Yemen Socio-Economic UpdateIssue (18) Sep., 2016

Yemen Economy in Lines

Ministry of Planning & International Cooperation

Economic Studies & Forcasting Sector

Liquidity Crisis Exacerbates Food InsecurityIn 2003,food insecurity among people in Yemen was 22%. The

percentage doubled (44%) in 2008 due to the triple F-crisis: the soaring world fuel and food prices and the global financial crisis. However, the percent of food insecurity fell to 32% in 2009, and then went up again to 44.5% in 2011 as a result of the negative re-percussions of the political crisis in the country.

In March-April 2014, the percent of food insecurity fell to 41.1% of the population. Food insecurity is concentrated more in rural ar-eas as around 48% of the total rural population were found to be food insecure, compared to 26%in urban areas. (The CFSS,2014).

As figure (1) and table (1) show, food security status worsened unprecedentedly during 2015-2016 as a result of the negative im-pacts of the ongoing war in Yemen, accompanied by severe crises, especially fuel shortage that reached a peak in the second quarter of 2015, and liquidity crisis that began in the second half of 2016.

According to the Integrated Food Security Phase Classification (IPC) released in June 2016, about 51% of the population (14.1 mil-lion people) is estimated to be food insecure, with a 9% increase compared to June 2015. Food insecurity is divided into five phas-es. Even though Yemen hasn’t yet reached the last phase (famine), there are pockets of severe food insecurity in Al Tuhayata and Al Khawkhah districts of Hodeida governorate which could lead to famine.

Figure(1): Prevalence of Food Insecurity %

Table(1): Phases of Food Insecurity

First: Food Insecurity:

Facts and Figures

The exchange rate in the parallel market has been fluctuating around YER305/USD during Mid Sep. - Mid-

Oct., 2016.

82% of the population in need of humanitarian assistance, including

9.9 million children.*

beneficiary cases have been await-ing the cash assistance of the Social

Welfare Fund since early 2015.

51% of the population are food insecure. 7 million severely food

insecure.*

The public budget deficit during Jan.-June 2016, compared to

YR278.7 billion during the same period in 2015.

Is the estimated decline in GDP, while the inflation rate rose

by over 30% in 2015.

90% of the population lack access to electricity through the public

grid.**

# of IDPs.*

Sources: *UN agencies and IOM, June, 2016. ** WB, June, 2016.

YER 305 / USD

21.2 million

1.5 million

14.1 million

YR 544.7 billion

34.6%

24.3 million

public employees are awaiting for their salaries1.25 million

2.21 million

51.0

JuneJune

World triple F-crisis: Pricesof Food& Fuel, and Financialcrisis in 2007-2008

Repercussionsof 2011 crisis

Repercussionsof ongoing war

Mar.-Apr.

48.3

41.1

44.5

31.5

44.0

22.0

20032014

2008 2009 20112015 2016

Description/Year 2014 June 2015 June 2016

Million people % Million

people % Million people %

Emergency (Phase 4) 4.8 18.3 6.1 22.7 7.0 25

Crisis (Phase 3) 5.8 21.9 6.8 25.6 7.1 26

Phases 3+4 (Food Insecurity) 10.6 40.1 12.9 48.3 14.1 51

Stressed and Minimal (Phase 1&2) 15.4 59.2 13.8 51.7 13.3 49

Source: CFSS, 2014. And FSIS, IPC 2015-2016

Source: Food Security Information Systems Development Program, IPC, 2014-2016.

IntroductIonFood insecurity and liquidity shortage are two serious

crises that exacerbate day by day. Emergence of these two factors in the arena of Yemen’s conflict intensifies the cri-sis, putting the lives of Yemenis at serious risk, shaking and destroying the financial and banking system and deteriorat-ing the entire economic activity. As a result, the remaining manifestations of stability, security and tranquility fall apart.As the entire world is celebrating this year World Food Day on October 16, food insecurity indicators in Yemen are unprecedentedly escalating. 14.1 million people are unable to meet their food needs (of whom 7 million are severely food insecure). In other words, at least one in two Yemenis don’t have access to enough food.

