With the conflict continuing in 2021, the value of the Yemeni riyal continues to depreciate to new historic lows, driving large increases in food prices and pushing more people into extreme poverty. Socioeconomic conditions are deteriorating rapidly, further affected by declining remittances, trade disruptions, severe fuel supply shortages, and the disruption and declining humanitarian operations. Intensifying violence and the fragmentation of macroeconomic policies add further strains on the fragile economic conditions. An unprecedented humanitarian crisis persists, further aggravated by COVID-19, leaving many Yemenis dependent on relief and remittances.
Recent Developments
Non-oil economic activity was affected by the COVID-19-induced slowdown in trade, dual taxation systems in the north and south, scarcity of inputs, and commodity price hikes. The negative impact of recent tightening of immigration to Saudi Arabia and the Saudization polices is not clear yet on Yemeni overseas workers and their associated remittances, although trends in workers remittance inflows since 2020 were already affected by the COVID-19 crisis. Shortages in foreign exchange have further intensified in 2021, due to the slow recovery in oil production and export capacity and the declining humanitarian funding and operations.
Outlook
Economic prospects in 2021 and beyond will critically depend on rapid improvements in the political and security situation, and ultimately whether a cessation of hostilities and eventual political reconciliation will allow for rebuilding the economy and Yemen’s social fabric. Without additional external financing and with a continuation of the pandemic, output is expected to further contract by 2% in 2021. Improved monetary supervision and policy controls could reduce currency exchange volatility and temporarily limit speculative activities, with possible moderate gains in the relative value of the US dollar in the south. A more durable stabilization of the exchange regime will require solutions to tackle the root causes of volatility.