Yemen’s currency woes do not top global concerns. And yet the wobbling Yemeni rial, having depreciated 13 percent against the dollar since January, could have devastating consequences for the stricken nation, the ripples of which could well wash ashore through the Arabian Gulf and beyond.
When oil prices plummeted more than two years ago, Yemen’s single-resource economy took a pounding, as the government had overestimated its income and overspent. The result was a 2009 deficit around 10 percent of GDP: crippling for a country unable to borrow from international financial markets and whose primary means of raising funds is to borrow from its central bank and sell foreign currency reserves.
International Monetary Fund policy advice and some aid have reduced the deficit, but the finance ministry predicts it will still be 7.7 percent of GDP in 2010. Further problems have come in the form of a national shortage of dollars. Yemen imports nearly everything it consumes, and a policy designed to make importing easier and more profitable saw low taxes on imported goods last year. Reliable statistics are hard to come by in Yemen, but Deputy International Planning Minister Hisham Sharaf said that luxury goods, including cars and electronics, came pouring into the country as never before. Exporting dollars for imported goods, traders have depleted dollar reserves, which stood at $6.2 billion in March, their lowest level in five years. This dollar demand consequently boosted its value over the rial.
Respected economists also allege that as much as $3 billion dollars has left the country in money-laundering activities. Political analyst Abdulghani al-Iryani, however, reckoned that sum to be on the high side, and said that the more common practice was for people to dump their rials for dollars and stash them in Dubai banks, exacerbating the dollar shortage and leaving the rial ever-more vulnerable.
Recently the rial has held stable on exchange markets, but only because the government has propped it up through drawing on some $1.1 billion in foreign currency reserves; this is unsustainable and would devour these reserves within two years. As long as the pressure on Yemen’s economy is maintained, oil supplies dwindle, gas exports remain negligible, investors are scared and no cash injection comes, the rial’s fall is inevitable.
How much it will fall is debatable: optimists hope for a gradual, controlled descent, while pessimists foresee a rush to change assets to dollars and a possible run on the banks. Even the current stability measures are harmful. Interest rates, for instance, are being held around 20 per cent, which businessmen say is preventing them taking out loans to expand or start businesses. Given that almost all Yemen’s food is imported, food prices have risen and will rise more. Yemeni consumers are fairly thin already and will have to tighten their belts further, despite there being more malnourished children here than anywhere in Africa, with the World Food Program classifying a third of the population as “acutely hungry.”
High food prices in 2007 sparked riots. Yemen is critically unstable, and large parts of the non-urban areas of the country are ungoverned, with Houthi rebel groups in the north, an increasing Al Qaeda presence and secessionists in the south. The IMF and World Bank, along with the government, are attempting to improve the situation. The bloated civil service has had its pay frozen and last year’s Ramadan bonus was cancelled. Massive government fuel subsidies, which benefit the rich far more than the poor, have been cut slightly, and a general sales tax has been introduced targeting importers.
There is talk of helping Yemen move from an oil to a non-oil economy, encouraging fishing, mining and tourism. But these are slow, long-term changes difficult for a country hanging on the edge of civil war and bankruptcy, with dwindling income, growing population, chronic unemployment and rapidly-diminishing savings. It is also an open secret that those close to the top of Yemen’s opaque power structure benefit from oil subsidies and unreformed business laws.
Western powers worried about Al Qaeda, and Gulf countries worried about a failed state on their borders need to look to the nitty gritty of the Yemeni economy. They should use their leverage with the government to cut corruption, slash fuel subsidies and get Yemenis trained and internationally employed in Saudi to help rebuild Yemen, one rial at a time.
ALICE FORDHAM is a correspondent
for The Times of London