YEMEN ECONOMIC MONITOR Confronting Escalating Challenges Fall 2024 Yemen Economic Monitor Confronting Escalating Challenges Fall 2024 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region © 2024 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii 1. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Economic and Social Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Real Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 External Sector Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Monetary Policy and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 iii List of Figures Figure 1.1 • The Conflict Led to a Sharp Decline in Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 1.2 • Youth Mortality Rose Dramatically with the Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Resulting in a Sharp Decline in Human Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 1.3  •  Figure 1.4 • Fatalities Remained Low During 2023 and 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 1.5 • Rising Protests and Riots Signaled Growing Unrest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 1.6 • Houthi Attacks in the Red Sea Escalated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Traffic through the Suez Canal Collapsed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 1.7  •  IRG Fiscal Revenues Excluding Grants Declined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 1.8  •  Figure 1.9 • IRG Fiscal Expenditures Increased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 1.10 •  Imports Increased Despite Red Sea Escalation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 1.11 •  The Shift towards Houthi Ports Stabilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 1.12 •  Remittance Inflows Remained Resilient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 1.13 •  Foreign Reserves Continued to Fall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 1.14 •  IRG Slowed Fiscal Monetization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 1.15  •  Money in Circulation (M0) (trillions of LCU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 1.16 •  Inflation Rates Eased Sharply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Figure 1.17 •  Exchange Rates Continued to Diverge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 2.1 • GDP Per Capita is Expected to Continue Decreasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Figure 2.2 •  Oil Production Is Expected to Stagnate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 List of Tables Selected Economic Indicators (2019–2023) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table 1.1  •  iv YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES ACRONYMS ACAPS Assessment Capacities Project IPC Integrated Food Security Phase ACLED Armed Conflict Location and Event Classification Data Project IRG Internationally Recognized Government AML Anti-Money Laundering LCU Local Currency Unit CBY Central Bank of Yemen MENA Middle East and North Africa CCY Cash Consortium of Yemen MICS Multiple Indicator Cluster Survey CFT Combating the Financing of MOF Ministry of Finance Terrorism SWIFT Society for Worldwide Interbank FX Foreign Exchange Financial Telecommunication GDP Gross Domestic Product UN United Nations GEP Global Economic Prospects UNDP United Nations Development HCI Human Capital Index Programme HDI Human Development Index UNICEF United Nations Children’s Fund IBY International Bank of Yemen WB World Bank IMF International Monetary Fund WFP World Food Programme IOM International Organization for YER Yemeni Rial Migration v PREFACE T he Yemen Economic Monitor provides an and Dina Abu-Ghaida (Country Manager). Nabeel update on key economic developments and Darweesh (External Affairs Officer) is the lead on policies over the past six months.* It also communications, outreach, and publishing. presents findings from recent World Bank work on The findings, interpretations, and conclusions Yemen. The Monitor places these developments, expressed in this Monitor are those of World Bank policies, and findings in a longer-term and global staff and do not necessarily reflect the views of the context and assesses their implications for Yemen’s Executive Board of The World Bank or the govern- outlook. Its coverage ranges from the macro ments they represent. economy to financial markets to human welfare and For information about the World Bank and its development indicators. It is intended for a wide activities in Yemen, including e-copies of this publi- audience, including policy makers, development cation, please visit https://www.worldbank.org/en/ partners, business leaders, financial market country/yemen. participants, and the community of analysts and To be included on an email distribution list professionals engaged in Yemen. for this Yemen Economic Monitor series and related The Yemen Economic Monitor is a product of publications, please contact Nabeel Darweesh (ndar- the World Bank’s Yemen Macroeconomics, Trade, weesh@worldbankgroup.org). For questions and and Investment (MTI) team. This issue was pre- comments on the content of this publication, please pared by Yasmine Osman (Country Economist) and contact Yasmine Osman (yosman@worldbank.org) Mohammad Al Akkaoui (Economist), supported by a or Mohammad Al Akkaoui (malakkaoui@worldbank. group of experts from different global practices of the org). Questions from the media can be addressed to World Bank. The team included Omar Al-Aqel (Private Nabeel Darweesh. Sector Specialist) and Alia Jane Aghajanian (Senior Economist). The Yemen Economic Monitor has been * The analysis presented in this edition reflects the situation completed under the guidance of Eric Le Borgne as of the end of August 2024. Events occurring after this (Practice Manager), Željko Bogetic´ (Lead Economist), cutoff date are not included. vi YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES EXECUTIVE SUMMARY A mid the continued blockade of the nomic contraction resumed in 2023 and 2024, driven Internationally Recognized Government by the Houthi blockade on IRG oil exports and esca- (IRG)’s oil exports by the Houthis and the lating conflict in the Middle East and Red Sea. As of escalating conflict in the Middle East and Red Sea, end-August 2024, the ACLED Dashboard for Red Sea Yemen faces an increasingly grim reality. The modest Attacks recorded around 373 incidents of violence cease-fire related economic rebound in 2022 was linked to Houthi actions in the Red Sea. As a result, the short-lived, with 2023 and 2024 witnessing new, volume of traffic through the strategic Suez Canal and sharp declines in GDP per capita. Food insecurity has Bab El-Mandeb Strait—carrying 30 percent of world reached a historic high, and poverty is more severe container shipping—has dropped by over 60 percent. and widespread. The outlook remains bleak as stalled The oil blockade has intensified economic peace negotiations and regional conflicts continue difficulties for the IRG, while the Houthi escala- to hinder immediate prospects for lasting peace tion in the Red Sea since November 2023 has and recovery. Yemen’s future hinges on resolving further eroded peace prospects. According to the these conflicts, securing donor support, and the Ministry of Finance in Aden, IRG revenues (exclud- government’s commitment to peace, reconstruction, ing grants) fell by 42 percent in the first half 2024, fol- and reforms. lowing a sharp 50 percent drop in 2023. Meanwhile, Yemen’s humanitarian crisis remains fiscal expenditures continued to rise, although at a deeply rooted in its prolonged conflict and the slower pace. The suspension of IRG oil exports, cou- fragmentation of its political and economic sys- pled with a heavy reliance on imports, has exacer- tems, further exacerbated by the broader regional bated external pressures, causing the Yemeni Rial conflict (Chapter 1). Since the conflict began in (YER) to depreciate in the Aden market from 1,619 2015, Yemen’s real GDP per capita has plummeted per US dollar in January 2024 to 1,917 by the end by 54 percent, pushing most of the population into of August. In addition, rising tensions between the poverty and severely eroding human capital. The con- Houthis and IRG over the regulation and supervision flict has split the country into two distinct economic of the banking sector in early 2024 have raised con- zones, each with its own institutions and competing cerns about the sector’s future, complicating the busi- monetary authorities, leading to widening disparities. ness environment. While regional and UN mediation A brief period of stability following the United Nations has helped ease some tensions, the situation remains (UN)-sponsored truce in 2022 was short-lived, as eco- fragile. vii In this context, living conditions for most tial escalation of attacks in the Red Sea. In this volatile Yemenis have become increasingly dire. In July environment, the prospects for resuming oil exports 2024, 62 percent of households reported inadequate and restoring unrestricted internal transport, trade, and food consumption, representing a dramatic increase finance appear remote. Escalating political tensions of 24 percent in IRG areas and 30 percent in Houthi further risk deepening the fragmentation between areas since last year. In some governorates, severe Houthi-controlled and IRG-controlled areas, widening food deprivation more than doubled. This is due to fur- economic and financial disparities, and worsening the ther depreciation of the YER and reduced humanitar- social and humanitarian crisis. Renewed discord over ian food assistance. Phone surveys reveal that many the banking sector, in particular, could pose signifi- households have resorted to extreme measures, with cant risks to finance and humanitarian aid. 19 percent turning to child labor or engaging in high- Despite these formidable challenges, risk work. Those with poor food consumption are also there remains a glimmer of hope for peace. A grappling with acute and chronic health conditions, sustained peace agreement could yield a signifi- and symptoms of mental health disorders, reinforcing cant economic, social, and financial dividend for a vicious cycle of poverty and eroding human capital. all Yemeni actors against the current reality of con- Yemen’s economic outlook is clouded by flict and decline. According to World Bank analysis, uncertainty, shaped by the ongoing regional con- a durable truce and peace agreement could pave flict and persistent internal tensions (Chapter 2). the way for swift economic recovery, supported by The economy is projected to contract by 1.0 percent external assistance, reconstruction efforts, and post- in real terms in 2024, following a 2.0 percent decline conflict reforms. However, realizing this potential in 2023. The outlook for 2025 also remains grim, with depends on achieving a comprehensive and lasting significant downside risks stemming from the poten- peace agreement. viii YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES 1 RECENT ECONOMIC DEVELOPMENTS The Economic and Social Context and considerably higher than the regional average (Figure 1.2).3 Yemen’s humanitarian crisis is deeply rooted in The depletion of the country’s already lim- its ongoing conflict and the highly fragmented ited human capital will leave a long and scarring political and economic landscape that has legacy, further compounding the nation’s chal- developed over the years. Between 2015 and 2023, lenges. This is evidenced by the country’s declining the country experienced a staggering 54 percent score on the Human Development Index (HDI), where contraction in real GDP per capita (Figure 1.1). Nominal Yemen ranked 186 out of 191 countries in 2022, down GDP per capita, estimated at just US$541 in 2023, has from 160 out of 188 in 2014 (Figure 1.3).4 Among the regressed to its 2001 level, meaning the conflict has HDI components, life expectancy at birth has declined wiped out over 20 years of economic progress. As a since the onset of the conflict, standing at 63.7 years result, most Yemenis now live in poverty1 and half of on average in 2022 compared to 67.4 years in 2014.5 the population faces food insecurity, as evidenced by Furthermore, a child who starts school at age four the November 2023–October 2024 Integrated Food Security Phase Classification (IPC). According to the Multiple Indicator Cluster Survey (MICS) 2023/24, 1 Before the crisis, poverty already affected almost half Yemen suffers from some of the highest rates of of Yemen’s population (49 percent in 2014). The latest wasting (17 percent), stunting (49 percent), and being and best available modelled estimate indicates that at underweight (41 percent) compared to other MENA least 74 percent of the population is poor (World Bank, countries and the poorest countries experiencing 2017). 2 CSO and UNICEF 2024 similar levels of food insecurity.2 In addition, data 3 Human Capital Index from the World Bank’s Human Capital Project 4 https://hdr.undp.org/content/human-development (2021) indicates that the mortality rate of youths -report-2023-24 aged 15-24 is 21.5 per 1,000, up from 12.5 in 2014 5 Life expectancy at birth, total (years) – Yemen, Rep. 1 FIGURE 1.1 • The Conflict Led to a Sharp Decline FIGURE 1.2 • Youth Mortality Rose Dramatically in Economic Activity with the Conflict Real GDP and Real GDP Per Capita Index (2014=100) Youth mortality rate ages 15–24 (per 1,000) 100 30 90 25 80 20 70 15 60 50 10 40 5 30 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Real GDP Real GDP per capita Source: WB and IMF Staff Calculations. Source: World Bank Human Capital Project. Resulting in a Sharp Decline in FIGURE 1.3 •  Living conditions for most Yemenis are Human Capital becoming increasingly dire. In July 2024, 62 per- Human Development Index in Yemen and the Arab States (index) cent of households reported inadequate food con- 0.75 sumption, representing a dramatic increase of 24 0.70 percent in IRG-controlled areas and 30 percent in Houthi-controlled areas since last year. In some gov- 0.65 ernorates, severe food deprivation more than doubled 0.60 (WFP 2024).8 This is due to further depreciation of 0.55 the YER and reduced humanitarian food assistance. 