By Amal Nasser and Alex J. Harper
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.
Warnings of currency instability
Economic pressures stemming from the two-year-old civil war and regional military intervention in Yemen have taken their toll on the value of the country’s currency. Between early 2015 and November 2016 the Yemeni rial (YR) lost more than half of its value relative to the United States dollar (USD); from November last year until early February 2017 the rial saw a slight gradual depreciation from YR320 to YR330 against the dollar in local market trading.
Amongst the factors weighing on the rial have been widespread collapse of economic activity, government services, security and humanitarian conditions, the cessation of oil exports (previously the largest source of foreign currency and government revenue) and the Central Bank of Yemen’s (CBY) decreasing ability to intervene in the market, given its depleted foreign currency holdings. The CBY has also been experiencing a severe rial liquidity crisis; in August 2016 most public sector workers – roughly a quarter of Yemen’s employed – lost their income due to the CBY not having the physical banknotes with which to pay them. In September 2016 President Abdu Rabbu Mansour Hadi, head of the internationally recognized government of Yemen, then ordered the relocation of the CBY’s headquarters from rebel-controlled Sana’a to government-controlled Aden, with the central bank’s subsequent dysfunction further complicating the country’s fiscal and monetary management.
Factors that have helped mitigate the downward pressure on the rial have been the continuing foreign exchange inflows from international organizations operating in Yemen and remittances from Yemenis abroad – now the largest source of new foreign currency coming into the country. In addition, foreign actors in the conflict – notably Saudi Arabia and the United Arab Emirates – have for the most part been paying local forces, fighting on behalf of the internationally recognized government, in foreign currency.
In early 2017 the Yemeni government in Aden received fresh rial banknotes from the printers in Russia, and in the first week of February started to distribute public sector salaries. The market quickly began to anticipate that the government would, for the first time in nearly half a year, distribute the full monthly public sector salary bill of 65 billion rials; the market was also aware that the central bank did not have the foreign currency reserves necessary to guarantee the rial’s value at the official exchange rate – currently YR250 to the USD.
By the second week of February – even with the government having distributed only a small portion of total civil servant wages – the rial began to depreciate rapidly in local market trading. This was compounded by importers’ increasing demand for foreign currency in the lead up Ramadan. Yemenis receiving remittances from abroad then began refusing to convert these into domestic currency; panic entered the market and set off a run on the rial as people rushed to convert their savings to USD, in turn accelerating currency exchangers’ speculative pricing. Within days the rial lost as much as 20 percent in value, trading as low as YR400 to the USD in some parts of the country. In expectation of further depreciation many businesses across the country were carrying out transactions at YR450 to the USD.
Stopgap support measures
The governing authorities and CBY administrations on either side of Yemen’s frontlines quickly recognized the rial’s weakness and moved to restabilize the currency. In Sana’a, CBY officials convened meetings with the heads of private banks and financial institutions to request their assistance in stabilizing the rial through providing the market with foreign currency. To curtail currency speculation, the so-called “Government of National Salvation” (GNS) – established in late 2016 by the Houthi rebels and allied General People’s Congress, loyal to former president Ali Abdullah Saleh – ordered currency traders to cease operations, leading to the forced closure of several exchange offices and the arrest of traders caught violating the ban. The GNS then secured an agreement with major food and fuel importers in northern Yemen to refrain from purchasing foreign exchange on the open market for 30 days.
Meanwhile in Aden, the internationally recognized government halted the distribution of public sector salaries within several days of having initiated them. Central bank governor, Monasser al-Quaiti, also met with exchange companies and banks in Aden to discuss currency stabilization, assuring them that CBY headquarters was soon to receive significant foreign exchange support.
By mid-February, the rial had stabilized at YR340 to the USD. The 30-day importer agreement not to buy foreign currency on the open market expired March 12, though continued GNS commitments that it will offer importers in Sana’a a better-than-market exchange rate has largely kept importers from entering the market for foreign exchange. The strength of such commitments was reinforced in mid-March when the GNS, through the Ministry of Telecommunications, sold US$30 million to the country’s three largest wheat importers. Most importers have thus been accumulating rials through selling goods without placing new orders, depleting existing stocks of food, fuel and other imports and exacerbating shortages of these commodities in many parts of the country.
President Hadi then travelled to Riyadh on February 27 to meet with Mohammad bin Salman Al Saud, the Saudi deputy crown prince and defence minister. Following this Hadi convened a meeting in Aden with his prime minister and governors from across South Yemen, Taiz and Marib, in which Hadi announced that the Saudi government had committed $10 billion in aid to Yemen – $8 billion for reconstruction projects and $2 billion to help the CBY stabilize the currency and resume import guarantees at YR250 to the USD.
On the cusp of rapid depreciation
The CBY in Sana’a currently has foreign cash holdings of US$100 million and 200 million Saudi Riyals (SR). The CBY in Aden has at least $700 million in foreign account holdings but no means to access these funds; when President Hadi ordered the relocation of central bank headquarters from Sana’a to Aden last September, he did so without first securing at the new location the financial infrastructure necessary to connect it to the SWIFT network, which governs global financial transactions. Governor al-Quaiti has repeatedly said that the Aden-based CBY would shortly be connected to the SWIFT network, however a financial observer speaking with the Sana’a Center said this is likely still months away.
