Ahmed Bahakim (South24)

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The end of the Yemeni conflict might pave the way for a long-term peace pact. A week-long round of consultations in Riyadh, Saudi Arabia's capital, began with that goal in mind to bring an end to the endless war in Yemen. But it had one major obstacle: the Houthis, who control the majority of Yemen's key population centers, were not present. [1]

The combination of excessive corruption, which has always put a burden on Yemen's limited resources, bad economic management, and later warfare defeats has resulted in a major collapse in Yemen's economy. Prior to COVID-19 crisis, the IMF estimated Yemen's nominal gross domestic product (GDP) in 2020 to be $23 billion, down 47 percent from nearly $43 billion in 2014. [2] Furthermore, in October 2018, the parallel market exchange rate of the US dollar reached a new high of 820 Yemeni rials per dollar, before stabilizing at around 600 rials per dollar by the end of 2019. Nevertheless, inflation rates in the double digits have continued to spiral out of control, beyond their acceptable bounds. According to one estimate, inflation rates were 30.4 percent, 27.6 percent, and 14.7 percent in 2017, 2018, and 2019, respectively, rising to 35.5 percent in 2020. [3]

The price of economic recovery is too high to bear. Yemen lost 25-35 percent of its GDP in 2015 alone, according to the IMF, while the country's entire infrastructure has lost more than $20 billion, or 50 percent of pre-war GDP, since the conflict began. It had previously been projected at the time that the expenses of reconstructing Yemen's economy would significantly beyond the country's ability to mobilize resources, especially given the country's limited domestic income mobilization options and heavy debt. The conflict's destructive impact has reversed Yemen's human growth, well beyond the expenses of reconstructing the economy. According to a UNDP assessment issued in April 2019, Yemen's hard-won human development achievements have already been set back by 21 years. [4] 

The long-term viability of a Yemeni peace plan hinges on two major economic challenges. First, in a dispute primarily about resource access, concerns of resource allocation, control, and sharing can create or break peace. As a result, during discussions, these concerns must be addressed head-on. Second, when peace agreements contain elements that ensure broad economic stability, Riyadh's efforts to end Yemen's conflict would face significant obstacles. If ignored, these issues will very certainly create dissatisfaction, instability, and insecurity in the near future, just as they have in the past.

Economic Challenges 

• Solving the dilemma of having two Central Banks governing one currency. [5]

• Inconsistent monetary policy and banking laws in relation to a single currency.

• The Central Bank's foreign reserves are being depleted.

• The depreciation of the Yemeni Rial.

• The local financial system's massive liquidity problem.

• The limited access to external financing and international banking services.

• The division of key state institutions among the parties to the conflict.

• The increase in unemployment rate. 

• Limitations in freely import and locally transport goods.

• Excessive cost of conducting business in Yemen, losing investment attraction.

• Inability to pay salaries and wages due to unsustainable government expenditure.

• A sharp drop in government revenue and a large public debt payment burden.

• The abolition of all vital government functions.

Aside from ideological causes, regional dynamics, and political goals of controlling territory and obtaining legitimacy, there are also economic elements fueling the conflict in Yemen. In order to address these economic concerns, analysts feel it is critical to include economic components in any eventual peace agreement. The battle in Yemen has been mostly focused on gaining control of the country's vital economic resources and institutions. The warring parties have been fighting over port access, revenue collection from taxes and customs, crude oil and liquefied natural gas (LNG) production and export, regulation of the local currency, aid channeling, control of key state institutions, and dominance across strategic economic sectors such as telecommunications. Unless the struggle over resource access is addressed directly and settled at the Riyadh peace talks, historical evidence suggests that recurrent violence is more likely to occur shortly after a conflict has formally ended. [6]

Over the last two decades, Yemen's economic instability has fueled social and political turmoil. This can be seen in the rise of Al-Qaeda, nationwide riots against harsh reforms, an armed northern insurgency, enormous southern rallies, and broad demands for political changes in the 2000s, as well as the massive revolutions, political upheavals, and complicated military wars that followed. Yemen's general economy has been hit by a series of severe shocks since 2011, driving an already destitute economy into a downward spiral. [7]

Yemen's population has continued to grow exponentially, from around 17 million in 2000 to 30 million in 2020, while human capital accumulation has slowed. As a result, if the existing critical needs for clean water, basic foods, secure income, rural development, key public services, electrical access, infrastructure, and housing are not met, repeating bouts of unrest will eventually occur. As a result, peace can only be sustained through a cessation of hostilities in any upcoming transition process if the factors that destabilize the economy are addressed. Economic stability is required to restore Yemenis' faith in the peace process and to develop the political capital required to break the war and fragility cycle, and to initiate and sustain long-term socioeconomic change and prosperity.

