YEMEN ECONOMIC MONITOR Persistent Fragility amid Rising Risks Spring 2025 Yemen Economic Monitor Persistent Fragility amid Rising Risks Spring 2025 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region © 2025 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 fail- ure to use the information, methods, processes, or conclusions set forth. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1. The Economic and Social Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Real Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 External Sector Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Monetary Policy and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 4. Unlocking Yemen’s Peace Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 The Economic Advantages of Achieving Lasting Peace in Yemen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Key Drivers Necessary to Unlock the Lasting Peace Dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 iii List of Figures Figure 1.1 The Conflict Led to a Sharp Decline in Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 1.2 Yemen Is One of the Ten Poorest Countries in the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 1.3 Human Capital Declined Sharply during the Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Figure 1.4 Humanitarian Funding to Yemen Has Declined Significantly . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 1.5 Fatalities Remained Low since 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 2.1 Houthi Attacks in the Red Sea Persisted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 2.2 Traffic through the Suez Canal Collapsed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 2.3 Rising Protests and Riots Signaled Growing Unrest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 2.4 IRG Fiscal Revenues Excluding Grants Declined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 2.5 The IRG Reduced Fiscal Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 2.6 Imports Increased Despite Red Sea Escalation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 2.7 The Shift Toward Houthi-Run Ports Stabilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 2.8 The Current Account Has Continued Expanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 2.9 Foreign Reserves Continued to Fall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 2.10 Monetary Financing Experienced a Slowdown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 2.11 Currency in Circulation Growth Decreased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 2.12 Inflation Rose in IRG-Controlled Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 2.13 Exchange Rates Continued to Diverge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figure 3.1 GDP Per Capita Is Expected to Continue Decreasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 3.2 Oil Production Is Expected to Stagnate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 3.3 The United States Is One of the Largest ODA Donors to Yemen . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 4.1 Growth Projections Vary across the 3 Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 4.2 The Cost of War in Yemen Is Massive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 List of Tables Table 1.1 Selected Economic Indicators (2020–2024) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Table 4.1 Yemen’s Priorities to Unlock and Sustain Lasting Peace Dividends . . . . . . . . . . . . . . . . . . . . 25 iv YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS ACRONYMS ACAPS Assessment Capacities Project IRG Internationally Recognized Government ACLED Armed Conflict Location and Event JMMI Joint Market Monitoring Initiative Data Project LCU Local Currency Unit AML Anti-Money Laundering MENA Middle East and North Africa CBY Central Bank of Yemen MICS Multiple Indicator Cluster Survey CCY Cash Consortium of Yemen MOF Ministry of Finance CCDR Country Climate and Development OCHA Office for the Coordination of Report Humanitarian Affairs CEM Country Economic Memorandum ODA Official Development Assistance CFT Combating the Financing of Terrorism SWIFT Society for Worldwide Interbank FTO Foreign Terrorist Organization Financial Telecom FX Foreign Exchange UN United Nations GCC Gulf Cooperation Council UNDP United Nations Development GDP Gross Domestic Product Programme GEP Global Economic Prospects UNICEF United Nations Children’s Fund HCI Human Capital Index USAID United States Agency for International HDI Human Development Index Development IBY International Bank of Yemen WB World Bank IMF International Monetary Fund WFP World Food Programme IOM International Organization for Migration YER Yemeni Rial IPC Integrated Food Security Phase Classification v PREFACE T he Yemen Economic Monitor provides an and Dina Abu-Ghaida (Country Manager). Nabeel update on key economic developments and Darweesh (External Affairs Officer) is the lead on policies over the past six months.1 It also pres- communications, outreach, and publishing. ents findings from recent World Bank analytical work The findings, interpretations, and conclusions on Yemen. The Monitor places these developments, expressed in this Monitor are those of World Bank policies, and findings in a longer-term and global con- staff and do not necessarily reflect the views of the text and assesses their implications for Yemen’s out- Executive Board of The World Bank or the govern- look. Its coverage ranges from the macro economy ments they represent. to financial markets to human welfare and develop- For information about the World Bank and its ment indicators. It is intended for a wide audience, activities in Yemen, including e-copies of this publi- including policy makers, development partners, busi- cation, please visit https://www.worldbank.org/en/ ness leaders, financial market participants, and the country/yemen. community of analysts and professionals engaged To be included on an email distribution list in Yemen. for this Yemen Economic Monitor series and related The Yemen Economic Monitor is a product of publications, please contact Nabeel Darweesh (ndar- the World Bank’s Yemen Macroeconomics, Trade, weesh@worldbankgroup.org). For questions and and Investment (MTI) team. This issue was pre- comments on the content of this publication, please pared by Yasmine Osman (Country Economist) and contact Yasmine Osman (yosman@worldbank.org) Mohammad Al Akkaoui (Economist), supported by a or Mohammad Al Akkaoui (malakkaoui@worldbank. team of experts from different global practices of the org). Questions from the media can be addressed to World Bank. The team included Omar Al-Aqel (Private Nabeel Darweesh. Sector Specialist) and Alia Aghajanian (Senior Economist). The Yemen Economic Monitor has been 1 The analysis presented in this edition reflects the situation completed under the guidance of Eric Le Borgne as of mid-March 2025. Events occurring after this cutoff (Practice Manager), Željko Bogetic (Lead Economist), date are not included. vii YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES vii EXECUTIVE SUMMARY W hile domestic tensions persist, with the its political and economic systems, further exac- Houthi movement continuing to blockade erbated in 2024 by broader regional instability the Internationally Recognized Government (Chapter 1). Since the war began in 2015, Yemen’s (IRG) oil exports, Yemen also faces growing exter- real GDP per capita has plummeted by 58 percent, nal risks. Ceasefire agreements in the Middle East in pushing most of the population into poverty and January 2025 had raised hopes for greater regional severely eroding human capital. The country has split stability. However, renewed military tensions in the into two distinct economic zones, each with its own Red Sea since mid-March have undermined this frag- institutions and competing monetary authorities, lead- ile progress. In parallel, the U.S. designation of the ing to widening disparities. A brief period of stability Houthi movement as a Foreign Terrorist Organization following the UN-sponsored truce in 2022 was short- (FTO) has introduced new compliance requirements, lived, as economic contraction resumed in 2023 and which are already affecting Yemen’s banking sector. 2024, driven by the Houthi blockade on IRG oil exports Meanwhile, growing concerns over the detentions of and 454 violent incidents linked to Houthi actions in humanitarian staff by the Houthi movement have led the Red Sea in 2024. By late December 2024, mari- several donors to scale back or redirect assistance. time traffic through the strategic Suez Canal and Bab These shifts risk deepening Yemen’s already severe El-Mandeb Strait had plummeted by three-fourths economic and social challenges. Two-thirds of the compared to historical levels, compounding eco- population have inadequate food consumption, and nomic challenges. poverty is widespread. Against this backdrop, the out- look remains bleak. Yemen’s future hinges on its ability to secure lasting peace, rebuild, and implement criti- Intensifying Economic Pressures and cal reforms to strengthen state institutions and restore Worsening Humanitarian Conditions both domestic and international business confidence— essential for attracting investment and fostering growth. In 2024, stalled peace discussions and the con- tinued oil blockade intensified economic hard- ships for the IRG (Chapter 2). IRG revenues Deepening Economic Fragmentation (excluding grants) fell to 2.5 percent of GDP, from 4.6 percent of GDP in 2023. However, Saudi budget Yemen’s humanitarian crisis is deeply rooted in support and spending reductions helped narrow the its prolonged conflict and the fragmentation of fiscal deficit. The suspension of IRG oil exports, com- ix bined with heavy reliance on imports, worsened exter- will severely disrupt essential services and constrain nal imbalances, leading to a sharp depreciation of the production. In Houthi-controlled areas, acute liquid- Yemeni Rial (YER) in Aden—from YER 1,540 per US ity shortages are expected to continue, with restric- dollar in early January 2024 to YER 2,065 per US dol- tions on cash withdrawals and limited access to funds lar by year-end—fueling inflation beyond 30 percent likely stifling local consumption and business activity. and further eroding household purchasing power. Externally, the FTO designation has introduced new Meanwhile, rising tensions between the Houthi move- compliance requirements that are already affecting ment and IRG over banking sector regulations in early Yemen’s banking sector. Ongoing military tensions in 2024 further complicated the business environment. the Red Sea and reductions in donor and UN aid are While regional and UN mediation efforts helped ease expected to further compound pressures on the coun- some tensions, the situation remains fragile. try’s already fragile social and economic conditions. Meanwhile, living conditions for most Yemenis deteriorated further in 2024. A growing share of households reported inadequate food con- The Path Forward: Lasting Peace and sumption, driven by rising food prices in IRG-controlled Economic Stabilization areas and disrupted aid deliveries in Houthi-led regions. One in four Yemenis faces the compounding Yemen’s future depends on its ability to achieve effects of food insecurity and climate-related hazards, lasting peace, rebuild, and implement critical often in areas already deeply affected by conflict. reforms (Chapter 4). This chapter argues that last- A decade of conflict-driven compounded shocks ing peace could yield substantial economic and has severely eroded household resilience. With tradi- social benefits. A credible commitment to peace by