Executive Summary
The Republic of Yemen today faces one of the most complex investment environments in the region. This reality is the result of structural weaknesses that predated the war and were then intensified by political and institutional fragmentation, security deterioration, and economic collapse. Even so, international experience in fragile and conflict-affected states suggests that Yemen can combine high levels of risk with promising investment opportunities in sectors that can operate before full peace is achieved – provided that reforms are clear, political will exists domestically, and regional support is active.
Over the past decade, the war has produced financial and monetary fragmentation, multiple decisionmaking centers, and divergent laws and procedures. This has created two distinct economic environments: one in government-controlled (liberated) areas and another in Houthi-controlled areas. The result has been a sharp decline in confidence, weaker institutions, severe deterioration in purchasing power, and a continuing fall in the Riyal’s value, alongside rising operating, transport, and insurance costs. At the same time, many of these constraints predate the war: even before the conflict, Yemen was a difficult investment environment due to corruption, complex procedures, a weak judiciary, widespread illegal levies, and capture of state resources by influential power centers.
Despite this bleak picture, the regional and international context offers encouraging indicators that investment space can still be created, especially in government-controlled (liberated) governorates. Compared with Houthi-controlled areas, these governorates offer internationally recognized legal authority, open ports, limited but workable banking channels through official institutions, and stronger prospects for investor protection through international arbitration.
International experience in Iraq, Lebanon, Rwanda, and other conflict-affected countries shows that investment can begin gradually in sectors least affected by war, and that success in fragile environments depends on four pillars: understanding risks while limiting exposure, strong risk management, clear government reforms, and organized regional and international support. With current Gulf investment shifts toward Iraq, Lebanon, and Syria, Yemen – given its geostrategic location along major trade routes, its young population, and its strategic relevance to Gulf security – is a logical candidate to attract part of these investment flows.
There are also conflict-compatible sectors that can be entered today, such as:
These sectors operate by their nature in unstable environments and do not require comprehensive national stability, and can be a starting point.
The paper emphasizes that investment in Yemen, at this stage, cannot be treated as an unrestricted open
field. It must be governed by clear requirements, including a government commitment to supporting
investment, legislative reform, procedure digitization, elimination of illegal levies, access to international
arbitration, specialized government units for investor services, and the launch of a unified investment
window in Aden. It also requires regional guarantees and practical enablers through direct partnerships
with Saudi Arabia, the United Arab Emirates, and other Gulf countries.
Foreign investment also requires active participation by the Yemeni private sector through alliances,
stronger governance standards, audited financial statements, and partnerships with Gulf investors through joint ventures (JVs) rather than stand-alone efforts. It also calls for a new donor role that goes beyond relief to support joint investment, improve the business environment, and provide financing guarantees and blended-finance tools.
Geographically, while the analysis covers Yemen as a whole, the practical application of opportunities
focuses on government-controlled (liberated) governorates. This reflects the current impracticality of
operating in the Houthi-controlled environment, which is marked by sanctions, extortion, capital flight,
institutional destruction, tight control over companies, and the absence of minimum legal and institutional guarantees for local and foreign investors.
The paper concludes that Yemen, despite its fragility, possesses rare strength elements in the region,
including:
The paper presents practical recommendations for the Yemeni government, the Yemeni and Gulf private
sectors, and donors aimed at transforming Yemen’s investment environment from a deterrent environment into an enabling one through short- and medium-term reforms, strategic partnerships, and a limited number of high-impact model projects that can build confidence and unlock larger investment flows later.
Based on this analysis, foreign investment in Yemen is difficult but not impossible. In the right regional
context and with clear government reforms, it can become a major driver of economic stability, a lever for reconstruction, and a tool for integrating Yemen into the Gulf and wider regional economy. The most logical starting point is in government-controlled (liberated) governorates and in sectors compatible with the current conflict context, before moving to larger projects in a later political settlement phase.
For decades prior to the ongoing conflict, Yemen had been vulnerable to recurring budget deficits due to a lack of meaningful fiscal reform, high recurrent expenditures – mainly public sector salaries and fuel subsidies – and an overdependence on oil revenues. While foreign debt obligations remained low, the debt market was poorly diversified, with treasury bill holders narrowly concentrated within the banking sector and government bonds held almost exclusively by public pension funds.
The escalation of the ongoing conflict in 2015 has had a profoundly negative impact on Yemen’s debt position. Large-scale oil exports ceased, leading to a collapse in public revenues, while banks and pension funds stopped purchasing government debt instruments. Management of the public debt became bifurcated between rival central bank administrations in Aden and Sana’a, both of which suspended payments on foreign and domestic debt obligations. Unable to receive interest payments, public debt holders faced a liquidity crisis, leaving banks unable to honor customer obligations and threatening their solvency, while pension funds have struggled to support retirees.
On January 25-27, 2021, senior Yemeni experts and professionals convened virtually for the 7th Development Champions Forum (DCF), as part of the Rethinking Yemen’s Economy initiative, to discuss the evolution and structure of Yemen’s public debt, the dynamics during the conflict that have led to its colossal expansion, and the macroeconomic risks it poses. This was followed a week later with a briefing for international stakeholders on February 2. These discussions formed the basis for the research presented in this paper and its recommendations for addressing Yemen’s public debt crisis.
Yemen is predominantly a rural country, with over 70% of the population living in 140,000 settlements in impoverished rural areas, and road transportation is essential for its development and overall economic growth. With only about 3,744km of paved rural roads, representing approximately 6.4% of all roads in the country, Yemen’s neglected road network poses significant development challenges. The current conflict, in its various forms, has complicated the movement of people and goods between governorates as well as into and out of Yemen. Road transportation costs have risen as much as 145% due to high fuel prices and the need to take alternative long-distance routes. Road infrastructure has also incurred heavy losses because of the conflict, estimated at $1.3 billion, with the total length of damaged roads reaching about 6,000km along with more than 100 bridges. Road projects have been halted due to a lack of financing, which has exacerbated the sector’s problems.
Among the most prominent institutional challenges are a lack of effective policies and legislation, rundown equipment and machinery, and personnel and human resources challenges. A shortage of financial resources, which limits the sector’s operations, is the largest obstacle facing road transport authorities.
This white paper offers short-term, medium and long-term recommendations on alleviating the impacts of the war on the road transportation sector; infrastructure policies for rural and urban roads; policies for road maintenance and repairs that impact commercial traffic; and updating the institutional structure of road transportation.
In the short-term, efforts must be made to boost the sector’s role in developing, implementing, and operating intelligent transportation systems for buses and freight trucks to guarantee the security and safety of passengers and streamline payments for cargo. It is also urgent that stalled road projects are resumed. Efforts must also include the restoration of operations at the weigh stations damaged by the war, application of traffic safety laws on roads between governorates to reduce accidents and enhancement of the institutional capacity of road transport institutions. Humanitarian and emergency aid should be directed toward rural roads to bolster these efforts.
In the medium to long term, authorities should establish inland ports at the main entrances to cities, which could help reduce traffic, heavy loads on roads and the price of goods. Efforts should also include a strategic program to expand rural roads in Yemen, assess the current state of the road network, develop international land border ports and facilitate transit procedures. Plans should also be made to develop the legislative, regulatory and institutional framework of the sector to meet current needs and prevent conflicting interests and tasks.
Yemen has a heavily cash-based economy with low levels of financial inclusion. The country’s formal banking sector is highly underdeveloped, undercapitalized and concentrated in urban areas, leaving it inaccessible for the majority of the Yemeni population. Just prior to the current conflict, the Central Bank of Yemen (CBY) began reforms aimed at developing Yemen’s financial sector infrastructure and reducing the predominance of cash by improving electronic interbank transactions and local electronic payment systems, including electronic and mobile money services. Given the widespread prevalence of mobile phones among the population, successful reform had the potential to dramatically increase financial inclusion. The onset of the ongoing conflict, however, interrupted progress.
