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The Sana'a Center Editorial: Absent Reform, Yemenis Bear Brunt of Government Tariff Hike

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The internationally recognized Yemeni government’s recent decision to dramatically increase customs tariffs on non-essential goods appears to be spurring price surges for imports across the board. Given that the primary driver of the country’s dire food security crisis is price volatility, and that the government’s recent tariff hikes threaten to exacerbate this humanitarian crisis, the government should reverse its decision immediately.

Under normal circumstances, it would be a sensible policy option for the Yemeni government to try to raise revenues through gradually charging importers more to bring foreign products into the country, especially non-essential goods. Yemen, notably, has some of the lowest customs tariffs in the Arab world, even while the government is facing a massive budget deficit with few other options available to narrow the gap between income and expenses. These, however, are not normal times.

Frontlines divide the country, and even at main seaports and border crossings in areas the Yemeni government supposedly controls, it has little to no presence on the ground. This severely hampers its ability to enforce customs procedures at all. Indeed, the Sana’a Center Economic Unit estimates that the state treasury currently receives less than 40 percent of the customs revenues it is legally due. The government’s ability to regulate the commodity and currency markets to protect consumers is also minimal, while major private sector actors and regional authorities have little confidence in the government’s administrative competence or capacity to act in a principled manner.

It is in this context that the Yemeni government announced on July 25 – with neither an implementation plan nor coordination with the private sector – that it was doubling the customs exchange rate on non-essential items. This means that for every US dollar an importer owes in customs duties, the amount owed will be 500 Yemeni rials (YR) instead of the previous YR250.

Business groups and representatives from across the country swiftly condemned the move, warning that it would disrupt the movement of goods, cause general price spikes, and further undermine food security in a country that depends on imports for up to 90 percent of the food items it consumes. Many traders with goods already unloaded at Aden port initially refused to pay the new customs fee and left their products waiting in warehouses. The Houthi authorities in the north condemned the move as well and sought to entice importers to divert their shipments through ports in Hudaydah governorate under Houthi control, where the previous customs exchange rate continues to prevail. The already byzantine processes importers and shippers must navigate to bring commodities into Yemen was thrown into further chaos, with traders seeking to circumnavigate the new tariff through redirecting incoming goods to different ports of entry.

The Yemeni government had claimed that the increased tariff would have a limited impact, not more than 5 percent, on the market prices of non-essential goods. Such may have been the case if the government had the capacity to regulate the commodity market and restrain traders’ self-serving tendency to preemptively pass on to consumers anticipated increases in the cost of doing business. Instead, as of this writing, the Sana’a Center had received reports from Aden and Hadramawt governorates that many products, both basic goods and non-essential items, had jumped in price through August. More data is needed to gauge the full impact of the Yemeni government’s tariff hike, but preliminary evidence suggests that Yemeni consumers are bearing the brunt of the fallout as importers pad their profit margins.

The government’s need to increase revenues is clear – it is currently covering its budget deficit, largely public sector salaries, through printing new currency, which is a primary reason for the rial’s rapid depreciation in non-Houthi areas. This in turn undermines local purchasing power and deepens the humanitarian crisis. The government, however, implemented its new policy without being in a position to substantially gain from it, given its severely limited ability to enforce revenue collection. (It is important to note here that the Houthi authorities’ greater success at reining in their budget deficit has been accomplished by coercive and extensive taxation measures and collection, denying almost all public sector workers in areas they control a salary, and instead directing most of their revenues – including a 30 percent tariff on goods entering the north from government-held areas – to their war efforts).

Prior to the conflict, Yemen’s customs administration was one of the country’s most corrupt government agencies. During the ongoing conflict, the capacities of the customs administration – and the Yemeni government’s revenue mobilization capacity in general – substantially deteriorated and created a conducive environment for a significant revenue leakage. Administrative reforms are needed to fix these holes, and to shield consumers from importers’ price gouging, before any new fees are introduced. Without such reforms, smuggling and corruption related to imports will be further incentivized, consumers will continue to suffer price shocks, and the Yemeni government’s budget deficit will see little reprieve in return.

This editorial appeared in ‘New Fronts in the Economic War – The Yemen Review, August 2021’

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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.