Yemen’s Economy in Crash Landing Mode: Implications and Options

EPC | 23 Aug 2021

Yemen has plunged into a complex, severe, and multifaceted economic crisis driven by widespread macroeconomic instability. This crisis portends that the country is on the path of a total and imminent collapse if the international community does not intervene to stop it. This precarious situation prompted the Yemeni Prime Minister, Maeen Abdul Malik, and his Foreign Minister, Ahmed Awad bin Mubarak, to appeal to "brotherly and friendly countries" to provide urgent support to rescue the economy and cushion the risks and repercussions arising from it.

This paper highlights the indicators of an imminent economic collapse in Yemen, its repercussions, and the options available to avoid such a collapse in the first place.  

An economy on the brink of collapse

Based on macroeconomic indicators[1], a cumulative and complex economic crisis that Yemen is experiencing today puts the country on the brink of a total economic collapse. Among the most important of these indicators are the following:

  • An economy in the doldrums. The real Gross Domestic Product (GDP) during the period 2014-2020 recorded a cumulative contraction of about 50%. From 2014 to 2018, it plummeted from $42.45 billion to $23.49 billion.
  • The annual growth rate of GDP declined from 7.7% in 2010 to 0.5% in April 2021. In the 2019 Global Competitiveness Report, the annual report that measures the elements of countries' economic competitiveness and their ability to grow, Yemen ranked 140 out of 141 countries. In the Doing Business 2020 report, which assesses the business and investment environment in 190 countries, Yemen ranked 187 globally, regressing from 133 in 2014.
  • Inflation jumped from 8% in 2014 to 30.6% in 2021, leading to the collapse of the national currency. The Yemeni riyal exchange rate against foreign currencies fell to unprecedented levels. In government-controlled areas, the exchange rate of the riyal slumped to more than 1,000 riyals against the US dollar. Inflation and the depreciation of the currency translated into a sharp rise in prices and a decline in commercial activities, and the unemployment rate reached 13.42% in 2020.
  • The trade balance amounted to -8,693.91 million US dollars in 2020, mainly due to a major decline in exports, especially oil and gas. Compared to 2014 figures, Yemen's oil and gas production plunged by 90 percent. In previous years, hydrocarbons accounted for 90 percent of the country's exports and a third of its GDP. According to local reports, the country's total exports have fallen by 75%, including agricultural exports, which have deteriorated by more than 70%. In the Doing Business 2020 report, Yemen ranked 188th on the Trade Across Borders Indicator. The losses resulting from the damage to foreign trade are generally estimated at about 36.285 billion US dollars.
  • Government debt to GDP reached 81.7% in 2020.
  • A severe public finance crisis. The Yemeni public budget suffers from a swelling deficit as a result of the drop in the internationally recognized government’s revenue from customs and taxes due to a deteriorating business environment (the decline in taxes and customs does not apply to the Houthi authority in Sana’a), as well as due to the slump in exports, particularly oil and gas, the revenue of which accounted for about three-quarters of the government's total income. What made matters worse was the depletion of a $2 billion Saudi deposit, which has enabled the central bank to cover basic imports since mid-2018. Undoubtedly, the public finance crisis plays a major role in accelerating the country’s drift toward an economic collapse. The budget deficit, for example, has led to a decline in government expenditure and spending on public services to unprecedented levels with which even minimal economic requirements cannot be met. Also, government investment spending is almost at a standstill, which eventually hit economic activity. On the other hand, this deficit has continued to impose inflationary pressures on the country's economy. The government finds itself facing a difficult trade-off, either stopping financing the deficit through printing money, or continuing with this policy to meet its obligations. However, the failure to meet such stressful obligations will put the government's future on the line. 

Challenges Deepening Economic Pain

It goes without saying that the conflict that has been raging in the country for years has also directly and indirectly caused the current crisis. It caused substanital damage to infrastructure, led to a severe shortage of basic production inputs, and severely restricted economic activity. In general, the war caused cumulative economic losses estimated at about 88.8 billion US dollars, bringing the economic cost of violence to about 22% of GDP (in 2019 prices).[2]

But it is not only the war. There are other factors that exacerbated the economic deterioration in the country. The Coronavirus pandemic has dealt a blow to economic activity at the level of Yemen and the world as a whole. Remittances by Yemeni expatriates, which are the main source of hard currency (estimated between 3 and 4 billion US dollars), have also tumbled. The situation is getting bleaker with a major decline in international aid provided to Yemen, including humanitarian aid.

