The economic crisis in Yemen has deeply infiltrated all aspects of daily life, with the capital bearing the full weight of the conflict since 2015, making it unable to withstand the multitude of challenges and pressures it faces. Consequently, this dire situation has triggered an unprecedented surge in emigration, with certain economic assessments suggesting that it may surpass 50% of the national capital base.
Amidst conflicting official statistics from internationally recognized government entities, ministries, and institutions, a troubling escalation of events across all fronts and levels has exacerbated the economic crisis's intensity.
The recent banking crisis, stemming from decisions made by the government's Central Bank in Aden - decisions which were later reversed - had far-reaching and detrimental consequences. It not only intensified the challenges within the investment sphere but also added layers of complexity to the existing national capital crisis. The economic and banking sectors were plunged into a state of deep discouragement, struggling with depleting foreign reserves and facing obstacles in the recovery of public resources. This distressing situation was further compounded by the devaluation of the local currency, a notable rise in poverty and unemployment rates, and the unauthorized outflow of financial assets, painting a bleak economic landscape.
The Duality of Monetary Policies and Decision-Making
Despite the aftermath of the recent decisions made by the Yemeni Central Bank in Aden, which some view as a final blow to capital assets, these events are just one chapter in a series of successive economic crises since the split of the Yemeni Central Bank and the establishment of two banking systems aligned with opposing factions in the conflict.
The migration of capital assets did not occur overnight but rather intensified as the economic and political situation in the country grew more complex, coupled with the division of the financial and banking systems. These adverse conditions negatively impacted the business landscape in Yemen, marked by rising taxes, extortion, and significant inflation in the prices of goods and services, creating a hostile environment for business and capital.
This had a tangible impact on capital assets and the local market, as highlighted by economic researcher Wahid Al-Fudai during an interview with "Khuyut." He emphasized that the deteriorating monetary policies between the two banks caused market confusion and disruption, a decline in investor trust in the financial system, and a notable devaluation of the local currency due to diminishing security reserves and heightened demand for hard currency.
The recent decisions taken by the Central Bank in Aden have caused a ripple of uncertainty among investors, leading to a heightened sense of unease within major commercial entities. Al-Fudai highlights that such decisions not only fail to serve the economic stability of the country but also create barriers for investors in accessing and transferring their funds. This hampers their business operations, fuels a lack of trust in the local banking system, and drives them towards relocating their assets to more stable foreign banks.
On the other hand, warnings issued by international organizations prior to the launch of the UN envoy's initiative on economic dialogue underscored the "potential catastrophic consequences" of the Central Bank's decision in Aden. They cautioned that this move could further fragment and weaken the already fragile Yemeni economy.
Additionally, multiple UN officials have voiced concerns about the grave implications of these measures on humanitarian relief efforts. The increasingly volatile banking environment has worsened the ongoing liquidity crisis and disrupted various economic activities, exacerbating the challenges faced by the country.
The Background of the Crisis: Rooted in the Onset of War
The movement of capital assets was not a sudden event but rather a gradual process that intensified as the economic and political situation in the country grew more complex. The fragmentation of the financial and banking systems had adverse effects on the business landscape in Yemen.
In this context, businessman Omar Ayedh, an investor active in the tourism and gold sectors, elaborates to "Khuyut" on the challenges faced by private sector individuals since the commencement of the war and the mounting pressures they have had to endure. He recounts the economic blockade imposed by the war, noting that conditions deteriorated following the Houthi takeover and the eruption of conflict in 2015. The firm grip exerted on traders, investors, and national capital by the authorities in Sanaa intensified significantly.
Additionally, Ayedh underscores a crucial issue in this scenario, identifying the escalating taxes, extortion, substantial inflation in prices of goods and services, exchange rate volatility, scarcity of foreign currency in the local market, and the complexities surrounding financial transactions as major factors driving businesses and capital away. These challenges compelled him to relocate the majority of his business operations overseas.
The obstacles encountered by businessmen and investors had far-reaching implications beyond their own spheres, extending to impact all individuals within the private sector, as highlighted by Ayedh. He lamented that 300 employees under his purview faced the harsh reality of losing their livelihoods amidst the challenging living conditions endured by the Yemeni populace. This unfortunate situation underscores the interconnectedness of economic hardships, where the repercussions of business struggles reverberate throughout the broader community, exacerbating the already dire circumstances faced by many Yemenis.
In another story shared with "Khuyut," Zainab Mohammed portrayed a harsh reality resulting from diminishing investments, the deterioration of economic activities, and their migration abroad. She recounted her struggles after losing her sole source of income following the closure of a factory in the province of Al Hodeida. Through her narrative, she revealed the profound hardships she and her children encountered after the loss of her husband in the war and her only source of income which compelled her to take on jobs in house cleaning and street vending, a stark contrast to their previous comfort when she was employed at the factory. "Life became more challenging for me and my children after losing their father in the war and my only source of income. This compelled me to work in house cleaning and selling on the streets, after our situation was comfortable when I worked in the factory." She said.
