World Bank Yemen Macro-Poverty Outlook (October 2020)

News and Press Release
Originally published


An unprecedented humanitarian crisis, now aggravated by COVID-19, persists, leaving many Yemenis dependent on relief and remittances. Economic conditions are deteriorating rapidly, driven by a drop in oil exports, downsizing of humanitarian support, and devastating torrential rains and flash floods. Fragmentation of macroeconomic policies add further strains on the fragile economic conditions, with serious humanitarian consequences.

Recent developments

Violent conflict has entered its sixth year, and Yemen continues to face an unprecedented humanitarian, social and economic crisis. Socio-economic conditions deteriorated further in 2020, affected by low global oil prices, the economic fallout of COVID-19, and weak public infrastructure and coping capacity to deal with extreme climate events/natural disasters. Distortions created by the fragmentation of institutional capacity (especially of the Central Bank of Yemen, CBY) and the divergent policy decisions between the areas of control, have further compounded the economic and humanitarian crisis, from protracted conflict, interruption of basic services, and acute shortages of basic inputs, including fuel.

Anecdotal evidence indicates a likely contraction of the economy from an already low base in the first half of 2020. The oil sector—the only large export earner—was hard-hit by low global oil prices. Non-oil economic activity suffered significantly from COVID-19 related trade slowdown and exceptionally heavy rainfalls, which caused intense flooding, infrastructure damage and human casualties. Foreign exchange shortages deepened further with the near depletion of Saudi Arabia’s basic import finance facility, reduced oil exports, and downsizing of humanitarian assistance. In April, some breathing space was provided through the IMF Catastrophe Containment and Relief Trust (CCRT). Trends in remittances are not clear, but were already troubling before Covid-19 due to the impact of weak oil prices on the GCC economies and the increased emphasis on employment nationalization programs in these economies.

The macroeconomic policy environment differs spatially due to the bifurcation of administration between areas of control.
In the areas controlled by the internationally recognized government (IRG), significant revenue underperformance and continued monetization of the fiscal deficit have undermined macroeconomic stability. Oil prices remain low, eroding government hydrocarbon revenue, the main revenue source. Collection of nonhydrocarbon revenue has been compromised by contested control of key institutions in Aden, due to the associated fragmentation of revenue administration functions. The severe revenue shortfall has led to expenditure compression. The expected formation of a new government within the framework of the Riyadh Agreement will strengthen the ability of the IRG to tackle the huge economic challenges facing the country.

Since early 2020, salary payments to public sector workers have seen frequent delays and uneven geographical coverage in the IRG-controlled areas. Payables to suppliers (mostly to energy suppliers) have continued to build up, disrupting fuel imports and the supply of electricity. Debt service to external creditors (except for IDA and IMF) have been halted since 2015. While official data remain unavailable, growing evidence suggests that the widening government deficit has been financed by the CBY overdraft facility.

Without stable sources of foreign exchange, expansionary monetary policy has accelerated the depreciation of the Yemeni rial. Given Yemen’s high dependence on imports, the weakening of the currency has passed through to domestic prices, eroding purchasing power of households and businesses.