Yemeni economists closely following recent developments have told the Sana’a Center that the only means the CBY in Sana’a currently has to support the value of the rial is to sell its foreign currency holdings directly to importers; given the CBY’s currently available reserves, this option would be feasible for roughly 6 to 8 weeks before the central bank’s foreign currency reserves were exhausted. It is unlikely the Sana’a-based CBY will voluntarily sell these reserves though, given that they are largely constituted by private Yemeni bank deposits. Despite this, pressure has been mounting from the GNS, which has been facing intense public pressure due to the unpaid public sector salaries. The Houthis in turn have increasingly been demanding that the CBY’s Sana’a branch sell its foreign currency reserves to pay these wages, fueling fierce conflict between them and the central bank, though the bank has so far resisted the pressure.
A CBY official at the central bank’s Aden headquarters told the Sana’a Center in early March that they were confident the $2 billion in Saudi support would arrive shortly. As of this writing, however, there had been no official Saudi confirmation regarding the proposed financial aid. In the uneasy calm that has thus prevailed in the market between mid-February and the end of March, the Yemeni currency has seen a slight gradual depreciation from YR340 to YR355 in open market trading. If the Saudi aid, or a similarly robust financial intervention, does not arrive in the very near-term to provide the market with foreign currency, however, Yemeni economists are anticipating that the rial will re-enter a phase of rapid depreciation.
Ramifications of evaporating Yemeni purchasing power
Before the current conflict began, Yemen had depended on commercial imports to supply almost 90 percent of the country’s nutritional needs – a crucial reason why the CBY has long been fixated on maintaining the value of the rial, lest average Yemenis be priced out of the market for food.
Yemen is also the poorest and least developed country in the Middle East and North Africa, with the World Bank reporting last year that between 2014 and early 2016 the incidence of poverty in the country rose from 34 percent to 62 percent, based on a national poverty line of $50 per capita per month (in 2014 prices). Importantly, that World Bank report was issued before a quarter of the country’s employed workforce – some 1.2 million public sector workers – lost their salaries in August 2016; the poverty rate is certain to have risen dramatically since.
Simultaneously, the Saudi-led regional military coalition intervening in the civil war has for two years imposed a air and land blockade on northern sections of the country, while numerous impediments to cargo ships have dramatically elevated the insurance and transportation costs for sea imports. Coalition airstrikes, ground fighting and fuel shortages within the country have also hobbled distribution networks inside Yemen.
The cumulative result is that food shortages have taken hold in many areas, while in other areas many locals no longer have the ability to purchase the foodstuffs that are available. The United Nation’s Food and Agriculture Organization declared in February 2017 that “Yemen is facing the largest food security emergency in the world”. The same month the UN Office for the Coordination of Humanitarian Affairs reported that 18.8 million people – more than two thirds of the population – require some form of humanitarian assistance; some 10.3 million Yemenis are acutely affected and require “immediate humanitarian assistance to save and sustain their lives,” and 3.3 million people, including 2.1 million children, are acutely malnourished.
In the current environment, a sizable erosion of the country’s remaining per capita purchasing power – as would result from rapid depreciation of the domestic currency – would significantly accelerate the spread of famine.
Amal Nasser is a non-resident economist at the Sana'a Center for Strategic Studies, based in Berlin. She holds an M.Sc. in Economics from the Berlin Institute of Technology.
Alex J. Harper is an affiliated researcher at the Sana'a Center for Strategic Studies.
*The authors would like to thank Spencer Osberg for his extensive editing and reviews.
 Yemen traditionally sees a spike of imports about three months before Ramadan, as importers begin to prepare for the expected increase in consumer demand.
 It is important to note that due to the persistent liquidity shortage in rial banknotes there are currently two effective prices when making currency exchanges in Yemen (at both currency exchangers and private banks): one for cash exchanges and another for exchanges via bank accounts. Cash exchanges are carried out at the market price, while currency exchanges via check or electronic means are typically carried out at a rate equal to the market price plus 50 rial; such is an indication of the premium placed on physical currency as a result of the liquidity crisis.
 A consequence of rescinding the public sector wage payments has been sporadic strikes by workers and soldiers in government controlled areas.
 Tariffs on private telecommunications companies – paid in USD – are one of the GNS’s few remaining sources of revenue.
 “SWIFT” stands for the Society for Worldwide Interbank Financial Telecommunications, and is a global communication network that facilitates 24-hour secure international exchange of payment instructions between banks, central banks, multinational corporations, and major securities firms.
 “COUNTRY ENGAGEMENT NOTE FOR THE REPUBLIC OF YEMEN”, The World Bank, June 20, 2016.
 "Yemen’s suffering is the world’s largest humanitarian crisis today", Food and Agriculture Organization of the United Nations, February 15, 2017.
 "Yemen: UN and partners appeal for $2.1 bln to provide life-saving assistance to 12 million people in 2017", Relief Web, February 8, 2017.