This paper examines the existing regulations surrounding the use of e-money in Yemen, its attempts to adopt e-money services both before and during the conflict, the major players and state of infrastructure in the sector, and the challenges and prospects facing greater adoption of electronic currency in the country.
Broadly speaking, e-money adoption around the globe has been accompanied by three types of regulatory environments: highly, moderately and minimally regulated markets. In Yemen, a highly regulated market – which grants the right to provide e-money services only to banks – was the legal framework prior to 2014, though in practice adoption remained minimal. The Yemeni conflict escalated in 2015, and by 2016 the CBY was fragmented across frontlines, with rivaling branches vying for dominance in Aden and Sana’a – affiliated with the internationally recognized government and the Houthi authorities, respectively. In the years following, the CBY-Sana’a has increasingly taken steps to establish a minimally regulated, nonbank led model for e-money services, which the CBY-Aden has opposed, holding to the prewar legal framework.
Given Yemen’s armed conflict, political crisis, deep institutional fragmentation in key state institutions – including the parliament and the CBY – and the underdeveloped state of e-payment infrastructure overall, widespread use of e-money is unlikely to emerge. During the conflict, any enforcement of aggressive unilateral steps by any of the competing parties to the conflict could deepen the division in the institutions involved in operating the e-payment services. Holistic initiatives to strengthen the Yemeni e-money and e-payment ecosystem are invariably tied to ending political division and stabilizing the monetary regime, which must start by unifying the central banks and the official exchange rate.
Until a resolution can be reached, this paper recommends that stakeholders interested in implementing e-money services in Yemen adopt a “do no harm” approach. In general, this should focus on supporting the reunification of the country’s regulatory environment and, when supporting public and private entities in developing the necessary skills and infrastructure to implement e-money and e-payment services, do so in a way that does not compound the current regulatory and monetary chaos.
Over the long term, international stakeholders should support a unified CBY in developing strategic plans to stabilize the monetary regime and foster recovery of the financial system, including developing a national payment systems strategy to strengthen the payment infrastructure and facilitate a well-studied shift to electronic payments.
Local councils are responsible for spearheading development projects and providing basic public services to Yemen’s population of more than 30 million people. The councils are particularly important in rural areas, where about 70 percent of Yemen’s population lives.
In July 2018, the Rethinking Yemen’s Economy initiative published a White paper that explored how the collapse of Yemen’s economy and the fragmentation of central government institutions during the war affected local councils. This new White Paper builds on those findings by examining how local governance has evolved in the intervening years, with a focus on the relationship between local authorities and the central governments in Sana’a and Aden. This White Paper also incorporates new research on local governance in Yemen since 2018.
The findings of this paper broadly reflect governance trends witnessed in various parts of Yemen during the war. In Houthi-controlled areas, the central government in Sana’a has restricted the autonomy of local authorities as part of efforts to consolidate political control and redistribute revenues to the war effort. In Houthi-run parts of Hudaydah governorate, for example, the central government in Sana’a tightly controls virtually all aspects of local governance.
In areas nominally controlled by the internationally recognized government, the story is more mixed. Local authorities in the oil-producing governorates of Marib and Shabwa have gained unprecedented autonomy from the central government and used newfound revenues from oil and gas sales to fund government work and provide services.
However, in other governorates like Aden, local government autonomy has been crippled by political infighting and a shortage of revenues. Despite their proximity to central government institutions in Aden, local officials have struggled to carry out their basic duties. In parts of Hudaydah controlled by the internationally recognized government, local authorities receive negligible support from the central government, relying instead on the Saudi-led coalition and its partners on the ground for funding and support.
Electricity is the backbone of any economy and one of the necessities of modern life. Poor electricity services in Yemen, even before the war, have been one of the key barriers to sustainable economic development and basic service provision (e.g., water supply, health care, education). This paper aims to lay out the top priorities for restoring electricity sector services and reforming the sector after the war. TWhe paper starts with an assessment of the electricity status prior to the war. It subsequently discusses the impact of the war on the electricity sector performance and the 1990s Power Sector Reform Model, followed by an identification of the key barriers faced by the sector.
The paper argues that the electricity sector, or power sector, in Yemen suffers from several chronic technical, political, economic and social challenges. These challenges are:
1) high dependency on diesel; 2) high electricity losses; 3) finance constraints; 4) lack of skilled employees; 5) security issues; 6) poverty and affordability issues; 7) inefficient and aging power plants; 8) corporatization and commercialization related issues; 9) unattractive market for private investments; 10) absence of supporting policies, laws and regulatory framework; and 11) absence of a clear vision on the form of the electricity sector after the war.
The paper concludes with a set of top priorities aimed at restoring the pre-war capacity of the sector and then further reforming the electricity sector towards improved performance. The immediate to short-term recommendations include adopting a realistic and practical recovery plan; securing funds for rehabilitating the infrastructure; reviewing the electricity tariff; reducing the technical and non-technical electricity losses; purchasing electricity when needed through a competitive process and via least-cost options such as gas and renewable energy; securing the fuel supply and the salaries of sector staff; resuming all suspended projects; finding sustainable and feasible solutions for the electricity supply in each governorate to avoid the challenges associated with the centralized grid; and installing sustainable stand-alone solar systems, compatible for connection to the national grid (when restored).
The medium to long-term priorities include specific recommendations under five categories, relating to 1) the legal and regulatory framework; 2) institutional arrangements; 3) capacity and performance; 4) private sector participation; and 5) technical issues.
Since early 2015, when the onset of war led to the cessation of large-scale oil exports, Yemen has been almost completely dependent on three main external sources to secure foreign currency inflows and stimulate economic activity: foreign humanitarian aid, Saudi financial support to the Yemeni government, and – by far the most significant – remittances from Yemeni expatriates, most working in Saudi Arabia. All three of these foreign currency sources have dramatically declined in 2020.
The Saudi response to the COVID-19 global pandemic, in concert with record low oil prices, led to historic economic contractions and spending cuts in the kingdom, in turn undermining the ability of hundreds of thousands of Yemenis to work there and send money home. This occurred alongside a steep decline in international donor funding for the Yemen relief effort and the Central Bank of Yemen in Aden effectively exhausting the US$2 billion Saudi deposit it received in 2018.
Roughly half the population in Yemen was already food insecure before the onset of the current armed conflict. The general economic collapse the war precipitated led to millions more requiring emergency food assistance to survive. The current acute shortage of foreign currency sources has profound implications for the value of Yemen’s domestic currency, and the country’s ability to finance fuel and basic commodity imports, and is likely to lead to the rapid intensification of the humanitarian crisis.
This paper presents policy recommendations to address this situation for the United Nations and other international stakeholders, Saudi Arabia and other Gulf states, as well as the internationally recognized Yemeni government and the de facto authorities in Sana’a (the armed Houthi movement, Ansar Allah).
In 1997 microfinance was introduced to Yemen. The government, supported by international donor states, viewed it as a strategic tool to alleviate poverty and reduce unemployment by expanding financial services to small and micro entrepreneurs to increase their share of the national economy. However, persistent challenges facing the microfinance industry have stunted its development, reach within the population and overall socioeconomic impact. More recently, the institutions, businesses and individuals involved have also faced challenges associated with the ongoing civil war and regional military intervention.
Structurally, the microfinance industry in Yemen can be separated into two distinct institutional groupings: the formal sector, composed of microfinance banks; and the informal sector, made up of microfinance institutions (MFIs). The primary difference is that microfinance banks are regulated by the central bank and permitted to finance their activities by mobilizing public savings and deposits. MFIs operate outside the central bank’s governance and are thus almost wholly reliant on external donor funds and programs channeled to them through the Social Fund for Development (SFD), a semi-autonomous public institution with the primary mandates of poverty reduction and job creation.