tional coping mechanisms—such as selling assets— all domestic actors would likely be met with scaled- largely exhausted, many families are now resorting to up financing, technical assistance, and other sup- destructive coping strategies that will have long-term port from Yemen’s international partners, helping to consequences for future generations. accelerate economic recovery and restore essen- tial social services. To maximize the benefits of last- ing peace, Yemen needs a clear strategy. In the short Grim Economic Outlook for 2025 term, efforts should focus on stabilizing the economic environment and restoring core state functions. In the The economic outlook for 2025 remains bleak, medium term, the priority must be economic recov- with further deterioration expected as domestic ery, including macro stabilization and productivity conditions worsen and external challenges inten- enhancements. Sustained development over the long sify (Chapter 3). In IRG-controlled areas, the ongo- term requires structural reforms that address systemic ing Houthi blockade on oil exports, coupled with the challenges, including the enhancement of trade com- absence of a clear path to lasting peace, is expected petitiveness, strengthening financial infrastructure, to continue to be a strain on public finances and exter- and enhancing data transparency. Without lasting nal accounts. Inflation is projected to remain elevated, peace and meaningful reforms, Yemen’s economic driven by further currency depreciation in Aden, erod- and humanitarian crisis will only deepen. However, ing purchasing power and dampening consumption. with decisive action and international support, the Fuel shortages are also likely to persist, leading to country can chart a path toward recovery, stability, electricity blackouts and reduced power supply, which and inclusive growth. x YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS 1 THE ECONOMIC AND SOCIAL CONTEXT The war in Yemen has inflicted massive human, food insecurity.5 Malnutrition rates are alarming, with economic, and social costs on the country and 17 percent of children experiencing wasting, 49 per- its people. Yemen’s GDP contracted by 43 per- cent suffering from stunted growth, and 41 percent cent in real terms between 2015 and 2024.2 With being underweight—some of the highest rates in the the country’s rapid population growth, per capita Middle East and North Africa (MENA) region and real GDP declined even more sharply, by an esti- among countries facing similar food insecurity lev- mated 58 percent over the same period (Figure 1.1). els around the world.6 Inflation further compounded these issues, causing The war has also imposed long-lasting nominal GDP per capita to drop from US$1,430 in impacts on Yemen’s physical stock of capital, 2014 to just US$433 in 2024—a staggering 70 per- significantly lowering its potential output and cent decrease. This has pushed Yemen from being creating long-term barriers to recovery. Years of the 40th poorest country in the world before the con- conflict have not only led to the direct destruction of flict to the 3rd poorest by 2024 in terms of nominal GDP per capita (Figure 1.2).3 2 World Bank calculations based on IMF estimates for GDP. These economic losses have devastat- 3 The UN Population Division recently released the 2024 ing human consequences. Poverty, which already Revision, which increases Yemen’s estimated population by approximately 5 million. This revision reflects updated esti- affected 49 percent of the population before the mates of fertility and mortality, along with adjustments for conflict, has worsened significantly. While it is dif- migration. The data is available here: UN Population Divi- ficult to estimate poverty today, some projections sion. indicate that at least 74 percent of Yemen’s popu- 4 Yemen Poverty and Equity Assessment: Living in Dire Con- lation now lives in extreme poverty, based on the ditions (English). Washington, D.C.: World Bank Group. 5 Yemen Humanitarian Needs and Response plan issued national poverty line.4 Today, approximately 19.5 mil- January 2025. lion people—including 15 million women and chil- 6 2023/24 Multiple Indicator Cluster Survey (MICS), CSO and dren—require humanitarian assistance, and half face UNICEF, 2024. 1 FIGURE 1.1 • The Conflict Led to a Sharp Decline FIGURE 1.2 • Yemen Is One of the Ten Poorest in Economic Activity Countries in the World Real GDP and Real GDP Per Capita Index (2014=100) Nominal GDP per capita (US$) 100 800 90 700 600 80 500 70 400 60 300 50 200 100 40 0 Burundi South Sudan Yemen Malawi CAR Madagascar Sudan Mozanbique Niger DRC 30 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Real GDP Real GDP per capita Source: WB and IMF Staff Calculations. Source: WB (March 2025 for Yemen) and IMF WEO (October 2024 for others). infrastructure but also accelerated its depreciation One out of every four children of basic school age due to the lack of maintenance resources. According are out of school.10 In 2023, the neonatal mortality to the World Bank’s Yemen Dynamic Needs was estimated at 21 per 1,000 live births while the Assessment Phase 3, damage in 16 assessed cities infant mortality rate, often used as an indicator of as of January 2020 is estimated at US$6.8 to 8.3 bil- the health status of a country, was 35 per 1,000 live lion—equivalent to 39–47 percent of 2024 GDP.7 The births. Yemen’s Human Development Index score has housing sector has been hit hardest, accounting for dropped to 0.424 in 2022, placing the country 186th over 74 percent of total damages, followed by health out of 193 countries and territories compared to 160th and power. Damage to water and sanitation, transport, out of 188 in 2014 (Figure 1.3).11,12 and education infrastructure is also estimated in the The ongoing conflict has further deepened hundreds of millions. Overall, the conflict damaged Yemen’s economic fragmentation, dividing the or destroyed more than one-third of the country’s country into two distinct economic zones, each homes, schools, hospitals, and water and sanitation governed by its own institutions and policies. facilities, further weakening Yemen’s already sluggish productivity.8 Recovery and reconstruction needs in 7 World Bank Yemen Dynamic Needs Assessment: Phase 3 the assessed sectors and locations are projected (2020 Update). between US$20 and US$25 billion over five years. 8 World Bank 2020b. Yemen’s human capital, one of its most crit- 9 Human Capital Country Brief, Yemen, World Bank. ical resources, has suffered deeply from the pro- 10 https://www.unicef.org/yemen/documents/yemen-mics​ longed conflict. The country’s quality-adjusted stock -multiple-indicator-cluster-survey. 11 Human Development Report, United Nations, New York of human capital has been eroded by reduced access (2015; 2023–24). to education, deteriorating health services, conflict- 12 The Human Capital Index (HCI) quantifies the economic related deaths, and permanent outmigration. Human value of a country’s human capital, reflecting the potential Capital Index (HCI) shows that a child born in 2020 productivity of its population through indicators related to will only be 37 percent as productive in adulthood as health, education, and survival rates. It helps evaluate how effectively countries are developing their human capital. they would have been with access to comprehensive In contrast, the Human Development Index (HDI) measures healthcare and a complete education.9 Overall, edu- a country’s progress across three key dimensions: health, cation and health outcomes have sharply declined. education, and standard of living. 2 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS FIGURE 1.3 • Human Capital Declined Sharply FIGURE 1.4 • Humanitarian Funding to Yemen during the Conflict Has Declined Significantly Human Development Index in Yemen and the Arab States (index) Humanitarian Aid (millions of USD) 0.8 3,500 3,000 0.7 2,500 0.6 2,000 1,500 0.5 1,000 0.4 500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Yemen Syria Iraq Lebanon West Bank and Gaza Source: OECD. Source: United Nations Development Program. Houthi-controlled areas are home to approximately have led to stark disparities in the value of the YER 70 percent of the population, while areas controlled between Aden and Sana’a, creating market distor- by the IRG hold Yemen’s oil and gas resources.13 tions that complicate policymaking and deter invest- In 2016, the IRG relocated the Central Bank of Yemen ment.15 In Houthi-controlled areas, reports indicate a (CBY) headquarters to Aden. However, CBY-Aden has reduction in local currency liquidity, while the country struggled to secure sufficient foreign exchange liquid- overall continues to suffer from declining foreign cur- ity due to the sharp decline in oil and gas exports. rency reserves. This economic fragmentation is deep- These challenges have been compounded by lim- ening, driven by ongoing political tensions between ited access to external financing, difficulties faced the Houthi movement and the IRG, further entrenching by domestic banks, and the absence of an enabling financial and institutional fragmentation. This division environment for effective monetary policy imple- mentation. Meanwhile, Houthi-controlled Sana’a has 13 Yemen: Population Estimates – Humanitarian Data remained the country’s banking and trading center. Exchange (humdata.org). Its larger population has attracted greater remittance 14 While external factors such as a shift in attention to other inflows and aid-agency payments executed through global crises and conflicts contribute to the decline in fund- ing, the EU reports that access restrictions and bureaucratic the formal banking system. However, in recent years, hurdles are common, especially in Houthi-controlled areas. humanitarian funding to Yemen has declined signifi- Here, the movement of national female aid workers has cantly, leaving the population in an increasingly dire increasingly been limited, significantly hampering access situation (Figure 1.4).14 The risks of food insecurity to assistance for women and children. Additionally, delays are especially severe, exacerbated by the suspen- in independent assessments, monitoring, and interference in contracts challenge aid delivery. Insecurity and political sion of aid and food distribution by the World Food fragmentation in IRG-controlled areas further exacerbate Programme (WFP) in Houthi-controlled areas since the situation, with targeted attacks on political figures and late 2023 and the pause of USAID funded programs threats to humanitarian workers. Recurrent power cuts and in early 2025. fuel shortages also threaten stability. The growing economic fragmentation 15 The currency has different values depending on the banknote’s date of printing: Yemen Economic Bulletin: between Houthi- and IRG-controlled areas poses Widening Exchange Rate Disparity Between New and Old a serious threat to Yemen’s already fragile econ- Banknotes – Sana’a Center For Strategic Studies (sanaa- omy. Divergent and uncoordinated monetary policies center.org). The Economic and Social Context 3 further exacerbates the already dire social and FIGURE 1.5 • Fatalities Remained Low since 2022 humanitarian crisis. The potential for renewed eco- Monthly Conflict Fatalities (persons) nomic escalation remains a serious concern, as dem- 4,000 onstrated by disputes between March and July 2024 3,500 over control and regulation of the banking and trans- port sectors.16 3,000 The economy has further deteriorated 2,500 since the expiration of the UN-brokered truce 2,000 in late 2022. While 2022 initially showed signs of improvement—bolstered by the April 2022 truce, 1,500 which temporarily