According to studies, the parties in charge of implementing a peace agreement would be confronted with major financial and economic difficulties that will determine whether peace or war is achieved. In general, studies warn both peacemakers and implementers that the period immediately after the signing of a peace agreement is undoubtedly the moment of greatest uncertainty and peril. The dangers of peace negotiations failing are particularly high when they do not produce a solid roadmap for navigating the conflict post-agreement environment. Yemen's recent history demonstrates this point: during the 2011 protest movement, the GCC Initiative concentrated mainly on political and military/security arrangements while largely overlooking critical economic goals and procedures, contributing to the transitional period's collapse. [8]

Prior to the ongoing negotiations in Riyadh, there have been several attempts to establish a political settlement. The United Nations Office of the Special Envoy of the Secretary-General for Yemen has sponsored these efforts, which began in 2015 with talks in Geneva and Biel, Switzerland, followed by negotiations in Kuwait in 2016, and consultations between the Yemeni government and Ansar Allah in Sweden in December 2018, culminating in the Stockholm Agreement. Separately, the Yemeni government and the Southern Transitional Council (STC) signed the Saudi-sponsored Riyadh Agreement in November. [10]

Except for the UN-mediated consultations in Sweden, where one of the consultation tracks focused on the economic file, and the resulting Hodeidah Agreement required that revenues from the ports of Hodeidah, Salif, and Ras Issa be channeled to the Central Bank of Yemen through its branch in Hodeidah as a contribution to the payment of the debt owed to the Central Bank of Yemen as a contribution to the payment of salaries in the governate of Hodeidah. However, even in Stockholm, economic problems were only considered as part of confidence-building measures and to obtain an agreement on initiatives that would set the basis for peace talks, rather than as a stand-alone pillar of a future peace agreement. [10]

Other initiatives aimed at reaching agreements on specific economic issues have included efforts to coordinate the work of the Central Bank as a national and independent institution, efforts to pay civil servant salaries across the country, and finally, efforts to implement the Stockholm Agreement's economic clauses. However, as vital as these efforts are, they are restricted to assisting in de-escalation and confidence-building. Nonetheless, it is not clear that the Yemeni parties and the international community have fully accepted the necessity of include economic considerations as an inherent aspect of any peace agreement.

Pathways to Sustainable Economic Peace 

The government, political groups involved in the war, the business sector, society, and foreign partners will need to work together for many years to overcome the economic implications of the ongoing conflict in Yemen. Granted, the peace deal will be mostly a political pact that will not include details on what has to be done at all levels, however, the peace plan negotiators in Riyadh must overcome the economic sticking issues. Where significant economic concerns must be addressed in the peace agreement, as this will establish the framework for the success of the post-peace transition phase. [11]

The Pathway to Sustainable Financial System

The peace agreement must include a provision that allows the Central Bank to play its critical role and carry out its primary functions in accordance with the law, including an agreement on the appointment of its board of directors based on the Central Bank Law's requirements and relevant competence and integrity criteria. [12]

The agreement must include a clause mandating all donors to route all aid and financial gifts through official channels, free of political interference. As a result, the Central Bank should be in charge of overseeing overseas aid flows to guarantee that they contribute to the country's foreign exchange reserves. The agreement must also state that it would adhere to the highest standards of donor aid transparency and include oversight procedures.

The Pathway to Sustainable Economy

There must be agreement on the general parameters of the new government's program's priorities. Prioritizing governmental expenditures that encourage economic recovery and generate growth, as well as vital industries such as the electricity industry, are examples of this. It is critical that the administration's goals are not left out of the political agreement, since this would repeat the tragedy of the GCC Initiative-formed consensus government. The post-2011 consensus administration, which was formed from divergent political groups, did not get meaningful political backing for its aims. As a result, the new government's program was separated from the country's political realities at the moment, making its efforts unsuccessful. As a result, the political agreement must be crystal clear, not just in terms of how the government is constituted, but also in terms of the issues that must be addressed. Reforms, for example, must be identified in the case of a reform government. Similarly, the boundaries of a caretaker government's program, or any other government's program for that matter, must be clearly specified so that there is no ambiguity about what it should or should not be doing.

