Traditionally an agricultural area, northern Yemen was self-sufficient in food and a net exporter of agricultural product until the Civil War in the 1960s and a prolonged drought in the early 1970s. In the late 1970s and early 1980s many farmers switched from labor intensive food crops to the more profitable cultivation of qat, a mild stimulant chewed by many Yemenis that has no significant export market. The economy of southern Yemen developed through foreign assistance (especially from the former USSR). The southern city of Aden, with its port and refinery, is the economic and commercial center of the country. The Yemeni economy depends on imports of wheat, flour, rice, and other foodstuffs. Trade deficits have been offset by remittances from Yemenis working abroad and by foreign aid.
Crude oil is now a significant sector of the economy, with exports accounting for over 80% of total exports. Following the unification of the country in 1990, responsibility for development of the oil sector fell to the state-owned general corporation for oil and mineral resources. Civil war in 1994 disturbed output. Oil output has been declining since 1995, and over 200 dry wells have been drilled, suggesting that the industry has passed its peak.
When Yemen aligned with Iraq during the Gulf War, Sa'udi Arabia and the Gulf states, Yemen's main aid donors and hosts to large numbers of Yemeni workers and their families, ended the Yemenis' privileged status. The economic impact of lost remittances was estimated at about $1 billion per year. After the Gulf crisis, Yemen was confronted with high unemployment, lost remittances, halving of US military aid, a sharp cutback in USAID programs, other canceled foreign assistance, and the cost of food imports and social services for the returnees totaling about $500 million.
Following the civil conflict in 1994, the government began a five-year program in 1995 that removed all controls on the exchange rate and cut the interest rate, as well as initialized trade policy reform, privatization, and the elimination of price controls. The reforms were favorably received by the World Bank and IMF, which agreed to provide aid.
A new liquefied natural gas drilling project promised exploitation of Yemen's 482 billion cu m (17 trillion cu ft) of gas reserves in subsequent years, although in 2002 US companies ExxonMobil and Hunt Oil withdrew from the project, leaving the French-based company, TotalFinaElf, as the lead investor.
Gross domestic product (GDP) grew at an average rate of3.8% from 1988 to 1998. Low oil prices in 1999 held real GDP growth to 3.7% in 1999, and their recovery helped push real growth to GDP to 5.1% in 2000. A stabilization in oil prices combined with declines in the growth of agricultural output, electricity and manufactures, attributable more to the domestic lack of rain than to the global economic slowdown, reduced GDP growth to 3.3% in 2001. Consumer price inflation had fallen to 6% in 1996 and 8% in 1998, but the average from 1999 to 2001 was 11%. An increase to 15.8% inflation was estimated for 2002 reflecting high fuel, electricity, and food prices from both shortages and the lowering or elimination of subsidies. Yemen is one of the 25 poorest and economically least development countries in the world with about a third of the population living in poverty.