0.50 Phone surveys reveal that many households have 0.45 resorted to extreme measures, with 19 percent turn- 0.40 ing to child labor or engaging in high-risk work, with 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 enduring destructive effects on safety, health, and the social fabric (World Bank 2024). Those with poor Yemen Arab States food consumption are grappling with compounding Source: United Nations Development Program. vulnerabilities, including higher levels of acute and chronic health conditions, and symptoms of mental health disorders. These factors reinforce a vicious can expect to complete 7.9 years of school by their cycle of poverty and eroding human capital, deepen- 18th birthday, the 7th worst level in the world. With the ing the humanitarian crisis. Going forward, some anal- health system on the verge of collapse and the educa- yses have indicated that if the conflict persists until tion system in severe crisis according to UNICEF, the 2030, Yemen’s human development will regress by prospects for human capital remain dire.6 The Human Capital Index (HCI) further underscores this, project- ing that a child born in 2020 will only be 37 percent 6 https://www.unicef.org/yemen/education as productive in adulthood as they would have been 7 Human Capital Country Brief, Yemen, World Bank with access to comprehensive healthcare and a com- 8 World Food Programme Yemen External Situation plete education.7 Report, July 2024 2 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES FIGURE 1.4 • Fatalities Remained Low during The economy has faced renewed challenges 2023 and 2024 since the expiration of the formal UN-sponsored truce in October 2022. Although an informal truce Monthly Conflict Fatalities (persons) 4,000 has remained in place—evidenced by the low level of conflict fatalities since then (Figure 1.4)—Yemen’s 3,500 economy contracted again in 2023. This downturn is 3,000 primarily attributed to the ongoing Houthi blockade on 2,500 IRG’s oil exports,12 which has exacerbated IRG’s fis- 2,000 cal and monetary challenges (Table 1.1). Furthermore, since October 2023, the escalation of the conflict in 1,500 the Middle East and related direct Houthi involvement 1,000 in the Red Sea, has further undermined Yemen’s 500 economic and social conditions.Uncertainty, hostile actions, and widespread protests have also intensi- 0 fied since the onset of the conflict (Figure 1.5).13 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 Jul-24 The escalation of the Middle East conflict Source: Armed Conflict Location and Event Data Project (ACLED). and direct Houthi involvement has resulted in a significant regional shock that continues to affect the region and beyond. As of end-August 2024, the 40 years, effectively erasing progress made over one ACLED Dashboard for Red Sea Attacks recorded and a half generations (Moyer et al., 2019; UNDP and around 373 incidents of violence linked to Houthi ESCWA, 2023).9 actions in the Red Sea, including 182 attacks on The collapse and depletion of Yemen’s commercial ships (Figure 1.6). As a result, as of July assets and stock of capital has significantly low- 2024, the volume of traffic through the strategic Suez ered its potential output, creating long-term barri- Canal and Bab El-Mandeb Strait—carrying 30 percent ers to recovery. Beyond the sharp decline in annual economic activity, the conflict has caused a severe reduction in the country’s stock of assets. Human 9 Human Development Report 2023/2024 capital, one of the most critical resources for a coun- 10 The Human Capital Index (HCI) quantifies the economic try, has diminished since the conflict began in 2014, value of a country’s human capital, reflecting the potential as reflected in the decline of key HCI components. productivity of its population through indicators related to health, education, and survival rates. It helps evaluate Human development has also regressed by 14 per- how effectively countries are developing their human cent, as indicated by the drop in the HDI.10 Years of capital. In contrast, the Human Development Index (HDI) conflict have also devastated Yemen’s physical cap- provides a more comprehensive perspective on human ital. According to the World Bank’s Yemen Dynamic development by measuring a country’s progress across Needs Assessment Phase 3, damage in 16 assessed three key dimensions: health, education, and standard cities as of January 2020 is estimated between of living. 11 World Bank Yemen Dynamic Needs Assessment: Phase US$6.8 to 8.3 billion—equivalent to 36-44 percent of 3 (2020 Update) 2023 GDP.11 The housing sector has been hit hard- 12 The Houthis imposed an embargo on IRG oil exports in est, accounting for over 74 percent of total damages, October 2022 through three drone attacks on Yemeni oil followed by health and power. Damages in water and exports in the months following the expiration of the UN- sanitation, transport, and education are also esti- sponsored truce. The Houthis demand that the Yemeni mated in the hundreds of millions. The continued government pay the salaries of civil servants in Houthi- controlled areas: https://www.mei.edu/publications/ depletion of Yemen’s assets—whether human, physi- houthis-embargo-yemens-oil-exports. cal, natural capital, or institutions—will make the path 13 It is noteworthy that these protests began around the to recovery and sustainable development increasingly onset of the crisis in the Middle East and have been difficult and constrained. concentrated in Houthi-controlled areas. Recent Economic Developments 3 FIGURE 1.5 • Rising Protests and Riots Signaled FIGURE 1.6 • Houthi Attacks in the Red Sea Growing Unrest Escalated Monthly Protests and Riots (count) Attacks by the Houthis in the Red Sea (number) 900 40 800 35 700 30 600 25 500 20 400 15 300 200 10 100 5 0 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 2023 2024 Houthi IRG Israel Military Unclear Commercial Ship Source: Armed Conflict Location and Event Data Project (ACLED) Source: ACLED of world container shipping—has dropped by over Critically, Yemen remains one of the most 60 percent, while the alternative route via the Cape vulnerable countries to climate change impacts, of Good Hope route has witnessed a 100 percent with attendant consequences on the wellbeing increase in navigation, giving rise to sharply higher of its people, especially the poor.19 During July freight rates (World Bank MENA FCV Economic and August 2024, Yemen experienced exception- Series Brief 14) (Figure 1.7). At the same time, Yemen continues to face deep structural challenges. The conflict has inten- 14 World Bank MENA FCV Economic Series Brief – April sified the country’s fragmentation into two distinct 2024 economic zones, each governed by its unique set 15 The currency has different values depending on the of institutions. These include competing monetary banknote’s date of printing: Yemen Economic Bulletin: authorities with their respective exchange rate and Widening Exchange Rate Disparity Between New and Old Banknotes – Sana’a Center For Strategic Studies policies, resulting in increasing disparities.15 Houthi- (sanaacenter.org). controlled areas are home to some 70 percent of 16 Yemen: Population Estimates – Humanitarian Data the population, while IRG-controlled areas hold the Exchange (humdata.org) country’s oil and gas resources.16 Growth prospects 17 In 2023, Yemen was ranked 176th out of 180 countries on in the oil sector depend on durable peace, financial the Corruption Perceptions Index with a score of 16 out and technical resources to restart oil production, and of 100, according to Transparency International. 