The formally regulated microfinance industry, given its stronger institutional framework and governance, has garnered a relatively more advantageous environment to develop capacities and strategies to react to local demand, making it more resilient to shocks and adverse events, such as the ongoing conflict. Meanwhile, the informal sector’s dependence on international donor funding – which comes with these foreign organizations’ implementation requirements – has left MFIs with reduced say over the programs they implement and the populations and markets targeted, thereby hindering MFIs’ ability to pursue consistent strategies and specialization. This, in turn, has limited their competitive position, overall impact and organizational development.
This paper explores the historic development of the industry and its players, as well as the impacts of the ongoing conflict. It then makes recommendations in four areas — capacity building, financing, program design and research — to help create a more conducive operating environment for microfinance overall. This would better place the industry to achieve its socioeconomic aims in the near term and contribute to Yemen’s recovery post conflict.
Executive Summary
Scarce opportunities to earn a viable livelihood in Yemen have, for decades, driven hundreds of thousands of Yemenis abroad in search of work. Given chronically poor access to education in Yemen, the majority of these have been unskilled or semi-skilled laborers. The proximity of Saudi Arabia and the robustness of its oil-driven economy has made it a natural destination for most of Yemen’s expatriate labor force. The economic boom in Gulf Cooperation Council (GCC) states in the 1970s and 1980s, with the corresponding demand for labor, also drew many Yemenis to work in the GCC, with Saudi Arabia opening its borders to Yemenis without visa requirements.
Following the 1990 Gulf War – and the Yemeni government’s decision not to support the United Nations Security Council resolutions against Iraq’s invasion of Kuwait – Yemeni workers were forcibly deported en masse from GCC countries. Close to one million returned home from Saudi Arabia alone. The loss of remittances from these workers, along with the increased demands on public services and pressure on the labor market, caused rapid economic decline and social instability in Yemen. This in turn is regarded as a contributing factor to the country’s 1994 civil war and today’s economic crisis.
In 1990 Riyadh also initiated a program to increase the share of its nationals in the labor force, however, it was not implemented at the time. Thus, over the subsequent two decades the number of Yemenis working in the kingdom returned to pre-1990 levels. Following the 2011 Arab Spring uprisings around the region and in Yemen, GCC monarchies’ security fears increased, as did their desire to increase employment for their nationals. Thus, in 2011 Saudi Arabia’s campaign to nationalize its labor market was reactivated, with this becoming part of Riyadh’s larger Vision 2030 economic plan in 2013.
The impact of these policies has become more pronounced in recent years, with greater restrictions on the number of job categories open to expatriate workers, fees to live and work in Saudi Arabia increasing for legally documented workers and their families, and undocumented laborers facing an evermore precarious existence and exploitation. This, along with Saudi campaigns to arrest and forcibly expel illegal workers, has resulted in tens of thousands of Yemenis being forced to return to their home country.
Concurrently, in 2015 Saudi Arabia and the United Arab Emirates launched a military intervention in Yemen in support of the internationally recognized Yemeni government, which had been deposed by the armed Houthi movement. The escalation of this conflict has caused widespread economic collapse in Yemen, mass loss of livelihood and the cessessation of large-scale oil exports, previously the country’s largest source of foreign currency. The result is that the survival of millions of Yemenis has become dependent on remittances sent home from relatives working Saudi Arabia, and elsewhere. These remittances – totalling billions of dollars annually – have also become the primary supply of foreign currency in the local market and critical to facilitating imports of basic commodities. Thus, remittances from Yemen’s expatriate workforce have prevented their country’s food security crisis, already the largest in the world, from being profoundly worse.
Should the mass expulsion of expatriate workers currently underway in Saudi Arabia continue at pace, it will have another catastrophic economic and humanitarian consequences for Yemenis. This in turn would spur further socioeconomic and political instability across Yemen and create an environment conducive to long-term armed conflict, regardless of whether a political settlement is reached between the parties currently at war. As many observers see Yemen’s stability as a cornerstone of stability in the wider Arabian Peninsula, the ramifications would be regionalized, if not globalized. Thus beyond the moral obligation to prevent the intensifying of mass human suffering, it is in the self-interest of all local, regional and international stakeholders that the flow of remittances from Yemen’s expatriate workforce be maintained.
It is incumbent on GCC states, and Saudi Arabia in particular, to allow Yemeni expat workers an exemption from the current labor nationalization campaigns, at least in the mid-term. Once the ongoing Yemeni conflict has reached a political resolution and the country has attained relatively sustainable economic growth – with a concurrent demand for labor that can absorb returning workers – the issue of the repatriation of Yemeni workers can be revisited responsibly.[1]
Corruption, or the abuse of power for private gain, is deeply entrenched in the Yemeni political economy. For decades Yemen has witnessed state capture, with political leaders at the highest level extracting rents from state institutions to benefit a select few. Administrative corruption, too, has been commonplace in Yemen: low-level bribery and favoritism have become a part of everyday life. There is arguably a cultural acceptance — even an expectation — of corruption in politics and business, as informal networks have come to wield more influence than official institutions.
State capture and administrative corruption in Yemen have their origins in the presidency of President Ali Abdullah Saleh. Under Saleh, a band of elites built a system of patronage over the course of the 1980s and 1990s, both before and after the 1990 unification of North and South Yemen.[1] The main beneficiaries of this “neopatrimonial” patronage system were the members of Saleh’s family, tribe, and close associates, who were installed into the upper echelons of Yemen’s military structures and security apparatus. The rules of the game were simple: state-sponsored handouts in exchange for loyalty to the regime. After oil was discovered in Yemen in the mid-1980s, oil and gas rents bankrolled the expansion and maintenance of Saleh’s patronage network.
Following pressure from the international community to address endemic corruption in Yemen, a wave of anti-corruption reforms were introduced in the mid-2000s. Despite praise at the time for what appeared to be progress towards addressing corruption, in the long term the reforms seem to have proven ineffective. In the meantime, Yemeni oil production declined after 2001, and Saleh’s patronage system became increasingly untenable.
Widespread protests broke out across Yemen in early 2011 and an elite power struggle ensued in Sana’a. Protestors were united by a shared animosity against the corrupt system they closely associated with Saleh and his cohorts. Saleh stepped down in February 2012. Saleh’s successor, President Abdo Rabbu Mansour Hadi, and the transitional government that he presided over talked tough on corruption. However, extensive corruption continued under the new government: patronage payments accelerated, fuel subsidies increased for the private sector, and money intended for humanitarian and development aid donated by the international community was diverted. In this context the Houthis rallied popular support by tapping into anti-corruption sentiments. After the Houthis entered Sana’a in September 2014 with the presumed support of former president Saleh, they signalled their determination to fight corruption and present themselves as a worthy alternative to the status quo. Operating under the cover of an anti-corruption banner the Houthis attempted to push Hadi from power in early 2015. This move led the Saudi-led coalition to enter the conflict in support of the Hadi government in March 2015, intensifying the conflict.
Over the course of the conflict, Yemen has witnessed corruption that continues to operate according to the same rules as before the war and at an equally troubling rate. As the conflict has fragmented and regionalized the country, however, state capture in Yemen has become far more complex. In the war economy, patronage networks are now emerging among previously marginal or unknown figures. The financial dimension of the Saudi-led coalition’s military campaign has extended patronage networks across national borders — though historically Yemen is accustomed to a degree of patronage from its Saudi neighbor. Alleged collusion between Houthi-affiliated importers and officials allied with the internationally recognized Yemeni government indicates patronage networks that potentially cross the frontlines of the war themselves. As greater numbers and a wider variety of actors profit from illicit activity in the war economy, vested economic interests in continued conflict become more entrenched.
