“There are many devils” – A conversation with Governor of Taiz Ali al-Mamari

“There are many devils” – A conversation with Governor of Taiz Ali al-Mamari

Taiz city and the wider governorate have been an active frontline in the Yemeni conflict for more than two and a half years. Fighters from the Houthi movement and allied forces of former President Ali Abdullah Saleh first stormed Taiz in early 2015, with local resistance groups soon taking up arms against them. Fighting has raged since, with the anti-Houthi forces receiving nominal support from the internationally recognized government of Yemen and the Saudi-led military coalition backing it.

Ali al-Mamari, an esteemed former member of the Parliament of Yemen, became the official local government representative of Taiz in 2016, when President Abdo Rabbu Mansour Hadi appointed him governor of Taiz.

Al-Mamari was in Beirut, Lebanon last month and spoke at an event entitled “The Paths of Conflict in Yemen and Opportunities for Peace”, co-hosted by the Sana’a Center for Strategic Studies and the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut on October 16.

During a question and answer session with Sana’a Center Chairman Farea al-Muslimi, al-Mamari spoke about the political, strategic and economic importance of Taiz. In particular, he described how Houthi-Saleh forces have used industrial areas around the city as a source of revenue generation, and thus why they have made such heavy troop commitments to try and hold these areas.

Al-Mamari spoke about the devastating siege Houthi-Saleh forces applied for more than a year on government-held areas of Taiz city. During this almost total blockade and constant shelling, he outlined how food, water and access to healthcare ran scarce, the collapse of the local economy and how the inability to dispose of waste created dire environmental hazards.

The Yemeni government and its coalition partners have also heavily neglected Taiz, said al-Mamari, pointing to the lack of funding that has caused public services to deteriorate and led to the absence of police and security on the streets in government held areas. In particular, he said the governor of the Central Bank of Yemen has made it a point to obstruct financial support from reaching Taiz.

Al-Mamari said military support for the local resistance has also been vastly inadequate, with anti-Houthi fighters being left heavily disadvantaged against the Houthi-Saleh forces’ better armed and better trained brigades. Al-Mamari said in large part this is due the United Arab Emirates, which has curtailed military support to Taiz due to fears it may aid the Islah Party, affiliated with the Muslim Brotherhood in Yemen; al-Mamari insisted these fears are overblown.

In an exception to this rule, however, the UAE has provided the Abu al-Abbas brigades in Taiz special treatment, said al-Mamari, which has led to divided loyalties amongst anti-Houthi forces. Notably, the UAE, whose affiliated forces seized control of Mokha Port along Taiz’s Red Sea coast in early 2017, has refused to relinquish control of the port and even denied al-Mamari permission to visit it.          

The following is a translated transcription of the conversation between al-Muslimi and al-Mamari, edited for clarity and length:

Farea al-Muslimi: First, what has hampered the battle for Taiz?

Second, I know you have submitted your resignation on more than once – indeed, the president rejected your resignation just two days ago – and that one of your biggest concerns was the need to pay public sector employee salaries. Could you provide… insight into the situation in Taiz, especially economically and militarily.

Governor Ali al-Mamari: As for the question why was the battle for Taiz has been hampered, there are many factors. As I noted earlier, Taiz has been a driving force for change and its peoples have been leaders at critical junctions in Yemen’s modern history. The sons of Taiz had an important role in the September 26 [, 1962, Republican] Revolution. Among those who were harmed by this revolution were the Houthis, and this is why they have a true vendetta against Taiz city. Then came the events of February 11, [2011 uprising] which eventually led to the departure of Ali Abdullah Saleh and his regime. The two, the Houthis and Saleh, are now joined in a battle against the sons of Taiz in a personal vendetta against the city.

Prior to February 11, [2011] there were already 11 significant military brigades stationed around the city – such as those stationed at the Khaled bin al-Waleed camp, which fell recently and is a camp of a similar importance to that of the al-Anad Camp in the south. These brigades, such as those commanded by Abdullah al Kadhi that were loyal to Saleh, surrounded the city to ensure it did not revolt. Saleh understood the danger of the city and that it wouldn’t remain patient forever.

Thus, when the Houthis and Saleh initially besieged Taiz it was besieged by all of these brigades, including members of [Saleh’s] special forces and military police. The concentration of these forces around the city made a swift liberation very difficult.

The resistance in Taiz was initially formed by untrained young men who are not battle hardened; teachers, doctors, pharmacists, skilled workers that were forced to defend themselves, their families and their city… Thus, the resistance had inadequate training, as well as armaments.

Imagine, today we are conducting a battle along hundreds of kilometers with only 10 old tanks. A war of these dimensions with 10 tanks… while Houthi-Saleh forces have hundreds of tanks in camps located in western Taiz. Hence, the military balance is tilted towards the Houthis and Saleh…

Another reason, is the [Saudi-led] coalition. I think that the coalition believes that Taiz has more of an Islah presence [than it actually has], and thus it is not in the interest of some coalition members for the battle of Taiz to be won by Islah, [as they believe] that would strengthen it. A particular coalition member sees Islah as an adversary, even though we reiterate the point that there is no one individual, group or party in Taiz that could dominate or control Taiz. All of the sons of Taiz have fought in the national armed forces, including members of different parties and affiliations.

