YEMEN ECONOMIC MONITOR Navigating Increased Hardship and Growing Fragmentation Spring 2024 Yemen Economic Monitor Navigating Increased Hardship and Growing Fragmentation Spring 2024 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region © 2024 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Economic and Social Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Real Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 External Sector Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monetary Policy and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 iii List of Figures Figure 1.1 The Conflict Led to a Sharp Decline in Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 1.2 Youth Mortality Increased Dramatically . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 1.3 Resulting in a Sharp Decline in Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 1.4 Conflict Fatalities Remained Low during 2023, Reflecting the Informal Truce . . . . . . . . . . . . . 3 Figure 1.5 GDP per capita Trends Show Economic Instability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 1.6 As Oil and LPG Production Declined during 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 1.7 Meanwhile, Rising Protests and Riots Signal Escalating Social Unrest . . . . . . . . . . . . . . . . . . .4 Figure 1.8 Steady Remittance Inflows Provided Economic Support during 2023 . . . . . . . . . . . . . . . . . . . 4 Figure 1.9 IRG Fiscal Revenues Declined by Over 30 Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 1.10 In Response, IRG Cut Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 1.11 Imports Were Diverted Away from IRG Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 1.12 And Increasingly Shifted towards Houthi Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 1.13 Yemen’s Current Account Deficit Widened . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 1.14 Yet, Foreign Reserves Remained Relatively Stable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 1.15 IRG Resumed Fiscal Monetization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Figure 1.16 As a Result, Currency in Circulation Increased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Figure 1.17 FX Auctions Partially Absorbed the Liquidity Created . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 1.18 Exchange Rates Continued to Diverge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 1.19 Inflation Decreased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 1.20 Supported by a Global Commodity Price Decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 2.1 Houthi Attacks in the Red Sea Escalated Amid Regional Tensions . . . . . . . . . . . . . . . . . . . . .14 Figure 2.2 As a Result Traffic through the Suez Canal Has Collapsed . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 2.3 Imports in Yemen have also Been Impacted by the Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Figure 2.4 Yemeni Rial Depreciates in Aden Amid Economic Pressures . . . . . . . . . . . . . . . . . . . . . . . . . .15 List of Tables Table 1.1 Selected Economic Indicators (2019–2023) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 iv YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION ACRONYMS ACAPS Assessment Capacity Project KYC Know Your Customer CBY Central Bank of Yemen LPG Liquefied Petroleum Gas CEM Country Economic Memorandum MICS Multiple Indicator Cluster Survey FTO Foreign Terrorist Organizations MOF Ministry of Finance FX Foreign Exchange MPO Macro Poverty Outlook GCC Gulf Cooperation Council ODA Official Development Assistance GDP Gross Domestic Product SDGT Specially Designated Global Terrorists HCI Human Capital Index SDR Special Drawing Right IPC Integrated Food Security Phase SOE State-Owned Enterprise Classification UN United Nations IRG Internationally Recognized Government WFP World Food Programme JMMI Joint Market Monitoring Initiative YBA Yemeni Banking Association KSA Kingdom of Saudi Arabia YER Yemeni Rial v PREFACE T he Yemen Economic Monitor provides an completed under the guidance of Eric Le Borgne update on key economic developments and (Practice Manager), Željko Bogetić (Lead Economist), policies over the past six months.* It also and Dina Abu-Ghaida (Country Manager). Ebrahim presents findings from recent World Bank work on Mohammed Yahya Al-Harazi (External Affairs Officer) is Yemen. The Monitor places these developments, the lead on communications, outreach, and publishing. policies, and findings in a longer-term and global The findings, interpretations, and conclusions context and assesses their implications for Yemen’s expressed in this Monitor are those of World Bank outlook. Its coverage ranges from the macro economy staff and do not necessarily reflect the views of the to financial markets to human welfare and development Executive Board of The World Bank or the govern- indicators. It is intended for a wide audience, including ments they represent. policy makers, development partners, business For information about the World Bank and its leaders, financial market participants, and the activities in Yemen, including e-copies of this publi- community of analysts and professionals engaged in cation, please visit https://www.worldbank.org/en/ Yemen. country/yemen. The Yemen Economic Monitor is a prod- To be included on an email distribution list for uct of the World Bank’s Yemen Macroeconomics, this Yemen Economic Monitor series and related pub- Trade, and Investment (MTI) team. This issue was pre- lications, please contact Ebrahim Mohammed Yahya pared by Yasmine Osman (Country Economist) and Al-Harazi (ealharazi@worldbank.org). For questions Mohammad Al Akkaoui (Economist), supported by a and comments on the content of this publication, group of experts from different global practices of the please contact Yasmine Osman (yosman@world- World Bank. The team included Omar Al-Aqel (Private bank.org) or Mohammad Al Akkaoui (malakkaoui@ Sector Specialist) and Alia Jane Aghajanian (Senior worldbank.org). Questions from the media can be Economist). The Yemen Economic Monitor has been addressed to Ebrahim Mohammed Yahya Al-Harazi. * The analysis presented in this edition reflects the situation as of the end of May 2024. Events occurring after this cutoff date are not included. vii EXECUTIVE SUMMARY A Amid the continued blockade of Yemen’s monetary challenges especially for the IRG. Structural oil exports by the Houthis and escalating issues such as reliance on external aid, remittances, conflict in the Middle East including the Red and vulnerability to climate change further compound Sea, Yemen navigates between glimmers of hope and Yemen’s economic woes, while deepening poverty a grim reality. The economic rebound in 2022 was pushes households to extreme coping measures short-lived, with 2023 witnessing a sharp 24 percent such as child labor. The confrontations in the Red Sea decline in nominal US$ GDP per capita (WB estimate). since October 2023 and resulting slowdown in peace The outlook remains uncertain, with stalled peace talks, have pushed the Yemeni economy further in a negotiations and regional conflict further threatening downspin. They have also had significant impacts on hopes for recovery. The risk of increased economic regional shipping and trade. fragmentation between Houthi-controlled and IRG- Yemen’s future economic