YEMEN ECONOMIC MONITOR Peace on the Horizon? Fall 2023 Yemen Economic Monitor Peace on the Horizon? Fall 2023 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region © 2023 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. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org /licenses/by/3.0/igo. All queries should be addressed to the lead author, at: gmele@worldbank.org. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photos courtesy of: (top) Old city of Sana’a, Yemen. Credit: Oleg Znamenskiy / Shutterstock (center, left) Destructive – schools, Yemen. Credit: anasalhajj / Shutterstock (center, right) Harbor in Aden, Yemen. Credit: Judith Lienert / Shutterstock (bottom) Food market in Sana’a, Yemen. Credit: ymphotos / Shutterstock Further permission required for reuse. Publication design and layout by The Word Express, Inc. TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1. The Economic and Social Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A Modest Recovery in 2022, Driven by the Non-Oil Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Adverse Macroeconomic Developments in 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Uncertain Outlook, High Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3. Peace Dividends and Their Distribution across Yemen: Evidence from the Temporary 2022 Ceasefire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 iii List of Figures Figure 1 Real GDP and Real GDP Per Capita Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 Life Expectancy at Birth, Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Monthly Conflict Fatalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 4 Real GDP Growth Decomposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Figure 5 Oil Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Figure 6 IRG Fiscal Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 7 IRG Fiscal Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 8 Money in Circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 9 Inflation Across Yemen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 10 Yemen’s Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 11 CBY-Aden Gross FX Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 12 Commercial Bank Deposits and Credit to the Private Sector . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 13 Monthly Protests and Riots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Figure 14 The Flow of Yemen’s Imports of Goods through Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 15 Share of Yemen’s Imports of Goods through Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 16 Net Claims on Government and Currency in Circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 17 Exchange Rate Trend: Sana’a and Aden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 18 Inflation Rate in Aden Versus Sana’a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 19 Projected Sectoral GDP Growth by Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 20 The Heterogeneous Gains and Losses from the 2022 Temporary Ceasefire Across Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 List of Tables Table 1 Selected Economic Indicators (2018–2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 iv YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? ACRONYMS ACAPS Assessment Capacity Project JMMI Joint Market Monitoring Initiative AMF Arab Monetary Fund PLC Presidential Leadership Council CBY Central Bank of Yemen KSA Kingdom of Saudi Arabia CEM Country Economic Memorandum MOF Ministry of Finance FX Foreign Exchange NTL Nighttime Light GCC Gulf Cooperation Council ODA Official Development Assistance GDP Gross Domestic Product UAE United Arab Emirates HCI Human Capital Index UN United Nations IPC Integrated Food Security Phase UNVIM United Nations Verification and Classification Inspection Mechanism for Yemen IRG Internationally Recognized Government YER Yemeni Rial v PREFACE T he Yemen Economic Monitor provides an guidance of Eric Le Borgne (Practice Manager), update on key economic developments Željko Bogetić (Lead Economist), and Tania Meyer and policies over the past six months. It also (Country Manager). Ebrahim Mohammed Yahya presents findings from recent World Bank work on Al-Harazi (External Affairs Officer) is the lead on com- Yemen. The Monitor places these developments, munications, 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 leaders, For information about the World Bank and its financial market participants, and the community of activities in Yemen, including e-copies of this publica- analysts and professionals engaged in Yemen. tion, please visit https://www.worldbank.org/en/cou​ The Yemen Economic Monitor is a product of ntry/yemen. the World Bank’s Yemen Macroeconomics, Trade, To be included on an email distribution list for and Investment (MTI) team. This issue was written this Yemen Economic Monitor series and related pub- by Mohammad Al Akkaoui (Economist) and Yasmine lications, please contact Ebrahim Mohammed Yahya Osman (Economist). The Special Focus entitled Dim Al-Harazi (ealharazi@worldbank.org). For questions Prospects but Glimmers of Lights: Economic Trends and comments on the content of this publication, across Yemen’s Fragmented Regions was pre- please contact Mohammad Al Akkaoui (malakka- pared by Mohammad Al Akkaoui, Yasmine Osman, oui@worldbank.org) or Yasmine Osman (yosman@ and Ali Ibrahim Almelhem (Consultant). The Yemen worldbank.org). Questions from the media can be Economic Monitor has been completed under the addressed to Ebrahim Mohammed Yahya Al-Harazi. vii EXECUTIVE SUMMARY Y emen’s humanitarian crisis is deeply However, a lasting resolution remained elusive due rooted in its conflict and complex to persistent disputes that prevented reaching a long- political and economic landscape. From lasting ceasefire and initiating a peace process. 2015 to 2022, the country experienced a staggering The formal truce expired in October 2022, 52 percent contraction in real GDP per capita, and although an informal truce remained in place, leaving two-thirds of the population, approximately the situation worsened in 2023 due to a Houthi- 21.6 million individuals, needing humanitarian imposed blockade on oil exports. This blockade assistance. The current level of poverty is anticipated is severely impacting foreign currency liquidity, and to be significantly higher than in 2014 when nearly exacerbating existing economic difficulties, including half of the population (49 percent) grappled with the fiscal position of the IRG. The depreciation of the poverty. Since the onset of the conflict the surge Yemeni Rial (YER) and ongoing monetization of IRG’s in the cost of basic essential goods, especially fiscal deficit through withdrawals from its overdraft food products, has propelled food insecurity to facility in the Central Bank of Yemen in Aden (CBY- the forefront of concerns in Yemen. Moreover, the Aden) contributed to inflationary pressures, partic- ongoing conflict has intensified the fragmentation ularly in Aden. Moreover, the reopening of Western of the country into two distinct economic zones, each governed by its unique set of institutions and policies, resulting in an increasing disparity despite 1 Yemen is divided among multiple competing power the evident interconnections. centers. The Houthis’ fatal split from Saleh in December 2017 left them as the dominant force in northwest During 2022, Yemen’s economy showed Yemen, where the bulk of the population lives. The improvement, supported by a truce that brought a international community has largely upheld the IRG glimmer of hope, albeit without the parties reach- as Yemen’s rightful sovereign authority; on the other ing a permanent political settlement. The two- hand, the Houthi forces hold de facto control over large month UN-brokered truce between the Internationally portions of the country, including Sana’a, the