When Monetary Aid Fails: The Global Perspective
The republic of Yemen continues to fight a humanitarian, social and economic crisis after almost six years of escalating civil war. The gruesome conflict has resulted in the deaths of nearly 10,000 people and pushed millions to the brink of starvation. So, what is the cause of this war? The roots of the war lie mainly in the Arab spring of 2011 when pro-democracy protesters took to the streets to force the president, Ali Abdullah Saleh, and end his 33-year rule. As tensions continued to rise in the country, the power was handed to his deputy, Abdrabbuh Mansour Hadi. During his time president Hadi struggled with various problems including food insecurity, corruption, militant attacks. One of the key players of this proxy war are the Houthis – Shia Muslims minority from northern Yemen. Despite being former enemies, the Houthis and the Saleh forces have allied and took over the capital Sanaa in 2014. On the other side, Saudi Arabia, as well as with several other countries, have formed a coalition to bring back the power of Abdrabbuh Mansour Hadi in Yemen. Since the assasination of Saleh,Yemen’s political situation has gotten worse leading to significant problems, just one being the collapse of Yemen’s already-weak economy.
Yemen has had one of the least developed economies in the world and in the Middle East region, a fact that was true even before civil war broke out. Yemen’s main trade partners are Saudi Arabia and China, as well as Turkey, which is the chief importer of Yemen’s products. Other major destinations of Yemen’s exports are Thailand, Malaysia, the United Arab Emirates, and Oman. Yemen imports grains, food products, chemicals, and machinery. The dominant export product is crude oil, but it also exports gold and food items to its neighbors.
Yemen is a minor oil economy that receives 70% of its GDP from its exports; however, disruptions in the form of air bombardments, conflict, falling investor confidence, and increasing risk margins. The halting of oil exports early in the war has denied the Central Bank of Yemen a key source of foreign currency. Additionally, in March of 2015, a Saudi-led coalition imposed a de facto blockade on the northern port of Hodeida. Saudi Arabia also carried out missile strikes that have damaged ports, transit routes, and warehouses, further hampering access to food, fuel, and medicine. Various schools and hospitals have also been damaged, resulting in the deaths of thousands of civilians, as well as mass unemployment.
As Yemen’s currency continues to be devalued at an alarming rate, the most desired option is to tighten the monetary policy to fight off the liquidity crisis, currency devaluation, and food insecurity. Fiscal policy measures such as government spending are focused on rebuilding the war-torn cities and paying public sector salaries across the country. In addition, Yemen is struggling with a large public budget deficit, which was estimated at 660 billion Yemeni Riyals ($2 billion) in 2018. However, it remains unlikely that any policy measures will have an immediate impact on the country. Government-led economic programs may yet have a long-term impact, but until then, the country will continue to fight famine, food insecurity, and internal tension.
Yemen has had one of the least developed economies in the world and in the Middle East region, a fact that was true even before civil war broke out. Yemen’s main trade partners are Saudi Arabia and China, as well as Turkey, which is the chief importer of Yemen’s products. Other major destinations of Yemen’s exports are Thailand, Malaysia, the United Arab Emirates, and Oman. Yemen imports grains, food products, chemicals, and machinery. The dominant export product is crude oil, but it also exports gold and food items to its neighbors.
Yemen is a minor oil economy that receives 70% of its GDP from its exports; however, disruptions in the form of air bombardments, conflict, falling investor confidence, and increasing risk margins. The halting of oil exports early in the war has denied the Central Bank of Yemen a key source of foreign currency. Additionally, in March of 2015, a Saudi-led coalition imposed a de facto blockade on the northern port of Hodeida. Saudi Arabia also carried out missile strikes that have damaged ports, transit routes, and warehouses, further hampering access to food, fuel, and medicine. Various schools and hospitals have also been damaged, resulting in the deaths of thousands of civilians, as well as mass unemployment.
As Yemen’s currency continues to be devalued at an alarming rate, the most desired option is to tighten the monetary policy to fight off the liquidity crisis, currency devaluation, and food insecurity. Fiscal policy measures such as government spending are focused on rebuilding the war-torn cities and paying public sector salaries across the country. In addition, Yemen is struggling with a large public budget deficit, which was estimated at 660 billion Yemeni Riyals ($2 billion) in 2018. However, it remains unlikely that any policy measures will have an immediate impact on the country. Government-led economic programs may yet have a long-term impact, but until then, the country will continue to fight famine, food insecurity, and internal tension.