trajectory is highly controlled areas is escalating due to recent currency uncertain, in part due to the escalating regional and banking developments. While Yemen faces tensions and persistent conflict (Chapter 2). The massive humanitarian and financing needs, hopes for resumption of oil exports, unrestricted internal trans- a better future for the Yemeni people hinge on the port, trade, and finance, and broader economic recov- resolution of the internal conflict and confrontations ery seem remote in the current climate. Additionally, in the Red Sea, support from development partners, the United States sanctions on the Houthis introduce and the commitment of all parties to reconstruction. further layer of complexity, prompting follow-up reac- Yemen’s conflict, exacerbated by regional tions from the Central Bank of Yemen in Aden (CBY- tensions and compounded by a Houthi imposed Aden). These developments have the potential to blockade, has resulted in a significant economic disrupt critical sectors such as banking and aid. The and humanitarian downturn (Chapter 1). Between risks of bifurcation between Houthi-controlled and 2015 and 2023, the country experienced a staggering IRG-controlled areas are also escalating, with political 54 percent contraction in real GDP per capita. This has tensions driving greater economic and financial frag- left a vast majority of Yemenis living in extreme poverty, mentation, which in turn could deepen the social and grappling with food insecurity, and facing dire challenges humanitarian divide. Nevertheless, amidst these for- in accessing basic education and healthcare. The midable challenges, the possibility of peace stands economic situation worsened following the expiration as a beacon of hope. World Bank analysis shows of the UN-brokered truce in October 2022, which that sustained peace agreement holds the promise of briefly provided a glimmer of hope but failed to yield a rapid economic rebound and benefits for the Yemeni permanent political settlement. The subsequent Houthi- people, facilitated by external support, reconstruction, imposed blockade on the Internationally Recognized and post-conflict reforms. However, the realization of Government’s (IRG) oil exports significantly hampered this potential hinges crucially on achieving a lasting national growth in 2023, exacerbating fiscal and truce and peace agreement. ix 1 RECENT ECONOMIC DEVELOPMENTS The Economic and Social Context low human capital of the country will be a long and scarring legacy of the conflict, as evidenced by the Yemen’s humanitarian crisis is deeply rooted in its decline in Yemen’s score on the Human Development conflict and the resulting economic contraction Index (Figure 1.3). As of 2022, it ranked 186 out of and fragmentation. Between 2015 and 2023, 191 countries.6 With the health system on the verge the country experienced a staggering 54 percent contraction in real GDP per capita (Figure 1.1), 1 Before the crisis, poverty already affected almost half resulting in most Yemenis living in poverty and half of Yemen’s population (49 percent in 2014). Today, it is expected to have reached significantly higher levels, with of the population (17.4 million) facing food insecurity, women being particularly vulnerable (World Bank, 2017). as evidenced by the 2022 Integrated Food Security 2 https://www.unicef.org/yemen/stories/community- Phase Classification (IPC).1 According to UNICEF, health-nutrition-volunteers-backbone-yemens-health- approximately 2.7 million children are projected to services. be acutely malnourished, including nearly 600,000 3 Republic of Yemen Human Capital Country Brief suffering from severe acute malnutrition, with (worldbank.org). 4 Similarly, life expectancy at birth has declined since the malnutrition rates among women and children among onset of the conflict, standing at 63.7 years on average the highest in the world.2 In addition, data from the in 2021 compared to 67.4 years in 2014 (World Bank, World Bank’s Human Capital Project (2021) indicates 2022). Simultaneously, the Human Capital Index (HCI) that the mortality rate of youths aged 15-24 is 21.5 underscores that a child born in 2020 is projected to be per 1,000, up from 12.5 in 2014 and considerably only 37 percent as productive in adulthood as they would higher than the regional average (Figure 1.2).3&4 have been with access to comprehensive healthcare and a complete education (World Bank, 2021). Furthermore, a child who starts school at age four 5 Learning-Adjusted Years of School | World Bank Gender can expect to complete 8.1 years of school by their Data Portal. 18th birthday or 4.2 learning-adjusted years, the 9th 6 Specific country data | Human Development Reports lowest level in the world.5 Depletion of the already (undp.org). 1 FIGURE 1.1 • The Conflict Led to a Sharp Decline FIGURE 1.2 • Youth Mortality Increased in Economic Activity Dramatically Real GDP and Real GDP Per Capita Index (2014=100) Youth mortality rate ages 15–24 (per 1,000) 100 30 90 25 80 20 70 60 15 50 10 40 5 30 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Real GDP Real GDP per capita Source: WB and IMF Staff Calculations. Source: World Bank Human Capital Project. Resulting in a Sharp Decline in FIGURE 1.3 •  are home to some 70 percent of the population and Human Capital account for around half of the GDP, while IRG-controlled Yemen Human Development Index (index) areas hold the country’s oil and gas resources.9 0.50 The economy has further deteriorated 0.49 since the expiration of the UN-brokered truce in late 2022. During 2022, the economy showed signs 0.48 of improvement, supported by a UN-brokered truce 0.47 in April 2022 that brought a glimmer of hope, albeit 0.46 without the parties reaching a permanent political set- tlement. The truce temporarily halted offensive hos- 0.45 tilities, reducing conflict-related fatalities (Figure 1.4). 0.44 The truce expired in October 2022, and although an 0.43 informal truce remained in place, the situation wors- 0.42 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 7 https://www.unicef.org/yemen/education. Source: United Nations Development Program. 8 The currency has different values depending on the banknote’s date of printing: Yemen Economic Bulletin: Widening Exchange Rate Disparity Between New and Old Banknotes – Sana’a Center For Strategic Studies of collapse and the education system in severe crisis (sanaacenter.org). according to the UNICEF, the prospects for human 9 Yemen: Population Estimates – Humanitarian Data capital remain dire.7 Exchange (humdata.org). The conflict has intensified the country’s 10 The Houthis imposed an embargo on IRG oil exports fragmentation into two distinct economic zones, through three drone attacks on Yemeni oil exports in the months following the expiration of the UN- each governed by its unique set of institutions. sponsored truce. The Houthis demand that the Yemeni These include competing monetary authorities with government pay the salaries of civil servants in Houthi- their respective exchange rate and policies, result- controlled areas: https://www.mei.edu/publications/ ing in increasing disparities.8 Houthi-controlled areas houthis-embargo-yemens-oil-exports. 