Central Bank and Currency Deterioration in Yemen

عربي

Yemen's food security is dependent on currency stability because the country imports up to 90% of the fundamental commodities it eats. Yemen's native currency traded at YR215 per USD-1 before to the ongoing conflict, which began more than seven years ago. The battle consequently produced a monetary environment that was divided along frontlines, with one US dollar selling for more than YR1,300 by mid-October in ostensibly government-controlled regions. The currency rate was mostly constant in regions held by the armed Houthi movement, at YR600 per USD-1.

The value of the Yemeni Rial has dropped in territory presumably held by the Yemeni recognized government, since the end of August 2021. This has resulted in a fast worsening of millions of people's living situations and massive social discontent. The collapse of the currency in government-controlled regions has heightened the importance of ensuring that IMF assistance is used wisely and efficiently to restore monetary stability, alleviate humanitarian suffering, and restore social order. Nevertheless, the Yemeni government's central bank's ability to do so is significantly undermined owing to foreign pressures and internal weaknesses.

Yemen was already suffering from a severe foreign money deficit when the COVID-19 outbreak broke out. The Central Bank of Yemen (CBY), situated in Aden and linked with the internationally recognized Yemeni government, has almost depleted its foreign currency reserves, rendering it unable to finance imports or significantly engage in the currency market. Remittances, the country's current greatest source of foreign currency inflows, dropped drastically as a result of the outbreak, since economic shutdowns limited the income Yemeni expatriates working abroad could send home mostly from Saudi Arabia. This exacerbated already existing downward pressure on the YR's value.

While the country's currency has been on the decrease since 2015, the most recent episode of fast and drastic depreciation happened between August and October 2018. During November and December of that year, however, its value recovered just as drastically. This was due to the CBY-Aden issuing rapid import finance tranches from a USD-2 billion deposit Saudi Arabia had made with the central bank earlier in the year with specific purpose of ensuring stability of the financial system. These funds were used to provide letters of credit for essential commodities such as wheat, rice, sugar, milk, and cooking-oil.

Although the central bank was issuing an average of USD-97 million in import finance per month in 2019, the Saudi deposit was drained by more than half in 2019, despite the currency exchange and commodity prices remained relatively stable. The remaining deposit was nearly depleted by the end of 2020, with only USD-11.3 million remaining out from the initial USD-2 billion Saudi deposit, consequently, Saudi Arabia has been hesitant to provide additional financial assistance since then. Attempts by the CBY-Aden to obtain foreign currency by arranging for international aid groups to send funds into Yemen through the bank have also been unsuccessful.

As a result, the CBY-Aden has had few feasible choices for replenishing its foreign currency reserves or meeting the needs of commercial importers for hard currency to buy products from other countries. Meanwhile, the Yemeni government is facing significant budget and balance of payments deficits, and has relied heavily on an expansionary monetary policy to fund government spending specifically on wages. To put it another way, the globally recognized government has been manufacturing new currencies to meet its spending requirements. The key causes driving the YR's falling value and rises in food costs outside of Houthi-controlled portions of the nation are a lack of foreign cash and an excess of domestic bills. In recent months, Houthi war victories have damaged local faith in the CBY-currency, Aden's prompting individuals in ostensibly government-controlled regions to hurry to buy real cash.

The country's main population and commercial hubs in Houthi territories bring in the majority of Yemen's foreign currency holdings. Since early 2017, circulation of banknotes produced by the CBY-Aden has been prohibited in Houthi territories, reducing local currency supply and supporting relative exchange rate stability in North.