halted hostilities, reduced conflict- 1,000 related fatalities, and stimulated economic activity 500 (Figure 1.5)—this progress was short-lived.17 The truce expired in October 2022 without a permanent 0 Jan-15 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18 Jul-19 Apr-20 Jan-21 Oct-21 Jul-22 Apr-23 Jan-24 Oct-24 political settlement, and despite an informal cease- fire, economic conditions worsened. The downturn Source: Armed Conflict Location and Event Data Project (ACLED). was exacerbated by the Houthi-imposed blockade on IRG oil exports since October 2022 and the ban on Marib LPG sales in Houthi-controlled areas since exhausted their resilience, and have resorted to May 2023.18 extreme measures, with 19 percent turning to child At the same time, Yemen continues to face labor or engaging in high-risk work, with enduring deep structural challenges. Growth prospects in destructive effects on safety, health, and the social the oil sector depend on durable peace, financial fabric.21 These coping strategies reinforce a vicious and technical resources to restart oil production, and cycle of poverty and continuing erosion of human Yemen’s ability to attract foreign investment, especially capital, deepening the humanitarian crisis. On the given its aging oil fields. Non-oil activity—primarily trade other hand, there is also evidence of households and agriculture—remains severely constrained by the turning to subsistence agriculture as an alterna- conflict conditions, compounded by interruptions in tive coping strategy (Box 1.1). Further investment in essential service delivery, acute input shortages, dou- domestic agriculture would still be needed to move ble taxation, widespread corruption, market distortions households away from subsistence farming to more stemming from uncoordinated policies, and the multi- sustainable livelihood options. plicity of Yemen’s institutions.19 While remittances and aid help alleviate social conditions, these flows, too, 16 See Chapter 2 – financial sector section. 17 Yemen Economic Monitor, “Peace on the Horizon?”, World are affected by conflict conditions. Bank, October 2024. Living conditions for most Yemenis are 18 The Houthi movement imposed an embargo on IRG oil becoming increasingly dire. An estimated 63 per- exports in October 2022 through three drone attacks on cent of the population now faces inadequate food Yemeni oil exports in the months following the expiration of consumption, due to the lack of purchasing power the UN-sponsored truce. The Houthi movement demands that the Yemeni government pay the salaries of civil ser- across Yemen, further depreciation of the YER in vants in Houthi-controlled areas: https://www.mei.edu​ IRG-controlled areas, and reduced humanitarian /publications/houthis-embargo-yemens-oil-exports. food assistance.20 Those with poor food consump- 19 In 2024, Yemen was ranked 173rd out of 180 countries on tion are also grappling with compounding vulnera- the Corruption Perceptions Index with a score of 13 out of bilities, including exposure to climate hazards and 100 down from 16 the preceding year, according to Trans- parency International. conflict, higher levels of acute and chronic health 20 Yemen Humanitarian Needs Overview 2024, OCHA, issued conditions, and symptoms of mental health disor- in January 2024. ders. Phone surveys reveal that many households 21 World Bank 2024. 4 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS BOX 1.1. COPING THROUGH AGRICULTURE AMIDST A DESTRUCTIVE CONFLICT Yemen’s conflict has severely disrupted agriculture, causing land and crop losses and damaging critical infrastructure. Even before the conflict, the sector was in decline. In the 1970s and 1980s, labor migration from northern Yemen to neighboring oil-producing countries led to the neglect of farmland.a The discovery of oil further shifted focus toward food imports over domestic agriculture. Persistent challenges—including droughts, urbanization, political instability, and weak policies—further hindered agricultural activity.b Recent satellite imagery and machine learning analysis reveal a significant expansion in cropland between 2018 and 2022, with increases of 10–40 percent in some areas.c Approximately 70 percent of agricultural land is now used for cereal, 20 percent for qat, and 10 percent for fruits and vegetables. While increased rainfall likely played a role, several other factors contributed, including the movement of households to rural areas in search of safety and livelihoods, and efforts by local authorities to boost domestic food production. Much of the expansion appears linked to increased cereal cultivation; however, the growth of qat cultivation over the past decade also played a role (Yemen CEM, 2023). Although qat cultivation generates income, its widespread production reduces food availability, places additional strain on already scarce water resources, and undermines long-term agricultural productivity due to its low nutritional value and associated health risks. A notable shift in urban-to-rural displacement and migration has also emerged, as households seek safety, stability, and improved living conditions in the face of conflict and deteriorating urban economies.d This shift has likely contributed to higher employment in agriculture, with rural areas offering more stable subsistence opportunities. Agriculture has become a vital source of income and food security, particularly for rural populations, as households increasingly rely on farming to supplement underfunded social protection programs.e It serves as a buffer against economic disruptions, providing stability and resilience for vulnerable communities. To sustain this safety net, further investment in agricultural infrastructure—potentially through existing public works programs—will be essential. Source: Yemen Agricultural Production Potential for Food Nutrition and Security (World Bank, forthcoming). a Al-Eryani, Aiman. 2021. “To Avoid Past Mistakes, Invest in Yemen’s Agricultural Sector.” Yemen Policy Center. June 24. www.yemenpolicy.org/yemens- agricultural-sec​tor-a-history-of-neglect-and-lost-potential/. b FAO. 2021. Yemen – Shocks, agricultural livelihoods and food security. Monitoring report, December 2021. Rome. https://openknowledge.fao.org/server/ api/co​re/bitstreams/bb5d8102-28c8-4faf-b025-fa48e256f807​/content. c World Bank report, forthcoming. The study utilized high-resolution satellite imagery from sources like Sentinel-2 and MODIS to cover large spatial scales and local areas. Ground truth data essential for training and validating the models—was sourced from existing datasets showing specific field locations and crop types and annotated by Yemeni agricultural experts with GIS experience. The analysis employed two primary approaches: the Dynamic World (DW) dataset for baseline estimates and the Normalized Difference Vegetation Index (NDVI) within a static DW-derived cropland mask to assess vegetation health. d While there has not been a systematic analysis of the place of origin of the internally displaced persons, many of them have fled governorates that are relatively more urban, such as Taiz and Hodeidah, according to data collected as part of UNHCR’s Protection Monitoring Activities in 2024. Moreover, most conflict events have been recorded in cities and urban areas according to ACLED’s conflict event data. e Gansey, Romeo Jacky; Aghajanian, Alia Jane. Monitoring Food Insecurity and Employment in Yemen: Results from the Yemen Mobile Phone Survey Monitoring – Round I (English). Washington, D.C.: World Bank Group. https://​documents1.worldbank.org/curated/en/09908222317​1029962/pdf/ P179194042dc4400709c080a81b92fd6​1b8.pdf. Yemen remains highly vulnerable countries ment Report (CCDR) provides valuable insights into to climate change impacts, with major conse- the complex nexus of development, conflict, and cli- quences for the wellbeing of its people, especially mate change in Yemen (Box 1.2). the poor. The Yemen Country Climate and Develop- The Economic and Social Context 5 BOX 1.2. YEMEN’S VULNERABILITY TO CLIMATE CHANGE: LESSONS FROM THE CCDR Yemen faces a complex interplay of development, conflict, and climate change. The ongoing conflict has led to a humanitarian crisis affecting 80 percent of households, limiting access to basic services and exacerbating vulnerabilities. Climate change intensifies issues such as water scarcity and food insecurity, necessitating a coordinated approach that integrates development needs with climate action. Approximately 50 percent of Yemen’s population is exposed to significant climate hazards, including extreme heat, drought, or flooding. Moreover, a quarter of the population suffers from the compounding effects of food insecurity and exposure to climate hazards, and many of them live in districts that have experienced significant conflict events. Under pessimistic climate scenarios, Yemen’s annual GDP could decline by 3.9 percent by 2040 due to decreased agricultural productivity and infrastructure damage. Conversely, optimistic scenarios with increased precipitation could lead to a 1.5 percent annual GDP growth. However, frequent intense precipitation and longer dry periods pose significant challenges without proper policies and investments in adaptation. Targeted support is essential for helping communities adapt to emerging risks and shocks. Projected climate shifts, particularly increased precipitation, offer opportunities to reduce the gap between supply and demand. Investments in water management, soil conservation, and climate-smart agriculture could increase yields by up to 13.5 percent from 2041 to 2050, bolstering food security and nutrition. The fisheries sector faces growing threats from climate change, including the risk of fish stock declines of up to 23 percent, underscoring the need for sustainable fishing practices and stronger coastal management. Increasing climate- related disasters pose risks to urban areas and infrastructure, making robust disaster risk management strategies essential. Yemen has significant potential for renewable energy development, which is crucial for reliable electricity and economic development. Integrating climate resilience into public health planning is vital, since climate change exacerbates health challenges, potentially costing over US$5 billion in excess health costs by 2050. Strengthening the private sector and developing innovative financing mechanisms are necessary to overcome the obstacles Yemen faces in accessing climate finance. Engaging diverse stakeholders, including local communities, women, and youth, is essential for effective climate actions and sustainable development. The CCDR’s recommendations are framed around five higher-level objectives: developing spatially targeted, scalable, and people- centered area-based approaches to build resilience and reduce multidimensional poverty; improving water and food security and building a resilient fisheries sector amid uncertainty; promoting disaster risk management and climate-resilient power service provision centered around renewable energy; fostering adaptive human development by advancing health and human capital, prioritizing women and vulnerable groups; and scaling up innovative climate finance and empowering the private sector through people-centered approaches. Source: World Bank Yemen Country Climate and Development Report (CCDR), 2024. 