Oil production in government-held areas ground to an almost complete halt early in the month as Houthi drone attacks continued to strangle exports. With oil revenues representing the largest source of income for the government, any prolonged halt to its production and export would have dire effects on economic conditions, including an inability to pay salaries and depreciation of the rial in government-controlled areas.
The government successfully scrambled to find more regional and international financial support. On November 17, the International Monetary Fund agreed to provide US$300 million to the Central Bank of Yemen in Aden’s foreign exchange reserves, with US assistance in facilitating transfers through the Federal Reserve. Separate deals to receive long-awaited financial support from Saudi Arabia and the UAE, promised after the formation of the PLC in April, were agreed on November 25 and 27.
Amid these developments, the value of the Yemeni rial in both government- and Houthi-held areas remained relatively stable, with some loss of value in the government rial. One notable trend was reduced subscriptions to the CBY-Aden’s weekly currency auctions, ostensibly due to concerns over the continued suspension of oil exports and the anticipation of a new Saudi deposit. Compared to a 50 percent subscription the previous week, the November 1 auction was only 8 percent subscribed, although this appeared to recover later in the month with the November 22 auction 84 percent subscribed.
Govt Buoyed by International Financial Support
After months of negotiations, the government agreed to conditions to receive much-needed financial support from the International Monetary Fund on November 17. As part of the agreement with the IMF to release US$300 million in Special Drawing Rights and hold the converted funds in the CBY-Aden’s account at the US Federal Reserve, the CBY-Aden must certify that any bank participating in weekly FX auctions is compliant with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) statutes. This requires banks to share their operations data with CBY-Aden. The government has called on banks to cooperate and comply with instructions released from the supervision sector, an institutional arm of the CBY-Aden responsible for regulating banks and monitoring their compliance with established laws and statutes.
On November 19, the CBY-Sana’a denounced the IMF support, accusing the IMF of “providing extrajudicial funds to finance military operations and the war on Yemen.” The Houthi-controlled central bank said it had contacted the IMF three times this year to voice its opposition to the IMF allocating support for Yemen to the CBY-Aden. The CBY-Sana’a proposed three alternative courses of action. The first was to use a third party to manage the SDR and allocate it to finance commodity imports and to pay six months’ worth of public sector salaries, a key sticking point in the truce negotiations. The second was to use the financial support to pay part of the public debt owed to banks operating in Yemen, which would allow them to pay a portion of their customer deposits, helping to address the prevailing liquidity crisis and alleviate downward pressures on the local currency. The third was to freeze the SDR until the monetary policy in Yemen is reunified. Should the IMF ignore these demands, the CBY-Sana’a said it reserved the right to legally prosecute the former for “the exploitation and destruction of the rights and capabilities of the Yemeni people.”
On November 27, the government and the Arab Monetary Fund (AMF) signed a US$1 billion agreement, financed by Saudi Arabia, to supply the government with financial support from the end of this year until 2025. The agreement is part of the US$2 billion in financial support that Riyadh and Abu Dhabi committed to the government in April this year, the release of which was purportedly delayed pending the implementation of governance and institutional reforms. The agreement came just two days after Prime Minister Maeen Abdelmalek Saeed announced that the United Arab Emirates had made 1.1 billion dirhams (nearly US$300 million) available to the government-affiliated CBY-Aden.
The terms and conditions for the usage of the new AMF grant are more stringent than those for previous support. The government and the CBY-Aden had been pressed by foreign donors and international financial institutions for months to adopt broad institutional and governance reforms that would increase transparency and oversight as a condition of further support. From the start of 2018 to 2020, Saudi Arabia made a US$2 billion deposit available to the CBY-Aden to replenish its foreign exchange reserves. This helped stabilize the exchange rate for new rials through import financing of five basic food commodities (wheat, rice, milk, cooking oil, and sugar). But the relatively lax terms of this support program – in particular the lack of transparency regarding how the CBY-Aden set a preferential exchange rate for its foreign currency sales – created an environment conducive to embezzlement and mismanagement, though UN accusations of such against the CBY-Aden and Yemeni importers were ultimately withdrawn. Among the CBY-Aden’s reforms in the past year has been the use of the Refinitiv platform, which has a predetermined and transparent mechanism to set the exchange rate at currency auctions.
Saudi Finance Minister Mohammed bin Abdullah al-Jadaan stated that the AMF-led program aims to support the government budget and banking sector and stimulate the private sector and economic development. While the financial support should help facilitate the government’s efforts at currency stabilization and budget financing, comprehensive economic, financial, and monetary reforms will be exceedingly difficult to achieve in the country’s deteriorating security and political environment.
Oil production in Yemen slowed a near-complete halt in late October and early November due to Houthi drone attacks on government oil ports. On October 31, Canada’s Calvalley Petroleum announced it was suspending oil production at Block 9 in Hadramawt governorate, citing force majeure. This was followed by the state-owned Petromasila company’s announcement on November 2 that it was suspending operations in three other oilfields. Oil revenues are by far the government’s largest source of revenue and any prolonged halt to production will have dire implications on government finances. In an attempt to restore production, PLC member Faraj al-Bahsani visited Petromasila’s headquarters on December 3, and vowed that the PLC would find ways to deter the attacks and enable the company to continue production. The meeting also discussed the possibility of expanding oil investments in the Masila fields, including setting up a refinery.
