Balhaf gas port in Shabwa (Internet)
The Continuous Cessation of Oil Exports: Ramifications and Confrontation
Reports
Wed, 21-06-2023 10:46 AM, Aden Time
Due to the Houthi attacks, the revenues of the internationally-recognized government have decreased amid a major economic crisis.
Raad Alrimi (South24)
In November and October 2022, the Iran-backed Houthi militias launched drone attacks against oil ports in Shabwa and Hadramout governorates in South Yemen. As a result, oil export operations have ceased in a way that threatens imminent economic collapse.
Due to these attacks, the revenues of the internationally-recognized government have decreased amid a major economic crisis that hit the country for years. Since then, the government has failed to resume exporting oil derivatives. On the other hand, the Houthis continue their threats every now and then. They insist on paying their fighters’ salaries and the civil sector officials in the areas under their control from oil and gas revenues in any future peace deal.
The Houthis have been able to impose a siege on oil production and exports. This is due to the disparity of air military capabilities between the government and the Houthis as well as the lack of defenses that can deal with the Houthi drones which likely came from Iran or developed by Iranian experts in Yemen.
With nearly 8 months since oil export operations ceased in South Yemen, the economic impact has been clearer recently. The local currency is on the brink of collapse again as it lost about 8% of its value during the past month in addition to the continuous slump in the service sector.
These developments raise questions about the ability of the government to carry out its duties and commitments. This came amid the deep failure and corruption charges against this government, even before the cessation of oil exports as well as the other near-term possible ramifications with the continuation of the status quo.
Besides, the current economic conditions and the escalation of people's suffering would cause cracks within the Presidential Leadership Council (PLC) and the parity government. This has led to political repercussions that already began in June amid demands to oust the leaders of the current government due to their failure to manage the situation.
Repercussions
In a televised interview last Monday, the Governor of the Central Bank of Yemen Ahmed Al-Mabaqi said that the cessation of oil exports due to the Houthi attacks hit the international government by a billion dollars loss. He also talked about a loss of nearly 700 billion Yemeni riyals from taxes and customs.
In December, PLC Chairman Rashad Al-Alimi said, during a televised interview, that the Houthi attacks against the oil Port of Al-Daba flooded the oil pump and inflicted a $50 million loss. "South24 Center" obtained exclusive photos of the damaged pump at that time.
Dr. Yousef Mohammed, Professor of Banking Sciences at Aden University and an advisor of the Central Bank of Yemen, told "South24 Center" that the cessation of oil exports has caused big economic repercussions.
Dr. Hussein Al-Malaasi, Head of the Yemeni Economists Association, stressed the importance of oil exports for the Yemeni government. He told "South24 Center": "Oil exports had constituted 70% of the government revenues before the war. They have been a basic source of the governmental revenues during the war".
According to him, "the cessation of oil exports under the threats of Houthi drones delivered a fatal blow to the internationally recognized government. This put it in front of a severe economic and financial problem which is the hardest ever since the war began".
The expert noted that halting oil exports "has impacted salaries and public services in the areas controlled by the government". He pointed out that "the government's foreign reserves are continuously depleting". He expected that the government will cease paying salaries by the end of the current year if the foreign reserves continue to decrease and oil exports keep halting".
The STC's Supreme Economic Committee exclusively spoke to "South24 Center" on the most important consequences of the cessation of oil exports.
The committee said that "the hydrocarbon sector [the oil sector] constitutes about 90% of the country's exports and 75% of government revenues in addition to 20% of the gross domestic product. Therefore, this sector plays a pivotal role in the economy of the state".
The committee listed the most prominent repercussions as shown below:
1- The government will likely face a big public budget deficit. This would hinder its ability to fulfill most of its duties towards people in the areas under its control. This includes for example funding public services and paying the salaries of public employees regularly".
2- It is also expected that the government's ability to provide sufficient allocations to finance the operational expenses of its various military and security formations will be affected. Therefore, the government is likely to face increasing challenges in terms of securing its areas and maintaining the readiness level among its forces along the frontlines with its Houthi foes.
3- The exchange rate of local currency in the government-controlled areas will likely witness a gradual decrease over the next few weeks. This is due to the inability of the Central Bank of Yemen to continue its weekly auctions to sell hard currency to importers amid the cessation of the only source of these auctions which is the government’s oil export revenues.
4- The expected gradual decline in the local currency exchange rate will negatively impact the living conditions of people in government-controlled areas. This is not just a result of the purchasing power decrease but also due to the decline in the overall economic activity and the shrinkage of available job opportunities amid the fluctuations of the national currency exchange rate against foreign currencies.
5- It is not unlikely that we will witness more decline in the local currency exchange rate which would score new low records if the government resorts again to inflationary funding resources(injecting new versions of local currency) to cover its expenses like what happened over the past few years (2017-2021). This would cause more impact and negative repercussions on the living conditions of people.
Service sectors
Al-Malaasi stressed that the ongoing cessation of oil exports will have direct and serious repercussions on the government services which he described as "fragile". This may lead to a full halt in case of not receiving urgent external support.
The STC's Supreme Economic Committee warned of the "repercussions of halting oil exports, the rampant corruption in all authority joints, and violating the limited financial resources".
It added that the continuous cessation of oil exports and its repercussions "give the corrupt members in the authority a pretext for their failure".
Importing basic commodities
As a result of this ongoing cessation the Supreme Economic Committee expects that this would largely affect importing basic commodities from abroad, foremost of which are main food products such as wheat. This comes in light of the hardships of meeting the foreign currency needs of the private sector to import commodities. This would reduce the required strategic stock of these commodities on one hand. On the other hand, prices of basic commodities will climb to high records beyond the budgets of families and individuals in addition to the expansion of poverty and hunger".
