Millions in aid linked to Yemeni reform

President Ali Abdullah Saleh was en route to Washington in 2005 for talks on his country's role in the "war on terror" when his entourage learned that Yemen would be dropped from a list of countries hoping for millions in US aid.

But no one in his retinue dared broach the subject with President Saleh, says a Sanaa source familiar with the trip. The leader, who had long denied that his country has a corruption problem, wouldn't learn until he reached the White House that Yemen was cut from the list of nations eligible to apply for the Millennium Challenge Account (MCA), a Bush administration plan that ties aid to governance benchmarks.

"It came as a real shock," says the source. "It was only then that the scale of Yemen's problems sank in."

While the November 2005 trip was a public embarrassment for Saleh, it marked a turning point in how his government began dealing with corruption.

In the beginning of 2006, he launched an ambitious anticorruption program, and on Feb. 14, the Millennium Challenge Corporation (MCC), which administers the MCA, reinstated Yemen's chance for assistance as a result of an "aggressive reform effort."

Now, this fragile state on the tip of the Arabian Peninsula could gain hundreds of millions of dollars in aid, if it can sustain reform momentum. Yemen is the poorest Arab country – almost half the population is illiterate and 1 in 10 people live on less than $2 a day.

"Our economy is heavily dependent on oil supplies that won't last more than 15 years and the water table is dropping at an alarming rate," says Ali Saif Hassan, director of Yemen's Political Development Forum, an independent think tank. "The current reform program is very welcome, but there's a danger that the speed of the approaching resources crisis will outpace the process of transformation."

Saleh's reward for his U-turn has more political value than immediate financial benefit. The country still has many hoops to jump through before it can claim the prize of full participation in President Bush's aid program.

Yemen is now embarking on a round of negotiations that will force it to define its intentions. If Yemen is accepted to join the MCC's Threshold Program during the next few months, it will receive funds to speed up early reforms that will allow Yemen to apply for full membership, known as compact status, in a few years' time. The process can be suspended at any time.

"Continued participation in the MCA program is contingent upon good performance on the policy benchmarks," says John Danilovich, chief executive officer of the MCC.

In December 2006, Yemen's parliament ratified a law forming the National Supreme Anticorruption Authority. The MCC board will be watching to see if this new body operates effectively before Yemen can progress to the compact stage.

Yemen must also show that revised procurement laws for government contracts are being used and that steps are being taken toward press freedom and respect for the rule of law.

The payoff could be substantial. Ghana is one of 31 countries admitted to the twin stages of the Millennium Challenge and the most recent applicant to qualify for a compact; it was awarded $540 million over four years.

The MCC's nod comes at a time of growing confidence in Yemen among donors. In November 2006, Britain and Yemen's Gulf neighbors pledged $4.7 billion in aid over the next four years. The agreement to increase aid followed the recognition that Yemen was underfunded. It receives just $12 per person in annual development assistance. Its African and Asian peers, on average, receive three times that amount.

British Ambassador Michael Gifford says Yemen is standing at "a crucial point. There are a number of reform-minded ministers responsible for key portfolios and recent pledges of increased aid, including from the UK, demonstrate that President Saleh's government has the good will and support of the international community."

To be sure, there are concerns about Yemen's capacity to spend this extra money wisely. Donors admit that such an extensive reform process will be difficult. In the long term, they emphasize Yemen's need to follow through on its promises.

"Economic reform and stamping out corruption are vital to solving the country's future challenges," says Kevin Rosser, an oil and gas analyst at risk consulting firm Control Risks. "Without them, there can be no progress toward reducing poverty, combating extremism, or strengthening democratic institutions."

Western diplomats and progressive Yemenis hope that this opportunity won't be squandered. Saleh has endorsed the project personally. Observers are hoping that he demonstrates the will to implement the changes in a sustained reform drive that lasts the course of his term in office.

"If Yemen backslides, it will affect the whole region," says presidential adviser Faris Sanabani. "Yemen has huge potential, and the economy is our next battle. Our commitment to reform is going to turn the country around and put us on the right track for the future."