yemen central bank will not hesitate to cover market needs of foreign currency when its needed
* Inflation seen at 8 pct in 2010, 2011
* Yemen central bank reserves at $6.1 bln vs $7.0 bln a year ago
* To hold interest rate steady at 20 pct for now
SANAA, May 26 (Reuters) - Yemen's central bank will not hesitate to intervene again should there be a repeat of a recent tumble in the Yemeni rial, caused by the country's security troubles hurting sentiment, the governor said on Tuesday.
The bank has injected some $850 million -- around 15 percent of its reserves -- into the market in 2010 to support the impoverished Arab country's currency, which has fallen by about 8 percent against the dollar since the start of the year.
In January, when fighting with Shi'ite rebels raged in the north and Yemen reeled from its resident al Qaeda wing's claim of responsibility for a December bomb attempt on a U.S.-bound plane, the rial fell to 215 versus the dollar from 208.
"From January we had a crash in the exchange rate. We had the Saada war, the Southern Movement, al Qaeda, Somali piracy -- all this was reflected psychologically in the exchange rate," Mohamed Awad bin Hamam told Reuters in an interview.
Bin Hamam said the currency was now stable at around 225 rials versus the dollar. He said the central bank's decision to raise the interest rate to 20 percent from 15 percent in March had also helped to stop further weakness.
"So far, so good, but of course if need be we will not hesitate to come to the market with some of our reserves," he said.
Inflation was expected to average at around 8 percent this year and next, Bin Hamam said, adding that the rising costs of imports such as wheat would push prices higher.
Yemen's powerful Western allies and neighbour Saudi Arabia, the world's top oil exporter, are watching anxiously as Sanaa tries to crack down on the Yemen-based regional al Qaeda arm and battles rising separatist violence in the south.
The country has also has just emerged from the latest round in a bitter conflict with northern rebels, who complain of discrimination and have been fighting the government on and off since 2004. An existing truce is already looking fragile.
Yemen, where more than 40 percent of its 23 million people live on less than $2 a day and more than half of young men are unemployed, is also facing chronic water shortages and dwindling oil reserves.
The cash-strapped government can do little to meet the rising needs of its rapidly growing population, and is groaning under the strain of heavy energy subsidies and tax evasion.
There are hopes the country's fledgling gas industry will go some way to support its struggling economy, but so far revenues from the export of liquefied natural gas (LNG) from a new, multi-billion dollar plant are seen below forecasts for 2010.
LENDING STILL LOW, STRUCTURAL CHANGE
A continued decline in oil export revenue also poses problems. Revenues so far this year stand at $1 billion, compared to $3.4 billion for the whole of 2009, the governor said.
Yemen's central bank reserves are currently at $6.1 billion, versus $7 billion at the same time last year, he said, while the loans-to-deposit ratio of local banks was around 30 percent.
"Lending to the private sector is still very low. It's the environment, the system, problems with loan collection that the banks face," he said. "We are trying to remedy that by improving the court system and other areas."
For Yemen to thrive in the future, Bin Hamam said, the very fabric of the economy must change.
"In the long term we have to talk about the structure of the economy and we have to improve the business environment for investment," he said.
"We have to improve the tax system, the banking system, the collateral loans banks will take from our side et cetera, we have to deal with the structure to deliver for the economy."
The governor said the possibility of renegotiating Yemen's $5.8 billion foreign debt should be considered as part of plans to improve the economy, but that no such talks were taking place now.
"Maybe we could think about it again and try to approach other countries to see if they could write off some of the debt. That should be part of the pipeline thinking of the government."