The Central Bank of Yemen (CBY), once one of Yemen’s comparatively functional government institutions, has become highly politicized since 2015 amid the country’s civil war. This trend has accelerated since President Abdo Rabbu Mansour Hadi decided to move the CBY’s headquarters from Sana’a to Aden in September 2016 and fire CBY Governor Mohamed bin Hamam – a skilled nonpartisan technocrat who is one of Yemen’s most widely respected public figures. The CBY is now struggling to cope with three key challenges: foreign reserves, liquidity and staffing.
Since the start of the conflict, Yemen’s foreign reserves have effectively dissipated. While some blame this on the Houthis and their allies, claiming that it was a result of the diversion of funds to the war effort, contacts both within the CBY and banking sector have cast it as simple mathematics. Yemen’s foreign reserves had already been dwindling in the face of budget deficits. The civil war, closure of key Yemeni ports, and virtual end of natural resource revenues just accelerated this trend. Meanwhile, the CBY paid salaries to government employees on both sides of the civil war for almost all of the 2015-2017 period.
The second issue is that of liquidity, since new money is not being produced in volume and Yemeni civilians – most of whom do not have bank accounts – are hoarding currency. Printing new currency appears to be a solution close at hand. However, our contacts in the banking sector have expressed concerns that a sizable infusion of cash would fuel rapid inflation, hastening the depreciation of the Yemeni rial.
Lastly, with the move to Aden, the CBY lost most of its highly experienced staff. While backers of the move have argued that those CBY employees should simply leave Sana’a, they have been reluctant to uproot their families and relocate to comparatively unstable Aden – particularly given unchecked discrimination against northerners by the city’s de facto authorities. A number of CBY employees from northern backgrounds have even been detained upon entering and leaving Aden city. While proponents of the bank move have argued that it will be easy to train new employees, our contacts in the banking sector have stressed the difficulty of replacing the current staff’s years of training and experience as well as its existing relationships.
These developments have come amid larger issues, namely the politicization of the CBY, general decline of confidence in said institution, and meddling of foreign powers. On the first count, CBY officials – including current Governor Munaser al-Quaiti – have openly pushed back against the institution remaining apolitical. They have instead expressed policy prescriptions that would weaponize the bank and harm Yemenis under Houthi control. For instance, salaries in areas controlled by the Houthis are now going unpaid, and any possibility of cooperation with the rump CBY in Sana’a has been ruled out. Meanwhile, some CBY branches – most notably, the one in Marib – have operated with relative autonomy.
Together, the aforementioned issues have deeply diminished international and domestic bankers’ faith in the CBY. Our contacts in Yemen’s private banking sector have been sharply critical of Quaiti and other officials, portraying the current monetary policy as based on flawed economics and a desire to exact revenge. Even pro-Hadi officials and businessmen have been very reluctant to cooperate with the CBY, given its diminished capacity and increasing politicization. This has largely stymied international efforts to restore some degree of normalcy to Yemen’s banking sector.
Moreover, now both Saudi Arabia and Iran are getting sucked into Yemen’s monetary battle. Hadi recently stated that Riyadh would recapitalize the CBY with an infusion of $2bn in foreign reserves, as well as provide a year of free fuel imports. However, until Saudi officials confirm that pledge, it must be viewed as provisional, in our assessment. Horizon understands that the transfer would be sourced from Saudi funds that will now be withheld from Lebanon under the Riyadh’s intensified anti-Hezbollah policy.
Additionally, the recapitalization is now possible following the US government’s aid reconnecting the CBY to the SWIFT international banking system. On 17 November, CBY Deputy Governor for Foreign Banking Operations Khaled al-Abbadi also announced that the Federal Reserve Bank of New York unfroze $205mn of CBY assets in September. In response to the CBY’s cutoff of salaries in Houthi areas, Iran set up new currency printing presses operated by the Qods Force, part of the Islamic Revolutionary Guard Corps (IRGC). In turn, the US government sanctioned a number of entities on 20 November for printing “counterfeit Yemeni bank notes potentially worth hundreds of millions of dollars.”