However, Al-Malaasi rules out zeroing the foreign reserves of the Central Bank of Yemen. He claimed that the Central Bank has about 2 billion dollars of foreign reserves currently (South24 Center can't confirm this information).
Reliable sources told "South24 Center" that the Central Bank faces a real problem related to the remaining foreign reserves.
Al-Malaasi believes that "there are other ongoing sources for foreign currencies including expatriate remittances. Moreover, the private sector and importers have huge money". The expert expected that the government would receive batches from the Saudi-Emirati deposit announced by the two countries in April 2022.
The economic expert indicated that businessmen and financiers developed innovative mechanisms through the experience of war that helped to regularize import operations during the war era. He expected the continuation of this in the future.
Confronting the crisis
Al-Malaasi believes that "there are no available options able to close the foreign currency gap caused by the cessation of oil exports". However, he mentioned some measures that can be done currently to alleviate the crisis.
"The available options include collecting local financial resources from various sources, especially uncollected taxes and customs from different land and sea ports as well as collecting fees from home and abroad. all the money that leaks out of its proper channels must be transferred to the Central Bank", he added.
Al-Malaasi stressed the need for the "government to fulfill its commitments in order to facilitate receiving an urgent batch of the Saudi and Emirati deposits as soon as possible. Furthermore, endeavors should be made to obtain grants, aid, and loans from donors and international organizations.
The Supreme Economic Committee set some measures that would help in the face of the current crisis. Many of them are related to treating the imbalances in the performance of the government institutions themselves. They include the following measures:
1- The gradual increase of the government's share of the excess profits of the economic units in addition to stopping wasting the resources of these units. The latter spend running expenses while their income lists always suffer a permanent deficit due to the deeds of those in charge of them who behave as if they are private fiefdoms.
2- The gradual increase of the government's share of the CPD fees (often called “a trip ticket"). This has to be 50-70% of the fees set by the Customs Authority with some car clubs.
3- Halting releases and cuts granted to private production inputs (raw materials) for investment projects such as the factories located in the governorates controlled by the Houthi militias as well as the full collection of tax and customs fees.
4- Reconsidering budgets adopted for some departments, authorities, and ministries without austere objective criteria. Those billions have to be reduced by 70%. This includes for example the Central Organization for Control and Accounting, the judiciary, High Authority for Tender Control, Supreme Commission for Elections, and Supreme National Authority for Combating Corruption.
5- Stopping exceptions from value-added tax and collecting sales tax in accordance with Cabinet Resolution No. 89 of 2018 at a rate of 5 + 5. Moreover, any tax statistics issued by the tax authority affiliated with the Houthis should be ignored.
6- Rationalization of import bills for goods and services in light of the policy of full currency float and the decrease in foreign exchange sources. This measure will save millions of foreign currencies.
7- Clearing the salary bill from different imbalances and reconsidering the costs of hiring electricity stations and importing derivatives. This is in addition to reducing the costs of the government, the House of Representatives, and Shura Councils that consume a large percentage of the total oil export revenues in foreign currency.
8- Withdrawing 100% of the government’s cumulative net SDR appropriations of $986 million as well as mobilizing additional SDR funds from the IMF’s Poverty Reduction and Growth Trust Fund. This is in addition to deducting 70% from the balances of fund accounts and transferring them to the public revenue account.
9- Ordering the Foreign Ministry to transfer the consular fees from embassies (estimated by hundreds of millions) to the public revenue account.
10- Abolishing the contracts of hiring government buildings that cost tens of thousands of dollars from the state budget.
11- The efficient use of aid, granted by Saudi Arabia, the UAE, and the UN to support the economy along with the expected transfer of the Special Drawing Rights to reduce the large financing gap and support and stabilize the price of the Yemeni riyal.
12- Collecting fees and taxes from communication companies as well as increasing air transit fees to support and increase the revenues of the state treasury.
13- Obtaining loans, grants and additional aid from regional and world countries as well as international organizations.
With all these measures, the Supreme Economic Committee stresses the importance of work for resuming oil exports. It said that this requires moving quickly and powerfully at the UNSC, the Quartet, and regional countries, in general, to resume exporting oil or taking the measures necessary to confront this matter. This means halting any activities in the Port of Hodeidah to force the Houthis to back off from hitting the oil export ports.
Previously, government parties criticized what they described as a shameful silence of the US and UN envoys to Yemen regarding the ongoing threats of the Houthis to target the oil export infrastructure.
The Houthi measures came concurrently with big facilities provided by Saudi Arabia to the group as it approved opening the Port of Hodeidah and reducing the inspection measures on ships heading to the Houthi areas. This move negatively affected the traffic in the ports of Aden and Mukalla of South Yemen. This doubled the losses incurred by the government and local authorities.
Meanwhile, Yemeni Information Minister Moammar Al-Eryani accused the Houthis of refusing to give customers their money deposited in the banks under the group's control according to an official document issued by the Association of Yemeni Banks.
Al-Eryani asked the international community, the UN, and the two UN and US envoys to "clearly condemn the criminal deeds that exacerbate the humanitarian suffering and threaten the collapse of the deteriorating economic situation".
Politicians, whose views were seen by "South24 Center", don't rule out that obstructing oil exports is part of a wider plot not limited to the Houthis.
On Saturday, the Central Bank of Yemen announced depositing the second batch of the Special Drawing Rights Units from the World Bank in one American bank.
On its website, the bank said, “it helped French friends, the International Monetary Fund and the US Federal Reserve to withdraw the second batch of Special Drawing Rights Units and deposit them in the Central Bank's account in the US Federal Reserve in New York".
South YemenShabwaBalhafGasOilHouthi dronesHadramoutHouthis