6 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS 2 RECENT ECONOMIC DEVELOPMENTS 22 Real Sector imminent liquidity crisis and rising hunger in Houthi- controlled areas. In 2024, Yemen’s economy remained severely Houthi-controlled areas continued to expe- impacted by the ongoing Houthi blockade on rience severe strain, compounded by security IRG’s oil exports and deepening economic frag- challenges. Liquidity shortages, cash withdrawal mentation. Real GDP is estimated to have contracted restrictions, reduced access to funding, and limited by 1.5 percent, after a 2.0 percent decline in 2023 civil servant salary payments suppressed local con- (Table 2.1). Oil-sector activity stagnated after a sharp sumption and constrained business operations.23,24 60 percent drop in 2023, as the Houthi movement con- Escalating military tensions with Israel, including air- tinued to block IRG oil exports. Meanwhile, the non-oil strikes targeting a port and a power plant in Hodeida, sector remained under pressure, grappling with wors- further disrupted economic activity.25 In addition, ening economic conditions and further fragmentation. growing security concerns, including detainment of Notably, tensions between the Houthi movement and the IRG over control of the banking sector in the first 22 This chapter examines economic development throughout half of 2024 increased concerns about financial stabil- 2024. ity and created further uncertainty for businesses. In 23 https://sanaacenter.org/the-yemen-review/oct-dec-2024​ /24105. April, CBY-Aden issued a mandate requiring banks in 24 According to the January 2025 FAO Yemen Market and Sana’a to relocate to Aden or face disconnection from Trade Bulletin, income sources vary significantly between SWIFT, exacerbating tensions between the two par- IRG- and Houthi-controlled areas. In IRG areas, 35 percent ties. The situation remained tense until July 23, when of households rely on government salaries. In contrast, in both sides agreed to de-escalate by reversing recent Houthi-controlled areas, 54 percent depend on casual labor, 18 percent on food aid, and only 3 percent on government measures against banks and expanding Yemenia salaries, reflecting the halt in public sector wage payments. Airways’ international flights. This agreement followed 25 IDF confirms launching strikes on Houthi-controlled port, a warning from the World Food Programme about an power plants in Yemen | The Times of Israel. 7 a number of United Nations (UN) personnel, led to a end of 2024, about a year after the onset of the crisis, scaling back of UN operations in these areas.26 the ACLED Dashboard for Red Sea Attacks recorded IRG-controlled areas faced sharp currency approximately 454 violent incidents linked to Houthi depreciation and persistent supply-side con- actions in the Red Sea, including 201 attacks on com- straints, limiting production and dampening con- mercial ships (Figure 2.1). Consequently, vessel traffic sumption. The depreciation of the Aden exchange through the strategic Suez Canal and Bab El-Mandeb rate—coupled with a heavy reliance on imports—drove Strait—which used to carry 30 percent of world con- up consumer prices and production costs, weakened tainer traffic—plummeted by three-fourths, forcing demand, eroded competitiveness, and disrupted sup- ships to detour around the Cape of Good Hope, ply chains. In principle, currency depreciation should where navigation volumes surged by over 50 per- boost exports and curb imports by making locally pro- cent (Figure 2.2). The disruption of maritime transpor- duced goods more competitive. However, in Yemen’s tation in the Red Sea has driven up global shipping FCV context, self-correcting market mechanisms are costs, with the sharpest increases observed on routes absent, as domestic firms remained severely con- directly affected by the hostilities. However, the impact strained by the conflict, limiting their capacity to of higher freight rates on inflation has been muted expand production. As a result, rather than improv- ing competitiveness, the depreciation of the Aden 26 UN is cutting back on Yemen activities after crackdown by exchange rate further exacerbated economic chal- Houthi rebels on humanitarian staff | AP News. lenges. Additionally, electricity blackouts, worsened 27 The Yemen Review Quarterly: April-June 2024 – Sana’a by fuel shortages, severely impacted essential ser- Center for Strategic Studies (sanaacenter.org). 28 Yemen Key Message Update: Emergency (IPC Phase vices, leaving many areas with only a few hours of 4) outcomes persist in areas with flooding, pause in aid, power per day. This significantly constrained produc- November 2024 – Yemen | ReliefWeb. tion capacity, particularly in the industrial and agricul- 29 For a recent, detailed analysis of multiple regional and tural sectors.27 Moreover, irregular public sector salary global impacts of the Red Sea Shipping crisis that started payments further dampened aggregate demand.28 with the Houthi movement’s blockade of commercial ship- ping through the Red Sea in late 2023, see World Bank The Middle East conflict, fueled by direct MENA Prosperity Economic Monitoring Brief No. 2 “The Houthi involvement, has further deepened insta- Deepening Red Sea Shipping Crisis: Impacts and Outlook” bility in Yemen and the broader region.29 By the (February 2025). FIGURE 2.1 • Houthi Attacks in the Red Sea Traffic through the Suez Canal FIGURE 2.2 •  Persisted Collapsed Attacks by the Houthi movement in the Red Sea (number) Suez Canal ship transits (number of ships) 45 1,600 40 35 1,200 30 25 800 20 15 10 400 55 00 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Jan-19 Aug-19 Mar-20 Oct-20 May-21 Dec-21 Jul-22 Feb-23 Sep-23 Apr-24 Nov-24 2023 2024 2025 Israel Military Unclear Commercial ship Cargo ships Tanker ships Sources: ACLED. Sources: IMF Port Watch. 8 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS so far, partly due to subdued global demand, lower FIGURE 2.4 • IRG Fiscal Revenues Excluding commodity prices, and adequate inventory levels. In Grants Declined Houthi-controlled areas, rising protests following the IRG fiscal revenues (in percent of GDP) onset of the Middle East crisis have further intensified 10 political, economic, and social volatility (Figure 2.3). 8 6 Fiscal Developments30 4 A significant increase in grants partially offset the continued decline in the IRG’s fiscal reve- 2 nues in 2024.31 The IRG’s fiscal revenues, excluding grants, fell from 4.6 percent of GDP in 2023 to 2.5 per- 0 2020 2021 2022 2023 2024 cent of GDP in 2024. This drop was primarily driven by reduced hydrocarbon revenues and weaker cus- Customs Other taxes Commodity revenues Other revenues Grants toms revenues, which reflected a slight contraction in imports and continued trade diversion away from Source: MOF and WB staff calculations. the port of Aden. However, grants provided some fis- cal relief, rising significantly, from 1.8 percent of GDP GDP in 2023 to 8.9 percent in 2024, driven by cuts in 2023 to 3.9 percent of GDP in 2024, bolstered by across all expenditure categories, particularly elec- direct budget support from Saudi Arabia in the amount tricity subsidies, goods and services, and transfers of US$750 million. This increase in grants helped off- (Figure 2.5). However, wages, compensation, and set revenue losses, keeping total revenues broadly sta- ble at around 6.4 percent of GDP in 2024 (Figure 2.4). The IRG reduced expenditures in 2024, 30 The following figures only reflect the fiscal position of IRG and do not encompass areas controlled by Houthi reallocating limited resources to address evolv- movement, which is understood to operate a balanced ing priorities amid persistent constraints. Total cash-based budget system. fiscal expenditures declined from 13.6 percent of 31 Ministry of Finance in Aden and World Bank calculations. FIGURE 2.3 • Rising Protests and Riots Signaled FIGURE 2.5 • The IRG Reduced Fiscal Growing Unrest Expenditures Monthly protests and riots (count) IRG fiscal expenditures (in percent of GDP) 800 14 700 12 10 600 8 500 6 400 4 300 2 200 0 2020 2021 2022 2023 2024 100 Wages and compensation Goods and services 0 Interest payments Electricity subsidies Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 May-24 Sep-24 Other transfers Other current expenditures Capital Expenditures IRG - protests and riots Houthi - protests and riots Source: MOF; WB and IMF staff calculations. Source: Armed Conflict Location and Event Data Project (ACLED). Recent Economic Developments22 9 interest payments saw relatively smaller reductions. deficit, primarily driven by lower nominal imports, Capital expenditures remained broadly stagnant at reflected a decline in international commodity prices— 0.2 percent of GDP. As noted in the previous monitor, including food—despite an increase in import vol- the persistently low level of capital spending—account- umes. Despite escalating tensions in the Red Sea in ing for just 2 percent of total expenditures—raises 2024, Yemen’s overall trade volumes were not signif- concerns about the country’s physical capital stock, icantly disrupted, according to ACAPS (Figure 2.6). which is either deteriorating rapidly due to insufficient However, imports continued to be heavily diverted maintenance or being damaged by the ongoing con- toward Red Sea ports, a pattern established after the flict. Despite these exceptional challenges, the IRG 2022 truce. ACAPS data indicate that 75 percent of has made significant efforts to ensure the continued imports by volume passed through Red Sea ports payment of state employees’ salaries in areas under in 2024, consistent with last year’s levels but repre- its control and to maintain the functioning of essential senting a significant shift compared to the pre-truce government institutions and services. period, when nearly 60 percent of imports were pro- Both donor support and reduced expendi- cessed through IRG ports (Figure 2.7). tures contributed to the narrowing of the IRG’s The current account deficit has widened, fiscal deficit. On a cash basis, the IRG’s fiscal def- as ongoing security challenges have led to a icit declined from 7.2 percent of GDP in 2023 to decline in humanitarian and development assis- 2.5 percent in 2024. However, this improvement, pri- tance. Yemen’s current account deficit is estimated marily driven by enhanced grant inflows and consol- to have expanded to US$3.2 billion (18.0 percent of idated fiscal expenditures does not include arrears GDP) in 2024, up from US$2.7 billion (16 percent of to public contractors; on an accrual basis, the defi- GDP) in 2023 (Figure 2.8). This deterioration reflects cit would be significantly wider. In contrast, Houthi- an estimated decline in Official Development controlled areas—which include some of Yemen’s Assistance (ODA) from approximately US$4.2 bil- major commercial and financial centers—are reported lion in 2023 to US$2.8 billion in 2024. The scaling to operate under a balanced, cash-based public bud- back of aid operations in Houthi-controlled areas— get system, although no official data on their public driven by escalating Houthi violence targeting UN finances is available. To mitigate fiscal pressures, the and NGO personnel since May 2024, as well as Houthi movement has introduced a draft law estab- operational disruptions— contributed to the decline. lishing a temporary, exceptional mechanism for public Notably, the Yemen Humanitarian Response Plan sector salary payments—entailing tiered salary reduc- for 2024, reported by OCHA, required US$2.7 billion tions and the mobilization of additional funds from in total funding, yet only US$1.5 billion was secured, special sources such as the Teacher’s Fund and other leaving 45 percent of needs unmet.34 The shortfall in independent institutions.32 humanitarian and development aid was partly miti- gated by increased Saudi budget support. However, remittance inflows have reportedly decreased, likely External Sector Developments33 due to tighter regulations in remittance-sending countries.35 Despite currency deprecation, pressure on the Yemen’s gross international reserves de- trade balance intensified in IRG-controlled areas. clined, driven by reduced aid inflows, remittances Although the trade deficit is estimated to have nar- rowed slightly to approximately US$12.3 billion (from 13.0 billion in 2023), its share of GDP remained ele- 32 The Economy – The Yemen Review, October-December vated at 70 percent in 2024. Exports remained broadly 2024 – Sana’a Center for Strategic Studies. 