The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) @#&OPS~Doctype~OPS^blank@pidaprcoverpage#doctemplate Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 14-Jan-2025 | Report No: PIDIA00471 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) @#&OPS~Doctype~OPS^dynamics@pidaprbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Region Operation ID Operation Name Yemen Financial Market MIDDLE EAST AND NORTH Yemen, Republic of P180708 Infrastructure and AFRICA Inclusion Project Financing Instrument Estimated Appraisal Date Estimated Approval Date Practice Area (Lead) Investment Project Finance, Competitiveness 17-Nov-2024 27-Mar-2025 Financing (IPF) and Innovation Borrower(s) Implementing Agency United Nations United Nations Development Programme Development Programme (UNDP) (UNDP) Proposed Development Objective(s) The Project's Development Objective is to develop a payment infrastructure that supports the efficiency of payment transactions for the Yemeni population and increases financial inclusion. Components Development of Fast Payment Systems (FPS) Development of a Real Time Gross Settlement System in Yemen and upgrading Core Banking for CBY Aden Supporting access and usage of the payment's infrastructure across Yemen Project management T @#&OPS~Doctype~OPS^dynamics@pidprojectfinancing#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? No Is this project Private Capital Enabling (PCE)? No SUMMARY Total Operation Cost 20.00 Total Financing 20.00 of which IBRD/IDA 20.00 Page 1 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) Financing Gap 0.00 DETAILS World Bank Group Financing International Development Association (IDA) 20.00 IDA Grant 20.00 @#&OPS~Doctype~OPS^dynamics@envsocriskdecision#doctemplate Environmental And Social Risk Classification Moderate Decision Other Other Decision (as needed) B. Introduction and Context Country Context 1. The ongoing conflict in Yemen, now in its tenth year, has led to a severe economic crisis in the country. Civil war broke out in 2015 between the Internationally Recognized Government (IRG), with support from the Arab Coalition, and the Houthi movement who gained control over major territories in the north. Yemen's humanitarian crisis is deeply rooted in this ongoing conflict and the highly fragmented political and economic landscape that has developed over the years. The conflict has intensified the country's fragmentation into two distinct economic zones, each governed by its unique set of institutions. These include competing monetary authorities with their respective exchange rates and policies, resulting in increasing disparities. Most of the population live in Houthi-controlled areas, while IRG-controlled areas hold the country's oil and gas resources. 2. Economic growth has been severely hampered by the conflict creating deep structural challenges. Between 2015 and 2023, the country experienced a staggering 54 percent contraction in real GDP per capita. The decline in economic activity is attributed to the conflict, the significant decrease in hydrocarbon production, reduced agricultural output, deteriorating institutional quality, increased the vulnerability of the banking sector and interference in the private Page 2 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) sector by competing factions. Yemen has remained in debt distress and halted most payments to local and international debtholders because of the decline in public revenue and liquidity shortages. 3. Ongoing domestic tensions, compounded by the escalating Middle East conflict have led to a further contraction of Yemen's economy. Amid the continued blockade of the IRG's oil exports by the Houthi movement and the escalating conflict in the Middle East and Red Sea, Yemen faces an increasingly grim reality. The economy is projected to contract by 1.0 percent in real terms in 2024, following a 2.0 percent decline in 2023. Concurrently, real GDP per capita is expected to decrease by 3.2 percent, with the nominal GDP per capita decline projected to be even more pronounced at 15.8 percent. Oil production is estimated to remain stagnant after a sharp 59.4 percent drop in 2023, assuming current conflict conditions continue. The oil blockade has intensified economic difficulties for IRG, with revenues (excluding grants) falling by 42 percent in the first half of 2024, following a sharp 50 percent drop in 2023. The ongoing blockade, coupled with persistent dependence on imported goods and services, is expected to widen the current account deficit to 25 percent of GDP, putting additional pressure on the Yemeni Riyal (YER). 