economic and financial center. Yet, the conflict extends beyond the Recognized Government (IRG) of Yemen and the Houti often simplistic, binary view of a Houthi led government in movement, popularly known as the Houthis, starting Sanaa, and Yemen’s IRG based in Aden. Disagreements in April 2022 and extended twice, temporarily halted among groups nominally united under either the Houthis offensive hostilities, thereby providing some relief for or IRG banner are often as sharp as the conflict between civilians and allowing for limited economic recovery.1 the two overarching factions. ix ports following the truce led to a decline in customs A special focus chapter using innovative receipts as imports were diverted from Aden. nighttime light (NTL) emission data at the gover- Yemen’s future economic prospects norate level explores Yemen’s economic perfor- depend on several factors. The economic out- mance during and after the 2022 UN-sponsored look for 2024 remains uncertain due to oil export truce, shedding new light on the dividends for constraints and ongoing political negotiations. peace as highlighted in the Yemen CEM. The anal- Nevertheless, positive developments, such as the ysis reveals two key findings. First, at the national recent rapprochement between regional powers and level, economic activity sharply increased during ongoing negotiations with the Houthis, could lay the the temporary ceasefire but contracted even more groundwork for recovery. The World Bank’s recent, in- starkly once the ceasefire lapsed. Second, both the depth country economic growth diagnostic, Country gains and losses were much more pronounced in the Economic Memorandum (CEM), outlines different Houthi-controlled areas, likely reflecting the fact that recovery paths under various macroeconomic and the ceasefire provided these areas with critical access political economy scenarios, emphasizing potential to imports, including oil from the rest of Yemen. While peace dividends.2 Realizing the peace dividend and short-term gains were evident during the truce, achiev- ensuring economic stability requires extensive efforts ing Yemen’s long-term prosperity depends on resolv- both domestically and from the international commu- ing political disputes that have fractured the economy nity by addressing immediate financial needs, capac- along regional lines, with the potential of a decentral- ity gaps, macroeconomic imbalances, and human ized model facilitating recovery if stability is achieved capital erosion. Implementing structural reforms is cru- through a political resolution. cial for sustainable and equitable growth, potentially laying a robust foundation for a resilient economy that meets citizens’ needs. Ending the blockade and mov- 2 World Bank. (2023). Yemen Country Economic ing from truce towards a lasting political settlement is Memorandum: Glimmers of Hope in Dark Times. a crucial, necessary condition for a lasting recovery. Washington, D.C: World Bank. x YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? 1 THE ECONOMIC AND SOCIAL CONTEXT The war in Yemen has inflicted massive human, Moreover, the ongoing conflict has inten- economic, and social costs on the country and sified the fragmentation of the country into two its people. From 2015 to 2022, the country experi- distinct economic zones, each governed by its enced a 42 percent contraction in real GDP. When unique set of institutions and policies.6 In 2016, accounting for Yemen’s rapid population growth, it the IRG relocated the (CBY) to Aden. However, the is likely that per capita real GDP saw an even more newly established CBY-Aden faced challenges. severe decline, estimated at 52 percent during the These included the struggle to secure sufficient for- same period (Figure 1). This contraction carried pro- eign exchange liquidity, stemming from the decline in found human implications, with around 21.6 million oil and gas exports. Additionally, the limited access to individuals, equivalent to two-thirds of the total popu- external financing coupled with the difficulties faced lation, now in need of humanitarian assistance.3 Prior by domestic banks, and the absence of an enabling to the crisis, poverty was already a significant con- environment for effective monetary policy implemen- cern, affecting almost half of Yemen’s population (49 tation, all presented considerable obstacles. On the percent). Today, it is expected to have reached signif- other hand, Houthi-controlled Sana’a remained the icantly higher levels than in 2014, with women being particularly vulnerable.4 Moreover, data indicates that 3 Yemen: Humanitarian Response Snapshot (OCHA, June life expectancy at birth has declined since the onset 2023). of the conflict, standing at 63.7 years on average 4 The World Bank in Yemen. in 2021 compared to 67.4 years in 2014 (Figure 2). 5 Yemen: Human Capital Index (2020). Simultaneously, the Human Capital Index (HCI) under- 6 In reality, fragmentation of the political and economic landscape extends beyond the binary view of a Houthi scores that a child born in 2020 is projected to be only led government in Sanaa and Yemen’s IRG based 37 percent as productive in adulthood as they would in Aden, with disagreements extending even among have been with access to comprehensive healthcare groups nominally united under either the Houthis or IRG and a complete education.5 banner (CEM, 2023). 1 Real GDP and Real GDP Per Capita FIGURE 1 •  FIGURE 2 • Life Expectancy at Birth, Total Index (2014=100) (years) 100 68 90 67 80 66 70 65 60 64 50 63 40 62 30 61 2014 2015 2016 2017 2018 2019 2020 2021 2022 Real GDP Real GDP per capita 60 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: WB and IMF Staff Calculations. Source: World Development Indicators. country’s banking and trading center and, due to its FIGURE 3 • Monthly Conflict Fatalities (persons) larger population, benefitted from greater remittance 4000 inflows and aid-agency payments executed via the for- 2022 mal banking system. 3500 Truce During 2022, Yemen’s economy showed 3000 improvement, supported by a UN-sponsored truce that brought a glimmer of hope, albeit 2500 without the parties reaching a permanent polit- ical settlement. The two-month UN-brokered 2000 truce between the IRG and the Houthis, start- 1500 ing in April 2022 and extended twice, temporar- ily halted offensive hostilities, thereby reducing 1000 conflict-related fatalities (Figure 3). Notable polit- 500 ical changes included IRG President Hadi ceding power to the newly formed Presidential Leadership 0 Jan-18 May-18 Sep-18 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 Council (PLC) to foster inclusivity. Shortly thereafter, the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE) announced a financial aid Source: Armed Conflict Location and Event Data Project. package of US$2 billion deposited at CBY-Aden.7 In November 2022, KSA announced that its US$1 bil- lion support would be allocated to helping Yemen bolster economic, financial, and monetary reforms, with technical assistance from the Arab Monetary Fund (AMF) (Box 1).8 7 Welcoming Saudi Arabia and the UAE’s Economic and Humanitarian Support for Yemen - United States Unfortunately, the positive momentum Department of State. was short-lived, as the formal UN-sponsored 8 https://www.amf.org.ae/en/news/25-11-2022/kingdom​ truce expired in October 2022. Although an infor- -saudi-arabia-extends-billion-us-dollar-support-republic​ mal truce remained in place (e.g., fatality levels in -yemens. 