ECONOMIC PROBLEMS AND PROSPECTS IN THE FLEDGLING PEOPLES REPUBLIC OF SOUTHERN YEMEN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220040-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 16, 2016
• Document Release Date: December 27, 2004
• Sequence Number: 40
• Publication Date: April 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Economic Problems and Prospects
in the Fledgling Peoples Republic
of Southern Yemen
Secret
ILLEGIB
ER IM 68-38
APRIL 1968
COPY NO. i
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WARNING
This doctnnent contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US (:ode, as amended.
its transmission or re%clation of its contents to or re-
ccipt by fit nnanthorized person is prohibited by law.
GROUP I
[XCt.vuru rlso~t /,tll'o VATIC
A%NIPVtl AMID
M 1?A t~
II I'''I.MS ICAi ION
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SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1968
Economic Problems and Prospects
in the Fledgling Peoples Republic
of Southern Yemen
Summary
The newly independent Peoples Republic of
Southern Yemen* faces economic and political prob-
lems of immense proportions. Both personal and
governmental incomes have fallen rapidly since
mid-1967, severely hampering the government's
ability to maintain order and to plan for the
future. The present economic decline, triggered
by the British withdrawal, follows a period of
rapid economic expansion created almost entirely
by the major British military presence in Aden,
which began in 1959. Between 1959 and 1965, Aden's
population grew from about 150,000 to about 250,000
and its national income increased about 75 percent.
By the end of 1968, Aden probably will have lost
slightly more income than it gained during 1959-65.
If 100,000 residents leave by the end of 1968, as
expected, average per capita real income will fall
well below the 1959 level., perhaps by
35
percent
(this estimate includes a price rise
imately 30 percent).
of
approx-
* South Yemen comprises the former British Crown
Colony of Aden and 20 principalities formerly
grouped into the An Protectorate. It is the suc-
cessor to the South Arabian Federation, which never
became fully operative, but it encompasses the four
Protectorate states that had refused to join the
Federation (see the map, Figure 1).
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and coordinated with the Office of National Esti-
mates and the Office of Current Intelligence.
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The economic life of the new state is concen-
trated in Aden. Aden's main economic activities --
(1) petroleum refining and bunkering and (2) tourism
and trade fostered by free port status -- slowed
down sharply during months of turmoil preceding
independence. Closure of the Suez Canal and with-
drawal of British troops destroyed most of Aden's
remaining port-related business. With the loss
of the $40 million annually contributed by the
British base, Aden can expect its gross national
product (GNP) in 1968 to reach less than 55 percent
of the level attained in 1966. The impact of
economic contraction on individual incomes will be
cushioned somewhat by emigration. The departure
of British citizens and of Indian, Somali, and
Pakistani shopkeepers and minor functionaries, how-
ever, has deprived Aden of most of its relatively
well-educated and skilled inhabitants.
The flow of population out of Aden to its
hinterland has contributed to problems in the out-
lying areas, which have relied mainly on British
subsidies, emigrant remittances, subsistence
agriculture, smuggling, and a few handicrafts for
a near subsistence income. The South Yemenis re-
maining in Aden now have less income to spare for
their families at home; those who have returned
home increase the population that inadequate
resources must support.
Prospects for a reversal of fortune in the
immediate future are poor. The reopening of the
Suez Canal would bring some improvement in port- and
bunkering-related activities. Political unrest and
terrorism, however, remain major deterrents to
recovery. Subsidies from the United Kingdom have
been the major source of governmental revenue in
the past, and no British aid has been promised for
the period following May 1968. Without substantial
foreign assistance, the ruling National Liberation
Front will be unable to meet current expenses, much
less embark on development schemes. With the
economy shrinking, revenues from local taxes and
fees are falling. The regime has visions of ambitious
but nebulous development programs aimed at building
a stable economic and political atmosphere and
fostering welfare and growth. It has appealed for
aid from any nation that will offer help, but
response to date has been meager. The immediate
need is for budget support funds, a category of aid
becoming increasingly rare throughout the world.
The longer term need is for substantial public and
private investment.