There must be agreement on clear mechanisms and a time frame to address the division of state institutions, particularly those that are critical to Yemen's economy, as well as a commitment to work within the scope of these institutions once they are restored. Creating alternative government structures undermines current institutions while simultaneously erasing their institutional memory, preventing the government from capitalizing on previous accomplishments. 

A clause in the peace agreement should lead to the formation of a council that includes representatives from the government, the corporate sector, and civil society and is charged with formulating economic strategies. In this regard, past efforts that concluded in 2014 can be put to good use in the formation of this council. Whether the council's policies guide or dictate government policy is a choice that the negotiating parties must negotiate and agree on. The period immediately after the peace agreement offers a rare chance to build a new vision for growth that avoids repeating previous errors over-dependence on oil income, rural marginalization, and ballooning food trade imbalances, to name a few examples. By providing instructions on how to organize this process, the peace agreement may set the tone for it. [13]

The Pathway to Sustainable Employment

To preserve service delivery and institutional resilience, the peace deal must assure the payment of public sector salaries in a sustainable way. Furthermore, the mounting salary bill for the public sector, which includes the military and security apparatus, is a ticking bomb that jeopardizes Yemen's long-term economic stability. As a result, the agreement's signatories must commit to a transparent and inclusive procedure for eliminating double-dippers and ghost workers from the 2014 payroll, as well as a clear and fair mechanism for any public sector payroll additions in 2014. [14]

In additions to the 2014 public sector payroll are frequently discussed as being necessary to absorb the enormous numbers of combatants recruited by various armed organizations. When a peace agreement is reached, negotiators should strongly advise against the blind absorption of huge numbers into the payroll, as the state would struggle to bear the cost of paying extra wages and salaries to an already-bloated public sector in perpetuity. The agreement's signatories should pledge to create a nationwide program for the rehabilitation and reintegration of members of armed organizations and military formations who were not already on the Civil Service or the Ministries of Defense and Interior's payrolls in 2014. 

The Pathway to Sustainable Government Resources

The peace agreement must state whether or not the producing governorates will continue to receive 20% of the revenues from oil and gas sales, as is the situation now. Whether the pre-war system will be re-instituted, or whether a completely new organization will be created. In all situations, the agreement must include a clause requiring the deposit of oil and gas profits into a specific account at the Central Bank. The clause should further state that this account would be audited by an international auditor, and that the government will manage this crucial sector with the utmost openness.

The agreement's signatories must commit to a transparent and responsible mechanism to guarantee that local governments collect all local income from taxes and customs fees and deposit it in the government's account at the Central Bank, after subtracting the permitted monies in the budget for local authorities. The agreement must include open and merit-based criteria and methods for appointing and holding accountable the heads of public revenue bodies and their branches around the country.

The Pathway to Sustainable Post-Conflict Recovery

Articles on rebuilding and recovery must be included in the peace agreement, as well as the guiding principles for the reconstruction and recovery process and the institutional institutions that will be entrusted with overseeing it. The goal of these articles is to make sure that the reconstruction and recovery activities in Yemen are effective, transparent, and in line with the people's needs. They must also address the role of donors, as well as the government's commitment to assist the government in creating a mutual responsibility framework with donors for implementing/facilitating the rebuilding and economic recovery process, as well as concrete indications. [15]

The peace agreement must allow numerous seaports, airports, and land border crossings to reopen. It must also abolish all limitations on the flow of goods and people, as well as any initiatives to check and inspect ships outside Yemeni ports. This might also serve as a confidence-building move in the run-up to a peace agreement. Through the stipulations of the peace agreement, international marine transporters' confidence in Yemen's seaports, particularly the Ports of Aden and Hodeidah, must be restored. 

Furthermore, the negotiated settlement must provide the groundwork for recovering International Ship and Port Facility Security (ISPS) compliance status at Yemen's key terminals in order to restore international confidence in the maritime community. [16]

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Ahmed Salem Bahakim

Economist and energy researcher 

Photo: A youth carries a portion of food aid, distributed by a development foundation in Sanaa (Middle East Online) 

This paper was written during the Yemeni Consultations in Riyadh from 27 March to 7 April.

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