Anyone concerned about building a stable post-conflict Yemen must take seriously the challenge presented by corruption in Yemen’s war economy. With this in view, the following guiding principles and recommendations are offered:
Guiding principles for policymakers aiming to address corruption in Yemen:
Guiding Principle No. 1: Acknowledge complexity. Any attempt to address corruption in Yemen should acknowledge and aim to understand the complex, context-specific mechanisms of corruption at the heart of Yemen’s war economy, the actors involved, and any overlapping political and economic interests. A well-developed contextual understanding will allow policymakers to weigh potential benefits and anticipate pitfalls when developing an anti-corruption strategy.
Guiding Principle No. 2: Implement gradually. Given the high levels of state capture and administrative corruption in Yemen, it would be unrealistic and perhaps counterproductive for policymakers to introduce a sudden and aggressive anti-corruption strategy. State capture should be rolled backed gradually, with a phased implementation of anti-corruption reforms limiting the shock to the system. Any attempt to combat corruption in a rushed or superficial manner may lead to grave policy errors where instead of restraining the actions of corrupt individuals the policies lead to greater suffering among the Yemeni people.
Guiding Principle No. 3: Engage as many actors as possible. Given the widespread reach of corruption in Yemen, anti-corruption efforts should not selectively target any single actor, but should instead seek to have an impact across the system as a whole. If any breakthrough is to be made in creating short- or long-term peace, policymakers will need the buy-in of as many actors as possible.
Policy recommendations for a post-conflict Yemen:
Build on the existing anti-corruption framework in Yemen by funding Yemen’s existing state-run anti-corruption agencies and encouraging greater coordination and data-sharing among them.
Encourage transparency and accountability by requiring higher standards of public disclosure, particularly on government tenders and the salaries of appointed officials and senior government staff.
Reduce conflicts of interest by legally obligating government employees to relinquish control of any private businesses, establishing rotating positions in state-run energy companies, implementing regulations concerning equal employment opportunities within the public sector, and reforming the military and security apparatus.
Improve the management of government finances by constructing a rigorous system to control the disbursal of government funds, making the Central Bank of Yemen fully independent, requiring adherence to anti-corruption legislation for the continued delivery of external donor assistance, and closely monitoring financial assistance provided for post-war reconstruction and local development projects.
Decentralize economic power by empowering local authorities to deliver public services and implement local development projects, aid the creation and expansion of small and medium-sized enterprises (SMEs), and empower anti-corruption agencies to monitor fuel import companies.
[1] Colloquially known as North Yemen and South Yemen respectively, the Yemen Arab Republic and the People’s Democratic Republic of Yemen were unified in 1990 to form the Republic of Yemen.
Yemen has spent much of the past 60 years embroiled in armed conflict and political crisis, with this cyclical instability and insecurity among the primary factors that has stymied both private sector maturation and the establishment of a strong state with well functioning public institutions. The vast majority of the Yemeni private sector is made up of small or very small businesses, even while providing almost 70 percent of working Yemenis with their livelihood. Rural agriculture has traditionally provided work for more than half the population.
Since the discovery of commercially viable oil fields in the mid-1980s and the ramping up of oil production in Yemen through the 1990s, the country’s annual gross domestic product (GDP) has been heavily influenced by its oil production levels and the volatility of global energy markets. Oil exports create a “Dutch disease” situation in the country, where the foreign currency from oil sales inflated the value of the domestic currency, inhibiting the private sector’s development of export-led growth. The higher value of the Yemeni rial also made imports relatively cheaper, impeding the development of local industry. These factors combined to leave Yemen dependent on imports for most goods.
There are numerous other challenges to private sector development, including bureaucratic obstructions, weak infrastructure, a largely unskilled workforce, a poor investment climate and lack of financing, an economy overly dependent on oil, corruption, a weak state, and a rent-seeking elite class with vested interests in stifling reforms.
There has also been some progress in the past 25 years: some import barriers have been removed and customs tariffs simplified; reforms to business registration and the elimination of minimum capital requirements brought down the time and cost to start a business; corporate taxes were reduced significantly and harmonized; there was a marked decrease in property related disputes; the market for Islamic banking services was opened; the government established a credit registry and introduced a Microfinance Banking Law.
Nevertheless, the impacts of the ongoing conflict, which began in 2014 and intensified significantly in 2015, have been devastating. Economic output has contracted a cumulative 40.5 percent since 2015. Suspended oil exports have decimated public revenues and cut off the country’s primary supply of foreign currency. The depletion of reserves and a domestic cash liquidity crisis in turn led to the Central Bank of Yemen (CBY) suspending most public sector salaries in August 2016 and ending import financing. Coupled with the relocation of the central bank headquarters from Sana’a to Aden in September 2016, this crisis hobbled the CBY’s ability to protect the value of the Yemeni rial (YR). The rial thus fell from YR 215 to US$1 at the beginning of the conflict to roughly YR 490 to US$1 as of the end of June 2018.
With currency depreciation the price of imports has spiked and per-capita purchasing power has plummeted. The price of imports has also been heavily affected by a Saudi-led coalition sea blockade of (and now military operation to retake) the country’s northern ports – most significantly Hudaydah and Saleef – which has dramatically reduced commercial and humanitarian deliveries through these ports, and increased the time and cost of delivery for those imports that do get through. All of these factors have facilitated a situation today where 8.4 million Yemenis are on the edge of famine and 22 million are in need of humanitarian support, in what the United Nations has called the world’s largest humanitarian catastrophe.
Increased costs for businesses have been spurred by a lack of security and a scarcity of business inputs, while a loss of customer base and demand as well as general purchasing power decline has driven a loss in revenue. Physical damage to public and private infrastructure has also severely affected the ability of businesses to operate. As of 2017 these losses associated with the conflict had let to private sector businesses on average cutting their working hours in half, with layoffs estimated at 55 percent of the workforce, while more than a quarter of private sector firms engaged in industry, trade and services have ceased to operate. Foreign currency shortages and a domestic currency liquidity crisis have also presented importers with increased challenges and costs. Even faced with these challenges, however, the Yemeni private sector is still one of the primary factors stopping the dire humanitarian crisis in Yemen from being far worse, facilitating the import of the vast majority of the country’s food and fuel.
In previous studies of impact of conflict on a country’s private sector, it was found that war tends to create a power vacuum that allows space for illegal trade and the rise of a ‘war economy’, in which grey and black market actors accrue large sums of liquidity, and draw such out of the formal economy. Even once peace is achieved, doubts regarding its durability classically dissuade investments in the country, in particular investments in fixed, illiquid assets. However, without private sector development, reconstruction, rehabilitation and socio economic and social stability are highly unlikely post conflict.
An incipient private sector cannot be expected to, of itself, redevelop and drive economic growth immediately after conflict resolution. Thus, this paper makes the following recommendations to the Yemeni government and international stakeholders regarding economic interventions to spur post-conflict private sector development in Yemen.
Key Recommendations
● Interventions must be conflict-sensitive. Yemen’s multifaceted and prolonged conflict has weakened both the formal state and formal private sector activity, allowing the emergence of new players in a war economy. Early interventions must thus be vetted to ensure they do not empower conflict actors and potential peace spoilers, would curb development in the formal private sector and threat overall socio economic stability. International actors intervening on the ground should establish an inclusive mechanism in which local business actors are meaningfully engaged to create strong buy-in in enhancing peacebuilding and enabling appropriate business environments.
● Build local business capacities to implement programs and create jobs. Stakeholders should work to ensure that local businesses have the necessary tools and requisite skills to take advantage of international interventions. This should include facilitating the transfer of knowledge, specifically knowledge related the use of technology in business, through providing education and training programs for Yemen’s private sector labor force.
● The agriculture sector should be the target of any early intervention. Agriculture, which employed the largest portion of the Yemeni workforce prior to the conflict, has been particularly adversely impacted by the dynamics of the war in Yemen and should be the target of any early intervention to boost the economy.[1] For instance, programs could be established to support microbusinesses in agriculture and offer training and technical assistance for farmers and those hoping to establish small-scale and self-sustaining projects.