33 Note that the following figures reflect external accounts for stable despite the weaker currency, as Yemen’s frag- the whole of Yemen. ile and conflict-affected environment continues to limit 34 https://fts.unocha.org/plans/1193/summary. production capacity. The slight reduction in the trade 35 Joint Monitoring Report by ACAPS. 10 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS FIGURE 2.6 • Imports Increased despite Red Sea FIGURE 2.7 • The Shift Toward Houthi-Run Ports Escalation Stabilized Bulk imports through ports (millions of metric tons) Share of goods imported through ports (in percent of total) 16 100% 14 80% 12 10 60% 8 6 40% 4 20% 2 0 0% 2019 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 Aden Al Mukalla Hodeidah Saleef Ras Isa IRG Red Sea Source: ACAPS – YETI. Source: ACAPS – YETI. Note: IRG-controlled ports (green shades): Aden and Al Mukalla; Houthi controlled ports Note: IRG-controlled ports (green shades): Aden and Al Mukalla; Houthi controlled ports (orange shades): Hodeidah, Ras Isa and Saleef. (orange shades): Hodeidah, Ras Isa and Saleef. FIGURE 2.8 • The Current Account Has Continued FIGURE 2.9 • Foreign Reserves Continued to Fall Expanding CBY-Aden Gross International Reserves (millions of US$) Yemen Current Account Balance (percent of GDP) 80 2,000 60 40 20 1,500 0 –20 1,000 –40 –60 –80 500 –100 2020 2021 2022 2023 2024 0 Non-oil exports Imports Remittance inflows Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 May-24 Sep-24 ODA Other flows Source: UN-Comtrade, OECD Development Assistance Committee, and WB staff Source: CBY – Aden and WB staff calculations. calculations. and ongoing challenges in boosting exports while In particular, Yemen has one of the least diversified ex- limiting imports. Total gross foreign currency reserves port bases among MENA countries (see Box 2.1). fell to approximately US$1.3 billion at end-2024 (equiv- alent to 1.1 month of imports), down from US$1.6 billion at end-2023 (1.4 months of imports) (Figure 2.9). This Monetary Policy and Inflation decline highlights persistent economic pressures, par- ticularly the difficulty in expanding exports, reducing In 2024, monetary financing of the IRG’s fis- dependence on food imports, and attracting foreign fi- cal deficit experienced a notable slowdown. Net nancing amid a deteriorating economic environment. domestic claims on government increased by only Recent Economic Developments22 11 BOX 2.1. EXPORT DIVERSIFICATION IN YEMEN Yemen is one of the least diversified economies in the MENA region. In 2023, manufacturing exports accounted for only 11 percent of total exports, while the three most exported products made up 71 percent of total exports, significantly higher than the 24 percent in emerging markets and developing economies (EMDEs). Similarly, the top three trading partners accounted for three-fourths of total exports, compared to an average of 56 percent in EMDEs. Moreover, Yemen’s manufacturing export concentration index is the highest in MENA after Djibouti, underscoring the country’s heavy reliance on a narrow export base. Manufacturing Exports in Total FIGURE A •  FIGURE B • Index of Concentration of Exports (2023) Manufacturing Exports 80 80 76 76 200 60 Rank of index of concentration 60 54 55 56 (higher is more concentrated) Percent of total exports 150 40 37 30 100 26 22 20 11 13 50 8 9 9 10 5 0 2 0 0 IRQ LBY EMDE DZA SYR QAT KWT YEM PSE SAU OMN DJI ARE EGY BHR IRN LBN JOR MAR TUN EGY ARE SAU JOR TUN SYR OMN MAR KWT IRQ QAT IRN LBN BHR PSE DZA LBY YEM DJI FIGURE C • Top 3 Exported Products as a FIGURE D • Top 3 Export Partners as a Share Share of Total Exports of Total Exports 100 100 88 82 80 77 80 76 71 69 70 73 60 61 % of Total exports % of Total exports 57 60 55 60 5555 56 49 50 49 45 45 47 45 40 42 42 44 39 40 32 34 35 40 36 38 29 30 31 28 32 24 26 20 17 20 0 0 EGY EMDE TUN JOR ARE SAU OMN SYR IRQ KWT BHR IRN MAR QAT LBN DZA PSE YEM LBY DJI EGY ARE QAT SAU DZA OMN BHR MAR LBY JOR LBN KWT EMDE SYR TUN IRQ IRN YEM PSE DJI Source: World Bank staff calculations based on data from BACI (from the Centre d’Etudes Prospectives et d’Informations Internationales) and World Development Indicators (World Bank). 12 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS 1.8 percent in nominal terms during 2024, represent- regions and to the emergence of two distinct exchange ing a deceleration relative the 24.6 percent growth in rates: the exchange rate of old banknotes steadily the previous year (Figure 2.10).36 This deceleration appreciated, while that of the new banknotes depreci- is largely attributable to the increased budget sup- ated reflecting their diverging supplies, with the former port from Saudi Arabia which reduced the need for being mostly fixed at the 2016 nominal level and the CBY to rely on unconventional measures to finance latter still expanding, sometimes briskly. Shortages of its expenses. Concurrently, currency in circulation old rial banknotes in Houthi-controlled areas followed, growth stagnated over the same period, compared to prompting the Houthi movement to attempt issuing a 4.8 percent annual increase in 2023 (Figure 2.11). its own rial banknotes, which culminated in the CBY- The steady level of monetary financing was fully offset Sana’a introduction of a new 100-YER coin for circula- by CBY-Aden’s proactive foreign exchange auctions, tion in their territories on March 30, 2024. However, the which absorbed excess liquidity and anchored mon- coins’ impact on money supply was minimal, because etary conditions. This sterilization effort underscores 100-YER coins only account for one percent of money the central bank’s commitment to maintaining mone- supply, thus having no meaningful effect on inflation- tary stability. Nevertheless, any sudden pickup in mon- ary conditions in Houthi-controlled areas. Additionally, etary financing could reignite inflationary pressures in efforts to combat food inflation, the Houthi move- and destabilize broader macroeconomic conditions, ment continues to impose price caps on essential food highlighting the need for continued policy discipline. items to safeguard household affordability. However, In Houthi-controlled areas, the ban on newly this strategy places pressure on vendors and traders, issued banknotes by CBY-Aden serves as a means increasing the risk of shortages of imported goods in of regulating money supply while price caps on local markets.37 food commodities further help to control infla- Inflation in IRG-controlled areas report- tion. Implemented on December 18, 2019, a direc- edly increased during 2024 despite a depressed tive from the Sana’a based central bank prohibited the economy. Inflation surged from 6.8 percent in 2023 use of new YER banknotes issued in Aden, allowing only for the circulation of older banknotes. This led to 36 According to data from the Central Bank of Yemen in Aden. effectively severing monetary policy between the two 37 Yemen Food Supply Chain Update, ACAPS, August 2023. FIGURE 2.10 • Monetary Financing Experienced a FIGURE 2.11 • Currency in Circulation Growth Slowdown Decreased CBY Net Domestic Claims on Government (trillions of LCU) Money in Circulation (M0) (trillions of LCU) 8 3.8 3.7 7 3.6 3.5 6 3.4 3.3 5 3.2 3.1 4 3.0 Dec-20 May-21 0ct-21 Mar-22 Aug-22 Jan-23 Jun-23 Nov-23 Apr-24 Sep-24 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 Source: CBY-Aden and WB staff calculations. Source: CBY – Aden and WB staff calculations. Recent Economic Developments22 13 to an average of 9.7 percent in 2024 (Figure 2.12).38 availability, drawing definitive conclusions for these In particular, end-of-period data indicate a sharp areas remains difficult. acceleration in inflation during the last quarter of the Although data for a comprehensive anal- year, reaching 15 percent in October and rising fur- ysis of the economy in Houthi-controlled areas ther to 20 percent and 30 percent year-on-year in remains limited, certain trends suggest that the November and December, respectively. These trends situation might be worse than it appears. While have contributed to markedly higher inflation projec- increasing revenues from the diversion of trade to tions for 2024 (Table 2.1). This increase occurred amid Houthi-controlled ports might fuel some activity, weak domestic demand, lower fiscal expenditures, other indicators point to potential economic distress. and reduced monetary financing, primarily driven by These include deflation, a shrinking money supply, the sharp currency depreciation. The current account financial sector repression, price controls, and short- deficit—exacerbated by halted oil exports, high import ages, which suggest an increasingly barter-based levels and reduced foreign aid—placed additional economy, and therefore a sharp drop in the ease of pressure on the YER in the Aden market, where it con- transacting for both firms and consumers, leading to tinued to depreciate, reaching an all-time high. The a fall in economic activity. Specifically, deflation can rate climbed from YER 1,536 per US dollar in early trigger significant adjustments in consumption and January 2024 to YER 2,062 per US dollar by year-end investment behaviors that have adverse impacts on (Figure 2.13). Meanwhile, the exchange rate in Sana’a the economy. Households, anticipating further price moved only slightly from YER 529 per US dollar to declines, may postpone spending on non-essen- YER 537 per US dollar during the same period. This tial goods and services, leading to decreased over- rate is nearly fixed by the CBY-Sana’a and does not all consumption. Simultaneously, businesses may reflect underlying market dynamics.39 Inflation data reduce investment due to lower expected returns and for Houthi-controlled areas became unavailable after uncertainty about future price levels, as falling prices July due to reporting challenges, leaving only par- tial insights for the year. However, available data until 38 According to JMMI data and World Bank staff calculations. June indicates significant deflation in the first half of 39 https://sanaacenter.org/the-yemen-review/april-june-2024​ 2024. Given extensive price controls and limited data /22888. Inflation Rose in IRG-Controlled FIGURE 2.12 •  FIGURE 2.13 • Exchange Rates Continued to Areas Diverge Price trends across Yemen (Index, Base = 100 in Jan. 2021) Exchange rate across Yemen (YER per US$) 300 1,400 200 900 100 0 400 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22 Oct-22 Feb-23 Jun-23 Oct-23 Feb-24 Jun-24 Oct-24 IRG Houthi Aden Sana'a Source: REACH JMMI and WB staff calculations. Sources: Telegram Exchange Market Group and WB Staff calculations. 14 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS diminish profit margins and make new investments amid a worsening currency crisis. In November less attractive. 