those organised under the EU-OECD Project on Promoting Economic Resilience in Yemen (see Box 1.1). Moreover, the YCA opened a Customs Training Centre that regularly organises training activities for officials on a wide range of topics, including inspection procedures, customs assessment, automated processes and data analysis, fraud and smuggling prevention, leadership, and management development. Continued efforts to meet staffing needs and build technical capacity will be a critical priority for both YTA and YCA.

• Intensifying recruiting and training efforts to strengthen officials’ skills and competencies

  Accelerating the recruitment of new staff is of utmost importance, together with the need to expand training opportunities for new and existing staff. In addition to benefitting from capacity-building support provided by development partners, the YTA and YCA may continue leveraging peer-learning exchanges with other countries in the same region who share cultural and linguistic affinities. Critical training needs include support for:

  • tax and customs risks management

  • tax collection and expenditures and in-depth policy analysis to increase revenues and achieve higher levels of voluntary taxpayer compliance

  • combating smuggling and money laundering

  • customs assessment and simplified customs clearance processes (e.g. ASYCUDA system, AEO and single-window programmes)

  • employees working on medium-term budget preparation to alleviate the structural fiscal challenges in Yemen, possibly with donor participation

  • tax audit in specialised sectors (i.e. banking, insurance and financial services, telecommunications, and oil industries). Strengthening YTA’s capacity to access and audit the tax files of large taxpayers and collect taxes and fees on their activities in the IRG-controlled territory can bring significant tax revenues. Sectors with higher revenue-generation potential include banking, insurance, financial services, telecommunications and extractive industries.

• Improving authorities’ physical and digital equipment

  Yemeni authorities should also improve their physical and digital infrastructures. Investment in office premises, training centres, and other facilities, as well as equipment and digital systems, is vital to improving YTA and YCA’s efficiency and effectiveness in carrying out their operations. The procurement of additional screening/x-rays machines and updated IT systems will be key to further improve YCA’s capacity to detect smuggling practices and counter the evasion of customs duties and other import taxes.

  With support under the USAID/Pragma Economic Recovery and Livelihoods Project (ERLP), a study was prepared for the implementation of an integrated IT system for the digitalisation and automation of tax processes. Appropriate funding will need to be allocated to acquire the required equipment and digital infrastructure, as well as to meet staffing needs. This project can help reduce administrative and compliance costs, enhance data management and analysis, and improve tax collection.

Enhancing tax capacity through short- and long-term measures

• Implementing a simple tax structure in the short-term

  In the short-term, Yemen should consider implementing a tax system aligned with its administrative capabilities and guided by the general principles of taxation, including equity, certainty, efficiency, and simplicity. Yemen’s tax system should feature:

  • broad and easily assessable tax bases with moderate, simple, and uniform rates,

  • limited number of taxes,

  • minimal exemptions to reduce loopholes,

  • simplified collection mechanisms,

  • presumptive taxation for small taxpayers,

  • centralised collection points,

  • and planning for future reforms.

All the above-mentioned features can enhance revenue mobilisation and long-term fiscal stability (Mansour, 2019[14]), by facilitating tax administration and reducing the scope for avoidance and informality, particularly for SMEs and individual taxpayers.

In the short term, revenue can be collected from natural resources, customs, large taxpayers, and wages in the formal sector.

• Introducing new taxes on the long run

In the medium to long term, as administrative capability improves, new taxes can be introduced to better achieve efficiency and equity objectives. Yemeni authorities may consider adopting VAT and excise taxes reforms, which have the potential to increase domestic resources significantly. The passing of these reforms will however require that the Legislative Council resume its functions. In the meantime, administrative measures can be improved to increase the collection of sales taxes (e.g. the registration of non-residents carrying out cross-border transactions in the country).

Adopting new taxes potentially involves adopting and communicating a medium to long term revenue strategy, evaluating and disclosing future spending needs and establishing a sound legal framework for fiscal management.

Strengthening fiscal governance through institutional reforms

Institutional reforms are essential to increase the effectiveness of planning, monitoring, and implementing processes, and reinforce tax and customs policy-setting and implementation mechanisms. This includes:

• Optimising tax governance structures and processes

Yemeni authorities should optimise their organisational structures and processes. A revamped organisational structure of the YTA and its executive offices was recently developed in co-operation with MITAC and agreed to in principle by the senior management of the YTA and MoF. The updated structure comprises three central departments, namely:

1) Strategy, Planning and Follow-up, with responsibility over taxpayer registration and services, tax filing and collection, risk management and investigations, and strategy, planning and performance;

2) Field Operations, with responsibility over large taxpayers, local tax offices and the tax office of the Investment Authority; and

3) Support Services and Legal Affairs, with responsibility over budget and finance, human resources, IT and data collection and analysis, and legal affairs (including tax appeals).