2 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION Conflict Fatalities Remained FIGURE 1.4 •  Yemenis are often exposed to multiple shocks and Low during 2023, Reflecting the forms of deprivations at the same time. The report fur- Informal Truce ther reveals that a quarter of the population are food Monthly Conflict Fatalities (persons) insecure while also exposed to climate-related haz- 4,000 ards including extreme temperatures, drought, or flooding. Similarly, a phone survey conducted in late 3,000 2023 shows that the burden of non-communicable diseases, such as hypertension and diabetes, is more prevalent among the food insecure (World Bank, 2,000 forthcoming). Alarmingly, many of those afflicted with these diseases are not being treated or able to access medications, particularly the food insecure, largely 1,000 because of the high costs. 0 Recent Economic Developments Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Source: Armed Conflict Location and Event Data Project. Real Sector The Houthi blockade on IRG’s oil exports and ened due to a Houthi-imposed blockade on IRG’s heightened tensions significantly impacted oil exports.10 This ongoing blockade dramatically Yemen’s economy in 2023. Overall, national GDP impacted national growth in 2023 and exacerbated is estimated to have contracted by 2.0 percent in real IRG’s fiscal and monetary challenges. Since October terms in 2023, following a rebound of 1.5 percent 2023, the escalation of the conflict in the Middle East in 2022. Concurrently, there was a notable decline and its propagation to the Red Sea, further compro- of 4.1 percent in real GDP per capita. However, the mises the already precarious economic and social nominal GDP per capita decline was even more conditions of the Yemeni people. pronounced, at 23.7 percent (Figure 1.5). This Furthermore, Yemen continues to face downturn was primarily attributed to the oil sector, deep structural challenges. Growth in the oil sec- which faced a substantial contraction (67 percent tor depends on Yemen’s ability to attract foreign in real terms) due to the Houthi blockade on IRG’s investment, especially given its aging oil fields, oil exports. This blockade more than halved which remains contingent on improving security crude oil production, dropping from an estimated and achieving peace. Non-oil activity continues to 37.8 thousand barrels daily in 2022 to 17.0 thousand be constrained by, in addition to the conflict itself, in 2023 (Figure 1.6). LPG production also saw a interruptions in essential service delivery, acute modest decline, attributed to the Houthi ban initiated input shortages, double taxation, widespread cor- in May 2023 on the utilization of LPG sourced from ruption, market distortions from uncoordinated pol- Marib.13 Additionally, heightened uncertainties and icies, and the multiplicity of Yemen’s institutions.11 Moreover, reliance on remittances, aid flows, and cli- mate change vulnerability expose Yemen to exter- 11 In 2023, Yemen was ranked 176th out of 180 countries on nal factors. the Corruption Perceptions Index with a score of 16 out Living conditions are dire for most Yemeni of 100, according to Transparency International. 12 Yemen Poverty and Equity Assessment: Living in Dire people due to inadequate food security, lim- Conditions (Worldbank.org). ited dietary diversity, and access to health and 13 See ACAPS report “Yemen: an analysis of the major shift education, as well as basic services.12 The 2024 in liquefied petroleum gas (LPG) dynamics since April World Bank Yemen Poverty Assessment reports that 2023”, Dec. 2023. Recent Economic Developments 3 FIGURE 1.5 • GDP Per Capita Trends Show FIGURE 1.6 • As Oil and LPG Production Declined Economic Instability during 2023 GDP per capita (annual growth, percent) Oil Production, including LPG (in thousands of barrels/day) 30 70 20 60 10 50 40 0 30 –10 20 –20 10 –30 2019 2020 2021 2022 2023 0 2019 2020 2021 2022 2023 GDP per capita growth (annual %, real) GDP per capita growth (annual %, nominal) Crude oil LPG Source: Yemeni authorities; WB and IMF staff estimations. Source: Yemeni authorities; WB and IMF staff calculations. FIGURE 1.7 • Meanwhile, Rising Protests and FIGURE 1.8 • Steady Remittance Inflows Provided Riots Signal Escalating Social Unrest Economic Support during 2023 Monthly Protests and Riots (count) Remittance Inflows (US$ million, nominal) 700 7,000 600 6,000 500 5,000 400 4,000 300 3,000 200 2,000 100 1,000 0 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: Armed Conflict Location & Event Data Project (ACLED). Source: Yemeni authorities, WB and IMF estimates. renewed protests and riots further stifled activity in due to an uptick in direct Saudi budget support to the non-oil sector, which contracted by 0.9 percent the IRG, bolstering Yemen’s balance of incomes and in real terms (Figure 1.7). The economy also suffered transfers. Despite the economic growth slowdown in further setbacks due to Cyclone Taj in October 2023, affecting agriculture, fisheries, and infrastructure.14 14 On October 23, 2023, Cyclone Taj made landfall Amid the tensions of 2023, remittances in Yemen, exacerbating the country’s challenges. and official development assistance (ODA) Approximately 75,000 individuals across 10,500 households were affected, with reported impacts on played a pivotal role in preventing a deeper eco- infrastructure, residential areas, and public buildings. nomic contraction. ODA inflows, which had declined The cyclone particularly disrupted economic activities in by 13.4 percent in 2022 to US$2.7 billion, rebounded the essential agricultural and fisheries sectors, leading in 2023 with a 9.9 percent increase to US$3.0 billion, to reduced revenue generation in the affected regions. 4 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION FIGURE 1.9 • IRG Fiscal Revenues Declined by FIGURE 1.10 • In Response, IRG Cut Expenditures over 30 Percent IRG Fiscal Expenditures (percent of GDP) 10 IRG Fiscal Revenues (percent of GDP) 10 8 8 6 6 4 4 2 2 0 2019 2020 2021 2022 2023 0 2019 2020 2021 2022 2023 Wages and compensation Goods and services Commodity revenues Taxes on international trade Interest payments Electricity subsidies Other taxes Non-tax revenues Other subsidies Capital expenditures Grants Other Source: MOF; WB and IMF staff calculations. Source: MOF; WB and IMF staff calculations. Gulf Cooperation Council (GCC) countries, remittance GDP as several factors continued to impede their inflows held steady at approximately US$6 billion, mir- growth, including applying a below-market exchange roring the figures from the previous year. This stabil- rate for customs, low tax collection rates, and a small ity in remittances supported household consumption tax base in IRG-controlled areas. and sustained overall economic activity throughout In response, the IRG has implemented the year (Figure 1.8). severe cuts in fiscal expenditures. Fiscal expendi- tures were recorded at 10.9 percent of GDP in 2023, Fiscal Developments15 down from 12.2 percent in 2022 (Figure 1.10). This decrease was distributed across all IRG’s expendi- The fiscal situation of the IRG deteriorated in 2023. ture categories but mostly concentrated in goods and According to the Ministry of Finance in Aden and World services. Nonetheless, electricity subsidies rose to Bank staff calculations, IRG’s fiscal revenues, including 4.2 percent of GDP during 2023 from 3.7 percent in grants, declined by over 30 percent in 2023 (to 6.9 2022. This