Ahmed Bahakim (South24) 

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.

A country's participation in the International Monetary Fund (IMF) involves payment of a subscription quota. This is determined by the size of the country's economy in comparison to its worldwide counterparts. This quota is used to calculate a country's vote share in relation to other members, as well as the amount of financial assistance it may get from the IMF. The IMF has approved a general allocation of Special Drawing Rights (SDRs) equivalent to SDR456 billion, or around USD-650 billion, to nations throughout the world as part of a worldwide campaign begun in August. Yemen was eligible for an SDR466.8 million (about USD-665 million) grant. This, however, is in addition to a prior SDR allocation made by the IMF to nations in the aftermath of the Global Financial Crisis in 2009, bringing Yemen's total net IMF support to SDR699 million, or over USD-1 billion.

The usage of SDRs is based on the idea of "mutuality and intergovernmental cooperation," in which nations can swap SDRs for freely useable currencies (such as the US dollar) by voluntarily entering into exchanges with other SDR Department member countries. The United States, United Kingdom, and Saudi Arabia are the most likely possibilities for carrying out the swap. If a voluntary exchange for a nation's SDR fails to materialize, the IMF might designate that a country with a stronger financial position conducts the transaction with a country with a weaker financial position. According to the IMF, the designation process "serves as a backup to guarantee the SDR's liquidity and reserve asset character."

Yemen's SDR allocation falls considerably short of the country's outstanding financial demands and obligations, especially given the IMF's limited assistance and Yemen's large and recurring foreign currency needs. The SDR allocation, on the other hand, may be able to alleviate some of the economic and financial pressures that have led to Yemen's status as one of the world's worst humanitarian disasters. If the monies are managed wisely and efficiently, they may be able to entice more international financial support; but, the CBY-ability Aden's to do so is very doubtful.

Since the Yemeni government formally transferred the CBY headquarters from Sana'a in 2016, poor governance and inadequate institutional capacity have hampered the Aden-based central bank's operations. The Yemeni government and the CBY-Aden were accused of terrible mismanagement and substantial corruption in a UN Panel of Experts' annual report on Yemen, issued in January 2021, for embezzling almost USD-500 million from the USD-2 billion Saudi deposit. The CBY-import Aden's finance system enabled this by offering merchants an unduly advantageous exchange rate when obtaining letters of credit for the five essential goods that were subsidized. Despite the fact that the UN panel eventually formally dropped its complaint, the CBY-protocols for using foreign currency cash from the Saudi deposit were arbitrary and opaque, creating a fertile atmosphere for corruption. 

Ahmed Salem Bahakim 

Economist and energy researcher

Photo: Reuters

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