Upon World Bank assessment…Yemen Economic Monitor Highlights Ongoing Challenges of Yemen’s economy

Monitored by\ Ashraf Mohammed
Yemen’s economy showed modest signs of recovery in 2022, but significant challenges remain, as the six-month UN-brokered truce from April to October failed to lead to a lasting political resolution, according to the World Bank’s latest assessment of Yemen’s economy.

The Yemen Economic Monitor estimates that in 2022, real growth reached 1.5 percent, following two years of economic contraction. The non-oil sector was the driving force behind this improvement, while the oil sector faced a significant contraction, due to the Houthi-imposed blockade on oil exports, which reduced average daily hydrocarbon production from 61,600 barrels in 2021 to 51,400 in 2022. Improvement in the non-oil sector was bolstered by increased household and government consumption expenditures, which contributed 1.1 and 1.3 percentage points, respectively, to the overall real GDP growth.

However, 2023 has proven to be a challenging year for Yemen’s economy, as the expiration of the UN-sponsored truce instigated a series of adverse economic events. This sequence of events is expected to push the economy back into a recession. The Houthi-imposed blockade had a deep impact on oil production and exports. Additionally, a strategic move to import household butane gas into Houthi-controlled areas diminished the demand for gas extracted from non-Houthi regions. Challenges like fluctuating currency values, high inflation, and heightened social unrest, have hindered the non-oil sector, especially the private sector. As a result, projections indicate that Yemen’s GDP will contract by 0.5% in 2023, a sharp contrast with the 1.5% growth observed the previous year.

Another economic challenge emerged due to a decline in imports and the diversion of the remaining imports from Aden to Houthi-controlled ports, reopened as part of the UN-sponsored truce. Data from the Assessment Capacities Project (ACAPS) revealed a substantial 61% reduction in imports through the Aden port from January to August 2023, while the Hodeida port experienced a much smaller 8% decrease. This shift significantly impacted Aden’s contribution to Yemen’s total imports.

Fiscal pressures mounted in the regions controlled by the Internationally Recognized Government of Yemen (IRG), mainly due to stagnant oil exports. A pronounced decrease in IRG revenues in the first half of 2023 suggests a potential 40% drop for the year. This decline, largely stemming from the oil blockade, has been further exacerbated by the reduction in customs revenues due to the redirection of imports away from Aden port. In response to declining revenues, the IRG implemented significant expenditure cuts to safeguard public finances. However, these measures may pose further challenges to maintaining essential public services and fostering long-term economic growth. Despite these efforts, the fiscal deficit is expected to remain around 2.9 percent of the GDP in 2023.

These fiscal challenges prompted the IRG to tap into their overdraft facility at CBY-Aden, leading to a 10% increase in government claims in the first half of 2023, and a subsequent 5% inflation in currency circulation. While overall inflation eased following the drop in global commodity prices, it varied substantially across regions. Sana’a witnessed a more pronounced decline in consumer price inflation, whereas Aden’s rates remained elevated due to the currency depreciation.

Looking ahead, 2024 holds uncertainty for Yemen’s economic landscape due to oil export constraints and ongoing political negotiations. Economic stability hinges on sustainable foreign currency inflows and political developments. However, a lasting truce or peace agreement could swiftly strengthen Yemen’s economy. Using innovative night-time light (NTL) emission data to assess economic activity during the 2022 UN-brokered truce, the World Bank report reveals there was a sharp increase in economic activity during the temporary ceasefire. Nevertheless, achieving Yemen’s long-term prosperity depends on resolving the political disputes that have fractured its economy. An equitable peace settlement addressing economic barriers, conflict-related grievances, and structural issues will be critical for Yemen’s recovery.

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