Rival CBYs Battle Over Data Oversight
In a November 8 memorandum, the CBY-Aden listed eight banks that had committed to sharing their data with the central bank and that are now subject to its supervision: the National Bank of Yemen; Cooperative and Agricultural Credit Bank (CAC Bank); Tadhamon International Islamic Bank; Al-Kuraimi Islamic Microfinance Bank; Arab Bank; Saba Islamic Bank; Aden Microfinance Bank; and Al-Qutibi Islamic Microfinance Bank. Twelve other Yemeni banks, which still largely carry out their operations from Sana’a, have been classified by CBY-Aden as non-compliant for refusing to share their operations data, and could be subject to punitive measures: the International Bank of Yemen; Islamic Bank of Yemen for Finance and investment; Qatar National Bank; Shamil Bank of Yemen and Bahrain; Yemen Bank for Reconstruction and Development; United Bank Limited; Yemen Commercial Bank; Yemen Gulf Bank; Yemen Kuwait Bank for Trade and Investment; Rafidan Bank; Housing Bank; and Al-Amal Microfinance Bank.
The Houthi-affiliated CBY-Sana’a has repeatedly warned banks against sharing their data with the CBY-Aden and threatened retaliatory measures against those who do so. On November 29, the Houthi-run Supreme Council for Management and Coordination for Humanitarian Affairs & International Cooperation issued a circular ordering CSOs, NGOs, and aid agencies to cut financial ties with the eight banks sharing data with CBY-Aden if they wished to continue implementing their programs. While these escalatory measures are part of the broader economic war, the banking sector has become the primary area of bargaining and contestation. The two branches of the CBY have intensified their battle for the unilateral regulation and control of foreign aid and hard currency held in Yemen’s banks.
The Yemen Kuwait Bank and Yemen International Bank handle the largest portion of aid funding and act as the main financial service providers of humanitarian actors – both are headquartered in Sana’a. The CBY-Aden has requested unlimited access to all of their data and records, according to a senior banking official, but as of writing, both have refused to comply.
The value of new rial banknotes remained generally stable in government-held areas throughout November, although it experienced a 9 percent drop in value from an average of YR1,156 to the US dollar early in the month to YR1,176 by November 23. The value of old rial banknotes in Houthi-held areas held stable in a band between 560 and 565 per US dollar.
The CBY-Aden continued to support the exchange rate through its US$30 million weekly currency auctions, although Yemeni banks dramatically reduced their subscriptions to the auctions in the three weeks following October 25. The auction on November 1 was the worst-performing of 2022, with only 8 percent of the available foreign currency sold. Later in the month, however, this appeared to improve, with 84 percent of the November 22 auction subscribed.
Banks appeared to be taking two countervailing market forces into consideration when subscribing to auctions. The first is that if Houthi drone strikes continue to prevent government oil sales, the CBY-Aden will lose its ability to finance its FX auctions, reducing the relative supply of FX in the market and putting substantial downward pressure on the value of new rials. However, recently arrived international financial support, resulting in continued regular access to FX, could buoy the value of new Yemeni rials moving forward. Given that the banking sector has reduced its FX purchases in the last three weeks, bankers are likely weighing the arrival of Saudi financial support as the dominant factor. Anticipating near-term gains in the value of new rials, bankers are holding on to them so as to be able to buy more FX later.
Internet communications appeared to be functioning as normal again in Houthi-held territories in November after outages for certain applications in October. What appeared to be a block on online meeting platforms such as Zoom and Google Meet may have been a botched attempt to hack and monitor those platforms using the Sana’a-run Yemen Net. The state provider loses revenue through the use of internet apps instead of mobiles for international phone calls, and the apps are beyond the reach of state surveillance. The interference had completely stopped as of early November, with the online meeting platforms accessible without requiring the use of a VPN. Aden Net users had also been hit by a temporary outage, possibly linked to a company dispute with international providers. Users in Al-Mahra governorate were unaffected due to coverage from neighboring Oman.
On November 10, the Y-Telecom Company in Aden launched a trial version of its fourth-generation telecommunication services, which are slated to eventually cover all governorates under government control. Attending the inauguration was Minister of Communications and Information Technology Najib al-Awj. Y-Telecom was established as Yemen’s fourth mobile operator in 2007. In March 2020, the company declared bankruptcy and its assets were sold to the Houthi-controlled General Holding Corporation for Real Estate Development and Investment for US$35 million, well below market value. It then resumed operations in Houthi areas under the moniker Al-Hudhud Company for Telecom. In government-controlled areas, Saudi investor Saud bin Abdullah al-Bawardi led a group of other shareholders in re-establishing Y-Telecom in late 2020 in Aden, with operations restarting in late 2021.