(Analysis) The deterioration of the Yemeni riyal exchange rate.. What are the causes and proposed solutions?

Since the beginning of the year 2024, the exchange rate of the Yemeni riyal has been continuously deteriorating, and although the causes of this deterioration are cumulative, diagnosing the problem of the accelerating collapse in the exchange rate of the Yemeni riyal recently requires focusing on the current factors that contribute to this deterioration.

The following is a group of factors that recently contributed to the deterioration of the value of the Yemeni riyal against hard currencies:

First: Factors (causes)

1. Weak government performance: The government’s slow response to economic crises and the failure to place the exchange rate as a priority contribute significantly to the acceleration of the collapse of the Yemeni riyal. The failure to take effective economic policies to control the exchange rate leads to the exacerbation of the monetary crisis and increases market fluctuations.

2. Oil exports stopped:

• Attacks on oil facilities: Houthi attacks on ports and oil fields disrupted production and exports, depriving the government of vital revenues that it relied on to support the economy.
• Loss of revenues: The cessation of exports has led to the loss of significant financial resources, which increases the fiscal deficit and weakens the ability to finance government projects and basic needs.

3. Increased fiscal deficit: The increasing fiscal deficit prompts the government to resort to borrowing or printing currency (currently stopped), which leads to increased inflation and a deterioration in the value of the local currency.

4. Lack of international support: The decline in financial support and international aid due to political and military tensions negatively affects the economy and reduces the resources available to support monetary stability.

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5. Dependence on imports: Yemen’s dependence on imports to meet basic needs leads to an increase in demand for foreign currencies and a deterioration in the value of the Yemeni riyal.

6. Increased demand for foreign currencies: The significant increase in demand for the dollar and other foreign currencies by individuals and companies for import or saving purposes, which leads to significant pressure on the exchange rate.

7. Lack of cash reserves: The central bank’s foreign cash reserves are constantly declining, making it difficult to support the local currency and maintain its stability.

8. Inflation: High inflation rates lead to a decline in the purchasing value of the Yemeni riyal, which prompts individuals and companies to search for a safe haven in foreign currencies.

9. Political instability: The unstable political situation in the country contributes to a decline in confidence in the local currency and increases volatility in the market.

10. Economic policies: Ineffective or inconsistent economic policies contributed to the weak ability to cope with financial pressures.

11. Corruption and mismanagement: Corruption and mismanagement of financial resources lead to a loss of control over the economy and increased financial burdens on the government.

12. Decline in domestic production: Decline in domestic production, whether in the agricultural or industrial sectors, increases dependence on imports, which raises the demand for foreign currencies.

13. External financial transfers:

• Decline in remittances: Yemen relies heavily on remittances from expatriates. Any decline in these remittances, whether due to international restrictions or any other reasons, leads to a reduction in hard currency resources.
• Informal channels: Transfers through informal channels (black market) lead to loss of control over currency flows and exacerbate the exchange rate crisis.
• Transfer restrictions: Restrictions on transferring funds to Yemen make it more difficult to obtain foreign currencies and exacerbate the exchange rate crisis.

14. Humanitarian crisis:

• Internal displacement: Mass displacement of populations due to conflict creates pressure on the local economy and infrastructure, increasing the need for government spending with limited resources.
• Food insecurity: The humanitarian crisis leads to an increase in food imports, which increases pressure on foreign exchange.

15. The informal economy:

• Size of the informal economy: A large informal economy complicates tax collection and misdistributes resources, weakening government revenues and exacerbating the fiscal deficit.
• Smuggling of goods: The spread of smuggling affects official trade and weakens the government’s ability to regulate the market and obtain customs revenues.

16. Banking sector: The weakness of the banking sector and the inability to provide stable banking services leads to increased trading on the black market and decreased confidence in the financial system, which affects exchange rates.

17. Conflicting policies: Conflicting financial and monetary policies between the government and the central bank and their division between Sana’a and Aden lead to instability of the economy and the exchange market.

18. Decline in confidence in the economy: The continuation of the conflict and security instability weakens confidence in the Yemeni economy and leads to the flight of capital and investments.

19. Weak monetary policies: The ineffectiveness of monetary policies in facing economic challenges complicates matters and leads to further deterioration in the exchange rate.

20. Currency speculation: Last but not least, at the top of the list of the most important factors is currency speculation and creating imaginary demand for hard currencies, which greatly negatively affects the exchange rate.

Together, these factors constitute a complex economic dilemma that contributes to the accelerating collapse of the Yemeni riyal exchange rate and increases the difficulty of achieving economic stability in the country.