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 SAUDI ARABIA
~`L_. 1 P. - I 9~ ndnrV Un deed
C`
K,mar,n
C.. Yerm?ul
PEOPLES REPUBLIC OF SOUTHERN YEMEN
1hamud
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is
PONRPMAUT
N
50 100 150 Miles
(1 50 100 150 Kd-,Iers
1.1
SOCOTRA
(S. Yemen) Iladibi~
Tamrida)
+,=,'r s e o
DI'r
Fuaum ?
Shakh
Ulhman
Ma'alah '
At Tawahi? ADEN Crater
. At Burarlah tl'I
LITTLE ADEN
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Mocha,
pr)ab)
ETHIOPIA ~??~\? / ?Lihll
MADINAt
ASH SHA'HO?Crater
% ADEN
(S. Yemen)
MADINAI
ASH SHA'B-
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Contrast Between Aden and the Outlying Areas
1. South Yemen is divided, economically and
politically, even more sharply than most under-
developed countries. When the area was under
British control or protection, Aden was ruled as a
colony while the remainder of the area experienced
only a minimal British advisory presence. The
administrative and advisory mechanisms operated
separately, and two greatly different economic and
social structures existed. Goods exchanged between
Aden and the outlying areas were regarded and
recorded as foreign trade.
2. When the British began trying in the late
1950's to merge the disparate areas into a nation-
state that could be granted independence, Aden was
relatively modern and prosperous. The surrounding
area was made up of monarchical, feudal, tribal
states that had little contact with the outside
world. The Adeni power groups tended to be
nationalistic, anti-British, and progressive; the
country sheiks and their supporters were benefici-
aries and advocates of the status quo. The initial
British formula for unification favored the tradi-
tional tribal rulers. Elements in Aden, however,
resisted this formula with increasing violence as
the time for power transfer approached. In mid-
1967 the British abandoned the attempt to impose
domination by the sheiks and agreed to negotiate
procedures for independence with any group that
could demonstrate effective control in South Arabia.
Aden then erupted into warfare among various
nationalist groups. Within weeks, the National
Liberation Front had established control in Aden
and in most of the principalities, and the majority
of the hereditary rulers had fled the country.
3. Political unity is precarious, however, and
economic unity has not even begun to appear. Aden
de.iends on the hinterland for some foods and in
turn supplies some consumer goods and machinery,
but their separate economic and financial institu-
tions differ greatly. The economy of the hinter-
land is based on subsistence agriculture and some
foreign aid and is largely nonmonetary. That of
Aden, on the other hand, is relatively modern,
industrialized, and monetary.
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The Economy of Aden*
4. Even before the British transferred their
major Middle East headquarters to Aden in 1959, Aden
was a prosperous city. Aden's location relative to
major international waterways and its excellent
harbor attracted a large clientele for bunkering,
commerce, and tourist services. Both the location
and a history of political stability encouraged the
British Petroleum Company to build an oil refinery
that supplied bunkers and provided exports. Eritish,
Indian, and Pakistani expatriates, attracted by the
city's bustling atmosphere, controlled most of the
commercial and industrial sectors of Aden's economy,
holding nearly all of the management and proprietary
functions and contributing a sizable portion to the
city's GNP. Conversion of the British military
establishment from a small garrison to a major head-
quarters added $35 million directly to Aden's GNP
by 1966, and the resulting economic boom inspired
other activities that generated a similar amount
of new income.
5. The decision of the United Kingdom to with-
draw its forces from Aden and to grant independence
to the area in November 1967 brought an immediate
end to economic growth. Even if the transition had
been peaceful, Aden would have lost about $40 mil-
lion annually -- $35 million in expenditures by the
British military and military dependents and $5 mil-
lion in subsidies. Such a decline would have re-
moved almost a quarter of Aden's GNP directly, and
adverse repercussions would have been felt through-
out the economy. The blow dealt by the British
withdrawal was compounded by a struggle for post-
independence power between rival groups whose mutual
terrorism disrupted economic activity. Problems
are intensified by the closure of the Suez Canal,
which altered world shipping routes and left Aden
isolated from most maritime traffic. Aden's economy
thus has been crippled so seriously that recovery
will be painfully slow.