high level of electricity subsidies can be percent of GDP in 2023) (Figure 1.9). This decline is attributed to the electricity sector’s below-cost recov- primarily attributed to a substantial drop in oil revenues ery tariffs and limited collection rates. Capital expendi- due to the ongoing blockade, which decreased to 1.6 tures declined to approximately zero percent of GDP percent of GDP in 2023 from 4.8 percent in 2022. during 2023 from 0.2 percent in 2022, raising con- Additionally, customs revenues have diminished from cerns about the stock of physical capital of the coun- 0.9 percent of GDP to 0.8 percent of GDP following the shift in import activity away from the port of Aden 15 The following figures only reflect the fiscal position of towards Red Sea ports, under Houthi control, despite IRG and do not encompass areas controlled by Houthis, an increase in the exchange rate used to calculate which is understood to operate a balanced cash-based customs duties on imported goods.16 On the upside, budget system. grants increased from 1.1 to 1.5 percent of GDP, driven 16 At start-2023, the IRG raised the USD exchange rate used to calculate customs duties on imported goods from by Saudi support through the disbursement of the first YER 500 to YER 750 per US$1. Nonetheless, the rate US$267 million tranche from its $1.2 billion budget remained below the YER’s Aden market exchange rate. support, announced in August 2023.17 Tax revenues 17 The Yemen Annual Review 2023 – Sana’a Center For (excluding customs) remained low at 2.2 percent of Strategic Studies (sanaacenter.org). Recent Economic Developments 5 FIGURE 1.11 • Imports Were Diverted Away from FIGURE 1.12 • And Increasingly Shifted towards IRG Ports Houthi Ports Bulk Imports through Ports (thousands of metric tons) Share of Goods Yemen’s Imports through Ports (in percent) 6,000 100% 5,000 80% 4,000 60% 3,000 40% 2,000 20% 1,000 0 0% Aden Al Mukalla Hodeidah Ras Isa Saleef 2022 2023 2022 2023 Aden Al Mukalla Hodeidah Ras Isa Saleef Source: ACAPS – YETI. Source: ACAPS – YETI. Note: IRG controlled ports: Aden and Al Mukalla; Houthi controlled ports: Hodeidah, Ras Note: IRG controlled ports: Aden and Al Mukalla; Houthi controlled ports: Hodeidah, Ras Isa and Saleef. Isa and Saleef. try—either depreciating fast due to a lack of adequate the Houthis resulted in a 44 percent drop in exports, maintenance or of being damaged by the conflict. plummeting from 9.5 percent of GDP to 6.8 percent. IRG’s public finances went under consider- The decrease in imports, due to the economic able stress. Overall, IRG’s fiscal deficit expanded to downturn, was less pronounced (–8 percent). A notable approximately 3.9 percent of GDP in 2023 (on a cash development was the diversion of imports from IRG- basis) from 2.7 percent in 2022. The budget deficit controlled ports to those under Houthi control in 2023, was covered primarily by increased domestic financ- which were reopened as part of the UN-sponsored ing through CBY-Aden. However, it is essential to high- truce (Figure 1.11). The proportion of bulk imports light that this figure does not include arears to public (excluding containers) through IRG ports decreased contractors. On an accrual basis, the fiscal deficit is from 49.5 percent in 2022 to 25.4 percent in 2023, expected to be significantly wider. On the other hand, while the share coming through Houthi-controlled in contrast to the rest of the country, Houthi-controlled ports increased from 50.5 to 74.6 percent during the areas, which include some of Yemen’s major com- same period (Figure 1.12).19 mercial and financial centers, are understood to oper- However, the conversion of IMF Special ate under a balanced, and cash-based, public budget Drawing Rights (SDRs) and financing from part- system. Yet, no information is available on public finances in the Houthi-controlled areas. 18 Note that the following figures reflect external accounts for the whole of Yemen. 19 The Houthis are actively promoting and incentivizing External Sector Developments18 imports via the Red Sea ports under their control by offering benefits such as covering demurrage costs and The halt in IRG’s oil exports intensified pressures providing advantageous customs rates. The Houthis on the country’s already large current account are also simultaneously implementing measures to deficit. This deficit widened from 17.8 percent of GDP discourage imports via IRG-controlled seaports and land border crossings by imposing added taxes and in 2022 to 19.3 percent of GDP in 2023, primarily customs fees on goods entering Houthi areas via driven by the escalating trade deficit, which surged to these routes. See ACAPS report “Yemen: Increased approximately 68.6 percent of GDP from 54.3 percent DFA intervention in the private sector in DFA-controlled of GDP in 2022. The blockade on IRG’s oil exports by areas”, February 2024. 6 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION FIGURE 1.13 • Yemen’s Current Account Deficit FIGURE 1.14 • Yet, Foreign Reserves Remained Widened Relatively Stable Yemen’s Balance of Payments (billions of USD) CBY-Aden Gross International Reserves (billions of USD) 30 1,800 2.0 20 1,600 1,400 1.5 10 1,200 0 1,000 1.0 –10 800 600 –20 400 0.5 –30 2020 2021 2022 2023 200 0 0.0 Financial account balance (excl. reserves) 2019 2020 2021 2022 2023 Net errors and omissions Change in reserve assets Gross international reserves Current account balance In months of imports Source: CBY-Aden and WB staff calculations Source: CBY-Aden and WB staff calculations. Note: Net errors and omissions reflect the imbalances resulting from imperfections in source data and compilation of the balance of payments accounts. ners provided some foreign exchange support. by 24.6 percent in 2023 (Figure 1.15). Consequently, Financial support from KSA played a pivotal role in currency in circulation witnessed a 4.8 percent this increase. Additionally, CBY-Aden bolstered its liq- increase during this period, rebounding from a uid foreign exchange reserves by acquiring US$187 3.8 percent decrease in 2022 due to earlier tightening million through the sale of 140 million IMF SDRs measures (Figure 1.16).20 However, the impact of in June 2023. This inflow of funds resulted in the this upsurge in monetary financing on the money increase of the financial account balance to 4.1 per- supply has been partially offset by foreign exchange cent of GDP from 0.9 percent in 2022 (Figure 1.13). auctions, which helped absorb a portion of the Consequently, despite the widening current account resulting excess liquidity (Figure 1.17). Nevertheless, deficit, CBY-Aden’s foreign exchange reserves while monetary financing might offer short-term relief grew to approximately US$1.52 billion in 2023, up for fiscal constraints, its uncontrolled continuation from US$1.25 billion in the previous year—though can escalate the risks of inflation and erode overall they remained below 1.5 months’ worth of imports economic stability. (Figure 1.14). In contrast, in Houthi-controlled areas, the ban on newly issued banknotes by CBY-Aden Monetary Policy and Inflation serves as a means of regulating money sup- ply while price caps on food commodities fur- The resumption of monetary financing by the ther help to control inflation. Implemented on IRG heightens the risk of inflationary pressures materializing over