The future of Yemeni Rial
Since the country’s uprising in 2011, Yemen has been embroiled in constant political turmoil that has bred intense economic unrest. Increasing brazenness seen in attacks launched by Al-Qaeda in the Arabian Peninsula (AQAP), and armed tribesmen on oil pipelines and fragile state infrastructure, in addition to the recent takeover of Sana’a and a number of other Yemeni governorates by the Houthis, also known as Ansar Allah, have all served to derail the transition and lead to an increased squeeze on the country’s resources and economy.
These factors have led to decreases in oil production, forcing Yemen, which has been an oil exporting country since 1986, and whose crude exports previously constituted upwards of 70% of its operating budget, to begin importing fuel in order to meet its domestic needs. Such factors have put a strain on the country’s foreign currency reserves, a fact which experts say could lead to increased pressure on the Central Bank of Yemen (CBY), and an eventual collapse of the country’s currency, the Yemeni Rial (YR), in comparison to the dollar.
Mustafa Nasr is the chairman of the Studies and Economic Media Center (SEMC), a non-profit NGO that works with government and the private sector to monitor and study economic developments in Yemen. Despite the challenges facing Yemen, he remains optimistic regarding the future of the country’s currency. “Yemen spent $1.7 billion on oil imports in 2014, however we also exported $1.5 billion in crude oil and liquefied natural gas,” he claimed. “In the end, we nearly broke even, and lost only $200 million in reserves. This isn’t enough to have a significant effect on the price of our currency.”
The total size of Yemen’s foreign currency reserves stood at $4.8 billion in October, a figure that, due to a lack of economic diversification, is largely subject to fluctuations in international oil prices. Yemen’s production peaked in 2001 at 440,000bpd (barrels per day) before declining due to maturing oil fields. During the first quarter of 2009, Yemen experienced a crisis in its oil sector when revenue from oil sales decreased 75% on the previous year as international prices dropped as a result of world economic crisis that struck in 2008, and investment to pay for expansion in the sector dried up. Despite the apparent flaw this exposed in the country’s economy, no major reforms were taken to expand the government’s sources of revenue.
Things took a turn for the worse in 2011, when repeated attacks launched on pipelines and oil infrastructure forced Yemen to begin spending from its reserves to import oil in order to meet domestic demand. The government was aided at the time by generous donations from Saudi Arabia and the United Arab Emirates (UAE) in June and July of 2011, totaling 6 million barrels. However according to Nasr, the long term damage this could have wrecked on Yemen’s economy has been mitigated by recent drops in international oil prices, which, by the beginning of July 2014 hovered at just over $105 per barrel, before steadily beginning to drop. By Dec. 8, 2014, prices reached record lows, at $63.50 a barrel according to Nymex January West Texas Intermediate, a US benchmark. Currently, oil trades for $46.07 a barrel on the West Texas Intermediate.
“Luckily for us, our spending on imports began to overtake export earnings at around the same time that prices began to drop internationally, creating a buyers market,” Nasr said. “This has allowed our foreign reserves to remain stable; as long as this remains the case the CBY will be able to preserve the current exchange rate, and stave off a crisis.”
However, according to some, recent developments and indicators show that this near balance of payments is unsustainable. In the event of any further disruptions to the current status quo, the gap between Yemen’s fuel bill and oil export earnings could widen, causing a further strain on reserves and possibly a currency crisis.
Abdu Seif, head of the United Nations Development Programme’s (UNDP) Advisory and Oversight team in Yemen, says it’s “just a matter of time before the rial collapses.” The successful near balance of payments achieved in 2014 was only possible due to a $950 million purchase of fuel products made by Saudi Arabia on behalf of the Yemeni government last summer. Yemen’s already strained budget would not be able to absorb this amount on its own if Saudi Arabia decided to not make a similar offer this year, according to Seif. Yemen’s budget deficit for the 2014 fiscal year totaled YR679 billion ($3.153 billion), and is expected to increase in 2015 if fuel subsidies are kept in place and oil revenue declines.
However, the drying up of Saudi aid seems to be what is likely to occur in the near future. With the exception of $54 million in food aid provided in December, Saudi Arabia has been wary of providing money to Yemen when the Houthis—who are viewed with skepticism by Riyadh for their perceived close ties to regional rival Iran—hold sway in the capital and elsewhere.
Rumors circulating that Saudi Arabia may ask Yemen to repay a $1 billion loan provided to the CBY in 2012, if proved true, could further chip away at the country’s reserves and starve Yemen of even more of its desperately needed foreign currency.
