Signs of the worsening crisis of the Yemeni economy have increased recently, warning that it is approaching the brink of total collapse. This may have enormous and tragic repercussions on the lives of the vast majority of Yemenis who have already been suffering from difficult living conditions for several years. This paper sheds light on the most prominent indications of the escalation of the current economic crisis in Yemen and explores its most important possible repercussions.
1) Continuous and increasing deficit in the public budget: this deficit is the result of limited government revenues against a continuous increase in its expenditures, in addition to other circumstantial factors such as the decline in revenues from exporting crude oil due to the decrease in its global average prices to nearly 40 dollars per barrel after it was 60 dollars per barrel in 2019. Many experts exclude the possibility of a significant increase in government revenues or even a relative improvement in the short term in a way that would enable covering the existing deficit. In this context, the only available option is to raise the rate of crude oil production intended for export. There are already aspirations to increase Yemen's daily production from the current 60,000 barrels to 80,000 barrels in the next few years. However, this increase will not lead to a significant increase in revenues in light of the continuing decline in oil prices and the high costs of extracting it locally as a result of widespread financial and administrative corruption in this sector.
2) The government's tendency to print more local currency: due to the increasing deficit in the public budget, in the last two months, the internationally recognized government has printed nearly 300 billion Yemeni rials (equivalent to approximately 400 million dollars) in order to fulfil its obligations and pay the salaries of employees in the public sector . The total of the new amounts printed by the government since 2018 has reached two trillion rials, an extremely large increase in the currency in circulation, especially that it was accompanied by a significant decline in the size of the hard currency reserves at the Central Bank of Yemen.
3) Depletion of the Saudi deposit in the Central Bank: the Saudi deposit, estimated at 2.2 billion dollars, has contributed to the capability of the Central Bank of Yemen to cover basic imports since mid-2018. However, the deposit appears to have neared depletion recently. Although the Kingdom of Saudi Arabia (KSA) may eventually have to offer a new deposit, that may be - as some analysts tend to believe - less than the previous amount. Therefore, it would be less than the contribution required to cover imports and other commitments, precisely at a time when the rest of the hard currency sources (remittances, aid, and export revenues) are declining significantly.
4) Decline in the volume of remittances from Yemeni workers in the Gulf countries due to the coronavirus epidemic and its economic repercussions: those transfers are the most important source of hard currency for Yemen, and contribute to supporting a large segment of Yemenis and to pumping an important amount of monetary liquidity into the underserved local market . Despite expectations about the near resumption of all commercial and economic activity in the Gulf countries recently, which means the return of Yemeni workers there to their work in a way that would enable them to send remittances to Yemen again, according to expert estimates, the resumption of economic and commercial activity in the Gulf countries is still partial. The economies of the region are currently experiencing a gradual recovery phase that is expected to take a longer time. Besides, the three months lost by labourers due to the quarantine and curfew measures have already caused the loss of a significant percentage of remittances for this year.
5) Escalation of the economic and financial crises in light of the outbreak of the coronavirus epidemic in Yemen, and the continued conflict between the Yemeni factions in the north and south: Yemen also suffers from direct and indirect economic consequences as a result of the continuing outbreak of the new coronavirus epidemic and the deterioration of the health situation in the country in general. The precautionary measures taken to confront the epidemic have led to disrupting a large percentage of economic activity and significantly reducing the labor market, in addition to the fact that fighting the epidemic required large resources that were deducted at the expense of other important relief and development projects, although the results in this regard are still not promising, and the epidemic has not reached its peak of spread yet, according to the estimation of many humanitarian organizations operating in Yemen.
On the other hand, the ongoing conflict between the political protagonists has in turn had serious repercussions on the general economic situation. The recent escalation of the dispute between the government of President Hadi and the Houthi group regarding the collection of the fees for imported oil derivatives led to the emergence of a stifling crisis in derivatives within the areas controlled by the group for more than two months. The conflict between President Hadi's government and the Transitional Council has also entered a new stage after the Council declared “self-administration” in south Yemen, before it retreated from this step in light of the recent agreement on a mechanism to accelerate the implementation of the Riyadh Agreement.
Based on previous indicators and data, it can be said that the preludes to a new, deeper and more painful economic crisis in Yemen are already in place. The catastrophic repercussions of that crisis may drive the country's economy to the brink of complete collapse in case the current facts last for a longer time or follow an upward trend that cannot be curbed or controlled. The new printed amounts of the local currency are without a cover; the Saudi deposit is near depletion; the volume of transfers from Yemeni workers in the Gulf states has decreased; the macroeconomic crisis has exacerbated by the repercussions of the coronavirus epidemic; divisions have increased as a result of the violent conflict between the local powers in the north and south. All this will inevitably lead to the widening of the large gap that already exists in the trade balance in favour of imports, thus leading to the decline of the Yemeni rial exchange rates to new and unprecedented levels.
The indicators of this decline began to appear after the exchange rate fell over the past few days to the range of 750-760 Yemeni rials against the dollar. While the Central Bank of Yemen attempted to intervene to reduce the level of this decline, put the blame on currency speculators and exchange bureaus, and took strict measures against them, this attempt was unsuccessful because this decline is associated with the root factors referred to in the paper and not the daily dealings that are often of marginal impact.
While the government's continued failure to pay the salaries of employees in the public sector will have more serious repercussions on their living conditions and on the activity of the local market as a whole, the government's resort to printing new amounts of local currency to pay the salaries without obtaining new revenues in hard currency will lead to an increase in the inflation level and the decline of the rial's exchange rate. The country may even enter into an “inflationary spiral” that could quickly develop into an overall economic collapse similar to what happened in other countries (Venezuela, for example).
In general, the most prominent potential repercussions of this anticipated economic crisis can be summarized as follows:
The available indicators mark the preludes of a new, deeper and more painful economic crisis in Yemen that is already in place. The catastrophic repercussions of that crisis may drive the Yemeni economy to the brink of complete collapse. The crisis follows an upward trend that cannot be curbed or controlled. The most important indicators are that the government continues to print more local currency without cover, the Saudi deposit is close to depletion with a diminishing possibility that it will be renewed, the volume of remittances from Yemeni workers in the Gulf countries has decreased in an unprecedented manner, and the macroeconomic crisis has exacerbated due to the repercussions of the coronavirus epidemic and the increasing divisions as a result of the violent conflict between local forces in the north and south.
 Most estimates indicate that the volume of those transfers ranges between 3 and 4 billion dollars annually. However, there are studies indicating the difficulty of determining the size of cash flows into Yemen through figures of official sources that are in fact unable to track all the methods and channels of transfer. Those studies provide larger numbers of up to 10 billion dollars per year.
 While some press reports claimed that the flow of remittances decreased by between 60 percent and 80 percent during the peak of the repercussions of the coronavirus epidemic in the Gulf countries, other sources presented more modest estimates, indicating a decline of less than 50 percent
 According to the exchange rate in circulation at the time of preparing this paper (750 riyals against one dollar), it is estimated that the national currency has lost 248 percent of its value compared to its position five years ago.
EPC | 11 Nov 2020
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