No one can claim that one party is in control or has superior power in the city, but this is the fear and anxiety of one coalition member that is responsible for the fourth [military] district [which includes Abyan, Aden, Dhalea, Lahj and Taiz]. Our Emirati brothers are the ones overseeing the battle and supplies in the fourth district, which includes Taiz. This fear means the supplies reaching the national armed forces are just for sustenance. They are not provided the capacity that could enable them to achieve significant battlefield victories. They [the UAE] are not in a hurry. Maybe one of their objectives is to try and make sure all warring parties are eventually exhausted so the governorate becomes easier to control.

When the Houthis attempted to control Taiz they did not dare enter the areas that are highly populous and highly educated, such as Maafir, Mawaset, Shamatein and Jabal Habashi. They positioned themselves in coastal districts,  and while they control 75 percent of Taiz, these areas have a lower population count and a lower level of education.

The Houthis concentrate on areas around the city with high economic activity for tax collection, such as the industrial area called Hawaban. The factories [there] provide an annual revenue of around 25 billion Yemeni rials (YR), or around $50-60 million (US). This area of economic activity, where the 22nd republican guard brigade is based, has always been controlled. The Houthis are fighting there so as not to lose this revenue. Towards the west of Taiz city there are factories such as al-Shaybani as well as the paint and soap factories, among others. The Houthis allocated their best forces, arms and equipment towards these areas because they know for certain that if they were to lose control they will suffer. This is one of the reasons why it is not easy for the national armed forces to progress in Taiz, because it is home to important areas for the Houthis and Saleh.

As for my resignation, I’ve said that the issue in Taiz is that while his excellency the president, and other esteemed ministers, are responsive and give orders whenever we go to them, we then find that many of those orders are obstructed by bureaucracy and low-level employees, especially at the central bank in Aden.

I remember a cabinet meeting I was invited to that related to the 40 billion in Russian-printed Yemeni rial sent to Aden airport. I heard the ministers talk about how the money should only go to liberated areas. I said at the time that this money belongs to all Yemenis, and it’s not right to consider only spending it in liberated areas. At the end of the day, this is an obligation of the Yemeni state towards its citizens across all of Yemen.

There was contention around this point. When it came to the distribution of security salaries in Taiz, my colleague, the minister of the interior, said salaries should only be given to those affiliated with the legitimacy, to which I said that a security officer’s salary is a right that does not relate to the conflict.

We were very careful to get salary disbursements for all the sons of Taiz. We have 54,000 public employees in Taiz,  and we disbursed salaries across all districts, whether under the control of the legitimacy or Houthi-Saleh forces. Citizens do not deserve to be deprived of their salaries. A salary is a right and people should not be punished on the basis of party or region.

As for my resignation, we were promised the salaries for the sons of Taiz. When the central bank headquarters was relocated to Aden in October [2016] we demanded the salaries be paid… We kept struggling from October until March 2017, and finally in March we managed to obtain the salaries for the month of December 2016. But when we finally came to collect the salaries for December, we received only YR 3 billion, and only for the education sector. They refrained from allocating the YR 750 million for other sectors, including the health sector.

In July this year I met the president and gained a clear order that Taiz was to be placed on an equal footing with liberated areas such as Aden and Shabwa, which now receive [public sector] salaries on a regular, monthly basis. In September, the moment arrived for the collection of August salaries, and the first transgression arrived when they told us to forget the salaries of August and to instead focus on the salaries for September. We agreed… When we arrived in September to receive the salaries, we were surprised that the governor of the central bank was refusing to disburse salaries for all sectors and was only approving salaries for the education sector.

I could not remain governor so long as people’s salaries and their rights were not being granted. After the resignation, the central bank disbursed one month’s salary for all employees across all different sectors in Taiz. We hope this month we will witness the same.

During the last week, after I submitted my resignation to the president, he summoned me to Riyadh and said that I must continue my work. I set a group of conditions to return as governor, regarding the liberation of Taiz, the central bank, salaries, and support for security services in Taiz.

Security services in Taiz are given no support. When the former director of security went to the Ministry of Interior in May to receive the operational security budget for Taiz he was surprised to find that the allocated budget for Taiz for three months was YR 1.9 million, the equivalent of $4,000 to $5,000 USD… $5,000 dollars as an operational budget for a governorate the size of Lebanon during wartime.  

When we created a special forces [unit comprised of] 3,000 well-trained officers and a facility and military police camp for them we used funds from other budgets, including the health budget, not those allocated for security.

In short, the president insisted that I remain in my post and pledged YR 2 billion for security in Taiz as well as YR 5 billion from the central bank. These are presidential orders, and we will go to Aden, to the government or the central bank, and hope that these orders are implemented.

