The rial is in free fall as a state of economic confusion and public concern prevails
[Sana’a] — Yemen’s economic situation is so dire that the banking sector is suffering a severe shortage of cash that left many public sector employees without their much needed salaries just before th Eid A-Fitr holiday, which marks the end of the holy month of Ramadan and its daily fasting.
Yemen is another of the victims of the “Arab Winter” and has been caught in the grip of a brutal civil war since early last year. The capital Sana’a is controlled by Houthi militias while forces loyal to the internationally recognized government of Abd Rabbuh Mansur Hadi are based in Aden.
A general state of economic confusion and public concern prevails with the local currency in free fall against foreign currencies and the foreign-exchange reserves are continually shrinking leading to a 20 percent increase in commodity prices.
According to a World Bank report the number of the poor in Yemen increased from 12 million in April of 2015 to over 20 million at present, out of a total of 26 million Yemenis.
To the consternation of many customers the Central Bank of Yemen (CBY) closed all its branches in Sana’a and the other provinces on July 2, announcing a vacation that started the next day and has not ended so far, even though working days have resumed after the time off in celebration of the Eid.
Public sector employee, Mansur Al-Raymi, 32, a married father of four, told The Media Line he could not travel to his village to spend Eid time with his family, because he did not receive his salary for the month of June and did not receive any promise of receiving it.
The cash crisis frightened many of those who live in Houthi-controlled areas since according to some economic analysts the CBY does not have enough cash to cover upcoming salaries.
Economic analyst Ahmed Shammakh told The Media Line that one of the main reasons for the cash flow crisis is that the Yemeni market is not subject to the law of supply and demand. Most trading is done outside the official economic system. State income has dried up, most notably oil and gas sales, which used to constitute 80 percent of the state’s revenues. The foreign-exchange reserve plummeted to $1.3 billion while the foreign debt exceeds $28 billion. This has led to an almost complete absence of cash flow in the CBY because 90 percent of the money is leaving the banking sector creating a much bigger cash demand than the available supply.
Shammakh added that the emergence of the fuel and currency black markets has overpowered the fragile official economy and affected all its sectors. Regarding solutions Shammakh hopes that the Kuwait reconciliation talks succeed, which will lead to reenergizing the economy. There are some short-term solutions such as resuming gas exports if a reduced intensity of conflict allows. Otherwise, CBY will resort to printing currency without financial cover and increase interest rates to 20 or 25 percent to attract deposits to finance the state budget.
Since the Houthis took over in early 2015, the country’s income sources have dried up and foreign aid was halted creating a severe cash flow shortage. The CBY adopted a number of measures including selling bonds and treasury bills, tapping the foreign-exchange reserves, re-using bills that were destined for shredding and borrowing from commercial banks to cover monthly public sector salaries which are approximately 81 billion Yemeni rials ($400 million).
According to media reports the Houthis withdrew YER 20 billion (about $80 million) in June, which was used it to pay the salaries of the military and 100,000 members of the popular committees, the Houthi militia. The Hadi government accused the CBY of colluding with the Houthis and continuing to pay them $100 million each month to support their “war efforts.”
Sources in the banking sector estimated that 75 percent of the banknotes in circulation are unusable. The 1,000 and the 500 rial notes have practically disappeared and the CBY paid some salaries using 250 rial notes ($1).
Commercial banks are also feeling the cash squeeze and were forced to limit cash withdrawals. Some banks cut the maximum ATM withdrawal from 300,000 YER per day, ($1,200) to 70,000 YER ($280). Some customers reported being unable to withdraw cash at all with the banks citing a “shortage of funds.”
Early in 2014, Yemen’s foreign reserve was about $4.5 billion but plunged to $1.3 billion last December. The official exchange rate is now 250 YER to the dollar. Beginning in the second quarter of 2015, oil and gas exports ceased due to the fighting and imports shrunk to food items and solar power products. The Media Line attempted, repeatedly, to get an official response from CBY, but the bank refused to disclose any information to any media outlet.
However, an informed source within the bank, who spoke on condition of anonymity, told The Media Line that the bank was doing everything in its power to generate cash flow and stabilize the exchange rates, contending that it was the black market that was determining the exchange rate not the banks. The source also admitted that the bank had to close down one day earlier to avoid having to face clients and say that there wasn’t enough cash and that the bank might not be able to provide the next month’s salaries.
The same source also claimed that the Houthis are meddling in the bank’s affairs and withdrawing huge amounts of cash, which is the main reason for the current crisis.
A World Bank report indicated that the economy is under great pressure and the government deficit climbed from 5 percent of the Gross Domestic Product in 2014 to over 11.4 percent in 2015.