The World Bank has revealed that in case a lasting truce or peace arises, the Yemeni economy could register more sustainable growth within months of the agreement.
“Even assuming oil exports resumption in H2-2023 at H1-2022 levels, we project real economic activity to contract by 0.5 percentage points during 2023,” the World Bank revealed in a recent economic report about Yemen.
“Should a lasting truce or peace arise, however, Yemen's economy could register more sustained growth within months of such an agreement, driven by an expected rapid rebound of transport, trade, financial flows, and reconstruction financing.”
“Over the medium term, growth is conditional on a peace agreement, prudent policymaking, and a robust reform and recovery effort backed by international reconstruction financing.”
Risks include a resurgence of hostile activities, terms of trade shocks, and new natural disasters. In addition, policy inaction - reflecting political gridlock by various parties – remains a paramount risk to Yemen's outlook, according to the Bank.
“Nevertheless, sustained government focus on monetary and macroeconomic stability and strengthening policy and institutional capacity can help improve immediate economic prospects.”
Several developments supported economic activity in 2022: a temporary UN-brokered truce, transferring power to a Presidential Leadership Council, and Saudi Arabia and UAE announcing a $3.3 billion financing assistance package, including $2 billion in deposits at the Central Bank of Yemen (CBY) Aden, and monetary and fiscal policy reforms, according to the report.
The report mentioned that “the truce expired without extension, and Houthis initiated a series of attacks on the Internationally Recognized Government's (IRG) oil export facilities.”
“As a result, IRG fiscal revenues and CBY-Aden foreign exchange reserves decreased. These developments also caused a decline in public expenditures – with civil servant salary payments in IRG-controlled areas taking a toll – a widening of the current account deficit, and the risk of renewed stress on the balance of payments and the currency, given the low level of CBY's FX reserves.”
“Therefore, economic stability both in the short and medium run remains contingent on mobilizing additional and sustainable external financing. The conflict has heavily jeopardized oil sector activity as well as Yemen's capability to attract foreign investment.”
This was compounded by double taxation (from Yemen's two fiscal authorities) pervasive corruption, uncoordinated policies, and the multiplicity of Yemen's institutions.
“Declining civil salary payments and volatile humanitarian assistance have had disastrous impacts on Yemeni households' already precarious living conditions. As a result, food insecurity and poverty are widespread. High food prices make it difficult for households to meet their basic needs. Agriculture – the primary source of subsistence – continues to be highly exposed to disruptive climate, environmental, and pest-related events.”
Amid a volatile year, according to IMF and WBG estimates, real GDP grew mildly, by 1.5 percent, in 2022.
This tepid growth rate was nonetheless a notable improvement following two consecutive years of contraction. Growth was driven by private consumption and was financed mainly from remittances and official development aid.
“An unprecedented series of torrential rains during the 2022 summer also impacted production, tapering economic expansion.”
“Regarding fiscal conditions, during the first three quarters of 2022, IRG was on track for a balanced budget; however, the expiration of the truce and subsequent oil export constraints significantly curbed revenues. As a result, IRG's fiscal deficit (cash basis) remained unchanged at 2.2 percent of GDP in 2022 compared to 2021. The deficit was financed through monetary sources, contributing to inflation/depreciation pressure during Q4-2022.”
A combination of domestic and external factors pushed Yemen's import bill from 46.4 percent of GDP in 2021 to 59.7 percent in 2022, according to the World Bank.
Exports, remittances, and donor assistance were significantly less than imports, resulting in a markedly wider current account deficit (14.0 percent of GDP) in 2022 (CBY Aden data.)
The deficit was financed through one-off financial inflows, including the liquidation of CBY-Aden foreign currency reserve accounts held abroad and 50 percent of Yemen's quota from the IMF's latest SDR allocation.
The spike in global commodity prices affected Yemen’s inflation rate, which rose to approximately 30 percent in 2022 (Joint Market Monitoring Initiative data), though unevenly between the IRG and Houthis areas.
Rising commodity prices, particularly food prices, negatively impact households purchasing power and consumption, leading to higher food insecurity and poverty.
The macroeconomic outlook for 2023 remains highly uncertain, given the oil export constraints and ongoing truce negotiations. Economic stability in the short run hinges heavily on predictable and sustainable hard currency inflows and political/military developments.