Liquidity crisis has recently reared its head, making the situation more vague and dangerous to all community mem-bers to varying degrees, but without exception. The mani-festations of liquidity crunch are obviously seen in the non-payment of wages of 1.25 million state employees (With 6.9 million dependents, including 48.2% children) for months, in addition to depriving 1.5 million SWF poor beneficiary cases from cash assistances. Banks’ inability to meet their obligations shakes confidence in the banking system and fur-ther exacerbates the liquidity crisis, thereby, deepening the economic downturn and increasing unemployment and pov-erty rates.

In light of the foregoing, this issue rings alarms bells about how serious the situation is, including a package of priorities that should be seriously dealt with to avoid further escalation of the economic, banking and humanitarian crises.

Dr. Mohammed Al-MaitamiMinister of Planning and International Cooperation

Issue (18) Sep., 2016 Page 2 Yemen Socio-Economic UpdateGeographically, food insecurity percentage varies from one governorate to another, as follows:

With regard to malnutrition among children, the prevalence of chronic malnutrition (Stunting) in children under five fell from 46.6 % in 2011 to 41.3% in 2014. However, it remained one of the highest in the world (Comprehensive Food Security Survey, 2014). Currently, UNICEF estimates that 370,000 children under 5 at risk of Severe Acute Malnutrition (SAM) compared to 160,000 prior to the war(1), while 2.2 million children need urgent humanitarian assistance to prevent a further deterioration in their nutritional status(2). SAM blunts children intellect and makes them nine times more likely to die compared to their healthy peers. This puts the future of human development in Yemen at risk.

Figure(2): Integrated Food Security Phase Classification (IPC) Map

● 9 governorates were classified under emergency (IPC phase 4) as the most food insecure governorates and need urgent life-saving food and livelihood assistance, namely Al-Dhale, Lahj, Taiz, Abyan, Sa’ada, Hajja, Hodeida, Al-Bayda and Shabwa.

● 10 governorates were classified under crisis (phase 3) and need urgent aid to reduce the food consumption gaps and acutemalnutrition, namely Aden, Amran, Dhamar, Sana’a City, Sana’a governorate, Ibb, Marib, Rima, Al-Mahweet and Al-Jawf.

● 3 governorates were classified in the stressed phase (phase 2) and are considered the least affected by food insecurity comparedto other governorates, namely Hadramout, Al-Mahra and Socotra.

Red Sea

Gulf of Aden

Arabian Sea

SAUDI ARABIA

OMAN

DJIBOUTI

ERITREA

Shabwah

Lahj

Abyan

Taizz

Sa'ada

Hajjah

Al Bayda

Al Hudaydah

Al Dhale'e

Aden

Al Jawf

Marib

Sana'a

Ibb

Amran

Dhamar

Al Mahwit

Raymah

Amanat Al Asimah

Hadramaut

Al Maharah

Socotra

0 30 60 120

Disclaimer: The boundaries and names shown anddesignation use in this Map do not imply o�cial endorsement or acceptance by collaborating Organizations and the IPC Global Partners.

Kilometers

Acute Food Insecurity Phase

Minimal

Stressed

Crisis

Emergency

Famine

Area with inadequate evidence

Not Analyzed

Area would likely be at least1 phase worse without thee�ects of humanitarian assistance

Source: FAO - Yemen, situation report, September 2016.

Yemen in the Global Hunger Index Report:

Kuwait TurkeySaudi ArabiaTunisiaJordanIranLebanonAlgeriaMoroccoEgypt OmanIraqYemen

10

0

30

20

50

40

70

60GHIGHIGHIGHI

1992200020082016

Source: http://www.ifpri.org/publication/2016-global-hunger-index-getting-zero-hunger

Figure(3): COUNTRY TRENDS FOR THE 1992, 2000, 2008, AND 2016 GLOBAL HUNGER INDEX SCORES. NEAR EAST AND NORTH AFRICA

According to the Global Hunger Index Report released by the International Food Policy Research Institute (IFPRI) for 2016, Ye-men is classified among the poorest 6 countries out of 118 countries in the world. There is no doubt that the liquidity crisis and other crises will further exacerbate the humanitarian situation and undermine social peace in the country.

