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The impact of remittances on Yemen’s economy

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Yemen
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ACAPS
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EXECUTIVE SUMMARY

The importance of remittances to Yemen’s economic stability at both the macro and household levels predates the current conflict. In the context of violence and deepening economic and humanitarian crises, the significance of remittances has increased during the conflict.

Remittances have become the primary source of foreign currency and play a more significant role in terms of import financing and Yemen’s balance of payments. Remittances helped mitigate the challenges that the Central Bank of Yemen (CBY) faced trying to underwrite fuel and food imports, owing to the reduction in hydrocarbon revenues and decreased foreign currency reserves during the conflict compared to pre-conflict levels. The level of dependency among Yemeni households on remittances increased notably during the conflict. Remittances helped households deal with the broader socioeconomic shocks reverberating across the country, including the sharp depreciation of the local currency, loss of income, inflation, and rising unemployment, among others.

Despite the positive role that remittances have played and continue to play, their inherent vulnerability to external and internal shocks remains a major cause for concern. Externally, remittance flows are highly susceptible to labour market reforms and changing living circumstances in key host countries – especially Saudi Arabia, which remains by far the biggest source of remittances to Yemen. Remittances are also susceptible to sudden regional and global market shocks, such as those witnessed in 2020 following the onset and spread of the COVID-19 pandemic and the biggest drop in global fuel prices in 20 years. The initial impact of both developments was felt inside Saudi Arabia at the same time – March and April 2020. The longer-term impact of both developments and the response from Saudi authorities was spread out across the remainder of 2020.

Decreased crude oil export revenues and additional loss of revenue and productivity caused by COVID-19 and related mitigation measures negatively impacted the Saudi economy and Yemeni migrant workers in Saudi Arabia. A national lockdown was introduced in Saudi Arabia in late March 2020 and remained in place until the easing of some movement and employment restrictions in late June 2020. The movement restrictions essentially reduced the ability of Yemeni migrant workers to generate income. They also removed the physical ability of many to send cash remittances via formal and informal channels. This, to some extent, prompted a shift in remittance flows – from cash to digital and from informal to formal channels – with options narrowed to electronic remittances services provided by Saudi banks and correspondent Yemeni banks while movement was restricted. Sharp and sustained decreases in global fuel prices led to lower Saudi crude oil export revenues – a significant development for the world’s biggest crude oil exporter. Lower crude oil export revenues resulted in decreased spending, credit, and consumption, as well as reduced income and job opportunities for foreign workers currently working or looking to work in Saudi Arabia, including Yemeni nationals.

Internally, competing monetary policies and attempts made by the Houthis and the Internationally Recognized Government of Yemen (IRG) to regulate Yemeni financial service providers (FSPs) are harming external and internal remittance flows. Forced or voluntary closures of Yemeni bank or money exchange company branches disrupt remittance flows.

The implementation of a total ban on the new Yemeni rial (YER) banknotes in Houthi areas in January 2020 resulted in a significant decrease in the value of internal remittances sent from non-Houthi to Houthi areas because of divergences between the value of the rial in both areas. The impact has been significant: during the conflict, many businesses and individuals looked to support their families based in Houthi areas by seeking work in non-Houthi areas – specifically Aden and Marib.

These external and internal trends directly affected recipients’ spending and saving capacity.1 In particular, the impact of COVID-19 and related restrictions led to a significant reduction of remittance flows in March–June 2020, after which there were signs of resilience in July– October 2020, followed by clearer signs of recovery from October onwards. Any notable reduction in the total value of remittances to Yemen over an extended period is cause for concern, not only for the increased dependence on remittances during the conflict but also because of the direct link between household purchasing power and food (in)security levels.

Any change in remittance flows to Yemen can directly impact the value of the rial, trade financing gap, and households’ wellbeing, in addition to indirect impacts on the stability of Yemen’s local and national economies. During March–June 2020, for Yemeni households that continued receiving some – albeit reduced – remittances, spending was limited to the purchasing of essential goods. Less fortunate households were forced to adopt different coping mechanisms, such as borrowing money to survive and prioritising certain essential goods and services over others.
This report provides a detailed breakdown of major developments and trends in Yemen and Saudi Arabia over the past seven years, with a particular focus on developments that occurred in 2020 and the impact of COVID-19 on remittance flows to Yemen. The report does not claim to offer a definitive breakdown of remittance flows to Yemen (and internal remittances) and highlights limitations throughout. The analysis aims to provide critical information and recommendations that might assist policy and programmatic discussions, in addition to offering a springboard for follow-up research.