Yemen’s Bank Catastrophe Call
As the US and UK call for a ceasefire and reconsider military support for the Saudi-backed Yemeni government’s campaign against Houti rebels, with fierce fighting now around the strategic Hudaydah port, the UN’s special envoy Martin Griffiths underscored the scope of “economic warfare” accompanying hunger for an estimated half the 30 million population. He cited “income famine” with years of unpaid civil servant salaries as split officials and central banks in charge in Aden and Sana’a clash over spending and banking and currency policies. The former, headed by President Abdo Rabbu Mansour Hadi operating from Riyadh, authorized fuel access to only licensed importers in September, while the latter spurned the decree and threatened retaliation against complying businesses, banks and money changers. The actions further reinforced fuel and exchange rate squeezes, as the rial slumped 50% against the dollar between July-September on the parallel market. In the view of experts on the ground such as the Sana’a Center for Strategic Studies, the established financial system and currency are at risk of outright collapse to add to the humanitarian catastrophe, without practical steps and policy reforms coordinated by international development institutions and private partners.
Yemen’s is the region’s poorest economy, and the latest International Monetary Fund projections are stark. Once a promising oil exporter, gross domestic product will contract 3% with the civil war, on 40% inflation from staple scarcity and rial depreciation. The fiscal and current account deficits are each estimated around 10% of GDP, and turnarounds next year are predicated on ebbing conflict. Output collapse since the outbreak of hostilities has been worse than in Libya and Syria, and the Fund notes “urgent needs” for food supply and public sector salary assistance. In the Gulf banking sector broadly private credit is “tepid” with state borrowing demand and commodity-related retrenchment in the construction industry, which was the mainstay in Yemen alongside hydrocarbons and agriculture. Saudi Arabia has provided fuel grants and deposited $2 billion to strengthen the currency, but transaction details are sketchy and confidence and substantive effects are so far minimal. In an October visit, special envoy Griffiths called for a collaborative emergency economic plan between local, foreign and regional parties, concentrated on exchange rate and central bank strengthening.
The UN humanitarian chief, Mark Lowcock, in turn, emphasized that half the population was in pre-famine condition, and two-thirds were “food insecure,” for a once in a century disaster. The international community has a $3 billion appeal underway, with 70% of pledges met according to the latest tally. The Rethinking Yemen’s Economy project, a network of analysts and business and government leaders funded by the European Union, points out that 90% of products were imported commercially before the war, through conglomerates like the Hayel Saeed Anam Group, which now operates out of the United Arab Emirates. Food is still available, but with destroyed distribution channels and consumer purchasing power costs have skyrocketed. Children suffer the most, with over 2 million “acutely malnourished” and also prone to cholera and other preventable diseases. The World Bank has announced a trade finance facility for food shipments and a war risk insurance mechanism is under donor consideration for other cross-border commercial engagement.
Yemen’s banking system was cut off globally over money laundering and terror funding concerns, before the 2011 version of its Arab Spring precipitated the then-President’s ouster and the chain of events to renewed war. European and American correspondents severed all contact from 2015 and refused to accept physical cash common in business dealings, forcing traders into informal currency houses escaping central bank regulation. International reserves quickly depleted as oil revenue was also diverted through these channels, and the monetary authority became completely dysfunctional when the respective Houti- and recognized government rivals were set up in late 2016. Unified supervisory, liquidity management, and payment capabilities no longer exist, as state-owned and private banks must increasingly rely on the two with their own capital crunch. The UN has convened meetings between the sides outside the country in Jordan and Kenya, but beyond informal contact progress is scant. With the currency literally under the gun, the system may be unsustainable and abolition of the two-tier system, which breeds corruption under the official rate, and a shift to a pegged regime as in the rest of Gulf, is likely another unplanned war legacy.