4. The macroeconomic outlook for 2025 remains grim, with multiple downside risks threatening stability. With stalled peace negotiations and ongoing regional and domestic tensions, our forecast assumes no resumption of oil exports in 2025. Real GDP is projected to grow at a modest 1.5 percent, reflecting only marginal improvements in the non-oil sector. The services sector, particularly transportation, may see slight gains due to expanded operations of Yemenia Airways. However, without significant clear prospects for peace and security, increased revenues and exports, public finances and external accounts will continue to be under stress. Inflation is expected to rise further, driven by currency depreciation in the IRG-controlled area. 5. Within this deteriorating economic environment, living conditions for most Yemenis have become increasingly dire. In July 2024, 62 percent of households reported inadequate food consumption, representing a dramatic increase of 24 percent in IRG areas and 30 percent in Houthi areas since last year. In some governorates, severe food deprivation more than doubled. This is due to further depreciation of the YER and reduced humanitarian food assistance. Phone surveys reveal that many households have resorted to extreme measures, with 19 percent turning to engaging in high-risk work. Those with poor food consumption are grappling with compounding vulnerabilities, including higher levels of acute and chronic health conditions, and symptoms of mental health disorders. These factors reinforce a vicious cycle of poverty and eroding human capital, deepening the humanitarian crisis. Some analyses indicate that if the conflict persists until 2030, Yemen's human development will regress by 40 years, effectively erasing progress made over one and a half generations. Within this context, cash transfers are particularly important, and the World Bank-funded Emergency Cash Transfer Program is one of the largest aid programs in Yemen (along with the in-kind support from the World Food Program). It serves as a significant source of income for poor households. Beneficiaries report using the cash transfers to meet basic needs, particularly food (82 percent), repaying debts related to food, healthcare, and utilities (65 percent), and covering healthcare expenses (28 percent). Sectoral and Institutional Context 6. Among the weakest in the MENA region, the financial sector in Yemen is dominated by the banking sector which, since 2015, has faced a liquidity crisis and declining trust by the Yemeni. There are over 20 operating banks and microfinances registered in Yemen. The lack of confidence in the sector and the inability to meet the needs of the private sector has led to the expansion of money exchanges during the conflict. The number of money exchanges has increased significantly during the conflict, with an increase in branches from 876 in 2017 to 3,244 in 2019. Exchange companies currently provide many financial services that Yemeni banks previously provided, including trade financing. Page 3 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) 7. Yemen's cash-based economy has minimal levels of financial inclusion, with adoption of account and digital payments driven by E-money issuers. Most transactions, including government payments, are in cash. The latest Findex data shows an increase in account ownership from 6 percent in 2014 to 12 percent in 2022, which is much lower than the regional average for the Middle East (48 percent) and low-income countries (62 percent), as of 2021. Women make up a disproportionately large share of unbanked adults, with just 2 percent holding a bank account. An estimated 50 percent of the population does not have national identification documents. The currency crisis left Yemen banks financially crippled and unable to meet customer demands for cash withdrawals or increase lending as they had historically been significant investors in government debt. In this context, E-money issuers have been able to capture new customers, with the total number of E-money accounts reaching about 800,0001. 8. Regarding business payments, cash also remains the dominant mode for transactions. A staggering 97.2 percent of companies remunerate their employees in cash, with a mere 2.1 percent relying on the formal banking system. Similarly, most suppliers receive payments in cash (68.1 percent) or through cash transfers facilitated by money exchange companies (20.6 percent). Only a modest 7.6 percent of suppliers receive payments through the established banking channels. In fact, the overall accessibility of banking services for businesses has considerably deteriorated. According to a 2018 WB survey involving 141 firms, less than 50 percent of large enterprises, 18.5 percent of medium-sized businesses, and 6.1 percent of small firms reported having access to a functioning bank branch. Alarmingly, 38.78 percent indicated having no access to any bank branch whatsoever. 9. Increasing the use of digital financial services offers significant opportunities to increase financial inclusion and access to finance, including through digitizing government payments, but is constrained by the limited payments infrastructure in the country. Due to the absence of a Fast Payments System (FPS)2, banks and other financial services providers in Yemen operate in silos, with no interoperability among providers. Currently, there is one FPS operating solely in the Houthi-controlled areas, which is privately owned. However, the market has only attracted limited participation and facilitates a very low volume of transactions. This limits its ability to enable FPS in the entire market and to spur adoption and usage of digital payments. There is no FPS in the IRG-controlled areas. The absence of an FPS in Yemen creates a system where individuals and enterprises have no avenue to exchange funds in an efficient way, as the options would be limited to cash, checks, or exchanging electronic payments among clients of the same financial institution. The lack of an FPS across all of Yemen also inhibits government to person transfers (G2P), person to person transfers (P2P), person to merchant payments (P2M), e-commerce and bill payments. 