● Target SMEs and entrepreneurs. Private actors should assist the government and international donors in developing joint financial mechanisms to finance small and medium enterprises (SMEs) and business incubators. These should also specifically target and assist women and youth to start businesses, given how underrepresented these groups are in private sector activities.
● Ensure private sector access to finance. Over the short run, the Yemeni government and all relevant stakeholders should support a full return of a functioning financial sector, including stabilizing the Central Bank of Yemen. Over the longer run, efforts should be directed to lead reforms on banking regulations and ensure an appropriate platform for foreign investors to establish banks in country, as well as for remittances influx. In this regard, the Yemeni government should establish for a mechanism for investment guarantees in order to attract the remittances of the Yemeni diaspora to contribute to country economic recovery.
● Yemen’s experienced microfinance institutions should be a key target of all stakeholders for driving more financial inclusion across Yemen. Microfinance banks and companies should be also empowered to offer financial services for individuals and cash management services for smaller businesses. Moreover, mobile banking in Yemen should be enhanced to expand access to low-income borrowers.
● Reform the business environment. The government should establish a business-friendly taxation system and anti-corruption institutions and encourage investments through easing some regulations that restrict foreign investments and discourage business startups. In particular, the government should engage with and invest in transformative sectors such as transportation, financial services, telecommunications, tourism, power production, and food processing and distribution.
Local councils are among Yemen’s most important state institutions. Responsible for providing basic public services to millions of Yemenis, local councils represent official governance and the Yemeni state for vast swathes of the population. The intensification of the conflict since March 2015, however, has undermined the councils’ ability to operate effectively in most areas of the country. The councils depend heavily on central government financing and, to a lesser degree, local sources of revenue such as taxes on basic utilities and telephone usage. As such, Yemen’s precipitous economic collapse, the subsequent decline in government revenues and the incapacitation of the Central Bank of Yemen (CBY) have compromised local councils’ ability to operate. The nonpayment of civil servant salaries and Yemenis’ decreased purchasing power contribute to Yemen’s alarming humanitarian crisis while limiting local councils’ ability to extract local sources of revenue.
Generally speaking, a shortage of revenues has left local councils across Yemen unable to operate anywhere near to their full capacity. The most obvious exceptions to this rule can be found in Marib and Hadramawt governorates, which enjoy relative stability and comparatively greater economic resources. These local councils are functioning at a much higher level than their counterparts. Some local councils, such as those in Ibb and Hadramawt governorates, have also received donations from Yemeni businessmen that have helped to continue operations to some extent.
The increased violence and instability since March 2015 have also largely overwhelmed local police and the judiciary — institutions that previously provided a degree of local order. As a result, local councils have been afforded little protection in their operations. As the state’s ability to provide either security or public services has eroded, civilian trust in either local councils or the state itself has fallen. In many areas this absence of effective official governance has created fertile ground for non-state actors to assert their authority, including over local councils. The autonomy and maneuverability of local councils in Houthi-controlled areas is restricted by the Houthis’ adoption and implementation of a centralized mode of governance, in which local-level processes such as the distribution of revenues or humanitarian aid are controlled by the Houthis at the center. In the areas under Houthi control, Houthi supporters closely monitor local council activity.
Although interference in local councils is arguably more consistent in Houthi-controlled areas, local councils also face interference elsewhere. Aden is a prime example: local councils in the southern coastal city are vulnerable to interference from competing armed militias that form part of a broader power struggle between southern secessionists and the internationally recognized Yemeni government.
Given the central role that local councils previously played in providing public services to their communities, the currently reduced capacity of local councils is cause for much concern as the conflict rages on and Yemen’s economic and humanitarian crises deepen. Although the majority of local councils in Yemen are not fully functional, local councils remain important instruments for the communities they represent, particularly in coordinating humanitarian relief efforts with local and international non-governmental organizations. Throughout the conflict, local council members have also been directly involved in local mediation and dispute settlement. They have leveraged their deep knowledge of complex local socio-political, economic and tribal dynamics to coordinate ceasefires, prisoner exchanges, and the safe passage of essential commodities and humanitarian aid across frontlines. Thus, irrespective of how the conflict progresses, it is imperative that local, regional and international actors not only seek to prevent local governance structures from collapsing, but also plan to enhance the capacities of local councils in post-conflict scenarios.
Prior to the onset and intensification of the current conflict, several parties had advocated in favor of a new, decentralized model of governance in Yemen. For example, such calls were made during the National Dialogue Conference. The conflict has inadvertently set a process of decentralization/regionalization in motion, whereby Yemen has become increasingly fragmented; local interests, local demands, and local actors are in the ascendancy. In the absence of central state authority, a number of effective local, self-governance models have emerged, notably in Marib and Hadramawt governorates. At some stage a new system of governance will arguably need to be drawn up to reflect the new realities on the ground. Local councils are among the best-equipped and best-established institutions to support such a shift away from the previous centralized model.
Key Recommendations
Regional and international stakeholders should coordinate efforts to restore the Central Bank of Yemen to a fully functioning unified national entity, able to facilitate the payment of public sector salaries and the operational costs of local councils regardless of the council’s location or leadership.
The international community should provide technical assistance and take constructive measures to develop a mechanism between the warring parties to allow for the nationwide collection and redistribution of state revenues — such as taxes and customs — with a view to re-establishing public services in all areas.
The internationally recognized Yemeni government should allocate additional funding for local councils. The Social Fund for Development (SFD) should be used as an intermediary institution to channel allocated revenues to local authorities and jointly to implement projects re-establishing the delivery of public services.
International donors and international non-governmental organizations (INGOs) should include local councils as key players in channeling financial support to, and empowering them in liaising with, other local actors. Such inclusion would leverage local councils’ deep understanding of local contexts, increase the councils’ legitimacy and encourage communities to unite under formal government structures. Financial support to local councils should also include an oversight mechanism to avoid the misappropriation of funds.
The Yemeni government should issue temporary regulatory instructions to officially devolve more powers to the governorate and district level. These instructions should:
authorize local councils to access and develop sustainable resources at the local level and spend the associated revenues on their needs;
allocate a share of sovereign resources to each governorate based on transparent financing criteria;
ensure local councils have sufficient administrative powers to supervise service provision, govern effectively and deter local patronage networks;
allow local councils to nominate leaders to formal positions in local security services and supervise the performance of these services.
International stakeholders should support local capacity-building programs to empower local judiciary and professionalize local security services.
Regional stakeholders should refrain from intervening in the activities of local judiciary and security services, or creating parallel competing entities that would undermine state legitimacy.
All stakeholders should promote bottom-up, inclusive forms of local governance to curb the appeal of non-state actors.
A comprehensive assessment should be undertaken to identify the groups and individuals in control at both the governorate and district levels — including evaluating their local support base and ability to provide public services — to inform and develop strategies for the restoration of state functions post-conflict.
The ongoing conflict in Yemen has imposed grievous costs on Yemenis, damaging lives, property and infrastructure and collapsing the country’s already fragile economy. And yet the conflict will eventually subside. Although some reconstruction projects have begun, they have generally been undertaken haphazardly and not as part of a comprehensive and structured plan. Post-conflict reconstruction following the war must address the basic needs and rights of the Yemeni population and put the country on the path toward sustainable peace and development.
This report examines the literature regarding post-conflict reconstruction and draws lessons from the reconstruction experiences of Afghanistan, Iraq, and Lebanon, in addition to multiple past post-crisis reconstruction efforts in Yemen itself. Past Yemeni efforts in the wake of disasters and conflicts have been ad hoc and reactive. The Yemeni government has demonstrated a limited capacity for aid absorption and weak capacity for project implementation. Donors have contributed to these poor results, to a certain extent, by circumventing the state and disbursing aid directly, thereby ensuring that the state do not develop the inherent authority to manage long-term reconstruction. Furthermore, actual donor disbursements often fail to keep pace with initial donor aid commitments.