Regarding the economic and military conditions in Taiz, imagine when the public employees have not been paid for 10 to 11 months, with economic mobility in Taiz dependent on this money circulating into the economy. Shop owners are owed huge debts. As I noted, the factories are not under our control and must pay a high, 25 percent tax directly to the Houthis. Wholesale traders are outside the city, and after two and half years of conflict people have run through all their savings.

For those who may not know, Taiz was totally besieged for a year. Even water and air was restricted – oxygen tanks were not allowed in and as a result 15 Yemenis from Taiz died. The King Salman Center had to airdrop medicine and food into Taiz because it was completely under siege. Regarding water, there aren’t any water projects in Taiz. Water used to arrive through mobile water tanks from outside the governorate. When the siege was partially lifted life improved but the economic situation and conditions in Taiz are dire. Hundreds of thousands of city residents have been displaced to other rural areas and regions.

Militarily speaking the national army makes progress every day but it’s not the progress we anticipate or hope for. They are making slow progress. Although the battle is not immensely difficult it requires resources, such as armaments that the government doesn’t have. The coalition is the only source of military support. We try to apply pressure so that our brothers in the coalition provide more support… and try where we can to press the government, which is not very responsive to Taiz.

Al-Muslimi: Who has more space within Taiz to operate, you or Abu al-Abbas, and what is the scope of competition between armed groups and the local authorities, especially those formed as a direct result of the war?

Is support from the coalition channeled through you as the local authority or do external powers deal with different groups on the ground directly?

How do you run a governorate in a time of war and what about crisis management?

Al-Mamari: Of course the role of the local authority might be more war-oriented than development oriented. Throughout a year and half we only demanded salaries. We didn’t dare to dream of saying we need operational budgets for construction, water or electricity projects. At a time when people are not receiving their salaries, and we are unable to demand an operational budget. Our offices work at minimum capacity. Taiz is living through a time of war and so crisis management is the most prominent form of administration.

We do not have the budgets or capacities to initiate water or electricity projects. Sanitation projects are supported by UNICEF and others. The city is living through terrible environmental conditions. The city’s main landfill is in the west in the old airport district where the Houthis are. On numerous occasions we requested that they allow garbage trucks to reach the landfill. Initially, they would not allow any truck to return [from the landfill]. Now, in a small area of the city, all we have are water runoffs. We place the waste in the way of the runoff so that it’s taken by the water to unknown locations. We also burn waste. It’s a true environmental catastrophe in Taiz.

One of God’s blessings is that we discovered unused wells in different areas. People started using them with the help of Kuwaiti, Emirati and Qatari organizations, among others, that provided generators or subsidized fuel.

Regarding Abu al-Abbas, I believe that he listens to me as governor and complies but only insofar as it doesn’t cause friction between him and the UAE supporting him. The UAE provides adequate support to all brigades and the military leadership axis. Abu al-Abbas is an exception though as he is supported personally by the UAE. If you note the message that the Emirati commander sent to the military leadership axis, he saluted the leaders of the 22nd, 35th, 17th, 170th and Abu al-Abbas brigades. That was in the official memo that Al Jazeera and other websites circulated.

No one denies that Abu al-Abbas was among one the first to join the resistance and fight the Houthis in Taiz. He has personnel as well as arms and nominally falls under the [command of] the 35th brigade. Nonetheless, he receives special attention from our Emirati brothers. As I said, the support the coalition provides arrives through the military leadership axis to all brigades, except for Abu al Abbas to whom it arrives directly.

Initially, I could not leave the city of Taiz for a year before my appointment [as governor]. I could only leave for Aden on foot through the Mishraa and Hadnan district toward Mashrakh. Taiz city was totally besieged. There was no way of getting materials to the city, but after that we carved a path. If you could see how supplies used to reach Taiz, I think the prices of donkeys in Sabr reached YR 60,000 to YR 80,000, because the only way goods were able to reach the city was on the backs of donkeys.

This continued for six months, and while I was on my way from Sabr, I saw children in very sad circumstances. Imagine a child climbing a very steep 3 km to 4 Km incline for three to five hours with a box of food, juice, or flour on their back only to make YR 1,500 rials, or around $3 to $4.

We have seven public hospitals in Taiz city, and only three operate at minimum capacity. Schools were also devastated. At the beginning of this year, students began the school year in either destroyed buildings or ones with armed groups. Teachers are not available. The education sector has been completely halted because teachers did not receive their salaries for 10 months. Children are not going to school and the sick cannot find medicine or hospitals. It is disastrous in Taiz, and this hurts to say as a man of the governorate. But no one helps… the only aid is through the King Salman Center. But for a governorate of 4 million, no matter the amount of aid from the King Salman Center, it cannot cover all needs in the city…

To be honest, it has reached the point of feeling like you’re begging from the government. When the president, the prime minister and the governor of the central bank agree that you will receive YR 3.75 billion for people’s salaries, and then in the same day you disagree with them over the sum and complain. You deal with the president, the vice president and the prime minister… and eventually, they tell you that the governor of the central bank says there isn’t 3 billion. You feel like a beggar in their offices. I told [them] I’m not there to beg, I’m demanding people’s rights. This city is fighting on the behalf of all Yemenis, and for legitimacy. If this city were to halt the war, what legitimacy would you have left?