However, much of the blame lies with the parties to the conflict for their main role in the current economic downturn. The economy and monetary policies were used as a tool of conflict, which ended up causing monetary and banking division, poor economic management, and rampant corruption. 

1. Monetary and Economic Division

From an early date, the two local warring parties, the government and the Houthis, breached an agreement to keep the economy out of the conflict, and purused policies that led to institutional and economic fragmentation, and a monetary and banking division. It has come to a state of forced economic separation between their areas of control, so that each of them has an economy that is distinct and even competing with the economy of the other party. The Houthi group has started rejecting the government's decisions and policies and taking counter and opposite decisions. This was evidenced by the group’s rejection of a decision to relocate the Central Bank of Yemen in 2016. However, things did not stop there. In December 2019, the group decided to ban the circulation of new banknotes printed by the government, under the pretext of preserving the value of the riyal and curbing inflation. The Houthis also established customs posts on the outskirts of areas just outside their control, forcing banks in their areas not to deal with the central bank in Aden when it began issuing letters of credit to import basic commodities.

These fragmented and often conflicting economic decisions and policies have shaken public finances. Revenues have been dispersed, economic activity has been disrupted, and the commercial and banking sectors have fallen into a crisis as a result of restrictions on local financial transactions, and on commercial exchanges between the two parties’ areas of control, which is confirmed by a 40% decrease in the volume of such exchanges. Ultimately, this division created two distinct macroeconomic environments and a disconcerting economic distortion. The government's policies have undermined macroeconomic stability in its areas of control. To finance a swelling budget deficit, the government has purused overdrafts from the central bank, and it has printed new banknotes without sufficient foreign exchange cover. In contrast, the value of the riyal and the inflation rate in Houthi-controlled areas remained relatively stable. But it remains not accurate to say that the credit for this is due to the actions taken by the group and its opposition to the policies of the central bank in Aden. Besides focusing on increasing revenue, the group has kept its public expenditures to such extremes that it appears as if it were an authority without obligations. The group, for example, pays state employees only half a salary every two months, and the operating expenses of state institutions are minimal, which reduced the cash circulating in the market, and thus contributed to the stability of the currency exchange rate in their areas of control.

2. Bad Macroeconomic Management

The government has not prepared any public budget, except for the year 2019. In addition to the lack of transparency, official financial activities and operations are opaque and are not subject to any oversight, review, or scrutiny. Also, much of official revenues are not deposited in government accounts with the central bank in Aden, especially oil and gas income. Government supporters justify such practices by saying that the government's situation in Aden is precarious and that it fears that its opponents in the Southern Transitional Council will seize the funds. The situation is not much different for the Houthis. Rather, they adopt authoritarian policies against the private sector and tighten the screws on it. They seemed to be working towards restructuring the economic map and building a private economy in which their supporters and symbols would control the financial and business sector. 

3. Rampant Corruption

The ongoing war provided an opportunity and cover for a state of government- and Houthis-sanctioned corruption. Indeed, a UN group of experts explicitly accused both the government and the Houthis of illegally diverting the country's economic and financial resources to achieve narrow and partisan goals. The UN group's accusations included the central bank's leadership team in Aden. In addition to imposing illegal levies on commercial activity, the Houthi decisions related to monetary policy, such as preventing the circulation of new banknotes, are not without suspicions of corruption in light of the lack of transparency about where the new confiscated banknotes go. Corruption of the Yemeni authorities in general remains an issue confirmed by the fact that Yemen is ranked 177 out of 180 countries in the 2019 Corruption Perceptions Index, a rank not much different from that in pre-war reports.

Undoubtedly, the various parties caused the current economic crisis in different ways. The fact that the recognized government was weak in the first place led, for example, to a problem in state revenue collection and opened the door to currency speculators.  On the other hand, the Houthis played a role in the liquidity and foreign exchange crisis by seizing the money in the Central Bank after their storming of Sana’a and keeping it outside the banking sector, including social security and pension funds, and also about 5 billion US dollars in foreign reserves.

Implications for an Impending Economic Crash

1. Political: Protests against the ruling class are expected to erupt in different regions of the country, further undermining an already-fragile political landscape. The economic collapse will not be a good development for any of the parties to the conflict. Rather, it will have negative consequences at various levels, but these ramifications will vary in degree and severity. The recognized government will be the most affected party, not only because it is responsible and in control of the central bank and monetary policies, but also because of its failure to pay the salaries of the army and state employees. Certainly, many parties will find in this an opportunity to escalate against the government of President Hadi, and it can even be said that this collapse will put its future on the line. In general, the government's ability to survive and withstand the expected storm will remain contingent on regional and international support.