18 Other factors have also negatively influenced Yemen’s ability to attract foreign investment, espe- remittances. The IOM’s 2023 report on “Migration, cially given its aging oil fields. Non-oil activity—mainly Environment, and Climate Change in Yemen” highlights trade and agriculture—continues to be severely con- that a “reduction in migrant working incomes, limited strained by the conflict conditions, along with inter- employment space in Saudi Arabia, and an overvalued ruptions in essential service delivery, acute input exchange rate in areas controlled by the Houthis shortages, double taxation, widespread corruption, have resulted in decreased remittances and reduced household net gains. Furthermore, there is a growing market distortions from uncoordinated policies, and trend of migrants relocating their dependents to Saudi the multiplicity of Yemen’s institutions.17 While remit- Arabia when possible.” tances and aid help alleviate social conditions, these 19 Forthcoming World Bank Yemen Country Climate and flows, too, are affected by conflict conditions.18 Development Report (CCDR), 2024. 4 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES Traffic through the Suez Canal FIGURE 1.7 •  control of the banking sector in the first half of 2024 Collapsed have raised concerns about the sector’s future and created uncertainties for the business environment Suez Canal Ship Transits (number of ships) 1,800 (see section on financial sector developments). In 1,600 Houthi-controlled areas, the economy is particularly 1,400 strained by liquidity shortages, with restrictions on 1,200 cash withdrawals and limited availability of funds 1,000 stifling local consumption and business operations. In 800 IRG-controlled areas, electricity blackouts, worsened 600 by fuel shortages, disrupt essential services, leaving 400 many areas with only a few hours of power each day, 200 significantly limiting production capacity, particularly 0 in industrial and agricultural sectors.22 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Despite these challenges, positive devel- opments in the transport sector have improved Cargo Ships Tanker Ships the operating environment. The reopening of the Source: IMF Port Watch Al-Houban-Taiz road in mid-2024 represents a sig- nificant step toward reducing the blockade on Taiz, improving national connectivity, including between ally heavy seasonal rains that led to severe floods major cities such as Sana’a and Ibb.23 The restored and landslides, causing widespread devastation road has drastically reduced travel time, transforming across the country. According to the United Nations- what was once a dangerous and several-hours detour International Organization for Migration (UN-IOM), the into a journey of mere minutes. This improvement not severe floods and landslides, affected nearly 562,000 only enhances safety and saves lives but also results individuals—approximately 1.6 percent of Yemen’s in substantial savings on fuel and vehicle operating 2024 population.20 The floods severely damaged crit- ical infrastructure, including roads, water and electric- ity systems, and health facilities. The floods caused 20 IOM Appeals for US$13.3 Million to Help Hundreds of Thousands Affected by Yemen Floods | International 122 deaths and 167 injuries, heavily damaging or Organization for Migration destroying shelters, basic facilities, housing, agricul- 21 Yemen Humanitarian Update: Issue 6, August/ ture, and livestock.21 September 2024 – Yemen | ReliefWeb 22 The Yemen Review Quarterly: April-June 2024– Sana’a Center for Strategic Studies (sanaacenter.org) Recent Economic Developments 23 The reopening of the Taiz road has far-reaching national benefits that extend well beyond local or city-level Real Sector advantages. This road not only provides access to Taiz city but also serves as a critical link to the entire In 2024, Yemen’s economy has been negatively governorate, enabling individuals to visit family and engage in various economic activities. Thus, the impact impacted by the ongoing Houthi blockade on of reopening this road should not be limited to the Ibb IRG’s oil exports, escalating tensions in the and Taiz governorates. As a strategic national asset, Red Sea, and domestic unrest. Oil-sector activity, its benefits stretch across the country. By facilitating predominantly located in IRG-controlled areas, is the movement of people and goods, the road plays a estimated to have stagnated. Meanwhile, the non-oil crucial role in bolstering Aden’s function as a key port for the import of essential goods, including food. Viewing sector faces mounting challenges due to economic the road from a national perspective underscores fragmentation, exchange rate depreciation, and its importance for broader economic and social reliance on imports, among other factors. Additionally, connectivity, making it a vital piece of infrastructure for escalating tensions between the Houthis and IRG over Yemen’s national resilience and development. Recent Economic Developments 5 costs, thereby boosting economic activity, and improv- FIGURE 1.8 • IRG Fiscal Revenues Excluding ing the quality of life for residents.24 Furthermore, a Grants Declined key agreement between the Houthis and the IRG led IRG Fiscal Revenues (in billions of LCU) to the resumption of Yemenia Airways flights between 1,200 Sana’a and Jordan (Amman), to be expanded to Egypt 1,000 (Cairo) and India, which is expected to ease travel restrictions for Yemeni people and facilitate trade, 800 access to health and medical services, and move- 600 ment. Lastly, the inauguration of Al-Makha Airport in 400 April 2024 could potentially enhance transport links in Taiz—an IRG-controlled area, improving access for 200 humanitarian aid and goods. However, there remains 0 limited publicly available information about its oper- H1-2021 H2-2021 H1-2022 H2-2022 H1-2023 H2-2023 H1-2024 ations, including which entities utilize the facility and Commodity revenues Other taxes whether the new airport complies with international Non-tax revenues Grants aviation safety standards. Source: MOF and WB staff calculations. Fiscal Developments25 The IRG’s domestic revenues continued to declined by 11 percent (Figure 1.9). Transfers saw a decline in the first half of 2024, although this was notable rise of 25 percent, accounting for more than partially offset by an increase in grants, leading to a third of the IRG’s total expenditures. This high level a rise in total revenues including grants. According of subsidies, particularly in the electricity sector, is to data from the Ministry of Finance in Aden, the largely due to below-cost recovery tariffs and limited IRG’s fiscal revenues, excluding grants, fell by 42 collection rates. Interest payments also surged by percent in H1-2024 compared to same period last 71 percent, reflecting mounting pressure from debt year. This decline was primarily due to a collapse in servicing. Spending on wages and compensation, oil revenues, alongside reductions in almost all tax which accounts for 40 percent of total expenditures, revenues, particularly customs revenues, which fell increased by 10 percent, underscoring the challenges by 34.5 percent. The decline in customs revenues of managing the public sector wage bill. Although cap- was largely attributed