Issue (18) Sep., 2016 Page 3 Yemen Socio-Economic Update

Concepts of liquidity: Signs of Liquidity Crisis:

Major Causes of Liquidity Crunch(3):

LiquidityConcepts

Public Budget Liquidity

The ability to finance public expenditure including salaries, otherwise we face a long-term liquidity crisis.

Funding liquidity

The ability of banks to meet their liabilities in a timely fashion.

Macroeconomic liquidity

Means broad money supply (M2) (currency outside banks, demand deposits and quasi money inside banks).

Central bank liquidity

It`s ability to supply the liquidity needed to the financial system.

Second: Liquidity Crisis:

1- At CBY:- The CBY has suspended all disbursements to the public

budget except for wages and salaries. However, it de-layed payment to employees.

- The CBY circulated damaged banknotes that were sup-posed to be replaced due to the lack of cash.

2- At banking sector and exchange companies:- Having difficulty in meeting depositors’ demands of local

currency.- Banks set a deposit withdrawal ceiling on deposits in

local currency.- Lack of Yemeni Riyal cash in markets, especially the

YR1000 and YR500 notes.- Exchange companies are having difficulty disbursing

large remittances, especially in the southern governor-ates.

● Aggravation of the public budget deficit, which amounted to YR1451 billion (equivalent to $ 6.4 billion) during January 2015-June 2016 due to the deterioration of tax revenues, halt of oil and gas exports and suspension of donor support. Therefore, thebudget relied on liquidity available at the CBY, which contributed 80.6% (YR1170 billion) of the public budget deficit duringthe same period. Thus, The CBY’s stock of available cash was depleted in financing budget deficit.

● Interruption in the cash flow cycle because the CBY used to periodically pump the hard-currency revenues of the public budgetto the local market in exchange for withdrawing the local currency from the market to use it to finance the budget expenditures.However, this cycle has been broken.

● Decline in the CBY’s total foreign reserves from $4.7 billion in December 2014 to $0.987 billion (including Saudi deposit andbanks’ deposits at the CBY) in September 2016 due to the sharp decline in the flow of foreign exchange resources to Yemen, inaddition to financing basic commodities imports, paying external debt service and easing the exchange rate crisis.

● Having difficulty continuing the policy of banknotes issuance that amounted to about YR498 billion during January 2015-June2016 since the ongoing war and conflict have restricted the CBY’s ability to issue new banknotes.Furthermore, the newly issuedbank notes remained in circulation outside banks.

● Waning confidence in the banking system,in particular, and the economic situation in general due to the narrow horizon of po-litical resolution and pessimism about the future of development.

(3) Liquidity crisis in commercial and Islamic banks has been discussed in detail in Yemen Socio-Economic Update No. (17). The liquidity crisis began in the public budget and then shifted to the CBY and spread to commercial and Islamic banks.

2.11.3

0.987

4.75.3

6.2

4.5

5.9

6.9

8.27.87.5

6.15.7

5.04.4

3.7

1.51.01.21.0

2.9

1.0

0.0

3.0

2.0

5.0

4.0

6.0

8.0

7.0

9.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

June

Sep.

2016

2016

552

532

571

800 833 822 855

811

1,034

1,064

1,353

1,330

785803777

547

20092010

20112012

20132014

20152016

Currency Outside Banks Banknotes Issued

June

Figure(5): Banknotes Issued and Currency outside banks (Billion YER)

Figure(4): Total Foreign Exchange Reserve of CBY (Billion USD)

Source: CBY,2016.Source: CBY,2016.