Drawing on lessons from past reconstruction efforts, this report proposes a new institutional structure for a proactive, permanent future reconstruction authority in Yemen. Because the war has both damaged the central government’s capacity to provide services and worsened regional and sectarian fragmentation, it is impractical to rely solely on the central government for post-conflict reconstruction throughout Yemen. Therefore, Yemen should adopt a multi-level mixed institutional approach to reconstruction that closely coordinates with all stakeholders.
Key recommendations
Executive Summary
Scarce opportunities to earn a viable livelihood in Yemen have, for decades, driven hundreds of thousands of Yemenis abroad in search of work. Given chronically poor access to education in Yemen, the majority of these have been unskilled or semi-skilled laborers. The proximity of Saudi Arabia and the robustness of its oil-driven economy has made it a natural destination for most of Yemen’s expatriate labor force. The economic boom in Gulf Cooperation Council (GCC) states in the 1970s and 1980s, with the corresponding demand for labor, also drew many Yemenis to work in the GCC, with Saudi Arabia opening its borders to Yemenis without visa requirements.
Following the 1990 Gulf War – and the Yemeni government’s decision not to support the United Nations Security Council resolutions against Iraq’s invasion of Kuwait – Yemeni workers were forcibly deported en masse from GCC countries. Close to one million returned home from Saudi Arabia alone. The loss of remittances from these workers, along with the increased demands on public services and pressure on the labor market, caused rapid economic decline and social instability in Yemen. This in turn is regarded as a contributing factor to the country’s 1994 civil war and today’s economic crisis.
In 1990 Riyadh also initiated a program to increase the share of its nationals in the labor force, however, it was not implemented at the time. Thus, over the subsequent two decades the number of Yemenis working in the kingdom returned to pre-1990 levels. Following the 2011 Arab Spring uprisings around the region and in Yemen, GCC monarchies’ security fears increased, as did their desire to increase employment for their nationals. Thus, in 2011 Saudi Arabia’s campaign to nationalize its labor market was reactivated, with this becoming part of Riyadh’s larger Vision 2030 economic plan in 2013.
The impact of these policies has become more pronounced in recent years, with greater restrictions on the number of job categories open to expatriate workers, fees to live and work in Saudi Arabia increasing for legally documented workers and their families, and undocumented laborers facing an evermore precarious existence and exploitation. This, along with Saudi campaigns to arrest and forcibly expel illegal workers, has resulted in tens of thousands of Yemenis being forced to return to their home country.
Concurrently, in 2015 Saudi Arabia and the United Arab Emirates launched a military intervention in Yemen in support of the internationally recognized Yemeni government, which had been deposed by the armed Houthi movement. The escalation of this conflict has caused widespread economic collapse in Yemen, mass loss of livelihood and the cessessation of large-scale oil exports, previously the country’s largest source of foreign currency. The result is that the survival of millions of Yemenis has become dependent on remittances sent home from relatives working Saudi Arabia, and elsewhere. These remittances – totalling billions of dollars annually – have also become the primary supply of foreign currency in the local market and critical to facilitating imports of basic commodities. Thus, remittances from Yemen’s expatriate workforce have prevented their country’s food security crisis, already the largest in the world, from being profoundly worse.
Should the mass expulsion of expatriate workers currently underway in Saudi Arabia continue at pace, it will have another catastrophic economic and humanitarian consequences for Yemenis. This in turn would spur further socioeconomic and political instability across Yemen and create an environment conducive to long-term armed conflict, regardless of whether a political settlement is reached between the parties currently at war. As many observers see Yemen’s stability as a cornerstone of stability in the wider Arabian Peninsula, the ramifications would be regionalized, if not globalized. Thus beyond the moral obligation to prevent the intensifying of mass human suffering, it is in the self-interest of all local, regional and international stakeholders that the flow of remittances from Yemen’s expatriate workforce be maintained.
It is incumbent on GCC states, and Saudi Arabia in particular, to allow Yemeni expat workers an exemption from the current labor nationalization campaigns, at least in the mid-term. Once the ongoing Yemeni conflict has reached a political resolution and the country has attained relatively sustainable economic growth – with a concurrent demand for labor that can absorb returning workers – the issue of the repatriation of Yemeni workers can be revisited responsibly.[1]
Corruption, or the abuse of power for private gain, is deeply entrenched in the Yemeni political economy. For decades Yemen has witnessed state capture, with political leaders at the highest level extracting rents from state institutions to benefit a select few. Administrative corruption, too, has been commonplace in Yemen: low-level bribery and favoritism have become a part of everyday life. There is arguably a cultural acceptance — even an expectation — of corruption in politics and business, as informal networks have come to wield more influence than official institutions.
State capture and administrative corruption in Yemen have their origins in the presidency of President Ali Abdullah Saleh. Under Saleh, a band of elites built a system of patronage over the course of the 1980s and 1990s, both before and after the 1990 unification of North and South Yemen.[1] The main beneficiaries of this “neopatrimonial” patronage system were the members of Saleh’s family, tribe, and close associates, who were installed into the upper echelons of Yemen’s military structures and security apparatus. The rules of the game were simple: state-sponsored handouts in exchange for loyalty to the regime. After oil was discovered in Yemen in the mid-1980s, oil and gas rents bankrolled the expansion and maintenance of Saleh’s patronage network.
Following pressure from the international community to address endemic corruption in Yemen, a wave of anti-corruption reforms were introduced in the mid-2000s. Despite praise at the time for what appeared to be progress towards addressing corruption, in the long term the reforms seem to have proven ineffective. In the meantime, Yemeni oil production declined after 2001, and Saleh’s patronage system became increasingly untenable.
Widespread protests broke out across Yemen in early 2011 and an elite power struggle ensued in Sana’a. Protestors were united by a shared animosity against the corrupt system they closely associated with Saleh and his cohorts. Saleh stepped down in February 2012. Saleh’s successor, President Abdo Rabbu Mansour Hadi, and the transitional government that he presided over talked tough on corruption. However, extensive corruption continued under the new government: patronage payments accelerated, fuel subsidies increased for the private sector, and money intended for humanitarian and development aid donated by the international community was diverted. In this context the Houthis rallied popular support by tapping into anti-corruption sentiments. After the Houthis entered Sana’a in September 2014 with the presumed support of former president Saleh, they signalled their determination to fight corruption and present themselves as a worthy alternative to the status quo. Operating under the cover of an anti-corruption banner the Houthis attempted to push Hadi from power in early 2015. This move led the Saudi-led coalition to enter the conflict in support of the Hadi government in March 2015, intensifying the conflict.
Over the course of the conflict, Yemen has witnessed corruption that continues to operate according to the same rules as before the war and at an equally troubling rate. As the conflict has fragmented and regionalized the country, however, state capture in Yemen has become far more complex. In the war economy, patronage networks are now emerging among previously marginal or unknown figures. The financial dimension of the Saudi-led coalition’s military campaign has extended patronage networks across national borders — though historically Yemen is accustomed to a degree of patronage from its Saudi neighbor. Alleged collusion between Houthi-affiliated importers and officials allied with the internationally recognized Yemeni government indicates patronage networks that potentially cross the frontlines of the war themselves. As greater numbers and a wider variety of actors profit from illicit activity in the war economy, vested economic interests in continued conflict become more entrenched.
Anyone concerned about building a stable post-conflict Yemen must take seriously the challenge presented by corruption in Yemen’s war economy. With this in view, the following guiding principles and recommendations are offered:
Guiding principles for policymakers aiming to address corruption in Yemen:
Guiding Principle No. 1: Acknowledge complexity. Any attempt to address corruption in Yemen should acknowledge and aim to understand the complex, context-specific mechanisms of corruption at the heart of Yemen’s war economy, the actors involved, and any overlapping political and economic interests. A well-developed contextual understanding will allow policymakers to weigh potential benefits and anticipate pitfalls when developing an anti-corruption strategy.