Originally slated to be paid back over 12 years with a four-year grace period, the loan was the first dispersal of a $3.25 billion pledge made by Saudi Arabia as part of an initiative launched by the Friends of Yemen (FOY). FOY is an international consortium made up of 39 governments and eight multi-lateral institutions chaired by the governments of Saudi Arabia and the United Kingdom. It was created in 2010 to help stabilize the country and combat the threat of rising militancy and radicalism, particularly from groups such as AQAP.
CBY Governor Mohammed Bin Humam told Reuters in December that the rumors were false, however, doubts prevail as to whether or not the Saudi government or the FOY will follow through and disperse money that they had been previously pledged to Yemen. The $3.25 billion promised by Saudi Arabia were part of a broader $7.9 billion total pledge package made to Yemen by all FOY donor countries and institutions in Sept. 2012. Since then, reports have claimed that Yemen has only received about one third of the money. “Disagreements” between the Yemeni government and donors over which specific projects the money would be used for are often widely cited as reason for delays in the transfer.
Yemen’s oil crisis risks being further exacerbated by renewed tensions in Marib governorate, where a majority of Yemen’s oil production occurs. Attempts by Houthis to penetrate Marib first occurred on Nov. 9, 2014, when the group took over the Al-Mas military base in the governorate’s Jedaan area. The move provoked local tribesmen, who opposed the spread of the Houthis for fear that they might seek to take over Marib as they had other governorates, such as Amran, Ibb, and Al-Baida.
At the time, tribesmen were able to deter the Houthis by threatening to attack government infrastructure and oil pipelines. Two weeks later, on Nov. 25, the two sides signed a peace agreement containing 13 articles. In the agreement, Houthis agreed not to expand further into Marib if tribesmen could successfully protect government facilities, prevent attacks on oil pipelines and electricity networks, and prevent the spread of AQAP throughout the governorate. For just over one month, the peace was held.
However on Jan. 2, the Yemen Times reported that tribesmen in Marib had forcibly seized a large stockpile of weapons from the 62nd Mechanized Brigade that had been passing through the area, allegedly to arm themselves against a possible renewed offensive that could be launched by the Houthis. Just over a week later, on Jan. 10, the Yemen Times reported that thousands of armed tribesmen had begun pouring into Marib from Al-Jawf, Al-Baida and Sa’ada governorates, to help prevent the Houthi’s expansion in the region.
It is unclear exactly when the latest round of tensions between Houthis and Marib’s tribesmen renewed or for what purpose; however what has followed since has been an escalation and exchange of accusations by both sides, both publically and in private, with each side accusing the other of attempting to sabotage Marib’s fragile peace.
Members of the Houthi Political Office in Sana’a have told the Yemen Times that Marib’s tribesmen have failed to uphold their end of the bargain, and have cooperated with and failed to prevent AQAP cells from operating in the area. Tribesmen have accused the Houthis of eyeing Marib’s oil reserves and planning a takeover of the governorate.
Regardless of the truth behind these claims, the reality is that a Houthi invasion of the governorate could serve as the tipping point that upsets the fragile financial balance that Yemen’s government has been able to manage until now, causing the state to witness further drops in oil revenues, which are already at record lows.
Mohammad Bohaibah, a leader in the Marib’s Murad tribe, the governorate’s largest, told the Yemen Times that tribesmen would “devastate the governorate’s electricity grid and oil pipelines,” if the Houthis attempted to expand in Marib.
According to a report released by the CBY on Jan. 10, the Yemeni government’s earnings from oil sales are already at their lowest figures ever. Yemen’s government raked in $1.58 billion through oil sales between January and November 2014, a $892 million decrease compared to the same period during the previous year, according to the CBY report.
This figure is just $58 million less than Saudi Arabia’s $950 million dollar purchase of oil products made last summer that was slated to help Yemen meet its domestic fuel needs. In 2015, with Saudi Arabia less likely to provide assistance, and expected decreases in revenue from oil sales possible, it is unclear how Yemen’s government could expect to be able to plug any further financial gaps.
Furthermore, according to Seif, Yemen’s current foreign currency reserves are only enough to pay for four to five months worth of imports. “These [the country’s reserves] are not amounts that the Yemeni government can expect Saudi Arabia to prop up any time soon,” he said. “Marib’s facilities are worth billions of dollars. If the Houthis enter the governorate, and vital facilities such as oil pipelines are attacked and destroyed, either by Houthis or tribesmen, there won’t be any money available to repair them. We could witness Yemen’s currency dropping to anywhere between YR400 and YR500 to the dollar.”
Jeremy Hodge (author)
Additional reporting by Ali Abulohoum
Source: YEMEN TIMES
- Jan 15, 2015