On the other hand, the Houthis will be in a better position to deal with the consequences of any collapse. They are more cohesive given the factional nature of their group and their strong security grip that enables them to control the street. In the end, they are closer to an authority without responsibilities, and people, of course, will not revolt, for example, for salaries that they do not receive in the first place.

Although all the parties to the conflict will be in an unenviable position, and regardless of the fact that the international community will find an incentive to move and exert more pressure towards stopping the conflict, the prospect that the economic collapse will be an opportunity to forge a peace agreement that ends the conflict remains modest. On the contrary, the collapse will further establish the current balance of power in light of the fact that its expected impact will be disproportionate on the government and the Houthis.

2. Military: Military confrontations in the country are expected to escalate. The economic collapse will give the Houthis a greater incentive to escalate further because it will put their opponents in a more fragile position than it is today, and this is an opportunity that they will be keen to exploit. If resources are the reason for their frantic pursuit of control over the oil-rich Ma’rib Governorate, this collapse will make them more determined to seize the oil and gas rich areas in light of the expected decline in their revenues as a result of the collapse. 

3. Security: It is expected that the security situation will deteriorate further and that organized crime will proliferate. A part of the population will also switch to illegal activities with the country becoming a hotbed for arms smuggling, narcotics, and money laundering mafias as militias flourish and proliferate. There is no doubt that any deterioration will serve extremist groups, and the expected chaos will pose additional threats, most notably to international maritime navigation.

4. Economic: In such a situation, factories and infrastructures are expected to crash, the labor market to collapse and unemployment to rise to record-high levels. This will lead to a "chaos economy" in which the illegal economy, the shadow economy, the corruption economy, the crime economy, and the war economy come together. Any regional or international economic efforts and interventions will be more difficult and more costly.

5. Humanitarian: What is seen today as the world's worst humanitarian crisis is poised to turn into a humanitarian catastrophe. Worse, the situation may be heading towards a certain famine that international organizations and the international community have long said was looming. Humanitarian aid today is insufficient and there is a shortfall in funding of the humanitarian response plan for Yemen (it has received only 47% of the required funds). In addition to the disruption of public services such as education and health, the outbreak of epidemics that spread in the past years, such as cholera, diphtheria, measles, and dengue fever, will intensify. It may end up with a massive wave of refugees towards neighboring countries.

Possible Options to Avoid Collapse

The Yemeni government has a set of options that can be taken in the foreseeable future to stop the deterioration of the currency as a priority and the key to avoiding economic collapse. Among the most important of these options are the following:

  1. Deposit all government revenues without exception, including oil and gas revenues, in government accounts with the central bank.
  2. Transfer of any accounts of government agencies and state-owned enterprises and businesses from private banks and exchange companies to the central bank.
  3. Activate as many disrupted economic activities and institutions as possible. In this regard, it seems that the government intends to operate a number of airports and has directed the Ministry of Transport to do so.
  4. Ramp up crude oil production and resume gas exports.
  5. Use the Special Drawing Rights units of the International Monetary Fund, which were approved by the Fund at the end of last June, to enhance hard currency reserves and support the value of the national currency. It is 487 Special Drawing Units, or $691 million. According to some reports, the government held consultations with the Fund towards this end.
  6. Move at the regional and international levels, including with international financial institutions, in order to secure urgent support to avoid collapse. This support may be in cash (grants, aid, loans or deposits) or in the form of funded projects and plans, such as the project to strengthen economic resilience funded by the European Union. The government confirms that it is indeed in the process of moving on this front, and is working actively with partners.
  7. Conduct a quick audit and review of the activities and operations of the central bank.
  8. Enforce the laws and regulations governing the banking sector. This would limit currency speculation and tax evasion, and thus secure some streams of revenue for the public treasury.
  9. Cease injecting new cash without a cover. This is conditional on increasing state revenues and/or improving their collection mechanisms.
  10. Return of the entire government to the country. This would ensure the functioning of state institutions and make them more disciplined and productive.


[1] For various indicators, see: The World Bank:; World Bank: Yemen: Economic Prospects, April 2020, at:; International Monetary Fund:; Yemen’s Ministry of Planning and International Cooperation, “The Status of Yemen in International Reports and Indicators”:; Trading Economics:

[2] Institute for Economics and Peace, Global Peace Index 2020: Measuring Peace in a Complex World. Available at: 


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