The first issue of the Yemen Economic Monitor (YEM) was launched on June 13, 2022. The YEM is expected to be a regular publication prepared by the Middle East and North Africa Macroeconomics, Trade and Investment (MTI) Global Practice ( MENA) Region. The Yemen Economic Monitors (YEM) will consist of two chapters: the first will provide an update on recent economic developments and an assessment of the outlook, and the second chapter will focus on a particular topic relevant to the country’s economic development. The YEM is part of the World Bank’s program to pay particular attention to fragile conflict and violence (FCV) contexts, where poverty is rising rapidly and hard-won development gains are rapidly reversing.
After seven devastating years of war, Yemen faces a deep economic crisis, threatening the government’s ability to maintain vital public services. Yemen’s economic output declined significantly in 2020, reflecting the cumulative effects of the COVID19 pandemic on pre-existing drivers of fragility. Annual GDP is expected to have shrunk a further 2% in 2021, falling to about half of its pre-conflict level. Besides rampant violence and insecurity, multiple internal and external shocks are driving these contractions, including weather events, the economic repercussions of the COVID-19 pandemic, and the war in Ukraine, among others. In this context, extensive damage to vital infrastructure has severely disrupted essential services, and the conflict has disrupted the payment of civil service salaries, undermining efforts to preserve human capital and prevent a further deterioration in government performance. Human Development.
Soaring food prices, further exacerbated by the war in Ukraine, have had a major impact on Yemen’s economy and, dramatically, on an already severe food crisis. Over the past year, inflation has been boosted by a combination of soaring global commodity prices, currency depreciation and extraordinary shocks like the war in Ukraine. As a net food importer, rising world commodity prices have had negative effects on Yemen’s external balances, inflation and international reserve levels. Recently, the war in Ukraine has led to a further spike in the price of essential imports, such as wheat: the country’s second-largest import after fuel (nearly half of all wheat imports to Yemen come from Russia and Ukraine ). Domestically, in the past year alone, currency depreciation has contributed to a 20-30% increase in domestic food prices, and shocks in the global grain market could strain the budgets of humanitarian importers. More dramatically, these dynamics have exacerbated an already serious food crisis.
As the conflict dragged on, the Yemeni economy increasingly developed into a de facto dual economy, divided between areas controlled by the WRI and those controlled by the DFA. With revenues well below spending needs, in 2021 WRI continued to monetize its budget deficit, eroding the purchasing power of the Yemeni rial. In 2021, high inflation caused public spending to contract in real terms even as it increased in nominal terms. However, recent developments have bolstered the credibility of WRI’s monetary policy. The introduction of a foreign exchange auction mechanism at the central bank in mid-November 2021, combined with the appointment of a new central bank management in December 2021, helped stabilize the exchange rate, which closed the year at YER 952 to the US dollar, after peaking at around YER 1,725 to the US dollar only a few days earlier in the same month (December 2). Meanwhile, the de facto authorities (DFA) in Sanaa manage fiscal policy strictly on a cash basis, which has helped contain inflation in DFA-controlled areas, although it is still in the double digits.
Since April 2022, a number of critical developments have raised hopes that a peacebuilding process is within reach. The government reorganization, together with the announced financial package of $3 billion by Saudi Arabia and the United Arab Emirates, as well as the planned conversion of the SDR and, above all, various efforts to identify avenues for dialogue at the political level, are positive signs of hope for a peaceful and secure Yemen. , which is a key condition for strengthening Yemen’s economic performance. At the same time, some of these large one-off windfalls will not eliminate the need for structural measures to address some of the deep-rooted imbalances in the economy. A key one is to address monetary and fiscal policy changes that can help stabilize the exchange rate and inflation, raise incomes, and generate foreign exchange to address external imbalances. Keeping trade open, removing restrictions on the movement of goods and people and fostering a conducive business environment, will be key to improving economic performance. Furthermore, coordination and complementarity should guide the work of the international community to enable Yemen to reap the dividends of peace, leveraging the respective comparative advantages of various organizations to achieve our common goals.
While a modest rebound in the GDP growth rate is expected in 2022, Yemen’s economic prospects are highly dependent on the evolution of the conflict and general security conditions on the ground. On the other hand, episodes of hostilities coupled with still high import prices could further undermine private sector conditions. On the positive side, the aforementioned renewed hopes for peace, together with increased remittances and the potential for higher hydrocarbon exports, could boost growth in the medium term.
This report focuses on events up to April 10, 2022 and acknowledges the rapid evolution of significant developments in the following weeks of May-June 2022. The medium-term outlook remains highly uncertain, and the most recent developments will subject of and will be discussed in more detail in the next issue of the Yemen Economic Monitor.