2 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? BOX 1. KSA FUNDED AMF PROGRAM FOR YEMEN In November 2022, KSA announced a US$1 billion financial aid package to support Yemen’s economic reform program, with technical assistance from the AMF. The program covers the period (2022–2025) and aims to establish economic and financial stability in Yemen, enhance fiscal stability and the external position, rebuild Yemeni institutions and support their governance and transparency, in order to enhance the macroeconomic environment, expand and diversify the productive base, support inclusive and sustainable economic growth, and create job opportunities. The program focuses on three reform areas aiming at i) strengthening the fiscal position of Yemen, ii) developing the financial and banking sector, and iii) creating an enabling environment to enhance the role of the private sector while scaling up its role in achieving sustainable economic development. • Public finance reforms include increasing domestic fiscal revenues, controlling and rationalizing government spending, enhancing public expenditure efficiency and governance while directing it toward urgent priorities, and rehabilitating vital infrastructure in the electricity, water, and road sectors, in a manner that supports fiscal sustainability and enhances confidence in the Yemeni economy. • Financial and banking sector reforms include developing governance and banking supervision in a way that enhances transparency and accountability, enhancing financial inclusion to enable micro, small and medium enterprises, as well as targeted groups (especially youth and women in rural areas) to have access to financial services, supporting digital financial transformation to enhance the flexibility of payment means, improving the banking sector infrastructure to enhance its resilience and support its ability to mobilize resources to meet the financing needs of the economy, in addition to achieving financial and economic stability. • Private sector reforms aim to enhance its role as an engine for inclusive and sustainable economic growth and creating job opportunities to improve living conditions and reduce unemployment and poverty rates, and at the same time enhance further integration in the global economy, increase foreign investment flows, and strengthen international partnerships. Figure 3), the economic situation worsened with a and the multiplicity of Yemen’s institutions. Moreover, Houthi-imposed blockade on oil export.9 This block- reliance on remittances and aid flows, coupled with ade is having far-reaching consequences, includ- climate change vulnerability, leaves Yemen exposed ing a complete halt in IRG’s oil export, severely to external factors. impacting fiscal revenues, and straining public-sec- In the face of escalating poverty and tor operations. Additionally, foreign currency liquid- heightened food insecurity, numerous house- ity conditions have been adversely affected, further holds, having exhausted traditional safety nets, exacerbating existing macroeconomic difficulties, now resort to dire measures. Since the onset of and increasing disparity between the North and the the conflict, the surge in the cost of basic essen- South. By end-2022, CBY-Aden’s liquid FX reserves tial goods, especially food products, has propelled had decreased to a month’s worth of imports, and the food insecurity to the forefront of concerns in Yemen. Aden-YER has significantly depreciated (Figure 17). Presently, over 17 million individuals are grappling Consequently, while Sana’a experiences relative with food insecurity.10 A mobile phone survey con- inflationary stability, Aden experiences high rates of ducted in 2023 revealed that, with limited viable inflation (Figure 18). Yemen continues to face deep structural 9 The Houthis imposed an embargo on IRG oil challenges. Growth in the oil sector depends on exports through three drone attacks on Yemeni oil Yemen’s ability to attract foreign investment, which export in the months following the expiration of the remains contingent on improving security and achiev- UN-sponsored truce. 10 Yemen Situation Report, WFP, July 2023. Furthermore, ing peace. Non-oil activity continues to be constrained on two critical occasions (in late 2018/early 2019 and by interruptions in essential service delivery, acute 2020), specific population segments were categorized input shortages, double taxation, widespread corrup- under the “catastrophe” classification according to the tion, market distortions from uncoordinated policies, Integrated Food Security Phase Classification (IPC). The Economic and Social Context 3 options to navigate adverse shocks, households are 11 World Bank. 2023. Monitoring Food Insecurity and now resorting to detrimental coping mechanisms, Vulnerability in Yemen: Results from the Yemen Mobile such as withdrawing children from school (33 per- Phone Monitoring Survey - Round II. © Washington, cent) or engaging in precarious, high-risk work (19 DC: World Bank. http://hdl.handle.net/10986/40266 percent).11 Furthermore, while child marriage has License: CC BY-NC 3.0 IGO. long been an issue in Yemen, even before the con- 12 Child marriage has long been an issue in Yemen, even before the current conflict began. According to the flict, an alarming three percent of respondents 2013 Demographic Health Survey, 16 percent of women reported cases of female children being married off between ages 20–49 were married before age 15. in the past three months alone as a means to allevi- Notably, the survey found the median age of marriage ate financial strain.12 was lower among younger women at the time, potentially signaling improvements in child marriage rates for the future. However, today any progress is likely being reversed, as more families are compelled to marry off their young daughters due to financial desperation amidst the country’s dire living conditions (World Bank, 2023). 4 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? 2 RECENT ECONOMIC DEVELOPMENTS A Modest Recovery in 2022, Driven tively impacted overall economic growth during the by the Non-Oil Sector same period. Increased remittances and official devel- Output and Demand opment assistance (ODA) played a major role in supporting domestic consumption in Yemen. Yemen’s economy exhibited a modest recovery An uptick in economic growth in Gulf Cooperation in 2022, driven by notable growth in the non-oil Council countries (GCC) led to a rise in remittances sector (Table 1).13 Following two years of economic sent to Yemen, substantially boosting domestic con- contraction, Yemen’s real GDP expanded by 1.5 per- sumption. Overall, official remittances rebounded in cent in 2022 (Figure 4). This positive development 2022, growing by approximately 10.7 percent in nom- was primarily driven by the non-oil sector, which grew inal dollar terms. According to donor data, ODA grew by 1.9 percent in real terms. In contrast, the oil sector by 9.7 percent during the same period. faced a significant contraction of 16.5 percent in real terms attributed to the blockade on oil exports, which resulted in average daily total hydrocarbon produc- 13 The Central Statistical Office (CSO) has been unable to tion (crude oil and LPG) declining from 61,600 bar- collect data necessary to update key indicators since rels in 2021 to 51,400 in 2022 (Figure 5). Growth before the conflict escalated in 2015. Thus, growth numbers in the non-oil sector was supported by increased presented in this section have been estimated based on national accounts data provided by the authorities for 2014. households and government consumption expen- 14 Household consumption is estimated for the entire diture, contributing 1.1 and 1.3 percentage points, population of Yemen. Government consumption refers to respectively, to overall real GDP growth.14 Yemen’s IRG fiscal expenditure sourced from Ministry of Finance net trade balance and gross fixed investment nega- data in Aden. 5 Real GDP Growth Decomposition FIGURE 4 •  FIGURE 5 • Oil Production (percentage points) (In thousands of barrels/day) 15 70 10 60 5 50 0 40 30 –5 20 –10 10 –15 2019 2020 2021 2022 0 Statistical discrepancy Net exports 2016 2017 2018 2019 2020 2021 2022 Investment Government consumption Household consumption Real GDP growth Crude oil LPG Source: Yemeni authorities; WB