Guiding Principle No. 2: Implement gradually. Given the high levels of state capture and administrative corruption in Yemen, it would be unrealistic and perhaps counterproductive for policymakers to introduce a sudden and aggressive anti-corruption strategy. State capture should be rolled backed gradually, with a phased implementation of anti-corruption reforms limiting the shock to the system. Any attempt to combat corruption in a rushed or superficial manner may lead to grave policy errors where instead of restraining the actions of corrupt individuals the policies lead to greater suffering among the Yemeni people.
Guiding Principle No. 3: Engage as many actors as possible. Given the widespread reach of corruption in Yemen, anti-corruption efforts should not selectively target any single actor, but should instead seek to have an impact across the system as a whole. If any breakthrough is to be made in creating short- or long-term peace, policymakers will need the buy-in of as many actors as possible.
Policy recommendations for a post-conflict Yemen:
Build on the existing anti-corruption framework in Yemen by funding Yemen’s existing state-run anti-corruption agencies and encouraging greater coordination and data-sharing among them.
Encourage transparency and accountability by requiring higher standards of public disclosure, particularly on government tenders and the salaries of appointed officials and senior government staff.
Reduce conflicts of interest by legally obligating government employees to relinquish control of any private businesses, establishing rotating positions in state-run energy companies, implementing regulations concerning equal employment opportunities within the public sector, and reforming the military and security apparatus.
Improve the management of government finances by constructing a rigorous system to control the disbursal of government funds, making the Central Bank of Yemen fully independent, requiring adherence to anti-corruption legislation for the continued delivery of external donor assistance, and closely monitoring financial assistance provided for post-war reconstruction and local development projects.
Decentralize economic power by empowering local authorities to deliver public services and implement local development projects, aid the creation and expansion of small and medium-sized enterprises (SMEs), and empower anti-corruption agencies to monitor fuel import companies.
[1] Colloquially known as North Yemen and South Yemen respectively, the Yemen Arab Republic and the People’s Democratic Republic of Yemen were unified in 1990 to form the Republic of Yemen.
Yemen has spent much of the past 60 years embroiled in armed conflict and political crisis, with this cyclical instability and insecurity among the primary factors that has stymied both private sector maturation and the establishment of a strong state with well functioning public institutions. The vast majority of the Yemeni private sector is made up of small or very small businesses, even while providing almost 70 percent of working Yemenis with their livelihood. Rural agriculture has traditionally provided work for more than half the population.
Since the discovery of commercially viable oil fields in the mid-1980s and the ramping up of oil production in Yemen through the 1990s, the country’s annual gross domestic product (GDP) has been heavily influenced by its oil production levels and the volatility of global energy markets. Oil exports create a “Dutch disease” situation in the country, where the foreign currency from oil sales inflated the value of the domestic currency, inhibiting the private sector’s development of export-led growth. The higher value of the Yemeni rial also made imports relatively cheaper, impeding the development of local industry. These factors combined to leave Yemen dependent on imports for most goods.
There are numerous other challenges to private sector development, including bureaucratic obstructions, weak infrastructure, a largely unskilled workforce, a poor investment climate and lack of financing, an economy overly dependent on oil, corruption, a weak state, and a rent-seeking elite class with vested interests in stifling reforms.
There has also been some progress in the past 25 years: some import barriers have been removed and customs tariffs simplified; reforms to business registration and the elimination of minimum capital requirements brought down the time and cost to start a business; corporate taxes were reduced significantly and harmonized; there was a marked decrease in property related disputes; the market for Islamic banking services was opened; the government established a credit registry and introduced a Microfinance Banking Law.
Nevertheless, the impacts of the ongoing conflict, which began in 2014 and intensified significantly in 2015, have been devastating. Economic output has contracted a cumulative 40.5 percent since 2015. Suspended oil exports have decimated public revenues and cut off the country’s primary supply of foreign currency. The depletion of reserves and a domestic cash liquidity crisis in turn led to the Central Bank of Yemen (CBY) suspending most public sector salaries in August 2016 and ending import financing. Coupled with the relocation of the central bank headquarters from Sana’a to Aden in September 2016, this crisis hobbled the CBY’s ability to protect the value of the Yemeni rial (YR). The rial thus fell from YR 215 to US$1 at the beginning of the conflict to roughly YR 490 to US$1 as of the end of June 2018.
With currency depreciation the price of imports has spiked and per-capita purchasing power has plummeted. The price of imports has also been heavily affected by a Saudi-led coalition sea blockade of (and now military operation to retake) the country’s northern ports – most significantly Hudaydah and Saleef – which has dramatically reduced commercial and humanitarian deliveries through these ports, and increased the time and cost of delivery for those imports that do get through. All of these factors have facilitated a situation today where 8.4 million Yemenis are on the edge of famine and 22 million are in need of humanitarian support, in what the United Nations has called the world’s largest humanitarian catastrophe.
Increased costs for businesses have been spurred by a lack of security and a scarcity of business inputs, while a loss of customer base and demand as well as general purchasing power decline has driven a loss in revenue. Physical damage to public and private infrastructure has also severely affected the ability of businesses to operate. As of 2017 these losses associated with the conflict had let to private sector businesses on average cutting their working hours in half, with layoffs estimated at 55 percent of the workforce, while more than a quarter of private sector firms engaged in industry, trade and services have ceased to operate. Foreign currency shortages and a domestic currency liquidity crisis have also presented importers with increased challenges and costs. Even faced with these challenges, however, the Yemeni private sector is still one of the primary factors stopping the dire humanitarian crisis in Yemen from being far worse, facilitating the import of the vast majority of the country’s food and fuel.
In previous studies of impact of conflict on a country’s private sector, it was found that war tends to create a power vacuum that allows space for illegal trade and the rise of a ‘war economy’, in which grey and black market actors accrue large sums of liquidity, and draw such out of the formal economy. Even once peace is achieved, doubts regarding its durability classically dissuade investments in the country, in particular investments in fixed, illiquid assets. However, without private sector development, reconstruction, rehabilitation and socio economic and social stability are highly unlikely post conflict.
An incipient private sector cannot be expected to, of itself, redevelop and drive economic growth immediately after conflict resolution. Thus, this paper makes the following recommendations to the Yemeni government and international stakeholders regarding economic interventions to spur post-conflict private sector development in Yemen.
Key Recommendations
● Interventions must be conflict-sensitive. Yemen’s multifaceted and prolonged conflict has weakened both the formal state and formal private sector activity, allowing the emergence of new players in a war economy. Early interventions must thus be vetted to ensure they do not empower conflict actors and potential peace spoilers, would curb development in the formal private sector and threat overall socio economic stability. International actors intervening on the ground should establish an inclusive mechanism in which local business actors are meaningfully engaged to create strong buy-in in enhancing peacebuilding and enabling appropriate business environments.
● Build local business capacities to implement programs and create jobs. Stakeholders should work to ensure that local businesses have the necessary tools and requisite skills to take advantage of international interventions. This should include facilitating the transfer of knowledge, specifically knowledge related the use of technology in business, through providing education and training programs for Yemen’s private sector labor force.
● The agriculture sector should be the target of any early intervention. Agriculture, which employed the largest portion of the Yemeni workforce prior to the conflict, has been particularly adversely impacted by the dynamics of the war in Yemen and should be the target of any early intervention to boost the economy.[1] For instance, programs could be established to support microbusinesses in agriculture and offer training and technical assistance for farmers and those hoping to establish small-scale and self-sustaining projects.
● Target SMEs and entrepreneurs. Private actors should assist the government and international donors in developing joint financial mechanisms to finance small and medium enterprises (SMEs) and business incubators. These should also specifically target and assist women and youth to start businesses, given how underrepresented these groups are in private sector activities.