Al-Muslimi: Is Mokha Port under the control of the local administration?

Al-Mamari: The Mokha Port was liberated and UAE forces are there. Now you only have long range missiles striking from long distances. The UAE have positioned patriot batteries that prevent missiles falling on Mokha city.

The port will make a huge difference if activated. It could bring large revenues for the city that might alleviate our grievances – when we talk about hospitals, we are not talking about many millions of dollars; we said that with a few million dollars we can resolve the health or education issues in Taiz.

If Mokha Port is made functional it might resolve the economic problems in the city too. A month and a half ago I met with Saudi officials working on the Yemen file, specifically Taiz. I asked them for Mokha port to be activated, as businessmen in Taiz are prepared to send their goods and fuel through the port.

[But] the UAE still hasn’t transferred the port. The UAE has, however, done a great thing in Mokha. We had a 160 megawatt (MW) power plant in Mokha that was nearly totally dysfunctional due to the war, and they [the UAE] restored it with a capacity of 120 MW. It previously had four turbines, 40 MW each, and they activated three of them. The power from one turbine is used for lighting and other needs in Mokha, and the rest feeds into Taiz, though the electrical network was damaged during the war.

Eight months ago, though, when I went to inaugurate the power plant in Mokha and asked to visit the port, they declined. They said the commander wasn’t there.

Al-Muslimi: What are the coalition’s considerations, as far as you believe, or the UAE specifically, regarding the suspension of salaries. Do they think there is a possibility that salaries might go to Saleh-aligned fighters in other brigades? Do they believe this adds pressure to the battlefronts? For example, the Mokha Port, do they believe that this relates to smuggling, despite the fact that their forces are at the port?

Al-Mamari: The coalition and the UAE have nothing to do with the salary issues. The problem is with the governor of the central bank. From my experience with him, from when he was the Minister of Finance and until he became governor of the central bank, he puts obstacles in the way of anything related to Taiz.

Mokha is still a war zone and there is still fighting in the vicinity of the city. Let’s not exaggerate by saying if we receive the port it will be immediately functional. Not true. The area is one of conflict, and the UAE is present there. At the end of the day, the war is over a few areas… the UAE, Saudi Arabia, Iran and the US are all involved in a struggle over the strategic area [that includes] Mokha, Dhabab, Bab al Mandab. I do not think the UAE is providing all this support to eventually just say, “go ahead and take it.” It is more complicated than we think. It is possible for them to achieve their interests, and for us as well; however, the fact that I couldn’t enter the port was problematic.

For the record, Mokha port was subject to penalties for 35 years. It is an area of smuggling – of “parallel trading.” Ali Abdullah Saleh made billions of dollars from this area as he wanted this area to remain in the dark as a passage for smuggled goods, narcotics and all other prohibited materials. Yemen was a transit for these materials to Saudi Arabia and Gulf states. Mokha and its environs are underdeveloped because more development means a larger population and more monitoring. This is why for 35 years it hasn’t been functional.

Now we expect the Emiratis in Mokha and areas adjacent to Hudaydah. This has been the case for the past few months, as we anticipate a battle in Hudaidah through Mokha. We also hear that the UAE is interested in Mokha as it is located at the center of a triangle between Taiz, Aden and Hudaydah; and is close to the Bab al Mandab Strait. I think the UAE will stay there, but we say to them. “stay there but let us work.” We never asked for them to leave, but to only let the governorate benefit from the activation of the port and the generation of revenue for hospitals and education.

Al-Muslimi: Have you requested from the coalition any justification for striking civilians and civilian facilities in Taiz?.

Are needs in Taiz primarily in the humanitarian field, such as education and health, or in the security sector?

Al-Mamari: There is no doubt that humanitarian needs are grave, but over the past year the loudest voices in Taiz are asking us to save them from violent groups and other security issues. The humanitarian aspect is a severe need, but there were at least active hospitals and [humanitarian] organizations, but the security sector was nonexistent in Taiz. We have no active security institutions in Taiz. This is why people voiced their concerns over their security needs. The government is not paying attention to the security aspect, no organizations are helping either. There are many organizations helping with humanitarian needs, but regarding security concerns no one helps – not the coalition nor the government.

Regarding the issue of airstrikes in which civilians are killed, there is no doubt that in a war of this scale mistakes are made. We affirmed and condemned the mistakes made. The coalition is, however, cautious on the matter of airstrikes. For example, in Taiz there is an operations control room that provides coordinates to the coalition. Coalition aircraft do not target anything unless they’ve been given assurances and precise coordinates from the control room.