Issue (18) Sep., 2016 Page 4 Yemen Socio-Economic Update

● Affecting about 1.25 million public employees (With 6.9 million dependents, including 3.3 million children) due to delaysin wage payment. This makes it difficult for them to have access to food and non-food commodities and services, particu-larly as 31.8% of them are already food insecure (Comprehensive Food Security Survey (CFSS), 2014). The salaries andwages bill stands at YR75 billion per month.

● Depriving about 1.5million poor casesfrom cash assistancesof the Social WelfareFund since early 2015.This exposes themto more deprivation,particularly as 63%of them are alreadyfood insecure (CFSS,2014). About YR22.7billion are requiredeach three months tocover the cash assis-tances of the poor (YR 7.57 billion per month).

● Disrupting the projects of the Public Investment Program and suspending the operating expenditures of basic social ser-vices (Such as education, health and water) in the public budget. This means the deterioration of employment and incomeand difficult access to basic social services.

● Declining aggregate demand (Consumption and investment spending) that leads to disruption of the remaining economicactivities, increase of economic downturn severity and higher unemployment and poverty rates.

46 %18 %

15 %7 %

13 %1 %

Foreign Assets

Local Currency in bank vaults

Balances at the CBY

Credit toGovernment

Advances to private sector

Other

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016June

In 2011, Bank deposits at the CBY declined by 39.5%.In 2016, the liquidity crisis in the CBY did not allowbanks to withdraw the required amounts of their deposits.

47%

14% 18%Government

Salary

Severely food insecure Moderately food insecure Food secure

SocialWelfare

Fund16% 37%

68%

● 59% of commercial and Islamic banks’ assets were saved as balances (deposits and required reserves) at the CBY (13%),and invested in government securities (46%) in 2015. However, the lack of liquidity at the CBY makes it difficult to use that liquidity.

● 38% of the total advances of banks to the private sector were at risk of default. This impacts negatively on the liquiditysituation in banks.

● Some banks set a withdrawal ceiling on deposits, which undermined depositors’ confidence in banking sector, and madewithdraw their deposits outside banks.

Figure(6): Balances of Commercial and Islamic Banks at the CBY (Billion YER)

Figure(8): Food security status of households whose main source of income depends on Government salary or SWF aid (pre-crisis in 2014)

Figure(7): Structure of Assets of Commercial and Islamic Banks 2015

The scarcity of liquidity at commercial and Islamic banks stems from:

Third: Liquidity Crisis Risks on Food Insecurity:Yemen’s economy is witnessing a severe domestic currency drought, as well as a scarcity of foreign exchange. The li-

quidity crisis has resulted in the suspension of, not only state employee wages, but also the public budget expenditures in general. This may cause significant risks to the economic, social and humanitarian indicators and further exacerbation of food insecurity. The major risks of liquidity crisis on food insecurity are as follows:

Source: CBY,2016.Source: CBY,2016.

Source: CFFS, 2014

Issue (18) Sep., 2016 Page 5 Yemen Socio-Economic Update

● Having difficulty in provid-ing the necessary foreign ex-change to import basic foodcommodities. Over the pastyears, the CBY has consistent-ly financed wheat, rice, sugarand fuel imports at the officialexchange rate (YR 214.9 / USDollar). The CBY was forcedto stop financing the fuel andsugar imports at the officialexchange rate in August 2015and February 2016 respec-tively as a result of the foreignexchange scarcity. However,the CBY continued to financethe wheat and rice imports, but raised the official exchange rate to YR 250 / US Dollar. Currently, it’s difficult to continuethis policy due to the erosion of foreign exchange reserves. More population will be susceptible to food insecurity as aresult of the increase of exchange rate in the parallel market to more than YR 300 / US Dollar and Yemen’s heavy importdependency for 90% and 100% of its wheat and rice requirements respectively.