to the conflict-induced shift in ital expenditures rose by 16 percent, they remained import activity from the port of Aden to Red Sea ports low, constituting just 2 percent of total expenditures, under Houthi control. Nevertheless, non-tax revenues raising concerns about the country’s physical capital and grants offered some relief to the IRG’s fiscal stock—either deteriorating rapidly due to insufficient situation. Grants increased significantly, bolstered maintenance or being damaged by the conflict. by direct budget support from Saudi Arabia, with Donor support, combined with a slower disbursements totaling US$550 million (3.5 percent growth of expenditures relative to revenues, of GDP) in the first half of 2024. As a result, when contributed to a decrease in the IRG’s fiscal defi- grants are included, total revenues rose by 39 percent cit. Overall, the IRG’s fiscal deficit contracted by half in nominal terms (Figure 1.8). during H1-2024 when compared to H1-2023. The Meanwhile, the IRG’s fiscal expenditures continued to rise, though at a slower pace than the increase in total revenues including grants, 24 Houthi opening of Taiz road raises hopes of end to blockades | Arab News but above inflation. Fiscal expenditures grew by 12.8 25 The following figures only reflect the fiscal position of percent in H1-2024 compared to the same period last IRG and do not encompass areas controlled by Houthis, year, driven by increases across most expenditure which is understood to operate a balanced cash-based components, except for goods and services, which budget system. 6 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES FIGURE 1.9 • IRG Fiscal Expenditures Increased FIGURE 1.10 • Imports Increased Despite Red Sea Escalation IRG Fiscal Expenditures (in billions of LCU) 2,500 Bulk Imports through Ports (millions of metric tons) 8 2,000 7 6 1,500 5 1,000 4 500 3 2 0 H1-2021 H2-2021 H1-2022 H2-2022 H1-2023 H2-2023 H1-2024 1 Wages and compensation Goods and services 0 H1-2021 H2-2021 H1-2022 H2-2022 H1-2023 H2-2023 H1-2024 Interest payments Subsidies Other Capital expenditures Aden Al Mukalla Hodeidah Saleef Ras Isa Source: MOF; WB and IMF staff calculations. Source: ACAPS – YETI. Note: IRG controlled ports (green shades): Aden and Al Mukalla; Houthi controlled ports (orange shades): Hodeidah, Ras Isa and Saleef. budget deficit was covered primarily by increased domestic financing through CBY-Aden. However, it is (Figure 1.11). Exports, meanwhile, showed modest essential to highlight that this figure does not include recovery, increasing by 3.7 percent in H1-2024, after arears to public contractors. On an accrual basis, the sharp contractions of 82.1 percent in H1-2023 and fiscal deficit is expected to be significantly wider. On 43.3 percent in H2-2023 due to the oil blockade. the other hand, in contrast to the rest of the coun- A sharp decline in humanitarian funding try, Houthi-controlled areas, which include some of contrasted with increased Saudi budget support Yemen’s major commercial and financial centers, are and stable remittance inflows. As of September understood to operate under a balanced, and cash- 9, 2024, only 27.9 percent of the UN’s Yemen based, public budget system. Yet, no information is Humanitarian Response Plan had been funded, available on public finances in the Houthi-controlled totaling US$755.4 million—a significant drop from areas. US$1.8 billion in 2023 and US$2.3 billion in 2022. Domestic tensions, particularly in the banking sec- External Sector Developments26 tor, have been followed by escalating violence from the Houthis in the first half of the year. Since May Pressure on the trade balance intensified in the first 2024, there was a notable increase in hostile actions half of 2024, driven by a significant rise in imports towards the Yemeni UN staff and NGO employees. alongside only a modest recovery in exports. Houthi security forces have arrested and forcibly dis- According to ACAPS data, despite the escalation of appeared dozens of individuals, including at least 13 the Red Sea crisis, the volume of imports—primarily United Nations staff members and numerous NGO food, fuel, construction materials, and containers— employees operating in Houthi-controlled areas, grew by 11 percent year-on-year during H1-2024 according to Human Rights Watch.27 These actions (Figure 1.10). The diversion of imports to Red Sea have further complicated aid delivery. Despite these ports has stabilized, with 77 percent of these imports passing through Houthi-controlled ports in H1-2024, 26 Note that the following figures reflect external accounts unchanged from H2-2023 but marking a significant for the whole of Yemen. shift from the pre-2022 truce period, when nearly 60 27 https://www.hrw.org/news/2024/06/26/yemen-houthis percent of imports were processed through IRG ports -disappear-dozens-un-civil-society-staff Recent Economic Developments 7 FIGURE 1.11 • The Shift towards Houthi Ports FIGURE 1.12 • Remittance Inflows Remained Stabilized Resilient Share of Goods Imports through Ports (in percent of total) Remittance Diffusion Index (Index, 50 = Unchanged) 100% 120 100 80% 80 60% 60 40 40% 20 20% 0 2021M11 2022M11 2023M11 2021M1 2021M3 2021M5 2021M7 2021M9 2022M1 2022M3 2022M5 2022M7 2022M9 2023M1 2023M3 2023M5 2023M7 2023M9 2024M1 0% H1-2021 H2-2021 H1-2022 H2-2022 H1-2023 H2-2023 H1-2024 Aden Al Mukalla Hodeidah Saleef Ras Isa Remittance Diffusion Index Source: ACAPS – YETI. Source: Yemeni authorities, Cash Consortium of Yemen, and IMF estimates Note: IRG controlled ports (green shades): Aden and Al Mukalla; Houthi controlled ports (orange shades): Hodeidah, Ras Isa and Saleef. challenges, Saudi Arabia provided critical bud- government increased by only 1.6 percent in nominal get support in H1-2024 to ease fiscal pressures, as terms during the first five months of 2024, a substantial described above. Remittance inflows appeared resil- deceleration from the 24.6 percent growth observed ient, with the Remittance Diffusion Index remain- the previous year (Figure 1.14). This slowdown could ing above the 50-point threshold throughout 2024, be attributed to the increased budget support from playing a crucial role in bolstering household con- Saudi Arabia, reducing the need for CBY to resort sumption and sustaining overall economic activity to unconventional policies to cover its financial (Figure 1.12).28 expenses. Concurrently, currency in circulation grew Yemen’s gross international reserves con- by just 1.1 percent over the same period, compared tinued to decline, reflecting the deteriorating to a 4.8 percent annual increase in 2023 (Figure 1.15). political environment and ongoing economic The slight rise in monetary financing was offset vulnerabilities. As of May 2024, reserves stood at by CBY’s foreign exchange (FX) auctions, which US$1,394 million—equivalent to less than 1.5 months helped absorb the excess liquidity. This sterilization of imports—down from US$1,626 million at the end of effort highlights the central bank’s commitment to 2023, marking a 14.9 percent decrease (Figure 1.13). maintaining monetary stability. Indeed, while monetary This decline, despite Saudi budget support and stable financing may provide short-term fiscal relief, its remittance inflows, underscores the persistent eco- uncontrolled continuation can escalate inflation risks nomic challenges, particularly in boosting exports, and undermine overall economic stability. reducing reliance on food imports, and attracting for- In Houthi-controlled areas, the ban on eign financing amid a worsening environment. newly issued banknotes by CBY-Aden serves as Monetary Policy and Inflation 28 The Remittance Diffusion Index (RDI) tracks changes in remittance inflows, where 50 indicates no change, The first five months of 2024 saw a significant values above 50 signal an increase, and values below 50 slowdown in the monetary financing of the IRG’s indicate a decrease. It is computed by the International fiscal deficit, helping contain inflation. Data Monetary Fund using data from Yemeni authorities and from CBY-Aden shows that net domestic claims on Cash Consortium of Yemen (CCY). 