We’ve seen the facilities and buildings that are being bombed. The problem is not the coalition, it is those residing in these buildings – the coup forces. They remained in Sofitel for two years, and the coalition was reluctant to destroy this building. It would conduct airstrikes near it and people in Taiz would say on a daily basis: “Why don’t they strike the Sofitel building? Tank shells and artillery fire are killing our sons every day and they are reluctant to destroy the Sofitel building.”

The coalition used to say that, “if we strike Sofitel, they would say we are targeting facilities.” Eventually they struck it after people and the local authorities insisted. Houthi-Saleh forces take over institutions in Taiz and station their artillery and tanks in there and fire. In Taiz University, they took over the buildings such as the Faculty of Medicine and kept shelling the city. Eventually we said that people’s lives are far more important to us than buildings that can be reclaimed. [The targeting of facilities] does not happen until it these attacks are repeated for months. For example, Houthi-Saleh tanks kept shelling from the Sofitel building for two years.

There are even people in some control rooms across the republic that have personal issues. I heard that in Aden and Sana’a some people that had with a personal issue with a merchant or someone gave the coordinates of [that person’s] factory and it was hit. Even personal issues matter. At the end of the day, the coalition uses the intelligence it has, and the people in the army are not angels – there are many devils.

 

Yemen Economic Bulletin: Renewed rapid currency depreciation and diverging monetary policy between Sana’a and Aden

Yemen Economic Bulletin: Renewed rapid currency depreciation and diverging monetary policy between Sana’a and Aden

Summary:

Through October Yemen’s domestic currency, the rial (YR), lost almost 10 percent of its value relative to the United States dollar (USD) in market trading, dropping from YR 375 to the USD to YR 412. This drop was roughly equivalent to the loss in value over the previous six months and the second time in 2017 that the rial has experienced rapid devaluation.

As the Sana’a Center has previously documented, in the first half of February Yemen’s domestic currency lost some 20 percent of its market value. In both these instances, the authorities in Sana’a, (where the Houthi movement and the allied forces of former President Ali Abdullah Saleh hold sway,) and those in the southern city of Aden, (the de facto capital of Yemen’s internationally recognized government,) quickly implemented stop-gap measures to reduce the instability and slow the rial’s decline.

The latest currency instability highlights the continuing deterioration of the rial’s supports in the face of more than two-and-a-half years of civil war and regional military intervention, and has sparked widespread fears that the rial is on the cusp of further steep depreciation, and possibly hyperinflation. In a country that is overwhelmingly dependant on imports to meet the population’s nutritional needs – and which the United Nations has declared the world’s worst humanitarian crisis – the extreme loss of local purchasing power that hyperinflation entails would leave most Yemenis unable to buy food and other basic necessities.

Furthermore, Sana’a Center sources have confirmed that the authorities in Sana’a, in an effort to halt the rial’s depreciation, are preparing to impose a fixed currency exchange rate in areas of the country’s north which they control. While the Central Bank of Yemen (CBY) had previously maintained a fixed official exchange rate, CBY headquarters – relocated to Aden in September 2016 – announced in August this year that it would allow the domestic currency to float according to the market rate.

Should the authorities in Sana’a follow through on their plan and try to enforce a separate monetary policy, it would formalize the rupture of the CBY as an institution across the conflict’s frontlines. This formalization of North Yemen and South Yemen as distinct economic entities could represent a significant step towards the division of the country into separate statelets.

The Sana’a Center also foresees significant difficulties in operating one currency with differing monetary policy between the north and south. Separate monetary policies would likely precipitate a significant shift in remittances from Sana’a to Aden, incentivize massive currency smuggling between the areas, and shift ever greater financial flows away from the official economy.

Background

Over the course of more than two-and-a-half years of civil war and regional military intervention, Yemen has seen tens of thousands civilians killed and wounded, millions of internally displaced peoples, billions of dollars of damage to property and infrastructure, and the widespread collapse of economic activity, government services, security and humanitarian conditions. In specific regard to economic activity, the World Bank estimates that between 2014 and 2016 alone Yemen’s gross domestic product shrank 37 percent.1

The conflict has thus weighed heavily on the value of the Yemeni rial. Concurrently, the cessation of oil exports – previously the largest source of foreign currency and government revenue – has led to the depletion of foreign currency reserves and undermined the central bank’s ability to intervene to support the rial.

Yemen is overwhelmingly a cash economy, and the CBY has also been experiencing a severe shortage in domestic currency banknotes; in the third quarter of 2016 most public sector workers – roughly a quarter of Yemen’s employed – lost their income due to the CBY not having enough physical banknotes with which to pay them.2

In September 2016 President Abdu Rabbu Mansour Hadi, head of the internationally recognized government of Yemen, ordered the relocation of CBY headquarters from Sana’a to Aden. The central bank’s subsequent dysfunction further complicated the country’s fiscal and monetary management.3 Consequently, between early 2015 and November 2016 the rial lost more than half of its value relative to the USD.

