Economic Collapse: The Free Fall of Yemen's Economy

By: Khaled A. BaRahma

PC: Anthony Beck

Yemen's riyal crashed to 1,000 USD in the government-controlled southern capital of Aden in mid-July, the worst exchange rate since the impoverished country began battling Houthi rebels in 2014 when they seized Sana'a, its northern capital. For the Middle East's poorest country, those fears are becoming increasingly real as the prospect of famine and economic collapse rises.

Over a quarter of businesses have closed and the unemployment rate has skyrocketed to more than 55 percent. The conflict has had dramatic effects on the economic welfare of ordinary Yemenis. More than 80 percent of Yemen's citizens now depend on international aid as the cost of food and other commodities rises and important sectors of the economy, such as agriculture and banking, have been severely curtailed over the past few years. Due to the fact that Yemen's most important export sector -- oil and gas -- only produces a fraction of what it used to, Yemen's exports do not cover the country's food imports, which account for 90 percent of its food consumption.

After completing a virtual mission with the Yemeni authorities from May 24 to June 3, the International Monetary Fund (IMF) concluded that the conflict has crippled Yemen's economy, divided it, and led to an acute economic and humanitarian crisis in Yemen. As a result of COVID, remittances and revenues have declined sharply, the reserves of foreign exchange have shrunk, and budget pressures are escalating. This has only exacerbated the crisis. This resulted in a rapid devaluation of the exchange rate and a rise in food prices.

There is no doubt that the beleaguered country, which is currently ruled by three governments — one led by Mohammed al-Houthi in the north and one led by the internationally recognized Hadi government, In the south of the country, it controlled initially under its leader Aidarous al-Zubaidi — It has been declared by the United Nations (UN) that the country is facing the world's worst humanitarian. UNICEF estimates that close to 2.3 million children in Yemen under the age of five will suffer from acute malnutrition in 2018, including over 400,000 who will have severe acute malnutrition and could die without immediate treatment. Aid organizations estimate that about 80 percent of the population needs humanitarian assistance.

The World Food Programme (WFP) head of research, Tobias Flaemig, reports that people are having to survive on just one meal each day. The UN's World Food Programme (WFP), meanwhile, estimates that more than five million Yemenis are on the edge of famine. Yet, due to the ongoing conflict, Flaemig says there is not yet enough evidence of food insecurity, malnutrition, and mortality to declare a famine. It is imperative that international intervention in Yemen do not wait for a formal classification. In July, Flaemig told Voice of America that "people are not going to die when a famine declaration is made and it is only when they die that the declaration is made."

Consequently, financial support from outside is essential. Indeed, Maeen Abdulmalik Saeed, the prime minister, has himself asked "brotherly nations to support Yemen urgently. In any other case, any intervention would not be able to save Yemen's economy." U.S. officials seemed to have heard the call, as they announced on August 9 that they will boost their aid contribution to Yemen by $165 million. This money will go toward providing badly needed food aid to the World Food Programme. Yemen has already benefited from 95 million Euros from the European Union this year, while the United Arab Emirates (UAE) have committed $230 million to the effort in February.

As well as addressing gaps, humanitarian agencies continue to do so. As part of its response to the COVID 19 pandemic, the United States Agency for International Development (USAID) increased support to craft SMEs which manufacture personal protection equipment and antibacterial cleaners -- so as to meet local demand and increase employment and incomes. Over 1,100 health care workers in public, private, and aid organizations were trained and placed as a result of workforce development tailored to COVID-19 preparedness and response.

The depreciation of the exchange rate, as well as the rising international food and fuel prices, will likely cause inflation to continue spiraling upward, but Yemen's balance of payments and reserves are worsening. Yemen needs to mobilize additional resources and accelerate the process of rebuilding institutions to stabilize its macroeconomic situation and support its recovery, according to the IMF following its visit to the country in June.

According to Brett Rayner, the team led by him, additional external assistance would help close the gap in financing, thereby lowering inflation and depreciation. By increasing home revenue, we'd be able to reduce our reliance on government financing. As well as meeting immediate social spending needs, the authority would be able to fund healthcare, education, and basic goods. According to the IMF, Yemen's economic prospects are dim in the near term without a rapid end to the conflict. It expects the global pandemic will have a significant impact on the country's gross domestic product (GDP), which contracted by 8.5 percent in 2021, but is projected to decline by 2 percent in 2021 due to the lack of external financing sources. Yemen's policy capacity has been weakened and fragmented due to the conflict, limiting the authorities' ability to address the crisis effectively. Due to hostilities currently raging in Yemen, millions of dollars of aid have been stolen since the beginning of the war, the Houthis often confiscates donations instead of distributing them to those in desperate need of assistance, and humanitarian aid is apparently subject to an informal tax.

Prior to Yemen starting economic stabilization or pursuing unification, a lasting ceasefire is therefore essential. As the Houthis have only become more aggressive in recent months -- setting up their own central bank and aiming for more financial independence -- the conflict seems destined to continue, especially as a fierce battle over Marib city shows little sign of non-ending anytime soon. Yemen's economy is also likely to remain in a deep crisis without an end in sight to the unrest.