8 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES FIGURE 1.13 • Foreign Reserves Continued to Fall FIGURE 1.14 • IRG Slowed Fiscal Monetization CBY-Aden Gross International Reserves (millions of USD) CBY Net Domestic Claims on Government (trillions of LCU) 8 2,000 1,500 7 1,000 500 0 6 May-23 May-24 Aug-23 Mar-23 Dec-23 Mar-24 Sep-23 Nov-23 Feb-23 Feb-24 Jun-23 Jan-23 Jan-24 Apr-23 Apr-24 Oct-23 Jul-23 Jan-21 Jan-22 Jan-23 Jan-24 Apr-21 Apr-22 Apr-23 Apr-24 Oct-21 Oct-22 Oct-23 Jul-21 Jul-22 Jul-23 Source: : CBY- Aden and WB staff calculations Source: : CBY-Aden and WB staff calculations FIGURE 1.15 • Currency in Circulation Growth a means of regulating money supply while price Deceased caps on food commodities further help to con- Money in Circulation (M0) (trillions of LCU) trol inflation. Implemented on December 18, 2019, 3.8 a directive from the Sana’a-based central bank pro- hibited the use of new Yemeni rial banknotes issued in Aden, allowing only for the circulation of older 3.7 banknotes. This led to effectively severing mone- tary policy between the two regions and to the emer- 3.6 gence of two distinct exchange rates: the exchange rate of old banknotes steadily appreciated, while that of the new banknotes depreciated reflecting their 3.5 diverging supplies, with the former being mostly (see Figure 1.17) fixed at the 2016 nominal level and the 3.4 latter still expanding, sometimes briskly. Shortages Jan-23 Mar-23May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24May-24 of old rial banknotes in Houthi-controlled areas fol- Source: CBY-Aden and WB staff calculations. lowed, prompting the Houthis to attempt issuing their own rial banknotes, which culminated in a sig- nificant development on March 30, 2024, when the essential food items to safeguard household afford- CBY-Sana’a introduced a new 100-YER coin for cir- ability. However, this strategy places pressure on ven- culation in their territories (the increase in the money dors and traders, increasing the risk of shortages of supply in Houthi-controlled areas following this intro- imported goods in local markets.29 duction is so far minimal as 100-YER coins only Data from January to July 2024 indicates account for one percent of money supply [M0]). This a general easing of inflation rates. The average measure is therefore not expected to meaningfully impact inflationary conditions in Houthi-controlled areas. Additionally, in efforts to combat food infla- 29 Yemen Food Supply Chain Update, ACAPS, August tion, the Houthis continue to impose price caps on 2023 Recent Economic Developments 9 Inflation Rates Eased Sharply FIGURE 1.16 •  FIGURE 1.17 • Exchange Rates Continued to Diverge Inflation across Yemen (percentage, period average) 100 Exchange rate across Yemen (YER per US$1) 2,000 80 1,800 60 1,600 1,400 40 1,200 20 1,000 800 0 600 –20 400 Dec-20 Mar-21 Dec-21 Mar-22 Dec-22 Mar-23 Dec-23 Mar-24 Sep-20 Sep-21 Sep-22 Sep-23 May-21 May-22 May-23 May-24 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 Aug-20 Aug-21 Aug-22 Aug-23 Nov-20 Nov-21 Nov-22 Nov-23 Feb-21 Feb-22 Feb-23 Feb-24 IRG Houthi Aden Sana'a Source: : REACH JMMI and WB staff calculations. Source: Telegram Exchange Market Group and WB Staff calculations. inflation rate decreased from 0.9 percent in 2023 to a Houthi-controlled ports might fuel some activity, deflationary rate of 1.6 percent during the first half of other indicators point to potential economic distress. 2024.30 In IRG-controlled areas, inflation rates slowed These include deflation, a shrinking money sup- significantly to 3.1 percent from 10.3 percent the ply, financial sector repression, price controls, and previous year (Figure 1.16), mostly due to reduced shortages, which, when taken together, suggest an domestic demand and slower growth in fiscal expen- increasingly barter-based economy, and therefore a ditures and monetary financing. However, this slow- sharp drop in the ease of transacting for both firms down in inflation is surprising given the ongoing and consumers, leading to a fall in economic activity. strong currency depreciation. Indeed, the current Deflation, in particular, can trigger significant adjust- account deficit, exacerbated by halted oil exports ments in consumption and investment behaviors with and high import levels, placed additional pressure adverse impacts on the economy. Households, antic- on the Yemeni rial (YER) in the Aden market, where ipating further price declines, may postpone spend- it continued to depreciate, reaching an all-time high. ing on non-essential goods and services, leading to The rate climbed from YER 1,619.5 per USD in decreased overall consumption. Simultaneously, busi- January 2024 to YER 1,917 per USD by the end of nesses may reduce investment due to lower expected August (Figure 1.17). Conversely, in the Sana’a mar- returns and uncertainty about future price levels, as ket, the YER stabilized, and deflation persisted. The falling prices diminish profit margins and make new exchange rate in Sana’a remained relatively stable, investments less attractive. moving from YER 529 per USD to YER 538 per USD during the same period. Houthi-controlled regions Financial Sector recorded a deflation rate of 9.6 percent, continuing the trend from the 11.8 percent deflation observed in The first half of 2024 saw escalating tensions the previous year. between the Houthis and the IRG over the Although data for a comprehensive anal- ysis of the economy in Houthi-controlled areas remains limited, certain trends suggest that the 30 The national inflation rate is determined by calculating situation might be worse than it appears. While the simple average inflation rate between Aden and increasing revenues from the diversion of trade to Sana’a. 10 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES regulation and supervision of the banking sector. underscoring the fragile state of the country’s econ- On April 2, 2024, CBY-Aden issued a directive omy.32 requiring banks operating in Sana’a to relocate their More broadly, in Yemen, confidence in the headquarters to Aden within two months, citing AML/ formal financial sector continues to be limited. CFT compliance concerns among others. This move Prior to the conflict, the provision of credit by banks was sparked by CBY-Sana’a’s introduction of a new was primarily focused on government debt instru- 100-riyal coin in March 2024, replacing damaged ments