Major currency instability in early 2017

Following the arrival of new rial banknotes from printers abroad in January 2017, the CBY in Aden began distributing public sector salaries. The market, however, quickly began to anticipate the injection of the full monthly public sector salary bill into the economy. Before the civil war began, this amount was roughly 65 billion rials nationwide, excluding the Ministry of Defence payroll. The market, aware that the central bank lacked the foreign currency reserves to support the rial, began short selling the domestic currency. This led to the rial’s market value diving as much as 20 percent in the first half of February.

In response, officials at the CBY in Sana’a convened meetings with private banks and financial institutions to coordinate currency stabilization efforts. Houthi-Saleh authorities forced currency traders to close and secured arrangements with major food and fuel importers to temporarily refrain from buying foreign currency from the market. In Aden, the CBY froze the distribution of public sector salaries, with the rial’s market value rebounding to YR 340 to the USD by mid-February.

Shortly thereafter President Hadi announced that the Saudi government had committed $10 billion in aid to Yemen – $2 billion of which would be direct currency support. The rial then experienced a gradual depreciation in market trading to YR 355 to the USD by end-March.   

Precursors of renewed currency instability

The Saudi funding that President Hadi promised was not forthcoming, and to date has not arrived. Meanwhile, the intensifying war through 2017 has ensured that the rial has remained under downward pressure since the first round of currency instability in February.4

However, increased foreign currency remittances to Yemen for the month of Ramadan, which ran between May and June, and for the Eid al Adha holiday at the beginning of September, helped slow the rial’s decline. As is normal for the period following Eid al Adha, remittances then began to decline through September. The end of this support for the rial was shortly thereafter followed by a number of new downward pressures.

Importers, seeking to replenish stocks of goods following the end of the holidays, began selling their rials in the market to purchase foreign currency. In Sana’a, this trend was accompanied by a particular complication: to compensate for their inability to pay public sector wages, the authorities had, in the second quarter of this year, paid civil servants in vouchers that they could use at selected business to buy goods.5 To cover the cost of these vouchers, the CBY had digitally created some 45 billion rials that it lent to the authorities to pay the businesses. After Eid al Adha, these businesses went to the market with these rials to purchase foreign currency to restock their inventory. Given the liquidity crisis there is currently a premium for physical cash relative to bank transfers in financial transactions, thus increasing the cost for businesses buying foreign currency using these digitally manufactured rials.

On September 24, Prime Minister Ahmed Obeid bin Daghr of the internationally recognized government announced that it would begin regularly paying public sector salaries across all governorates under their control, as well as the entire Taiz governorate. The Sana’a Center estimates that the monthly public sector payroll across southern governorates, plus Taiz, is some YR 20 billion, in addition to more than YR 20 billion in salaries for the army and police. Following a shipment of newly printed rials from abroad in September, the government began distributing public sector salaries on September 29. Notably, there had been no increase in government revenue or foreign currency reserves that prefaced the increased government expenditure on salaries.

The cumulative macroeconomic effect of the above-mentioned events in September was a decrease in rial demand concurrent with an increased rial supply. Thus, at the beginning of October the rial then began to rapidly depreciate in market value.   

The response in Sana’a

Through October Houthi-Saleh security services began arresting currency exchangers en masse in an effort to halt currency trading and speculation. (As of publication, most of the exchangers had been released from custody.)

On October 18, the deputy prime minister for economic affairs in Sana’a, Hussein Maqbouli, convened a meeting involving representatives from the National Security Council, the Saleh-allied General People’s Congress party, leading public and private banks, currency exchangers and major importers to discuss ways to halt the rapidly falling currency. (Notably absent from the meeting was a representative of the CBY in Sanaa.)

Following the meeting Maqbouli’s office released a six-point action plan. The first two points involved the parties committing to scheduling and facilitating the sale of foreign currency to the largest wheat and oil importers through CAC Bank, Yemen’s largest public bank. Specifically, fuel importers committed to immediately providing YR 6 billion to CAC Bank, which the bank would use to shop for foreign currency wholesale, rather than having the importers go individually to the market.

Points three and four of the action plan involved the implementation of currency controls. Specifically, the plan prohibits the exit of foreign currency from areas controlled by Houthi-Saleh forces – except with permission from the CBY in Sana’a – and bans the importation of large sums of rials from South Yemen, specifying that no one transfer should exceed YR 5 million.   

In the action plan’s fifth point, banks, fuel importers, telecommunications companies, tobacco merchants and basic commodities traders committed to not purchasing foreign currency on the market until at least the end of October. The sixth point stipulated that the security services would pursue and punish those who violated any of the previous points.

The prospect of one currency with two monetary policies

According to Sana’a Center sources, the authorities in Sana’a are also planning to publically announce a fixed currency exchange rate, at below market value, in areas under their control, and force money exchangers and banks to adhere to such. While ostensibly a move to halt currency depreciation, if implemented the Sana’a Center foresees it having myriad unintended consequences.

