High-level policymakers working on Yemen often resemble firefighters: moving from crisis to crisis, rarely affording themselves time to take stock of the bigger picture. Five years on from the launch of Operation Decisive Storm stakeholders remain transfixed by short-term political and military developments in Yemen, such as the recent Houthi advances in Al-Jawf governorate or the stagnant political process. The catastrophic impact that the prolonged violence has had on Yemeni society is clear, in terms of the loss of life, displacement and mental turmoil; this in addition to the destruction of property and vital infrastructure, chief among which include a healthcare system that is now effectively paralyzed. While the focus on immediate crises is understandable, this approach can, however, distract from the disturbing long-term trends that in many cases predate the war. The most important of these overlooked issues, given its profound impact on the daily lives of Yemenis, is the economy.
The slow-motion atrophy of Yemen’s economy has been occurring for years and has deepened the impoverishment of the country, with some 24 million Yemenis now requiring some form of humanitarian assistance. Despite persistent efforts by various Yemenis in the public and private sectors to make economic issues more of a priority, there remains little concerted effort to address the principal factors behind the country’s general economic collapse, and a lack of awareness regarding the financial interests that various parties to the conflict have in continuing the war. There is also a lack of acknowledgment of the nature and extent of the Yemeni economy’s fragility. Spoiler alert: the situation is pretty bleak and likely to get worse, no matter how resilient Yemeni society and people’s social support networks are in the face of the crisis.
Yemen’s economic decline continues to shape the extreme humanitarian suffering felt nationwide. This is manifested in reduced purchasing power tied to the decline in value of the Yemeni rial, rising unemployment and poverty levels, the major collapse in the public service delivery system and infrequent public sector employee salary payments, among other symptoms. Fleeting international attention on Yemen’s economic decline often focuses on the public sector and tends to overlook the huge challenges that Yemen’s private sector has also faced, even though the latter provides more jobs to Yemenis. While even basic data collection to quantify trends with statistics is scant, the indicators that do exist still fail to give the full perspective on the humanitarian cost.
A political settlement is urgently needed. The problem though is that any agreement will remain elusive as long as battles over access and control of key economic facilities and sources of revenue continue to drive the conflict. Actors dotted all over the country are personally and collectively profiting from the conflict, whether from extracting rents from fuel imports, liquified petroleum gas (LPG), humanitarian aid, taxation or the plentiful options of foreign patronage on offer. There are a lot of potential spoilers who have a vested interest in a continuation of the status quo.
And no matter what the main warring parties may present publicly – trading accusations over who is to blame for Yemen’s humanitarian crisis – underlying economic objectives ultimately override concerns they might have over the suffering of the Yemeni people. Diplomatic efforts to bring about change through a short-term humanitarian solution (i.e. the Stockholm Agreement) that view the humanitarian angle as a springboard to a more comprehensive political breakthrough have proven to be misguided at best, and have added another layer of complexity when it comes to trying to mediate between the main warring parties. This approach has also left UN agencies, international non-governmental organizations and humanitarian actors vulnerable to being targeted by warring parties in pursuit of broader political and economic objectives.
More serious discussions need to be held in regard to the economy, and fast. If for nothing else, these talks should heed the warning signs and prepare for the worst case scenario – the total collapse of the Yemen economy — with the goal of protecting the public at large and the most vulnerable members of society in particular.
Looking ahead, the scope of international policy discussions related to the Yemen economy must go much deeper than the usual topics of conversation – which are often limited to the current status of imports, commodity prices and public sector salary payments, or briefly highlighting the daunting task of reconstruction that awaits, rather than exploring potential avenues for development and investment in Yemen’s human capital that could begin in earnest. A good place to start when broadening discussions on the Yemeni economy would be examining different ways to balance pressing economic concerns versus longer-term planning on crucial matters such as the eventual need for economic diversification to reduce the reliance on hydrocarbon revenues and external financial aid.