Financial Assets Drainage in Yemen
Numerous companies, agencies, commercial entities, and both local and foreign investment centers have gradually departed from Yemen since the onset of the conflict. Traders and high-ranking officials hurriedly repatriated their financial assets, estimated to be in the billions of dollars. However, a banking accountant - who chose to remain anonymous - affirmed to "Khuyut" that these circulating figures are unverifiable, potentially appearing inflated or deflated due to various factors, primarily stemming from the inefficiencies within statistical bodies and the exfiltration of funds outside the financial and banking framework, impeding the acquisition of precise data.
In the aftermath, medium and small-scale enterprises bore a heavy brunt, compounded by the widespread phenomenon of displacement that forced the closure of a multitude of businesses. The annual economic assessment of Yemen by the World Bank underscores the departure of approximately 35 oil companies, coinciding with a significant 54% downturn in per capita GDP from the years 2015 to 2023. This economic downturn not only disrupted the business landscape but also exacerbated the challenges faced by enterprises of varying sizes, painting a bleak picture of the economic struggles gripping the nation during this period.
The work environment has transformed into a challenging, perilous, and unstable setting in the absence of state institutions that should uphold security, stability, and enforce the necessary laws safeguarding investments and financial assets. This situation is compounded by a significant divide - marked by dual banking systems and a central bank with conflicting leaderships and exchange rates - within the private sector at large. Given these circumstances, it is only logical for the private sector to seek out a secure haven to ensure the continuity of its operations.
In this context, Al-Fudai emphasizes that the economic downturn resulting from armed conflicts and the devastation of infrastructure has adversely affected the investment climate. The ongoing war and persistent conflict have created an unstable and insecure environment for business ventures, leading many investors to transfer their funds overseas. Moreover, the imposition of restrictions on financial and banking transactions has hindered investors from effectively managing funds within the country. Administrative corruption has further eroded trust in local and governmental institutions.
Furthermore, the Houthi policies in their governed territories have intensified the pressure on financial resources, notably through the mandatory utilization of the Hodeida port and the significant 100% rise in customs tariffs. Al-Fudai underscores that enforcing traders to engage with the Hodeida port amplifies logistical costs, bureaucratic procedures, and import duties, all exacerbated by the Houthis' disregard for commercial and financial regulations.
In a recent report published by the World Bank towards the end of June, a concerning observation was made regarding the impact of the Red Sea strikes. These attacks have triggered a surge in shipping costs and insurance premiums, exerting additional financial strain on businessmen and investors alike. The increased expenses incurred as a result of these destabilizing events pose significant challenges to the business community, adding yet another layer of complexity to the economic landscape.
The solution lies in ending the conflict
The crux of the matter lies in resolving the ongoing conflict. The outflow of capital has resulted in diminished local investments, culminating in economic standstill, heightened unemployment rates, and exacerbated levels of poverty. The disruption of salaries and the soaring cost of living have further deteriorated living conditions, pushing many individuals to depend on external remittances for family sustenance.
Ali Essa, an investor, shared with "Khuyut" that the business landscape has evolved into a challenging, precarious, and unstable environment due to the lack of robust state institutions ensuring security, stability, and the enforcement of laws protecting investments and assets. He underscored the profound impacts of the existing fragmentation – characterized by dual banking systems, a central bank marred by conflicting leadership, and volatile exchange rates – on the wider private sector. Given these complexities, it is understandable that businesses are compelled to seek a secure setting in order to sustain their operations and navigate the turbulent economic climate.
Economic experts stress the crucial importance of prioritizing initiatives to fortify security and stability, put an end to armed conflicts, achieve political concord, and enhance infrastructure for reconstruction and development to facilitate commercial endeavors in Yemen. By addressing these fundamental aspects, the country can create a conducive environment for economic growth and attract investments, both domestic and foreign. Combatting corruption and implementing transparent and equitable policies are essential steps to rebuild trust in governmental institutions and stimulate economic activities. Furthermore, providing legal protections and incentives for investors will promote a stable and predictable business environment, encouraging long-term investments that can contribute to sustainable economic development. Through these concerted efforts and strategic reforms, Yemen can chart a path towards economic recovery and advancement, fostering a prosperous future for its people and the nation as a whole.
In conjunction with the imperative task of harmonizing monetary and fiscal policies among diverse regions to fortify banking system stability, the Fouda'i underscores the critical need for the internationally acknowledged government to diligently pursue all-encompassing solutions to terminate the conflict and foster economic stability. Additionally, a heightened emphasis on bolstering international collaboration to secure essential backing for economic reconstruction and drive both domestic and foreign investments is paramount. Genuine economic advancement and an inviting investment ambiance hinge upon conflict resolution and the establishment of enduring stability within the nation.