the next twelve months. With 20 In response to inflation and exchange rate instability in limited avenues for increasing revenues or cutting late 2021, IRG officials implemented decisive actions, expenditures, IRG has resumed monetizing its fiscal including introducing a weekly foreign exchange (FX) deficit through withdrawals from its overdraft facility at auction mechanism to improve the efficiency and transparency of CBY FX transactions with the market, as CBY-Aden, leading to an uptick in the money supply. well as the appointment of a new central bank governor. According to data from CBY-Aden, net domestic These auctions played a vital role in counteracting claims on the government, which serve as a proxy inflationary pressures by absorbing liquidity from the for the IRG’s monetized fiscal deficit, have surged market. Recent Economic Developments 7 FIGURE 1.15 • IRG Resumed Fiscal Monetization FIGURE 1.16 • As a Result, Currency in Circulation Increased CBY Net Domestic Claims on Government (increase, bns of YER) 1,600 Money in Circulation (y-o-y growth rate) 35% 1,400 1,200 25% 1,000 800 15% 600 400 5% 200 0 –5% 2016 2017 2018 2019 2020 2021 2022 2023 2016 2017 2018 2019 2020 2021 2022 2023 Source: CBY-Aden and WB staff calculations. Source: CBY-Aden and WB staff calculations. FIGURE 1.17 • FX Auctions Partially Absorbed the due to their deterioration from daily use. Shortages Liquidity Created of old rial banknotes in Houthi-controlled areas fol- Liquidity Absorption of Monetary Financing through the FX lowed, prompting the Houthis to attempt issuing their Auction System (in YER billion, cumulative change since 2023) own rial banknotes, which culminated in a significant 1,500 development on March 30, 2024, when the CBY- Sana’a introduced a new 100-YER coin for circula- 1,000 tion in their territories (see below). Additionally, in 500 efforts to combat food inflation, the Houthis continue to impose price caps on essential food items to safe- 0 guard household affordability. However, this strategy places pressure on vendors and traders, contribut- –500 ing to frequent shortages of imported goods in local markets.22 –1,000 In 2023, inflation saw a notable decrease Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 nationwide, although this trend differed across FX auction liquidity absorption Net claims on government regions. The average inflation rate transitioned from Currency in circulation 29.5 percent in 2022 to a deflationary rate of 1.5 per- cent in 2023.23 However, the extent of this decline Source: CBY-Aden and WB staff calculations. varied across regions, reflecting diverse factors (as detailed below). December 18, 2019, a directive from the Sana’a based central bank prohibited the use of new Yemeni 21 The War for Monetary Control Enters a Dangerous New rial banknotes issued in Aden, allowing only for the Phase, Sana’a Center for Strategic Studies, January circulation of older banknotes.21 This led to effectively 2020. 22 Yemen Food Supply Chain Update, ACAPS, August severing monetary policy between the two regions 2023 and to the emergence of two distinct exchange rates: 23 The national inflation rate is determined by calculating the exchange rate of old banknotes steadily appre- the simple average inflation rate between Aden and ciated, while that of the new banknotes depreciated Sana’a. 8 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION FIGURE 1.18 • Exchange Rates Continued to FIGURE 1.19 • Inflation Decreased Diverge Inflation across Yemen (percentage, period average) Exchange rate across Yemen (YER per US$1) 70 1,600 60 1,400 50 40 1,200 30 1,000 20 800 10 0 600 –10 400 –20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 May-23 Aug-23 Nov-23 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Aden Sana'a Aden Sana'a Sources: Telegram Exchange Market Group and WB Staff calculations. Sources: Reach Joint Market Monitoring Initiative and WB Staff calculations. Supported by a Global Commodity FIGURE 1.20 •  mirroring levels last seen in 2021 (Figure 1.18). Yet, Price Decline inflation rates in IRG territories decelerated markedly Commodity Prices (index, July 2021 = 100) to 7.0 percent from the previous year’s 36.4 percent 180 (Figure 1.19), attributed to the contraction in domes- tic demand and the drop in global commodity prices 160 (Figure 1.20). 140 In the Sana’a market, the YER margin- ally appreciated, bolstered by increased reve- 120 nues. This, along with global food price trends, led to deflation. Houthi-controlled regions recorded 100 a deflation rate of 11.8 percent, a sharp contrast to the 21.6 percent inflation rate observed in the pre- 80 ceding year. The diversion of international trade away Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 from IRG ports towards Houthi-controlled ones should be a significant factor driving the appreciation. This IMF Brent Crude Price Index S&P GSCI Wheat Index shift not only introduced foreign currencies but also Source: S&P, IMF, and WB staff calculations. spurred additional economic activity, consequently increasing fiscal revenue. Moreover, with more goods flowing into their areas at reduced costs, there was In IRG-controlled areas, despite the cur- a deflationary effect, as products destined for Houthi rency depreciation, with the depressed econ- territories no longer incurred the substantial transac- omy, inflation eased during 2023, also due to tion costs associated with crossing between different a drop in global commodity prices. The easing areas of control. of monetary conditions—to finance the growing fis- Although data for a comprehensive anal- cal deficit—coupled with a growing current account ysis of the economy in Houthi-controlled areas deficit due to the halt of oil exports, placed the YER remains limited, certain trends suggest that the under strain in the Aden market, leading to its depre- situation might be worse than it appears. While ciation to 1,532 YER per US$1 by the end of 2023, increasing revenues from the diversion of trade to Recent Economic Developments 9 Houthi-controlled ports might fuel some activity, other exchangers grants them a significant advantage over indicators point to potential economic distress. These banks in Yemen’s predominantly cash-based econ- include deflation, a shrinking money supply, finan- omy. As a result, money exchangers have become cial sector repression, price controls, and shortages, pivotal in providing the economy with access to for- which suggest an increasingly barter-based economy. eign-currency liquidity. Despite this, they have not Deflation, in particular, can trigger significant adjust- replaced the banking sector as facilitators of trade ments in consumption and investment behaviors with payments for key commodities like wheat and rice adverse impacts on the economy. Households, antic- because they do not have access to correspondent ipating further price declines, may postpone spend- banking or SWIFT, which is a requirement to buy from ing on non-essential goods and services, leading to the international market. decreased overall consumption. Simultaneously, busi- In March 2023, the Houthi authorities nesses may reduce investment due to lower expected enacted, effective immediately, a law prohibit- returns and uncertainty about future price levels, as ing interest-based banking transactions, facing falling