Informing humanitarians worldwide 24/7 — a service provided by UN OCHA

Yemen

Potential Impacts of the Banking Sector Crisis on Household Vulnerability to Food Insecurity in Yemen

Attachments

Main Highlights

  • The various directives issued by the Central Banks in Aden and Sana'a, resulting in notable disruptions in the financial and banking sectors, pose a substantial risk of heightened food insecurity and hunger for the average Yemeni population: the economic and financial fallout of the measures between the Government of Yemen (GoY) and Sanaa Based Authorities (SBA) peaked in May 2024 after both issued reactive regulatory measures to financial sector actors.

  • Accelerated local currency depreciation: in the last one year leading up to June 2024, the YER in the GoY areas lost value against the US Dollar (US$) by 38 percent, equivalent to an average monthly depreciation of 3 percent. The YER is projected to depreciate further at much faster rate in GoY areas, at least by 5 percent per month over the next four months. The trajectory of the YER in SBA areas remains uncertain in the short-term owing to tight exchange rate controls.

  • Increased risk of food, and fuel prices and anticipated decline in imports: The Minimum Food Basket (MFB) is projected to reach between US$87 and US$107 in August 2024, increasing by a minimum of 6 percent in GoY areas at a time when casual labour rates are not expected to grow in tandem with increased minimum cost of living. Similarly, the projected currency depreciation in GoY areas poses a heightened risk of diesel price hikes. Consequently, this is expected to lead to an increase in food prices due to transportation costs, representing approximately 30 percent of food inflation. The food and fuel price risks in SBA areas remain unpredictable because of economically unresponsive price controls but the inflation risks linger. This comes at a time when humanitarian assistance has decreased. In addition, the inability of traders and importers to access adequate dollars, transfer funds, and secure credit lines, combined with currency depreciation and increased transaction costs, is anticipated to decelerate commercial import flows, impacting Southern Ports disproportionately.

  • Internal and external remittance flows to slow down: remittances, which exceed US$4.2 billion per year, play an important role in meeting food needs of millions of people in Yemen, translating equivalent to US$270 on average monthly per household of the estimated 27 percent of the population receiving remittance. The financial sector disruptions are expected to worsen the already declining domestic and external remittance flows since 2022, resulting in accelerated currency depreciation, widened import financing gap and worsened household food insecurity.

  • Deepening economic downturn: the ensuing financial sector crisis is expected to further impede Yemen’s economy amidst a delayed peace settlement. IMF had projected a negative growth for the second consecutive year in 2024. The deepening economic crisis has the potential to adversely affect economic and trade activities, increase unemployment rates, and reduce household incomes.

  • In Yemen, the reliance on essential food items from the market is substantial, and households allocating more than 65% of their income to food expenses. With a significant percentage of the population (82%) living in multidimensional poverty, highly dependent on market resources, coupled with a consistent decline in real income, families are increasingly at risk due to the currency crisis, depreciating YER, and subsequently rising food costs. The situation leaves them susceptible to economic and market instabilities and many households are turning to food borrowing and aid for support. This dependency may hinder their financial recovery, worsen their nutritional status, and deepen their poverty.

  • A combination of mitigating and preventive actions is essential in managing the current banking/financial crisis and reducing its potential negative consequences: The heightened vulnerability underscores the urgent need for humanitarian and development assistance to address the growing food insecurity among households in Yemen. Furthermore, fostering negotiation and dialogue among conflicting parties to establish mutual understanding and agreements is crucial. International mediation and support for financial institutions can assist in stabilizing the financial sector and ensuring the efficient delivery of essential services to meet basic needs and safeguard vulnerable communities.