The recently formed Yemeni government pursuant to the Riyadh Agreement is expected to face complex economic challenges that may paralyse its ability to fulfill the aspirations and hopes placed on it. The most important of those challenges are the significant decline in the Yemeni riyal exchange rate, and the difficulty of paying the salaries of public sector employees.
The decline of the Yemeni riyal exchange rate
Since mid-2020, the rate of decline in the local currency exchange rate has accelerated within the areas controlled by the internationally recognised government. This decline reached a new record in early December 2020, after it crossed the 900 Yemeni riyal barrier against the US dollar. This continuous decline in the exchange rate is attributable to the depletion of the Saudi deposit in the Central Bank of Yemen (CBY) and the continuation by the government to inject additional amounts of newly printed local currency into the market to cover its expenses in the light of the significant decline in its revenues, as well as to the Houthis’ decision to prevent the circulation of those newly printed cash amounts in their areas of control.
This decline has had serious repercussions for the living conditions of citizens in government-controlled areas, most importantly the increase in the prices of most imported commodities, especially the main foodstuffs, despite the fact that the CBY offers a preferential exchange rate to importers of those materials and bears heavy burdens due to the increasing difference between the market and the preferential exchange rates.
While the exchange rate has witnessed a relative improvement by returning to below the level of 800 Yemeni riyals against the US dollar after the announcement of the designation of members of the government, this level is in itself considered low compared to the beginning of 2020 when the exchange rate was at 650 riyals against the dollar.
In addition, local public opinion expresses great interest in the issue of comparing this deterioration with the situation within the areas controlled by the Houthi group, in which the exchange rate remained stable throughout 2020 at the level of 600 Yemeni riyals against the US dollar. Naturally, this comparison serves the authority of the Houthis, regardless of the real facts and factors behind this disparity between the Houthi-controlled areas and the government-controlled areas.
Given that the new government’s own resources would not be sufficient to enable it to deal with this situation, there is talk about Saudi promises to provide a new deposit to the CBY, although the manner of using this deposit would have important repercussions that should not be overlooked:
Salaries of public-sector employees
It is impossible to obtain accurate figures about the government’s revenues and expenditures. However, estimates indicate that the salaries of civil and military public sector employees range from 800 billion to 1,200 billion Yemeni riyals annually, that is, between 1 and 1.5 billion US dollars, according to the current exchange rate (800 riyals to the dollar). It is usually indicated that the decline in government revenues from exporting crude oil even as its prices fell globally has led to the government’s failure to pay the salaries of civil and military employees for most of the months of 2020 (with the exception of some areas). Indeed, it has not been able to pay the salaries and overheads of its foreign missions and embassies around the world for nearly ten months.
However, the volume of crude oil exports from Yemen is currently basically modest (between 60 thousand to 80 thousand barrels per day), and the costs of its production from local fields are high, which reduces its sales revenues. Therefore, it is difficult to rely on oil export revenues alone without other sources, regardless of expectations of a possible increase in oil prices in the coming period.
On the other hand, given the talk of a new Saudi deposit to the CBY, seeking to raise the local currency exchange rate would lead at the same time to an undesirable result, namely an increase in the size of the salary bill on the general budget, especially that most of the government revenues come from the export of crude oil (in hard currency) and not from local sources (in local currency).
In addition, the government’s continued coverage of salaries and the rest of its expenditures through inflationary sources – such as the newly printed local currency – is a dangerous trend that raises the level of inflation and exacerbates the severity and manifestations of the humanitarian and economic crises in Yemen.
 Due to the Houthi’s decision to prevent the circulation of the newly printed local currency and other factors, the exchange rate of the old banknotes has become high compared to the new ones. Since this decision has led to the movement of most of the old banknotes to the Houthi areas and the accumulation of the new notes within the government areas, the high exchange rate of the old notes became the norm In the Houthi areas, while the low exchange rate for the new notes is the one applicable in government areas.
 The variation in exchange rates between the government and Houthi regions will continue, given that the volume of the newly printed notes of the local currency far exceeds the volume of the old ones, and also given that the CBY in Aden assumes the task of covering most imports to Yemen at a time when most cash flows of the hard currency go to the Houthi-controlled areas with the largest population density. This discrepancy requires various measures to resolve it, such as canceling the circulation of the old notes.
 In an interview he gave to Asharq Al-Awsat newspaper in May 2020, the Governor of the CBY in Aden Dr. Ahmed al-Fadli indicated that the cost of producing one barrel of crude oil from local fields at the time was equivalent to its selling prices on the global market, meaning that the cost of producing a single barrel of crude oil locally ranges between 20 and 30 US dollars. This is a very high figure compared to the costs of producing oil in neighbouring countries, and indicates potential corruption, mismanagement and misplanning. See: https://aawsat.com/print/2269806
 For example, according to a scenario of improvement and a rise in the local currency exchange rate within the government-controlled areas to the level of 600 riyals TO the dollar, the total annual salaries will increase to a figure ranging between 1.3 and 2 billion US dollars (compared to 1-1.5 billion dollars according to the exchange rate of 800 riyals against the dollar).
 Expatriate Yemeni workers' remittances are the most important and largest source of hard currency flow to Yemen. Restoring the confidence of dealers in the exchange rate and convincing them to use official channels to transfer their money would give the CBY access to large hard currency stocks that can significantly contribute to alleviating its burdens.
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