denominated in the local currency. These 100-YER banknotes. Further decisions in June 2024 instruments have been in a state of technical default deepened the divide, with CBY-Aden prohibiting since the beginning of the conflict. The ongoing eco- dealings with unlicensed entities, wallets, and nomic crisis and the increase in non-performing loans electronic payment services (Directive No. 282) and among banks established before the conflict have fur- suspending remittance networks that were not part ther eroded confidence in the banking sector. In con- of the Unified Network for Money (Directive No. 23). trast, non-bank financial service providers, especially CBY-Aden also canceled the circulation of banknotes money exchangers, have experienced a rise in trust, printed before 2016, which were used exclusively in regardless of their location. This shift is evident in the Houthi-controlled areas, and encouraged traders to decrease of local currency deposits in commercial exchange these for new banknotes printed after 2017 by CBY-Aden. banks, which dropped from 15.1 percent of GDP in These tit-for-tat measures threatened 2014 to 8.6 percent by the end of 2022. Nevertheless, Yemen’s economic, financial, and social stability there was a slight recovery to 9.4 percent of GDP in while deepening the country’s political and eco- 2023, following the introduction of new banks in Aden. nomic fragmentation. Banks attempting to relocate Money exchangers, with their strong liquid- faced technical challenges and the risk of retaliatory ity position, more than offset the banking sector’s measures from the Houthis. Conversely, banks that negative net foreign assets. Money shops typi- refused relocation were at risk of being cut off from cally maintain net foreign assets that outstrip their for- SWIFT, jeopardizing formal financial flows in and out of eign liabilities, as they are the main beneficiaries of Yemen, a lifeline for the economy and the Yemeni peo- remittances and because they actively hedge against ple. The financial viability of smaller banks was par- fluctuations in the local currency. The World Bank ticularly at risk. Transfers through Aden-based banks analyzed the financial statements of ten of the largest and money exchangers may have helped alleviate money exchangers in Aden, which showed that the some of the negative impacts. By June 2024, several liquidity-focused business model of money exchang- private banks resisted relocation, leading CBY-Aden ers grants them a significant advantage over banks to issue directives against six of them. Subsequently, in Yemen’s predominantly cash-based economy. As a CBY-Sana’a countered with a directive banning coop- result, money exchangers have become pivotal in pro- eration with 13 Aden-headquartered banks. viding the economy with access to foreign-currency These directives escalated tensions until liquidity. Despite this, they have not replaced conven- July 23, 2024, when the UN announced that the tional banks as facilitators of trade payments for key IRG and the Houthis had agreed to de-escalate commodities like wheat and rice because they do by reversing recent measures against banks and not have access to correspondent banking or SWIFT, refraining from making similar decisions in the future. The UN also indicated plans to convene a meeting between both sides to address broader eco- 31 https://osesgy.unmissions.org/statement-office nomic and humanitarian issues in line with an agreed -un-special-envoy-yemen roadmap.31 This agreement followed a dire warn- 32 https://english.aawsat.com/arab-world/5036519-un- ing from the World Food Programme (WFP) about a warns-profound-liquidity-crisis-yemen%E2%80%99s- looming liquidity crisis and threat of hunger in Yemen, houthi-controlled-areas Recent Economic Developments 11 which is a requirement to buy from the international banks. The World Bank conducted a stress test market. based on public information available until December In March 2023, Houthi authorities enacted 2023.33 The test revealed that large traditional and a law, effective immediately, banning interest- state-owned banks are particularly vulnerable to asset based banking transactions, despite resistance write-downs that may result from implementing the and proposed amendments from their legal com- anti-usury law. A write-down of more than 15 percent mittee. Since then, banks have shifted most savings of the value of sovereign debt holdings would deplete deposits to current accounts and ceased paying inter- the capital buffers of the country’s largest banks, such est. This has deprived banks from interest income for as the International Bank of Yemen (IBY), CAC Bank, the past months, while increasing their liabilities, put- and the National Bank of Yemen.34 In early September, ting additional pressure on their balance sheets. This IBY, the largest private bank holding public debt, situation poses a severe threat to the health of the issued a statement attributing its liquidity crisis to fac- banking system in Houthi-controlled areas. Without tors beyond its control, while affirming that it is work- the ability to generate interest income, banks may ing with the CBY in Sana’a to find urgent solutions. It is struggle to maintain profitability and solvency, and worth noting that, due to their limited public debt own- rely only on non-interest-income such as trade facili- ership, most Islamic and non-state-owned banks’ cap- tation and exchange rate fluctuation. Additionally, due ital buffers would withstand the asset shock. to liquidity constraints, banks have been unable to withdraw their holdings or reserves. The law has disproportionately affected 33 Fitch Connect commercial banks, which hold a larger share 34 World Bank Yemen Financial Sector Diagnostic report of government securities compared to Islamic 2024 (forthcoming) 12 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES Selected Economic Indicators (2019–2023) TABLE 1.1 •    2019 2020 2021 2022 2023 Real Sector (Annual percentage change) Real GDP 2.1 –8.5 –1.0 1.5 –2.0 Real GDP per Capita –0.4 –10.7 –3.2 –0.6 –4.2 Money and Prices (Annual percentage change, unless stated otherwise) Consumer Prices (period average) 15.7 21.7 31.5 29.5 0.9 Aden 22.6 30.5 59.8 36.4 10.3 Sana’a 11.4 15.6 9.4 21.6 –11.8 Base Money 3,485 3,948 4,491 4,689 4,919 Exchange rate (YER per US$1, average) Aden 607 778 1,029 1,112 1,368 Sana’a 565 601 598 570 533 Exchange rate (YER per US$1, eop) Aden 607 677 989 1,197 1,532 Sana’a 580 591 600 560 528 IRG’s Finances (In percent of GDP) Total Revenues and grants 7.3 6.2 7.3 9.5 6.0 Commodity Revenues 3.6 2.2 2.5 4.8 1.2 Taxes on International Trade 0.8 0.8 1.0 0.9 0.7 Other Taxes 1.9 2.0 2.6 2.2 2.0 Non-Tax Revenues 0.6 1.1 0.7 0.6 0.4 Grants 0.4 0.1 0.6 1.1 1.6 Total Expenditures 13.2 10.6 8.2 12.2 12.1 Current Expenditures 12.5 10.3 7.8 12.0 11.9 Capital Expenditures 0.7 0.3 0.4 0.2 0.3 Overall Fiscal Balance –5.9 –4.5 –0.9 –2.7 –6.1 Financing 5.9 4.5 0.9 2.7 6.1 External (net) –0.1 –0.3 –0.2 –0.4 –0.7 Domestic 6.0 4.8 1.1 3.1 6.8 General Government Debt 103.5 104.8 93.6 77.9 100.4 External 41.1 44.4 46.0 38.6 53.2 Domestic 62.3 60.4 47.6 39.3 47.2 External sector (In percent of GDP) Current Account Balance –4.2 –15.6 –14.2 –17.7 –20.3 Capital Account Balance 0.0 0.0 0.0 0.0 