Among the immediate impacts will likely be a large-scale shift in Yemen’s remittance deliveries from Sana’a to Marib and Aden, with senders and receivers alike seeking a better exchange rate for arriving foreign currency. Given that Yemen’s largest population centers are in the north, and thus the north will remain the final destination for most remittances, large-scale currency smuggling is likely to ensue in order to subvert the newly-imposed currency controls.

Throughout the conflict trust in the banking system has waned and its economic clout has in large part shifted to the currency exchangers, many of whom are semi-official or entirely black market entities. The empowerment of new currency smuggling networks would thus entail the continued decline of the official economy.

Marib, held by nominally pro-government groups yet less than 200 kilometers from Sana’a, would likely play a prominent role is such smuggling, given the pre-existing tribal dynamics of the area that are already facilitating rampant smuggling between Yemen’s north and south. As a result, Marib’s relative economic ascendency through the conflict – thanks to businesses and capital relocating there from Sana’a – would likely continue, and thus further empower the aspirations of Marib’s political elite for autonomy from both Sana’a and Aden.  

Until its relocation last year, Yemen’s central bank had essentially been the last state institution truly acting as a national entity. The implementation of distinct monetary policy between the country’s north and south would formalize the schism of Yemen’s central bank. This creation of distinct economic areas would be in addition to the military and political division of the country, and thus should be understood as a significant step toward the creation of independent statelets.

A shared currency with distinct monetary policies, especially in the context of Yemen today, is also almost certain to wildly distort market mechanisms.  

Government reaction to currency depreciation

October 21, Prime Minister Bin Daher called a meeting with the CBY in Aden and the directors of private banks in the city to discuss ways to stabilise the rial. Following the meeting the internationally recognized government implemented a number of new policies; among the most immediate was to prohibit large transfers of both foreign and domestic currency to northern Yemen, and to dispatch security agencies to force the closure of unlicensed currency exchanges in the governorate.

The prime minister also announced that the internationally recognized government would continue to purchase fuel from abroad for electricity generator consumption, and thus partially cover the market’s needs.

As of this publication, the market was trading the rial at between YR 406 and YR 412 – the buy and sell prices, respectively – to the USD. However, in anticipation of further weakness in Yemen’s domestic currency, and thus increased costs in restocking inventory, many Yemeni business owners were pricing goods based on an exchange rate of YR 500 to the USD.

Looking ahead: Recommendations

It is in the best interests of all Yemenis that the authorities in both Sana’a and Aden refrain from flooding the market with rials. Both parties must recognize that increased spending in the absence of increased revenue risks triggering rapidly accelerating inflation, which would have catastrophic implications for millions of Yemenis.

Both parties should also refrain from enacting policies that are deeply problematic for the banking sector – such as a fixed currency rate and currency controls between northern and southern Yemen.

The Yemeni government and members of the Saudi-led coalition intervening in the war must expedite efforts to restart Yemeni government revenue streams – such as natural gas exports through Bilhaf terminal in Shabwa governorate, currently under the control of United Arab Emirates-affiliated forces. In the interim period, the Yemeni government should also repatriate the foreign currency holdings it has abroad, which amount to hundreds of millions of dollars. Saudi-led coalition member states should also provide the CBY with foreign currency funds to prop up the rial, support the import of basic commodities and pay public sector salaries.

When conditions permit, it is incumbent upon the CBY to begin paying commercial banks the interest they are due on deposits held in treasury bonds. This would help re-empower the banks in the market again, allowing them facilitate normal business, play a role in stabilizing the currency, and help restore public trust in the banking system.   

As previously detailed by the Sana’a Center, the CBY offices in Sana’a and Aden should coordinate to implement a dedicated exchange rate for humanitarian funds entering Yemen. This could be calculated using a moving average of the market rate of the previous three months. Given the size of foreign aid funds entering Yemen from international nongovernmental organizations and UN agencies, the use of such an exchange rate would help stabilize the domestic currency and the price of imports on the local market, as well as provide humanitarian organizations with a fair price for their foreign currency and curtail excessive arbitrage.

As the global currency authority, the International Monetary Fund should also bring its influence to bear on all parties in Yemen and the Saudi-led coalition regarding the above points.


Notes:

1 The World Bank, ‘Data; Yemen Rep.’; accessed October 30, 2017, available at https://data.worldbank.org/country/yemen-rep

2 Mansour Rageh, Amal Nasser and Farea Al-Muslimi, ‘Yemen without a functioning central bank: The loss of basic economic stabilization and accelerating famine’, Sana’a Center for Strategic Studies, November 2, 2016. Accessed October 30, 2017, available at https://sanaacenter.org/publications/main-publications/55

Ibid.

4 The Yemen Protection Cluster – a coordination body for humanitarian organizations led by the UN High Commissioner for Refugees – reported in August that through the first half of 2017 the frequency of coalition airstrikes per month in Yemen had tripled, and the frequency of frontline battles had increased roughly 56 percent relative to 2016. For more see: Protection Cluster Yemen Situation Update August 2017. 