Although a number of crude oil production blocks have come back online and crude oil exports have increased in recent years, the fact remains that economic dependency on hydrocarbons offers short-term relief as opposed to long-term stability. Yemen’s crude oil production notably peaked in 2001 and the country became a net fuel importer in 2013. Liquified natural gas (LNG) exports have yet to resume and are unlikely to do so in the absence of an extended period of relative security from the point of production in Marib to the point of export at Shabwa’s Balhaf terminal, where despite the government’s protestations, a small contingent of Emirati soldiers remain. Government revenues from crude oil exports have dropped in accordance with the decline in global oil prices in recent years. These returns look set to take a significant hit this year following Saudi Arabia’s decision earlier this month to slash prices and boost production, which resulted in the biggest drop in Brent crude since 1991 during the first Gulf War.
Discussions and planning on Yemen must acknowledge realities on the ground, including the political, regional and economic fragmentation of the country. The increased levels of autonomy achieved in certain governorates, such as Marib, Hadramawt and Al-Mahra, will need to be considered – not only because of their relative economic importance to the country but also as part of a broader exploration of how best to reconfigure the economic relationship between the central and local government under a new form of governance. Such discussions must broach the complex issue of a fairer distribution of revenue from the center to the periphery – including to governorates that generate much less revenue than others due to the absence of hydrocarbon production and/or export facilities, land or sea ports, and industry.
Yemen’s economy was teetering years prior to the escalation and regionalization of the conflict in March 2015 due to elite capture of resources, weak state legitimacy and capacity, structural economic imbalances, social inequalities and political exclusion. Five years on, despite a patchwork of bailouts and internal measures to stay afloat, the Yemeni economy is in a worse state than ever before. Contributing factors include: the reduced hydrocarbon export capacity and the depletion of country foreign currency reserves; a growing trade deficit and deteriorated investment climate; the fragmentation of the Central Bank of Yemen and the unraveling of Yemen’s formal banking system; and escalating economic warfare between the internationally recognized Yemeni government and the Houthi movement, which has manifested itself in the form of conflicting monetary, fiscal and economic policies as well as competing efforts to regulate and monetize essential imports, trade and other commercial activities. The end result of the economic warfare has been the creation of parallel and competing economic institutions and the narrowing of the space in which banks, businesses, money exchangers and ordinary citizens can operate and carry out essential, everyday transactions free of political interference. The added costs of doing business and transferring money in Yemen are ultimately passed on to the consumer who is also faced with cyclical fuel shortages, price hikes on essential goods, electricity power outages and poor public service delivery.
Yemen’s economy is only being held together by money from abroad. The primary source of foreign currency during the conflict comes from remittances sent home by Yemeni workers. The second biggest source is humanitarian aid that has been either channeled through the UN humanitarian response plan or delivered independently. One of the biggest donors is Saudi Arabia. While critics will rightly argue that Riyadh has a moral obligation to provide continued financial support to Yemen given its active role in a conflict that has pushed Yemen’s economy closer to the brink, it is also a fact that without Saudi financial support the Yemen economy may have already collapsed.
All three sources of external financial aid are under threat and will probably be reduced in 2020. This month Saudi Arabia told state agencies to plan for wide budget cuts in reaction to the sharp drop in oil prices as a result of its decision to increase production while the United States Agency for International Development announced that it would be suspending activities in northern Yemen in reaction to Houthi restrictions. In addition, the ominous economic repercussions of COVID-19 has resulted in a massive reduction in economic activity worldwide and forced countries to become more inward looking. In Saudi Arabia, for instance, measures to combat the spread of the virus have led to more Yemeni workers staying home, unable to make money that a lot of people back in Yemen are dependent on.
In the short term, neither the government nor the Houthis are likely to countenance abandoning the economic warfare that both are engaged in, and the stark reality is that neither is in a position to avert Yemen’s economic decline on their own. Still, deescalation remains essential. Moving forward, Yemen certainly cannot afford to hang all its hopes of economic recovery on hydrocarbon revenues or the potentially misplaced assumption that Saudi Arabia will continue to bail it out in perpetuity. International policymakers, for their part, need to read the macroeconomic warning signs that have been present for years and take note of the origins of what was and arguably still is a conflict driven by local dynamics – at the heart of which is a battle over access and control over different sources of revenue.
This commentary appeared in Five Years Since Decisive Storm – The Yemen Review, March 2020.
The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover diplomatic, political, social, economic, military, security, humanitarian and human rights related developments, aiming to impact policy locally, regionally, and internationally.