prices diminish profit margins and make new resistance and proposed amendments from their investments less attractive. legal committee. Since then, banks have moved most saving deposits to current accounts and have Financial Sector stopped paying interest. However, depositors are unable to withdraw their money due to liquidity con- In Yemen, confidence in the conventional financial straints. There are unanswered questions regard- sector continues to be limited. Prior to the conflict, ing whether Islamic products like Murabaha will still the provision of credit by banks was primarily focused be permitted. Given the diversity in asset portfolios on government debt instruments denominated in the and capital structures, the law’s impact is expected local currency. These instruments have been in a to vary across different banks. For example, govern- state of technical default since the beginning of the ment securities represent the largest share of assets war. The ongoing economic crisis and the increase among commercial banks versus Islamic banks, in non-performing loans among banks established and public banks versus private banks. Thus, pub- before the war have further eroded confidence in lic commercial banks’ balance sheets are the most the banking sector. In contrast, non-bank financial vulnerable to changes in the value of outstanding service providers, especially money exchangers, have domestic debt. experienced a rise in trust, regardless of their location. The CBY in Aden has implemented a series This shift is evident in the decrease of local currency of reforms aimed at fostering digital transforma- deposits in commercial banks, which dropped from tion and enhancing financial inclusivity. Key ini- 15.1 percent of GDP in 2014 to 8.6 percent by the end tiatives include joining the Buna platform for Arab of 2022. Nevertheless, there was a slight recovery to payments and launching the National Switch system, 9.4 percent of GDP in 2023, following the introduction which are instrumental in facilitating financial trans- of new banks in Aden. fers. CBY Aden has also permitted non-bank service Money exchangers, with their strong liquid- providers to offer e-rial services and introduced new ity position, more than offset the banking sec- payment instruments such as prepaid cards. The issu- tor’s negative net foreign assets. Money shops ance of digital banking Know Your Customer (KYC) typically maintain net foreign assets that outstrip their instructions highlights CBY Aden’s dedication to reg- foreign liabilities, as they are the main beneficiaries ulatory compliance and the security of financial oper- of remittances and also because they actively hedge ations. These reforms are designed to support the against fluctuations in the local currency. The World digitization of government salary payments, which the Bank analyzed the financial statements of ten of the Ministry of Finance began in August 2023. However, largest money exchangers in Aden, which showed there are constraints to fully benefiting from digitiza- that the liquidity-focused business model of money tion due to the existing payment infrastructure. 10 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION Selected Economic Indicators (2019–2023) TABLE 1.1 •    2019 2020 2021 2022 2023 Real Sector (Annual percentage change) Real GDP 2.1 –8.5 –1.0 1.5 –2.0 Real GDP per Capita –1.0 –10.6 –3.1 –0.7 –4.1 Money and Prices (Annual percentage change, unless stated otherwise) Consumer Prices (period average)a 15.7 21.7 31.5 29.5 –1.5 Aden 22.6 30.5 59.8 36.4 7.0 Sana’a 11.4 15.6 9.4 21.6 –11.8 Base Moneyb 3,485 3,948 4,491 4,689 4,944 Exchange rate (YER per US$1, average)c Aden 576 743 1,028 1,114 1,355 Sana’a 567 603 599 572 535 Exchange rate (YER per US$1, eop)c Aden 612 669 952 1,205 1,518 Sana’a 581 591 600 560 528 Central Government Finances (IRG) (In percent of GDP) Total Revenues and grants 7.3 6.2 7.3 9.5 6.9 Commodity Revenues 3.6 2.2 2.5 4.8 1.6 Total Expenditures 13.2 10.6 8.2 12.2 10.9 Current Expenditures 12.5 10.3 7.8 12.0 10.8 Capital Expenditures 0.7 0.3 0.4 0.2 0.0 Overall Fiscal Balance –5.9 –4.5 –0.9 –2.7 –3.9 Financing 5.9 4.5 0.9 2.7 3.9 External (net) –0.1 –0.3 –0.2 –0.4 –0.4 Domestic 6.0 4.8 1.1 3.1 4.3 General Government Debt 103.5 104.8 93.6 77.9 100.5 Externald 41.1 44.4 46.0 38.6 54.5 Domestic 62.3 60.4 47.6 39.3 46.0 External sector (In percent of GDP) Current Account –4.2 –15.6 –14.2 –17.8 –19.3 Imports, Goods & Services 54.2 61.7 72.4 63.8 75.4 Exports, Goods & Services 8.7 9.5 13.1 9.5 6.8 Hydrocarbon Exports 4.0 3.2 5.1 4.2 0.0 Remittance Inflows 21.6 24.6 28.9 25.5 32.8 Capital & Financial Account (excl. res.) 0.1 0.3 –3.2 –0.9 –4.1 Net Errors and Omissions 1.0 12.6 14.3 15.1 16.7 Other memo items           GDP nominal in US$ (millions) 21,888 20,220 19,256 23,54 18,374 Gross Reserves in US$ (millions) 1,654 970 1,688 1,251 1,519 Source: ACAPS, Central Bank of Yemen, IMF staff estimates, IRG Ministry of Finance, REACH, UN, and World Bank staff estimates. Note: Excluding the central government’s fiscal accounts and gross reserves, this table encompasses data for whole of Yemen. a The national inflation rate is determined by calculating the average inflation rate between Aden and Sana’a. Inflation rates are used using a modified version of REACH’s Minimum Expenditure Basket (MEB). The MEB includes essential commodities and services vital for survival, such as food, shelter, healthcare, and support from various humanitarian organizations. b The monetary base includes the total supply of the Yemeni Rial (YER), encompassing both old and new banknotes in circulation across the country. It represents the sum of currency outside the Central Bank of Yemen, including the holdings of the public, commercial banks’ reserves, and any other financial institutions. c Data on market exchange rates are derived from ACAPS’s Yemen Economic Tracking Initiative (YETI), which sources its information from Telegram currency exchange groups. d External debt comprises arrears and foreign deposits. Recent Economic Developments 11 2 OUTLOOK AND RISKS Outlook The prospects for Yemen are also overshad- owed by the Middle East conflict, notably with the The macroeconomic outlook for the region is Houthis’ involvement and the escalation of ten- clouded by the ongoing conflict (World Bank sions in the Red Sea since October 2023. The Middle East and North Africa (MENA) Economic Houthis have been launching attacks since October Update).24 The MENA region is projected to grow at 19, declared in support of the Palestinians, target- a modest 2.7 percent in 2024 before rebounding to ing both Israeli-affiliated and Israel-bound ships in the 4.2 percent in 2025, and thereafter to return to the low Red Sea. In response, after repeated warnings to the growth that prevailed in the decade before the global Houthis to cease the attacks, on January 12, 2024, the pandemic. The magnitude of the conflict’s regional United States and the United Kingdom began retal- and global impact is still unfolding and will depend iatory military strikes on Yemen, targeting areas and on whether the conflict expands and on the resilience launch sites under Houthi control, also shooting down of neighboring economies. The conflict in the Middle Houthi-launched missiles and drones.25 Despite the East is taking place in a global economy that is in damage sustained, the Houthis asserted their intent its third year of a growth deceleration, following the to continue their attacks until Israel ceases its mili- recovery from the COVID pandemic. The conflict tary actions in Gaza. As of the end of March 2024, the has increased uncertainty regionally, at the same ACLED Dashboard for Red Sea Attacks has recorded time when existing issues—especially a rising debt burden—have curtailed the ability of many countries in the region to navigate shocks. On average, over the 24 World Bank Middle East and North Africa Economic Update — April 2024. past half century, armed conflict has been associated 25 Joint Statement from the Governments of Australia, with slowing growth and rising debt; the same could Bahrain, Canada, Denmark, Germany, Netherlands, New happen in the Middle East if the current situation were Zealand, Republic of Korea, United Kingdom, and the to escalate further. United States. 