0.0 Financial Account Balance (excl. reserves) –2.1 0.3 –3.2 -0.9 –4.8 Net Errors and Omissions –1.8 12.6 14.7 15.2 17.3 Other memo items GDP nominal in US$ (millions) 21,888 20,220 19,394 23,534 18,806 Gross Reserves in US$ (millions) 1,654 970 1,688 1,307 1,638 Source: Central Bank of Yemen Aden, Ministry of Finance, ACAPS YETI, REACH JMMI, and World Bank staff estimates Recent Economic Developments 13 2 OUTLOOK AND RISKS Outlook and July 2024, the number of ships passing through the Suez Canal and Bab El-Mandeb decreased by 54 The macroeconomic outlook for the Middle East percent and 64 percent, respectively, compared to the and North Africa region remains highly uncertain first 10 months of 2023. However, these disruptions due to the ongoing conflict (World Bank October have, so far, not led to significant consumer price 2024 MENA Economic Update). Economic activity in increases. the region is expected to pick up to 2.5 percent in 2024, Ongoing domestic tensions, compounded following a slowdown to 1.9 percent in 2023. Growth by the conflict in the Middle East, have further is projected to decelerate more sharply in developing strained Yemen’s economic growth. As a result, oil importers, where the conflict exacerbates existing the economy is expected to deteriorate further in vulnerabilities. The heightened uncertainty has led to 2024. National GDP is projected to contract by 1.0 a downward revision of the region’s 2024 economic percent in real terms, following a 2.0 percent decline outlook since the June Global Economic Prospects in 2023. Concurrently, real GDP per capita is expected (GEP) report, with growth forecasts reduced by 0.3 to decrease by 3.2 percent. However, the nominal percentage points from 2.8 percent. GDP per capita decline is projected be even more The impact of the conflict has varied across pronounced, at 15.8 percent (Figure 2.1). Oil produc- MENA economies, largely depending on their eco- tion is estimated to remain stagnant after a sharp nomic linkages and proximity to conflict zones. 59.4 percent drop in 2023, assuming the current con- The limited integration of Palestinian and Israeli mar- flict conditions continue and preclude oil exports in kets with the broader MENA region has helped shield IRG-controlled areas from resuming (Figure 2.2). The the region from more severe spillover effects. Key ongoing blockade on IRG oil exports, coupled with channels of impact include tourism (notably in Jordan persistent dependence on imported goods and ser- and Lebanon) and disruptions in maritime traffic vices, is expected to widen the current account defi- through the Suez Canal (Egypt). Between February cit to 25 percent of GDP, putting additional pressure 15 FIGURE 2.1 • GDP Per Capita is Expected to FIGURE 2.2 • Oil Production is Expected to Continue Decreasing Stagnate GDP per capita (annual growth, percent) Oil Production (in thousands of barrels/day) 20 160 15 140 10 120 5 0 100 –5 80 –10 60 –15 –20 40 –25 20 2021 2022 2023 2024 2025 GDP per capita growth (annual %, nominal US$) 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 GDP per capita growth (annual %, real) Source: : Yemeni authorities; WB and IMF staff estimations. Source: Yemeni authorities; WB and IMF staff calculations. on the YER. However, donor support to the IRG and have remained relatively stable so far, the ongoing a reduction in expenditures are expected to decrease conflict increases risks of broader supply shortages the IRG’s fiscal deficit from 6.1 percent of GDP in and rising import costs due to increased shipping 2023 to 3.5 percent in 2024, despite the decline in expenses, conflict premiums, and insurance costs. revenues excluding grants. These risks are already materializing, as seen by The macroeconomic outlook for 2025 is recent Israeli airstrikes on Hodeida port, which will also grim. With stalled peace negotiations and ongo- have severe adverse effects on imports—a crucial ing regional and domestic tensions, our forecast lifeline for Yemen.35 An escalation of tensions in the assumes that there is no resumption of oil exports in Red Sea could also trigger additional sanctions 2025. Consequently, real GDP is projected to grow at a on the Houthis, adversely impacting aid flows and modest 1.5 percent, reflecting only marginal improve- remittances. Yemenis have already been struggling to ments in the non-oil sector. The services sector, par- get the aid they need, in part due to low humanitarian ticularly transportation, may see slight gains due to funding. The risks regarding food insecurity are expanded operations of Yemenia Airways under the alarming, exacerbated by the suspension of aid and UN-mediated agreement. However, without significant food distribution by the WFP in Houthi-controlled clear prospects for peace and security, increased areas in late 2023. On the domestic front, tensions as revenues and exports, public finances and external those seen in 2024 within the banking sector could accounts will continue to be under stress. Inflation is expected to rise further, driven by currency deprecia- tion in the IRG-controlled area. 35 In September and October 2024, military tensions between the Houthis and Israel escalated significantly. The conflict began with a series of Houthi aerial drone Risks and missile attacks, mainly targeting southern Israel and the coastal city of Eilat. In retaliation, Israel launched precision airstrikes on Houthi-controlled areas, focusing Significant downside risks could further on the strategic port city of Hodeida. Key targets destabilize Yemen’s economy. This is mainly included military and energy infrastructure critical to attributed to the potential further escalation of attacks Houthi operations, such as a power plant and seaports in the Red Sea. While Yemen’s imports and prices in Hodeida and Ras Issa. 16 YEMEN ECONOMIC MONITOR: CONFRONTING ESCALATING CHALLENGES reemerge, posing serious threats to the economy conflict reforms and additional external financial by disrupting humanitarian aid, essential imports, assistance and reconstruction efforts supported by remittances, and key sources of livelihood. Such development partners, Yemen could achieve acceler- developments would further exacerbate Yemen’s ated and sustained growth within the short to medium already severe economic and social challenges. term. This growth would be driven by a swift rebound However, if a lasting truce or peace agree- in domestic transportation, trade, financial inflows, ment is achieved, Yemen could experience and reconstruction, and recovery of public services. large and sustained growth within months. Such efforts are essential for overcoming the current This peace dividend could result in large eco- crisis and laying the foundations for a unified and nomic, social, and financial gains for all actors prosperous future for all Yemenis.36 in Yemen. Achieving a lasting truce or peace agree- ment could pave the way for rapid economic recov- ery, driven initially by the recovery of internal transport 36 World Bank. (2023). Yemen Country Economic and trade from a low base, resulting in lower costs Memorandum: Glimmers of Hope in Dark Times. and increased employment and incomes. With post- Washington, D.C: World Bank. Outlook and Risks 17 1818 H Street, NW Washington, DC 20433