Two significant World Bank reports about Yemen have been published – the Country Economic Memorandum (CEM), and Surviving in the Times of War (STW). As prospects for a permanent ceasefire or even a peace deal in Yemen look more favorable than ever since the conflict began in late-2014, our reports provide policies and recommendations for taking Yemen’s economic growth forward.
Many years of violence and conflict had plunged the already poor country into an ongoing food emergency verging on famine. Yemenis have not just been affected by open warfare but by economic warfare. Both of the abovementioned World Bank reports analyze the consequences of this economic war, highlighting the strong linkages between the macroeconomic shocks experienced since 2014 and the microeconomic setbacks to households struggling to put food on the table. In particular, both reports consider the currency crisis, one of the key economic shocks faced by Yemenis
Of all the economic challenges posed by the conflict, diverging monetary policies between the two parties, foreign-exchange flows, and monetization of fiscal deficits are among the most consequential. In 2016, the Internationally Recognized Government (IRG) moved the Central Bank of Yemen (CBY) headquarters to Aden, representing, in effect, a new institution. While the CBY retained access to markets and monetary instruments, it has lacked adequate foreign-exchange liquidity.
Meanwhile, Houthi-controlled Sanaa remained Yemen’s banking and trading center, benefiting from greater remittance inflows and foreign aid executed through the formal banking system. The Yemeni rial briefly stabilized in early 2019 following Saudi Arabia’s large deposit of hard currency at the CBY-Aden. As this deposit was gradually depleted, the Houthis announced that Sanaa would no longer accept the new IRG-printed banknotes, effectively severing monetary policy between the two areas.