Deterioration Yemeni Rial: Has the Government Lost the Ability to Intervene and Enforce Its Monetary and Fiscal Tools?

Yemen Monitor/ Reporting Unit

Economists and bankers are raising doubts about Yemen’s financial and monetary situation amid a significant void in monetary policy, a standstill in government financial reforms, and a multiplication of economic challenges in the country.

Meanwhile, Yemeni citizens are living in a state of anxiety and tension as the national currency, the Rial, continues to deteriorate to record lows, and the internationally recognized government is failing to intervene and implement its monetary and fiscal tools to readjust the exchange rate.

In recent days, the foreign exchange markets have witnessed a terrible deterioration in the value of the national Rial against foreign currencies, indicating the extent of the weakness of the overall economy.

A banking source told “Yemen Monitor” that the Yemeni Rial witnessed a sharp decline against foreign currencies to a record low for the first time in its history in Friday’s trading, with its exchange rate against the Saudi Riyal reaching 510 for buying and 513 for selling, while for the dollar, it reached 1946 for buying and 1962 for selling.

The national currency had recorded a slight improvement against foreign currencies in the past two weeks, but it quickly declined again at the end of last week and the beginning of this week.

Government Resources Depleted

In this regard, economic expert Wafiq Saleh said that the exacerbation of this crisis is driven by the continued disruption of the government’s public resources, especially foreign exchange resources, and the increasing pressures on the state’s public finances due to the high volume of the government’s financial obligations, such as salaries and spending on basic services, compared to the decline in the volume of public revenues.

Despite the widening gap in Yemen’s trade balance, resulting from the halt of oil exports and the expansion of imports, Wafiq Saleh believes that “there are also imbalances prevailing in the monetary and banking situations, due to the division process caused by the Houthi group in the central bank institution, and the duplication of banking decisions, which reflected on the weakness of the impact of the central bank’s monetary policy in Aden, and the increase in black market banking activities.”

He also indicated that the potential international factors and variables related to the escalation of the conflict in the region and the Red Sea, and the ports of Hodeidah, may have negatively affected the exchange markets, and led to an increase in uncertainty and economic fears among commercial and industrial sectors, due to the complication of supply chains, which led to an increase in demand for foreign currency in the black market, and the intensification of the import mechanism, in anticipation of any bleak possibilities in the import process, especially with the gloominess of the scene, and the absence of any indicators on the horizon to contain the successive economic crises in the country.

He continued, saying: “It seems that the government has actually lost its ability to intervene and enforce its monetary and fiscal tools to contain the Rial crisis and achieve stability in the exchange market.”

Shifting Blame to the Government

In a related development, the UAE-backed Southern Transitional Council (STC) reaffirmed its commitment to secession on Thursday, while holding the government and the Presidential Leadership Council responsible for the collapse and deterioration of the Yemeni Rial against foreign currencies.

In a meeting held by what is known as the “Presidency of the STC” chaired by Ali Abdullah al-Kathiri, the acting president of the council on Thursday, the council called for “renewing the covenant and loyalty to the liberation process, as well as affirming adherence to national constants, and continuing the struggle until the full achievement of the noble goals sought by our people, foremost of which is the goal of restoring and building our independent federal state.”

According to the council’s website, the meeting discussed a number of developments and various issues on the local scene, most notably the continued collapse of the local currency against foreign currencies, and the resulting impact of this collapse on the lives and living conditions of citizens.

The meeting called on the Presidential Leadership Council, the central bank, and the government to assume their responsibilities in putting an end to this rapid deterioration, and to take real, quick, and transparent measures to curb the activities of manipulators and expose the suspicious parties that are working to create an artificial demand for foreign currencies in order to inflate their price in the local market.

Consequences of Currency Collapse

According to residents and merchants in areas controlled by the internationally recognized government, the rapid decline of the currency has led to sharp daily increases in prices, with many Yemenis unable to purchase most basic commodities. Most citizens are now complaining about the madness of prices.

Although the central bank has been announcing weekly electronic auctions to sell hard currency to banks and provide part of the market’s needs for foreign currency, the foreign exchange markets seem to be out of control and have not responded to any measures that could curb the rise of foreign currencies against the Yemeni Rial.

The central bank says it has completely stopped financing expenditures from inflationary sources, in addition to preventing the printing of currency and refusing to pump any new quantities of currency into the banking market.

A source at the central bank explained that the bank will not return to the practices of the past by financing government expenditures from inflationary sources, due to their risks and negative effects on the economy and the exchange rate in particular, noting that the growth rate of the monetary base during the period from the beginning of 2022 until today was zero, which means that there was no monetary issuance during the period.

This comes amid a state of stagnation in the activity of the Yemeni central bank following the Presidential Leadership Council’s retreat from implementing its decisions to address the distortions in the money market, in contrast to regional and international promises to hold consultations on the economic file with the Houthis, which were supposed to be held before the end of September last year but have not been held until today.