and IMF staff estimations. Source: Yemeni authorities; WB and IMF staff calculations. IRG Fiscal Developments15 increase was primarily due to higher current expen- ditures, with the electricity sector being a significant Despite the oil export blockade in the last quar- cost center. The combination of rising global oil prices ter of 2022, the IRG managed to increase its (Yemen is a net oil importer), below-cost electricity revenues during that year. According to World Bank consumer tariffs, and limited collection rates led to a staff estimates based on data from IRG’s Ministry of substantial increase in electricity subsidies, reaching Finance (MOF), total revenues rose to 10.3 percent of as much as 4.0 percent of GDP in 2022 compared GDP in 2022, up from 7.8 percent in the previous year to 1.1 percent in 2021.17 Furthermore, goods and ser- (Figure 6). This revenue increase was primarily driven vices expenditures and wages and salaries, grew by by oil revenues, which rose to 5.1 percent of GDP in an additional 0.5 percentage point, reaching 2.2 and 2022 from 2.7 percent in 2021, reflecting higher prices 3.5 percent of GDP, respectively. Capital expenditures, as well as the adoption of the market exchange rate in contrast, remained highly constrained, decreasing for oil revenues in January 2022, despite the decline in production.16 Additionally, grants provided by KSA 15 The following figures only reflect the fiscal position of increased from 0.6 to 1.2 percent of GDP (YER 274 bil- IRG and do not encompass areas controlled by Houthis, lion in fuel grants for electricity and YER 10 billion in which is understood to operate a balanced cash-based budget system. scholarship grants). However, tax revenues slightly 16 In January 2022, the authorities adopted the market decreased to 2.4 percent of GDP in 2022 from 2.8 per- exchange rate for oil revenues. Before that change in cent in 2021. Several factors continue to impede tax policy, foreign exchange was valued at the official rate of revenue growth, including applying a below-market 400 YER/USD, against a market value of 1032.5 YER/ exchange rate to customs, low tax collection rates, and USD on average in 2021, meaning a discount of 158 a small tax base in IRG-controlled areas. percent. 17 Energy subsidies in Yemen place an unsustainable Similarly, fiscal expenditures increased in burden on public finances. Yet, international experience 2022, propelled by electricity subsidies. Overall, has shown that electricity subsidies often benefit total IRG expenditures rose to 13.1 percent of GDP wealthier households, distort price signals, foster in 2022, up from 8.8 percent in 2021 (Figure 7). This inefficiency, and facilitate corruption. 6 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? IRG Fiscal Revenues FIGURE 6 •  IRG Fiscal Expenditures FIGURE 7 •  (percent of GDP) (percent of GDP) 12.0 20 10.0 15 8.0 6.0 10 4.0 5 2.0 0.0 0 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022 Hydrocarbon revenue Customs Grants Wages and salaries Goods and services Capital expenditure Tax revenue (excl. customs) Non-tax revenue Interest payments Subsidies and transfers Source: MOF; WB and IMF staff calculations. Source: MOF; WB and IMF staff calculations. to around 0.2 percent of GDP compared to 0.4 per- In response to inflation and exchange rate instability in cent of GDP in 2021. late 2021, IRG officials implemented decisive actions, Yemen’s public finances went under con- including introducing a weekly foreign exchange (FX) siderable stress, regardless of the area of con- auction mechanism to improve the efficiency and trol. The country’s division between Sana’a and Aden transparency of CBY FX transactions with the mar- and complex local-level institutional power dynam- ket, as well as the appointment of a new central bank ics added to challenges in managing fiscal policy. governor. These auctions played a vital role in coun- Overall, IRG’s fiscal deficit expanded to approximately teracting inflationary pressures by absorbing liquid- 2.8 percent of GDP in 2022 (on a cash basis), a nota- ity from the market, created when the government’s ble increase from 1.0 percent in 2021. The budget CBY account is credited with oil revenues in local cur- deficit was covered primarily by increased domes- rency. As a result of those measures, money in circu- tic financing through the CBY-Aden.18 However, it is lation witnessed a decrease of 3.5 percent in 2022, essential to highlight that this figure does not account following a significant 12.1 percent increase in 2021 for arrears to public contractors. On an accrual basis, (Figure 8). the fiscal deficit is expected to be significantly wider. Inflation followed diverse paths across On the other hand, in contrast to the rest of the coun- Yemen during 2022. CBY-Aden’s measures aimed try, Houthi-controlled areas, which include some of at stabilizing the exchange rate exerted down- Yemen’s major commercial and financial centers, are ward pressure on prices in IRG-controlled areas. understood to operate under a balanced cash-based Simultaneously, external factors, particularly rising public budget system. Yet, no information is available global commodity prices, contributed to increased on Houthi-controlled areas public finances. 18 Data from CBY-Aden reveals that claims on the Monetary Developments government, which serve as a proxy for the IRG’s monetized fiscal deficit, witnessed a substantial increase The improvements in monetary policy com- of 14.6 percent on average in 2022 compared to 2021, menced in late 2021 continued throughout 2022. despite a decrease in the first quarter of the year. Recent Economic Developments 7 FIGURE 8 • Money in Circulation Inflation across Yemen FIGURE 9 •  (y-o-y growth rate) (percentage, period average) 40 80 30 60 20 40 10 20 0 0 2018 2019 2020 2021 2022 –10 Aden Sana’a 2016 2017 2018 2019 2020 2021 2022 Source: CBY- Aden and WB staff calculations. Source: CBY-Aden , JMMI, and WB staff calculations. domestic prices across Yemen. This dual dynamic led CBY-Aden managed to bolster its liquid FX reserves to distinct inflation trends across the country, with infla- by converting approximately US$300 million in IMF tion in Houthi-controlled areas surging from 9.4 per- Special Drawing Rights21 (SDRs) and liquidating a fro- cent in 2021 to 21.6 percent in 2022. In contrast, in zen FX account at the Bank of England. However, the IRG regions, it markedly decelerated from 59.8 per- reduction in unofficial transfers weighed on Yemen’s cent to 36.4 percent (Figure 9). Overall, the inflation balance of payments, with a decrease in net errors rate across Yemen slightly decreased from 31.5 per- and omissions from US$3.2 billion to US$3.0 billion cent in 2021 to 29.5 percent in 2022. 19 Note that the following figures reflect external accounts External Accounts 19 for the whole of Yemen. 20 The initial two-month UN-sponsored truce in Yemen allowed 18 fuel ships to enter the ports of Hodeida Throughout 2022, Yemen faced significant chal- without inspection by the United Nations Verification and lenges in its external account, primarily driven by Inspection Mechanism for Yemen (UNVIM). As part of the widening current account deficit due to the extending the truce for a second time, 18 more tankers increasing domestic demand for costly foreign were permitted to unload at Hodeida’s ports without goods. This deficit expanded from US$3.1 billion in UNVIM oversight. Additionally, in February 2023, the 2021 to US$3.6 billion in 2022, equivalent to 16.5 per- restrictions on commercial goods coming into the port of Hodeida were relaxed. cent of GDP. This growth was primarily attributed to the 21 In August 2021, Yemen received a significant amount escalating trade deficit, which rose from US$11.5 bil- of SDRs 466.8 million (equivalent to US$650 million) as lion to US$13.0 billion, roughly 60 percent of GDP part of the IMF’s general SDR allocation in response to (Figure 10). The increase in imports resulted from fac- the COVID-19 crisis. Subsequently, in November 2022, tors like the reopening of the Hodeida port20 and rising the IRG converted half of this allocation into US dollars, food prices. Simultaneously, exports declined, notably amounting to approximately SDRs 234 million. This conversion was undertaken to provide funding for CBY- oil exports due to the Houthi-imposed blockade. Aden to support its weekly FX auction operations. In In 2022, Yemen’s reserves declined to a June 2023, CBY-Aden acquired a sum of US$187 million level equivalent to a month’s worth of imports. through the sale of an additional SDRs 140 million. As Although anticipated one-off FX reserve inflows from of August 31st, 2023, Yemen’s SDR holdings were KSA and UAE did not materialize during the year, recorded at SDRs 70.6 million. 