Yemen's Economic Update - February 2020

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**On February 13, TeleYemen, the country’s sole operator of international gateway, announced the restoration of the FALCON submarine cable and the return of the internet services. The restoration came after more than a month-long severe outage nationwide caused by damage to the cable. The sudden internet outage forced a vast majority of Yemenis offline and paralyzed commercial and financial transactions, including remittances, causing widespread socio-economic disruptions and exposing the vulnerability of internet infrastructure's dependence on a single cable. Despite owning a large capacity in other international submarine cables (AAE1, SMW-5), TeleYemen has been unable to use the capacity due to constraints imposed by the current conflict. For the past months, the company has made several calls to the international community for urgent support to prevent the sector from politicized fragmentation and a complete collapse. Continued political divides and fragmentation in the sector pose serious risks for the loss of national coverage in the telecom market, which would negatively affect economic activity and coping mechanisms, as seen during the recent outage.

Crude oil production continued to grow in 2019. According to the Ministry of Oil and Minerals, the country’s total oil production increased to 17.5 million barrels in 2019 from 12.7 million barrels in 2018 (Figure 1). Although this represents growth of about 38 percent, the actual production volume was significantly lower than the target, of 27 million barrels, caused by delays in the construction of a pipeline in Marib, which was expected to boost exports from the Marib-Shabowa basin. Of the total production of 17.5 million barrels in 2019, 16.7 million barrels were exported (compared with 14.2 million barrels in 2018) and the remaining 0.8 million barrels were allocated for domestic refining. Despite the increase in volume, export proceeds from crude oil exports declined in 2019 as a result of lower global oil prices. The Ministry of Oil and Minerals forecasts a further rise in oil production in 2020 to 30 million barrels. However, reaching this volume depends critically on the completion of the pipeline as well as the security situation on the ground, and these barrels will face a much less favorable oil price environment.

Businesses in areas controlled by the de facto Sana’a authorities(“north”) appear to be coping relatively well for now with the monetary environment created by the illegalization of new banknotes. As the restriction on the use of new prints had been in place for some time, businesses were already aware of the position held by the Sana’a authorities, before the tightening of the ban was announced in December 2019, and the circulation of new banknotes was limited in the areas controlled in the north. This may have helped to minimize the negative impact on the real sector in the north. Banks in Sana’a continue to allow cash disbursements in old banknotes, which are in short supply, although as before larger withdrawals tend to be constrained and take more time to process. Similarly, cash transfer programs by donor agencies in the north have thus far not been disrupted by the limited availability of old banknotes, as humanitarian agencies are liaising with partner banks to ensure sufficient availability of appropriate notes for each region to minimize inconvenience to the beneficiaries. The major challenge is the shifting lines of control between the two authorities in certain areas, although this concern is limited to a couple of districts.

The acceptance of e-rial remains limited and there is currently no mechanism for using e-rial for normal daily economic activities. Since January 2020, the operators of the three e-wallets promoted in the context of the banknote ban—AL Kuraimi Bank, Yemen Kuwait Bank and CAC Bank—have made efforts to develop services (such as offering visa and ATM cards) and expanded business network to include a few supermarkets and business outlets. However, their acceptance and potential remain limited in scope and geopolitical coverage. The e-rial can still only be used to pay limited expenses such as water and electricity bills and mobile phone services. The Central Bank of Yemen (CBY) based in Sana’a is currently developing a mechanism to widen the acceptance and use of e-rial further in 2020.

The exchange rate of the Yemeni rial stayed broadly stable during February 2020. After a steep fall triggered by the de facto authorities in Sana’a, the rial regained strength in areas controlled by the Aden authorities (“south”), supported by the approval of withdrawals from Saudi Arabia’s deposit for import financing for essential commodities in late January (Figure 2). During February, the rial remained broadly stable in the south, trading at YR 650 - 665 per US dollar, as the coronavirus-related slow-down in trade