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6. No sector of Aden's economic life was left
untouched by the chaos of the last half of 1967.
GNP, which had been estimated to total some $175
million in 1966, fell to roughly $120 million in
1967 (see Table 1), the greatest decline occurring
in the last half of the year. Prospects for re-
covery in 1968, which depend on continuation of a
precarious peace, are slim. Some renewal of domes-
tic and foreign trade is possible, but it will not
compensate for the loss incurred when the British
base was closed. GNP probably will decline to
about $95 million in 1968 unless substantial new
foreign aid is forthcoming (see the chart, Figure 2).
Aden: Gross National Product
1966-68
Million Current US $
1966 a/ 1967 1968
(Estimated) (Estimated) (Projected)
Military installations 35 20
Refining 10 8 8
Port and shipping 12 6 7
Retail and tourism 36 19 17
Bunkering
and petroleum distri-
bution 5 2 2
Construction
and transportation 10 8 9
Other industry 8 6 7
Government b/ 40 35 30
Emigrant remittances 4 3 3
Other 15 13 12
This item includes expenditures of foreign aid
revenues estimated at $20 million for 1966, $16 miZ-
lion in 1967, and $14 million in 1968.
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British Military Expenditures
7. When the United Kingdom decided to end its
rule in Aden, expenditures by British military
authorities and personnel accounted for more than
20 percent of Aden's GNP and provided direct
employment for more than 8,000 persons. As many as
25,000 local contractors, grocers, merchants, and
servants depended indirectly on the presence of
British troops for their livelihood. As British
civilians and dependents were evacuated in the
summer of 1967 and strict security measures were
imposed on British troops, economic activity dF:-
clined sharply. The part of the GNP that was
derived from the British military presence in 1967
probably declined by $15 million -- to about $20
million (see Table 2) ?-- and this income ceased
altogether in November 1967 when the British with-
drawal was completed.
Aden: Contribution of British Military Installations
to the Gross National Product
1966-67
Million Current US $
1966
1967
Total
Expendi-
tures
Contri-
bution
to GNP
Total
Expendi-
tures
Contri-
bution
to GNP
Spent by service men
and families
For services
12
12
6
6
For local goods
2
2
1
1
For imported goods
10
2
5
1
Spent by base authori-
ties
Salaries to the local
personnel 8
8
6
6
Fuel, utilities, and
goods 9
7
7
5
Capital investment 4
4
1
1
Total
45
35
26
20
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 Aden: Gross National Product
1966 and 1968
1966
Military Installations
1968
1966
1968
1966
1968
Ii-
F
D
Figure 2
150 200
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58624 3-68 CIA
1966
1968
1966
1968
Refinery, Bunkering, 1966
and Petroleum
Distribution 1968
Port and Shipping 1966
1968
Construction and 1966
Transportation 1968
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8. When the British withdrew, about 25,000
people -- about one-third of Aden's labor force --
were left jobless. They include workers at the
base, a large number of domestic servants formerly
employed by the British, and workers in restaurants
laundries, barber shops, and similar local service
industries. Many of these unemployed left Aden to
return to their former homes in other countries or
to the outlying districts of South Yemen, but many
remain in Aden and constitute a serious problem
for the new government.
Port, Shipping, Retail, and Tourist Revenues in
Aden
9. Port, shipping, retail, and tourist
revenues, which together contributed $48 million
to the GNP in 1966, accounted for only about $25
million in 1967 (see Table 3) . Although emigra-
tion aggravated the situation, a sharp decrease in
shipping activity was the largest single factor in
the decline.