8 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? FIGURE 10 • Yemen’s Balance of Payments CBY-Aden Gross FX Reserves FIGURE 11 •  (billions of USD) (billions of USD and in months of imports) 5 4 1.8 2 3 1.6 2 1.4 1 1.2 0 1.0 –1 –2 0.8 1 –3 0.6 –4 0.4 –5 0.2 2019 2020 2021 2022 0.0 0 Change in Reserve Assets Net Errors and Omissions 2019 2020 2021 2022 Financial Account Balance Capital Account Balance (excl. reserves) Current Account Balance Gross reserves In months of imports (rhs) Source: CBY- Aden and WB staff calculations. Source: CBY-Aden , JMMI, and WB staff calculations. in 2022. Moreover, Yemen’s net financial and capital past year. Other non-bank financial institutions (such account balance experienced reductions. Coupled as insurance companies, pension funds, post offices, with a growing current account deficit, this decline microfinance institutions, and e-wallet service provid- pushed CBY-Aden’s FX reserves to a month’s worth ers), play a more marginal role in the economy. of imports by the end of the year (Figure 11). The financial sector in Yemen faces chal- lenges arising from divergent regulations and Financial Sector inadequate intermediation of savings into invest- ments, hindering economic growth. The com- In Yemen, trust in the traditional financial sec- peting authorities, with the Houthis overseeing tor remains low, leading to a growing market of banks in their territories (including Sana’a, Yemen’s unregulated financial service providers. Credit pre- dominantly revolves around government debt instru- 22 Before the onset of the conflict, approximately ments, denominated in local currency, which have 45 percent of the assets held by banks were allocated to been in a state of technical default following the con- government Treasury bills (TBs) to support the financing flict.22 The ongoing economic crisis and rising non-per- of the public deficit. However, with the emergence of forming loans have further eroded confidence in the the conflict in 2015, the CBY (responsible for managing debt and liquidity on behalf of the government) ceased formal banking sector. This is evident from the decline its repayments and servicing of public debt, opting in deposits in commercial banks, dropping from 24.0 instead to annually roll over all outstanding public debt percent of GDP in 2014 to 15.6 percent by the end ever since. The CBY froze the assets of the banking of 2022 (Figure 12). Instead, more savers are turning sector that were invested in TBs, compelled banks to to microfinance services, and exchange and remit- reduce their risks and limit credit to the private sector. tance firms have experienced a surge, with the num- Furthermore, depositors could not withdraw their savings. These actions triggered a liquidity crisis in the ber of such firms growing from 876 in 2017 to 3,244 north and eroded trust in the banking sector. in 2019.23 These firms have become unregulated hubs 23 Abdulghani Mohamed Al Samawi et al., “Electronic for informal deposits and credit provision, despite Payment Services in Yemen: Challenges and Opportunities some efforts to regulate money exchanges over the for Success,” Institute of Banking Studies, May 2020. Recent Economic Developments 9 FIGURE 12 • Commercial Bank Deposits and Monthly Protests and Riots (count) FIGURE 13 •  Credit to the Private Sector (percent of GDP) 250 30 200 20 150 100 10 50 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 Jan-18 May-18 Sep-18 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 Commercial bank deposits Credit to private sector Source: CBY-Aden and WB staff calculations. Source: Armed Conflict Location and Event Data Project. commercial hub) and the IRG in Aden, have created sharp drop in oil production (with limited domestic a challenging operating environment. Their contra- market capacity to absorb the excess supply); and dictory regulations, threats of non-compliance conse- (2) a strategic move to import household butane quences, and complex requirements have increased gas into markets in Houthi-controlled areas, thereby operational costs, promoted currency speculation, reducing the demand for domestically extracted and impeded cross-border transactions. Moreover, butane gas (originating from non-Houthi controlled the financial sector’s capacity to channel savings into areas). At the same time, a more volatile currency on investments is hampered by the absence of credit the Aden FX market, soaring inflation, and escalation reporting systems, weak legal enforcement, and polit- in protests and riots are weighing on non-oil activity ical instability. Consequently, credit provided by the within the private sector (Figure 13). Considering banking sector to the private sector has dwindled these events, Yemen’s GDP is projected to contract from 5.6 percent of GDP in 2014 to 1.4 percent by by 0.5 percent in real terms in 2023, following a the end of 2022 (Figure 12). These challenges have 1.5 percent rebound in 2022. hindered the sector’s ability to contribute effectively to Another significant challenge emerged with economic growth.24 a notable decline in customs receipts as imports decreased and were increasingly diverted to Houthi-controlled ports, reopened as part of the Adverse Macroeconomic UN-sponsored truce. Data from the Assessment Developments in 2023 Capacities Project (ACAPS) Yemen Economic Tracking Initiative reveals a sharp decline in imports The expiration of the UN-sponsored truce triggered a series of adverse economic events that have significantly and negatively impacted 24 Yemen’s banking sector provides limited participation in development and credit to the private sector. As of Yemen’s economy in 2023 pushing the economy December 2019, 42 percent of banking sector credit back to a contractionary recession. These include: was allocated to import financing, while almost the same (1) the blockade of oil exports by the Houthis, percentage of all bank credit portfolios to non-government resulting in a complete cessation of exports and a credit were classified as non-performing loans. 