Since the outbreak of the war in 2015, the Yemeni economy has been facing an unprecedented deterioration as the war continues and the country is divided into two parts. It is also experiencing constant turmoil and severe economic fluctuations. Both the authorities in Sana'a and Aden operate according to their own financial and monetary policies, without awareness or concern for any negative effects on the national economy or the livelihood of citizens. Consequently, this has accelerated the economic and living deterioration, the difficulty of stability, and the lack of ability to counteract the collapse of the financial and banking systems on both sides. Both the Aden and Sana'a authorities control the financial and monetary institutions of the state under their control and randomly practice financial and monetary policies and procedures that are not based on any correct economic methodological foundations. Therefore, the result is a continuous disturbance of the economic situation in its financial and monetary aspects, the emergence of a sharp division in the state’s financial and banking systems, and a national currency at a different exchange rate for each of the two denominations, which were distinguished from each other in the form of an “old” currency denomination that is circulated in the areas of influence of the Sana’a Authority and another “new” denomination that is circulated and tradable in the areas of influence of the Aden Authority. This led to the loss of the national currency's status as a store of value and made it not enjoy the confidence of citizens in banking exchange. Consequently, the dominance of the dollar and Saudi riyal currencies in the Yemeni monetary market and the markets for goods and services, and the decline in the value of the Yemeni riyal, weakened confidence in it as a national currency, and this led to an increase in the complications of the economic and living life of the country’s population in all Yemeni governorates. All of this calls for us to discuss the importance of working with financial and monetary policy tools, explaining methods for maintaining economic stability as follows:
First: Financial Policy Tools:
In general, it can be said that the state’s general budget is the objective framework that carries on its right and left sides “revenues and expenditures” as elements of financial policy tools that are used to counteract economic fluctuations such as recession and inflation.
In the first side, “the state’s public revenues” flowing to the state treasury from various revenue bodies with a variety of names, which can be summarized in the following main elements:
On the other side “the public expenditures”: state expenditures in their various types, which can be summarized in the following points:
All of these elements on both sides of the state’s general budget, in a free economic system such as the Yemeni economy, can be used as financial policy tools to counteract economic fluctuations. For example, if the economy has been afflicted with a state of inflation, some or all of these elements are directed towards addressing inflation by reducing public expenditures through a set of policies and procedures, such as reducing internal or external spending, or both together, as needed, and in a way that would restore the balance between supply and demand in the money market and the market for goods and services as well, to counteract inflation. However, if the economy has fallen into a state of recession, then financial policy tools are directed towards increasing public spending to move the overall demand for goods and services towards an increase in a way that achieves rebalancing the market. All of this should be done in coordination with the Central Bank so that financial policy tools combine with monetary policy tools to restore balance and stability to the economic situation. The Ministry of Finance, with all its central and local administrative components, including the Customs and Tax Administrations and the various state revenue channels, as well as its branches in the governorates, is the administrative authority to implement financial policies and procedures, as it constitutes the state’s financial apparatus according to the applicable structural and administrative organization.
The Central Bank is considered the top of the pyramid of the state's banking system, which constitutes the center of the economic cycle and plays an influential role in counteracting economic fluctuations by directing the movement of monetary policy tools in the direction that achieves counteracting economic fluctuations and maintaining economic stability.
Second: Monetary Policy Tools:
The Central Bank is considered the top of the pyramid of the state's banking system, which constitutes the center of the economic cycle and plays an influential role in countering economic fluctuations by directing the movement of monetary policy tools in the direction that achieves countering economic fluctuations and maintaining economic stability.
The most important of these tools can be explained as follows:
2-1 The legal reserve ratio: is a percentage of the capital of banks operating in the country that is legally determined and which banks are obliged to deposit in special accounts at the Central Bank. The Central Bank can control this ratio by increasing or decreasing it depending on the state of the economy and the direction in which an impact is intended to counteract the imbalance in the economic situation, such as inflation and recession. For example, in the event of inflation, the central bank raises the legal reserve ratio in order to absorb excess cash liquidity to counteract inflation and lowers this ratio when it is intended to counteract recession.