10. The absence of a Real-Time Gross Settlement System (RTGS) for large-value payments in Yemen significantly hampers the efficiency and security of retail payment systems. An RTGS is crucial for facilitating the timely settlement of transactions, mitigating financial risks, and ensuring secure inter-institutional obligations. In the IRG-controlled areas, there is no RTGS system in place, which undermines the ability to monitor and manage financial risks effectively. However, in the Houthi-controlled areas, a mechanism resembling an RTGS exists and is sufficiently functional to support fast payment providers. 11. The lack of the core payments infrastructure also limits the ability to digitize government payments in Yemen that could enhance the transparency and efficiency of government payments, including those for public sector salaries and social transfers. In August and September 2023, the IRG issued several decrees and instructions to launch its efforts towards digital payments of salaries. Government institutions are instructed to close their accounts with commercial banks and open new ones with CBY-Aden. Government civil servants are instructed to open bank accounts with 17 CBY approved financial institutions. However, Yemen is missing the core elements of a modern G2P framework to enable this 1 Electronic Payment Services in Yemen, Challenges and Opportunities: Institute of Banking Studies. Page 4 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) digitization, including shared infrastructure that is interoperable (FPS) and seamlessly supports various programs and financial service providers. 12. Moreover, there is a large and growing level of demand for a digital payment infrastructure to accelerate and effectively digitize the Unconditional Cash Transfers (UCT)3 in Yemen which is also limited by the lack of core payments infrastructure. The WB funded UCT program is the single largest social protection program in Yemen, covering 1.42 million households, rendering cash transfers up to 3 times per year to beneficiaries to provide support and protection to Yemeni households. Amongst this population (29 percent of Yemen population), there is a growing interest to receive UCT payments digitally as evidenced in the December 2023 third party monitoring (TPM) results under the ongoing social protection project (P173582) which showed that 92 percent of those who did not already have an e-wallet indicated interest in receiving their payments digitally. The main difference between digital transfers versus the existing process of cash transfer distribution would be that the end users would receive the UCT payments in their bank or e-money accounts opened at participating financial institutions, which would include debit card or mobile wallet. 13. There is a clear need to develop payments infrastructure in Yemen to advance financial inclusion and support the digitization of government payments, including cash transfers. Digitalization of cash transfers will: (i) improve the efficiency of making payments by lowering the cost of disbursing and receiving them, and by increasing the speed of payments; (ii) increase the transparency of payments, and thus reduce the likelihood of leakage between the sender and receiver; (iii) enhance the security of payments and thus lower the incidence of fraud or other financial crime; (iv) increase financial inclusion by providing an important first entry point into the formal financial system; and (v) contribute to women’s economic empowerment by increasing the privacy of payments and increasing control over the funds received. A pilot enabling digital payment options for beneficiaries in 8 districts (4 in Houthi-controlled, 4 in IRG-controlled areas), was conducted. The beneficiaries in the pilot districts were offered a limited choice of financial institutions via which to receive their benefits via e-wallets. Across pilot districts, take-up rates ranged from 40 to 70 percent. By the end of the payment cycle 18, which was conducted from 16 September to 17 October 2024, 10,761 wallets had been opened with cash transfers rendered into them.4 The large coverage of the UCT program in Yemen holds the promise of facilitating a significant and swift digital transformation of the financial sector and economy, such as the one experienced in multiple African economies including Kenya. Payment infrastructure can bring down the costs of accessing cash and become a convenient option that can bring unbanked and underbanked populations into the formal financial system. Modern payment systems include real-time monitoring, data analytics, and compliance checks that help to ensure the integrity of financial transactions. Moreover, they provide traceability for financial operations and reduce the need of holding and transacting in cash. Access to centralized payments infrastructure reduces the need of deploying costly physical access points increasing