After unification in 1990, the new government assumed all debts incurred by former governments. Domestic political strains ultimately culminated in civil strife in 1994. As a result, the economy was further burdened with reconstruction costs.
The government launched a major reform program in 1995. The program included revenue mobilization through tax measures, depreciation of the customs valuation rate, the liberalization of cement prices, an increase of petroleum product prices by about 90%, and a 60% rise in electricity tariffs. The government's medium-term goal is to eliminate all subsidies by 1999–2001. Fiscal and monetary measures included the containment of primary non-development budget expenditures, partial reform of the exchange system (including currency depreciation), interest rate reform, and monetary management reforms. Furthermore, transportation and communication charges were deregulated, health and education fees were increased, and privatization programs were initiated. In 1996, 16 public enterprises were targeted for privatization. Laws prohibiting foreign investment in certain industrial sectors were abolished in 1996.
International aid has an ongoing role in the economy's development. In early 1996, the IMF agreed to provide a 15-month standby credit of $191 million, and the World Bank authorized the loan of $80 million to support the reform policies. The World Bank also decided to allocate government loans to Yemen worth $365 million during 1996–99. The EU also pledged grants worth $61.7 million in 1996/97, including $30 million in project finance. Yemen benefited when Russia was admitted to the Paris Club (an organization of countries owed money from past official loans). Approximately 80% of Yemen's debts to Russia, mostly for arms purchases, was forgiven in the debt rescheduling. The remainder of Yemen's debt to Paris Club members was rescheduled under Naples terms (for the poorest countries, this allows for cancellation 50% to 66% of eligible sovereign debt), and in 2001, another Paris Club rescheduling provided an "exit treatment" that allowed Yemen to reach a sustainable level of indebtedness.
External debt was brought to a steady average of about 55% GDP for 2000 for the three years 2000. Yemen's fiscal imbalance has also improved in recent years, helped considerably by recovering oil prices in 2000. The fiscal deficit reached 6.4% of GDP in 1998, but then moderated to 0.2% of GDP in 1999, and, with increasing oil prices, soared to a surplus of 8.5% of GDP in 2000. In 2001 and 2002, the government continued to run surpluses of revenues and grants over expenditures, amounting to2.8% of GDP in 2001 and 0.4% of GDP in 2002. Inflation, however, reached over 15% in 2002 due to increased prices for fuel, electricity and food.
In 2002 the parliament signed into law a general sales tax (GST), but implementation of this major tax reform designed to broaden and rationalize the tax base was delayed with IMF approval while more information about the effect of indirect taxation was collected. Yemen remains one of the poorest and least developed countries in the world. With a birth rate of around 3% a year, poverty has actually been expanding in recent years. About one-third of households are considered to be living in poverty. Water scarcity poses a severe challenge. The water crisis involves a depletion of groundwater, so that economic activity may become unsustainable in some areas. The fertility rate is 6.4, and illiteracy among women and girls is particularly high—72% of females and 44% of males are illiterate—a social deficiency with serious implications for economic development.