A Fiscal Juggle: The Need for both Inflation and Stimulus
Yemen is an oil-exporting and food-importing economy with low levels of domestic industrial output and lack of raw materials. According to the United Nations, the Yemen Humanitarian Crisis is by far the worst in the world. Thus, Yemen’s economy has become dependent on a variety of imports. In fact, over five years of escalating conflict has exacerbated existing economic problems, increased unemployment, and furthered shortages of food, water, and medical resources. As this unprecedented adversity continues, a decline in even one of Yemen's three sources of foreign currency - humanitarian aid, remittances, and oil exports - can have a considerably negative impact on local purchasing power. Unfortunately, yet unsurprisingly, Yemen is now facing a decline in all three.
The World Bank recently quoted that over 20.5 million Yemenis are without safe water and sanitation and 19.9 million without adequate healthcare. Socio-economic conditions deteriorated further in 2020 because of the economic impact of COVID-19, a subsequent fall in global oil prices, weak public infrastructure, and a limited capacity to cope with extreme climate events and disasters. As the economic effects of coronavirus rippled across countries in the middle east, inflation in Yemen reached 26.4% in 2020, with estimates of a rise to 31% in 2021 (October 2020 IMF World Economic Outlook).
Yemen’s economy is burdened by the reduction in oil revenues and decline in remittances, a situation only worsened by the impact of desert locusts on the cropping season. These circumstances are all worsening food security, and weakening public health systems in Yemen, restricting the country’s ability to cope with the COVID-19 pandemic. Meanwhile, the International Finance Corporation extended its support to farmers across Yemen. Over the last three fiscal years, the IFC has invested billions of dollars in the middle east, advised businesses and legislators, and financed 824 solar projects for farm irrigation. These efforts by the IFC can go a long way in fending off a menacing famine and helping Yemen’s farmers produce the food the country is in desperate need for.
To mitigate the negative effects of the pandemic, the World Bank is also supporting activities through a US$26.9 million grant under the Yemen COVID-19 Response Project. In addition, the Emergency Health and Nutrition Project (EHNP) has helped over 23 million people across Yemen. Over 2.6 million people have gained access to improved water sources, 2.2 million to improved sanitation, and over 2.6 million people in districts at high risk of cholera have received oral cholera vaccine.
Laurent Bukera, the UN World Food Programme’s Country Director in Yemen, describes the crisis as “a poisonous cocktail of conflict, economic crisis, and coronavirus.” Calling for financial access and humanitarian efforts, Bukera warns against letting “people slip into [the] catastrophe,” claiming that the support received remains inadequate to fulfil the rising needs of Yemen. With the rising global uncertainty around the COVID-19 pandemic, the future of Yemen’s economy seems grim, but hopeful.
The World Bank recently quoted that over 20.5 million Yemenis are without safe water and sanitation and 19.9 million without adequate healthcare. Socio-economic conditions deteriorated further in 2020 because of the economic impact of COVID-19, a subsequent fall in global oil prices, weak public infrastructure, and a limited capacity to cope with extreme climate events and disasters. As the economic effects of coronavirus rippled across countries in the middle east, inflation in Yemen reached 26.4% in 2020, with estimates of a rise to 31% in 2021 (October 2020 IMF World Economic Outlook).
Yemen’s economy is burdened by the reduction in oil revenues and decline in remittances, a situation only worsened by the impact of desert locusts on the cropping season. These circumstances are all worsening food security, and weakening public health systems in Yemen, restricting the country’s ability to cope with the COVID-19 pandemic. Meanwhile, the International Finance Corporation extended its support to farmers across Yemen. Over the last three fiscal years, the IFC has invested billions of dollars in the middle east, advised businesses and legislators, and financed 824 solar projects for farm irrigation. These efforts by the IFC can go a long way in fending off a menacing famine and helping Yemen’s farmers produce the food the country is in desperate need for.
To mitigate the negative effects of the pandemic, the World Bank is also supporting activities through a US$26.9 million grant under the Yemen COVID-19 Response Project. In addition, the Emergency Health and Nutrition Project (EHNP) has helped over 23 million people across Yemen. Over 2.6 million people have gained access to improved water sources, 2.2 million to improved sanitation, and over 2.6 million people in districts at high risk of cholera have received oral cholera vaccine.
Laurent Bukera, the UN World Food Programme’s Country Director in Yemen, describes the crisis as “a poisonous cocktail of conflict, economic crisis, and coronavirus.” Calling for financial access and humanitarian efforts, Bukera warns against letting “people slip into [the] catastrophe,” claiming that the support received remains inadequate to fulfil the rising needs of Yemen. With the rising global uncertainty around the COVID-19 pandemic, the future of Yemen’s economy seems grim, but hopeful.
