Can Saudi's $1 billion deposit fix Yemen's economic woes?
The Yemeni riyal marked a sudden jump against the US dollar last week after Saudi Arabia announced that it would deposit $1 billion into the Aden-based Central Bank of Yemen to stimulate the country’s faltering economy.
Yemen's financial system has been in tatters over the last seven years, with the country's war setting the country back decades at different levels. The recent Saudi injection of money into its neighbour's central bank is a bid to stop the country's economy from further collapse.
"This deposit aims to develop a clear roadmap and a vision that takes care of the Yemeni people first and addresses their needs. It also aims to strengthen efforts for building reserves at the Central Bank of Yemen," said the state-run Saudi Press Agency.
The Kingdom's move received abundant local and international praise. However, some Yemeni economists are less optimistic, arguing that such a deposit is a fleeting remedy that falls short of tackling the root causes of the country’s economic plight.
"From 2015 until 2021, Yemen lost a cumulative $126 billion in potential gross domestic product (GDP), according to the United Nations"
As a leading member of an Arab coalition fighting the Iran-backed Houthis in Yemen since March 2015, Saudi Arabia’s military operations are largely responsible for the colossal ruin of the country's infrastructure and countless deaths and injuries.
Its development projects and financial aid to Yemen have been an attempt to tackle some repercussions of the destructive war.
"The Saudi deposit's impact will be positive for achieving relative [economic] stability and will provide an opportunity for the Central Bank of Yemen to play a role in fulfilling better monetary management," Mustafa Nasr, the head of the Taiz-based Studies & Economic Media Centre, told The New Arab.
According to Nasr, Yemen's local currency devaluation will slow as a balance in the monetary market will prevail. Nonetheless, he said the Saudi deposit is a temporary solution whose effects will likely last for only a few months.
Multiple issues, including a currency clash between the Yemeni government and the Houthi movement, interrupted oil exports, and indefinite fighting, have rendered money pumping into the central bank ineffective for establishing long-term economic revival.
In October last year, Houthi drone strikes began hitting government-run oil ports in Yemen's south. Consequently, crude oil exports halted, costing the government around one billion dollars, Yemeni Prime Minister Maeen Abdulmalik told the media two weeks ago.
The financial loss impacted the government's capacity and ability to deliver basic services in areas under its control. With the halt of oil exports, the already-precarious national economy has received an additional blow.
A message to Yemeni civilians
Wafiq Saleh, a Yemeni economic analyst, describes the Saudi deposit as "a temporary solution" that can mitigate the financial pressures on the government, whose revenues have declined due to the stoppage of crude oil exports. However, he warned civilians against exchanging their foreign currencies at present.
Some Yemeni citizens have savings in US dollars or Saudi riyals. Once they heard about the Saudi deposit and the rise in the value of the local currency, they rushed to the exchange centres, seeking to transfer their money from foreign currencies into the Yemeni riyal.
Fawaz Ahmed, a 38-year-old resident of Aden, used to keep $2,000 of savings in his house. When the news about the Saudi deposit broke, he exchanged $1,000. "I do not want to keep my savings in US dollars. The value of the local currency may improve, which is why I prefer to diversify my modest savings," he told The New Arab.
Ahmed is one of many following this line of thinking, with most fearful that their foreign currency savings will lose some of their value should the local currency keep improving. However, what Ahmed and many others did was a miscalculation, according to economists.
"All [the deposit] can do is give the government room to launch some economic reforms, stabilise the exchange rate, and facilitate food imports to the population"
"The post-deposit exchange prices are temporary, and it varies from one exchanger to another. These are impromptu and random prices that resulted from the sudden news of financial support for the central bank," Saleh explained.
"It is better that citizens do not sell their hard currency savings because they will be shocked later when the local currency value falls again,” he added.
A frank reply from the central bank
With a clear understanding of the magnitude of the economic crisis in the country, Ahmed Ghalib, the governor of the Central Bank of Yemen, presented a frank response on the potential role of the Saudi deposit.
He ruled out the possibility that it would end the "catastrophic situation" in Yemen. All it can do is give the government room to launch some economic reforms, stabilise the exchange rate, and facilitate food imports to the population, Ghalib told the state-run Yemen TV channel on 22 February.
The scale of destruction across Yemen since 2015 is indescribable, and the economic losses have been huge. From 2015 until 2021, Yemen lost a cumulative $126 billion in potential gross domestic product (GDP), according to United Nations Development Program (UNDP) estimates. The Saudi deposit is a tiny fraction of what Yemen would have made if the war did not erupt.
The parties to the conflict have pushed forward with an aggressive military approach for seven years, but neither the Saudi-backed Yemeni forces nor the Iran-allied Houthi rebels have managed to score a final victory.
In April last year, a peaceful breakthrough materialised for the first time when the rivals agreed to a ceasefire, which ended on 2 October.
Last year, Saudi Arabia started back-channel talks with the Houthis through Oman-led mediation. The Kingdom demonstrated a desire to exit the quagmire in Yemen, giving up on military operations. So far, no substantial agreement has been declared, with the Houthis maintaining maximalist demands.
"With the conflict remaining unresolved and violence continuing, any loans or financial aid that Yemen receives will not be able to address the country's economic woes in their entirety"
Nasr views the Saudi deposit into the Yemeni government-run central bank as a politically motivated measure amidst the continued failure of talks between Saudis and the Houthi group.
"This positive point will enable the central bank to take needed actions in the coming months," he told The New Arab.
In reality, however, the Saudi deposit, and those that could follow, will not fully stabilise the Yemeni economy or fix the damage wrought by the war.
With the conflict remaining unresolved and violence continuing, any loans or financial aid that Yemen receives will not be able to address the country’s economic woes in their entirety.
The writer is a Yemeni journalist, reporting from Yemen, whose identity we are protecting for their security.