A Special Report by Barran Press - Shu'aib al-Ahmadi
Since the Houthi militia, designated as a terrorist group by the international community, seized control of Yemen's capital Sana'a in September 2014, the country's economy has been in a state of unprecedented collapse.
The Houthis' control over the Central Bank of Yemen, used to finance their military operations and control the banking sector, has fueled a fierce conflict with the internationally recognized Yemeni government. In September 2016, the government relocated the Central Bank to Aden, declared the temporary capital, to counter Houthi manipulation.
As the Houthis continue to deepen the currency split, the Central Bank in Aden has been forced to implement "decisive" measures to protect the banking sector, regulate banks, and ensure economic solutions to unify the national currency, strengthen the value of the rial, and secure its future.
A Continuous Decline
The local currency's depreciation has led to a harsh living environment for citizens, with soaring prices amidst currency instability. For the first time in Yemen's history, the dollar has surpassed 1900 rials, and the Saudi riyal has exceeded 500 rials in government-controlled areas, with indicators pointing towards further decline. Observers note the lack of government action to prevent the rial's devaluation.
Experts attribute the rial's decline to the ongoing suspension of oil exports for over a year and a half, coupled with the financial conflict and currency split. Official statistics reveal that the Yemeni government lost over 80% of its revenue in October 2022 after the Houthis targeted oil facilities in Marib, eastern Yemen.
Economic analyst Adel al-Amri states that the Yemeni government was forced to halt oil and gas exports in October 2022 due to Houthi threats to bomb the Dhubab and Ash Shihr ports and the ships approaching them.
Al-Amri, speaking to Barran Press, considers this a "second nail in the coffin of the government's economy, following the nail of the currency split in October 2019, and before that, the shift of commercial activity and ship traffic to the port of Hodeidah."
Decisions as Weapons
Before the Houthis could deal the final blow to the Yemeni economy, al-Amri says, "The Central Bank took notice and decided to use its effective weapons, implementing decisions to unify the financial network, reform the foreign remittance system, relocate bank headquarters to Aden, followed by the revocation of their licenses, the cancellation of licenses for violating money changers, and the decision to abolish and withdraw the old currency."
Al-Amri points out that "these decisions have financially isolated the Houthis from the world. They are now facing a crisis and confusion in their decisions and actions, marking the beginning of the end, it seems."
The Houthi militia had previously taken "destructive" economic decisions that supported the currency split, including a December 2019 declaration banning the use of the national currency issued by the Aden Central Bank. Experts view this as part of the group's war on Yemen's economy and banking sector.
The Governor of the Central Bank of Yemen, Ahmed al-Mubaki, stated in a previous press release that 20 violations committed by the Houthi group during the current year have been documented, accusing them of "politicizing the banking sector and breaching all standards and laws."
Further exacerbating the economic divide between the recognized Central Bank in Aden and the kidnapped Sana'a Central Bank since 2014, the Houthi militia announced in April the issuance of a counterfeit 100 rial coin, attempting to address a severe liquidity crisis in their controlled areas due to the deterioration of the old currency.
Experts believe that the Houthi announcement in April to issue a 100 rial coin, rejected by the Central Bank in Aden as "counterfeit currency," has further strengthened the economic split.
A Move Deemed Illegal and Counterproductive
Economic journalist, Mohammed Al-Juma'i, told Barran Press that issuing new coins is typically reserved for denominations, not for larger banknotes. He considers this action a violation of established practices, arguing that it constitutes a larger crime by effectively eliminating smaller denominations.
Al-Juma'i further argued that this move weakens the Yemeni rial's value and creates a prime opportunity for counterfeiters. With the ability to print their own currency, any entity can now easily produce counterfeit bills.
Central Bank of Aden's Decisions Fuel Tensions
The journalist views the recent decisions made by the Central Bank of Aden as a direct response to pressure from the Houthis. He believes these decisions are designed to disrupt and hinder the implementation of the Houthis' own economic policies.
Grim Economic Indicators
Experts describe the current financial and monetary indicators in Yemen as "alarming and discouraging," highlighting the ongoing economic decline.
Economist Hesham Al-Samaei, citing a recent World Bank report, noted that Yemen's GDP is projected to contract by 1.0% in 2024, following a 2.0% contraction in 2023 and a modest 1.5% growth in 2022.
In a research paper presented at the first Youth Conference in Taiz, Al-Samaei highlighted the significant decline in per capita GDP, which has fallen by 54% between 2015 and 2023, pushing a large portion of the Yemeni population into poverty. The report also indicates that food insecurity affects half of the population.
The Central Bank of Aden's report on financial and monetary indicators for January-June 2023 reveals a staggering total domestic debt of 5.2 trillion rials, coupled with an external debt of 7.6 billion dollars. The current account deficit reached 19.3% of GDP.
Experts predict that the state budget deficit for this year will exceed 65%. While acknowledging the efforts made over the past two years to mitigate the deficit and prevent economic collapse, they remain concerned about the long-term implications of these measures.
Fighting Inflation and Stagnation
Dr. Mohammed Ali Qahtaan, an economics professor at Taiz University, told Barran Press that the Central Bank of Aden is attempting to combat inflation and stagnation through a series of decisions. These include compelling banks to join a unified network and refusing to comply with orders from the Houthi-controlled Central Bank in Sana'a.
This was followed by a directive requiring banks to relocate their main branches from Sana'a to Aden within two months. When banks failed to comply, the Central Bank of Aden issued a ban on transactions with these institutions, effectively ending their operations despite their significant role in Yemen's banking sector.
These decisions also included the withdrawal of old Yemeni rial banknotes from areas controlled by the Houthis. This move coincided with the bank's relocation to Aden, leaving Sana'a devoid of any remaining funds. The majority of the old banknotes, predating the war, were nearing the end of their lifespan and were largely unfit for circulation.