Accelerating the implementation of this new organisational structure is key to achieving an efficient allocation of responsibilities and increasing the effectiveness of planning, monitoring and implementing processes.

• Promoting further decentralisation and co-ordination with and among local offices

Following the Council of Ministers’ Decision No. 26 of 2023, which increased the amount and allocation of certain fees to local administrations, further decentralisation and improved co-ordination among central and local tax offices in the long term can lead to strengthened and more consistent tax collection across the country, in addition to greater empowerment and accountability of local authorities.

• Reinforcing tax and customs policy-setting mechanisms through the establishment of an MoF-led body

The function of setting tax and customs policies may benefit from the establishment of an MoF-led body comprising experts with diverse experience in a range of fields, including tax, customs, law, economics, business administration and communication. This body can support the development of policies aligned with the economic, social and development goals set by the Government, oversee their implementation, and provide strategic advice to ensure that they keep pace with evolving needs.

• Establishing effective dispute resolution mechanisms

In light of the dramatic inflationary trends facing the country, delays in tax dispute resolutions can lead to a substantial loss of the value of revenues recovered in these processes. Institutionalising an efficient, trusted tax dispute mechanism is essential to relieve the inflationary impact on tax liabilities which are under dispute and promote a climate of trust between taxpayers and the tax administration.

Strengthening fiscal governance through the design and implementation of fiscal rules

Fiscal governance is key to restoring trust in public institutions, attracting foreign aid, and improve tax morale (i. e. the intrinsic willingness to pay taxes). Governance underpins choices about taxation, public spending, and government debt, which are crucial for current budget management and the provision of necessary public services, as well as to drive long-term prosperity. It also entails ensuring accountability and transparency.

While challenging to implement in the current environment of scarce resources and political and institutional fragility, fiscal rules will be needed in the medium term to raise confidence in the sustainability of public finances and allow raising funds from investors. This includes introducing measures to fight corruption of tax officials and participating in international initiatives for co-operation on taxation to fight tax evasion. Moreover, YTA has recently co-operated with the Yemen Association of Chartered Accountants to improve the processes for the filing of large taxpayers’ tax returns, with a view to increasing transparency and trust between taxpayers and the tax administration.

Improving sovereign cashflow and account management’s efficiency

Modernising Yemen’s cashflow and account management should aim at achieving three objectives: i) paying expenditures in a timely manner, ii) reducing financial and non-financial borrowing, and iii) improving the monetary policy effectivity. The following steps, identified by representatives of central-level Yemeni economic institutions during the workshops organised by the OECD, can be considered:

• Setting up a technical system for government financial and accounting information to network between the MoF and relevant bodies, such as the CBY-Aden, various government authorities, and commercial banks, including Islamic finance. This will allow the MoF to conduct more effective budget management.

• Implementing a Treasury Single Account (TSA) reform to consolidate all government cash resources into a single account. The use of TSA could facilitate cash management by enabling public resources to be collected in a single pool to be utilised more efficiently through economies of scale. The TSA would also help containing debt remuneration by reducing and avoiding unnecessary borrowing as substantial amounts of cash would be used by the National Treasury. The TSA would ensure accurate remuneration of public resources with appropriate instruments at an optimum rate of return. The coverage of the TSA should be comprehensive, including all government cash resources and spending units with their own source of revenues, unless they are completely independent of the government (e.g. an independent state-owned enterprise). Moreover, to address the issue of independent government accounts, the MoF has already adopted decrees that prohibit the opening of such accounts and establish mechanisms for better control.

• Fostering co-operation with the central bank to ensure effective cash management and monetary policy implementation. This can be formalised through an institutional-level agreement of co-operation between the CBY-Aden and the Treasury that would clearly define roles, responsibilities, and expectations, as well as detail account operations, co-ordination, information sharing, and remuneration of deposits and transactions.

• Establishing a centralised payment system at the MoF and improving co-ordination between cash management and budgeting processes would ensure that cash is available when needed and that spending is in line with budgetary provisions.

• Implementing measures to promote the expansion of domestic financial markets to increase the government's access to funds and reduce reliance on external borrowing.

• Establishing a cash co-ordination committee involving the relevant bodies to oversee and co-ordinate an effective implementation of such cash management measures.

Yemen’s fiscal reform first priority includes reinforcing fiscal governance and cashflow management through institutional reforms, while strengthening the YTA and YCA through capacity-building. The second priority is to enhance tax capacity by adopting a simple short-term tax structure and preparing for medium- to long-term tax reforms. The last reform priority is to reduce dependence on oil revenues by diversifying income sources and managing hydrocarbon revenues transparently. These recommendations should be implemented gradually over time and in a co-ordinated manner between the MoF, spending units, the tax authorities, the central bank, donors, and commercial banks.