ANALYSIS-Wary donors to demand economic reforms from Yemen
* Inefficiency, corruption seen as major deterrents
* Saleh is West's main partner in fight on al Qaeda
By Ulf Laessing
SANAA, Jan 17 (Reuters) - Western and Gulf Arab donors want to help Yemen escape the poverty on which al Qaeda thrives, but new aid will not flow unless President Ali Abdullah Saleh enacts reforms and tackles corruption, diplomats and analysts say.
U.S. and Saudi concern that al Qaeda is gaining safe havens in the unstable Arab country to plan and launch attacks elsewhere has soared since the group's Yemen-based wing said it was behind a failed Dec. 25 attempt to blow up a U.S. airliner.
A British-hosted conference on Jan. 27 will discuss how the outside world can help Yemen counter radicalisation and promote reform, but participants will be aware that the government has yet to spend most of the $4.7 billion pledged by donors in 2006.
Transport Minister Khaled al-Wazir has said $617 million of that total will be disbursed on transport projects this year and blamed delays on long feasibility studies and tendering holdups.
But diplomats say inefficient bureaucracy and a lack of transparency in tenders have helped clog the aid pipeline.
"This time we need a mechanism (to ensure) that money goes into projects and economic reforms are being undertaken to gradually lower dependence on foreign aid. It can't be business as usual," said a Western diplomat in the capital Sanaa.
Yemen faces daunting challenges, including a revolt by Zaid Shi'ite tribesmen in the north and separatist unrest in the south. Government control is feeble in parts of the impoverished country of 23 million. Roughly half the population is under 15 years of age.
Foreign Minister Abubakr al-Qirbi said last week Yemen needs about $4 billion a year in aid to revive its economy and improve living standards for a population set to double in 20 years.
Government revenue from Yemen's limited oil exports fell 70 percent in the first 10 months of 2009, official figures show, and new gas exports cannot fully offset the decline.
Saleh is the West's main partner in fighting al Qaeda in Yemen, even though diplomats say his rule is tainted by graft and under challenge from disaffected Yemenis.
"Look at this mosque. It cost $60 million or so," said Ali Yaqoub, 31, pointing at a giant mosque named after the president which opened in 2008 and can accommodate 40,000 worshippers.
"I'm Muslim but I think the money should have gone to poor families," said Ali, who juggles several jobs to make ends meet.
Nightly power cuts plunge swathes of Sanaa into darkness, but the mosque lights blaze on unaffected.
Saleh has denounced corruption in the past, but for three decades he has also operated a patronage system to balance power among tribes and factions in the military-security elite.
Pauline Baker, president of the Washington-based Fund for Peace, acknowledged that Yemen's opaque system was a problem for donors, but noted that the country had a government to work with, unlike Somalia, where state failure was more apparent.
The fund, which researches failed states, rates Yemen's leadership, judiciary and civil service as "poor".
Baker suggested that donors might conduct inspections to verify that foreign aid had reached intended projects.
"Another option is to have these projects not go through the government, but through the private sector or NGOs (non-governmental organisations)," she said.
Yemen's government has worked out a 10-point reform plan to tackle issues such as public service reform, privatisation and improving the rule of law in a country dominated by tribes.
"The most important thing is to prioritise, to focus," said deputy finance minister Jalal Omar Yaqoub, the author of the plan, who said some success, such as sorting out land disputes in one area, would then "spill over" to the rest of the country.
But diplomats and analysts are sceptical that the government will tackle the toughest issues, such as diesel subsidies, which it expects to cost $2 billion this year -- a huge budget burden.
The last attempt to reduce diesel subsidies sparked protests in 2005. The subsidies also encourage irrigation of qat, a mild drug that pervades life in Yemen, where water is running out.
Yaqoub said the government would shrink the budget by using gas instead of diesel or fuel oil in its power plants.
Apart from aid, Yemen hopes Gulf oil producers such as Saudi Arabia will accept Yemeni workers to help rescue the economy.
"We have the problem of poverty. There are so many young men who can't find jobs. It would be good if Saudi Arabia opened its labour market," said Ismail Saydi, head of the political science faculty at Sanaa's Islamic Iman University.
Saudi Arabia, Kuwait and other Gulf states expelled millions of Yemenis after Iraq's 1990 invasion of Kuwait, when Saleh failed to join the U.S.-led coalition against Saddam Hussein.
Yet time is not on Yemen's side in its survival struggle.
"Every year the population is growing by 700,000, while water reservoirs are rapidly depleting. Oil revenues are falling. I am very pessimistic," said the diplomat.
(Editing by Alistair Lyon and Noah Barkin)