13 FIGURE 2.1 • Houthi Attacks in the Red Sea FIGURE 2.2 • As a Result Traffic through the Suez Escalated Amid Regional Tensions Canal Has Collapsed Attacks carried out by the Houthis in the Red Sea since October (number) Suez Canal Ship Transits (number of ships) 50 2,000 40 1,500 30 1,000 20 500 10 0 0 Oct Nov Dec Jan Feb Mar Apr Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 2023 2024 Commercial ship Unclear Military Israel Cargo ships Tanker ships Sources: ACLED. Sources: IMF Port Watch. around 170 incidents of political violence and intercep- all growth in the MENA region in 2024, downgraded tions linked to Houthi actions in the Red Sea, includ- by 0.8 percentage points to 2.7 percent compared to ing 67 attacks on commercial ships (Figure 2.1).26 the October 2023 projection. These actions have both disrupted shipping These developments are also expected to in the Red Sea and dampened the MENA growth significantly affect economic growth in Yemen. forecast. The significant disruptions to international While data remains limited, available indicators sug- shipping in the Red Sea, the corridor for 30 percent gest tangible risks could materialize. The resumption of world container shipping, underscore the severity of IRG’s oil exports in 2024 seems unlikely due to the of the situation.27 As of March 2024, traffic through slowdown in peace negotiations amid the conflict. the strategic Suez Canal and Bab El-Mandeb Strait While Yemen’s imports and prices have so far shown has halved while the Cape of Good Hope route has relative stability, with continued conflict, there are risks seen a twofold increase in navigation (Figure 2.2).28 of supply shortages and rising import costs due to The detours necessitated by the crisis have not only reduced and more costly imports, increased shipping inflated the journey distances for cargo and tankers expenses, including due to rising war premiums and by up to 53 percent, but also the environmental toll, insurance costs; this risk is more prominent in IRG- with a surge in CO2 emissions from the additional controlled areas than in Houthi ones, given the latter’s fuel consumed by ships rerouting around the Horn control of ports of entry (Figure 2.3).30 of Africa (World Bank MENA FCV Economic Series Brief29). Financial repercussions are acute: freight 26 https://acleddata.com/yemen-conflict-observatory/red- rates have risen and the cost of shipping insurance sea-attacks-dashboard/#1707908374225-329692ad- has reached unprecedented heights, delivering a 51d5. blow to both regional and international shipping econ- 27 Higher Shipping Freight Rates to Offset Costs of Re- omies. This increase in shipping costs would also add Routing from Suez (fitchratings.com). pressure on inflation. The Red Sea ports and associ- 28 Port Monitor – Suez Canal | PortWatch (imf.org). 29 World Bank MENA FCV Economic Series Brief — April ated economies are enduring most of this upheaval, 2024. with most grappling with diminished volumes and only 30 On January 16th, 2024, the war risk premium increased a select few benefiting from the diverted traffic. As a to approximately 1 percent of a ship’s value, up from result, the World Bank forecasts a decline in the over- 0.5 percent-0.7 percent on 18 December 2023, and just 14 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION Imports in Yemen have also Been FIGURE 2.3 •  FIGURE 2.4 • Yemeni Rial Depreciates in Aden Impacted by the Conflict Amid Economic Pressures Imports in Yemen (thousands of metric tons) Exchange rate across Yemen (YER per US$1) 1,700 1,400 1,200 1,500 1,000 1,300 800 1,100 600 400 900 200 700 0 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 500 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 Food, fuel, construction, and other imports 12 months moving average Aden market Sana'a market Sources: ACAPS YETI & WB staff calculations. Sources: Telegram Exchange Market Group and WB Staff calculations. With the depreciation of the YER on the tranche of the US$250 million budget support which Aden market, these factors are anticipated to KSA provided to the IRG. exert upward pressure on consumer prices, The sanctions imposed on the Houthis by particularly in IRG-controlled areas lacking com- the US administration in February 2024 could prehensive price controls.31 As a result, estimated have several repercussions. On January 17, 2024, real GDP growth for 2023 has been downgraded the U.S. administration classified the Houthis as from –0.5 percent in the Fall 2023 Yemen Eco- nomic Monitor, to –2.0 percent in the current Spring 0.07 percent in early December: https://www.acaps. 2024 edition. Furthermore, the growth forecast for org/fileadmin/Data_Product/Main_media/20240119_ 2024 has also been reduced from 2.0 percent to ACAPS_Yemen_analysis_hub_Import_flows_following_ –1.0 percent.32 the_escalation_in_the_Red_Sea.pdf. The war risk The ongoing tensions will also likely exacer- premium remained around 1 percent since: https://www. reuters.com/markets/war-insurers-shrug-off-rubymar- bate high fiscal, monetary and external pressures sinking-red-sea-rates-stable-2024-03-04/. in IRG-controlled areas. The fiscal deterioration, par- 31 The impact in Houthi-controlled areas remains uncertain, ticularly if coupled with potential decreases in financ- primarily due to the presence of price caps on certain ing from donors, could lead the Central Bank in Aden commodities like wheat. Reports indicate reinforced to resort to additional monetization of the fiscal defi- enforcement of these price caps in strategic locations cit, exacerbating already high inflation, and resulting such as Hodeidah and Sana’a. While the sustained enforcement may burden traders with heightened in further currency depreciation. Notably, the Yemeni operational costs, the extent to which these costs Rial (YER) continued to depreciate throughout 2024 will be absorbed solely by traders or passed on to in Aden, reaching YER 1,685 per US$ on February consumers remains uncertain. If price caps continue to 29th, the lowest since monetary reforms were imple- be enforced, the increased costs will hurt producers and mented in 2021; it has recovered slightly since then traders which will lead to a reduction in food supply and and has been trading at YER 1,679 per US$1 as of availability. Food security is already a major challenge, and Yemenis are vulnerable to changes in prices as their mid-April (Figure 2.4). Meanwhile, the Sana’a YER coping strategies are running out. has shown some resilience by appreciating slightly. 