10. Violent strikes in the spring of 1967,
followed by the closure of the Suez Canal, combined
to reduce ship calls at Aden. Only about 3,000
major vessels visited Aden in 1967, compared with
more than 6,000 in 1966
11. The decline in ship traffic and fear of
terrorist activities also depressed income from
tourist services and retail trade. Arrivals of
transit passengers in 1967 dwindled to 28 percent
of the 1966 level, and tourist arrivals were only
10 percent of normal levels in late 1967 and early
1968 in the face of continuing unrest, and are un-
likely to revive as long as this continues. Hotels
and restaurants suffered from the loss of tourists
as well as from declining expenditures of British
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military personnel and their dependents. Aden's
free port status was maintained, but earnings from
lavish expenditures by tourists and ship crews on
duty-free items, such as watches, cameras, and
household items, also dropped. General strikes
and the flight of expatriate Indian, Pakistani,
and European shopkeepers and businessmen have
depressed retail trade further. Many of Aden's
retail outlets are closed, and their departing
owners have taken away a significant part of the
market for Aden's more expensive goods -- luxury
food items and manufactured goods.
12. If some semblance of peace is maintained,
Aden's retained income from shipping and visitor-
related services during 1968 probably will rise
slightly, but recovery to the level of 1967 is
highly unlikely. The exodus of European and Asiatic
consumers presumably is permanent in most cases,
and thus retail trade will remain slow. The pros-
pects for a significant increase in shipping activity
also are dim. A slightly larger share of any profits
from tourism and retailing will remain in Aden
because the businesses that continue to function
will be operated increasingly by Adenis and other
Arabs. As remittances of profits abroad decline,
money retained in Aden will provide some basis for
renewed activity.
Aden: Contribution of Port, Shipping, Retail,
and Tourist Revenuea
to the Gross National Product
1966-68
Million Current US $
1966
1967
1968
(Estimated)(Estimated)(Projected)
Total income earned
from:
Port and shipping
15
7
8
Retail and tourism
Less: repatriated
46
25
21
earnings of foreigners
13
7
5
Contribution to net
income
48
25
24
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Refining and Bunkering in Aden
13. In 1967, refining and bunkering activity
contributed only about $10 million to Aden's GNP,
compared with some $15 million in 1966. The
British Petroleum Company refinery at Little Aden,
with throughput capacity recently expanded to 8.3
million tons per year, is the largest single non-
government source of earnings in the area, but its
operations have been severely hampered by recent
events. Rising political unrest, violent strikes,
and the change in basic shipping routes due to the
closure of the Suez Canal in June 1967 have made
Aden an inopportune bunkering port. Sales of bunker
fuel fell from 3.9 million tons in 1966 to less
than 2 million tons in 1967. Loss of the bunkering
trade was a major factor in the decline of refinery
output. The refinery operated at about 70 percent
of capacity in 1967, with an output of 6.0 million
tons, compared with 7.1 million tons in 1966.
Production increased nearly to capacity in November
and December 1967, when Aden began refining Egyptian
crude at the rate of 50,000 barrels per day (bpd).
Egyptian business is a temporary phenomenon, how-
ever, brought about by the closure of the Suez
refineries. Processing of Egyptian crude was re-
duceci to 20,000 bpd in January 1968. The refinery
will continue to operate nearly at capacity until
the Suez refineries begin operations in the summer
of 1968.
14. Both British Petroleum and the government
of South Yemen are anxious to keep the refinery
operating. Refinery activity accounts for about
$1.5 million in tax revenues to the government and
an additional $1.6 million in salaries to the more
than 3,000 Arab workers employed there. Profits
remitted to the United Kingdom amounted to $15 mil-
lion in 1966. Output, however, is not likely to
be maintained at capacity unless the substantial
bunkering trade is regained. Unless the Suez Canal
reopens soon, 1968 output can be expected to remain
at the 1967 level, and contribute some $8 million
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Other Aspects of Aden's Economy
15. Aden's small industries, construction, and
transportation have suffered from the general
depression. Small industries, which began a gradual
decline in the early 1960's, lost more of their
consumer market as the wealthy expatriate groups
left Aden.
ons ruc-
tion at the port has stopped, and otrier new build-
ing has dwindled. Only the local fishing industry,
which is an important supplier of domestic consump-
tion, seems to be operating normally.
16,. Rising prices and incipient shortages of
food are beginning to cause some concern to the
government. Food prices, rents, and doctors' fees
have been pegged at their pre-independence level.