10 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? TABLE 1 • Selected Economic Indicators (2018–2022) 2018 2019 2020 2021 2022 Real Sector (Annual percentage change) Real GDP 0.8 1.4 –8.5 –1.0 1.5 Real GDP per Capita –1.7 –1.0 –10.6 –3.1 –0.7 Money and Prices (Annual percentage change, unless stated otherwise) Consumer Prices (period average) 33.6 15.7 21.7 31.5 29.5 Aden 33.6 22.6 30.5 59.8 36.4 Sana’a 33.7 11.4 15.6 9.4 21.6 Base Money 28.0 11.5 13.3 13.7 4.4 Exchange rate (YER per US$1, average) 535.9 576.0 743.0 1035.5 1114.3 Exchange rate (YER per US$1, eop) 535.0 612.0 669.0 952.0 1242.0 Central Government Finances (IRG) (In percent of GDP) Total Revenues and grants 6.4 7.3 6.7 7.8 10.3 Commodity Revenues 3.0 3.6 2.4 2.7 5.1 Total Expenditures 14.3 13.2 11.5 8.8 13.1 Current Expenditures 13.4 12.5 11.1 8.4 12.9 Capital Expenditures 0.8 0.7 0.4 0.4 0.2 Overall Fiscal Balance –7.8 –5.9 –4.8 –1.0 –2.8 Financing 7.8 5.9 4.8 1.0 2.8 External (net) –0.1 –0.1 –0.3 –0.2 –0.4 Domestic 8.0 6.0 5.2 1.2 3.2 General Government Debt 103.5 106.7 116.0 99.2 83.1 External 40.6 39.8 46.4 48.1 40.5 Domestic 62.9 66.9 69.6 51.1 42.6 External sector (In percent of GDP) Current Account Balance –1.0 –7.0 –14.1 –17.3 –16.5 Imports, Goods and Services 47.3 54.2 66.8 78.2 70.8 Exports, Goods and Services 8.8 8.7 10.2 13.8 11.1 Hydrocarbon Exports 5.2 5.2 3.4 5.5 4.5 Remittance Inflows 18.3 20.9 25.8 30.2 27.4 Capital Account Balance 0.0 0.0 0.2 0.2 0.0 Net Foreign Direct Investment –9.1 0.1 0.3 –3.5 –0.9 Net Portfolio Investment 0.0 0.0 0.0 0.0 0.0 Net All Other Flows –0.1 –0.1 –0.3 –0.2 –0.4 Net Errors and Omissions 1.5 1.0 10.6 17.7 13.5 Other memo items GDP nominal in US$ (millions) 21606.2 21887.6 18676.7 17930.1 21912.0 Gross Reserves in US$ (millions) 2983.2 1653.6 969.6 1688.0 1251.0 Source: Central Bank of Yemen Aden, Ministry of Finance, and World Bank staff estimates Recent Economic Developments 11 FIGURE 14 • The Flow of Yemen’s Imports of FIGURE 15 • Share of Yemen’s Imports of Goods Goods through Ports through Ports (in millions of metric tons) (in percentage) 5 100% 4 80% 3 60% 2 40% 1 20% 0 0% Aden Hodeidah Mukallah Saleef Nishtun Ras Isa Jan–Aug 2023 Jan–Aug 2022 Jan–Aug 2022 Jan–Aug 2023 Aden Hodeidah Mukallah Saleef Nishtun Ras Isa Source: ACAPS - Yemen Economic Tracking Initiative. Source: ACAPS - Yemen Economic Tracking Initiative. through the port of Aden.25 Between January 2023 cal expenditures (cash basis), which World Bank staff and August 2023, imports through Aden decreased estimate could reach up to 30 percent in 2023. Key by 61 percent or 2.73 million metric tons compared areas of adjustment include reductions in electric- to the same period in the previous year (Figure 14). In ity subsidies and spending on goods and services, contrast, imports through Hodeida port experienced potentially impacting the quantity, quality, and timeli- a lower decline of 8 percent, amounting to 0.24 mil- ness of public service delivery. Furthermore, cuts in lion metric tons. Consequently, Aden’s share in capital expenditures may have long-term implications Yemen’s overall imports declined by 25.1 percentage for economic growth. Despite these cuts, the fiscal points, dropping from 47.8 percent to 22.7 percent deficit (on a cash basis) is expected to hover around (Figure 15). On the other hand, Hodeida’s share of 2.9 percent of GDP in 2023. Financing of this defi- Yemen’s imports saw a slight increase of 1.6 percent- cit is expected to come from domestic financing via age points, rising from 34.6 percent to 36.2 percent. the CBY (as detailed below). Additionally, the recent Meanwhile, Ras Issa port observed an even more sub- announcement of US$1.2 billion in budget support stantial increase of 20.9 percentage points. from Saudi Arabia, including the recent deposit of The halt of oil exports has exacerbated US$250 million as the first tranche, could contribute already high fiscal pressures in IRG controlled to covering these financial needs.27 areas. Data from the Aden MOF reveals a substantial With limited avenues for increasing reve- decline in IRG revenues in the first half of 2023, con- nues or cutting expenditures, IRG has resumed firming World Bank staff estimate of a potential 40 per- monetizing its fiscal deficit through withdraw- cent decrease for the year. This decline is primarily als from its overdraft facility at CBY-Aden, lead- attributed to a substantial drop in revenues from crude oil export due to the ongoing blockade. Additionally, 25 ACAPS, “Imports”, YETI | Yemen Economic Tracking customs revenues are expected to diminish follow- Initiative, accessed on September 10th, 2023. 26 At start-2023, the IRG raised the USD exchange rate used ing the shift in import activity away from the port of to calculate customs duties on imported goods from YER Aden, despite an increase in the exchange rate used 500 to YER 750 per US$1. Nonetheless, the rate remained to calculate customs duties on imported goods.26 In below the YER’s Aden market exchange rate. response, the IRG has implemented severe cuts in fis- 27 https://press.un.org/en/2023/sc15383.doc.htm. 12 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? FIGURE 16 • Net Claims on Government and FIGURE 17 • Exchange Rate Trend: Sana’a and Currency in Circulation Aden (billions of YER) (YER per US$1) 700 1,600 2022 600 Truce 1,400 500 400 1,200 300 1,000 200 800 100 600 0.0 –100 400 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Dec-19 Mar-20 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 Net claims on government Currency in circulation Aden market Sana’a market Source: CBY-Aden and WB staff calculations. Source: Telegram Exchange Market Group and WB staff calculations. ing to an uptick in the money supply (Figure 16). downward trend on the Aden market initially began in According to data from CBY-Aden, claims on the gov- mid-April 2023, possibly due to a drop in remittance ernment, which serve as a proxy for the IRG’s mone- inflows following the end of Ramadan,29 the trend tized fiscal deficit, have surged by 10 percent in the accelerated on June 8th after a statement by govern- first half of 2023. Consequently, currency in circula- ment officials regarding declining CBY FX reserves. tion witnessed a 5 percent increase during this period, Inflationary dynamics have continued to rebounding from a 3.5 percent decrease in 2022. diverge significantly across regions in 2023, Nevertheless, the impact of this upsurge in monetary reflecting the distinct impacts of Yemen’s bifur- financing on the money supply has been partially off- cated macroeconomic policies. Notably, Sana’a set by FX auctions, which helped absorb a portion of has witnessed a sharp reduction in consumer price the resulting excess liquidity.28 inflation during the first seven months of 2023, aver- Additionally, the blockade of oil exports has aging around 2 percent, compared to 21.6 percent in widened the current account deficit, heightened 2022.30 This reduction can be attributed to a relatively external pressures, and led to a loss of confidence in the currency on the Aden market. The current 28 In 2022, the FX auction did not counterbalance the account deficit is estimated to reach 21.8 percent in deficit financed by money, as the government received local currency in exchange for FX obtained from oil 2023, up from 16.5 percent in 2022. In addition, the exports. However, with the suspension of oil exports due halting of oil exports has limited FX receipts, threaten- to the blockade, the market has been supplied with FX ing the overall level of reserves, which is anticipated to from existing reserves and foreign FX assistance. This reach less than a month’s worth of imports in 2023. At action has helped absorb excess liquidity and restrain to the same time, confidence in the currency has been some extent the expansion of the money supply. eroding. As of end-August 2023, the YER depreciated 29 According to ACAPS (2021), Ramadan is typically the peak time for remittances to Yemen. to YER 1,418 per US$1 on the Aden market, returning 30 The REACH Joint Market Monitoring Initiative’s Survival to end-2021 levels (Figure 17). Meanwhile, the YER Minimum Expenditure Basket survey is used as a proxy appreciated slightly on the Sana’a market. While the to a CPI basket. Recent Economic Developments 13 Inflation Rate in Aden Versus Sana’a FIGURE 18 •  ongoing truce negotiations. Economic stability 80% in the short run hinges heavily on predictable and 70% sustainable hard currency inflows and political/ 60% military developments. Should a lasting truce or 50% peace arise, Yemen’s economy could resume growth 40% within months of such an agreement, driven by an 30% expected rapid rebound of transport, trade, financial 20% flows, and reconstruction financing. Over the medium 10% term, growth is conditional on a peace agreement, 0% prudent policymaking, and a robust reform