Second: Proposed recommendations

For each of the factors that contributed to the exchange rate collapse, specific recommendations can be made to help mitigate the impact of each factor. The following are recommendations that reflect each factor causing drain failure:

1. Poor government performance:

• Promoting government transparency and accountability. (Leadership Council).
• Activating effective and proactive economic policies that focus on exchange rate stability. (the government).

2. Oil exports stopped:

• Securing oil installations and enhancing the infrastructure to protect them. (Government, Leadership Council, Arab Coalition).
• Develop alternative revenue sources to reduce dependence on oil. (the government).

3. Increased fiscal deficit:

• Improving public financial management and enhancing tax revenues. (Ministry of Finance).
• Reducing unnecessary spending and rationalizing government expenditures. (Ministry of Finance).

4. Lack of international support:

• Strengthening international relations and improving the investment environment to attract more financial support and aid. (Government and Leadership Council).
• Improving the security and political conditions to enhance international confidence. (Government, Leadership Council).

5. Dependence on imports:

• Supporting local production and encouraging local industries to reduce dependence on imports. (Government, Ministry of Agriculture, Ministry of Trade and Industry).
• Improving the infrastructure for agricultural and industrial production. (Ministry of Agriculture, Ministry of Trade and Industry).

6. Increased demand for foreign currencies:

• Apply monetary policies to reduce demand for foreign currencies. (central bank).
• Enhancing confidence in the local currency by stabilizing the economy. (central bank).

7. Lack of cash reserves:

• Strengthening financial policies to improve cash reserves. (Central Bank, Ministry of Finance).
• Attracting foreign investments and increasing financial transfers from abroad. (Government, Ministry of Industry and Trade).

8. Inflation:

• Implement strict monetary policies to control inflation rates. (Central Bank, Ministry of Finance).
• Promoting economic stability to reduce inflationary pressures. (Central Bank, Ministry of Finance).

9. Political instability:

• Achieving political and security stability through a comprehensive national dialogue. (Leadership Council, Government).
• Strengthening the rule of law and combating corruption. (Government, Central Oversight and Accounting Agency, Public Prosecution, Anti-Corruption Commission).

10. Economic policies:

• Developing comprehensive and sustainable economic policies (Central Bank, Ministry of Finance).
• Ensuring coordination of fiscal and monetary policies to achieve clear economic objectives. (Central Bank, Ministry of Finance).

11. Corruption and mismanagement:

• Strengthening anti-corruption mechanisms and activating accountability (the government, the Central Oversight and Accounting Agency, the Public Prosecution, the Anti-Corruption Commission).
• Improving financial resource management and economic planning. (Ministry of Finance, Ministry of Planning).

12. Decline in local production:

• Supporting agriculture and local industries by providing incentives and encouraging investment. (Government, Ministry of Agriculture, Ministry of Trade and Industry).
• Improving infrastructure to support local production. (the government).

13. External financial transfers:

• Facilitating the transfer of funds through official channels to improve control of currency flows. (central bank).
• Strengthening financial policies to encourage remittances from abroad. (Central Bank, Ministry of Finance).

14. Humanitarian crisis:

• Strengthening humanitarian support and improving the conditions of internally displaced persons. (Government, Ministry of Foreign Affairs, Ministry of Human Rights, Ministry of Planning).
• Improving food security by increasing local agricultural production. (Ministry of Agriculture, Ministry of Trade and Industry).

15. The informal economy:

• Reducing the size of the informal economy by enhancing transparency and combating smuggling. (Government, Ministry of Finance, Security).
• Improving the tax system and expanding the tax base. (Ministry of Finance).

16. Banking sector:

• Reforming the banking sector to enhance stability and confidence in it. (central bank).
• Improving access to banking services and promoting financial inclusion. (central bank).

17. Policy conflicts:

• Unifying financial and monetary policies among all parties. (Government, Alliance Leadership Council).
• Improving coordination between the government and the central bank. (Central Bank, Ministry of Finance).

18. Declining confidence in the economy:

• Enhancing security and stability to attract investments. (Interior, Government, Leadership Council).
• Providing incentives to local and international investors. (Ministry of Finance, Government).

19. Weak monetary policies:

• Implementing effective monetary policies to confront economic challenges. (central bank).
• Improving monetary management by strengthening the role of the central bank. (central bank).

20. Currency speculation:

• Tightening oversight of the financial market and combating illegal speculation. (Coordinating efforts with all state agencies).
• Implementing policies that limit the fictitious demand for hard currencies. (Coordinating efforts with all state agencies).

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* Yemeni economic researcher and analyst