The Central Bank of Aden then decided to print new banknotes to address its depleted treasury and ensure the payment of salaries, wages, and operational budgets for government agencies. However, the move inadvertently allowed the Sana'a authorities to retain old banknotes, including damaged ones, as a form of currency within their controlled territories. This was further compounded by measures preventing the entry of new banknotes into these areas and the confiscation of any found. This resulted in two distinct forms of the Yemeni rial: old and new.
A Potential Path to Peace?
While acknowledging the detrimental impact of these developments on the escalating conflict between the authorities in Aden and Sana'a, particularly the deepening division within the banking system and the devaluation of the national currency, Dr. Qahtaan believes they also hold the potential for positive change. He suggests that these developments could ultimately lead to the reunification of the banking system and the national currency, paving the way for an end to the war and the establishment of peace.
Government Directives
The Central Bank of Yemen (CBY) in Aden is engaged in a fierce economic battle, aiming to unify the local currency and strengthen its role in liberating the Yemeni rial from the control of the Houthi rebels. The bank faces mounting pressure to implement strict economic measures to regulate financial and banking transactions and prevent further depreciation of the local currency.
The CBY recently announced a decision to unify the old and new national currency at a rate of 1,000 old rials to 1,000 new rials. This decision is set to take effect soon, with the old currency (issued in 2016 and before) becoming invalid within a week.
Experts believe the CBY's ongoing decisions aim to solidify its monetary control over areas under Houthi control. Earlier this year, the CBY Governor, Ahmed Al-Mubarki, issued a series of directives that have caused significant inconvenience for the Houthis. One such directive restricted foreign remittance activities to banks and exchange companies authorized by the CBY in Aden.
Due to the CBY's adherence to the global SWIFT system, it is able to enforce these decisions on all banks and financial institutions, both domestic and foreign.
In June, the CBY implemented a decision requiring all commercial and Islamic banks to relocate their headquarters from Sana'a to Aden, the temporary capital. Following the deadline, the CBY announced a 10 billion rial (approximately 90%) investment scheme for banks that relocated their headquarters.
These measures follow a December 2022 directive issued by the CBY to all exchange companies in Yemen, freezing accounts and prohibiting financial transactions with 12 companies listed on a blacklist.
Loss of Control
Mustafa Nasr, head of the Economic Media Center, told "Barran Press" that the CBY's decisions have shifted the economic file entirely to external parties.
"Yemenis are now left to wait for the outcome of negotiations," he said. "The economic file has become a key condition for the completion of negotiations and the roadmap, which is reportedly ready."
He added, "It remains unclear whether the Presidential Leadership Council will maintain its stance on the three conditions. The file is now out of Yemeni hands, and we hope that currency and monetary policy unification will be implemented according to relevant data."
UN Pressure
In response to the recent economic developments, the Presidential Leadership Council held an emergency meeting to discuss a letter from UN Special Envoy Hans Grundberg, who urged the government and the CBY to postpone the implementation of the recent decisions until the end of August. He called for a UN-sponsored dialogue to discuss the latest economic developments and find solutions that serve the best interests of the Yemeni people.
The council reaffirmed its commitment to a clear agenda for participation in any dialogue on the economic file, including the resumption of oil exports, the unification of the national currency, the cancellation of all arbitrary measures against the banking sector and the business community, and the pursuit of a course of action to deter what it called the Houthis' arbitrary practices. The council emphasized its commitment to maximum flexibility and openness to discussions on any proposals that would strengthen the independence of the banking sector and the legal authority of the state in the temporary capital, Aden.
Legal violations
Since the Houthi takeover of the Yemeni government in late 2014 and their control over the Central Bank in Sana'a, Yemen's economy has been transformed into a private sector exploited by the group for its destructive and subversive activities, according to observers.
Since then, banks and exchange companies have struggled with currency depreciation and dollar scarcity. Recently, the Houthis issued a directive to use the Saudi riyal instead of the US dollar for settlement of transfers and financial payments, prompting the Central Bank in Aden to take action and monitor any violations of Yemeni laws by exchange companies.
The CBY in Aden has emphasized its commitment to strengthening its oversight role in the money market, as it is responsible for any illegal activities conducted through foreign remittances to Yemen, including money laundering and terrorist financing.
To address this, the CBY has issued instructions related to the unified network for monitoring foreign remittances, which amount to an estimated $4.5 billion annually.
As of July 11, the CBY has issued 32 decisions to suspend licenses of violating exchange companies, including prominent ones like Al-Karimee Islamic Bank and Al-Tadhamun Bank.
An Economic Race
Economic analyst Wafic Saleh believes the internationally recognized Yemeni government is engaged in an economic race against the Houthis. He argues that the recent measures taken by the CBY in Aden are not aimed at improving the value of the national currency or enhancing banking stability.
"These measures are part of a struggle for control over financial and banking activities across Yemen, with the aim of implementing the CBY's monetary and financial policy tools," Saleh told "Barran Press."
He explains that these measures "seek to undermine the Houthis' influence on the banking sector and the national currency, as well as their manipulation of the local currency in liberated governorates."
Saleh believes that the CBY's measures to regulate foreign remittances and financial flows into the country will deprive speculators of opportunities to manipulate the rial's value through currency exploitation outside the official banking system. These speculators artificially inflate demand for foreign currency to profit, ultimately impacting the rial's value.
Regarding improving the exchange rate, Saleh told "Barran Press" that "a comprehensive package of measures is needed, starting with securing large quantities of foreign currency and injecting them into the market, creating a balance between supply and demand."
He further emphasizes the need for "sustainable foreign currency sources for the CBY. Without such sources, the exchange rate will remain unstable."