and –10% recovery effort backed by international reconstruction –20% financing. Ensuring that this growth trickles down to Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 the most vulnerable will require sustained investments in human capital that has been severely impacted by Aden market Sana’a market many years of protracted conflict. Source: Reach JMMI and WB staff calculations. Despite some positive developments, risks to Yemen’s economic outlook remain high. The recent rapprochement between regional powers marks steady money supply and the base effects of the a significant step towards alleviating longstanding commodity price shock in 2022. Conversely, inflation regional tensions that have hindered Yemen’s devel- in Aden has remained elevated, at around 35 percent opment prospects. Additionally, the ongoing negoti- during the first seven months of 2023, compared ations between KSA and the Houthis could change to an average of 36.4 percent in 2022 (Figure 18). the dynamics on the ground, laying the groundwork This situation can directly be linked to the significant for recovery. However, risks persist, including the depreciation of the YER in 2023, as mentioned ear- potential resurgence of hostile activities triggered by lier. regional or domestic tensions, new adverse terms In March 2023, the Houthis enacted a law of trade shocks, and new natural disasters posing a banning “usury transactions” within their con- significant threat to Yemen’s fragile economy. Most trolled regions. The law, effective immediately, aims significantly, the reduction in humanitarian aid will for a complete overhaul of the commercial banking result in significant increases in the prevalence of the sector practices to align with Sharia principles. It con- food poor. Moreover, policy inaction due to political sists of thirteen articles that prohibit both commercial gridlock among various parties remains a paramount and financial usury. The introduction of this new law risk. It could potentially yield adverse repercussions on may pose risks to the stability of the local currency the fiscal front, particularly considering the sluggish and potentially disrupt banking operations, particularly momentum of reforms. Such inaction might lead to an trade financing, lead to a fragmentation of the bank- escalation in monetary financing, which in turn could ing and financial sector in Yemen, reduced financial exacerbate inflationary pressures. Maintaining a sus- inclusion, limited access to credit, especially affect- tained focus on monetary and macroeconomic stabil- ing SMEs and low-income households, and a reduced ity while strengthening policy and institutional capacity capacity for the CBY’s to utilize monetary policy tools, can help improve the immediate macro prospects. complicating efforts to manage inflation and liquidity.31 Moving forward, the future scenarios for Yemen can be envisioned based on different tra- jectories of the conflict and post-conflict environ- Uncertain Outlook, High Risks 31 See the communique sent to Sana’a by the Yemen The economic outlook for 2024 remains highly Banking Association, the Chamber of Commerce and uncertain, given the oil export constraints and Industry, and several business consortiums. 14 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? Projected Sectoral GDP Growth by Scenario FIGURE 19 •  9 8 7 idend Peace div In percent deviation from baseline 6 5 4 3 2 1 0 –1 Status quo – Restored state Restored state+ Imperfect peace Imperfect peace+ Best case scenario no war, no peace Agriculture Mining Manufacturing Other industry Private services Gov't services Source: Yemen CEM (2023). ments. The World Bank’s recent Yemen CEM provides This would permit a rapid increase in overall real GDP insights into various recovery scenarios, considering in Yemen by one-third over the next six years, trans- different political, institutional, and economic dynam- lating into major increases in employment, incomes, ics. The “Status Quo/Base” scenario depicts a contin- and a reduction of poverty for the Yemeni people. uation of the war with a similar trajectory to the past Moreover, other than in the “status quo/base sce- eight years, with violence fluctuating. The “No War, No nario,” gains in productivity, driven by improved secu- Peace/Limbo” scenario envisions a decline in conflict rity and policy changes, have an almost immediate intensity, possibly due to a ceasefire, but without a effect in boosting GDP across all sectors in all scenar- political settlement. Alternatively, the “Restored State/ ios (Figure 19). These productivity gains also boost Limited Recovery” scenario entails authority consol- income levels, generating higher household con- idation around a single centralized set of state insti- sumption, savings, private investment, exports, and tutions. On the other hand, the “Imperfect Peace/ imports, with the investment increases feeding back Enhanced Recovery” scenario envisages a possible to higher growth. political settlement based on power-sharing, agreed However, realizing the peace dividend will upon by national elites. Each of these scenarios rep- require extensive efforts from the authorities and resents potential pathways for Yemen’s future. Which the international community. While a comprehen- pathway the Yemenis choose will crucially determine sive peace agreement is vital for Yemen’s growth, social and economic outcomes. addressing immediate financial needs, capacity Crucially, achieving peace holds sub- gaps, and macroeconomic imbalances is equally cru- stantial dividends for Yemen’s economy and its cial. As such, maintaining a robust dialogue and effec- people. Economic projections from the above sce- tive coordination of foreign financing commitments narios reveal that shifting from lower to higher recov- emerges as a key factor in enhancing Yemen’s eco- ery scenarios yields remarkable peace dividends. nomic stability in the short to medium term. Moreover, For instance, in the enhanced recovery scenario, ongoing reform efforts, including those through the GDP growth can reach up to three times the levels AMF-supported reform program, play an essential observed in the “status quo/base scenario,” with an role and could provide a well-developed gateway for expected average growth of 6 percent through 2030. a broader economic recovery agenda. This recovery Recent Economic Developments 15 agenda could potentially extend to involve official mul- Such a foundation would enable the country to with- tilateral and bilateral donors, helping Yemen tackle stand future shocks and effectively meet the needs of debt challenges, including recurrent arrears, and lay its citizens. This collaborative approach with various a robust and resilient economic foundation supported stakeholders will be instrumental in shaping Yemen’s by much larger financial assistance for economic path toward post-conflict economic prosperity and reconstruction from the international community. sustainable development. 16 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? 