Key risks of liquidity

crisis on food insecurity

Difficulty financing basic imoprts at

the offical ER, thus, exacerbating food

insecurity

Difficulty accessing basic social services

such as education, health and water

Deprivng 1.5 M poor cases from

cash assistances of the Social Welfare

Fund

Affecting 1.25 M public employees

(With 6.9 M dependents,

including 48.2% children)

Deepening econominc downturn,

and increasing unemployment and

povrty rates

Bank 2013 2014 2015 Jan.-Jun.2016

Wheat 771 812 763 279Rice 18 48 120 84Sugar 36 8 50 1.35Fuel 2931 2188 969.8 49.4

Total 3756 3056 1902.8 413.75

Bank 2013 2014 2015

Wheat 2121 2570 2686

Rice 23 54 224

Sugar 60 17 125

Total 2204 2641 3035

Table(2):Imports of basic commodities and fuel financed by the CBY (million USD)

Table(3):Imports of basic commodities and fuel financed by the CBY (thousand ton)

Key Issues Priorities

Food insecurity mitigation priorities

1. Regular payment of state employee wages.

2. Paying the cash assistances to the poor beneficiary cases of the Social Welfare Fund.

3. Ensuring that basic food commodities are imported at the official exchange rate.

4. Resuming donor support to the social protection and poverty alleviation programs, including thecash-for-work programs.

5. Facilitating the foreign trade movement, especially food and fuel imports.

6. Enhancing the humanitarian support provided to IDPs and the most food insecure areas.

7. Supporting the income-generating activities linked to the production of food with high nutritionalvalue, with a focus on rural women.

8. Stimulating the use of solar energy to operate water pumps in agriculture.

9. Finalizing the food security survey to provide an actual database.10. Increasing the number of vitamin (A) and iron supplementation campaigns for children and pregnant

women.11. Opening the shut-down health facilities to treat the acutely malnourished children.

Fourth: Priorities to cope with food insecurity and liquidity crisis:

Source: CBY,2016. Source: CBY,2016.

Issue (18) Sep., 2016 Page 6 Yemen Socio-Economic Update

Key Issues Priorities

Priorities to cope with the liquidity

crisis

1. Opening a dialogue about the Central Bank to ensure its independence and avoid the vacuum ordisputes over the functions and obligations of the CBY.

2. Accelerating the process of printing new bank notes to ease the liquidity crisis.

3. Obtaining foreign-currency deposits at the central bank, and resuming the oil and gas exports.

4. Reallocating the previous donor pledges and mobilizing donor cash and in-kind support “oil prod-ucts” to finance the essential public expenditures.

5. Sending reassurance signals from all concerned parties to banks and depositors in the banking sec-tor.

6. Raising awareness among businessmen about the importance of re-depositing their cash in banks,using cheques in dealings and reducing cash transactions.

7. Adopting a simulative and attractive monetary and saving policy.

8. Allowing the use of foreign currencies in domestic transactions to ease the local currency crunch.

9. Disbursing salaries of all state employees (Including the private sector) through banks and post of-fices instead of cash payment.

10. Establishing regulations on the most essential imports, making the financing process goes throughthe banking system.

11. Adopting measures to prevent exchange dealers and senior businessmen from keeping large sumsof money outside the banking system.

12. Bolstering supervision and evaluation of the performance and safety of commercial and Islamicbanks, and developing immediate remedies for any obstacles.

In the medium term (post war), the CBY must study the feasibility of establishing a bank, or windows in banks, to deposit gold savings, where a depositor can get gold equivalent to his/her in-kind gold deposits during “weddings” or when needed. This will maximize benefitting from gold wealth of Ye-meni women by exporting gold bullions abroad and, consequently, financing the development and poverty alleviation projects.

Priorities to cope with food insecurity and liquidity crisis: (Continuous):

Contact PersonFor more detailed information about items in this update please contact:

Mr. Abdulmageed Albatuly Email: aalbataly@gmail.com Tel.:+967 771 555 730 www.mpic-yemen.org