Currency in Crisis: The Yemeni Riyal and the Dangerous Effects of Depreciation

This is the second installment in our series about Yemen's economic crisis. Read the previous piece, on Yemen's pre-war economy, here.

A taxi driver is unable to feed his family after long days of work. A police officer spends most of his salary on transportation to and from his workplace. A government employee’s salary is worth half of what it was worth before the war. A school teacher goes to work everyday, but hasn’t been paid for five months. These are some of the personal stories that news outlets like Bloomberg[1] and Xinhua[2] have reported since the conflict began in 2014. Financial strain in the Yemeni economy has had an outsize impact on Yemenis’ lives, as ordinary Yemenis contend with the falling currency value that decreases their purchasing power on imported items. Imported items make up a large percentage of what Yemenis buy: In 2013, almost 90 percent of the country’s food products came from abroad.[3] Because of a heavy reliance on imports for basic necessities, the national currency crisis affects the living conditions of Yemenis across the country without exception.[4]

When the conflict began in 2014, several major developments destabilized the economy. The Central Bank of Yemen, the centralized bank that managed monetary policy in San’a, faced a rapidly deteriorating situation. Hydrocarbon exports--which previously amounted to 90% of exports and made up 40% of government revenue--were suspended.[5] Meanwhile, several international donors and development partners halted financing. Yemeni commercial banks, who had previously transferred Saudi riyals abroad in exchange for US dollars, were unable to due to an economic blockade.[6] As a result of these developments, foreign currency reserves fell: dollar reserves fell from $4.81 billion at the end of 2014 to an estimated $600-850 million in 2017.[7] Shortage of foreign currency drives up its market value, which means more Yemeni riyals are exchanged for one dollar. This in turn drives up the local prices of imported consumer products.[8]

The Central Bank of Yemen also was experiencing a shortage of local currency, rendering it unable to make payments to local banks in August 2016. As a result, it became more difficult to distribute wages, and the government stopped paying salaries to about 1.5 million civil servants and state employees. Additionally, Social Welfare Fund payments, a government welfare program, have not been made since late 2014.[9] Thousands have been cut off from their last source of government support.

In September 2016, President Hadi announced his intention to move the Central Bank of Yemen from San’a to Aden, after months of political skirmishes over control of the Bank. At the time, Hadi government officials argued that the decision, rather than a political one, was an economic one made in order to ensure that currency could continue to be printed.[10] However, the decision provoked concern among many economists and foreign diplomats, who feared that the move would destabilize one of the last well-functioning institutions left in Yemen, without preparation and strategic clarity.[11] In the end, Hadi’s decision essentially created two central banks: One based in San’a and under Houthi control, another in Aden and under the control of the legitimate government.

In mid-August 2017, the Central Bank in Aden floated the currency, which had previously been fixed, or pegged, at 250 riyal to the dollar. By that time, black market rates had reportedly reached 400 riyal to the dollar. By floating the currency, the central bank allowed the foreign exchange market forces of supply and demand to determine the exchange rate, resolving the discrepancy between the black market rate and the pegged rate. As Abdulrahman Al-Eryani, the chief economic officer of Yemen’s embassy in Washington explained in an interview with Reuters, the decision to float the currency was made in order to address “the wide divergence between the former official rate and unofficial rate.”[12] Yet the San’a bank did not agree with Aden's decision, and refused to float the currency, citing concerns about the effect of a floating exchange rate on Yemenis’ purchasing power.[13] While the floating currency equalizes the official and black market rates, currency fluctuation has further complicated economic survival for ordinary Yemenis.

The currency crisis will likely continue through Yemen’s post-conflict reconstruction. As analyst Zaid Basha predicts: “In the event of a peace agreement, and starting from an almost fully depleted foreign reserves, Yemen’s inflow of foreign currency from oil exports, international aid, and remittances, will not be sufficient to cover the needs for food and fuel imports, external debt services, and imports of materials related to post-conflict reconstruction.”[14] Options like mobile banking offer a way to simplify some of the challenges the banking sector faces, such as reducing riyal note printing and facilitating exchanges and transfers.[15] However, the economy will continue to face significant challenges. Only the commitment of all stakeholders to the economic stability of Yemen, with a focus on Yemenis’ well-being and survival, will offer a starting point for economic rebuilding and an end to the currency crisis.

[1] Wilkin, Sam and Mohammed Hatem. "Currency Rout Pushes Poorest Arab Nation to Brink of Starvation," Bloomberg. February 23, 2017. 

[2] Abdu, Mourad "Local currency depreciation leaves citizens destitute in war-ravaged Yemen" Xinhua, July 23, 2018. 

[3] Rageh, Mansour, Amal Nasser and Farea Al-Muslimi, "Yemen without a functioning central bank: the loss of basic economic stabilization and accelerating famine," Open Democracy, November 22, 2016. 

[4] “Yemen Socio-Economic Update,” Ministry of Planning & International Cooperation. June 2018, p. 4. 

[5] Basha, Zaid, “Yemen Transition 2.0: The Foreign Exchange Crisis," Deeproot Consulting, August 2016. 

[6] Basha, Zaid, "Yemen Transition 2.0: The Foreign Exchange Crisis” Deeproot Consulting, August 2016. 

[7] Salisbury, Peter. “Bickering While Yemen Burns: Poverty, War, and Political Indifference.” The Arab Gulf States Institute in Washington. 2017.

[8] Basha, Zaid, "Yemen Transition 2.0: The Foreign Exchange Crisis.” 

[9] Salisbury, Peter. “Bickering While Yemen Burns: Poverty, War, and Political Indifference.” The Arab Gulf States Institute in Washington. 2017, p. 16.

[10] Salisbury, Peter. “Bickering While Yemen Burns: Poverty, War, and Political Indifference.” The Arab Gulf States Institute in Washington. 2017.

[11] Rageh, Mansour. “Yemen Without a Functioning Central Bank: the Loss of Basic Economic Stabilization and Accelerating Famine”

[12] “Yemen's central bank floats riyal currency - circular” Reuters. August 15, 2017.

[13]  “Central Bank in Wartorn Yemen Floats Currency” Reuters. August 15, 2017.

[14] Basha, Zaid, "Yemen Transition 2.0: The Foreign Exchange Crisis." 

[15] Ferrand, A. (2017). Responding to central bank collapse. K4D Helpdesk Report. Brighton, UK: Institute of Development Studies (10)