5 For details regarding the initiation of the voucher program, please see the Sana’a Center’s Yemen at the UN – April 2017 Review; for details on the demise of the voucher program, please see the Sana’a Center’s Yemen at the UN – July 2017 Review.

The evolution of militant Salafism in Taiz

The evolution of militant Salafism in Taiz

The rise of Salafi militias in the Yemeni city of Taiz has contributed to the now frequent outbursts of violence there between ostensibly pro-government factions. It has also helped foster an environment conducive to extremist groups such as al-Qaeda in the Arabian Peninsula (AQAP). If not addressed directly, these developments are likely to continue destabilizing the city and wider governorate well after any potential resolution to the larger conflict in Yemen.

Yemen Economic Bulletin: How currency arbitrage has reduced the funds available to address the humanitarian crisis

Yemen Economic Bulletin: How currency arbitrage has reduced the funds available to address the humanitarian crisis

The disparity between the official exchange rate and the market exchange rate of the Yemeni rial that developed during the current conflict led to large-scale profiteering through currency arbitrage. In particular, Yemeni banks exchanging foreign funds for international humanitarian organizations reaped significant profits at the expense of the intended aid recipients in Yemen.

The destabilizing legacy of US military aid and counterterrorism efforts in Yemen

The destabilizing legacy of US military aid and counterterrorism efforts in Yemen

ince the administration of United States President George W. Bush, Washington has provided military assistance to the Yemeni government under the stated goal of bolstering the Yemeni Armed Forces’ capacity to combat Yemen’s local branch of al-Qaeda. This assistance was fairly consistently provided up until the outbreak of the most recent conflict in 2015, irrespective of the domestic upheaval taking place in Yemen.

Iran and Houthis: Between political alliances and sectarian tensions

Iran and Houthis: Between political alliances and sectarian tensions

Houthis’ missiles targeting Saudi Arabia became more developed and far-reaching during the current war, thus prompting questions about Iran’s role in Yemen. Many stories circulated about Iran smuggling weapons to Houthis despite the blockade and tight control on all air, land and sea ports in the country. It is also believed that Iranian experts are developing Houthis’ weapon capacities.

Iran’s Role in Yemen Exaggerated, but Destructive

Iran’s Role in Yemen Exaggerated, but Destructive

Since March 2015, Saudi Arabia and ten other countries have been conducting a bloody airstrike campaign against the Houthi rebel forces in Yemen. The campaign, meant to counter what Saudis call the “Iranian Threat” in the Arabian Peninsula, had received limited support from the Obama Administration, but Saudi Arabia and its coalition partners are now operating with a freer hand from the Trump White House.

The endless battle in Taiz

The endless battle in Taiz

Taiz is the site of the longest-running battle ground in the Yemen war, which began when Houthi forces took over the city on March 25, 2015. Initially, the Houthis were confronted by peaceful demonstrations which they repressed heavily, killing six demonstrators in the process. The situation rapidly developed into armed conflict when the war erupted after the Houthis invaded the south, prompting the Saudi-led coalition to launch a counteroffensive on March 26, 2015. Taiz is centrally located in Yemen, and is the country’s third most populous city. Although large parts of Taiz were reportedly liberated from Houthi dominance, the “Taiz liberation operation” was never launched with serious intent.

Rapid currency depreciation and the decimation of Yemeni purchasing power

Rapid currency depreciation and the decimation of Yemeni purchasing power

International financial intervention is urgently needed to protect the value of the Yemen’s domestic currency. If this support is not forthcoming in the immediate near-term the Yemeni rial faces rapid depreciation; in a country that imports nearly 90 percent of its nutritional needs this depreciation would decimate the ability of most Yemenis to purchase food and other basic necessities.
The two-year-old civil war and regional military intervention in Yemen has already helped create the world’s largest food security emergency, with millions of people currently facing starvation; a steep decline in remaining per capita purchasing power would significantly accelerate the spread of famine.

The Limits of US Military Power in Yemen: Why Al Qaeda in the Arabian Peninsula continues to thrive

The Limits of US Military Power in Yemen: Why Al Qaeda in the Arabian Peninsula continues to thrive

Similar to US counterterrorism efforts in Yemen under President Barack Obama, the newly minted White House administration of Donald Trump has shown little appetite to explore non-military policy options to supplement the use of American firepower in Yemen. Indeed, shortly after taking office President Trump authorized the escalation of drone strikes and special forces operations in Yemen. The Trump administration’s 2017 budget proposal to congress also outlines massive cuts in US diplomatic and humanitarian spending, even as the UN declared last month that Yemen faces the largest food security emergency in the world. Such a myopic focus on the military option in the battle against Al Qaeda in the Arabian Peninsula (AQAP) indicates a failure to grasp why AQAP has expanded so successfully in Yemen despite well more than a decade of US counterterrorism efforts in the country.