the productivity of financial services providers and lowering barriers to entry for new players, fostering competition among financial service providers. This can lead to better services and lower costs for consumers. C. Proposed Development Objective(s) Development Objective(s) (From PAD) The PDO is to develop a payment infrastructure that supports the efficiency of payment transactions for the Yemeni population and increases financial inclusion. Key Results Page 5 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) • Increased government payments, as measured by the percentage of beneficiaries who received or made government payments and transfers through electronic channels (of which female). • Increase in large-value payment systems across the financial markets, as measured by the percentage increase in the value of RTGS transactions • Increased access to digital financial services, as measured by the number of financial access points. • Efficiency of Payments systems, as measured by percentage decrease in transaction cost to customers D. Project Description 14. The project will include 4 components focused on developing the payments infrastructure and supporting the digitization of payments in Yemen as follows: • Component 1: Development of Fast Payment Systems (FPS) • Component 2: Development of a Real Time Gross Settlement System (RTGS) for Yemen and upgrading Core Banking for CBY Aden • Component 3: Supporting access and usage of the payment's infrastructure across Yemen • Component 4: Project Management @#&OPS~Doctype~OPS^dynamics@pidaprlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 TBD Summary of Screening of Environmental and Social Risks and Impacts 15. The environmental risk rating of the project is low. The project does not support rehabilitation or construction activities, or civil works and therefore, none of the interventions under this project result in significant negative environmental impacts. Nonetheless, the project will fund the acquisition of some equipment under component one which might result in generating limited quantities of e-waste. The e-waste will be generated through the replacement of old hardware/software/systems and/or when the procured equipment comes to the end of life. This risk will be assessed going forward and once more information is gained on the nr of equipment to be procured, adequate mitigation measures -if needed- will be agreed on with the implementing agency. This includes the preparation of e- waste management plan and/or adding adequate clauses to the contracts with the implementing agencies to ensure adequate management of such waste. 16. At the appraisal stage, the social risks are considered moderate. The social risks associated with the project include exclusion risks, security risks, sexual exploitation and abuse (SEA), elite capture, fraud and corruption, operational risks, consumer trust and protection, and digital literacy challenges. The social risks of the project will be managed through robust implementation guidelines and meaningful stakeholder engagement by the implementing agency Page 6 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) including the development of site-specific E&S instruments if required to address these risks and should be applied throughout the project lifecycle. E. Implementation Institutional and Implementation Arrangements 17. The UNDP will receive the IDA grant for the benefit of the Republic of Yemen and will act as implementing agency of the project, while partnering with the authorities for the relevant components and leveraging local capacity for the other components. This arrangement maximizes development impact on the ground, whilst helping to preserve and build local institutional capacity. 18. The UNDP will: (a) take responsibility for project implementation; (b) monitor the project targets and results in coordination with the local partners; (c) handle relevant procurement, financial management, M&E, and disbursement management including the preparation of withdrawal applications under the project; (d) enter contractual arrangements with service providers and third-party monitors; and (e) ensure that all reporting requirements for the Bank are met per the Financing Agreement. UNDP will decide on the appropriate procedures for selecting contractors, consultants, and implementation partner(s) in accordance with its own operational guidelines. @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Rinku Chandra Senior Financial Sector Specialist Omar Mohammed Ahmed Al-Aqel Private Sector Specialist Ghada Ahmed Waheed Ismail Financial Sector Specialist Borrower/Client/Recipient United Nations Development Programme (UNDP) Zeina Barrage Country Represetative zeina.barrage@undp.org Implementing Agencies Page 7 The World Bank Yemen Financial Market Infrastructure and Inclusion (P180708) United Nations Development Programme (UNDP) Nadia Alawamleh Deputy Resident Representative nadia.alawamleh@undp.org FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Rinku Chandra, Omar Mohammed Ahmed Al-Aqel, Ghada Ahmed Waheed Task Team Leader(s): Ismail Approved By Practice Manager/Manager: Djibrilla Adamou Issa 09-Jul-2024 Country Director: Dina N. Abu-Ghaida 14-Jan-2025 Page 8