2-2 The interest rate: It is the rate that commercial banks are obligated to pay to depositors in exchange for depositing their money in savings accounts in banks to be employed in any investment frameworks that achieve commercial profits for the banks. Thus, if the economy is afflicted by a state of inflation, this percentage is raised to counteract inflation, and when the economy is afflicted by a state of recession, this percentage is reduced to counteract it.
2-3 Trading in securities “Treasury bills”: It means that the central bank issues securities “bonds” and trades them in the financial market. Therefore, in the event of inflation, the central bank, as a measure to counteract this inflation, offers these bonds for sale in exchange for an interest rate on the share in order to withdraw excess liquidity and rebalance the money market so that inflation is countered. Similarly, the central bank buys these bonds when needed as a measure to counteract the recession and achieve economic balance and stability.
These three tools, as the most important monetary policy tools, are controlled and directed by the central bank in a direction that maintains economic stability. However, it is important to realize that the central bank, alone and away from the state's financial system, cannot create the desired impact to maintain economic stability. So, in order to ensure this is achieved, the financial and banking systems—the financial represented by the Ministry of Finance and the banking represented by the Central Bank—must work together to counteract economic fluctuations and maintain economic stability using the tools we have presented.
Based on what was presented, it is possible to evaluate the efficiency of the financial and banking systems of the two ruling authorities in Yemen, each of which is controlled by one of the two sides of the division occurring in the economic aspect of the state, as follows:
Once we see the economic fluctuations and the continuous deterioration of the economic and living situation of the population in Yemen, it can be concluded that the financial system in both cases—"the one that is managed from Aden or the other that is managed from Sana'a"—has no capacity to manage the financial system.
The financial system, which is based in Aden "as a center for its management", is characterized by many imbalances, corruption, and the inability to carry out any administrative and regulatory reforms, enabling it to be able to use financial policy tools to maintain economic stability and counter the challenges of deteriorating living conditions and the deterioration that the humanitarian situation has reached, which is described internationally as the worst in the world. Likewise, the financial system based in Sana'a "as a center for its management" highlights a great deal of randomness, corruption, and abandonment of responsibility for being a financial apparatus affiliated with the state within its framework. Consequently, this regime does not recognize any responsibility for maintaining economic balance and counteracting economic fluctuations, and the deterioration of economic and living conditions and the collapse of the humanitarian situation result from its actions. But the most prominent orientation of this apparatus is its great activity in collecting money under various pretexts that do not take into account compliance with the state’s financial system. Therefore, it is not possible to imagine that such a body would comprehend its responsibilities for formulating financial policy that would maintain the economic and living stability of the population.
Yemen's banking system has collapsed since the beginning of the war in 2015. The collapse was followed by the division of the Central Bank between the authorities of Sana'a and Aden, which reinforced the division of the banking system. This division led to the existence of two forms of banking notes for the national currency.
B) The Banking System:
It is known that the Yemeni banking system has collapsed since the beginning of the war in 2015. This collapse was followed by the division of the Central Bank between the authorities of Sana'a and Aden, which reinforced the division of the banking system. However, this division was followed by the existence of two forms of the national currency (the Yemeni riyal) and two exchange rates, one of which is in force in the areas of influence of the Aden Authority and the other in the areas of influence of the Sana'a Authority. This situation has led to the emergence of many challenges for the recovery of the banking system, the most important of which are:
All this indicates the loss of control over the monetary market and the absence of the central bank’s role in counteracting economic fluctuations, thereby emphasizing the central bank’s inability to work with monetary policy tools to maintain economic balance.
We conclude from what we have mentioned that both the financial and banking systems in both Aden and Sana’a are incompetent and unable to play their role in formulating financial and monetary policies to cope with economic fluctuations, maintain economic and living stability, and limit the deterioration of the unprecedented collapse of the humanitarian situation. Accordingly, we do not believe that there is a glimmer of hope in the recovery of the economic situation and maintaining its stability, as well as the humanitarian situation, without reforming the financial and banking systems with a correct scientific vision. However, according to the data of Yemeni political reality, this will not be achieved except by resolving the military conflict, putting an end to the war, and achieving peace.