Fresh fruits, vegetables, and fish, which form an
important part of Aden's diet, are available locally
on a day-to-day basis as long as the Central Market
and retailing outlets remain open. The government
is working to avoid the potentially explosive
position reached in February 1967, when the market-
ing system broke down, leaving the large, poor
segment of Aden's population without fresh food for
several days. Most other staple products -- rice,
sugar, tea, flour, ghee -- are imported. With
shippers reluctant to visit Aden, food imports have
declined. Thus far, the population exodus has
averted a serious food shortage in Aden, and an
emergency committee was appointed in December 1967
to insure a food supply adequate for at least three
months.
17. Economic recovery is hampered by a serious
shortage of skilled personnel. Before independence,
foreigners in Aden accounted for nearly all of the
bankers, accountants, white-collar workers, business-
men and managers, harbor pilots, and skilled labor
in the utilities industries. The majority of these
people left Aden in the fall of 1967, and the
gradual departure of the remainder probably will
inhibit the economy further. Recovery will depend
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either on the return of skilled foreigners or on
an extensive government program to train Adenis in
white-collar and management skills.
Outlying Areas
18. Economic life in the vast areas of South
Yemen outside Aden, already at a near subsistence
level, also has been depressed somewhat by the
events of 1967. Formerly, the hinterland derived
almost one-half of its income from a combination
of British subsidies and emigrant remittances.
Earned income came from some agriculture, fishing,
smuggling, and handicrafts. The standard of living
probably deteriorated in 1967, as unemployed workers
returned home from Aden. An expected decline in
British aid probably will lead to a further decline
in 1968. The estimates in Table 4 of GNP for the
outlying areas are indicative of the trend; the
absolute values are largely only gross approxima-
tions.
Outlying Areas: Estimated Gross National Product a/
1966-68
Million Current US $
1966
1967
1968
Local government 30
30
20
Agriculture and fishing 20
20
20
Smuggling
and "services" 15
15
15
Emigrant
receipts 10
8
5
Petroleum
and industry 5
2
4
Other
5
4
4
a. Since the area is primitive and lacks financial
institutions, much of its economic activity is non-
monetary.
19. The flow of population from Aden to the
countryside has a dual impact. The people of the
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Hadhramaut* region traditionally have supported
their families at home by working abroad. Rising
nationalism in Indonesia, East Africa, and other
areas began to impel the Hadhramis to return by
about 1965. By the end of 1968, perhaps 25,000
South Yemenis will have left Aden for their outly-
ing villages, where they will be jobless. Conse-
quently, emigrant receipts probably will amount to
only about $5 million in 1968 -- half the 1966
level. The influx of people will place an addi-
tional strain on the subsistence-level food supply
of the area. Unless new sources of food or
financing can be found, widespread malnutrition may
become a serious problem.
20. Faint hope for slightly increased income
is offered by the possible resumption of oil
exploration. In 1966, $5 million was added to the
income of outlying areas by the expenditures of
unsuccessful oil prospectors. In 1967, Pan American
abandoned its explorations, but preliminary discus-
sions have been held between the government and
Atlantic Richfield concerning new explorations.
21. The port-term future of the rural area of
South Yemen hinges on government expenditure and
hence on foreign monetary aid. Expenditures by the
feudal governments formerly provided more than a
third of the total income of the hinterland. The
rulers, in turn, derived more than two-thirds of
their income from British subsidies. The United
Kingdom maintained its aid payments at the 1966
level of nearly $50 million per year through 1967,
but the British aid commitment expires in May 1968.
Most of the sheiks and sultans of the area have
fled, and government expenditure henceforth will
be channeled through the South Yemeni mechanism in
Aden. Given the poor prospects of South Yemen for
revenue and the obvious need for large expenditures
* Hadhramaut is a general term referring to the
region that was formerly the East Aden Protectorate.
It constitut(s about 80 percent of the Zand area of
South Yemen. The major economic feature is the
Wadi Hadramawt, a fertile 400-mile-long valley.
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to maintain security in Aden, the outlying areas
probably will receive no more than $20 million in
government expenditure in 1968.