2024, allegations of large-scale hard currency smug- gling through Aden International Airport triggered public outcry, despite firm denials from CBY-Aden. Financial Sector To strengthen oversight, the CBY launched several reforms in December, including an electronic licens- A wave of international sanctions in late 2024 ing system for money exchange companies and the further isolated Houthi financial networks and rollout of the International Bank Account Number intensified domestic banking stress in the north. (IBAN) system.41 These efforts are meant to curb U.S. sanctions in October targeted arms-smuggling speculation, improve financial transparency, and align routes spanning Yemen, Iran, and Oman, followed by with international standards. However, the Houthi renewed UN measures in November and additional movement blocked IBAN implementation in areas U.S. sanctions on entities involved in illicit Iranian oil under its control, further entrenching financial sector trade. Furthermore, in December, Canada designated fragmentation. the Houthi movement as a terrorist group, compound- ing their financial isolation. Domestically, liquidity pres- sures deepened—particularly at the Internal Bank of Yemen (IBY), the largest private holder of public debt— 40 https://moit.gov.ye/ar/sdwr-qanwn-bshan-alalyt-alastthnay​ which began struggling to meet short-term liabilities. yt-almwqtt-ldm-fatwrt-mrtbat-mwzfy-aldwlt-whl-mshklt-sghar. In response, the Houthi movement enacted the Law 41 IBAN is an internationally standardized method for identi- on the Temporary Exceptional Mechanism to support fying bank accounts, designed to streamline cross-border salary payments and small depositors, aiming to inject transactions and minimize errors. Preparations for the IBAN system began last April, including consultations with liquidity and ease banking sector strains in Sana’a.40 local banks, with CBY-Aden acknowledging support from In IRG-controlled areas, the CBY in Aden the United States Agency for International Development faced rising political and economic pressure (USAID). Recent Economic Developments22 15 Selected Economic Indicators (2020–2024) TABLE 1.1 •    2020 2021 2022 2023 2024 Real Sector (Annual percentage change) Real GDP (8.5) (1.0) 1.5 (2.0) (1.5) Real GDP per Capita (11.1) (3.7) (1.4) (4.9) (4.4) Money and Prices (Annual percentage change, unless stated otherwise) Consumer Prices 21.7 31.5 29.5 0.9 30.4 Base Money 13.3 13.7 4.4 (10.0) 6.9 Exchange rate (YER per US$, average) Aden 782 1,036 1,125 1,376 1,823 Sana'a 604 600 573 536 535 Exchange rate (YER per US$, eop) Aden 680 999 1,200 1,540 2,065 Sana'a 585 601 561 529 537 IRG’s Finances a (In percent of GDP) Total Revenues and grants 6.2 6.8 8.9 6.3 6.4 Commodity Revenues 2.2 2.0 4.2 1.0 — Taxes on International Trade 0.8 1.0 0.9 0.8 0.4 Other Taxes 2.0 2.6 2.2 2.3 1.7 Grants 0.1 0.6 1.1 1.8 3.9 Other Revenues 1.1 0.7 0.6 0.5 0.4 Total Expenditures 10.6 8.2 12.2 13.6 8.9 Current Expenditures 10.3 7.8 12.0 13.3 8.7 Capital Expenditures 0.3 0.4 0.2 0.3 0.2 Overall Fiscal Balance (4.5) (1.4) (3.2) (7.2) (2.5) Financing 4.5 1.4 3.2 7.2 2.5 External (net) (0.3) (0.2) (0.4) (0.7) (0.6) Domestic 4.8 1.6 3.6 8.0 3.1 General Government Debt 104.8 93.6 77.9 112.4 94.8 External 44.4 46.0 38.6 59.6 51.0 Domestic 60.4 47.6 39.3 52.8 43.9 External sector b (In percent of GDP) Current Account Balance (18.3) (9.9) (13.5) (16.0) (18.0) Capital Account Balance 0 0 0 0 0 Financial Account Balance (excl. reserves) 0.3 (3.2) (0.9) (5.4) (0.1) Net Errors and Omissions 22.0 3.0 14.2 8.6 15.7 Other memo items GDP nominal in US$ (millions) 20,220 19,394 3,534 16,794 17,580 Gross Reserves in US$ (millions) 970 1,688 1,307 1,638 1,250 Source: Central Bank of Yemen Aden, Ministry of Finance, ACAPS YETI, REACH JMMI, and World Bank staff estimates. a The fiscal figures only reflect the fiscal position of IRG and do not encompass areas controlled by Houthi movement. b The external sector figures reflect external accounts for the whole of Yemen. 16 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS 3 OUTLOOK AND RISKS 42 Outlook tory of global trade policy will be a key determinant of whether these forecasts materialize. The macroeconomic outlook for the MENA region In Yemen, the economic outlook for 2025 remains challenging, with considerable uncer- also remains bleak, with both domestic and exter- tainty clouding economic forecasts.43 Growth in nal challenges expected to deepen the country’s the region has been sluggish, but it is expected to economic distress. Real GDP is projected to con- pick up in 2025. In 2024, MENA’s economy grew by tract by 1.5 percent, while the decline in nominal a modest 1.9 percent, roughly mirroring the pace of GDP per capita is expected to be even more severe, 2023. Real GDP is projected to increase to 2.6 per- at 19 percent (Figure 3.1). The combination of inter- cent in 2025. The region’s oil exporters are likely to nal instability and growing external pressures threat- benefit from a gradual rise in oil production, while oil ens to further undermine economic activity and living importers could see gains from strong private con- conditions. sumption and easing inflation. However, these fore- Domestic economic conditions are casts are subject to significant uncertainty. Risks expected to remain fragile. In IRG-controlled areas, stemming from global policy uncertainty, subdued the ongoing Houthi blockade on oil exports, coupled global demand, volatility in oil markets, and regional with the absence of a clear path to lasting peace and fragility could undermine the expected recovery. A security, is expected to keep public finances and decline in global demand could reduce oil export external accounts under significant strain. Oil produc- revenues, putting pressure on the fiscal and external tion is projected to remain stagnant in 2025 for a sec- accounts of oil exporters. Conversely, while oil import- ond consecutive year, assuming the current conflict ers may benefit from lower oil prices, a decline in remittances, combined with declining consumer con- 42 This section covers the economic outlook and forecasts for fidence and investor sentiment, could lead to capital 2025. outflows, straining their external balances. The trajec- 43 World Bank’s April 2025 MENA Economic Update. 17 FIGURE 3.1 • GDP Per Capita Is Expected to restrictions on cash withdrawals and limited access Continue Decreasing to funds stifling both local consumption and business GDP per capita (annual growth, percent) activity. The economic divide between the two zones is likely to widen further as diverging monetary poli- 15 cies drive an increasing disparity between the Aden and Sana’a exchange rates. 5 The U.S. decision, confirmed on March 4, 2025, to designate the Houthi movement as a FTO –5 is expected to carry implications for Yemen’s econ- omy. The designation upgraded the group’s prior sta- –15 tus as a Specially Designated Global Terrorists (SDGT) and led the Office of Foreign Assets Control (OFAC) to –25 2021 2022 2023 2024 2025 revise its licensing framework.44 It has introduced new GDP per capita growth (annual %, nomnal US$) compliance requirements that are already impacting GDP per capita growth (annual %, real) the banking sector. While general licenses have been issued, operational challenges and uncertainty are Source: Yemeni authorities; WB and IMF staff estimations. expected to complicate aid delivery and hinder remit- tance flows; trade and import activity could also face conditions continue, thereby precluding oil exports disruptions (see Box 3.1). in IRG-controlled areas from resuming (Figure 3.2). Reductions in donor and UN funding are Inflation is likely to persist, driven by currency depre- projected to significantly strain Yemen’s precar- ciation in the Aden market, eroding purchasing power ious economic conditions. These cuts—driven by and dampening household consumption. At the same growing concerns over Houthi detentions of human- time, fuel shortages are also expected to continue, itarian staff—are expected to significantly affect leading to electricity blackouts and limited power sup- the country’s economic stability, as aid currently ply, which will disrupt essential services and constrain accounts for around 25 percent of the Yemen’s GDP. production capacity. In Houthi-controlled areas, acute As Yemen’s second-largest ODA donor, the U.S. pro- liquidity shortages are expected to continue, with vides over 90 percent of its support as humanitarian aid. In 2023, official U.S. assistance to Yemen totaled US$820 million—nearly one-fifth of Yemen’s total ODA FIGURE 3.2 • Oil Production Is Expected to (Figure 3.3). Yemen is also the fifth-largest recipient Stagnate of U.S. aid in the Middle East and sixth among low- income countries.45 Oil production (in thousands of barrels/day) 160 140 44 These amendments include: (1) GL 25A – Authorizes the 120 delivery and offloading of refined petroleum in Yemen until April 4, 2025, provided it was loaded before March 100 5. However, refined petroleum products are now excluded 80 from permitted imports and exports via Yemeni ports and 60 airports; (2) GL 23A – Revokes prior authorization for tele- communications transactions, now limiting them to activities 40 within Yemen involving the Houthis; (3) GL 22A – Authorizes 20 transactions related to agricultural commodities, medicine, and medical devices; (4) GL 24A – Permits noncommercial, 0 personal remittances; (5) GL 28A – Allows activities related 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 to third-country diplomatic missions. 45 https://foreignassistance.gov/cd/yemen/2023/disbursem​ Source: Yemeni authorities; WB and IMF staff calculations. ents/0. 18 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS BOX 3.1. IMPACTS OF FTO DESIGNATION ON YEMEN’S ECONOMY The U.S. designation of the Houthi movement as a FTO is already impacting Yemen’s banking sector, particularly in Houthi-controlled areas. In January 2025, the Yemen Kuwait Bank (YKB) was sanctioned by the U.S. Treasury for allegedly facilitating financial activities linked to the Houthi movement.a On April 17, the IBY became the second major bank in Sana’a to be sanctioned, with measures also applying to its leadership over similar allegations. Since January, over US$30 million held by UN agencies and local implementing partners in IBY accounts has been frozen, with recovery now seen as unlikely. Concurrently, shortages of U.S. dollars and old Yemeni rial notes are becoming more acute in Houthi-controlled areas, while the Central Bank in Sana’a has imposed new currency controls to curb speculation. In response to these challenges, some residents and businesses in northern Yemen are exploring alternative financial solutions, including decentralized finance (DeFi), to navigate banking restrictions. In addition, the CBY in Aden has encouraged banks headquartered in Sana’a to relocate to IRG-controlled areas as a mitigation measure. As of March 15, eight banks have informed the CBY in Aden of plans to relocate, citing operational challenges.b Several institutions have begun the relocation process, though approvals are still pending. In turn, the CBY in Sana’a has required these banks to settle all local liabilities before moving. While general licenses have been issued, operational challenges and uncertainty are expected to complicate aid delivery and hinder remittance flows. Although general licenses allow for key activities, legal and operational uncertainties could delay or complicate aid deliver. Depending on how implementation evolves, the impact could range from tighter operating conditions to more severe disruptions. In a worst-case scenario, delays in payment processing for essentials such as rent and utilities could affect implementing partners’ operations. Past aid cuts—such as the World Food Programme’s 2020 reductions that increased food insecurity by 15 percent—illustrate the risks. Remittances, accounting for 38.6 percent of GDP in 2024, may also be affected. While personal transfers are generally allowed