32 https://www.worldbank.org/en/news/press-release/20​ CBY-Aden has resumed foreign exchange auctions in 23/10/26/yemen-economic-monitor-highlights-ongoing​ early 2024 following the disbursement of the second -challenges-amid-renewed-hope. Outlook and Risks 15 specially designated global terrorists (SDGT).33 While dated that banks in Sana’a relocate their head- aggregate economic and social data, along with anec- quarters to Aden within two-months, citing AML/ dotal evidence, suggest that the impact of the SDGT CFT regulations. This mandate could have sig- designation has been relatively contained thus far in nificant economic, financial and social implica- Yemen, it could nonetheless serve as a deterrent to tions. Banks attempting to relocate within the given commercial engagements with the Houthis and may timeframe might face technical challenges and poten- impede the flow of remittances and complicate aid tial retaliatory actions from the Houthis. Conversely, delivery in northern Yemen. Any disruptions to human- banks that refuse to relocate risk disconnection from itarian aid, essential imports, remittances, and sources SWIFT, which could negatively impact financial flows of livelihood will exacerbate Yemen’s economic and in and out of Yemen, a lifeline for the economy and for social conditions, particularly in a society plagued by the Yemeni people, and threaten the financial viabil- widespread poverty, deprivation, and food shortages. ity of the smallest banks. Yet, transfers through Aden- Yemenis have already been struggling to get the aid based banks and alternative actors such as money they need, in part due to low humanitarian funding. The exchangers could mitigate some impacts. So far, it United Nation’s US$4.34 billion aid appeal for Yemen is reported that some banks are resisting relocation, in 2023 was only 40.7 percent funded, marking the low- highlighting the need for continued close monitoring est funding percentage for a UN Yemen appeal since of the situation. On May 30, 2024, CBY-Aden flagged at least 2008.34 The risks regarding food insecurity are these banks in a directive, mandating the suspen- alarming, exacerbated by the suspension of aid and sion of dealings with them.36 On the same day, CBY- food distribution by the World Food Programme (WFP) Aden also issued a directive requiring all Yemenis to in Houthi-controlled areas in late 2023. The conflict has deposit old paper currency printed before 2016 within already inflicted profound and far-reaching economic, sixty days.37 On May 31, 2024, CBY-Sana’a retaliated social, and humanitarian consequences on Yemen. by issuing a directive to ban cooperation with thirteen On the domestic front, notable adverse banks headquartered in Aden. developments such as the decision of the CBY- Sana’a in March 2023 to introduce a new 100- riyal coin to replace damaged YER100 banknotes Risks will require close monitoring. YER100 banknotes currently account for only one percent of the currency Overall, the macroeconomic outlook for Yemen in circulation in Houthi-controlled areas. As such, the remains predominantly leaning towards the monetary and economic effects of this measure alone downside. This is largely attributed to the ongoing are limited.35 However, uncertainties remain regarding and looming risk of further Houthi attacks in the the legality and acceptance of this decision, further Red Sea within the next twelve months. Continued deepening fragmentation in the monetary and institu- attacks and retaliations will severely disrupt vital tional setup between Sanaa and Aden. Moreover, the potential printing of money by the Houthis could exac- 33 In February 2021, the current U.S. administration delisted erbate inflationary pressures. Regarding the financial the Houthis as foreign terrorist organizations (FTO), sector implications, YER100 banknotes primarily cir- citing the humanitarian crisis in Yemen as the reason culate outside the banking sector, yet potential legal for the removal. This decision came after the previous repercussions on banks necessitate careful examina- administration had listed them as FTOs in January 2021. tion. It will be crucial to monitor any further issuance, 34 Yemen Humanitarian Response Plan 2023. particularly the printing of banknotes, which may sig- 35 YER 500 and YER 1,000 notes continue to dominate the market. These denominations represent over 95 percent nal a more active use of monetary policy to generate of the total volume of currency in circulation, while the seigniorage revenues. YER 100 coin represents just one percent. Furthermore, in response to the decision 36 https://cby-ye.com/news/691. by CBY-Sana’a, on April 2, 2024, CBY-Aden man- 37 https://cby-ye.com/news/692. 16 YEMEN ECONOMIC MONITOR: NAVIGATING INCREASED HARDSHIP AND GROWING FRAGMENTATION trade flows and remittances through the strategic tion, the attainment of a lasting truce or peace agree- Red Sea region, thus depressing economies not ment holds the promise of rapid economic recovery. only in Yemen but also across the wider Red Sea With strong external financial assistance and recon- region. Other downside risks include the potential struction efforts supported by Yemen’s development escalation of hostile activities and further economic partners, along with post-conflict reform, the country fragmentation fueled by domestic tensions, adverse could achieve accelerated growth within a short time- terms of trade shocks, and new natural disasters that frame. In such a favorable scenario, growth would be pose significant threats to Yemen’s fragile economy. expected to be driven by a swift rebound in domestic The risks of bifurcation between Houthi-controlled transportation, trade, financial inflows, and reconstruc- and IRG-controlled areas are escalating, with political tion efforts. Such efforts are essential for overcoming tensions driving greater economic and financial the current crisis and laying the foundations for a uni- fragmentation. This could, in turn, deepen the social fied and prosperous future for all Yemenis. The World and humanitarian divide. In addition, the potential Bank’s in-depth country economic growth diagnostic, upgrade to the FTO designation is tangible, signifying Country Economic Memorandum (CEM), outlines dif- a more rigorous sanction in contrast to the existing ferent recovery paths under various macroeconomic SDGT classification.38 However, on the upside, if and political economy scenarios, emphasizing policy the situation in the Red Sea normalizes, real GDP recommendations to unlock peace dividends.39 growth could accelerate with the resumption of trade, remittances, and aid. However, if a lasting truce or peace agree- 38 For details, see Congressional Research Service description of the FTO and related information: https://​ ment is achieved, Yemen could experience sus- crsreports.congress.gov/product/pdf/IF/IF10613. tained growth within months. While heightened 39 World Bank. (2023). Yemen Country Economic domestic and regional tensions pose significant Memorandum: Glimmers of Hope in Dark Times. risks to its economic, social, and humanitarian situa- Washington, D.C: World Bank. Outlook and Risks 17 1818 H Street, NW Washington, DC 20433