22. If rural earnings from farming, herding,
gunrunning, handicrafts, and other activities are
maintained at the 1966 level, the expected changes
in government expenditure, emigrant remittances,
and population probably will leave per capita
income in 1968 at about $100 -- some 25 percent
below the 1966 level. The outlook is even more
bleak if food shortages, unemployment, and politi-
cal disputation lead to unrest that interferes with
23. British aid will bolster South Yemen's
revenues until May 1968, but the new nation may
face a serious shortage of government funds and
foreign exchange by the end of 1968. Both foreign
and domestic revenue are falling, and the govern-
ment faces a $60 million deficit in a putative
budget of $86 million. At birth, South Yemen
possessed foreign exchange reserves of only about
$8.4 million. Because these reserves were held
almost entirely in pounds sterling, more than $1
million was lost when the British pound was devalued.
During the fiscal year ending in March 1967, aid
from the United Kingdom amounted to more than 65
percent of the $86 million spent by the various
governments in the area. Aid inflow in fiscal year
1968 was slightly larger, and about $10 million is
pledged to South Yemen for April and May 1968.
24. Estimated domestic revenues also are falling.
Customs duties normally make up the bulk of tax in-
come; with foreign trade declining, collections are
down. Receipts from other sources -- for example,
the electric company, the airline, the refinery, and
some small industries and shops -- similarly have
been depressed by slackening economic activity.
Thus domestic revenues of the government may well
decline from the estimated 1966 level of $30 million
to some $20 million in 1968 (see Table 5).
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Peoples Republic of Southern Yemen:
Government Domestic Revenues
1966-68
Million Current: US $
1966
1967
1968
Income taxes
10
9
7
Customs and excise duties
12
9
7
Agricultural taxes
1
1
1
Other
7
6
5
Total
30
25
20
25. Early in December 1967, President Qahtan
al Shabi of South Yemen outlined ambitious plans
for defense and development. In addition to inter-
nal security and defense, he proposed port expan-
sion to help boost income and the establishment of
a banking and financial system to help establish
the country's role as a commercial nation. He also
outlined agricultural, industrial, medical, cultural,
and educational projects.
26. With UK aid almost certainly ended, develop-
ment plans will be nearly impossible to carry out.
The government of South Yemen was forced to cut
salaries of civil servants and military personnel
by between 6 and 60 percent in l.ebruary 1968, but
defense and security expenditures, which accounted
for nearly half of total government expenditure in
the recent past, probably will grow as internal
rivals and the former sheiks and sultans continue
to threaten the present government. Education and
welfare projects will require foreign teachers,
technicians, and foreign financing. Many of the
teachers and medical personnel in the country, as
well as agricultural and other technical experts,
were British citizens who have been evacuated.
27. The British have not offered future assis-
tance, and significant aid from other sources has
not been forthcoming. In the fall of 1967, South
Yemen asked the United Kingdom for more than $180
million during a three-year period. The British,
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SECRET
however, promised only about $29 million in aid, to
be provided from December 1967 through May 1968.
West Germany has responded to South Yemeni requests
for aid by offering to send technical assistance
for irrigation and other agricultural projects,
but West Germany has not yet offered money. Arab
countries have been asked for aid also, but response
has been meager. Egypt has promised to send
doctors, teachers, and agricultural experts. Scholar-
ships for twenty-five South Yemeni students are
being discussed with Algeria. Aid from South Yemen's
largest and richest neighbor, Saudi Arabia, presently
is out of the question, since the Saudi Arabian
governor
hostile
28. South Yemen has turned increasingly to
Communist countries for aid, but little has been
forthcoming. The Chinese have sent some technicians
A few Rumanian and Bulgarian doctors now help
staff hospitals in South Yemen.
A Soviet military training mission is
expected to arrive in Aden in 1968.
29. Facing a desperate need for hard currency,
South Yemen has appealed for foreign investment as
well as aid. The government specifically has stressed
the desire for foreign investment in railroads and
air transport facilities. Because of the unstable
political situation, the general mistreatment and
mistrust of foreigners, and the government's announce-
ment that it will pursue a socialist, "anti-imperia-
list" policy, substantial new foreign investment in
the near future is not likely.
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