under the licencing regime, compliance risks may divert flows to informal channels, reducing transparency and oversight. In addition, the overall uncertainty may discourage diaspora investment and constrain external inflows. Trade and import activity could also face disruptions, particularly for essential goods. Yemen’s dependence on food and fuel imports makes it vulnerable to supply shocks. Importers, banks, and shipping companies may incur higher insurance premiums, compliance costs, and logistical delays. Hodeida—the country’s busiest port—is particularly at risk, with banks potentially refusing to process transactions linked to it. Although rerouting through Aden and Mukalla is possible, such shifts could raise transports costs, lead to delays, and subject goods to double taxation. However, they may increase customs revenues for the IRG, especially on oil imports, as new U.S. fuel sanctions—effective April 4,2025 —ban petroleum deliveries via Houthi-controlled ports.c On April 28, the U.S. sanctioned several shipping firms accused of transporting oil for the Houthis, targeting both smuggling routes and informal financial channels. In response, the Houthi movement may impose additional road taxes, further burdening businesses and households. They could also block fuel deliveries from IRG-controlled ports, potentially triggering shortages similar to those experienced during the 2017–18 closures of Hodeida and Ras Issa ports. Source: World Bank. a On January 17, 2025, the U.S. sanctioned YKB for allegedly facilitating financial activities linked to the Houthi movement: https://ofac.treasury.gov/recent- actions/20250117. b https://english.cby-ye.com/news/187. c Past disruptions—such as the Hodeida offensive in 2018, conflict-induced port disruptions from 2019 to 2022, and the end of the UN-sponsored truce in 2022—redirected oil and fuel imports toward IRG-controlled ports. Specifically, during such events, oil imports through Houthi-controlled Red Sea ports declined by 36.5 percent, while imports at IRG-controlled ports increased correspondingly. Risks shortages, rising import costs, and further declines in economic activity. The effects of the FTO designation Risks remain heavily tilted to the downside, with could prove more significant than initially anticipated, the potential to further destabilize Yemen’s fragile particularly if they prompt retaliatory actions by the economy. Regional military escalation could disrupt Houthi movement. Meanwhile, a deepening global trade routes, drive up shipping costs, and impair port trade war could exert additional strain on Yemen’s operations, particularly in Houthi-controlled areas. import-dependent economy. Lastly, renewed instabil- The broader impact may include increased supply ity in the banking sector—similar to the tensions seen Outlook and Risks42 19 FIGURE 3.3 • The United States are One of the Largest ODA Donors to Yemen ODA disbursements (millions of US$) 10,000 8,000 6,000 4,000 2,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 United States Germany United Arab Emirates Multilaterals organisations Other non DAC, including KSA Other DAC Total Source: OECD. in 2024—could re-emerge, exacerbating already dire designed to restore fiscal stability, enhance revenue economic and social conditions. collection, and lessen Yemen’s dependence on exter- Overall, Yemen’s future depends on its abil- nal assistance amidst economic shocks, which have ity to secure lasting peace, rebuild, and implement been worsened by the Houthi blockade on oil exports.47 critical reforms—overcoming the current crisis and This comprehensive strategy prioritizes strengthening establishing the foundations for a unified, prosper- public financial management and reforming the bank- ous future for all Yemenis. Achieving a lasting truce ing sector to foster sustainable growth and improve or lasting peace agreement could pave the way for the delivery of essential services such as electricity. rapid economic recovery, driven initially by the recov- Ultimately, these reforms aim to bolster economic resil- ery of internal transport and trade from a low base, ience and alleviate the humanitarian consequences resulting in lower costs and increased employment of ongoing fiscal pressures. The Government’s near- and incomes. With additional external financial assis- term stabilization efforts are complemented by two tance and reconstruction efforts supported by develop- distinct economic frameworks, each offering different ment partners, along with post-conflict reforms, Yemen approaches and timeframes for Yemen’s recovery.48 could achieve accelerated and sustained growth within the short to medium term. This growth would be driven by a swift rebound in domestic transportation, trade, 46 World Bank. (2023). Yemen Country Economic Memoran- financial inflows, and reconstruction, and recovery of dum: Glimmers of Hope in Dark Times. Washington, D.C: World Bank. public services. Such efforts are essential for overcom- 47 Barran Press 2024; Yemen TV 2024. ing the current crisis and laying the foundations for a 48 (1) The AMF economic reform program complements the unified and prosperous future for all Yemenis.46 Government’s stabilization efforts with a focus on currency, The IRG’s economic reform plan, announced financial governance, and resilience, ultimately seeking to in December 2024, marks a positive step toward improve living conditions and address conflict challenges; and (2) further supporting these efforts, ESCWA is devel- addressing medium-term economic imbalances oping a nationally owned vision for Yemen’s long-term and reforming the country. The Government’s Plan recovery and sustainable development through a technical for Economic Developments and Urgent Priorities is dialogue platform. 20 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS 4 UNLOCKING YEMEN’S PEACE DIVIDEND This chapter outlines three illustrative economic sce- of military inertia, or temporary truces and ceasefires narios, drawn from the Yemen Country Economic that fall short of a lasting political settlement. In con- Memorandum, intended to inform recovery planning trast, the “lasting peace” scenario imagines a political and policy dialogue. These are not projections, nor breakthrough that leads to the emergence of either do they represent positions on the current political or a centralized or decentralized state authority, paving security dynamics. the way for recovery. While the CEM does not propose it, a third possibility, the “escalation” scenario involv- ing heightened political or economic tensions, could The Economic Advantages of see the Yemen conflict worsening, further destabiliz- Achieving Lasting Peace in Yemen49 ing the nation. Each scenario carries profound impli- cations for political and macroeconomic stability, Three possible futures investment and consumption patterns, and the level of international aid and grant support—all of which are Yemen’s future remains uncertain, but scenario crucial determinants of Yemen’s future growth.50 analysis can help envision a lasting, peaceful, and prosperous future by assessing the potential eco- 49 The concept of Lasting Peace, drawn from the Yemen Coun- nomic and social outcomes of achieving peace try Economic Memorandum (CEM, July 2023), emphasizes versus continuing the current conflict. The World the need to go beyond a formal peace agreement to ensure Bank’s Yemen CEM examines two contrasting sce- durable and sustainable peace—one that supports inclusive, narios: “lasting peace” and “status quo”. The analysis broad-based growth once peace is achieved. provides a broad sense of the political, international, 50 The growth projections for the “Peace” and “Status quo” sce- narios are grounded in the analytical work from the CEM. For and macroeconomic context across these scenar- detailed information on the assumptions and methodology, ios. The “status quo” scenario envisions a continua- please refer to the CEM. The projections for the “Escala- tion of internal violent conflict, punctuated by periods tion and Intensification” scenario were calculated using the 21 In a “lasting peace” scenario, Yemen In a vision of escalating conflict and intensi- embarks on a transformative journey toward high fying hostilities, Yemen faces a future of sharp eco- growth and stability. With a comprehensive settle- nomic decline and deepening instability. As political ment achieved and fully implemented in Yemen, the or economic tensions worsen, internal violence could physical and economic barriers dividing the coun- erupt into full-scale conflict, with further fragmentation try are dismantled. The free movement of people of the country and involvement from external actors. and goods is restored, leading to the reintegration of International development financing and economic aid Yemen’s economic space, with trade, finance, and would shrink dramatically, shifting almost entirely to transport networks recovering across the national terri- emergency humanitarian relief, with minimal prospects tory. International support shifts from short-term emer- for long-term development assistance. Public and pri- gency aid to a focus on reconstruction, rebuilding key vate sector investment would plummet, restricted to transport routes, restoring critical infrastructure, and micro and small enterprises providing only the most providing long-term development assistance. Lasting basic services such as water, energy, and food, with no peace and security attract a surge of public and pri- FDI. A decline in both oil revenues and customs reve- vate sector investments, including increased foreign nues due to reduced imports would further widen the direct investment (FDI), as lower trade and transport fiscal deficit, pushing the country deeper into debt. costs create a favorable environment for business. GDP growth would contract by an estimated 2 percent Expanded oil and gas production and exports further annually, and per capita GDP would fall by a staggering fuel economic growth, facilitating fiscal consolidation, 4 percent each year. This downward spiral would not and reducing the debt-to-GDP ratio. Over time, exter- only exacerbate conflict conditions but also heighten the nal arrears are cleared, debt is restructured, and fiscal risk of famine, particularly in the most vulnerable areas. space is expanded to support social and infrastruc- ture development. Under this scenario, Yemen’s GDP Significant Lasting Peace Dividends vs grows steadily, averaging 5 percent annually between Steep Costs of War 2025 and 2040, fostering greater economic and social stability. Such rapid recoveries have been recorded The comparison of these three pathways under- in many instances of post-war reconstruction when it scores the critical importance of lasting peace was underpinned by a durable lasting peace.51 for Yemen’s economic and social recovery, offer- If Yemen remains in the current “status ing substantial economic dividends. The stark con- quo”, the country faces a future of modest-to- trast between the scenarios emphasizes the immense moderate-growth. The ongoing conflict, without a cost of war under the “escalation” scenario, contrasted political settlement, keeps the country in a state of with the significant benefits of full “lasting peace.” While near constant instability. International support contin- the status quo scenario provides only marginal poten- ues to focus primarily on humanitarian relief and basic tial for growth, the lasting peace and recovery scenario services, with few reforms needed to foster long-term development. Financing difficulties and the lack of fis- average real growth rate observed since the conflict began cal reforms stifle growth, with limited fiscal space and (2017–2023), excluding outliers from the immediate post- an impaired banking sector restricting capital expen- conflict years (2015: –28.0 percent and 2016: –9.4 percent). 