Ahmed Bahakim (South24)

On April 7th, major results emerged from consultations in Riyadh between Yemeni anti-Houthi coalition parties and Gulf Cooperation Council states, with Yemeni President Abdrabbuh Mansur Hadi being replaced by a presidential council and Vice President Ali Mohsen Al-Ahmar being sacked. Saudi Arabia and the United Arab Emirates each pledged USD-1 billion in new support to the government-controlled Central Bank of Yemen (CBY) in Aden, while Saudi Arabia also pledged an additional USD-1 billion for oil derivative purchases and development projects.

Following the declaration of USD-3 billion in additional Saudi and Emirati funding for Yemen's internationally recognized government, the value of Yemeni Rials skyrocketed. The money market, on the other hand, is already indicating that the recovery will only be temporary. Positive market mood following the overnight political shakeup at the top of the Yemeni government, as well as recently stated Saudi and Emirati financial backing, can be linked to the Rial's fast gain. Around midday, new Rials were trading at around 36 percent higher than the US dollar, while old Rials were trading at around 18 percent higher. The rates had decreased by the evening, with new Rials still up 21% and old Rials down 9%.

Prior to the ongoing conflict, the CBY was able to keep the exchange rate stable by limiting speculation and regulating the relative supply of foreign and domestic currency in the money market. Since the central bank's fragmentation, both of these capabilities have been severely harmed, giving currency traders far more leeway to manipulate the market and profit from large swings in currency value. The CBY moved its headquarters from Sanaa to Aden in September 2016, leaving the central bank split between two locations. The economic war between the Houthi authorities and CBY-Sanaa on the one hand, and the internationally recognized Yemeni government and CBY-Aden on the other, began with this announcement. Meanwhile, the CBY-Aden has struggled to assert its dominance in its own region [1]. Nonetheless, it is officially recognized as Yemen's Central Bank, and it is treated as such by other countries, international organizations, and financial institutions. It has also gained access to international banking networks. Both parties have sought to utilize their different positions to enforce their own competitive monetary policies in the years since the CBY relocated, competing for control of the local currency.

As a result, the monetary environment has been considerably affected. While the government and CBY-Aden printed more money to meet spending demands due to a shortage of revenue and foreign currency reserves, the Houthi authorities and CBY-Sanaa attempted to limit the use of freshly minted bank notes in Houthi-controlled regions. As a result, the exchange rates between 'old Rial' banknotes, which are largely used in Houthi-controlled Northern areas, and 'new Rial' banknotes, which circulate across the rest of the country, have widened. Since the end of August 2021, the value of the Yemeni Rial has fallen in areas allegedly controlled by the recognized Yemeni government. As a result, millions of people's living conditions have rapidly deteriorated, causing widespread social unrest. The currency collapse in government-controlled areas has highlighted the necessity of ensuring that IMF support is used intelligently and effectively to restore monetary stability, alleviate humanitarian suffering, and restore social order. However, due to external pressures and internal weaknesses, the Yemeni government's central bank's ability to do so is severely limited.

Money exchange companies, on the other hand, are legally prohibited from receiving or accepting deposits from customers. Money exchange companies are currently unregulated, and many of them do not follow international financial regulations. Money exchange companies are in a unique position to provide money transfers and exchange services to a wide range of people, particularly those in rural areas. The number of money exchange companies and shops, often managed by families, has increased considerably throughout the conflict: in 2017, there were 876 such businesses in Yemen; in 2019, there were 3,244 [2].

The start of the holy month of Ramadan always puts upward pressure on the Yemeni Rial's value. Hundreds of thousands of Yemenis working abroad increase the number of remittances they send home to their families during Ramadan, forcing them to exchange the foreign currency for Rials to spend in Yemen, putting upward pressure on the Rial's value. This assistance is just temporary, and it usually ends with Ramadan, when remittances return to normal. Nonetheless, the offer of fresh financial assistance has effectively amplified the typical currency rate pressures that occur throughout Ramadan. While additional foreign currency injections will help lift the Rial's value, particularly the new Rial, above previous year's levels, much of today's gains will almost definitely be transient.

There was a significant difference in supply and demand pricing offered by money exchange providers, which was telling. During the day, money exchange firms in Sanaa offered to purchase dollars for YR509 and sell them for YR567, while in Aden, exchanges offered to buy dollars for YR684 in new Rial notes and sell them for YR874. By the evening, money exchange firms in Sanaa were offering to purchase dollars for YR530 and sell them for YR567; in Aden, exchanges were purchasing dollars for YR889 in new Rial notes and selling them for YR980, showing that the value of new Rials was very volatile [3].

Remarkably, these rates were speculative in some cases, while Rials were available for purchase, neither US dollars nor Saudi riyals were. This shows that money exchange businesses are stockpiling foreign cash in the hope that the Yemeni Rial would depreciate in value again, allowing them to profit from currency arbitrage. The outsized gains made by new Rials relative to old Rials, which significantly narrowed the exchange rate disparity between the two, are also notable from the exchange rate fluctuations. This difference has boosted the legitimacy of the Houthi leadership, who have exploited it to show that they have better economic and monetary management than the Yemeni government. As a result, the Houthi authorities will almost definitely feel obligated to revalue old Rials in regions under their control in order to close the currency gap.

Ahmed Salem Bahakim

Economist and energy researcher

Photo: Mohammed HUWAIS/AFP