● Ensure private sector access to finance. Over the short run, the Yemeni government and all relevant stakeholders should support a full return of a functioning financial sector, including stabilizing the Central Bank of Yemen. Over the longer run, efforts should be directed to lead reforms on banking regulations and ensure an appropriate platform for foreign investors to establish banks in country, as well as for remittances influx. In this regard, the Yemeni government should establish for a mechanism for investment guarantees in order to attract the remittances of the Yemeni diaspora to contribute to country economic recovery.
● Yemen’s experienced microfinance institutions should be a key target of all stakeholders for driving more financial inclusion across Yemen. Microfinance banks and companies should be also empowered to offer financial services for individuals and cash management services for smaller businesses. Moreover, mobile banking in Yemen should be enhanced to expand access to low-income borrowers.
● Reform the business environment. The government should establish a business-friendly taxation system and anti-corruption institutions and encourage investments through easing some regulations that restrict foreign investments and discourage business startups. In particular, the government should engage with and invest in transformative sectors such as transportation, financial services, telecommunications, tourism, power production, and food processing and distribution.
Local councils are among Yemen’s most important state institutions. Responsible for providing basic public services to millions of Yemenis, local councils represent official governance and the Yemeni state for vast swathes of the population. The intensification of the conflict since March 2015, however, has undermined the councils’ ability to operate effectively in most areas of the country. The councils depend heavily on central government financing and, to a lesser degree, local sources of revenue such as taxes on basic utilities and telephone usage. As such, Yemen’s precipitous economic collapse, the subsequent decline in government revenues and the incapacitation of the Central Bank of Yemen (CBY) have compromised local councils’ ability to operate. The nonpayment of civil servant salaries and Yemenis’ decreased purchasing power contribute to Yemen’s alarming humanitarian crisis while limiting local councils’ ability to extract local sources of revenue.
Generally speaking, a shortage of revenues has left local councils across Yemen unable to operate anywhere near to their full capacity. The most obvious exceptions to this rule can be found in Marib and Hadramawt governorates, which enjoy relative stability and comparatively greater economic resources. These local councils are functioning at a much higher level than their counterparts. Some local councils, such as those in Ibb and Hadramawt governorates, have also received donations from Yemeni businessmen that have helped to continue operations to some extent.
The increased violence and instability since March 2015 have also largely overwhelmed local police and the judiciary — institutions that previously provided a degree of local order. As a result, local councils have been afforded little protection in their operations. As the state’s ability to provide either security or public services has eroded, civilian trust in either local councils or the state itself has fallen. In many areas this absence of effective official governance has created fertile ground for non-state actors to assert their authority, including over local councils. The autonomy and maneuverability of local councils in Houthi-controlled areas is restricted by the Houthis’ adoption and implementation of a centralized mode of governance, in which local-level processes such as the distribution of revenues or humanitarian aid are controlled by the Houthis at the center. In the areas under Houthi control, Houthi supporters closely monitor local council activity.
Although interference in local councils is arguably more consistent in Houthi-controlled areas, local councils also face interference elsewhere. Aden is a prime example: local councils in the southern coastal city are vulnerable to interference from competing armed militias that form part of a broader power struggle between southern secessionists and the internationally recognized Yemeni government.
Given the central role that local councils previously played in providing public services to their communities, the currently reduced capacity of local councils is cause for much concern as the conflict rages on and Yemen’s economic and humanitarian crises deepen. Although the majority of local councils in Yemen are not fully functional, local councils remain important instruments for the communities they represent, particularly in coordinating humanitarian relief efforts with local and international non-governmental organizations. Throughout the conflict, local council members have also been directly involved in local mediation and dispute settlement. They have leveraged their deep knowledge of complex local socio-political, economic and tribal dynamics to coordinate ceasefires, prisoner exchanges, and the safe passage of essential commodities and humanitarian aid across frontlines. Thus, irrespective of how the conflict progresses, it is imperative that local, regional and international actors not only seek to prevent local governance structures from collapsing, but also plan to enhance the capacities of local councils in post-conflict scenarios.
Prior to the onset and intensification of the current conflict, several parties had advocated in favor of a new, decentralized model of governance in Yemen. For example, such calls were made during the National Dialogue Conference. The conflict has inadvertently set a process of decentralization/regionalization in motion, whereby Yemen has become increasingly fragmented; local interests, local demands, and local actors are in the ascendancy. In the absence of central state authority, a number of effective local, self-governance models have emerged, notably in Marib and Hadramawt governorates. At some stage a new system of governance will arguably need to be drawn up to reflect the new realities on the ground. Local councils are among the best-equipped and best-established institutions to support such a shift away from the previous centralized model.
Key Recommendations
Regional and international stakeholders should coordinate efforts to restore the Central Bank of Yemen to a fully functioning unified national entity, able to facilitate the payment of public sector salaries and the operational costs of local councils regardless of the council’s location or leadership.
The international community should provide technical assistance and take constructive measures to develop a mechanism between the warring parties to allow for the nationwide collection and redistribution of state revenues — such as taxes and customs — with a view to re-establishing public services in all areas.
The internationally recognized Yemeni government should allocate additional funding for local councils. The Social Fund for Development (SFD) should be used as an intermediary institution to channel allocated revenues to local authorities and jointly to implement projects re-establishing the delivery of public services.
International donors and international non-governmental organizations (INGOs) should include local councils as key players in channeling financial support to, and empowering them in liaising with, other local actors. Such inclusion would leverage local councils’ deep understanding of local contexts, increase the councils’ legitimacy and encourage communities to unite under formal government structures. Financial support to local councils should also include an oversight mechanism to avoid the misappropriation of funds.
The Yemeni government should issue temporary regulatory instructions to officially devolve more powers to the governorate and district level. These instructions should:
authorize local councils to access and develop sustainable resources at the local level and spend the associated revenues on their needs;
allocate a share of sovereign resources to each governorate based on transparent financing criteria;
ensure local councils have sufficient administrative powers to supervise service provision, govern effectively and deter local patronage networks;
allow local councils to nominate leaders to formal positions in local security services and supervise the performance of these services.
International stakeholders should support local capacity-building programs to empower local judiciary and professionalize local security services.
Regional stakeholders should refrain from intervening in the activities of local judiciary and security services, or creating parallel competing entities that would undermine state legitimacy.
All stakeholders should promote bottom-up, inclusive forms of local governance to curb the appeal of non-state actors.
A comprehensive assessment should be undertaken to identify the groups and individuals in control at both the governorate and district levels — including evaluating their local support base and ability to provide public services — to inform and develop strategies for the restoration of state functions post-conflict.
The ongoing conflict in Yemen has imposed grievous costs on Yemenis, damaging lives, property and infrastructure and collapsing the country’s already fragile economy. And yet the conflict will eventually subside. Although some reconstruction projects have begun, they have generally been undertaken haphazardly and not as part of a comprehensive and structured plan. Post-conflict reconstruction following the war must address the basic needs and rights of the Yemeni population and put the country on the path toward sustainable peace and development.
This report examines the literature regarding post-conflict reconstruction and draws lessons from the reconstruction experiences of Afghanistan, Iraq, and Lebanon, in addition to multiple past post-crisis reconstruction efforts in Yemen itself. Past Yemeni efforts in the wake of disasters and conflicts have been ad hoc and reactive. The Yemeni government has demonstrated a limited capacity for aid absorption and weak capacity for project implementation. Donors have contributed to these poor results, to a certain extent, by circumventing the state and disbursing aid directly, thereby ensuring that the state do not develop the inherent authority to manage long-term reconstruction. Furthermore, actual donor disbursements often fail to keep pace with initial donor aid commitments.
Drawing on lessons from past reconstruction efforts, this report proposes a new institutional structure for a proactive, permanent future reconstruction authority in Yemen. Because the war has both damaged the central government’s capacity to provide services and worsened regional and sectarian fragmentation, it is impractical to rely solely on the central government for post-conflict reconstruction throughout Yemen. Therefore, Yemen should adopt a multi-level mixed institutional approach to reconstruction that closely coordinates with all stakeholders.
Key recommendations