51 Economic reconstruction in Western, Eastern and Southern ditures. Public and private sector investment remains Europe following the devastation of the World War II pro- stagnant, mostly limited to small and medium-sized vides an important history lesson. Following hundreds of local companies, with minimal FDI. This financial con- years of intermittent wars, Germany and France agreed on straint results in anemic economic growth of about a durable peace and cement it by a joint project on steel 2 percent, leaving the economy fragile and vulnera- industry, followed by substantially expanded economic, for- eign policy, and military collaboration that ultimately led to ble. With population growth unchanged, per capita the Franco-German Treaty Elisee in 1963, and the creation growth hovers around or just above zero, failing to lift of the European Economic Community on November 1, living standards or alleviate poverty. 1993 in the Maastricht Treaty. 22 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS projects an annual average growth rate of 5 percent eted approach—one that combines short-term mea- over the next 15 years, compared to an annual 2 per- sures to support lasting peace and stabilize the cent decline in the escalation scenario (Figure 4.1). immediate environment, medium-term measures to If the conflict continues until 2040, Yemen’s restart economic growth and rebuild state functions, human development could regress by 50 years. and long-term strategies to ensure sustained devel- Under the “escalation” scenario, real GDP by 2040 opment and resilience. would fall back to its 1990 level, erasing five decades of progress. In the status quo scenario, GDP would Peace: A Political Choice only return to its pre-war level by 2040, 25 years after the conflict began. However, under the lasting peace Yemen’s prospects for peace and economic and recovery scenario, GDP could recover by 2035. recovery ultimately rest on a political choice. As By 2040, the lasting peace scenario projects that Stefan Dercon argues in Gambling on Development Yemen’s real GDP could be more than three times (2022), development takeoffs require political elites to that of the escalation scenario and 50 percent higher make a deliberate commitment—or “gamble”—to pri- than the status quo (Figure 4.2). oritize national development over factional control or rent-seeking. Yemen’s future hinges on such a gam- ble: a shift from fragmented authority toward a shared Key Drivers Necessary to Unlock national vision backed by credible institutions. This the Lasting Peace Dividend. mirrors the insights of Acemoglu and Robinson (Why Nations Fail, 2012), who highlight the centrality of While the ultimate solution for attaining peace in inclusive political and economic institutions in sustain- Yemen will be political, the conflict also has deep eco- ing long-term prosperity. Yemen’s current dual system nomic roots and dimensions that must be addressed. of governance is rooted in exclusionary structures that Recognizing this, the UN has established an eco- inhibit recovery and deepen vulnerability. Paul Collier’s nomic track within the broader peace process, along- concept of conflict and governance traps (The Bottom side the military, security, and political roadmaps. Billion, 2007) also applies directly—Yemen’s deepen- Unlocking lasting peace dividends and effectively ing crisis reflects multiple overlapping development addressing Yemen’s challenges requires a multifac- traps that cannot be overcome without external sup- FIGURE 4.1 • Growth Projections Vary across the FIGURE 4.2 • The Cost of War in Yemen Is Massive 3 Scenarios Real GDP growth (base 100 in 1990) Real GDP and Real GDP per capita growth (mean 2025–40) 350 6% 300 4% 250 2% 200 0% 150 100 –2% 50 –4% 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 –6% Escalation Peace Status Quo Real GDP Real GDP per capita Escalation Peace Status Quo Sources: World Bank calculations. Sources: World Bank calculations. Unlocking Yemen’s Peace Dividend 23 port and internal reform. Achieving peace in Yemen public finances will support fiscal health. Addressing will thus require more than a cessation of hostilities energy costs and reducing subsidies are vital for man- between Yemeni groups; it demands a coherent insti- aging public expenditure and promoting sustainabil- tutional framework and a renewed commitment to ity. Additionally, supporting the increase of oil and gas inclusive governance. Only through such a founda- production, and establishing a robust oil and gas rev- tional political transformation can the country unlock enue management mechanism will be crucial for eco- its peace dividend and lay the groundwork for lasting nomic stabilization. development. Boosting productivity growth involves facil- itating private investment, rehabilitating the Short-Term Measures: Supporting Lasting education and health systems, and enhancing Peace and Stability infrastructure. Strengthening financial access for micro, small, and medium-sized enterprises, facilitat- Building a foundation for lasting peace and stabil- ing private investments and fostering public-private ity requires that war grievances be addressed and collaboration will drive economic growth. Reopening essential state functions be restored. Key actions and rehabilitating roads will also reduce freight costs include 1) early dismantling of all physical transport and enhance the competitiveness of local busi- and trade barriers across Yemeni national territory; nesses. Prioritizing the rehabilitation of the education 2) refraining from monetary financing of fiscal defi- and health systems will support economic activity and cits and working toward unifying the currency and the job creation. central banks to reduce economic divergence; and 3) resuming civil service salaries to support livelihoods Long-Term Measures: Ensuring Sustained and reinforce government trust. Enhancing data col- Development and Resilience lection, particularly on public debt, and securing exter- nal financing from development partners are essential For long-term resilience, Yemen needs to focus to managing arrears and sustaining critical services. on systemic changes that foster sustained devel- These measures will foster confidence among Yemenis opment. Improving trade competitiveness, increas- and international stakeholders. Developing a clear gov- ing economic inclusion, and enhancing financial ernment vision and coordinating both international and infrastructure are essential for integrating Yemen into local resource use will enhance the effectiveness of the the global economy. Promoting financial literacy and reconstruction process. A plan needs to be agreed upon inclusion, leveraging digital services, and supporting for the demobilization and disarmament of combatants cross-border finance will contribute to a more robust and their reinsertion and reintegration into the civilian economic framework. economy and society. This approach will help align Strengthening institutional infrastructure efforts and resources to stabilize and rebuild Yemen. and improving data transparency and quality are fundamental for effective governance and pol- Medium-Term Measures: Jumpstarting the icymaking. Addressing the lack of reliable macro- Economy and Rebuilding State Functions economic, financial, and sectoral data will enable more informed decisions and better resource man- Reconstruction efforts must focus on restoring agement. As Yemen progresses, these long-term macroeconomic stability and boosting produc- strategies will help build a resilient economy, ensur- tivity growth. To this end, enhancing domestic rev- ing that lasting peace dividends are not only realized enue mobilization and improving transparency in but sustained. 24 YEMEN ECONOMIC MONITOR: PERSISTENT FRAGILITY AMID RISING RISKS TABLE 4.1 • Yemen’s Priorities to Unlock and Sustain Lasting Peace Dividends Priority Area Measure Short-Term Measures: Supporting Lasting peace and Stability 1 Civil Service Salaries Resume civil service salaries to support livelihoods and reinforce government trust. 2 Trade and Transport Remove all physical transport and trade barriers across Yemen. 3 Monetary Policy Refrain from monetary financing and work towards unifying the central banks and currency to reduce divergence. 4 Data Collection Improve data collection, particularly on public debt, to manage arrears and sustain essential services. 5 External Financing Secure external financing from development partners to address arrears and support reconstruction. 6 Government Vision Develop a clear government vision and coordinate international and local resource use to enhance reconstruction effectiveness. 7 Demobilization plan Agree on a plan for the demobilization and disarmament of combatants and their reinsertion and reintegration into society. Medium-Term Measures: Jumpstarting the Economy and Rebuilding State Functions 8 Revenue Mobilization and Oil Management Enhance domestic revenue mobilization, including by increasing oil and gas production and exports, along with establishing a robust natural resource revenue management mechanism. 9 Energy Cost and Subsidy Management Address energy costs, reduce subsidies, and improve the energy mix with investments in renewable energy. 10 Infrastructure and Road Rehabilitation Reopen and rehabilitate roads to reduce freight costs and enhance competitiveness. 11 Education and Health Systems Prioritize the rehabilitation of education and health systems to support economic activity and job creation. Long-Term Measures: Ensuring Sustained Development and Resilience 12 Trade Competitiveness and Economic Inclusion Improve trade competitiveness through trade facilitation and improve economic inclusion by addressing informality. 13 Financial Access and Private Investment Strengthen financial access for businesses, facilitate private investments, and foster public- private collaboration to boost productivity and economic growth. 14 Institutional Infrastructure and Data Transparency Strengthen institutional infrastructure and improve data transparency and quality to support effective governance and policymaking. References Sana’a Center for Strategic Studies. (n.d.). Reconstruc- tion and Recovery in Yemen: Recommendations Acemoglu, D., & Robinson, J. A. (2012). Why Nations Fail: from the Sana’a Center. https://sanaacenter.org​ The Origins of Power, Prosperity, and Poverty. /publications/main-publications/7296. Crown Business. Sana’a Center for Strategic Studies. (n.d.). Restructur- Collier, P. (2007). The Bottom Billion: Why the Poorest ing Public Finances in Yemen. https://sanaac​ Countries Are Failing and What Can Be Done enter.org/publications/main-publications/8147. About It. Oxford University Press. United Nations Development Programme (UNDP). Dercon, S. (2022). Gambling on Development: Why Some (n.d.). Assessing the Impact of War in Yemen: Countries Win and Others Lose. Hurst & Company Pathways for Recovery. https://www.undp.org​ / Princeton University Press. /sites/g/files/zskgke326/files/migration/ye/Im​ International Growth Centre. (2022). Options for an pact-of-War-Report-3---QR.pdf. Economic Track of the Yemen Peace Process. World Bank. (2023). Yemen Country Economic Memoran- https://www.theigc.org/sites/default/files/2022​ dum: Glimmers of Hope in Dark Times. Washington, /01/IGC_Options-for-an-economic-track-in-Yem​en- D.C.: World Bank. Peace-Process_Final.pdf. Unlocking Yemen’s Peace Dividend 25 1818 H Street, NW Washington, DC 20433