Exclusive - Houthi Ban on New Banknotes Cripples Yemen Economy
The Iran-backed Houthi militias’ ban on new rial banknotes has left a crippling effect on Yemen’s economy and deprived tens of thousands of people from their salaries.
Merchants in Houthi-held Sanaa told Asharq Al-Awsat the Houthi measure has deeply affected business and led to a hike in prices of consumer goods amid low purchasing power among the people and traders alike. Moreover, businesses are refusing to accept payments in the new currency, which was printed by the central bank in Aden.
In its latest report on Yemen, the World Bank highlighted the disaster the Houthi move has left on the economy.
“Throughout 2019, the ban on the new notes has been imposed by the authorities in Sanaa on financial institutions operating in the areas under their control. However, now the new banknotes have been invalidated, and holders of new notes must surrender ‘illegal cash’ within 30 days from the date of announcement for an exchange into an electronic currency (‘e-rial’) or cash reimbursement in old banknotes, only if available, for up to YR 100,000 per person (about US$150-170 at the prevailing parallel market exchange rate),” said the report.
“Compensation in old notes is being offered at over 300 agents points located in all governorates nationwide. Electronic payment services are offered by three commercial banks: Mfloos operated by Al Kuraimi bank; Floosk operated by Yemen Kuwait Bank; and Mobile Money operated by CAC bank,” it added.
“The sudden announcement of the new measure has contributed to a payment crisis, further disrupting economic activity and aggravating humanitarian conditions. The measure to invalid the new banknotes has mostly affected individuals and small businesses, as the use of new notes was already constrained in the formal sector,” continued the World Bank report.
“One semi-official estimate is that around one-third of currency currently in circulation in the north has been invalidated. Reportedly, successful reimbursement in cash is rare, leaving no option but exchange for the e-rial. However, the acceptance of (unsecured) electronic currency is not widespread at present, effectively eroding the purchasing power of the holders of e-rial,” it noted.
Cash-based businesses, such as restaurants, small retailers and local transport are being hit hard by the demonetization measure, as cash trading has become constrained due to reduced supply of old banknotes.
“Popular discontent in the affected areas is high,” it added. “The short-term effect of the new measure is certain to be contractionary. Cash payments as a vital coping mechanism are now facing serious disruption.”
The government in Aden has suspended the payments of civil servants’ salaries and pensions in areas under Houthi control, citing refusal by financial institutions to process payments as a result of the new measures announced in Sanaa, said the World Bank. However, the allegation was quickly dismissed in a joint-statement from the Banks and Exchangers Associations, which also reiterated commitment to continue providing support to monthly pension and salary payments in all governorates without further complications or delay.
After a brief period of appreciation, the Yemeni rial began to weaken in December and the dual exchange rates between Aden and Sanaa have widened since the new measures were announced, said the report. “The monetary decision by the Houthis in Sanaa have effectively reduced the circulation of the rial, and encouraged speculation on the price of the new banknotes against the old and in turn widening the exchange rate differences in Aden and Sanaa.”
Merchants who spoke to Asharq Al-Awsat said that internal transfer fees from Aden to Sanaa, for example, had on occasions risen eight times the original cost, therefore, compounding the suffering of the Yemeni people and allowing vast sums of their money to fall in Houthi hands.
Yemeni economists warned that the Houthis’ reckless actions will lead to the collapse of the rial against foreign currencies and consequently lead to the collapse of the country’s economy.
The union of health sector employees revealed that the militias’ actions have deprived 23,160 workers from their salaries. The legitimate government in Aden had appealed to the World Bank and International Monetary Fund to intervene and put an end to the Houthi practices.