3 PEACE DIVIDENDS AND THEIR DISTRIBUTION ACROSS YEMEN: EVIDENCE FROM THE TEMPORARY 2022 CEASEFIRE Over the span of six months in 2022, a UN-sponsored In April 2022, Yemen experienced a six- ceasefire was in effect. Our analysis, using innova- month UN-brokered truce between IRG and tive night-time light (NTL) emission data at the gover- Houthis after years of conflict. Although the truce norate level as a proxy for economic activity32 reveals brought about economic opportunities and tempo- the following findings: (1) at the national level, eco- rary relief for civilians, it failed to result in a lasting nomic activity sharply increased during the tempo- rary ceasefire but contracted even more starkly once the ceasefire lapsed; and (2) both the gains and 32 Studies have validated satellite NTL data as a useful losses were significantly more pronounced in areas proxy for tracking economic growth when statistics are limited, as greater nighttime illumination corresponds to under Houthi-control, likely reflecting the fact that the higher production, consumption, and GDP growth (see ceasefire provided these areas with critical access Henderson, Storeygard, and Weil. Measuring economic to imports, including oil from the rest of Yemen. growth from outer space, 2011). However, factors like While short-term gains were evident during the truce, power shortages can complicate measurement (see achieving Yemen’s long-term prosperity depends on Bundervoet, Maiyo, and Sanghi. Bright lights, big cities: resolving political disputes that have fractured the Measuring national and sub-national economic growth in Africa from outer space, with an application to Kenya economy along regional lines. Ultimately, the find- and Rwanda, 2015). With appropriate caution, changes ings suggest that a decentralized model could facil- in NTL indicate shifts in production, consumption, and itate recovery if stability is achieved after a political overall GDP. This offers empirical insights into Yemen’s resolution. economic patterns amidst data scarcity. 17 political resolution due to underlying disputes over FIGURE 20 • The Heterogeneous Gains and Losses revenue sharing, public salary payments, and other from the 2022 Temporary Ceasefire across Regions deep-rooted issues. As the truce expired in October (average growth in estimated 2022, new economic dynamics emerged, starting national GDP Index) with the Houthis attack on al-Dhabba oil terminal in 3.0% Hadhramaut province in late November, disrupting 2.0% crude oil exports and choking state revenues. This special focus note utilizes NTL satel- 1.0% lite data to examine economic trends surround- 0.0% ing Yemen’s 2022 temporary ceasefire. By –1.0% assessing NTL emissions, we gain insights into how –2.0% Yemen’s economy responded during and after the –3.0% truce. Comparing NTL-based trends in measures of –4.0% economic activity before, during, and after the truce –5.0% allows us to understand whether reduced hostilities –6.0% facilitated a tentative economic recovery and how –7.0% Sana’a Aden Yemen economic activity performed after the truce amidst resumed pressures. Leveraging NTL data is crucial Pre-truce Truce Post-truce as traditional statistics on economic activity face limi- Source: WB staff calculations. tations in analyzing Yemen’s economic patterns. The empirical analysis of NTL data at the national level reveals that economic activity sharply increased during the temporary ceasefire bilize fiscal conditions, enhance governance, and fos- but contracted even more starkly once the cease- ter private sector growth. Without a concerted effort fire lapsed. The Yemen NTL-based GDP index indi- toward political and economic reconstruction, growth cates significant economic expansion during the 2022 prospects will remain limited. UN-sponsored truce, with an average monthly growth The analysis of NTL data at the governor- rate of 1.1 percent from April 2022 to September ate level further reveals that both the gains and 2022. This contrasts with the average monthly con- losses were significantly more pronounced in traction of 0.4 percent in the year preceding the truce. areas under Houthi-control, likely reflecting the However, in the two months following the truce’s expi- fact that the ceasefire provided these areas with ration (November-December 2022), Yemen’s aggre- critical access to imports, including oil from gated NTL-based GDP index contracted at an average the rest of Yemen. In Houthi-controlled areas, the monthly pace of 3.0 percent, erasing the gains made monthly expansion during the truce stood out signif- during the truce period (Figure 20). icantly at 2.5 percent. Conversely, these same areas Overall, the findings confirm that tempo- also experienced a more pronounced contraction of rary ceasefires can lead to short-term economic 4.9 percent in the two months following the cease- gains. Yet, unlocking a sustainable peace divi- fire’s expiration. This likely reflects the significance of dend requires a lasting political agreement. The the ceasefire in granting these areas critical access 2023 World Bank CEM underscores that a peace to imports, including oil from the rest of Yemen. For deal could result in significant economic benefits, instance, in Sana’a, a Houthi-controlled region, the including an increased real GDP growth rate (refer to monthly growth plummeted sharply from 2.4 percent Section 2.3 Uncertain Outlooks, High Risks). However, during the truce to an alarming –5.7 percent post-expi- realizing these gains hinges on addressing conflict- ration. In contrast, Aden’s monthly growth declined related issues comprehensively and implementing from 0.3 percent during the truce to –2.9 percent after economic reforms alongside capacity building to sta- the ceasefire’s expiration. 18 YEMEN ECONOMIC MONITOR: PEACE ON THE HORIZON? Overall, the results underscore Yemen’s attempting to reverse it, can facilitate reconstruction economic fragmentation along conflict lines. in a post-conflict environment. Ultimately, Yemen’s The variance in governorate-level economic perfor- governance model should align with and leverage mance during and after the 2022 truce reveals sig- its transformed political economy while promoting nificant fragmentation, with Houthi-controlled areas national reconciliation. experiencing more pronounced contractions after the To fully harness the potential benefits of truce’s expiration compared to IRG regions. A simi- decentralized recovery, targeted policies, and lar result was observed in the CEM report’s longer- coordination are essential to avoid exacerbating term analysis when comparing the pre- and post-2014 divisions. Achieving an appropriate balance between conflict, indicating a slower recovery in Houthi areas, national and local governance will be crucial. An likely attributed to differences in governance capabili- inclusive model could empower greater accountabil- ties and access to hydrocarbon resources. ity of local authorities to their constituencies by giving Moving forward, data and lessons from them more autonomy over local affairs. While the cen- other post-conflict contexts suggest that imple- tral state should coordinate key monetary and fiscal menting a decentralized governance model policies to ensure macroeconomic stability, certain could be pivotal in empowering economic recov- aspects, such as the management of fuel subsidies ery across Yemen’s regions. Yemen has undergone and public sector salaries, should remain handled a de facto, unmanaged localization process during nationally. With adequate central coordination, decen- the years of conflict that is unlikely to be reversed. tralized flexibility would allow governorates to tailor A decentralized approach post-conflict, building on public investment, service delivery, regulatory poli- this emergent reality, could empower governorates cies, and capacity building to suit their local economic to rebuild based on local strengths. By providing conditions and priorities. When coupled with national greater policy autonomy within a unified framework, reconciliation efforts, this balanced localization model this approach can catalyze growth driven by area-spe- could foster inclusive growth across Yemen’s hetero- cific resources. However, successful decentralized geneous regions. However, if the model implemented recovery requires first restoring stability after years is unbalanced, with inadequate revenue sharing and of division. Relevant international examples demon- coordination on national priorities, it risks exacerbat- strate that embracing proper localization, rather than ing regional inequalities and threatening stability. Peace Dividends and their Distribution Across Yemen: Evidence from the Temporary 2022 Ceasefire 19 1818 H Street, NW Washington, DC 20433